<PAGE>
As filed with the Securities and Exchange Commission on March 17, 2000
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
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
Chief Executive Officer
CAPSOURCE, INC.
2901 El Camino Avenue, Suite 206
Las Vegas, 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
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act 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 [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Title of Amount Being Proposed Maximum Proposed Maximum Amount of
Securities Being Registered Registered Offering Price Aggregate Registration Fee
Per Unit Offering Price
=================== ======== ============= =============== =============
<S> <C> <C> <C> <C>
Units of Limited Liability 100,000,000 $1.00 $100,000,000 $26,400
Company Interest
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</TABLE>
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>
CROSS REFERENCE SHEET
-----------------
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY FORM S-11
<TABLE>
<CAPTION>
Item Number and Caption Location in Prospectus
<S> <C>
1. Forepart of Registration Statement and Outside Front Outside Front Cover Page of Prospectus
Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of Summary Risk Factors
Earnings to Fixed Charges
4. Determination of Offering Price *
5. Dilution *
6. Selling Security Holders *
7. Plan of Distribution Plan of Distribution
8. Use of Proceeds Use of Proceeds
9. Selected Financial Data Selected Financial Data
10. Management's Discussion and Analysis of Financial *
Condition and Results of Operations
11. General Information as to Registrant Front Cover Page; Summary; Risk Factors; Business;
Management; Summary of Operating Agreement, Rights of
Members and Description of Units
12. Policy with Respect to Certain Activities Business; Compensation of Manager; Summary of Operating
Agreement, Rights of Members and Description of Units;
Reports to Members
13. Investment Policies of Registrant Business; How the Company Protects Its Rights as a
Lender; Summary of Operating Agreement, Rights of
Members and Description of Units
14. Description of Real Estate *
15. Operating Data *
</TABLE>
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<TABLE>
<S> <C>
16. Tax Treatment of Registrant and Its Security Holders Risk Factors; Federal Income Tax Consequences
17. Market Price of and Dividends on the Registrant's *
Common Equity and Related Stockholder Matters
18. Description of Registrant's Securities Summary of Operating Agreement, Rights of Members and
Description of Units
19. Legal Proceedings *
20. Security Ownership of Certain Beneficial Owners and Management
Management
21. Directors and Executive Officers Management
22. Executive Compensation Management; Compensation of the Manager
23. Certain Relationships and Related Transactions Conflicts of Interest; Management; Business
24. Selection, Management and Custody of Registrant's Compensation of the Manager; Business
Investments
25. Policies with Respect to Certain Transactions Risk Factors; Conflicts of Interest; Business; Summary
of Operating Agreement, Rights of Members and
Description of Units
26. Limitations of Liability Fiduciary Responsibility; Summary of Operating
Agreement, Rights of Members and Description of Units
27. Financial Statements and Information Financial Statements
28. Interests of Named Experts and Counsel Legal Matters
29. Disclosure of Commission Position on Fiduciary Responsibility
Indemnification for Securities Act Liabilities
30. Quantitative and Qualitative Disclosures About *
Market Risk
</TABLE>
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* Not Applicable
<PAGE>
SUBJECT TO COMPLETION
DATED MARCH 17, 2000
PRELIMINARY PROSPECTUS
DM MORTGAGE INVESTORS, LLC
a Nevada Limited Liability Company
100,000,000
Units of Limited Liability Company Interests
--------------------
The Limited Liability Company
The Company will primarily invest in or purchase mortgage loans on real
estate and leasehold interests. The Company was organized in Nevada in December
1999, and as of the date of this Prospectus has not conducted any investment
business. Its Manager, Capsource, Inc., a Nevada corporation, is wholly owned by
Sunderland Corporation, a Delaware corporation with publicly held common stock
traded on the NASDAQ Bulletin Board under the symbol "DLMA." Investors in the
Company will be members, similar to limited partners of a limited partnership,
whose rights and obligations are described in the Operating Agreement.
The Offering
o Offering is 100,000,000 Units for $100,000,000.
o Price is $1.00 per Unit.
o Minimum purchase is 2,000 Units.
o Offering is on a best-efforts basis - DM Financial Services, Inc., an
affiliate of the Company, will be offering the Units for sale and will
be receiving commissions, dealer management fees and reimbursement of
accountable expenses of up to one and one-half percent (1.5%) of gross
proceeds, of which a maximum amount of one-half percent (0.5%) of gross
proceeds is for the reimbursement of expenses. Additionally, sales
commissions of up to three percent (3%), marketing incentive fees of up
to one half of one percent (0.5%) and reimbursement of accountable
expenses of up to one-half of one percent (0.5%) of gross proceeds of
this offering may be paid to unaffiliated broker-dealers, if any.
o Proceeds to the Company are a Minimum of $1,500,000 and a Maximum of
$100,000,000, less fees and expenses (including sales commissions, if
any) of the Offering estimated to be between $500,000 (a portion of
which will be paid by Sunderland Corporation) and $2,500,000.
o The first $1,500,000 of proceeds from the Offering will be held in an
Escrow Account by BankWest of Nevada and returned to investors if
$1,500,000 in proceeds have not been obtained by December 31, 2000.
o The Units will be in book entry form only. You will not receive a Unit
certificate.
The Risk Factors
See "Risk Factors" at page 8 for a discussion of these and other
significant risk factors associated with a purchase of Units: o Your ability to
sell or transfer Units is limited; no market currently exists, nor is one
expected to develop.
o You must hold your Units for one year before requesting that the
Company repurchase any of them.
o Repurchases of Units by the Company are subject to other limitations. o
You must place total reliance on the Manager for operating the Company.
o The Manager is subject to conflicts of interest with other members.
o Investments in real estate mortgages carry risks; for example, defaults
can occur in payments by the borrowers.
o The Company will primarily invest in commercial real estate mortgages
in Nevada, Arizona and California. No mortgages have yet been
identified for investment by the Company.
o Other than the minimum gross proceeds of $1,500,000, of which
approximately $1,250,000 are expected to be available for mortgage
investments, the Company is not assured of any Offering proceeds.
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.
<PAGE>
The use of forecasts in this offering is prohibited. Any representations to the
contrary and any predictions, written or oral, as to the amount or certainty of
any present of future cash benefit or tax consequence which may flow from an
Investment in this program is not permitted.
The date of this Prospectus is , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
COVER PAGE........................................................................................................1
The Limited Liability Company............................................................................1
The Offering.............................................................................................1
The Risk Factors.........................................................................................1
SUMMARY .........................................................................................................1
RISK FACTORS......................................................................................................8
Forward Looking Statements...............................................................................8
Risks of Real Estate Mortgage Loans......................................................................8
Lack of Liquidity.......................................................................................13
Risks of Lack of Control by Members.....................................................................14
Conflicts of Interest Risks.............................................................................15
Competition Risks.......................................................................................17
Taxation Risks..........................................................................................17
INVESTOR SUITABILITY STANDARDS...................................................................................18
NOTICE TO CALIFORNIA RESIDENTS...................................................................................20
USE OF PROCEEDS..................................................................................................21
CAPITALIZATION OF THE COMPANY....................................................................................22
CAPITAL CONTRIBUTION OF THE MANAGER..............................................................................22
COMPENSATION OF THE MANAGER AND ITS AFFILIATES...................................................................22
Front End Fees..........................................................................................25
Promotional Interest of Manager.........................................................................25
Ongoing/ Recurring Fees.................................................................................26
Paid by Borrowers.......................................................................................26
CONFLICTS OF INTEREST............................................................................................26
FIDUCIARY RESPONSIBILITY.........................................................................................30
Exculpation.............................................................................................30
Indemnification.........................................................................................30
MANAGEMENT.......................................................................................................31
Management of the Company...............................................................................31
</TABLE>
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<TABLE>
<S> <C>
Research and Acquisition by the Manager.................................................................31
Company Management......................................................................................31
Mortgage Investments....................................................................................32
Directors and Executive Officers........................................................................32
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................36
BUSINESS ........................................................................................................38
Commitment of Members' Capital Contributions............................................................42
Principal Investment Objectives.........................................................................42
Types of Mortgage Loans.................................................................................43
Prepayment Penalties....................................................................................45
Balloon Payment.........................................................................................45
Equity Interests and Participation in Real Property.....................................................45
Loan Limit Amount.......................................................................................45
Mortgage Loans to Affiliates............................................................................45
Purchase of Loans from Affiliates.......................................................................45
Borrowing...............................................................................................46
Repayment of Mortgages on Sales of Properties...........................................................46
No Trust or Investment Company Activities...............................................................46
Miscellaneous Policies and Procedures...................................................................46
Competition and General Economic Conditions.............................................................46
Available Information...................................................................................47
HOW THE COMPANY PROTECTS ITS RIGHTS AS A LENDER..................................................................48
Introduction............................................................................................48
General ...............................................................................................48
Parties to a Deed of Trust..............................................................................48
Foreclosure.............................................................................................48
Provisions in Deeds of Trust............................................................................49
Usury Law Not Applicable to Company Mortgage Loans......................................................51
FEDERAL INCOME TAX CONSEQUENCES..................................................................................52
Classification as a Partnership.........................................................................53
The Company 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.....................................................................................58
Tax Treatment of Tax-Exempt Entities....................................................................59
Partnership Tax Returns and Audits......................................................................60
Original Issue Discount Rules...........................................................................61
Market Discount.........................................................................................61
No Section 754 Election - Impact on Subsequent Purchasers...............................................61
Taxation of Mortgage Loan Interest......................................................................61
Treatment of Compensation of Manager....................................................................62
Possible Legislative Tax Changes........................................................................62
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Annual Valuation........................................................................................63
Plan Assets Generally...................................................................................63
SUMMARY OF OPERATING AGREEMENT, RIGHTS OF MEMBERS................................................................66
AND DESCRIPTION OF UNITS.........................................................................................66
Nature of the Company...................................................................................66
The Responsibilities of the Manager.....................................................................66
Limitations on the Manager..............................................................................66
Liabilities of Members--Nonassessability................................................................66
Meetings ...............................................................................................67
Voting Rights...........................................................................................67
Status of Units.........................................................................................67
Distributions...........................................................................................67
Reinvestments...........................................................................................68
Assignment and Transfer of Units........................................................................69
Repurchase of Units, Withdrawal from Company............................................................69
Special Power of Attorney...............................................................................70
REPORTS TO MEMBERS...............................................................................................70
PLAN OF DISTRIBUTION.............................................................................................71
LEGAL MATTERS....................................................................................................72
EXPERTS..........................................................................................................72
</TABLE>
<PAGE>
SUMMARY
This Summary highlights some of the information from this Prospectus.
The summary is not complete and does not contain all of the information that you
should consider before investing in the Units. You should read the entire
Prospectus carefully, including the section, "Risk Factors," beginning at page
8, and the Financial Statements and Notes, beginning at page F-1.
The Company The name of the Company is "DM Mortgage Investors,
LLC." It was organized in December 1999, as a Nevada
limited liability company. The date specified for
termination of the Company in the Operating Agreement
is December 31, 2019, unless a majority of the
members extend the duration of the Company.
The Manager The sole manager of the Company is Capsource, Inc., a
Nevada corporation, incorporated in 1997. Its
executive offices and the executive offices of the
Company are at 2901 El Camino Avenue, Suite 206, Las
Vegas, Nevada 89102, telephone (702) 227-0965.
Conflicts of Interest The Manager will experience conflicts of interest
with the Company and its members in connection with
the management of the Company, including the
following:
o The Manager and its affiliates will have to
allocate their time between the Company and
other activities they are involved in.
o The various fees of the Manager are not set
by arms-length negotiations.
o The Manager will be receiving fees from
borrowers that may reduce the Company's
returns.
Risk Factors In addition to the conflicts of interest above, an
investment in Units is also subject to the following
risks:
o You must rely totally on the Manager to operate
the Company.
o Investments in real estate mortgages are risky;
for example, defaults can occur in payments by
the borrowers. Furthermore, the mortgage
portfolio will be secured by real property
located primarily in only three states.
o You may not be able to timely obtain cash for
your Units. See "Units are Restricted as to Sale
and Transfer" on page 4 and "Lack of Liquidity"
beginning on page 13.
o Mortgage lending is highly competitive, and the
Company competes with numerous established
entities, many of which have greater resources
than the Company.
o Your return on investment would be adversely
affected if the Company were to be deemed a
corporation for tax purposes, or if the Company
were deemed to be conducting a trade or
business. See "Taxation Risks" beginning on page
17.
o Upon redemption you may receive less than $1.00
per Unit, the price in this offering.
o A member's interest in the fair market value of
the underlying assets of the Company may be
diluted by subsequent capital contributions.
Compensation to The Manager and its affiliates receive significant
Manager and its compensation and fees for services to, and for the
Affiliates benefit of, the Company and third party borrowers for
the organization of the Company and the Manager's
making, arranging, evaluating, extending and
permitting the assumption of loans. These fees are
summarized in the table below.
1
<PAGE>
<TABLE>
<CAPTION>
Compensation/
Section of Prospectus Description of Fee Amount of Fee
--------------------- ------------------ -------------
<S> <C> <C> <C>
1. Front-End Fees
Paid by Fund
Compensation for Commission and dealer management Up to one and one-half
Services in the fees paid to broker-dealer percent (1.5%) of gross
Offering (see "Plan of affiliates of the Manager; proceeds of this
Distribution") recoupment of expenses incurred in offering, of which a
the offering maximum of one-half of
one percent (0.5%) of
gross proceeds is for the
reimbursement of expenses
Paid by Borrower Loan Brokerage Fees Points and fees paid for the 2%-6%. Any points or
(payable to Manager or origination/placement of loans fees paid up front;
an affiliate) dictated by local market
conditions
Loan Evaluation and Points and fees for Manager's Approximately 2-5%.
Processing Fees evaluation, analysis and processing Dictated by local market
of a loan conditions
The Front End Fees above plus all other
organizational and acquisition fees and expenses paid
to third parties out of the proceeds of this
offering, whenever paid, including sales commissions
of up to three percent (3%), marketing incentive fees
of up to one half of one percent (0.5%) and
reimbursement of accountable expenses of up to
one-half of one percent (0.5%) of gross proceeds of
this offering to be paid to unaffiliated
broker-dealers, if any, shall in no event exceed 14%
of the aggregate amount of the Company's capital
contributions.
2. Promotional Promotional Interest Additional ownership interest vested 0.5% ownership interest
Interest of Manager of Manager ("Capital in Manager in addition to 0.5%
Contribution of interest paid for.
Manager," Manager may only receive
"Distribution") distributions on its
interest, including the
portion for which it paid
consideration, after all
members receive a return of
100% of their initial
capital contributions
</TABLE>
2
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<TABLE>
<S> <C> <C> <C>
3.Ongoing/
Recurring Fees
Paid by Fund Management Fees Paid to the Manager
to Company loans Initially up three-quarters
of one (0.75%) of the
original capital
contributions committed to
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 the
Company's assets (including
working capital), less any
indebtedness of the Company.
For funds not invested in
mortgages, the percentage
paid as a management fee is
one-half of one percent
(0.5%).
Reimbursement of Manager's or affiliate's recoupment Lesser of cost or third of
Operating Expenses of charges for conducting the party rate
Fund
Real Estate Brokerage Amounts paid to the Manager for Up to 3% of proceeds Fees on Property
Fees on Property reselling properties foreclosed upon where substantial Resales
contribution by Manager
(up to 6% for all persons
involved)
</TABLE>
3
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Paid by Borrower
Servicing Fee (payable Fees payable for the administration 0.25% of the outstanding
to the Manager and its of each borrower's loans principal balance of the
Affiliates) loan
Escrow/ReconveyanceLoan Fees payable for other services As permitted by law and
Extension and provided by the Manager or its local market conditions;
permitting loan affiliates anticipated to be 2-5%
Assumption (payable to
the Manager and its
Affiliates)
Late Fees/Prepayment Fees payable when payments As permitted by law and
Fees under mortgage loan are local market conditions
not timely made or
in some cases upon prepayment of
mortgage loans
</TABLE>
* * *
The Units Each Unit is a limited liability company interest
in the Company.
Units are Restricted as Some of the factors that may prevent you from
to Sale and Transfer transferring your Units include:
o No public market exists for our Units, and we do
not expect one ever to develop;
o Securities laws restrictions apply to the Units;
o Investor suitability standards apply to any
proposed transferees of your Units;
o Restrictions apply regarding prevention of the
Company from becoming a "publicly traded
partnership" under the Internal Revenue Code of
1986, as amended (the "Code") (generally a limited
liability company whose interests are publicly
traded or frequently transferred); and
o Restrictions apply regarding preventing
termination of the Company for tax purposes.
The Offering The Company is offering for sale 100,000,000 Units
of limited liability company interests at a purchase
price per Unit of $1.00. The minimum initial
purchase under the offering is 2,000 Units for
$2,000, except to the extent that state suitability
standards dictate otherwise. DM Financial Services,
Inc., a Nevada corporation and affiliate of the
Manager, is acting as the best-efforts Dealer
Manager, will receive commissions, dealer management
fees and reimbursement of bona fide accountable
expenses of up to one and one-half percent (1.5%) of
gross proceeds, of which a maximum amount of
one-half percent (0.5%) of gross proceeds is for the
reimbursement of expenses. Unaffiliated
broker-dealers may receive sales commissions of up
to three percent (3%), marketing incentive fees of
up to one half of one percent (0.5%) and
reimbursement of accountable expenses of up to
one-half of one percent (0.5%) of gross proceeds in
this offering. The Minimum Offering of not less than
1,500,000 Units for $1,500,000 must be sold on or
before December 31, 2000, or the sales proceeds will
be returned in full to investors by BankWest of
Nevada, the escrow agent for the Minimum Offering
amount.
The Units will be in book entry form only. You will
not receive a Unit certificate.
4
<PAGE>
Investor Suitability You must meet certain standards as an investor in
Standards Units. These are imposed by the state securities law
administrators and by the Manager, since there are
risks associated with investment in the Units,
including a lack of liquidity of the investment.
Generally, the standards are:
o You must have 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 Alternatively, a minimum net worth of
$150,000.
Notwithstanding the above, some states have enacted
suitability standards or procedural rules for
mortgage funds that differ from the foregoing. These
are appended to the Subscription Agreement that each
purchaser will sign, appended to this prospectus as
Exhibit B. See also "Investor Suitability Standards".
Tax Considerations In the opinion of tax counsel to the Company, the
Company will be treated for federal tax purposes as
a partnership and not an association taxable as a
corporation. A person considering a purchase of the
Units should consult his or her own tax advisor for
advice on other personal tax consequences that might
be associated with investment in the Units. See
"Taxation Risks," beginning at page 17, and "Federal
Income Tax Consequences," beginning at page 52 of
this Prospectus.
Purchase of Units To Purchase Units you must complete and sign the
Subscription Agreement and Power of Attorney, which
is Exhibit B at page B-1 of this Prospectus, and
deliver it to the securities dealer which has
solicited your investment, together with the payment
for the Units that is specified in the Subscription
Agreement. The Subscription Agreement contains
subscriber representations that the Company will be
relying on in determining the suitability to you of
an investment in the Units. If your Subscription
Agreement is accepted, you are then an owner of the
Units and a member of the Company. If you are not
accepted, your purchase payment will be returned to
you promptly. In the latter case, no interest will
be paid.
The first $1,500,000 of proceeds from the Minimum
Offering, representing the purchase price of
1,500,000 Units will be placed in a segregated escrow
account with BankWest of Nevada, Las Vegas, Nevada,
as escrow agent.
If the $1,500,000 Minimum has not been received in
that escrow account on or before December 31, 2000,
BankWest will return to each investor the purchase
price for the Units subscribed to, together with the
investor's proportionate share of any earnings
obtained by BankWest from permitted investment of the
sales proceeds in the escrow account.
If the $1,500,000 Minimum is deposited into BankWest
escrow account on or before December 31, 2000, the
proceeds together with all earnings obtained by
BankWest from investment thereof will be delivered to
the Company for its use according to the provisions
in this Prospectus. The offering will then continue
without the use of an escrow account for proceeds
received from the sale of Units.
Use of Offering If only the Minimum Offering is sold, the Company
Proceeds will receive the sales proceeds of $1,500,000 less
expenses of the offering and sales commissions
estimated at $500,000 (out of which the portion in
excess of 14% of the gross offering proceeds will be
paid by Sunderland). If the maximum amount of this
offering is sold, the Company will receive
$100,000,000, less expenses of the offering and
sales commissions estimated not to exceed
$2,500,000. After receipt of the Minimum, the
offering proceeds will be received by the Company as
Units are sold.
5
<PAGE>
Investment The Company's objectives are:
Objectives
o To maximize cash flow and distribute net income to
the members; and
o To preserve, protect and return your capital
contribution.
The Manager may change these investment objectives at
its full discretion, but may not change the nature of
the Company's business as a mortgage investment fund.
Distributions All net income available for distribution is paid
monthly in arrears to the members on or before the
last day of the calendar month following the month in
which the net income is earned. Net income available
for distribution means taxable profits and losses
reduced by amounts set aside for the restoration or
creation of reserves and increased by the reduction
or elimination of reserves.
Profits or cash revenues will come primarily from
interest on mortgage loans.
It is not anticipated that any capital will be
returned prior to seven years after the effective
date of the registration statement of which this
prospectus forms a part. A return of a member's
capital will result in a deemed redemption of Units
proportionately to the amount in the member's capital
account.
Distribution The Company has an automatic Distribution
Reinvestment Plan Reinvestment Plan that allows you to invest your
monthly distribution in our Units. If you elect this
automatic reinvestment plan, your election may be
changed by sending a written form obtained from the
Company.
If you elect to participate in the Distribution
Reinvestment Plan, you will be allocated your share
of the Company's taxable income even though you do
not receive cash distributions. The Manager could
terminate this Plan for various reasons listed later
in this Prospectus. See "Summary of Operating
Agreement, Rights of Members and Description of
Units," beginning at page 66 of this Prospectus.
Operating Your rights and obligations in the Company
Agreement and your relationship with the Manager will be
governed by the Operating Agreement. Some of the
significant features of the Operating Agreement
include:
Allocations of the Company's income, gains, losses
and distributions are in the same proportion that the
amount of the member's capital account bears to all
of the members' capital accounts of the Company. The
number of Units owned will be of no significance in
this determination.
The owners of a majority by value of the Company's
capital accounts (the "majority-in-interest") may
vote to:
o amend the Operating Agreement, subject to
certain limitations;
o change our business purpose;
o dissolve the Company; and
o to remove and replace the Manager.
In the event of any such vote, you will be bound by
the majority vote even if you did not vote with the
majority.
Mergers and Consolidations. The Company may not merge
or consolidate with any other limited liability
company, partnership or corporation without approval
by a majority-in-interest.
6
<PAGE>
For a more detailed discussion concerning the terms of the Operating
Agreement please refer to the "Summary of Operating Agreement, Rights of Members
and Description of Units" section of this Prospectus on page 66. 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.
7
<PAGE>
RISK FACTORS
There are risks associated with investing in the Company, most of which
the Manager does not control, such as trends in the economy, general interest
rates, income tax laws, governmental regulations, and the availability of
satisfactory investment opportunities. Also, you cannot properly evaluate
whether to invest in the Company without careful analysis of your own investment
objectives. Accordingly, it is important for you to discuss investment in the
Company with your own professional advisors.
Forward Looking Statements
Some of the information in this Prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
words such as "may," "will," "expect," "anticipate," "estimate," "continue" or
other similar words. These statements discuss future expectations, contain
projections of results of operations or of financial conditions or state other
forward-looking information. When considering such forward-looking statements
you should keep in mind the risk factors and other cautionary statements in this
Prospectus. Although management of the Company believes that the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, there are certain factors, in addition to these risk factors and
cautioning statements, such as general economic conditions, local real estate
conditions, or weather and other natural occurrences, as well as other risks and
uncertainties, that might cause a material difference between actual results and
those forward-looking statements. As such, this analysis may prove to be
inaccurate because of the assumptions made by the Manager or the actual
development of future events. No assurance can be given that any of these
forward-looking statements and predictions will ultimately prove to be correct
or even substantially correct.
Risks of Real Estate Mortgage Loans
The Company will invest in or purchase mortgage loans secured by real
property and mortgage loans on leasehold interests. For purposes of this
Prospectus, the term "mortgage" shall include mortgages and deeds and trust.
Therefore, it is subject to the risks usually associated with real estate
financing, such as the following:
o Repayment of a commercial loan generally is dependent upon the
ability of the property to produce cash flow and, to the extent
there is recourse to the borrower, the ability of the borrower to
repay the loan.
o Some of the factors that may affect the net operating income or
value of a mortgaged property can develop after the Company
acquires a mortgage loan and therefore could not be included in
the factors considered by the Manager in selecting the loan for
the Company.
o Net operating income can be volatile and may be insufficient to
cover debt service on the loan at any given time.
o Net operating income and property value of the mortgaged
properties may be affected adversely by a large number of factors,
such as:
|X| age, design and construction quality;
|X| attractiveness of competing properties;
|X| adequacy of the property's management and maintenance;
|X| increases in operating expenses;
|X| a decline in the financial condition of a major
tenant; or
|X| an increase in vacancy rates in the specific property
and in the region generally.
+ Risks of Default by Borrowers and Real Estate Ownership after
Foreclosures
Since most of the assets of the Company will be mortgage loans,
defaults by borrowers under those loans can have adverse consequences
to the Company's income. Examples of these are the following:
8
<PAGE>
o Operation of foreclosed properties may require the Company to
spend substantial funds for an extended period;
o Subsequent income and capital appreciation from the foreclosed
properties may be less than competing investments or insufficient
to meet any remaining expenses or surviving debt service;
o The proceeds from sales of foreclosed properties may be less than
the Company's initial mortgage investment in foreclosed properties
and/or the amount invested to improve these properties.
o Keeping the property leased by tenants may be unfeasible;
o Adverse general and local market conditions;
o High operating costs and high costs of complying with changes in
laws and regulations pertaining to taxes, use, zoning and
environmental protection, in each case for indeterminate periods;
and
o Possible liability for injury to persons and property.
Investing in construction mortgage loans is riskier than investing in
loans secured by properties with an operating history. The Company's
efforts to reduce this risk may include prior commitments for permanent
financing, strict voucher controls, progress payment programs, or
holding back loan proceeds under a permanent loan until construction is
completed, which may have the effect of limiting the number of
construction loans made available to the Company or determined by the
Company to be acceptable to the Company for investing. This smaller set
of options could potentially decrease the returns to the Company's
members. In addition, there is no assurance that the Company's efforts
to reduce risk will be successful.
Loans secured by leasehold interests are riskier than loans secured by
real property because the loan is subordinate to the lease between the
property owner (lessor) and the borrower. There is no assurance that
the Company will be able to obtain consents from the applicable lessor
to facilitate curing defaults under the lease in order to protect the
Company's rights as lender.
Second and wraparound mortgage loans (those under which the Company
generally makes the payments to the holders of the prior liens) are
substantially riskier than first mortgage loans because of:
o Their subordinate position in the event of default;
o A decline in the real estate market where the property underlying
the loan is located could adversely affect the value of the
property such that the aggregate outstanding balance of senior
liens and company loans may exceed the value of the underlying
property; and
o The potential need to cure liens of a senior loan holder, which,
if not satisfied, would cause the Company to lose its entire
interest in the loan.
+ Risks of Balloon Payment Loans
The Company intends to invest in or purchase some commercial property
loans that will have substantial remaining principal balances as of
their respective maturity dates. A borrower's ability to repay such a
balloon payment loan typically will depend upon its ability either to
refinance the loan or sell the mortgage property at a price sufficient
to permit repayment. A borrower's ability to refinance or sell is
affected by a large number of factors that affect the value or
operating income of a property, including among others the factors that
are listed under "Risks of Real Estate Mortgage Loans" at page 8. Thus,
balloon payment loans involve greater risks than fully amortizing
loans.
+ Risks of Large Loans
In situations where the Company has funds to invest in loans and
relatively smaller loans are not available, it may be required to
invest in loans of a higher amount than the average existing loans at
any time. This would decrease the diversification of Company loans and
increase the risk of losses through delinquencies.
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<PAGE>
+ Risks from the Manager Not Purchasing Defaulted Receivables and Loans
The Manager has no obligation or intention to purchase loans or
receivables that may go into default.
The Company intends to maintain working capital reserves of three
percent (3%) of its assets invested in mortgage loans. There is no
assurance that these reserves will be adequate to meet the Company's
needs from time to time.
+ Risks of Incorrect Original Collateral Assessment (Valuation)
Appraisals are obtained from certified third party appraisers on all
properties securing trust deeds. However, there is a risk that the
appraisals prepared by these third parties are incorrect, which could
result in defaults and/or losses related to these loans if the amount
realized upon a sale of the underlying property turns out to be
insufficient to cover the outstanding loan balance.
+ Risks of Unexpected Declines in Values of Secured Properties
The Company generally invests in or purchases loans with the following
maximum loan to appraised value ratios at the time of the investment:
o First Mortgage Loans (which will comprise the majority of
the Company's investments)---
75% of improved residential property,
60% of unimproved property,
75% of commercial property, and
75% of projected appraised value upon completion for
not-yet-constructed property;
o Second and Wraparound Loans --- total indebtedness of 75%.
Because values of properties can quickly decline below their appraised
values during the term of the associated Company loans, there is no
assurance that the foregoing ratios will be adequate to protect the
Company. Material declines in values could result in Company loans
being undersecured with subsequent losses if the Company has to
foreclose on such loans. If the Manager decreases the ratios above,
there is no assurance that the returns offered on subsequent mortgage
investments will remain at the levels currently anticipated by the
Manager.
+ Risks Related to Short Term Loans
The Manager intends that most of the Company's initial mortgage loans
will mature within one to seven years. For that reason, the Manager
will not regularly examine loans to see if the original loan to
appraised values are being maintained. Instead, it will review a loan
if there is a delinquency or indication of possible decline in the
market value of the secured property. Because the investment may not be
monitored as frequently as a longer-term investment would be, the
Company may not necessarily be aware of changes in the following
factors relating to its security, which could materially and adversely
affect the Company's results of operations:
o Physical evaluation of the property and area where it is located;
o Property occupancy and vacancy experience;
o Tenant mix and quality; and
o Financial stability of the borrower.
+ Risks Related to Change in Market Interest Rates
10
<PAGE>
o It is expected that at least for the foreseeable future the loans
invested in or purchased by the Company will be predominantly
fixed-interest rate loans. Market interest rates on investments
comparable to the Units could materially increase above the
general level of the Company's fixed-rate loans. Distributions by
the Company could then be less than the yield obtainable by the
members from these other investments.
o A decrease in market interest rates on variable rate loans in the
Company's portfolio would lower the yields of these investments.
Additionally, Company investments in new mortgage loans may
require the Company to accept these lower yields. Increases in
variable interest rates could increase default rates on such loans
if material increases in borrowers' monthly loan payments result.
o Risk related to interest rate shifts increases as the length of
maturity of a Company loan increases and the amount of Company
cash available for new loans decreases.
+ Risks of Equity or Cash Flow Participation in Loans
o The Company may sometimes obtain participation in any appreciation
in value or the cash flow from a secured property. If a borrower
defaults and claims that this participation makes the loan
comparable to equity (like stock) in a joint venture, the Company
might lose its secured position as lender in the property. Other
creditors of the borrower might then wipe out or substantially
reduce the Company's investment. Participation in property
appreciation could also expose the Company to the risks associated
with being an owner of real property.
o Controls on a borrower imposed by Company loans may also increase
the risk of claims of liability as lender against the Company for
wrongful acts of the borrower.
+ Risks of Uninsured Losses
o Company loans require that borrowers carry adequate hazard
insurance for the benefit of the Company. Some events are,
however, either uninsurable or insurance coverage is economically
not practicable. For example, flood insurance may not be available
at commercially reasonable rates in Nevada in the event of
unexpected water levels in that state. In California, losses from
earthquakes, floods or mudslides may be uninsured. These and other
scenarios in the other states in which the Company invests in
loans would cause losses to the Company on entire loans.
o If a borrower allows insurance to lapse, an event of loss could
occur before the Company knows of the lapse and has time to obtain
insurance itself.
o Insurance coverage may be inadequate to cover property losses,
even though the Manager will impose insurance requirements on
borrowers that it believes are adequate.
+ Proceeds of this Offering are not Committed to Specific Loans
The Company's assets will be invested primarily in a portfolio of
mortgage loans, the amount of which will depend upon the total amount
of the proceeds that are received from this offering. The Manager has
sole authority and control to choose loans for the Company, including
their type and amount. Members will be informed concerning the
Company's loan portfolio in reports provided by the Manager.
+ Risks of Real Estate Development on Property Acquired by the Company
When the Company has acquired property by foreclosure or otherwise as a
lender, it may develop the property, either singly or in combination
with other persons or entities. This could be done in the form of a
joint venture, limited liability company or partnership, with the
Manager, its affiliates and/or unrelated third parties, subject to the
Company having a controlling equity interest and other conditions. This
development can create the following risks:
11
<PAGE>
o Reliance upon the skill and financial stability of third-party
developers and contractors;
o Inability to obtain governmental permits;
o Delays in construction of improvements;
o Increased costs during development; and
o Economic and other factors affecting sale or leasing of
developed property.
+ Risks Related to Concentration of Mortgages in Nevada, Arizona and
California
The majority of the initial mortgage loans that the Company invests in
will be secured by Nevada, Arizona, or California real estate. This
concentration may increase the risk of delinquencies on our loans when
real estate or economic conditions are weaker in one or more of those
states than elsewhere, for reasons such as:
o economic recession;
o overbuilding of commercial properties; and
o relocations of businesses outside the area, due to factors such
as costs, taxes and regulatory environment.
These factors also tend to make more commercial real estate available
on the market and reduce values, and suitable mortgage loan investments
could become less readily available to the Company. In addition, such
factors tend to increase defaults on existing loans.
+ Hazardous or Toxic Substance Risks
Various federal, state and local laws can impose liability on owners,
operators, and sometimes lenders for the cost of removal or remediation
of certain hazardous or toxic substances on property. Such laws often
impose liability whether or not the person knew of, or was responsible
for, the presence of the substances.
When the Company forecloses or obtains a deed in lieu of foreclosure on
a mortgage loan, it becomes the owner of the property. As owner, the
Company, under some circumstances, could become liable for remediating
any hazardous or toxic contamination, which costs could exceed the
value of the property. Other costs or liabilities that could result
include the following:
o damages to third parties or a subsequent purchaser of the property;
o loss of revenues during remediation;
o loss of tenants and rental revenues;
o payment for clean up;
o substantial reduction in value of the property;
o inability to sell the property; or
o default by a borrower if it must pay for remediation.
Any of these could create a material adverse effect on Company assets
and/or profitability.
Lack of Liquidity
12
<PAGE>
+ General
You may not be able to obtain cash for Units you own on a timely basis.
There are a number of restrictions on your ability to sell or transfer
your Units or to have them repurchased by the Company. These are
summarized in this Risk Factor. For further discussion, please refer to
page 66, under the caption "Summary of Operating Agreement, Rights of
Members and Description of Units."
+ No Free Tradability of Units
The Units are restricted as to free tradability under the Internal
Revenue Code of 1986, as amended (the "Code"). To preserve the
Company's status as a limited liability company taxable as a
partnership and to prevent its being taxable as a corporation, you will
not be free to sell or transfer your Units at will, and they are likely
not to be accepted by a lender as security for borrowing. Factors
affecting tradability are the following:
o There is no market for the Units, public or private, and there is
no likelihood that one will ever develop.
o You must be prepared to hold your Units as a long-term investment.
o To comply with applicable tax laws, the Manager may refuse on
advice of tax counsel to consent to a transfer or assignment of
Units. The Manager must consent to any assignment that gives the
assignee the right to become a member, and its consent to that
transaction may be withheld in its absolute discretion.
o Sales to or by residents of Nevada are limited by Nevada state
regulations that approximate Regulation D promulgated under the
Securities Act of 1933, as amended. Other states may have further
regulated such sales. In California, for example, the Commissioner
of Corporations has also imposed a restriction on sale or transfer
because of the investor suitability standards that apply to a
purchaser of Units. Refer to the section beginning at page 18,
under the caption "Investor Suitability Standards." All purchasers
in this offering are advised to speak with counsel to see what
restrictions may be applicable in their particular situations.
+ Repurchase of Units by the Company is Restricted
If you purchase Units pursuant to the offering made by this Prospectus,
you must own them for at least one year before you can request that the
Company repurchase any of those Units. This restriction does not apply
to Units purchased through the Company's Distribution Reinvestment
Plan, as set forth in the Company's Operating Agreement. Some of the
other restrictions on your requesting that the Company repurchase your
Units are the following:
o You must give a written request to withdraw at least 60 days
prior to the withdrawal;
o Payments only return all or the requested portions of your Capital
Account and are not affected by the value of the Company's assets,
except upon final liquidation of the Company;
o Payments are made only to the extent the Company has available
cash;
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 aggregate capital accounts of the
members;
o Payments are only made by the Company on the last day of any
month.
13
<PAGE>
If the Company does not sell sufficient Units in this offering or if
principal payments on existing loans decrease, your ability to have
your Units repurchased may be adversely affected, especially if the
total amount of requested withdrawals should increase substantially. To
help prevent lack of such liquidity, the Company will not refinance or
invest in new loans using payments of loan principal by borrowers or
new invested capital of members, unless it has sufficient funds to
cover requested withdrawals.
Risks of Lack of Control by Members
+ Rights of Members Are Restricted
No member can exercise control over the Company's affairs, which is
entirely in the hands of the Manager. Voting of members is provided for
in a limited number of specific situations. A majority-in-interest of
members can take action in those situations and bind all of the
members. These situations include votes to:
o dissolve the Company;
o change the nature of the Company's business;
o amend the Operating Agreement;
o remove and replace the Manager; or
o approve a merger or sale of all or substantially all of the
assets of the Company.
+ Greater Uncertainty Investing in Unspecified Mortgage Fund
Because all of the proceeds of this offering are not committed to a
specific property, there is increased uncertainty and risk to
investors, who will not be able to evaluate the manner in which the
proceeds are to be invested and the economic merit of the particular
real estate projects prior to investment. Additionally, there may be a
substantial period of time before the proceeds of this offering are
invested, and therefore a delay to investors in receiving a return on
their investment.
+ Risk if Sole Manager Withdraws or is Terminated
The Company presently has only one Manager. If the Manager withdraws
from the Company or is terminated as Manager by its dissolution or
bankruptcy, the Company itself will be dissolved unless the members,
acting by a majority-in-interest, agree to continue the Company and,
within 6 months, admit one or more successor Managers. There is no
assurance that the members will be able to coordinate such activities
or that the assets of the Company would be monitored during such period
to the same extent as they had been monitored by the Manager. No
assurance is given that the Members will choose a Manager or Managers
that will run the Company's business as well as or better than the
current Manager.
Risks related to Capital Account and Unit Calculations
+ Capital Accounts
The Manager will establish for each member an individual capital
account on the books of the Company, initially in the amount of the
member's first capital contribution for Units. The capital account will
receive that percentage of the Company's income, gains, losses and
distributions that the amount of the member's capital account bears to
all of the members' capital accounts of the Company.
14
<PAGE>
Notwithstanding anticipated fluctuations in the value of Units (as
described below), capital accounts generally are not adjusted to
reflect unrealized appreciation or depreciation of the Company's
underlying assets (except for write-downs). As a result, each member's
capital account may not reflect the member's proportionate interest in
the fair market value of the Company's underlying assets, particularly
immediately after a capital contribution (and corresponding Unit
issuance). For example, if the fair market value of the Company's
assets at the time of a capital contribution (including under the
Company's dividend reinvestment plan) is greater than its carrying
value (cost) on the books of the Company, then, because there are no
interim revaluations of the capital accounts (except for write-downs),
the right to a subsequent allocation of those inherent gains will be
shared with new members (or members making reinvestments), which
results in the dilution in the member's proportionate interest in the
fair market value of the underlying assets.
+ Valuation of Units
The value of a Unit is based on the proportional interest of an
individual member's capital account compared to all of the members'
capital accounts of the Company. A member's capital account is then
adjusted upwards and downwards based on the income, gains, losses and
distributions from the Company. Consequently, the value and
distribution rights for a Unit at any point in time may be less or more
than $1.00, the price subscribers will be paying for Units in this
offering, with the value of an individual Unit varying based on when
the Unit was purchased. For example, if the fair market value of the
Company's assets at the time of a capital contribution (including under
the Company's dividend reinvestment plan) is less than its carrying
value (cost) on the books of the Company, then the value of a member's
proportionate interest in the fair market value of the underlying
assets immediately after a capital contribution to the Company may be
less than one dollar. Additionally, the amount of gains, losses and
distributions to be allocated to any member is based on the member's
capital account as of the date of such allocation, which may be
different from the member's proportionate share of the Units held by
all members and may also be different from the member's proportionate
interest in the fair market value of the underlying assets.
Conflicts of Interest Risks
The Manager and its affiliates are subject to various conflicts of
interest in managing the Company. The Company pays the Manager substantial fees
that are not determined by arms-length negotiations. These fees are shown in
tabular form in the prospectus summary and in the section entitled "Compensation
of the Manager."
+ Payment of Fees to Manager and its Affiliates by the Company
The Company is responsible for paying the following fees, compensation
and expenses to the Manager and its affiliates:
1. Front-End Fees. Compensation for services rendered in this
offering to DM Financial Services, Inc., an affiliate of the
Manager. These fees are paid directly by the Company and are
taken out of any funds used to make investments by the Company,
which diminishes the funds that can generate cash flow for the
Company's members.
2. Promotional Interest of the Manager. The Manager has a one-half
percent (0.5%) ownership interest for which it did not pay
consideration. The Manager can receive distributions on its
interest, including the portion for which it paid consideration,
only after all members have received a return of 100% of their
capital contributions.
3. Ongoing/ Recurring Fees.
o Management fees;
o Reimbursement of permitted operating expenses attributable
to the Company; and
o Real estate brokerage fees.
15
<PAGE>
The Company must pay these fees monthly or upon sales of
mortgages or real property owned due to foreclosure, as
determined by the Manager within the limits provided in the
Operating Agreement. The Manager may continue to receive
management fees even if the Company is not generating
sufficient income to make distributions to the members.
Brokerage fees reduce the proceeds to the Company of
transactions without regard to the profitability of such
transactions.
+ Payment of Fees to Manager and its Affiliates by Borrowers
The Manager also will earn fees if the Company enters into mortgage
investment transactions where a borrower has employed and agreed to
compensate the Manager or an affiliate of the Manager to act as a
broker in arranging the loan. Origination, placement and investment
evaluation fees to the Manager are generally payable up front from
payments made by third parties. Borrowers will also pay the Manager or
an affiliate of the Manager a fee for servicing their respective loans.
The Manager and/or an affiliate will also receive fees for escrow
services, reconveyance of mortgages, extending and permitting the
assumption of loans. The Manager 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. All of these fees
belong to the Manager and are not shared with the Company.
The members must rely on the fiduciary duty of the Manager to deal fairly with
the members in all of these situations.
+ Manager Not Full Time
The Company does not have its own officers, directors, or employees.
The Manager supervises and controls the business affairs of the
Company, locates investment opportunities for the Company and renders
certain other services. The Manager devotes only such time to the
Company's affairs as may be reasonably necessary to conduct its
business. The Manager may be a general partner or manager of other
partnerships or limited liability companies and has other business
interests of significance. See "Management" at page 31.
+ Affiliates of the Manager as Underwriters
To the extent the broker-dealer conducting the offers and sales of the
Units is related to the Company, which it is, there is a perceived risk
that it may not be performing its due diligence with the same degree of
care as an unrelated third party.
+ Joint Ventures with Affiliates and Third Parties
The Company may also participate in loans with other lenders (including
certain affiliates or other limited partnerships organized by the
Manager), other individuals and pension funds, by providing funds for
or purchasing a fractional undivided interest in a loan meeting the
requirements set forth above. Although the Company presently intends to
only participate in such loans with publicly registered affiliates,
there is no assurance that it will not invest with parties not under
common control in the future. In joint ventures with related parties,
there is a risk of impasse on joint venture decisions, as no program
has a controlling interest, and the risk that although the Company may
have the right to buy an asset from its co-venturer or the joint
venture itself, it may not have the resources to do so in the future.
The Company will only invest in joint ventures with unrelated parties
if it has a controlling interest in such joint venture.
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<PAGE>
Competition Risks
The mortgage lending business is highly competitive, and the Company
competes with numerous established entities, some of which have more financial
resources and experience in the mortgage lending business than the Manager. The
Company encounters significant competition from banks, insurance companies,
savings banks, thrifts, mortgage bankers, pension funds, real estate investment
trusts, and other lenders with objectives similar in whole or in part to those
of the Company. Any general increase in the availability of funds to mortgage
lenders may increase competition for loans and could reduce the yields they
produce, including those of the Company.
Taxation Risks
The tax consequences of investing in the Company may differ materially
depending on whether the member is an individual taxpayer, corporation, trust,
partnership or tax-exempt entity. Therefore, members should discuss investment
in the Company, including the following taxation risks, with their own tax
advisor.
Risks of Taxation as a Corporation. The Company has obtained an opinion
from tax counsel, Wendel, Rosen, Black & Dean, LLP, Oakland, California, that
under Treasury Regulations enacted in 1996, the Company will be classified as a
partnership for tax purposes. Tax counsel has also given its opinion that the
Company will not be classified as a "publicly traded partnership" taxable as a
corporation. However, there can be no assurance that such status might not be
lost because of future changes in applicable laws or regulations. The Company
has not and will not apply for a ruling from the IRS that it is properly
classified as a partnership rather than an association taxable as a corporation.
If the Company were taxable as a corporation, the Company would be
subject to federal income tax on any taxable income at regular corporate tax
rates. The members would not be entitled to take into account their distributive
share of the Company's deductions or credits, and would be subject to tax on
their share of the Company's income to the extent distributed either as
dividends out of current or accumulated earnings and profits or as taxable gain
in excess of the tax basis of their Units. Classification of the Company as an
entity taxable as a corporation would result in a reduction in yield and cash
flow, if any, to a member on its investment. See Federal Income Tax
Consequences--Classification as a Partnership, at page 53.
Other Risks Related to Tax Aspects. In evaluating an investment in the
Company, a member should consider all of the tax consequences thereof,
including, but not limited to: (i) the possibility that the Company might not be
considered to be engaged in a trade or business, with the result that income or
loss of the Company will be considered portfolio income or loss and an
individual member's share of expenses of the Company will be "miscellaneous
itemized deductions," deductible only to the extent all miscellaneous itemized
deductions exceed 2% of the member's adjusted gross income (subject to certain
additional limitations in the case of certain high-income taxpayers); (ii) the
possibility that interest incurred to carry Units may not be deductible under
the "investment interest" limitation of Section 163(d) of the Code; (iii) the
possibility that an audit of the Company's information returns may result in the
disallowance of certain deductions, an increase in the Company's gross income,
and an audit of the income tax returns of the members, which could result in
adjustments to the members' nonpartnership items of income, deductions or
credits, and the imposition of penalties and interest relating to such
adjustments and additional expenses in connection with filing amended income tax
returns; (iv) if the Company invests in or purchases any loan in which it
participates in the appreciation of the mortgaged property or in the cash flow
from the operations thereof, the IRS may attempt to recharacterize the entire
loan as an equity interest in the underlying property--there can be no assurance
that the IRS will not be successful in this regard; (v) the possibility that
state or local income tax treatment may not be similar to federal income tax
treatment; and (vi) with respect to tax-exempt entities investing in the
Company, the possibility that all or a portion of the income from the Company
may be deemed "unrelated trade or business income" subject to tax.
Risks of Investment by Tax-Exempt Entities. Prospective investors that
are qualified employee benefit plans and individual retirement accounts
("Qualified Plans") should consider a number of factors which may affect their
decision to invest in the Company, including whether an investment in the
Company would comply with the "prudent man" rule of the Employee Retirement
Income Security Act of 1974 ("ERISA"); whether an investment in the Company
would be consistent with the requirement that the assets of a Qualified Plan be
invested in a diversified
17
<PAGE>
manner; and whether an investment in the Company would be consistent with the
liquidity needs of the prospective investor. The resolution of these issues
could vary for each Qualified Plan considering an investment in the Company,
depending upon, among other factors, the exact composition of the assets owned
by the Qualified Plan. In addition, the Company does not intend to provide
investors with annual appraisals of Units or Company assets. The Manager,
however, will furnish its best estimate of the value of the Units or the
Company assets, if requested to do so by any member. Each Qualified Plan
contemplating an investment in the Company should consider the impact that such
an investment will have on the requirement that the Plan revalue its assets on
at least an annual basis.
INVESTOR SUITABILITY STANDARDS
You must meet the investor suitability standards in this section to
purchase Units and/or to participate in the Company's Distribution Reinvestment
Plan. In addition, the Company and certain states have placed various
restrictions on the resale or transfer of Units. Please review the appendix to
the Subscription Agreement (which is found at Exhibit B to this prospectus)
prior to executing it, as you will be deemed to have made representations as to
certain aspects of the suitability standards for the state in which you reside
(as indicated in the appendix to the Subscription Agreement).
The Subscription Agreement outlines the suitability standards and
requests the disclosure from each investor that it meets the minimum standards.
The Manager reviews and screens all Subscription Agreements, and rejects
Subscription Agreements from investors not meeting the suitability standards. DM
Financial Services, Inc. and other participating securities broker/dealers that
offer and sell Units for the Company must diligently inquire of all prospective
investors to ascertain if the Units are suitable for the investor in light of
such investor's age, educational level, knowledge of investments, financial
means and other pertinent factors and maintain records for at least six years of
the information used to determine that an investment in Units is suitable and
appropriate for each investor. The Company cannot accept subscriptions from any
person or entity where the representations required are either not provided or
are provided but inconsistent with the determination that the investment is
suitable for the subscriber. The Manager has the unconditional right to accept
or reject any subscription in whole or in part.
Units represent a long-term investment with limited liquidity. You may
not be able to liquidate your investment in the event of an emergency or for any
other reason. Units will be sold to you only if you have, and you also represent
in the Subscription Agreement that you have, either:
o a minimum net worth (exclusive of home, home furnishings and
automobiles) of $45,000 plus a minimum annual gross income of at
least $45,000;
o a minimum net worth (exclusive of home, home furnishings and
automobiles) of $150,000, irrespective of annual gross income; or
o in the case of purchases by fiduciary accounts, a fiduciary that
meets one of the foregoing conditions.
As noted in the first paragraph in this section, deviations from these standards
or additional requirements are set forth in the appendix to the Subscription
Agreement.
If the investment is a gift to a minor, the custodian or the donor must
meet the above conditions.
In certain states, you may transfer Units only to persons who meet
similar suitability standards. You should carefully read the requirements in
connection with resales of Units in "Summary of Operating Agreement, Rights of
Members and Description of Units--Assignment and Transfer of Units" at page 69,
and in the Subscription Agreement.
Investment in the Company involves certain risks and, accordingly, is
suitable only for entities or persons of adequate means. Due to the nature of
the Company's investments, it is likely that all or substantially all of the
income of the Company will be taxable to the members as ordinary income. See
"Federal Income Tax Consequences" at page 52. The Units may, therefore, be
suitable for:
18
<PAGE>
o a corporate pension or profit sharing plan ("Corporate Plan");
o a Keogh Plan account ("Keogh Plan") (Corporate Plans and Keogh
Plans are referred to herein, collectively, as "Qualified
Plans");
o an Individual Retirement Account ("IRA" or "Roth IRA");
o a Simplified Employee Pension ("SEP");
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); and
o persons seeking current taxable income.
It should be noted, however, that an investment in the Company will not
create an IRA for you and that, in order to create an IRA, you must comply with
the provisions of Section 408 of the Code.
The investment objectives and policies of the Company have been
designed 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." In accordance with applicable regulations, the Manager
intends to manage the Company to assure that an investment in the Company by a
Qualified Plan will not make the assets of the Company "plan assets." The
regulations are also applicable to an IRA. See "Federal Income Tax Consequences"
at page 52.
The Manager is not permitted to allow any Qualified Plan to purchase
Units if the Manager has investment discretion with respect to the assets of the
Qualified Plan invested in the Company, or regularly gives individualized
investment advice that serves as the primary basis for the investment decisions
made with respect to such assets. This prohibition is designed to prevent
violation of certain provisions of ERISA.
You should obtain the advice of your attorney, tax advisor, and/or
business with respect to the legal, tax and business aspects of this investment
prior to subscribing for Units.
19
<PAGE>
NOTICE TO CALIFORNIA RESIDENTS
All certificates representing Units resulting from any of offers or
sales of Units will bear the following legend restriction 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 Corporations 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 is furnished to each California investor by the Manager.
20
<PAGE>
USE OF PROCEEDS
The Manager has not identified the mortgage loans in which it will
invest the proceeds of this offering, although the Company will invest in
mortgage loans of the kind that are described under "Business - Types of
Mortgage Loans," at page 43. Members, however, have no advance information
concerning particular investments that the Company may make and must rely solely
upon the judgment and abilities of the Manager. The Manager has complete
discretion in investing the proceeds from the sale of Units, subject to certain
limitations set forth in the Operating Agreement.
There is no assurance that Units will be sold or that any proceeds in
excess of the Minimum Proceeds of $1,500,000 (less certain expenses of the
offering) will be received. If the Minimum Proceeds are received within the time
permitted by this Prospectus under "Plan of Distribution" at page 71, the
Company will continue this offering seeking to obtain the proceeds from the
Maximum Offering. Since there will be no escrow of those funds, there can be no
assurance that any proceeds other than the Minimum will be obtained from the
offering, which would severely restrict the Company's mortgage investments and
its intended operations, and, depending on the rates of withdrawal by members
and principal payments on loans by borrowers, withdrawals by members could be
further restricted due to lack of liquidity. The following table sets forth the
application of the sales proceeds of the Minimum and Maximum number of Units
being offered. Pending investment in such mortgage loans, the Company may invest
in short-term liquid investments such as U.S. Treasury bills, notes or bonds,
certificates of deposit or commercial paper.
<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:
Public Offering Expenses (1) .... 210,000 (2) 14.0% 2,500,000 2.5%
------------------------ ------------ ---------------------- ------------
Proceeds Available for Investment 1,290,000 86.0% 97,500,000 97.5%
Less:
Cash Reserves (3) ............... $45,000 3.0% 3,000,000 3.0%
------------------------ ------------ ---------------------- ------------
Cash Available for Investment in
Mortgage Loans (4) ................. $ 1,245,000 83.0% $94,500,000 94.5%
======================== ============ ====================== ============
</TABLE>
- ----------
(1) Includes filing and review fees, legal, accounting, printing and other
expenses of this offering, estimated not to exceed this amount.
(2) If the expenses of this offering exceed 14% of the gross offering
proceeds, Sunderland Corporation, the owner of the Manager, has agreed
to pay the expenses in excess of that amount. For the Minimum Offering
of Units, this amount paid by Sunderland will be $290,000, based upon
anticipated offering expenses of $500,000.
(3) The Company will maintain working capital reserves of at least 2 1/2%
of the aggregate capital accounts of the members other than the
Manager. This reserve is available to pay expenses in excess of
revenues, satisfy obligations of underlying securities, expend money to
satisfy unforeseen obligations of the Company and for other permitted
uses of the Company's working capital. The Manager will make a capital
contribution in the amount of one-half of one percent (0.5%) of the
aggregate capital accounts of the other members, making the total
reserves equal to three percent (3%) of the aggregate capital accounts
of members. Working capital reserves of up to three percent (3%) are
included in the funds committed to mortgage investments in determining
whether the Company has invested at least 84% of its capital
contributions in mortgage investments.
(4) The Manager has not set the amount of sales proceeds to be allocated to
the various types of mortgage loans to be invested in or purchased by
the Company. Each loan presented to the Company is reviewed to
determine if it meets the criteria established by the Manager. See
"Business - Principal Investment Objectives" at page 42. It is expected
that the majority of the funds will be invested in first mortgage loans
on income-producing commercial properties (including properties
currently under construction). The Company does not expect to use any
of the proceeds of this offering to acquire assets other than in the
ordinary course of its business.
21
<PAGE>
CAPITALIZATION OF THE COMPANY
The capitalization of the Company as of December 31, 1999, and as
adjusted to give effect to the sale of the minimum and maximum number of Units
offered hereby, excluding the promotional contributions (and interest) of the
Manager, is as follows:
<TABLE>
<CAPTION>
As Adjusted (1)
---------------
Minimum Number Maximum Number
Actual Of Units Sold Of Units Sold
------ -------------- --------------
<S> <C> <C> <C>
Members' Equity - actual 115,100 Units,
minimum 1,615,100 Units, maximum $ 115,100 $ 1,405,100 $ 98,000,000
100,115,100 Units
- ----------
</TABLE>
(1) Amounts are shown net of payments of certain estimated public offering
costs aggregating $500,000 (to the extent that Sunderland Corporation
does not pay those costs - see footnote (2) under "Use of Proceeds")
and $2,500,000 if the minimum and maximum number of Units are sold,
respectively.
CAPITAL CONTRIBUTION OF THE MANAGER
The Manager is required to contribute to capital one-half of one
percent (0.5%) of the aggregate capital contributions of the members. In
addition, the Manager is entitled to a promotional interest of one-half of one
percent (0.5%) of the aggregate capital accounts of the members. If the minimum
of 1,500,000 Units is sold in the offering, $7,500 of the Manager's existing
$115,100 contribution will be deemed to be the Manager's required minimum
capital contribution, and the Manager will be credited with an additional $7,500
in promotional interest. If the maximum of 100,000,000 Units is sold in the
offering, the Manager will contribute $384,900 (plus the existing $115,100
contribution) and will be credited with an additional $500,000 in promotional
interest. If a number of Units between the minimum and the maximum number of
Units is sold, those amounts will be adjusted accordingly.
COMPENSATION OF THE MANAGER AND ITS AFFILIATES
The Manager and its affiliates receive significant compensation and fees for
services to and for the benefit of the Company and third party borrowers in
connection with the organization of the Company and the Manager's making,
arranging, evaluating, extending and permitting the assumption of loans. These
fees are summarized in the table below.
Compensation to The Manager and its affiliates receive significant
Manager and its compensation and fees for services to, and for the
Affiliates benefit of, the Company and third party borrowers for
the organization of the Company and the Manager's
making, arranging, evaluating, extending and permitting
the assumption of loans. These fees are summarized in
the table below. A more complete description of these
fees can be found in the section of this prospectus
entitled "Compensation of the Manager".
<PAGE>
22
<TABLE>
<CAPTION>
Compensation/ Section
of Prospectus Description of Fee Amount of Fee
--------------------- ---------------------------------- ----------------------
<S> <C> <C> <C>
1. Front-End Fees
Paid by Fund
Compensation for Commission and dealer management fees Up to one and one-half
Services in the paid to broker-dealer affiliates of percent (1.5%) of gross
Offering (see "Plan of the Manager; recoupment of expenses proceeds of this
Distribution") incurred in the offering offering, of which a
maximum of one-half of
one percent (0.5%) of
gross proceeds is for
the reimbursement of
expenses
Paid by Borrower Loan Brokerage Fees Points and fees paid for the 2%-6%. Any points or
(payable to Manager or origination/placement of loans fees paid up front;
an affiliate) dictated by local market
conditions
Loan Evaluation and Points and fees for Manager's Approximately 2-5%.
Processing Fees evaluation, analysis and processing Dictated by local market
of a loan conditions
The Front End Fees above plus all other organizational and acquisition
fees and expenses paid to third parties out of the proceeds of this
offering, whenever paid, including sales commissions of up to three
percent (3%), marketing incentive fees of up to one half of one percent
(0.5%) and reimbursement of accountable expenses of up to one-half of
one percent (0.5%) of gross proceeds in this offering to be paid to
unaffiliated selling broker-dealers, if any, shall in no event exceed 14%
of the aggregate amount of the Company's capital contributions.
2. Promotional Promotional Interest Additional ownership interest vested 0.5% ownership interest
Interest of of Manager ("Capital in Manager in addition to 0.5%
Manager Contribution of interest paid for. The
Manager," Manager may only receive
"Distribution") distributions on its
interest, including the
portion for which it paid
consideration, after all
members receive a return of
100% of their initial capital
contributions
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
3.Ongoing/ Recurring
Fees
Paid by Fund
Paid to the Manager for managing Initially up to three-quarters
Management Fees Company loans one percent (0.75%) of the
original capital contributions
committed to mortgage loans committed
(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 the
Company's assets (including
working capital), less any
indebtedness of the Company.
For funds not invested in
mortgages, the percentage paid
as a management fee is one-half
of one percent (0.5%).
Reimbursement of Manager's or affiliate's recoupment Lesser of cost or third
Operating Expenses of of charges for conducting the party rate
Fund Company's business
Real Estate Brokerage Amounts paid to the Manager for Up to 3% of proceeds
Fees on Property reselling properties foreclosed upon where substantial Resales
contribution by Manager (up to
6% for all persons involved)
Paid by Borrower
Servicing Fee (payable Fees payable for the administration 0.25% of the outstanding
to the Manager and its of each borrower's loans principal balance of the
affiliates) loan
Escrow/ReconveyanceLoan Fees payable for other services As permitted by law and
Extension and provided by the Manager or its local market conditions;
permitting loan affiliates anticipated to be 2-5%
Assumption (payable to
the Manager and its
Affiliates)
Late Fees/ Prepayment Fees payable when payments under As permitted by law and
Fees mortgage loan are not timely made local market conditions
or in some cases upon prepayment
of mortgage loans
* * *
</TABLE>
24
<PAGE>
Front End Fees
Paid by the Company
Compensation for Services in the Offering
DM Financial Services, Inc., an affiliate of the Company, will be
offering the Units for sale and will be receiving commissions, dealer management
fees and reimbursements of bona fide accountable expenses of up to one and
one-half percent (1.5%) of gross proceeds, of which a maximum amount of one-half
percent (0.5%) of gross proceeds is for the reimbursement of expenses.
Paid by Borrowers
Loan Brokerage Fees
The Manager or an affiliate will be permitted to receive loan brokerage
commissions for services rendered for other aspects of a borrower's mortgage
investments. The Manager anticipates that loan brokerage commissions will
average approximately two to six percent (2-6%) of the principal amount of each
Mortgage Investment, subject to market conditions. The loan brokerage
commissions typically will be paid by the borrower through the title company or
escrow agent at the close of escrow.
Loan Evaluation and Processing Fees
Borrowers will pay the Manager fees for the Manager's evaluation and
processing of a mortgage loan. These fees are anticipated to be between two and
five percent (2-5%). These fees will be subject to applicable local laws and
market conditions where the loans will be made.
Limitation on Up-Front Fees
The Front End Fees above plus all other organizational and acquisition
fees and expenses paid to third parties out of the proceeds of this offering,
whenever paid, including sales commissions of up to three percent (3%),
marketing incentive fees of up to one half of one percent (0.5%) and
reimbursement of accountable expenses of up to one-half of one percent (0.5%) of
gross proceeds in this offering to be paid to unaffiliated selling
broker-dealers, if any, shall in no event exceed 14% of the aggregate amount of
the Company's capital contributions.
Promotional Interest of Manager
The Manager receives a promotional interest of one-half of one percent
(0.5%) of the aggregate capital accounts of the members, which is additional
compensation to the Manager. The Manager may also receive additional
distributions of Company income from its promotional interest. For example, if
the Company generates an annual yield on capital of the members of 10%, the
Manager would receive additional distributions on its promotional interest of
approximately $50,000 per year if $100,000,000 of Units were outstanding. If the
Company were then liquidated, the Manager could receive up to $500,000 in
capital distributions as a result of its promotional interest without having
made equivalent cash contributions. Any distributions on the Manager's interest
in the Company, including the portion for which the Manager paid consideration,
would only be made after all members receive a return of 100% of their initial
capital contributions.
25
<PAGE>
Ongoing/ Recurring Fees
Paid by the Company
Management Fees
The Company will pay the Manager 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 the Company's assets (including working capital
reserves), less any indebtedness of the Company. For funds not invested in
mortgages, the percentage paid as a management fee is one-half of one percent
(0.5%). The Manager is entitled to receive a management fee on all loans,
including those that are delinquent. The Manager believes this is justified by
the added effort associated with such loans.
Reimbursement of Other Expenses
The Manager is reimbursed by the Company for the actual cost of goods
and materials used for or by the Company and obtained from unaffiliated entities
and the actual cost of services of non-management and non-supervisory personnel
related to the administration of the Company (subject to certain limitations
contained in the Operating Agreement).
Real Estate Brokerage on Resales of Property
The total compensation paid to all persons for the sale of a real
property held by the Company as a result of foreclosure shall be limited to a
competitive real estate commission, not to exceed six percent (6%) of the
contract price for the sale of the real property. If the Manager or its
Affiliate provides a substantial amount of the services in the sales effort, it
may receive up to one half (50%) of the competitive real estate commission, not
to exceed three percent (3%) of the contract price.
Paid by Borrowers
Servicing Fees
The Manager or an affiliate will service all of the mortgage loans held
by the Company. The Operating Agreement permits the Manager or affiliate to
receive a servicing fee of up to one-quarter of one percent (0.25%) of the
unpaid balance of each mortgage loan held by the Company serviced.
Escrow, Other Loan Processing, Reconveyance, Extention and Assumption
Fees
The Manager (and its affiliates, in the case of assumption fees) may
charge such fees with respect to these services as are consistent with
applicable local law, subject to market demands.
Late Fees and Prepayment Fees
The Manager 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.
CONFLICTS OF INTEREST
The Company and its members are subject to various conflicts of
interest arising out of their relationship with the Manager. These conflicts
include, but are not limited to, the following:
26
<PAGE>
+ Payment of Fees to Manager and its Affiliates by the Company
The Company is responsible for paying the following fees, compensation
and expenses to the Manager and its affiliates:
1. Front-End Fees. This compensation is for services rendered in this
offering, payable to DM Financial Services, Inc., an affiliate of
the Manager. These fees are paid directly by the Company and are
taken out of any funds used to make investments by the Company,
which diminishes the funds that can generate cash flow for the
Company's members.
2. Promotional Interest of the Manager. The Manager has a one-half
percent (0.5%) ownership interest for which it did not pay any
consideration. The Manager will only receive distributions on its
interest in the Company, including the portion for which it paid
consideration, after all members have received a return of 100% of
their initial capital contributions.
3. Ongoing/ Recurring Fees.
o Management fees;
o Reimbursement of permitted operating expenses attributable
to the Company; and
o Real estate brokerage fees.
The Company must pay the annual management fee in monthly
portions and the brokerage fees upon sales of mortgages or
real property acquired upon a foreclosure, as determined by
the Manager within the limits provided in the Operating
Agreement. The Manager may continue to receive management fees
even if the Company is not generating sufficient income to
make distributions to the members. Brokerage fees reduce the
proceeds to the Company of transactions without regard to the
profitability of the transactions.
+ Payment of Fees to Manager and its Affiliates by Borrowers
The Manager also will earn fees if the Company enters into mortgage
investments where a borrower has employed and agreed to compensate the Manager
or an affiliate of the Manager to act as a broker in arranging the loan.
Origination, placement and investment evaluation and processing fees to the
Manager are generally payable up front from payments made by third parties.
Borrowers will also pay the Manager or an affiliate a fee for servicing their
loans. The Manager will also receive fees for escrow services, reconveyance of
mortgages, and extending and permitting the assumption of loans. The Manager
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 loan. All of these
fees belong to the Manager or affiliate, as applicable, and are not shared with
the Company.
Compensation of the Manager Not Negotiated
The compensation payable to the Manager was not determined by
arms-length negotiations.
Other Mortgage Lending Activities
The Manager may form additional limited liability companies and other
entities to engage in activities similar to and with the same investment
objectives as the Company. The Manager may be engaged in sponsoring other
entities at approximately the same time as the Company's securities are being
offered or its investments are being made. The Manager also originates, places,
sells and services loans for individuals or unaffiliated entity investors. These
activities may cause conflicts of interest between such activities and the
Company and the duties of the Member concerning such activities and the Company.
The Manager will attempt to minimize any conflicts of interest that may arise
among these various activities.
27
<PAGE>
Competition by the Company with Other Entities for Management Services
The Company does not have independent management and relies on the
Manager for the operation of its business. The Manager devotes only such time to
the business of the Company as, in its judgment, is reasonably required. The
Manager has conflicts of interest in allocating time, services, and functions
between the Company and other present and future entities which the Manager has
organized or may in the future organize or with which it is or may be
affiliated, as well as other business ventures in which it is or may be
involved. The Manager is engaged, and in the future may be engaged, for its own
account, or for the accounts of others, in other business ventures, and neither
the Company nor any member is entitled to any interest in such other ventures.
No Separate Legal Representative
The same legal counsel currently represents the Company and the
Manager. The Company does not have independent legal counsel. If a conflict of
interest should arise from such dual representation, appropriate consideration
will be given to the extent to which the interests of the Company may diverge
from those of the Manager, and, if necessary, separate counsel will be obtained
for the Company and the Manager.
Acquisition of Loans from Manager
The Manager arranges and makes all of the loans invested in or
purchased by the Company and sells those loans to the Company at the lower of
the Manager's cost or then-current market value. The Manager also arranges and
makes mortgage loans for its own account and for other investors. There may be a
conflict of interest between the Company and the Manager or other investors for
whom it selects mortgage loans for investment. This could arise from the fact
that the Manager may be choosing among various loans that it may have
originated, placed or evaluated with different interest rates or other terms and
features, for placement either in the Company's mortgage loan portfolio, with
other investors, with the Manager itself or with other affiliates. Loans may
sometimes be acquired by the Company at a discount from face value. The members
must rely upon the Manager to honor its fiduciary duty to protect their
interests in its choosing, investing in or purchasing of mortgage loans.
A committee of officers and directors of the Manager makes all
decisions regarding mortgage loans to be invested in or purchased by the
Company. This committee is currently comprised of Michael V. Shustek, a director
of the Manager, Stephen J. Byrne, the President and a director of the Manager,
and Lance L. Bradford, the Treasurer and a director of the Manager. See
"Management."
Investing in Loans with Manager or Affiliates
The Company may invest in mortgages acquired by the Manager or
affiliates. The Company's portion of the total mortgage loan may be smaller or
greater than the portion of the loan made by the Manager or its affiliates but
will generally be on terms substantially similar to the terms of that entity's
investment. Such an investment would be made after the Manager determines that
the entire loan is not suitable for the Company. However, investing with the
Manager or its affiliates could result in a conflict of interest between the
Company and the Manager or its affiliates in the event that the borrower
defaults on the loan and both the Company and the Manager or its affiliates seek
to protect their own interest in the loan and in the underlying security.
Members of the Company must rely on the fiduciary duty of the Manager under the
Operating Agreement to protect their interests.
Mortgage Loans to the Manager or its Affiliates
The Company generally will not invest in or purchase mortgage loans to
the Manager, affiliates of the Manager, or any limited liability company or
entity affiliated with or organized by the Manager. However, the Company may
have an investment in a mortgage loan to the Manager if the Manager or an
affiliate purchases a defaulted mortgage loan from the Company for an amount
equal to or greater than fair market value and subsequently forecloses on the
related loan, becoming the obligor.
28
<PAGE>
Right of Manager to Engage in Competitive Business
The Manager will only devote such time to the Company as it deems
necessary to conduct the Company's business. The Operating Agreement provides
that the Manager and its affiliates have the right to engage in other business
(including, but not limited to, acting as manager in other companies formed for
the purpose of making, investing in of purchasing mortgage loans similar to
those invested in or purchased by the Company), and to compete, directly or
indirectly, with the business of the Company. Neither the Company nor any member
has any rights or claims from such activities.
29
<PAGE>
FIDUCIARY RESPONSIBILITY
In connection with the safekeeping of the Company's assets, the Manager
is accountable to the Company as a fiduciary, and consequently must exercise
good faith and integrity with respect to Company affairs, must not take
advantage of the members, must make full disclosure in its dealings with the
Company, and must account to the Company for any benefit or profit derived by it
from any transactions connected with the Company without the consent of the
members. The Operating Agreement provides that the Manager and its affiliates
may engage in activities similar to or identical with the business of the
Company. Presently, the Manager acts for its own account in the mortgage loan
investment business, and also arranges and services trust deed investments for
other investors. When it acts in such capacity, it has a fiduciary duty to each
entity and is bound to treat each fairly and with equal access to investment
opportunities. The Operating Agreement does not modify any fiduciary standard
imposed on the Manager by Nevada law.
Based upon the present state of the law, members appear to have the
following legal rights and remedies as to the Manager and the Company:
o they may bring individual actions on behalf of themselves or class
actions on behalf of themselves and other members to enforce their
rights under the Operating Agreement and Nevada limited liability
company law, including breaches by the Manager of its fiduciary
duty;
o they may bring actions on behalf of the Manager for claims it
might have, as "derivative" actions, if the Manager refuses to
bring suit;
o they may bring actions under federal or state securities laws,
either individually or as a class of members, if the Manager has
violated certain of such laws in connection with the offer and
sale, or repurchase of Units.
Exculpation
In accordance with the terms and conditions of the Operating Agreement,
which exculpates the Manager from liability to the fullest extent permitted by
law, the Manager may not be liable to the Company or members for errors in
judgment or other acts or omissions not amounting to willful misconduct or
negligence.
Indemnification
The Operating Agreement indemnifies the Manager by the Company, not by
the members, for liabilities the Manager and its affiliates incur in dealing
with third parties on behalf of the Company. To the extent that 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, such indemnification is contrary to public policy and
unenforceable.
This is a rapidly developing and changing area of the law, and members
who have questions concerning the duties of the Manager should consult with
their own legal counsel.
30
<PAGE>
MANAGEMENT
Management of the Company
The Manager is Capsource, Inc. Its telephone number is (702) 227-0965.
Capsource is a wholly owned subsidiary of Sunderland Corporation, a Delaware
corporation with publicly held common stock that trades on the NASDAQ Bulletin
Board under the symbol "DLMA." A brief discussion of the business operations of
Sunderland is provided immediately after the following summary description of
the Manager's duties.
The Manager manages and controls the affairs of the Company and has
general responsibility and final authority in all matters affecting the
Company's business. These duties include dealings with members, accounting, tax
and legal matters, communications and filings with regulatory agencies and all
other needed management duties. The Manager may also, at its sole discretion and
subject to change at any time,
o purchase from the Company the interest receivable or principal on
delinquent mortgage loans held by the Company;
o purchase from a senior lienholder the interest receivable or
principal on mortgage loans senior to mortgage loans held by the
Company;
o use its own funds to cover any other costs associated with
mortgage loans held by the Company such as property taxes,
insurance and legal expenses; and
o purchase from the Company real estate acquired through
foreclosure.
Members have no right to participate in the management or control of
the Company's business or affairs other than to exercise the limited voting
rights provided for in the Operating Agreement. The Manager has primary
responsibility for the initial selection, evaluation and negotiation of mortgage
investments for the Company. The Manager provides all executive, supervisory and
certain administrative services for the Company's operations, including
servicing the mortgage loans held by the Company. The Company's books and
records are maintained by the Manager, subject to audit by independent certified
public accountants.
Research and Acquisition by the Manager
The Manager considers prospective investments for the Company. In that
regard, the Manager evaluates the credit of prospective borrowers, analyzes the
return to the Company of potential mortgage loan transactions, reviews property
appraisals, and determines which types of transactions appear to be most
favorable to the Company. See "Business" at page 38. For these services, the
Manager generally receives mortgage placement fees (points) paid by borrowers
when loans are originally invested in or purchased, or when the Company extends
or refinances mortgage loans. These fees may reduce the yield obtained by the
Company from its mortgage loans.
Company Management
The Manager is responsible for the Company's investment portfolio. Its
services include:
o the creation and implementation of Company investment policies;
o preparation and review of budgets, economic surveys, cash flow and
taxable income or loss projections and working capital requirements;
o preparation and review of Company reports;
o communications with members;
o supervision and review of Company bookkeeping, accounting and
audits;
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o supervision and review of Company state and federal tax returns; and
o supervision of professionals employed by the Company in connection
with any of the foregoing, including attorneys, accountants and
appraisers.
The Company will pay the Manager 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 the Company's assets (including working capital),
less any indebtedness of the Company. For funds not invested in mortgages, the
percentage paid as a management fee is one-half of one percent (0.5%). The
management fee is payable on all loans, including nonperforming or delinquent
loans. The Manager believes that a fee payable on delinquent loans is justified
because of the expense involved in the administration of such loans. See
"Compensation of the Manager - Management Fees," at page 26.
Mortgage Investments
The Manager originates, places and services the Company's mortgage
investments. These mortgage investment services include:
o review of investments;
o recommendations with respect to changes in investments;
o employment and supervision of employees who handle the investments;
o preparation and review of projected performance;
o review of reserves and working capital;
o collection and maintenance of all investments; and
o sales and servicing of investments.
Directors and Executive Officers
The following persons comprise the board of directors and executive
officers of the Manager:
NAME AGE TITLE
- -------------------------- --- -------------------------------
Michael V. Shustek 40 Director
Stephen J. Byrne 41 President and Director
Lance Bradford 33 Treasurer, Secretary and Director
Sunderland Corporation is the sole stockholder of the Manager. Sunderland had a
net worth of approximately $4,700,000 as of December 31, 1999. The directors and
officers of Sunderland are as follows:
NAME AGE TITLE
- ---------------------- --- -------------------------------
Michael V. Shustek 40 Chief Executive Officer and
Director
Stephen J. Byrne 41 President and Director
Lance Bradford 33 Chief Financial Officer,
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Corporate Secretary and Director
Michael J. Whiteaker 49 Vice-President of Regulatory
Affairs
Robert J. Aalberts 49 Director
Robert W. Fine 64 Director
John E. Dawson 42 Director
Robert L. Forbuss 51 Director
All respective directors of Sunderland and the Company hold office until
the next annual meeting of shareholders or until their successors are elected
and qualified. At present, Sunderland's Bylaws provide for not less than one nor
more than 10 directors. Currently, there are seven directors of Sunderland. The
Manager's By-laws also provide for up to 10 directors. The Bylaws of each entity
permit the Board of Directors to fill any vacancy and such director may serve
until the next annual meeting of shareholders or until his successor is elected
and qualified. Officers serve at the discretion of the Board of Directors.
The principal occupation and business experience for each officer and
director of the Company and Sunderland, for at least the last five years, are as
follows:
MICHAEL V. SHUSTEK serves as Chairman of the Board of Directors and as
Chief Executive Officer of Sunderland and is a director of the Manager. Mr.
Shustek founded Del Mar Mortgage in 1993 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, and has built it into what the Company believes to be the second
largest company of its kind in the state. During the same year, he also
established Goldell Development, Inc., a company that specialized in residential
and commercial construction. With the completion of the existing projects and
the growth of Del Mar Mortgage, Goldell Development ceased operations in 1998.
In 1990, Mr. Shustek started Shustek Investments, a company that originally
specialized in property valuations for lending or investment purposes by third
parties and which continues today as the primary vehicle for his private
investment portfolio. 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.
STEPHEN J. BYRNE serves as President and a director of Sunderland and is
the President and a director of the Manager. Mr. Byrne joined Del Mar Mortgage
in June 1998 as its Senior Lending Officer. Prior to joining Del Mar Mortgage,
Mr. Byrne owned and operated Capsource, Inc., which he founded in February 1997,
and which is involved in substantially the same asset lending activities as Del
Mar Mortgage. From October, 1991 to February 1997, Mr. Byrne served in Las Vegas
as Vice-President of Wells Fargo Bank and of its predecessor First Interstate
Bank of Nevada. In that capacity, he underwrote over $1.5 billion in real
estate, commercial and gaming industry loans. Mr. Byrne served in various
capacities with First Interstate Bank, including management of the Diversified
Asset Group based in Las Vegas and heading-up the commercial Diversified Asset
Group in Houston, Texas. Mr. Byrne received a Bachelor's of Science degree in
Business Administration from Hastings College, Hastings, Nebraska.
LANCE BRADFORD joined Sunderland in April 1999 as Chief Financial Officer,
Corporate Secretary, and director. He is also a director and the Treasurer and
Secretary of the Manager. 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.
MICHAEL J. WHITEAKER joined Sunderland in May, 1999 as its Vice-President
of Regulatory Affairs. From 1982 to 1999, Mr. Whiteaker served with the State of
Nevada as its Supervisory Examiner, responsible for the financial and regulatory
compliance audits of all financial institutions in Nevada. In this capacity, he
supervised the activities of the examiners and served as the interface with
management and/or board of directors of the regulated financial institutions.
Mr. Whiteaker worked extensively on compliance matters pertaining to both state
and federal statutes, credit administration for commercial, real estate, and
consumer loans procedures, and all facets of operations management. From 1973 to
1982, Mr. Whiteaker was Assistant Vice-President of the Nevada National Bank,
responsible for a variety of matters including loan reviews. Mr. Whiteaker
received a Bachelor of Science degree in Management from the University of
Nevada, Reno.
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ROBERT AALBERTS serves as a Director of Sunderland. 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. His work is either cited in, and/or he is the author of, almost 100
legal articles, dealing with various aspects of real estate, business, and the
practice of law. Mr. Aalberts received his JurisDoctor 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 serves as a Director of Sunderland. 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 in over 100 mergers, principally in the healthcare
field. Mr. Fine received a Bachelor of Arts in Accounting degree from Bentley
College, Waltham, Massachusetts.
JOHN E. DAWSON was elected a Director of Sunderland in March 2000. Mr.
Dawson has been a partner at the law firm of Marquis & Aurbach since 1995. Prior
to joining Marquis & Aurbach, Mr. Dawson was affiliated with the law firm
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 was admitted to the Nevada Bar in 1988 and the Utah Bar
in 1989.
ROBERT L. FORBUSS was elected a Director of Sunderland in March 2000.
Since February 1999, Mr. Forbuss has been the President of Strategic Alliances,
a business and government affairs consulting organization. Prior to joining
Strategic Alliances, was the President of Medical Transportation of America from
March 1998 through February 1999. From February 1997 to March 1998, Mr. Forbuss
was the Chief Executive Officer of the Southwest Division of American Medical
Response. From March 1994 to February 1997, Mr. Forbus was Senior Vice President
of Laidlaw Medical Transportion, which had acquired Mercy Medical Services,
Inc., a company that Mr. Forbus founded, owned and managed for 22 years. The
latter four companies are all in the business of providing emergency ambulance
and transportation services.
SUNDERLAND CORPORATION
Overview
Following is an overview and a description of the business of
Sunderland Corporation, a corporation existing under the laws of the
State of Delaware. For a complete description of Sunderland, potential
investors should review Sunderland's most recent periodic filings,
which are on file with the Securities and Exchange Commission and can
be found in the Commission's EDGAR database found at on the Internet at
http://www.sec.gov.
Sunderland is a non-conventional mortgage lender. Mortgage
lending refers to the origination funding of loans secured by real
property. Loan origination involves the processing of a loan
application, including necessary documentation and research, the
approval of the loan and the funding of the loan. The mortgage lending
industry consists of large public and private institutional lenders,
such as banks, insurance companies, and savings associations and
thrifts, as well as numerous private and non-conventional lenders.
Currently, approximately 85% of the loans originated by
Sunderland service commercial and residential developers. The remaining
15% of Sunderland's loans involve primarily (i) land loans (10%), and
(ii) bridge financing loans (5%). Sunderland's pool of loan
participants is principally derived from its data base of prior
participants in securitized mortgages, consisting of approximately
4,500 potential investors. Sunderland received over 560 mortgage loan
applications during 1999, of which approximately over $122,000,000 of
those mortgage applications have been successfully funded and
$12,000,000 remain
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as active loan applications in the pipeline. The loan pipeline is
defined as the volume of loans in Sunderland's system that have met all
of Sunderland's preliminary qualification criteria and are consequently
eligible for funding. These loans have been pre-approved and are
awaiting final review. Generally, between 65% to 70% of the loans in
the Pipeline are funded. The majority of loans that fund will do so
within 90 days from entrance into the pipeline. Private investors now
hold over $225 million in mortgage notes placed by Sunderland.
Experience with Other Programs
The following is a summary of the combined experience of
Sunderland and its affiliates, including the Manager, with real estate
investments during the last decade.
Sunderland has coordinated the investment by approximately
4,500 investors in approximately $450 million dollars in mortgage
loans. Almost all of the properties underlying mortgages and deeds of
trust invested in by Sunderland, its affiliates and such other
investors have been secured by properties located in Nevada, California
and Arizona.
For the three year period ended December 31, 1999, the
properties underlying loans by these programs can be subdivided as
follows:
Aggregate amount invested
(as percentage of total
Property Type purchases by these programs)
------------- ----------------------------
Commercial (total) 58%
Residential 6%
Land Acquisition 36%
Of the loans described in the foregoing table, 90% of Sunderland's and
its affiliates' real estate program sponsorships (by dollar amount)
were for development loans (including construction loans), the balance
being for land acquisition loans and loans secured by developed
properties .
Sunderland and its affiliates invested in or purchased mortgage loans
that are secured by real estate with respect to approximately 350
properties during the last three years in all programs combined. These
loans were divided up by type as described in the table above.
Sunderland and its affiliates invested in or purchased such loans
primarily with working capital obtained by means of capital
contributions, except for $1,980,000 incurred in indebtedness to
finance such transactions.
The description above of Sunderland and its affiliates is not intended
to provide a description of the loans to be invested in or purchased by
the Company in the future. That information can be found elsewhere in
this prospectus.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Manager owns 100% of the interest of the Company as of December 31,
1999. Following the successful completion of the offering of the Minimum Amount
and at all times thereafter, the Manager will own one percent (1%) of the
interests in the Company. The ownership (common stock) of the Manager is held
100% by Sunderland Corporation, a Delaware corporation, whose common stock is
publicly held and is traded on the NASDAQ Bulletin Board under the symbol
"DLMA." Based in part upon Sunderland's public filings, the ownership of the
common stock of Sunderland by its executive officers and directors is set forth
in the table below.
COMMON STOCK PERCENT OF
BENEFICIALLY COMMON STOCK
NAME OWNED(1) BENEFICIALLY OWNED
- ---- ------------ ------------------
Michael V. Shustek 3,300,000(2) 53.3%
Chairman and Chief
Executive Officer
129 Augusta
Henderson, Nevada 89104
Stephen J. Byrne 30,200 *
President, Director
1808 Dalton Avenue
Henderson, Nevada 89104
Lance Bradford 30,000 *
Chief Financial Officer,
Corporate Secretary and Director
3441 Eastern Avenue
Las Vegas, Nevada 89109
Michael J. Whiteaker 0 0%
Vice-President of Regulatory Affairs
4008 Tyler William Lane
Las Vegas, Nevada 89130
Robert J. Aalberts 1,000 *
Director
311 Vallarte Drive
Henderson NV 89014
Robert W. Fine 400,000 6.5%
Director
3 Palazzo Terrace
Henderson, Nevada 89014
John E. Dawson 8,400(3) *
Director
228 South Fourth Street
Las Vegas, Nevada 89101
Robert L. Forbuss 0 0%
200 Starlite Drive
Las Vegas, Nevada 89107
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All directors and 3,769,600(3) 54.3%
executive officers as
a group (8 persons)
- -------------
* Less than 1%
(1) Based upon 6,191,270 shares outstanding giving effect to the Company's
5-for-3 forward stock split in April, 1999, which amount includes the
assumed issuance of 30,000 shares to Mr. Shustek upon the completion of the
transfer by Mr. Shustek to Sunderland of all of the equity of DM Financial
Services, Inc., the dealer-manager in this offering.
(2) Assumes the issuance of 30,000 shares to Mr. Shustek upon the completion of
the transfer by Mr. Shustek to Sunderland of all of the equity of DM
Financial Services.
(3) Beneficial ownership of two hundred of these shares are owned by Mr.
Dawson's spouse. Mr. Dawson disclaims beneficial ownership of such shares.
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BUSINESS
Members' Return on Investment
The Company will invest the proceeds of this offering in mortgage loans
or similar instruments, as illustrated in the "Use of Proceeds" section. These
loans will yield monthly payments of interest and/or principal to the Company,
which for tax purposes will be attributed to the Members. The Company's
objectives are to preserve the members' capital and to maximize the cash flow
and distributions to its members of the income generated by the loans in which
the Company has invested. Such distributions will be paid monthly in arrears.
The Company will not accumulate cash on hand (except for working capital
reserves of up to three percent (3%) of capital contributions) or assets other
than mortgage notes or similar instruments. Distributions to new members will
commence with the distribution with respect to the month in which their
contributions are received, pro rata based upon the monthly return on all
Company assets, if any, the size of the investor's contribution and when during
the month the contribution is received.
Capital Accounts
For a member's initial investment in the Company, the Manager will
establish for the member an individual capital account on the books of the
Company in the amount of that capital contribution. The capital account will
receive that percentage of the Company's income, gains, losses and distributions
that the amount of the member's capital account bears to all of the members'
capital accounts of the Company. Each member's capital account is increased by
additional capital contributions (including dividend reinvestments) and the
member's share of income and gains realized by the Company. The capital account
is decreased by the member's share of losses realized by the Company and both
income and capital distributed to the member. Except for a writedown of a
Company investment, capital accounts are not adjusted to reflect unrealized
appreciation or depreciation of the Company's underlying assets, which means
that each member's capital account may not reflect the member's proportionate
interest in the fair market value of the Company's underlying assets. Because
this is a continuous offering, Units purchased by members at different times
will have different values (i.e., different rights to distributions and income
from the Company's mortgage investments).
Unit Repurchases and Deemed Distributions
After the one year holding period described elsewhere within this
prospectus, the members will have a right, subject to certain limitations and
delays, to cause the Company to repurchase the Units for an amount equal to the
amount in the capital account. See "Summary of Operating Agreement, Rights of
Members and Description of Units." The number of Units held by a member will
also decrease upon the return of capital to the member, which the Company does
not anticipate occurring until seven years after the effectiveness of the
registration statement of which this prospectus forms a part. A return of
capital will result in a deemed redemption of Units proportionately to the
amount in the member's capital account. The Company will provide statements to
the members reflecting the number of Units deemed to have been redeemed and the
number of Units still owned by the member.
Write-Down of Investments
Within 30 days following the end of each calendar quarter, the Manager
shall determine whether a write-down of any of the Company's investments is
required, and shall cause the Company's accountants to determine whether the
write-down conforms with generally accepted accounting principals. 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.
Valuation of Units
The value of a Unit is based on the proportional interest of an
individual member's capital account compared to all of the members' capital
accounts of the Company. A member's capital account is adjusted upwards and
downwards based on the income, gains, losses and distributions from the Company.
Consequently, the value and distribution rights for a Unit at any point in time
may be less or more than $1.00. Additionally, the amount of gains,
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<PAGE>
losses and distributions to be allocated to any member is based on the member's
capital account as of the date of the allocation, and not based on the member's
proportionate share of the Units held by all members. As a result, the value of
an individual Unit may vary based on when the Unit was purchased.
Notwithstanding the fluctuations in the value of Units described above,
capital accounts and distribution percentages will not be adjusted to take into
account an increase or decrease (other than a write-down of an investment) in
the fair market value of the Company's underlying assets at the time of a
capital contribution (and corresponding Unit issuance). Thus, if the fair market
value of the Company's assets at the time of a capital contribution (including
under the Company's dividend reinvestment plan) is less than its carrying value
(cost) on the books of the Company, then the value of a member's proportionate
interest in the fair market value of the underlying assets immediately after a
capital contribution to the Company may be less than one dollar. Conversely, if
the fair market value of the Company's assets at the time of a capital
contribution (including under the Company's dividend reinvestment plan) is
greater than its carrying value (cost) on the books of the Company, then,
because there are no interim revaluations of the capital accounts (except for
write-downs), the right to a subsequent allocation of the unrealized gains in
the fair market value of the Company's assets will be shared with new members
(or members making reinvestments), thereby resulting in a dilution in the value
of the member's proportionate interest in the fair market value of the
underlying assets.
Company Investments
The Manager and/or its affiliates make and arrange or purchase all of
the loans invested in or purchased by the Company. In connection with the
investment in loans, the Company in limited instances may acquire an equity
interest in the underlying real property in the form of a shared appreciation
interest. To date, the Company has not acquired any shared appreciation
interests. The Company's mortgage loans are to be secured by mortgages or deeds
of trust (such terms being used interchangeably in this prospectus unless the
context indicates to the contrary) on unimproved, improved, income-producing and
non-income-producing real property, such as apartments, shopping centers, office
buildings, and other commercial or industrial properties, as well as secondarily
on residential properties. No single Company loan may exceed 20% of the total
Company assets as of the date the loan is made.
General Standards for Mortgage Investments. The Company is engaged in
the business of investing in or purchasing loans to members of the general
public which will generally be secured by deeds of trust on real property,
including single-family residences (including homes, condominiums and
townhouses), multiple unit residential property (such as apartment buildings),
commercial property (such as stores, shops and offices), and unimproved land.
Based on prior experience, the Manager anticipates that of the number of
Mortgage Investments to be made, approximately no more than five percent (5%) of
the total dollar amount of Mortgage Investments will be secured by single family
residences, twenty percent to sixty-five percent (20% - 65%) by commercial
properties, ten percent to twenty percent (10% - 20%) by apartments, and fifteen
percent to twenty-five percent (15% - 25%) by unimproved land. The Company's
Mortgage Investments will not be insured by the Federal Housing Administration
or guaranteed by the Veterans Administration or otherwise guaranteed or insured.
Mortgage Investments will be made pursuant to a strict set of guidelines
designed to set standards for the quality of the security given for the Mortgage
Investments, as follows:
1. Priority of Mortgages. The lien securing each Mortgage Investment
will not be junior to more than one other encumbrance (a first deed of trust) on
the real property (the "security property") which is to be used as security for
the loan. Although the Company may also invest in or purchase wrap-around (or
"all-inclusive") Mortgage Investments, those wrap-around loans will include no
more than two (2) underlying obligations. The Manager anticipates that the
Company's Mortgage Investments will be diversified as to priority approximately
as follows: first mortgages - ninety percent (90%); second mortgages - ten
percent (10%).
2. Construction Mortgage Investments. The Company anticipates that it
will invest a significant amount of the proceeds in or otherwise purchase
construction loans (other than home improvement loans on residential property).
The Company estimates that such loans will comprise between twenty and
sixty-five percent (20-65%) of the Company's Mortgage Investment portfolio,
subject to the following guidelines:
o The Company may not invest in mortgage loans on unimproved
real property in an amount in excess of twenty-five
percent (25%) of the Capital Contributions to be raised, and
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<PAGE>
o In no event will the loan-to-value ratio on construction
loans exceed eighty percent (80%) of the independently
appraised completed value of the property.
The Company will not invest in or purchase construction loans secured by
properties determined by the Manager to be Special-Use Properties, other than
loans to casinos.
3. Loan-to-Value Ratio. The amount of the Company's Mortgage Investment
combined with the outstanding debt secured by a senior deed of trust on the
security property generally will not exceed a specified percentage of the
appraised value of the security property as determined by independent written
appraisal, according to the following table:
Type of Security Property Loan-to-Value Ratio
Residential 75%
Unimproved Land 60%
Commercial Property 75%
(including retail stores and office buildings)
Property under Development/Construction Loan 75%
Any of the above loan-to-value ratios may be increased if, in the sole
discretion of the Manager, a given loan is supported by credit adequate to
justify a higher loan-to-value ratio. In addition, such loan-to-value ratios may
be increased to the extent mortgage insurance is obtained; however, the Manager
does not anticipate obtaining mortgage insurance. Finally, the foregoing
loan-to-value ratios will not apply to purchase-money financing offered by the
Company to sell any real estate owned (acquired through foreclosure) or to
refinance an existing loan that is in default at the time of maturity. In such
cases, the Manager shall be free to accept any reasonable financing terms that
it deems to be in the best interests of the Company, in its sole discretion.
Notwithstanding the foregoing, in no event will the loan-to-value ratio on any
loan exceed eighty percent (80%) of the independently appraised completed value
of the property. The target loan-to-value ratio for Company Mortgage Investments
as a whole is approximately seventy percent (70%).
The Company will receive an independent appraisal for each property
securing a mortgage loan with respect to which it will invest in or purchase a
mortgage loan. Members will have the right to review or review copies of these
appraisals upon reasonable notice to the Company. Generally, appraisers retained
by the Company shall 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 ("FNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC"), 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 the Manager. The Manager will review each appraisal
report and will conduct a "drive-by" for each property on which an appraisal is
made. A "drive by" means the Manager or its affiliates will drive to the
property and assess 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 the Manager will also attempt
to do so.
4. Terms of Mortgage Investments. Most mortgage investments will be for
a period of one to seven years, but in no event more than 15 years. Most
Mortgage Investments will provide for monthly payments of principal and/or
interest. Many mortgage investments provide for payments of interest only or are
only partially amortizing with a "balloon" payment of principal payable in full
at the end of the term. Some Mortgage Investments will provide for the deferral
and compounding of all or a portion of accrued interest for various periods of
time.
5. Equity Interests in Real Property. Most Mortgage Investments will
provide for interest rates comparable to second mortgage rates prevailing in the
geographical area where the security property is located. However, the Manager
reserves the right to make Mortgage Investments (up to a maximum of twenty-five
percent (25%) of the Company's Mortgage Investment portfolio) bearing a reduced
stated interest rate in return for an interest in the appreciation in value of
the security property during the term of the Mortgage Investment.
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6. Escrow Conditions. Mortgage Investments will be purchased through an
escrow account handled by a title insurance company, subject to the following
conditions:
(a) Satisfactory title insurance coverage will be obtained for all
loans, with the title insurance policy naming the Company 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 the
Company's deed of trust, and does not insure the Company against loss by reason
of other causes, such as diminution in the value of the security property, over
appraisals, etc.).
(b) Satisfactory fire and casualty insurance will be obtained for all
loans, naming the Company as loss payee in an amount equal to cover the
replacement cost of improvements.
(c) The Manager does not intend to arrange for mortgage insurance,
which would afford some protection against loss if the Company foreclosed on a
loan and there were insufficient equity in the security property to repay all
sums owed. If the Manager determines in its sole discretion to obtain such
insurance, the minimum loan-to-value ratio for residential property loans will
be increased.
(d) All loan documents (notes, deeds of trust, escrow agreements, and
any other documents needed to document a particular transaction or to secure the
loan) and insurance policies will name the Company as payee and beneficiary.
Mortgage Investments will not be written in the name of the Manager or any other
nominee.
7. Purchase of Mortgage Investments from Affiliates and Other Third
Parties. Existing mortgage investments may be acquired from the Manager or its
affiliates 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 income to the Manager. All income generated by the
mortgage loan while owned by the Manager or its affiliate through the date the
Company acquires the mortgage loan will belong to the Company.
8. Note Hypothecation. The Company also may acquire Mortgage
Investments which will be secured by assignments of secured promissory notes.
The amount of a Mortgage Investment secured by an assigned note will satisfy the
loan-to-value ratios set forth in Paragraph 3 above (which are determined as a
specified percentage of the appraised value of the underlying property) and also
will not exceed eighty percent (80%) of the principal amount of the assigned
note. For example, if the property securing a note is commercial property, the
total amount of outstanding debts secured by such property, including the debt
represented by the assigned note and any senior mortgages, must not exceed
seventy-five percent (75%) of the appraised value of such property, and the
Mortgage Investment will not exceed eighty percent (80%) of the principal amount
of the assigned note. For purposes of acquiring Mortgage Investments secured by
promissory notes, the Company shall rely on the appraised value of the
underlying property, as determined by an independent written appraisal which was
conducted within the then-preceding twelve (12) months, or if such appraisal was
not conducted within that period, then the Company will arrange for a new
appraisal to be prepared for the property. All such appraisals will satisfy the
standards described in Paragraph 3 above. Any Mortgage Investment evidenced by a
note assigned to the Company will also satisfy all other lending standards and
policies described herein. Concurrently with the Company's acquiring the
Mortgage Investment, the borrower of Company funds, i.e., the holder of the
promissory note, shall execute a written assignment which shall assign to the
Company its interest in the promissory note. No more than twenty percent (20%)
of the Company's portfolio at any time will be secured in this manner.
9. Joint Venturers. The Company may also participate in loans with
other lenders (including certain affiliates or other limited partnerships
organized by the Manager), other individuals and pension funds, by providing
funds for or purchasing a fractional undivided interest in a loan meeting the
requirements set forth above. Because the Company will not participate in a loan
that would not otherwise meet its requirements, and will only participate in any
joint venture where the Company holds a controlling interest, the risk of such
participation is minimized. The Company shall not give the Manager and the
Manager's affiliates any consideration in form or substance like rebates or
give-backs or enter into reciprocal arrangements with the Manager or its
affiliates that might be entered into in lieu of joint ventures.
10. Diversification. The maximum investment by the Company in a
Mortgage Investment will not exceed twenty percent (20%) of the then total
Company assets.
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11. Reserve Fund. A contingency working capital reserve fund equal to
not more than three percent (3%) of the gross proceeds of this offering will be
established and maintained for the purpose of covering unexpected cash needs of
the Company.
Credit Evaluations. The Manager may consider the income level and
general creditworthiness of a borrower to determine its ability to repay the
Mortgage Investment according to its terms, but such considerations are
subordinate to a determination that a borrower has sufficient equity in the
security property to satisfy the loan-to-value ratios described above.
Therefore, the Company may invest in loans to borrowers who are in default under
other of their obligations (e.g., to consolidate their debts) or who do not have
sources of income that would be sufficient to qualify for loans from other
lenders such as commercial banks, savings banks and thrifts.
Loan Brokerage Commissions. The Manager or an affiliate (or a
non-affiliated third party) will receive loan brokerage commissions from
borrowers for services rendered in connection with the review, selection,
evaluation, negotiation, extension and permitted assumptions of the Mortgage
Investments. The Manager anticipates that loan brokerage commissions will
average approximately two to six percent (2-6%) of the principal amount of each
Mortgage Investment, but may be higher or lower depending upon market
conditions. The loan brokerage commissions typically will be paid by the
borrower through the title company or escrow agent at the close of escrow.
Loan Servicing. It is anticipated that all Mortgage Investments will be
"serviced" (i.e., loan payments will be collected) by the Manager or an
affiliate of the Manager that also acts as a loan broker in the initial
placement of Mortgage Investments, which will be compensated for such loan
servicing activities (See "Compensation to Manager and Affiliates" at page 22).
Borrowers will make interest payments in arrears, i.e., with respect to
the preceding 30-day period, and will make their checks payable to the Manager.
Checks will be deposited in the Manager's trust account, and, after checks have
cleared, funds will be transferred to the Company's bank or money market
account.
Sale of Mortgage Investments. Although the Manager has no plan to do
so, the Company may sell Mortgage Investments (or fractional interests therein)
to parties other than the Manager or its affiliates if and when the Manager
determines that it appears to be advantageous to the Company to do so.
Commitment of Members' Capital Contributions
At a minimum, the Manager shall commit at least eighty-four percent (84%)
of the capital contributions received by the Company to invest in or purchase
mortgage loans (including in such amount the three percent (3%) held as working
capital reserves). Subject to the policies described in this prospectus, 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. Such mortgage loans may be senior to other mortgage
loans on such property, or junior to other mortgage loans on such property, all
in the sole discretion of the Manager
Principal Investment Objectives
The Company will invest primarily in mortgage loans on commercial,
industrial and residential income-producing real property and land (including
properties under construction). The Manager and/or its affiliates negotiate the
terms of and make or purchase all loans on a loan-by-loan basis, after which the
loans are acquired by the Company.
The Company's two initial principal investment objectives are to
preserve the capital of the Company and to provide monthly cash distributions to
the members. It is not an objective of the Company to provide tax-sheltered
income. Under the Operating Agreement (and as further described elsewhere in
this prospectus), the Manager would be permitted to modify these investment
objectives without the vote of members but has no authority to do anything that
would make it impossible to carry on the ordinary business as a mortgage
investment limited liability company.
The Manager locates and identifies virtually all mortgages the Company
invests in and makes all investment decisions on behalf of the Company in its
sole discretion, except as set forth to the contrary in the Operating
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Agreement. The members are not entitled to act on any proposed investment. In
evaluating the prospective investments, the Manager 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 property's potential for capital appreciation;
o expected levels of rental and occupancy rates;
o current and projected cash flow of the property;
o potential for rental increases;
o the degree of liquidity of the investment;
o geographic location of the property;
o the condition and use of the property;
o the property's income-producing capacity;
o the quality, experience and creditworthiness of the borrower;
o general economic conditions in the area where the property is
located; and
o any other factors which the Manager believes are relevant.
During the course of its business, the Manager will continuously
evaluate prospective investments. The Manager originates and places or obtains
loans from mortgage brokers, previous borrowers, and by solicitations of new
borrowers in those states where permissible. The Company may purchase existing
loans that were originated by other lenders. Such a loan might be obtained by
the Manager from a third party and then sold to the Company for an amount equal
to the lower of the Manager's cost or the then-current market value. The Manager
evaluates all potential mortgage loan investments to determine if the security
for the loan and the loan-to-value ratio meet the standards established for the
Company, and if the loan can meet the Company's investment criteria and
objectives. An appraisal will be ordered on the property securing the loan, and
an officer, director, agent or employee of the Manager will inspect the property
during the loan approval process.
The Company requires that each borrower obtain a title insurance policy
as to the priority of the mortgage and the condition of title. The Company
obtains an independent, on-site appraisal from a qualified appraiser for each
property in which it invests. Appraisals will ordinarily take into account
factors such as property location, age, condition, estimated building cost,
community and site data, valuation of land, valuation by cost, valuation by
income, economic market analysis, and correlation of the foregoing valuation
methods. The Manager additionally relies on its own independent analysis in
determining whether or not to arrange for the investing in or purchasing of a
particular mortgage loan for the Company.
Types of Mortgage Loans
The Company invests in first and second mortgage loans, wraparound
mortgage loans, and construction mortgage loans on real property. The Company
does not ordinarily invest in or purchase mortgage loans with a maturity of more
than 15 years, and most loans invested in or purchased have terms of one to
seven years. All loans provide for monthly payments of interest and some also
provide for principal amortization, although Company loans may provide for
payments of interest only and a payment of principal in full at the end of the
loan term. The Manager does not intend to originate or place loans with negative
amortization provisions.
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First Mortgage Loans
First mortgage loans are secured by first mortgages and/or deeds of
trust on real property. Such loans are generally for terms of one to seven
years. In addition, such loans do not usually exceed 75% of the appraised value
of improved residential real property, 60% of the appraised value of unimproved
real property, 75% of the appraised value of commercial property, and 75% of the
anticipated appraised value upon completion of property under construction.
Second and Wraparound Loans
Second and wraparound mortgage loans are secured by second or
wraparound deeds of trust on real property which is already subject to prior
mortgage indebtedness, in an amount which, when added to the existing
indebtedness, does not generally exceed 75% of the appraised value of the
mortgaged property. A wraparound loan is one or more junior mortgage loans
having a principal amount equal to the outstanding balance under the existing
mortgage loans, plus the amount actually to be advanced under the wraparound
mortgage loan. Under a wraparound loan, the Company generally makes 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. Construction loans invested in by the
Company are generally secured by first deeds of trust on real property for terms
of six months to two years. In addition, if the mortgaged property is being
developed, the amount of such loans generally will not exceed 75% of the
anticipated post-development appraised value.
The Company will not usually 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. In addition, the Company requires the submission of signed labor and
material lien releases by the borrower in connection with each completed phase
of the project prior to 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. Such loans are
generally for terms of up to 15 years. Leasehold interest loans generally do not
exceed 75% of the value of the leasehold interest and require personal
guarantees of the borrowers. 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 the Manager to cure any
default under the lease.
Variable Rate Loans
Variable rate loans originated or placed by the Manager 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). The Manager may negotiate
spreads over these indices of from 2.5% to 5.5%, depending upon market
conditions at the time 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 the Company. The Manager attempts to minimize such
interest rate differential by tying variable rate loans to indices that are more
sensitive to fluctuations in market rates. In addition, most variable rate loans
originated and placed by the Manager contain provisions under which the interest
rate cannot fall below the starting rate.
Interest Rate Caps
All variable rate loans to be acquired by the Company will have
interest rate caps. The interest rate cap is generally a ceiling that is 2-4%
above the starting rate with a floor rate equal to the starting rate. The
inherent risk in interest rate caps occurs when general market rates exceed the
cap rate.
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Assumability
Variable rate loans of five to ten year maturities are generally not
assumable without the prior consent of the Manager. The Company does not
typically invest in or purchase other assumable loans. To minimize risk to the
Company, any borrower assuming an existing mortgage loan is subject to the same
stringent underwriting criteria as the original borrower.
Prepayment Penalties
The Company's loans typically will not contain prepayment penalties. If
the Company's 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 the Company on the reinvestment of the prepayment
proceeds. However, such loans will usually be written with relatively high
minimum interest rates, which generally would minimize the risk of lower yields.
Balloon Payment
A majority of the loans to be invested in or purchased by the Company
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 satisfy
this obligation may be dependent upon its ability to sell the property, obtain
suitable refinancing or otherwise raise a substantial cash amount. As a result,
these loans involve a higher risk of default than fully amortizing loans.
Equity Interests and Participation in Real Property
As part of its investing in or purchasing a mortgage loan, the Company
may acquire an equity interest in the real property securing the loan in the
form of a shared appreciation interest or other equity participation, subject to
the limitations set forth in the Operating Agreement which, generally, require
that the Company's interest be a controlling interest in the entity owning the
real property.
Loan Limit Amount
The Company limits the amount of its investment in any single mortgage
loan, and the amount of its investment in mortgage loans to any one borrower, to
20% of the total Company assets as of the date the loan is made.
Mortgage Loans to Affiliates
The Company will not invest in mortgage loans made to the Manager,
affiliates of the Manager, or any limited liability company or entity affiliated
with or organized by the Manager. However, the Company may acquire investment in
a mortgage loan payable by the Manager when the Manager has assumed by
foreclosure the obligations of the borrower under that loan.
Purchase of Loans from Affiliates
The Company may purchase loans from the Manager or its affiliates that
were originated and placed by the Manager and first held for its own portfolio,
as long as the loan is not in default and otherwise satisfies all of the
Company's ending criteria. In addition, if the loan did not originate within the
90 days prior to its purchase by the Company from the Manager, the Manager must
retain a minimum of a 10% interest in the loan. This requirement also applies to
any loan originated and/or placed by an affiliate of the Manager.
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Borrowing
The Company will not incur indebtedness for the purpose of investing in
mortgage loans. However, the Company may incur indebtedness in order to prevent
default under mortgage loans which are senior to the Company's mortgage loans or
to discharge senior mortgage loans if this becomes necessary to protect the
Company's investment in mortgage loans. Such short-term indebtedness may be with
recourse to the Company's assets. In addition, the Company may incur
indebtedness in order to operate or develop a property that the Company acquires
under a defaulted loan.
Repayment of Mortgages on Sales of Properties
The Company invests in mortgage loans and generally does not acquire
real estate or engage in real estate operations or development (other than when
the Company forecloses on a loan or takes over management of such foreclosed
property). The Company also does not invest in mortgage loans primarily for sale
or other disposition in the ordinary course of business.
The Company 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. This may be done if it is determined that repayment appears to be
advantageous to the Company based upon then-current interest rates, the length
of time that the loan has been held by the Company, the credit-worthiness of the
buyer and the objectives of the Company. The net proceeds to the Company from
any sale or repayment are invested in new mortgage loans, held as cash or
distributed to the partners at such times and in such intervals as the Manager
in its sole discretion determines; provided that after seven years the Company
will be prohibited from reinvesting proceeds of capital transactions, including
foreclosures and prepayments of mortgages to the extent classified as a return
of capital under the Code, and any other disposition of a mortgage or underlying
property.
No Trust or Investment Company Activities
The Company has not qualified as a real estate investment trust under
the Code, and therefore is not subject to the restrictions on its activities
that are imposed on real estate investment trusts. The Company conducts its
business so that it is not an "investment company" within the meaning of the
Investment Company Act of 1940. It is the intention of the Company to conduct
its business in such manner so as not to be deemed a "dealer" in mortgage loans
for federal income tax purposes.
Miscellaneous Policies and Procedures
The Company 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 in connection with the exercise of
its rights as a secured lender;
o underwrite securities of other issuers; or
o offer securities in exchange for property.
Competition and General Economic Conditions
Savings banks, thrifts, conduit lenders and other entities both larger
and smaller than the Company may compete with the Manager to make the loans that
the Company might subsequently invest in or fund. The Company believes it can be
competitive in large part because the Manager will generate all of its loans.
For the past few years, the major institutional lenders have not been
as active in the commercial mortgage market as in past years. Recently, however,
many major institutional lenders have reentered the commercial mortgage market
due to a stronger economy, stabilized property values and leasing rates, and the
decrease in demand
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for residential loans. This has created increased potential competition to the
Company for investments in mortgages secured by commercial properties, creating
downward pressure on interest rates. As such, the Company may not be able to
obtain as high interest rates on mortgage investments to be held by the Company
as would otherwise be possible, which would affect the net income of the Company
and the yield earned by the members.
Available Information
This Prospectus does not contain all information set forth in the
Registration Statement on Form S-11 (No. 333-__________) and exhibits thereto
which the Company has filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended, and to which
reference is hereby made. Additionally, the Company will be subject to the
informational requirements of the Securities and Exchange Act of 1934, as
amended, and in accordance therewith 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 the Company 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 such
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 maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of this site is
http://www.sec.gov.
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HOW THE COMPANY PROTECTS ITS RIGHTS AS A LENDER
Introduction
The following discussion is limited to the laws of the States of Nevada
and California. The Company anticipates that loans into these two states (Nevada
to a larger extent) are expected to comprise a substantial portion of the loans
to be invested in by the Company. The laws of other states where the Company may
have mortgage investments, including Arizona, are believed to be substantially
similar to Nevada. The Company will generally obtain the advice of legal counsel
in other states in connection with its investments in loans secured by real
property in those states.
General
Most of the Company's loans are secured by a deed of trust, the most
commonly used way of securing the lender's interest in a real property secured
loan. As previously noted, in this Prospectus references to "mortgages" or
"mortgage loans" include "deeds of trust" or "deeds of trust loans."
Parties to a Deed of Trust
The deed of trust has these parties:
o The borrower-trustor (like a mortgage);
o The trustee; and
o The lender-beneficiary (like a mortgagee).
The borrower conveys the property, until the debt is paid, in trust to
the trustee for the benefit of the lender (the "beneficiary"), to secure the
payment of the borrower's obligations.
The power of the trustee is governed by the loan documents and
applicable state law. The trustee under the Company's loans will be a
corporation qualified to act as a trustee in the state where each loan and real
property securing it are located. The trustee may be changed by the Company and
a different qualified trustee appointed.
Foreclosure
Nonjudicial Foreclosure
If and when a Company loan becomes in default and the Manager's
judgment is that the best way of protecting the Company interest in the loan is
to foreclose, it will act to do so. The most commonly used foreclosure procedure
is the following:
o The Manager will notify the trustee;
o The trustee records a notice of default, sends it to the
borrowers, and publishes it publicly;
o If there is a lien on the property that is junior to the
Company's the junior lienholder or its borrower has time to
cure the default and reinstate the loan;
o The trustee may sell the secured property by public auction
after the required notice has been provided to the borrower,
unless it pays the loan obligations;
o The beneficiary under the deed of trust, in this case the
Company, may make a non-cash bid equal to the total amount
secured by the deed of trust, including fees and expenses;
any other bidder may be required by the trustee to show
evidence of ability to pay its bid amount in cash;
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o After the sale, the trustee will execute and deliver a
trustee's deed to the Company if it is the purchaser; title
under this deed is subject to all prior liens and claims,
including real estate taxes;
o If the Company's deed of trust was not superior to all other
liens on the property, foreclosure by the Company leaves it
subject to those prior liens.
Proceeds to Company from Trustee Sale
When the Company uses non-judicial foreclosure, the trustee will first
apply the amount of the Company's purchase bid to the fees and costs of the
sale, and then to the unpaid indebtedness. Amounts in excess of that, if any,
are paid first to holders of any junior liens and then to the borrower.
Following the trustee's sale, the borrower's right to redeem the property is cut
off. In Nevada, the Company 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 the Company. In California, the
Company normally has no further right of collection for any amount remaining
unpaid under the loan, unless there was other security obtained from the
borrower, such as property other than the real estate.
Judicial Procedure
As noted immediately above, the laws of the State of Nevada provides
for an action on a deficiency balance after a non-judicial foreclosure.
Therefore, judicial foreclosure, which also provides a mechanism for bringing an
action for the deficiency balance, would not justify the incremental cost and
delay to the Company in Nevada and other states with similar law. In
jurisdictions like California, however, if the Company desires to seek a
judgment in court against the borrower for the deficiency balance, it may be
required to seek judicial foreclosure of its deed of trust. This typically is a
more prolonged procedure, and is subject to most of the delays and expenses that
affect other lawsuits. Recovery of such a deficiency judgment is also barred by
California law in certain situations where the loan was made to purchase the
real estate, and is subject to other statutory limitations. Following a judicial
foreclosure sale, the borrower or its successor has either one year or three
months, depending upon the type of purchase made at the sale, to redeem the
property and remains in possession during this period. Consequently, judicial
foreclosure will be rarely used by the Company.
Other Statutory Provisions Affecting Foreclosure
Other statutes, such as bankruptcy laws and laws giving certain
priorities to federal tax liens, may have the effect of delaying the Company's
foreclosure under a deed of trust. During such a delay, the amount realizable
from a trustee's sale could decline, due to (among other difficulties) adverse
changes in the borrower's financial condition or ability to maintain the secured
property pending repossession of it by the Company.
Provisions in Deeds of Trust
Insurance and Condemnation Proceeds
The form of deed of trust used by the Company gives it the right to
receive all proceeds from hazard insurance and any award made in a condemnation
proceeding and use those funds to apply to the indebtedness under the loan.
Future Advances Clause
If the Company advances additional funds to a borrower, these will be
covered by the deed of trust. The Company's priority with respect to those
advances depends on whether an advance was obligatory or optional. If
obligatory, the Company's priority will remain as to the advance. If optional,
the advance will be subordinate to any other lien imposed with the knowledge of
the Company after it invested in or purchased the original loan.
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Borrower Must Pay Taxes and Prior Liens, Maintain Property
If the borrower under a Company deed of trust does not pay when due all
taxes and assessments and prior liens on the secured property and maintain the
property with adequate hazard insurance, the Company can advance the monies to
preserve its interest and priority in the collateral. If it does, its
expenditures become additions to the indebtedness of the borrower under the note
and/or deed of trust.
"Due-on-Sale" Clauses
The Company's standard form of note and deed of trust, like that of
most institutional lenders, may contain a due-on-sale clause and/or debt
acceleration clause, permitting the Company to accelerate payment of the loan if
the borrower sells or transfers the secured property or undergoes a monetary or
non-monetary default. Such clauses are enforceable subject to certain
exceptions. Clauses providing for acceleration in the event of a material
payment default are generally enforceable, but courts of some states may refuse
foreclosure of a mortgage when an acceleration of indebtedness would be
inequitable or unjust or the circumstances would render the acceleration
unconscionable.
Under a 1982 federal statute and a U.S. Supreme Court case, the Company
should be permitted to enforce a due-on-sale clause, with certain exceptions
pertaining to specific residential property. None of the Company's investment
loans are expected to be secured by that type of residential property and its
due-on-sale clauses should therefore be enforceable.
"Due-on-Encumbrance" Clauses
If a "due-on-encumbrance" clause is in a Company's note and/or deed of
trust, it permits the Company to accelerate the maturity of the loan if the
borrower encumbers the property with an additional lien, or it may prohibit such
a lien altogether. The due-on-encumbrance clause would probably be enforceable,
like its due-on-sale clause, because the Company's loans will not be secured by
the type of residential property that would make the loans unenforceable.
Prepayment Charges
The Company's deed of trust may provide that a borrower must pay
specified additional amounts if it makes early payments or on full repayment of
the loan. A similar provision would preclude the borrower from repayment for a
specified period of time, usually several years. These provisions should be
enforceable by the Company, so long as any reasonable charges are imposed. The
Company's notes and/or deeds of trust will not usually contain this type of
provision.
The Manager has the total discretion to waive prepayment charges
imposed by any Company's deed of trust.
Late Charges and Additional Interest on Delinquent Payments
The Company's loans generally will include a provision which requires
the borrower to pay a late payment charge, if payments are not received within
the specified period, and additional interest on delinquent payments. These
provisions should be enforceable if the amount of the charge is reasonable. The
Manager will be entitled to receive all such late payment charges and additional
interest.
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Usury Law Not Applicable to Company Mortgage Loans
Nevada law does not apply limitations on interest that may be charged
on the type of loans that are intended to be invested in or purchased by the
Company. The Arizona law that limits interest on certain types of loans is
believed not to apply to the types of loans that are to be invested in or
purchased by the Company.
In California, the Company 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 the Company will be arranged by
such a licensed California real estate broker for the Company.
When the Company invests in a loan in a state other than Arizona,
California or Nevada, it will consult with legal counsel in that state for
advice as to the usury laws there. The Company will always seek to invest in
loans that will not cause usury law violations in any state. It is possible,
however, that violations may inadvertently occur in the future. Significant
penalties, including loss of interest and treble damages, may be imposed for
violations of usury laws.
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FEDERAL INCOME TAX CONSEQUENCES
The following summarizes the anticipated federal income tax aspects of
an investment in the Company. It is impractical to discuss all aspects of
federal, state, and local law which may have tax consequences with respect to an
investment in the Company. This summary is based on the Code, as in existence on
the date hereof, existing laws, judicial decisions and administrative
regulations, rulings and practice, any of which are subject to change and such
changes could be retroactive.
The Company and its members may be subject to state and local taxes in
states and localities in which the Company may be deemed to be doing business,
and this discussion does not cover state or local tax consequences to a member.
Some of the deductions claimed or positions taken by the Company will
not 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
the Company's information return may result in, among other things, an increase
in the Company's gross income, the disallowance of certain deductions or credits
claimed by the Company or in an audit of the income tax returns of a member.
Any audit adjustments made by the IRS could adversely affect the
members even if no such adjustments are ultimately sustained, the members will,
directly or indirectly, bear the expense of contesting such adjustments.
Members are advised to consult their own tax advisors, with specific
reference to their own tax situation and potential changes in applicable laws
and regulations.
Neither the Company's independent accountant or tax counsel will
prepare or review the Company's income tax information returns, which will be
prepared by the Manager. Tax matters involving the Company will be handled by
the Manager, often with the advice of independent accountants, and may be
reviewed with tax counsel in certain circumstances.
Tax counsel has rendered an opinion to the Company that:
o the Company will be classified as a partnership rather than
as an association taxable as a corporation for federal income
tax purposes;
o the Company 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
certain material federal income tax aspects of an investment
by a member in the Company.
The following discusses the material tax issues associated with an
investment in the Company.
The discussion considers existing laws, applicable current and proposed
Treasury Regulations ("Regulations"), current published administrative positions
of the IRS contained in Revenue Rulings, Revenue Procedures and other IRS
pronouncements, and published judicial decisions. It is not known whether a
court would sustain any Company position, if contested, or whether there might
be legislative or administrative changes or court decisions that would modify
this discussion. Any such changes may or may not be retroactive with respect to
transactions prior to the date of such changes.
Moreover, it is possible that such changes, even if not applied
retroactively, could reduce the tax benefits anticipated to be associated with
an investment in the Company.
Each person is urged to consult and rely upon his own tax advisor with
respect to the federal and state consequences arising from an investment in the
Company. The cost of such consultation could, depending on the amount thereof,
decrease any return anticipated on the investment. Nothing in this
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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. Investors should be aware that the IRS may not agree with all tax
positions taken by the Company and that legislative, administrative or court
decisions may reduce or eliminate the anticipated tax benefits to an investor.
Classification as a Partnership
Under Regulations issued in December 1996 (the "Check-the-Box"
Regulations), 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.
The Company is a domestic limited liability company and if the minimum offering
of $1,500,000 Units is completed as described in the Prospectus under "Plan of
Distribution", at page 71, it will have more than one member. The Manager will
not cause the Company to make an election to be classified as an association
taxable as a corporation. Based on the foregoing and subject to the discussion
set forth below regarding the tax treatment of publicly traded partnerships, it
is the opinion of tax counsel that that the Company will be classified as a
partnership for federal income tax purposes.
Based on the opinion that the Company will be classified as a
partnership for federal income tax purposes, in the discussion which 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 (i.e., the
Company);
o the use of the term "partner" will be construed to refer also
to a member of a limited liability company (i.e., a member of
the Company); and
o "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 (i.e., the
interest of a member in the Company).
The Company Will Not Be Classified As A Publicly Traded Partnership
Section 7704 of the Code treats "publicly traded partnerships" as
corporations for federal income tax purposes. Section 7704(b) of the 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) the interest of which are readily traded on an established
securities market; or readily tradable on a secondary market or the substantial
equivalent thereof.
Notice 88-75 issued by the IRS, sets forth comprehensive guidance
concerning the application of Section 7704 prior to the adoption of final
Regulations under Section 7704. It primarily addresses the issue of when
partnership interests will be considered to be readily tradable on a secondary
market or the substantial equivalent thereof under Section 7704(b).
In1995, the IRS issued final Regulations under Section 7704 (the "Final
PTP Regulations"). The Final PTP Regulations generally retain the conceptual
framework of Notice 88-75, but contain a number of modifications, and are
generally effective for taxable years beginning after December 31, 1995.
The Final PTP 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 (i.e., an over-the-counter
market).
As indicated above, the primary focus of the Final PTP Regulations is
on determining when partnership interests will be treated as "readily tradable
on a secondary market or the substantial equivalent thereof." The Final PTP
Regulations provide a number of safe harbors relative to this determination.
Included as a safe harbor in the Final PTP Regulations is a safe harbor
described under the heading "Lack of Actual Trading" (the "Lack of Actual
Trading Safe Harbor").
The Lack of Actual Trading Safe Harbor contained in Final PTP
Regulations provides that interests in a partnership will not be considered
readily tradable on a secondary market or the substantial equivalent thereof
within the meaning of Section 7704(b) of the Code 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 "Two Percent Safe Harbor")).
Certain transfers are disregarded for purposes of determining whether
the Two Percent Safe Harbor is met under the Final PTP Regulations. These
include transfers at death, transfers in which the basis is determined under
Section 732 of the Code, interests issued by the partnership for cash, property
or services, and interests in the partnership which are redeemed pursuant to the
"Redemption and Repurchase Safe Harbor" discussed below.
The Final PTP Regulations contain a safe harbor for redemption and
repurchase agreements (the "Redemption and Repurchase Safe Harbor"). This safe
harbor provides that the transfer of an interest in a partnership pursuant to a
"redemption or repurchase agreement" is disregarded for purposes of determining
whether interests in the partnership are readily tradable on a secondary market
or the substantial equivalent thereof certain requirements are met. The Final
PTP Regulations provide that a redemption or repurchase agreement means a plan
of redemption or repurchase maintained by a partnership whereby the partners may
tender their partnership interests for purchase by the partnership, another
partner or certain persons related to another partner.
The requirements which must be met in order to disregard transfers made
pursuant to a redemption or repurchase agreement are:
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 right;
o the redemption agreement requires that the redemption price
not be established until at least 60 days after receipt of
such 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.
The Operating Agreement provides that, subject to certain limitations,
a member may withdraw or partially withdraw from the Company and obtain the
return of his outstanding capital account. These provisions of the Operating
Agreement constitute a redemption or repurchase agreement within the meaning the
Final PTP Regulations.
The limitations on a member's right to withdraw his capital account set
forth in the 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 the Manager;
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o the amount distributed to the withdrawing members will be a
sum equal to such member's capital account as of the date of
such distribution; and
o in no event will the Manager 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 of the Final PTP Regulations set forth
above.
The Operating Agreement provides that a member may not transfer his
interest in the Company if the Manager determines that such a transfer would
result in the Company being classified as a publicly traded partnership within
the meaning of Section 7704(b) of the Code. To prevent such classification, the
Operating Agreement provides that:
o the Manager will not permit trading of Units on an
established securities market within the meaning of Section
7704(b);
o the Manager will prohibit any transfer of Units which would
cause the sum of percentage interests in Company capital or
profits represented by partnership interests that are
transferred during any taxable year of the Company to exceed
the limitation under the Two Percent Safe Harbor; and
o the Manager will not permit during any withdrawal of Units
except in compliance with the provisions of the Operating
Agreement.
Based upon the provisions of the Operating Agreement and the
representations of the Manager, tax counsel's opinion is that:
o interests in the Company will not be traded on an established
securities market within the meaning of Section 7704 of the
Code;
o the operation of the Company with regard to the withdrawal by
members will qualify for the Redemption and Repurchase Safe
Harbor;
o the operation of the Company with regard to the transfer of
Units by members will qualify for the Two Percent Safe
Harbor;
o interests in the Company will not be considered as readily
tradable on a secondary market or the substantial equivalent
thereof; and
o the Company will not be classified as a publicly traded
partnership for purposes of Section 7704 of the Code.
A partnership which is classified as a publicly traded partnership
under Section 7704 of the Code will not be treated as a corporation for federal
income tax purposes if 90% or more of its gross income is "qualifying income."
Section 7704(c) of the Code defines the term "qualifying income" for this
purpose to include, 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 may be treated as income from an unrelated trade or
business under the unrelated trade or business taxable income rules discussed
below.
It is not clear whether the Company would satisfy the "qualifying
income" test of Section 7704(c). (This would be relevant only if it were
determined that the Company should be classified as a publicly traded
partnership.) The Manager expects that more than 90% of the Company's income
will be of the passive-type included in the definition of "qualifying income"
contained in Section 7704(c). However, it is not clear whether the Company will
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be engaged in the conduct of a financial business. If the Company were
classified as a publicly traded partnership and considered to be engaged in a
financial business, the Company would be treated as a corporation for federal
income tax purposes.
General Principles of Partnership Taxation
A partnership generally is not subject to any federal income taxes. The
Company will file partnership information returns reporting its operations on
the accrual basis for each calendar year.
Determination of Basis in Units
In general, a member will not be taxed on Company distributions unless
such distributions exceed the member's adjusted basis in his Units. A member's
adjusted basis in his Units is the amount originally paid for such Units
increased by:
o his proportionate share of Company indebtedness with respect
to which no member is personally liable;
o his proportionate share of the Company's taxable income, and
o any additional contributions to the Company's capital by such
member, and decreased by:
o his proportionate share of losses of the Company,
o the amount of cash, and fair value of noncash,
distributions to such member, and
o any decreases in his share of any nonrecourse
liabilities of the Company.
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 the member does not actually contribute or receive cash. Distributions in
excess of such basis generally will be treated as gain from the sale or exchange
of a member's interest in the Company.
Allocations of Profits and Losses
The Company will allocate to the members profits and losses and cash
distributions in the manner described in Article 7 of the Operating Agreement.
These allocations of profits and losses under a partnership agreement will be
recognized as long as they have "substantial economic effect" under the
Regulations by satisfying one of these tests:
o it has "substantial economic effect" (the "substantial
economic effect test");
o it is in accordance with the partners' interest in the
partnership (determined by taking into account all facts and
circumstances) (the "partners' interest in the partnership
test"); or
o it is "deemed" to be in accordance with the partners'
interest in the partnership.
The substantial economic effect test is a substantially objective test
which effectively creates a safe harbor for compliance with the requirements of
Section 704(b). However, in order to comply strictly with the requirements of
that test, it would be necessary to include in the Operating Agreement a
lengthy, intricate and complex set of provisions which may have little practical
significance based on the Company's anticipated operations.
It is not anticipated that the operation of the Company and the
allocation provisions of the Operating Agreement will ever produce a situation
in which a member will be allocated losses in excess of the economic losses
actually borne by such member. For these reasons, the Manager has decided not to
include these complex provisions in the Operating Agreement and to rely instead
on the partners' interest in the partnership test as the basis for
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justifying the allocations under the Operating Agreement.
The allocations of profits, losses and cash distributions contained in
the Operating Agreement will be substantially proportionate to the capital
accounts of the members. For this reason, the IRS should treat the allocations
as being substantially in accordance with the partners' interests in the
partnership within the meaning of this alternative test.
Limitations on the Deduction of Losses
The Company does not expect that it will incur net losses in any
taxable year. However, if the Company were to incur losses in any year, the
ability of a member to deduct such losses would be subject to the potential
application of the limitations discussed below.
(i) The Basis Limitation
Section 704(d) of the Code provides that a partner's share of
partnership losses is allowed as a deduction 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) may be carried forward
indefinitely until adequate basis is available to permit their deduction. Due to
this limitation, a member will be precluded from deducting losses in excess of
his adjusted basis in his Units.
(ii) The At Risk Limitation
Section 465 of the Code provides that a partner (other than a partner
which is a widely-held corporation) to deduct losses incurred in certain
business activities, including the lending activities contemplated by the
Company, in an amount exceeding the aggregate amount the partner is "at risk" in
that activity at the close of his taxable year. The effect of these rules
generally is to limit the availability of tax losses of a partnership as offsets
against other taxable income of a partner to an amount equal to such 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 such contributions.
(iii) The Passive Loss Rules
Section 469 of the 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.
Generally, 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 such as 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 (but not credits) 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 Regulations under Section 469 provide that in certain situations,
net income, but not net loss from a passive activity (or a portion thereof) is
treated as nonpassive. One of the items covered by this Regulation 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 such year.
The Manager expects that at no time will the average outstanding
balance of Company liabilities exceed 80% of the average outstanding balance of
the Company's mortgage loans. If the Company is deemed to be engaged in the
trade or business of lending money, it is an equity-financed lending activity,
and income of the Company will generally be recharacterized as nonpassive
income, even though the net losses of the Company or loss on the sale of a Unit
will be treated as passive activity losses.
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If the Company is not considered engaged in a trade or business of
lending money, then income and loss will be considered portfolio income and
loss, and a member will not be permitted to offset passive losses from other
activities against his share of the income of the Company.
Section 67(a) of the 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. A member's allocable share of the
expenses of the Company will be considered miscellaneous itemized deductions
subject to this 2% limitation only if the Company is not considered to be in the
trade or business of lending money.
Computation of Gain or Loss on Sale or Redemption of Units
Gain or loss on the sale by a member of his Units (including a
redemption by the Company) will be measured by the difference between the amount
realized, including his share of Company nonrecourse liabilities and his
adjusted basis in such Units.
Character of Gain or Loss
Generally, gain on the sale of Units which have been held over 12
months will 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 Code, which would
be treated as ordinary income. The Company may have "unrealized receivables"
arising from the ordinary income component of "market discount bonds." In
addition, if the Company holds property as a result of foreclosure which is
unsold at the time a member sells his Units, or holds an investment in a
mortgage loan that is classified as an equity interest, the amount of ordinary
income that would result if the Company were to sell such property is generally
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% (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 in
the case of a married taxpayer filing a separate return $1,500) or the excess of
such losses of the taxpayer over the taxpayer's capital gain.
Tax Rates on a Partner's Share of Ordinary Income from the Partnership
A taxpayer's tax liability with respect to an investment in the Company
will depend upon his individual tax bracket. Currently, there are five tax
brackets for individuals. For calendar year 2000, the first bracket is at 15%
(on taxable income not over $43,850 in the case of married taxpayers filing
joint returns), the second at 28% (on taxable income from $43,850-$105,950), the
third at 31% (on taxable income from $105,950-$161,450), the fourth at 36% (on
taxable income from $161,450-$288,350), and the fifth at 39.6% (on taxable
income over $288,350).
Depreciation
From time to time the Company may acquire equity or leasehold interests
in real property by direct investment, foreclosure or otherwise. Generally, the
cost of the improvements on any such owned real property may be recovered
through depreciation deductions over a period of 39 years.
Investment Interest
Section 163(d) of the Code, applicable to noncorporate taxpayers and S
corporation shareholders, places a limitation upon 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 such property. In general, 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.
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Net investment income is the excess of investment income over the sum
of investment expenses. Interest expense of the Company and interest expense
incurred by members to acquire Units will not be treated as investment interest
to the extent attributable to a passive activity of the Company. However, that
portion of interest expense allocable to portfolio investments is subject to the
investment interest limitations.
Interest attributable to debt incurred by a member in order to purchase
or carry Units may constitute "investment interest" subject to these
deductibility limitations. Prospective investors should consider the effect of
investment interest limitations on using debt financing for their purchase of
Units.
Tax Treatment of Tax-Exempt Entities
Sections 511 through 514 of the Code impose a tax on the "unrelated
business taxable income" of organizations otherwise exempt from tax under
Section 501(a) of the Code. Entities subject to the unrelated business income
tax include qualified employee benefit plans, such as pension and profit-sharing
plans, Keogh or HR-10 plans, and individual retirement accounts. Other
charitable and tax-exempt organizations are also generally subject to the
unrelated business income tax. Such organization, plan or account is referred to
as a "Tax-Exempt Entity". Interest income is not subject to this tax unless it
constitutes "debt-financed income."
Unrelated business taxable income includes gross income, reduced by
certain deductions and modifications, derived from any trade or business
regularly carried on by a partnership of which the Tax-Exempt Entity is a member
where the partnership is a publicly traded partnership or which is unrelated
trade or business with respect to the Tax-Exempt Entity. Among the items
generally 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 a Tax-Exempt Entity
has no effect on such entity's tax-exempt status or on the exemption from tax of
its other income. In certain circumstances, the continual receipt of unrelated
business taxable income may cause certain Tax-Exempt Entities to lose their
exemption. For certain types of Tax-Exempt Entities, the receipt of any
unrelated business income taxable may cause all income of the 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 such
year. Each tax-exempt entity is urged to consult its own tax advisors concerning
the possible adverse tax consequences resulting from an investment in the
Company.
The Manager intends to invest Company assets in such a manner that
tax-exempt members will not derive unrelated business taxable income or
unrelated debt-financed income with respect to their Units. Unrelated
debt-financed income might be derived in the event that the Manager deems it
advisable to incur indebtedness in connection with foreclosures on property
where mortgagees have defaulted on their loans.
Subject to certain exceptions, if the Company acquires 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 Tax-Exempt Entity holding Units.
Sales of foreclosure property might also produce unrelated business
taxable income if the Company is characterized as a "dealer" with respect to
that property. Mortgage loans invested in or purchased by the Company which
permit the Company to participate in the appreciation value of the properties
may be recharacterized by the IRS as an equity interest and such
recharacterization could result in unrelated debt-financed income. The IRS might
not agree that the Company's other income is not subject to tax under the
unrelated business income and unrelated debt-financed income tax provisions.
If a Tax-Exempt Entity is a Qualified Plan (as defined below) and its
Partnership income constitutes
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unrelated business taxable income, such 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 the Partnership of a portion of the
assets of a qualified employee benefit plan and an individual retirement account
("Qualified Plan"), a fiduciary should consider:
o whether the investment is in accordance with the documents
and instruments governing the plan;
o whether the investment satisfies the diversification
requirements of Section 404(a)(1)(C) of the Employee
Retirement Income Security Act of 1974 ("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 Code.
An investment in the Company by an individual retirement account
generally will not be subject to the above diversification and prudence
requirements of ERISA unless the individual retirement account 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 and Audits
The Manager will prepare the Company's information income tax returns.
Generally, all members are required to report Company items on their individual
returns consistent with the treatment of such items on the Company's information
return. A member may report an item inconsistently if he files a statement with
the IRS identifying the inconsistency. Otherwise, additional tax necessary to
make the member's treatment of the item consistent with the Company's treatment
of the item may be summarily assessed without a notice of deficiency or an
opportunity to protest the additional tax in the Tax Court being afforded to the
members. Penalties for intentional disregard of the consistency requirements may
also be assessed.
The Company's returns may be audited by the IRS. Tax audits and
adjustments are made at the Company level in one unified proceeding, the results
of which are binding on all members. A member may, however, protest the
additional tax by paying the full amount thereof and suing for a refund in
either the U.S. Claims Court or a U.S. District Court.
Manager is Tax Matters Partner
A limited liability company which is classified as a partnership for
tax purposes must designate a "tax matters partner" to represent it in dealing
with the IRS. The Manager will serve as the "tax matters partner" to act on
behalf of the Company and 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 Company level.
Members with less than a 1% interest in the Company will not receive
notice from the IRS of these Company administrative proceedings unless they form
a group with other members, which group has an aggregate interest of 5% or more
in the Company, and request such notice. However, all members have the right to
participate in the administrative proceedings at the Company level. Members will
be notified of adjustments to their distributive shares agreed to at the Company
level by the "tax matters partner."
If the Company's return is audited and adjustments are proposed by the
IRS, the "tax matters partner" may cause the Company to contest any adverse
determination as to partnership status or other matters, and the result of any
such contest cannot be predicted. Members should be aware that any such contest
would result in additional expenses to the Company, and that the costs incurred
in connection with such an audit and any ensuing administrative proceedings will
be the responsibility of the Company and may adversely affect the profitability,
if any, of Company operations.
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Adjustments, if any, resulting from any audit may require each member
to file an amended tax return, and possibly may result in an audit of the
member's own return. Any audit of a member's return could result in adjustments
of non-Company items as well as Company income and losses.
Original Issue Discount Rules
The original issue discount rules under the Code pertain to mortgage
loans and obligations issued by the Company. The effect will be that the Company
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 the Company's interest deduction
on its obligations, if any.
Market Discount
The Company may purchase mortgage investments for an amount
substantially less than the remaining principal balance of such mortgage
investments. Each monthly payment which the Company receives from a mortgagor
will consist of interest at the stated rate for the investment in a mortgage
loan and a principal payment. If the Company purchases 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 the
Company's 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.
The Company 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 the Company's investment will not
constitute taxable income to the Company. Accrued market discount will also be
treated 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 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 such an election would be that, with respect to the
transferee member only, the basis of Company property would either be increased
or decreased by the difference between the transferee's basis for his Units and
his proportionate share of the Company's basis for all Company property.
The Manager has decided that due to the accounting difficulties which
would be involved, it will not cause the Company to make an election pursuant to
Section 754 of the Code. Accordingly, the Company's tax basis in its assets will
not be adjusted to reflect the transferee's purchase price of his Units.
This treatment might not be attractive to prospective purchasers of
Units, and a member might have difficulty for that reason in selling his Units
or might be forced to sell at a discounted price.
Taxation of Mortgage Loan Interest
Mortgage loans invested in or purchased by the Company may sometimes
permit the Company to participate in the appreciation in the value of the
properties or in the cash flow generated by the operation of the borrowers
mortgaged properties.
The IRS might then seek to recharacterize a mortgage loan as an equity
interest. If a mortgage loan is recharacterized as an equity interest, the
Company would be required to recognize an allocable share of the income, gain,
loss, deductions, credits and tax preference items attributable to the mortgaged
property. Recharacterization of a loan as an equity interest also could result
in the receipt of unrelated business taxable income for certain tax-exempt
members.
Treatment of Compensation of Manager
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The Company will pay the Manager 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 the Company's assets (including working capital),
less any indebtedness of the Company. For funds not invested in mortgages, the
percentage paid as a management fee is one-half of one percent (0.5%). The
Manager will be entitled to loan processing fees paid by the Company in
connection with the Company's investing in or purchasing a mortgage loan, in
addition to reimbursement from the Company of permitted expenses. In addition,
the Manager of an affiliate of the Manager will act as a servicing agent with
respect to the Company's mortgage investments, for which it will be paid by the
relevant borrower a fee of up to one-quarter of one percent (0.25%) of the
unpaid balance of the respective mortgage loan serviced.
The Company will deduct the amount of all management, loan processing
and other fees paid by the Company each year in computing the taxable income of
the Company. The deductibility of such 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 has not given its opinion as to
the proper tax treatment of these fees, and the IRS may attempt to
recharacterize the Company's treatment of such fees by disallowing the deduction
claimed by the Company. Such a recharacterization could cause the tax benefits
generated by the payment of such fees to be deferred or lost.
The Manager or an affiliate may also act as escrow agent for mortgage
investments made by the Company and may also provide certain document
preparation, notarial and credit investigation services for which it 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.
The Company will enter into mortgage investment transactions in which
the borrower has employed and agreed to compensate the Manager or an affiliate
(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. The Manager 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, the Manager and/or an affiliate may receive a
fee payable by a borrower for permitting the assumption of a loan. The Manager
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 any of the commissions or fees described in the preceding two
paragraphs will be payable by the borrowers, such payment should not have any
effect on the calculation of the Company's taxable income. The IRS could take
the position that these commissions or fees, or any of them, are constructively
paid by the Company, in which case interest income of the Company would be
increased by the amount of the commissions, and the commissions would be
deductible by the Company only to the extent the commissions or fees are
reasonable compensation for the services rendered and otherwise considered
deductible expenditures.
Since this is ultimately an issue of fact which may depend on future
events, tax counsel has not given an opinion regarding the issue.
The Manager or its affiliates will be entitled to reimbursement from
the Company for certain expenses advanced by the Manager or its affiliates for
the benefit of the Company and for salaries and related expenses for
nonmanagement and nonsupervisory services performed for the benefit of the
Company. The reimbursement of such expenses by the Company will generally be
treated in the same manner as if the Company incurred such costs 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
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adoption of any such proposal, the likely effect of any such proposals upon the
income tax treatment presently associated with investment in mortgage loans or
the Company, or the effective date, which could be retroactive, of any
legislation which may derive from any such past or future proposal.
Potential investors are strongly urged to consider ongoing developments
in this uncertain area and to consult their own tax advisors in assessing the
risks of investment in the Company.
State and Local Taxes
The Company may invest in or purchase loans in states and localities
which impose a tax on the Company's assets or income, or on each member based on
his share of any income (generally in excess of specified amounts) derived from
the Company's activities in such jurisdiction. Members who are exempt from
federal income taxation will generally also be exempt from state and local
taxation.
All members should consult with their own tax advisors concerning the
applicability and impact of state and local tax laws.
ERISA Considerations
ERISA generally requires that the assets of employee benefit plans be
held in trust and that the trustee, or a duly authorized investment manager
(within the meaning of Section 3(38) of ERISA), 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 ERISA and prohibits certain transactions between an employee benefit plan and
the parties in interest with respect to such plan (including fiduciaries).
Under the Code, similar prohibitions apply to all Qualified Plans,
including IRA's, Roth IRA's and Keogh Plans covering only self-employed
individuals which are not subject to ERISA. Under ERISA and the Code, any person
who exercises any authority or control respecting the management or disposition
of the assets of a Qualified Plan is considered to be a fiduciary of such
Qualified Plan (subject to certain exceptions not here relevant).
ERISA and the Code also prohibit parties in interest (including
fiduciaries) of a Qualified Plan from engaging in various acts of self-dealing.
To prevent a possible violation of these self-dealing rules, the Manager may not
permit the purchase of Units with assets of any Qualified Plan (including a
Keogh Plan or IRA) if it
o has investment discretion with respect to the assets of the
Qualified Plan invested in the Company, or
o regularly gives individualized investment advice which serves
as the primary basis for the investment decisions made with
respect to such assets.
Annual Valuation
Fiduciaries of Qualified Plans subject to ERISA are required to
determine annually the fair market value of the assets of such Qualified Plans
as of the close of any such plan's fiscal year. Although the Manager 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 the assets of the Company are deemed to be "plan assets" under
ERISA:
o the prudence standards and other provisions of Part 4 of
Title 1 of ERISA applicable to investments by Qualified Plans
and their fiduciaries would extend (as to all plan
fiduciaries) to investments made by the Company,
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o certain transactions that the Partnership might seek to enter
into might constitute "prohibited transactions" under ERISA
and the Code because the Manager would be deemed to be
fiduciaries of the Qualified Plan, and
o audited financial information concerning the Partnership
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" (the "Final DOL Regulations"). Under the Final DOL
Regulations, generally, when a plan makes an equity investment in another
entity, the underlying assets of that entity will be considered plan assets
unless:
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. The Final
DOL Regulations provide that the assets of a corporation or partnership in which
an employee benefit plan invests would not be deemed to be assets of such plan
if less than 25% of each class of equity interests in the corporation or
partnership is held in the aggregate by "benefit plan investors" (including, for
this purpose, benefit plans such as Keogh Plans for owner-employees and IRA's).
For purposes of this "25%" rule, the interests of any person (other
than an employee benefit plan investor) who has discretionary authority or
control with respect to the assets of the entity, or who provides investment
advice for a fee (direct or indirect) with respect to such assets, or any
affiliate of such a person, shall be disregarded.
Thus, while the Manager and its Affiliates are not prohibited from
purchasing Units, any such purchases will be disregarded in determining whether
this exemption is satisfied. The Company cannot assure "benefit plan investors"
that it will always qualify for this exemption.
Exemption For a Real Estate Operating Company. The Final DOL
Regulations also provide an exemption for securities issued by a "real estate
operating company." 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 the Final DOL 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 the Company would qualify for an exemption from "plan
assets" treatment as a real estate operating company.
Exemption for Publicly Offered Securities. Under the Final DOL
Regulations, 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 Securities 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 of 1933 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
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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 administrative needs (which are
enumerated in the Final DOL Regulations) 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 of 1933, and the
Manager has represented that it will cause the Company to register the Units
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 Company 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 the Final DOL Regulations and referenced in the
preceding paragraph. Based on the foregoing, the Units should be "publicly
offered securities" within the meaning of the Final DOL Regulations. As a
result, the underlying assets of the Company should be considered to be plan
assets under the Final DOL Regulations.
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SUMMARY OF OPERATING AGREEMENT, RIGHTS OF MEMBERS
AND DESCRIPTION OF UNITS
The Units represent interests in the Company. The following is a
summary of the Operating Agreement. It does not purport to be complete and is
qualified in its entirety by reference to the Operating Agreement and to the
Nevada Limited Liability Companies Law. It in no way modifies or amends the
Operating Agreement, Exhibit A to this Prospectus.
Nature of the Company
The Company is a Nevada limited liability company formed on December
14, 1999 under the Nevada Limited Liability Companies Law.
The Responsibilities of the Manager
The Manager is the exclusive manager of the Company and controls all of
its affairs. The Manager arranges, makes and places with the Company all of its
investments, on terms that it believes are in its best interests. The Manager's
specific responsibilities, among others, are these:
o to determine how to invest the Company's assets;
o to execute all documents;
o to acquire, sell, trade, exchange or otherwise dispose of
Company assets or any interest therein in its discretion;
o to cause the Company to become a joint venturer, partner or
member of a development or operating entity for properties
acquired by the Company through foreclosure;
o to manage, operate and develop Company property;
o to employ or engage persons, including its affiliates, at the
expense of the Company, required for the operation of the
Company's business;
o to amend the Operating Agreement, under certain
circumstances, without the vote of the members.
Limitations on the Manager
The Manager has no authority to do any of the following, among others:
o any act in contradiction of the Operating Agreement;
o any act which would make it impossible to carry on the
business of the Company;
o admit a Manager without the prior approval of a
majority-in-interest of the members;
o sell all or substantially all of the Company assets or
dissolve the Company, without the prior approval of a
majority-in-interest of the members.
Liabilities of Members--Nonassessability
The Company will continue until December 31, 2019, unless a majority of
the members extend the duration of the Company. The Company may, in certain
circumstances, be dissolved at an earlier date. Under the Operating Agreement,
the Company will be dissolved and its business wound up upon the first to occur
of:
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o the Manager ceasing to be a manager, with no remaining
manager, unless a majority-in-interest of members (excluding
the Manager's member interest) agree in writing to continue
the business of the Company and within six months admit at
least one new manager; or
o the written consent or vote of a majority-in-interest of the
members in favor of dissolution and winding up of the
Company.
The Manager ceases to be a manager upon its removal, withdrawal,
dissolution or adjudication of bankruptcy.
Meetings
The Manager may call meetings of the members at any time and upon
written request to the Manager signed by the members holding at least 10% of the
Units. The Manager has no present intention of calling any meetings of the
members. All voting by the members is anticipated to be by written consent,
pursuant to notice as provided in the Operating Agreement.
Voting Rights
The vote or consent of a majority-in-interest of the members is
required, for the following:
o to amend the Operating Agreement, except that the Manager may
amend to cure any ambiguity or formal defect or omission, to
conform the Operating Agreement to applicable laws and
regulations and any change which, in the Manager's judgment,
is not to the prejudice of the members;
o to dissolve and wind up the Company;
o to remove and replace the Manager; or
o to approve or disapprove the sale of all or substantially all
of the assets of the Company.
The Company's books and records are maintained at the principal office
of the Company and are open to inspection and examination by members or their
duly authorized representatives during normal office hours. A copy of each
appraisal for the underlying property where the Company has invested in a
mortgage loan shall be maintained at the principal office of the Company, until
at least six years after the last date the Company holds the related mortgage
and is open to inspection, examination and copying by members or their duly
authorized representatives during normal office hours. A fee for copying may be
charged by the Company.
Status of Units
Each Unit when issued will be fully paid and nonassessable and all
Units owned by members have equal rights. Investments in the Company, whether
initial investments or subsequent additional investments, may be made at any
time during any calendar month. An investor is deemed to be a member, with all
of the associated rights, immediately upon acceptance by the Manager of the
Operating Agreement signed and delivered by the investor.
Distributions
All Net Income Available for Distribution (as defined in the Operating
Agreement), if any, is paid to the members monthly in arrears in cash or
additional Units (via reinvestment, as described in the next section), in the
ratio that the members' respective capital accounts bear to the aggregate amount
in all capital accounts of the members as of the last day of the calendar month
preceding the month in which such distribution is made. Net Proceeds (as defined
in the Operating Agreement), if any, received by the Company may be reinvested
in new loans, may be used to improve or maintain properties acquired by the
Company through foreclosure, may be used to pay permitted operating expenses, or
may be distributed to the members, in each event, in the sole discretion of the
Manager; provided that after seven years such amounts shall not be reinvested in
new mortgages. In the event of any distribution of net proceeds, such
distributions will be made to the members, 1% to the Manager, and 99% to the
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other members in the ratio that the members' respective capital accounts bear to
the aggregate amount in all capital accounts of the members as of the last day
of the calendar month preceding the month in which such distribution of net
proceeds is made. No such distribution will be made to the Manager until the
other members have received distributions of at least 100% of the amount of
their capital contributions.
All distributions are subject to the payment of expenses and other
liabilities and the establishment and maintenance of working capital reserves
which are adequate in the judgment of the Manager.
Reinvestments
After you purchase Units, you can choose to have your distributions
reinvested rather than receiving cash payments. These are called Reinvested
Distributions. Reinvested Distributions are used to purchase additional Units at
a rate of one Unit for every $1.00 of Reinvested Distributions. Subject to the
right of the Manager to terminate or reinstate the Reinvestment Plan, it will
continue to be available as long as the member meets all applicable suitability
standards. Reinvested Distributions are normally invested in mortgage loans of
the Company. No fees shall be paid to the Manager in connection with the
reinvestment of Net Proceeds (as defined in the Operating Agreement).
As a member you may elect to participate in the Reinvestment Plan at
the time you invest and will be deemed a Reinvestment Plan participant as of
that day. You may also make an election or revoke a previous election at any
time by sending written notice to the Company. Such notice shall be effective
for the month in which the notice is received if received at least 10 days prior
to the end of the calendar month, otherwise it is effective the first of the
following month. Units purchased under the Plan are credited 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,
subsequent distributions made by the Company are distributed to the member
instead of being reinvested in Units.
The Manager will mail to each Reinvestment Plan participant a statement
of account describing the Reinvested Distributions received, the number of Units
purchased, the purchase price per Unit, and the total Units accumulated, within
30 days after the Reinvested Distributions have been credited. Tax information
for income earned on Units under the Reinvestment Plan for the calendar year
will be sent to each reinvestment participant by the Manager at the same time
annual tax information is sent to the members. Reinvestment of distributions
does not relieve a reinvestment participant of any income tax which may be
payable on such distributions.
No reinvestment participant shall have the right to draw checks or
drafts against his account.
Units acquired through the Reinvestment Plan carry the same rights,
including voting rights (generally based on the value of the underlying capital
account), as Units acquired through original investment, although the amount in
the capital account underlying the new Units will not necessarily be the same as
those previously acquired. Capital accounts and distribution percentages will
not be adjusted to take into account an increase or decrease (other than a
write-down of an investment) in the fair market value of the Company's assets at
the time of a capital contribution (and corresponding Unit issuance). Thus, if
the fair market value of the Company's assets at the time of a capital
contribution (including under the Company's dividend reinvestment plan) is less
than its carrying value (cost) on the books of the Company, then the value of a
member's proportionate interest in the fair market value of the underlying
assets immediately after a capital contribution to the Company may be less than
one dollar. Conversely, if the fair market value of the Company's assets at the
time of a capital contribution (including under the Company's dividend
reinvestment plan) is greater than its carrying value (cost) on the books of the
Company, then, because there are no interim revaluations of the capital accounts
(except for write-downs), the right to a subsequent allocation of the unrealized
gains in the fair market value of the underlying assets will be shared with new
members (or members making reinvestments) thereby resulting in a dilution in the
member's proportionate interest in the fair market value of the underlying
assets.
The terms and conditions of the Reinvestment Plan may be amended,
supplemented, or terminated for any reason by the Company at any time by mailing
notice thereof at least 30 days prior to the effective date of such action to
each reinvestment participant at his last address of record.
The Manager reserves the right to suspend or terminate the Reinvestment
Plan if:
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o it determines, in its sole discretion, that the Plan impairs
the capital or the operations of the Company;
o it determines, in its sole discretion, that an emergency
makes continuance of the plan not reasonably practicable;
o any governmental or regulatory agency with jurisdiction over
the Company so demands for the protection of the members;
o in the opinion of counsel for the Company, such Plan is not
permitted by federal or state law, or when repurchases,
sales, assignments, transfers and exchanges of Units in the
Company within the previous twelve (12) months would result
in the Company being considered terminated within the meaning
of Section 708 of the Internal Revenue Code; or
o the Manager determines in good faith that allowing any
further reinvestments would give rise to a material risk that
the Company would be treated as a "publicly traded
partnership" within the meaning of Internal Revenue Code
Section 7704 for any taxable year.
Assignment and Transfer of Units
There is no public market for the Units and none is expected in the
future. Members have only a restricted and limited right to assign their company
interests and rights. You may transfer your member interest in the Company only
by written instrument satisfactory in form to the Manager. You may make no
transfer of a fractional Unit, and no transfer if you would then own less than
2,000 Units (other than a member transferring all of his or her Units or in the
event of a transfer by operation of law). Any transfer must comply with
then-current laws, rules and regulations of any applicable governmental
authority, and the person to whom you would wish to transfer must meet the
registration and suitability provisions of applicable state securities laws.
Transferees who wish to become substituted members may do so only upon the
written consent of the Manager, and after compliance with Article 10 of the
Operating Agreement.
Repurchase of Units, Withdrawal from Company
Subject to the one year holding period limitation, a member may
withdraw, or partially withdraw, from the Company and obtain the return of all
or part of its outstanding Capital Account within 61 to 91 days after written
notice of withdrawal is delivered to the Manager, subject to the following
limitations:
o Except with respect to a personal representative of a
deceased member, no withdrawal may be made until the
expiration of at least on year from the date of a purchase of
Units or after the date of this Prospectus, other than by way
of automatic reinvestment of Company distributions through
the Reinvestment Plan.
o Any such cash payments in return of an outstanding Capital
Account will be made by the Company from Net Proceeds and
Capital Contributions during the 61 to 91 day period after
written notice is provided to the Manager.
o Distributions to withdrawing members are limited to a maximum
of $100,000 per calendar quarter for any member.
o The members have the right to receive such distributions of
cash only to the extent such funds are available in excess of
known or anticipated expenses or other liabilities and
reserves therefor; the Manager is not required to use any
other sources of Company funds other than Net Proceeds and
Capital Contributions to fund a withdrawal; nor is the
Manager required to sell or otherwise liquidate any portion
of the Company's assets in order to fund a withdrawal.
o In addition to other restrictions on the Manager's
reinvesting Net Proceeds described elsewhere herein,
commencing on the date of receipt from a member of written
notice of such member's withdrawal from
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the Company and for a period of up to 90 days thereafter,
the Manager will not reinvest any Net Proceeds or Capital
Contributions into new loans until the Company has
sufficient funds available to distribute to the withdrawing
member all of his Capital Account in cash.
o The amount to be distributed to any withdrawing member is a
sum equal to such member's Capital Account as of the date of
such distribution, notwithstanding that such sum may be
greater or lesser than such member's proportionate share of
the current fair market value of the Company's net assets.
o No more than 10% of the outstanding capital accounts of
members may be withdrawn during any calendar year except upon
dissolution of the Company.
o In the event that any member takes withdrawals from the
Company and such withdrawal reduces the Capital Account of
such member below $2,000, the Manager may distribute all
remaining amounts in such account to such member, who will
thereupon be deemed to have fully withdrawn from the Company.
o All payments in satisfaction of requests for withdrawal are
on a "first-come, first-served" basis. If the sums required
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 was first received by the
Manager, until such member's request is paid in full. If such
member's withdrawal request cannot be paid in full at the
time made, because of insufficient cash available for
withdrawals or otherwise, the Manager will continue to
distribute eligible funds to such member until such
withdrawal request is paid in full. Once the Manager has
satisfied the request of the member whose request was
received first, the next member to submit a withdrawal
request may begin to receive distributions on account of such
withdrawal.
Special Power of Attorney
Under the terms of the Operating Agreement, each member appoints the
Manager to serve as his attorney-in-fact with respect to the execution,
acknowledgement and filing of certain documents related to the Company or the
Operating Agreement. The special power of attorney given by each member to the
Manager cannot be revoked and will survive the death of a member or the
assignment of Units.
REPORTS TO MEMBERS
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. The Manager shall cause to be prepared at least annually, at
Company 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
materials delivered to the members will include
o annual financial statements: audited balance sheet,
statements of income or loss, Members' equity, and a
statement of Cash Flow;
o 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
o a report identifying distributions from (A) cash flow from
operations during that year, (B) cash flow from operations of
prior years that had been held as reserves, (C) proceeds from
capital transactions, (D) lease payments on net leases with
builders and sellers, and (E) reserves from the gross
proceeds of the offering originally obtained from the
Members.
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Copies of the financial statements and reports referred to above
(other than those delivered for purposes of members filing their income tax
returns) shall be distributed to each Member within 120 days after the close of
each taxable year of the Company. Costs of any verification performed by the
Company's accountants in connection therewith will be itemized by said
accountants and may be reimbursed to the Manager by the Company only to the
extent that such reimbursement when added to the costs for administrative
services rendered does not exceed the competitive rate for such services.
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 during each quarter in which there were mortgage loans or
origination, placement or evaluation fees incurred, a special report (which may
be included in the quarterly report described below) containing a statement of
the amount of the Mortgage Loans, the material terms of these loans, the
identity of the borrower and the real property and the appraised value of the
real property. Copies of the statements shall be distributed to each Member
within sixty (60) days after the end of each such quarterly period.
The information required by Form 10-Q (if required to be filed with the
Securities and Exchange Commission) will be provided to each Member within 45
days of the end of the quarterly period covered thereby. 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 these latter statements and information shall be
distributed to each Member within sixty (60) days after the close of the quarter
covered by the report of the Company.
PLAN OF DISTRIBUTION
The Units are being offered to the public pursuant to this Prospectus
through DM Financial Services, Inc. (the "Dealer Manager"), an affiliate of
Sunderland Corporation, the Delaware corporation that is the owner of Capsource,
Inc., which is the Manager of the Company. The Dealer Manager is a securities
broker-dealer registered with the SEC and certain states and a member of the
National Association of Securities Dealers, Inc. ("NASD").
The Dealer Manager intends to contract with non-affiliated securities
firms that are members of the NASD ("Selected Dealers"), who will also offer and
sell the Units to the public. The Dealer Manager will receive commissions,
dealer management fees and reimbursements of bona fide accountable expenses of
up to one and one-half percent (1.5%) of gross proceeds, of which a maximum of
one-half percent (0.5%) of gross proceeds is for the reimbursement of expenses.
The Selected Dealers may receive sales commissions of up to three percent (3%),
marketing incentive fees of up to one half of one percent (0.5%) and
reimbursement of accountable expenses of up to one-half of one percent (0.5%) of
gross proceeds in this offering.
Until at least 1,500,000 Units have been sold and the sales proceeds of
$1,500,000 have been obtained, all proceeds from sales of Units will be placed
in a segregated escrow account with BankWest, whose address is 2700 North Sahara
Avenue, Las Vegas, Nevada 89102-1700, pursuant to an escrow agreement which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
If the minimum amount of sales proceeds of $1,500,000 have been placed
in the escrow account with BankWest by not later than December 31, 2000, the
escrow account will be closed and the proceeds, after deduction of BankWest's
escrow agent fees, together with amounts earned as interest on those proceeds,
will be delivered to the Company for its intended use as described in this
Prospectus under "Use of Proceeds" at page 21.
If the minimum amount of $1,500,000 has not been deposited into the
escrow account by not later than December 31, 2000, BankWest will return to all
investors the amounts they have paid to buy Units, together with their pro rata
amounts of any interest earned on those proceeds, without deductions, to the
investors and the offer and sale of the Units will terminate and the investors'
Subscription Agreements will be cancelled.
If the minimum amount of $1,500,000 is timely obtained as described
above, the Company will continue to
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offer its Units for sale to the public through the Dealer Manager and Selected
Dealers to seek a total of $100,000,000 from the sale of a total of 100,000,000
Units. Subject to the two immediately preceding paragraphs, the offer may extend
for a period equal to two years from the date the offering originally began, or
the Company may elect to terminate the offering at any time in its sole
discretion. In certain states where the offering will be made, it may not
extend beyond a total of one year from its inception without the prior consent
of the appropriate state securities regulatory agency.
Investors who wish to purchase Units should complete the Subscription
Agreement and Power of Attorney (the form is attached as Exhibit B to this
Prospectus) that will be provided to them by the securities firm that solicits
their purchases and return it to that securities firm, together with full
payment for the Units being purchased. The securities firm will advise each
subscribing investor whether to make checks or wire transfers payable to
"BankWest of Nevada, as Escrow Agent" or, if the escrow account has been closed
after the timely sale of the minimum amount of 1,500,000 Units, to "DM Mortgage
Investors, LLC." Additional copies of the Subscription Agreement and Power of
Attorney may be obtained from DM Financial Services, Inc., whose address is 2901
El Camino Avenue, Suite 207, Las Vegas, Nevada 89102, telephone number (702)
247-1332.
By submitting the signed subscription Agreement and Power of Attorney
with payment for the purchase of Units, the investor:
o agrees to be bound by the Operating Agreement;
o grants a special and limited power of attorney to the
Manager; and
o represents and warrants that the investor meets the relevant
suitability standards and is eligible to purchase Units.
Upon commencement of monthly distributions from cash flow by the
Company, the Company's members will have the opportunity to acquire additional
Units in lieu of receiving cash dividends. No fees or commissions will be paid
in connection therewith. See, generally, "Summary of Operating Agreement, Rights
of Members and Description of Units - Reinvestments."
LEGAL MATTERS
Certain legal matters in connection with the issuance of Units offered
hereby will be passed upon for the Company by Goodman Phillips & Vineberg and
also by Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP, legal counsel for
the Company and Manager.
Tax counsel for the Company is Wendel, Rosen, Black & Dean, LLP,
Oakland, California.
EXPERTS
The financial statements of the Company as of December 31, 1999 and for
the period from December 14, 1999 (date of inception) through December 31, 1999
included in this prospectus or in the registration statement of which this
prospectus forms a part, have been audited by Grant Thornton LLP, independent
certified public accountants, whose report thereon appears herein and elsewhere
in this registration statement. Such financial statements are included in
reliance upon the report of Grant Thornton LLP, given upon the authority of such
firm as experts in accounting and auditing.
The financial statements of the Sunderland Corporation as of December
31, 1999 and for the year then ended included in this Prospectus or in the
Registration Statement of which this Prospectus forms a part, have been audited
by Grant Thornton LLP, independent certified public accountants, whose report
thereon appears herein and elsewhere in this Registration Statement. Such
financial statements are included in reliance upon the report of Grant Thornton
LLP, given upon the authority of such firm as experts in accounting and
auditing.
72
<PAGE>
INDEX TO FINANCIAL STATEMENTS
DM MORTGAGE INVESTORS, LLC
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
BALANCE SHEET AT DECEMBER 31, 1999 F-2
STATEMENT OF MEMBERS' EQUITY FOR THE PERIOD FROM
DECEMBER 14, 1999 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1999 F-3
NOTES TO THE FINANCIAL STATEMENTS F-4
SUNDERLAND CORPORATION
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-8
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 F-9
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED
DECEMBER 31, 1999 F-10
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999 F-11
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE
YEAR ENDED DECEMBER 31, 1999 F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-13
<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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 generally accepted accounting
principles.
/S/ GRANT THORNTON LLP
Reno, Nevada
January 10, 2000
F-1
<PAGE>
DM Mortgage Investors, LLC
(A Development Stage Company)
BALANCE SHEET
December 31, 1999
ASSETS
Deferred offering costs $ 115,100
---------
Total assets $ 115,100
=========
LIABILITIES AND MEMBERS' EQUITY
Liabilities $ -
Members' equity - actual 115,100 units at $1
per unit, minimum 1,615,100 units, maximum
100,115,100 units 115,100
---------
Total liabilities and members' equity $ 115,100
=========
The accompanying notes are an integral part of this statement.
F-2
<PAGE>
DM Mortgage Investors, LLC
(A Development Stage Company)
STATEMENT OF MEMBERS' EQUITY
For the period from December 14, 1999 (date of inception)
through December 31, 1999
Inception, December 14, 1999 $ -
Issuance of units 115,100
---------
Members' equity at end of period $ 115,100
=========
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
DM Mortgage Investors, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
For the period from December 14, 1999 (date of inception)
through December 31, 1999
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 Bulletin Board under the symbol "DLMA".
For the period from December 14, 1999 (date of inception) through December
31, 1999, the only transaction was non-cash deferred offering costs which
were paid by the Manager on behalf of the Company
2. 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.
3. 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.
4. Revenue Recognition
Interest is recognized as revenue when earned according to the terms of
the loan.
F-4
<PAGE>
DM Mortgage Investors, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the period from December 14, 1999 (date of inception)
through December 31, 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. 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.
6. 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 $100,115,100. 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
For the period from December 14, 1999 (date of inception)
through December 31, 1999
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
For the period from December 14, 1999 (date of inception)
through December 31, 1999
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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 generally accepted
accounting principles.
/s/ Grant Thornton LLP
Reno, Nevada
February 11, 2000
F-8
<PAGE>
Sunderland Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31, 1999
ASSETS
Cash $1,085,753
Accounts receivable 902,622
Notes receivable 323,000
Investments in marketable securities 114,949
Investment in real estate held for sale 1,293,194
Investments in mortgage loans on real estate 5,516,244
Deferred tax asset 27,542
Other assets 115,870
Property and equipment, net 35,005
----------
Total assets $9,414,179
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 232,935
Accrued expenses 197,751
Line of credit 1,980,000
Income taxes payable 736,875
Due to related party 244,641
Note payable 1,290,000
----------
Total liabilities 4,682,202
----------
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;
6,161,270 shares issued and outstanding 616
Additional paid-in capital 1,642,490
Retained earnings 3,088,871
----------
Total stockholders' equity 4,731,977
----------
Total liabilities and stockholders' equity $9,414,179
==========
The accompanying notes are an integral part of this statement.
F-9
<PAGE>
Sunderland Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, 1999
Revenues
Loan origination and related fees $11,237,208
Interest income 605,468
Other income 19,319
-----------
Total revenues 11,861,995
===========
Expenses
Sales and marketing expenses 1,749,948
General and administrative expenses 6,049,323
Interest expenses 142,489
-----------
Total expenses 7,941,760
-----------
Income before provision for
income taxes 3,920,235
Provision for income taxes 959,333
-----------
NET INCOME $ 2,960,902
===========
Pro forma information (unaudited):
Historical income before income taxes $ 3,920,235
Pro forma income taxes 1,341,202
-----------
Pro forma net income $ 2,579,033
===========
Pro forma net income per share $ 0.42
===========
Weighted average shares outstanding $ 6,154,914
===========
The accompanying notes are an integral part of this statement.
F-10
<PAGE>
Sunderland Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31, 1999
<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 - $ - 4,891,270 $ 489 $ 3,075,147 $ (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
Net income - - - - - -
---- --- --------- ----- ----------- -----------
Balance at December 31, 1999 - $ - 6,161,270 $ 616 $ 1,642,490 $ -
==== === ========= ===== =========== ==========
<CAPTION>
Retained
Earnings Total
-------- -----
<S> <C> <C>
Balance at January 1, 1999 $ 127,969 $ 2,667,959
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
Net income 2,960,902 2,960,902
--------- -----------
Balance at December 31, 1999 $ 3,088,871 $ 4,731,977
========= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-11
<PAGE>
Sunderland Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1999
<TABLE>
Cash flow from operating activities:
<S> <C>
Net income $ 2,960,902
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 6,806
Changes in operating assets and liabilities:
Accounts receivable (501,096)
Deferred tax asset (27,542)
Other assets (5,025)
Due from related party (292,033)
Accounts payable and accrued expenses 764,594
Due to related party 332,270
Income taxes payable 736,875
------------
Net cash provided by operating activities 3,975,751
------------
Cash flows from investing activities:
Purchase of property and equipment (19,507)
Purchase of investment in note receivable (323,000)
Purchase of investment in marketable securities (114,949)
Purchase of real estate held for sale (3,194)
Purchase of investments in mortgage loans (3,055,520)
------------
Net cash used in investing activities (3,516,170)
------------
Cash flows from financing activities:
Advance on line of credit 1,980,000
Payments on short-term note (100,000)
Distribution to stockholder (2,132,305)
Payments received from note receivable from stockholder 535,646
Deferred offering costs (115,100)
------------
Net cash provided by financing activities 168,241
------------
NET INCREASE IN CASH 627,822
Cash at beginning of year 457,931
------------
Cash at end of year $ 1,085,753
============
Supplemental cash flow information:
Cash paid for Federal income taxes $ 250,000
============
Cash paid for interest $ 128,783
============
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
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-12
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
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 and operates in
one business segment.
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.
F-13
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
Note A - Organization and Summary of Significant Accounting Policies
- Continued
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 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, and extension fees. 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.
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.
F-14
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
Note A - Organization and Summary of Significant Accounting Policies
- Continued
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."
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 $339,000 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.
F-15
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
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), the
earnings of Del Mar Mortgage, Inc., which are included in the Consolidated
Statement of Income, are taxed to the shareholder of Del Mar Mortgage,
Inc. 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.
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.
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 historical cost or net realizable value.
F-16
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
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 at December 31, 1999:
Furniture and equipment $ 52,429
Less: Accumulated depreciation (17,424)
-------------
$ 35,005
=============
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 April 8, 2000.
Note G - Line 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
contains certain covenants, which the Company has complied with as of
December 31, 1999.
F-17
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
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 I). 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.
Note I - 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 J - 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.
F-18
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
Note K - 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.
The Company incurred accounting and financial consulting fees of $150,000
for the year ended December 31, 1999, which were paid to an accounting
firm whose managing principal is an officer, director and stockholder of
the Company.
F-19
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
Note L - 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 M - 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.
F-20
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
Note N - 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 O - 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 P - Commitments and Contingencies
Lease Commitments
The Company operates from a leased office facility 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. Rent expense for the leased office facility charged to operations
for the year ended December 31, 1999 was $140,000.
The Company leases equipment under a noncancellable operating lease. Rent
expense for the equipment was $20,000 for the year ended December 31,
1999.
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
============
F-21
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
Note Q - Acquisitions
On December 23, 1999, the Company consummated an agreement to acquire all
the outstanding capital stock of DM Financial Services, Inc., a 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. is pending regulatory
approval of both the National Association of Securities Dealers and the
Corporate Securities Division of the State of Nevada. The acquisition of
DM Mortgage Advisors, Inc. is also pending regulatory approval by the
State of Arizona.
Note R - 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.
Note S - Subsequent Events
In January 2000, the Company entered into a letter of intent to merge with
an accounting firm (the "Firm") whose managing principal is an officer,
director and shareholder of the Company. The proposed transaction would
transfer 100% of the outstanding common stock of the Firm to the Company
in exchange for 800,000 common shares of the Company's stock.
F-22
<PAGE>
EXHIBIT A
DM MORTGAGE INVESTORS, LLC
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
<PAGE>
DM MORTGAGE INVESTORS, LLC
TABLE OF CONTENTS
<TABLE>
<S> <C>
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......................................................................1
1.7 Power of Attorney......................................................................2
1.8 Nature of Power of Attorney............................................................2
ARTICLE 2
DEFINITIONS..............................................................................................3
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...................................................................................5
2.10 Company................................................................................5
2.11 Controlling Person.....................................................................5
2.12 Deed of Trust..........................................................................5
2.13 Earnings...............................................................................5
2.14 Escrow Account.........................................................................5
2.15 Fiscal Year............................................................................5
2.16 Front-End Fees.........................................................................5
2.17 Gross Asset Value......................................................................5
2.18 Independent Expert.....................................................................6
2.19 Investment in Mortgage Loans...........................................................6
2.20 Interest...............................................................................6
2.21 Late Payment Charges...................................................................6
2.22 Majority-In-Interest...................................................................6
2.23 Management Fee.........................................................................6
2.24 Manager................................................................................6
2.25 Member.................................................................................7
2.26 Mortgage Investment(s).................................................................7
2.27 Mortgage Loans.........................................................................7
2.28 NASAA Guidelines.......................................................................7
</TABLE>
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2.29 Net Income Available for Distribution..................................................7
2.30 Net Proceeds...........................................................................7
2.31 Net Worth..............................................................................7
2.32 Nevada Statutes........................................................................7
2.33 Offering...............................................................................7
2.34 Organization and Offering Expenses.....................................................7
2.35 Person.................................................................................8
2.36 Profits and Losses.....................................................................8
2.37 Program................................................................................8
2.38 Promotional Interest...................................................................8
2.39 Property Management Fee................................................................8
2.40 Prospectus.............................................................................8
2.41 Real Property..........................................................................9
2.42 Regulations............................................................................9
2.43 Reinvested Distributions...............................................................9
2.44 Roll-Up................................................................................9
2.45 Roll-Up Entity.........................................................................9
2.46 Sales Commissions......................................................................9
2.47 Sponsor................................................................................9
2.48 Subscription Agreement.................................................................9
2.49 Units.................................................................................10
2.50 Writedown.............................................................................10
2.51 Writedown Amount......................................................................10
ARTICLE 3
THE MANAGER.............................................................................................10
3.1 Control in Manager....................................................................10
3.2 Limitations on Manager's Authority....................................................12
3.3 Right to Purchase Receivables and Loans...............................................13
3.4 Extent of Manager's Obligation and Fiduciary Duty.....................................13
3.5 Liability and Indemnification of Manager..............................................15
3.6 Assignment by the Manager.............................................................16
3.7 Promotional Interest of Manager.......................................................16
3.8 Removal of Manager....................................................................16
3.9 Right to Rely on Manager..............................................................16
3.10 Sole Discretion.......................................................................17
3.11 Transfer of the Control of the Manager................................................17
ARTICLE 4
INVESTMENT AND OPERATING POLICIES.......................................................................17
4.1 Commitment of Capital Contributions...................................................17
4.2 Limitation on Single Property Loans...................................................17
4.3 Limitations on Company Indebtedness...................................................17
4.4 Limitation on Single Mortgage Loans and To Any One Borrower...........................18
</TABLE>
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4.5 Limitation of Mortgage Loans on Unimproved Real Property..............................18
4.6 Limitation on Investment in Land Sale Contracts.......................................18
4.7 Title Insurance Policy Required.......................................................18
4.8 Insurance Coverage Required...........................................................18
4.9 Sale of Mortgage Investments to Manager or Affiliates.................................18
4.10 Limitations on Purchase of Mortgage Investments from Manager..........................18
4.11 Criteria For Selection of Mortgage Investments........................................19
4.12 Limitation on Payments on Loans to the Company by the Manager or its Affiliates.......19
4.13 Restriction on Acquisition of or Sale of Mortgage Loans to Affiliated Programs........19
4.14 No Sale of Foreclosed Property to Manager or Affiliated Program.......................19
ARTICLE 5
CAPITAL CONTRIBUTIONS; LOANS TO COMPANY.................................................................20
5.1 Capital Contribution by Manager.......................................................20
5.2 Other Contributions...................................................................20
5.3 Interest..............................................................................20
5.4 Loans.................................................................................20
ARTICLE 6
VOTING AND OTHER RIGHTS OF MEMBERS......................................................................21
6.1 No Participation in Management........................................................21
6.2 Rights and Powers of Members..........................................................21
6.3 Meetings..............................................................................21
6.4 Limited Liability of Members..........................................................22
6.5 Access to Books and Records...........................................................22
6.6 Representation of Company.............................................................22
ARTICLE 7
PROFITS AND LOSSES; CASH DISTRIBUTIONS..................................................................23
7.1 Allocation of Profits and Losses......................................................23
7.2 Net Income Available For Distribution.................................................23
7.3 Net Proceeds..........................................................................23
7.4 Cash Distributions Upon Dissolution...................................................23
7.5 Special Allocation Rules..............................................................24
7.6 Code Section 704 (c) Allocation.......................................................25
7.7 Intent of Allocations.................................................................26
7.8 Quarterly Valuation of Assets.........................................................26
ARTICLE 8
REINVESTED DISTRIBUTIONS PLAN...........................................................................26
8.1 Members' Reinvested Distributions.....................................................26
8.2 Purchase of Additional Units..........................................................26
8.3 Statement of Account..................................................................27
8.4 Continued Suitability Requirements....................................................27
</TABLE>
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ARTICLE 9
BOOKS AND RECORDS, REPORTS AND RETURNS..................................................................27
9.1 Books and Records.....................................................................27
9.2 Annual Statements.....................................................................28
9.3 [Reserved]............................................................................28
9.4 Quarterly Reports.....................................................................28
9.5 Filings...............................................................................29
9.6 Suitability Requirements..............................................................29
9.7 Fiscal Matters........................................................................29
9.8 Tax Matters Partner...................................................................30
ARTICLE 10
TRANSFER OF COMPANY INTERESTS...........................................................................30
10.1 Interest of Manager...................................................................30
10.2 Transfer of Member's Interest.........................................................30
10.3 Further Restrictions on Transfers.....................................................31
ARTICLE 11
DEATH, LEGAL INCOMPETENCY, OR WITHDRAWAL OF A MEMBER; WITHDRAWAL OF MANAGER.............................32
11.1 Effect of Death or Legal Incompetency of a Member on the Company......................32
11.2 Rights of Personal Representative.....................................................32
11.3 Withdrawal of Members Other than Managers.............................................32
11.4 Withdrawal by Manager.................................................................34
11.5 Payment to Terminated Manager.........................................................34
ARTICLE 12
DISSOLUTION OF THE COMPANY..............................................................................34
12.1 Events Causing Dissolution............................................................34
12.2 Winding Up............................................................................34
12.3 Order of Distribution of Assets.......................................................35
12.4 No Recourse to Manager................................................................35
12.5 Compliance With Timing Requirements of Regulations....................................35
ARTICLE 13
ROLL-UPS AND INVESTMENTS IN OTHER PROGRAMS..............................................................35
13.1 Investment in or with Non-Affiliates..................................................35
13.2 Investments In or With Affiliates. ...................................................36
13.3 Roll-Up Transactions: Appraisal.......................................................36
13.4 Members' Rights in a Roll-Up..........................................................37
ARTICLE 14
COMPENSATION TO THE MANAGER AND ITS AFFILIATES..........................................................38
14.1 Offering Sales Commissions to Dealer Manager and Selected Dealers/
</TABLE>
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Reimbursement of Organizational and Offering Expenses.................................38
14.2 Compensation for Loan Evaluation and Processing Fees..................................38
14.3 Loan Brokerage Commissions............................................................38
14.4 Promotional Interest..................................................................39
14.5 Management Fee........................................................................39
14.6 Reimbursement ........................................................................39
14.7 Real Estate Brokerage Commissions in Resale of Property...............................39
14.8 Loan Servicing Fee....................................................................39
14.9 Escrow Fees...........................................................................40
14.10 Reconveyance Fees.....................................................................40
14.11 Extension Fee.........................................................................40
14.12 Assumption Fee........................................................................40
14.13 Non-reimbursable and Other Expenses...................................................40
14.14 Operating Expenses....................................................................40
14.15 Deferral of Fees and Expense Reimbursement............................................41
14.16 Prepayment and Late Fees..............................................................41
ARTICLE 15
MISCELLANEOUS...........................................................................................41
15.1 Covenant to Sign Documents............................................................41
15.2 Notices...............................................................................41
15.3 Right to Engage in Competing Business.................................................42
15.4 Amendment.............................................................................42
15.5 Entire Agreement......................................................................42
15.6 Waiver................................................................................43
15.7 Severability. .......................................................................43
15.8 Application of Nevada law. ..........................................................43
15.9 Captions..............................................................................43
15.10 Number and Gender.....................................................................43
15.11 Counterparts..........................................................................43
15.12 Waiver of Action for Partition........................................................43
15.13 Defined Terms.........................................................................43
15.14 Binding on Assignees..................................................................43
</TABLE>
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<PAGE>
OPERATING AGREEMENT
OF
DM MORTGAGE INVESTORS, LLC
A Nevada Limited Liability Company
THIS OPERATING AGREEMENT ("Agreement") was made and entered into as of the 15th
day of December, 1999, by and between Capsource, Inc., a Nevada corporation
("Manager"), and DM Mortgage Investors, LLC, a Nevada Limited Liability Company
("Company").
ARTICLE 1
ORGANIZATION OF THE LIMITED LIABILITY COMPANY
1.1 Formation. The Manager caused the formation of the Company on
December 14, 1999 pursuant to 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
shall be located at 2901 El Camino Avenue, Las Vegas, Suite 206, Nevada 89102,
until changed by designation of the Manager with notice to all Members. 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 such
documents as are necessary and appropriate 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 invest in and
purchase first, second, wraparound, participating and construction Mortgage
Investments (as defined in Section 2.25 below), and to do all things reasonably
related thereto, including, but not limited to, developing, managing and either
holding for investment or disposing of real property acquired through
foreclosure, either directly or through general partnership or joint ventures,
as provided for in Sections 13.1 and 13.2 of this Agreement, and to generate and
distribute the Profits of the Company from its operations.
1.5 Articles of Organization. The Manager has duly executed,
acknowledged and filed with the Office of the Secretary of State of the State of
Nevada, Articles of Organization and Certificate of Acceptance of Appointment of
resident agent, pursuant to the provisions of NRS Sections 86.151 and 86.221.
Hereinafter, the Manager shall execute and cause to be filed Certificates of
Amendment of the Articles of Organization whenever required by NRS or this
Agreement.
1.6 Term of Existence. The Company was organized and its term of
existence commenced as of the date on which the Articles of Organization
referred to in Section 1.5 were
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filed with the Office of the Secretary of State, and shall continue until
December 31, 2019, unless earlier terminated pursuant to the provisions of this
Agreement or by operation of law. The term of the Company may be extended by
affirmative vote of the Majority-in-Interest, 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:
(a) 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;;
(b) 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
(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.
1.8 Nature of Power of Attorney. The grant of authority in Section 1.7:
(a) 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
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(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.
ARTICLE 2
DEFINITIONS
Unless stated otherwise, the terms set forth in this Article 2 shall, for all
purposes of this Agreement, have the meanings as defined herein:
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 in connection with purchasing or
investing in Mortgage Investments. Included in the computation of such 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 or 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 (a) any person directly or indirectly controlling,
controlled by or under common control with another Person, (b) any Person owning
or controlling ten percent (10%) or more of the outstanding voting securities of
such other Person, (c) any officer, director or Member of such Person, or (d) if
such other Person is an officer, director or Member, any company for which such
Person acts in any such capacity.
2.5 Agreement means this Operating Agreement, as amended from time to
time.
2.6 Capital Account. means, with respect to any Member, the Capital
Account maintained for such Member in accordance with the following provisions:
(a) To each Member's Capital Account there shall be credited such
Member's Capital Contribution, such 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 such Member or that are secured by
any Company property distributed to such Member.
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(b) To each Member's Capital Account there shall be debited the amount
of cash and the fair market value of any Company property distributed to such
Member pursuant to any provision of this Agreement, such 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 such Member
that are assumed by the Company or that are secured by any property contributed
by such Member to the Company.
(c) In the event that the Gross Asset Value of a Company asset is
adjusted as a result of a Writedown, the Capital Accounts of all Members shall
be adjusted simultaneously therewith in order to reflect the aggregate net
adjustment which would have occurred if the Company had recognized Losses equal
to the Writedown Amount and such Losses were allocated pursuant to Article 7.
In the event 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 such Regulation. In the event the Manager shall
determine 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 such modification, provided
that it is not likely to have a material effect on the amounts distributable to
any Member pursuant to Articles 7 and 12 hereof upon the dissolution of the
Company. The Manager shall adjust the amounts debited or credited to Capital
Accounts with respect to (a) any property contributed to the Company or
distributed to the Manager, and (b) any liabilities that are secured by such
contributed or distributed property or that are assumed by the Company or the
Manager, in the event the Manager shall determine such adjustments are necessary
or appropriate pursuant to Treasury Regulation Section 1.704-l(b)(2)(iv). The
Manager shall make any appropriate modification in the event unanticipated
events might otherwise cause this Agreement not to comply with Treasury
Regulation Section 1.704-l(b) as provided for in Sections 7.7 and 15.4(c).
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 as hereinafter defined. "Initial
Capital Contribution" means the amount paid in cash by each Member with his
original subscription to Units of the Company, pursuant to the offer and sale
made by the Prospectus.
2.8 Capital Transaction. means the repayment of principal or prepayment
of a Mortgage Investment to the extent classified as a return of capital under
the Code, and the foreclosure, sale, exchange, condemnation, eminent domain
taking or other disposition of a Mortgage Investment or Real Property subject to
a Mortgage Investment, or the payment of
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insurance or a guarantee with respect to 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 Controlling Person. means any Person, with whatever title, who
performs functions for the Manager similar to those of (i) chairman or member of
the board of directors; (ii) executive management, such as the president,
vice-president, chief financial officer, corporate secretary or treasurer, or
senior management, such as the vice president of a division reporting directly
to executive management; or (iii) those holding 5% or more equity interest in
the Manager or a Person having the power to direct or cause the direction of the
Manager, whether through the ownership of voting securities, by contract or
otherwise.
2.12 Deed of Trust. means the lien or liens created on the Real
Property of the borrower securing the borrower's obligation to the Company to
repay the Mortgage Investment, whether in the form of a deed of trust, mortgage
or otherwise.
2.13 Earnings. means all revenues earned by the Company less all
expenses incurred by the Company.
2.14 Escrow Account. means the separate escrow account established by
agreement with the Bankwest of Nevada, located in Las Vegas, Nevada, into which
will be deposited all proceeds from the sale of the first 1,500,000 Units
($1,500,000), as described in Section 5.2 of this Agreement.
2.15 Fiscal Year. means, subject to the provisions of Section 706 of
the Code and Section 9.7.1, (i) the period commencing on the date of formation
of the Company and ending on December 31, (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 pursuant to Article 12.
2.16 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 other similar fees, however designated by the Manager.
2.17 Gross Asset Value. means, with respect to any Company asset, the
following:
(a) 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
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market value of such Company asset (without regard to the provisions of Code
Section 7701(g)), as determined by the contributing Member and the Manager;
(b) 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;
(c) 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 pursuant to Code Section 708(b)(1)(B); and
(d) The Gross Asset Value of a Company asset shall be adjusted
in the case of a Writedown of such Company asset in accordance with Section
2.50.
2.18 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 such
services.
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 Interest. means the Capital Accounts of Members, which are divided
into "Units."
2.21 Late Payment Charges. means additional charges paid by borrowers
on delinquent Mortgage Investments or on Mortgage Investments held past maturity
by the Company, including additional interest and late payment fees.
2.22 Majority-In-Interest. means Members holding a majority of the
total outstanding Interests of the Company as of the first day of any current
calendar month.
2.23 Management Fee. means a fee paid to the Manager or other Person
for the management of the Company and its Mortgage Investments and the
administration of the Company.
2.24 Manager. means Capsource, Inc., a Nevada corporation, or any
Person
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substituted in place thereof pursuant to this Agreement. The Manager is
also a Member.
2.25 Member means the owners of Units in the Company.
2.26 Mortgage Investment(s). means the Mortgage Loan(s) or an interest
in the Mortgage Loans that are held by the Company.
2.27 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.
2.28 NASAA Guidelines. means the Mortgage Program Guidelines of the
North American Securities Administrators Association, Inc. adopted on September
10, 1996 and as amended from time to time unless indicated to the contrary by
the context.
2.29 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 such month; provided
that:
(a) such 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 Section 14.14 of this Agreement; and
(b) Net Income Available for Distribution shall not exceed the
amount of cash on hand.
2.30 Net Proceeds. means the net cash proceeds from any Capital
Transaction.
2.31 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 such assets have been depreciated, then the amount of the
depreciation relative to any particular asset may be added to the depreciated
cost of such asset to compute total assets, provided that the amount of
depreciation may be added only to the extent that the amount resulting after
adding such depreciation does not exceed the fair market value of such asset.
2.32 Nevada Statutes. means Nevada Revised Statutes, as amended from
time to time, unless indicated to the contrary by the context.
2.33 Offering. means the offer and sale of Units of the Company made
under the Prospectus.
2.34 Organization and Offering Expenses. means those expenses incurred
in connection with and in preparing the Company for registration with the
Securities and Exchange
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Commission and states and subsequently offering and distributing Units to the
public, including sales commissions, if any, paid to securities broker-dealers
in connections with the distribution of Units, and all advertising expenses.
2.35 Person. means any natural person, partnership, corporation,
unincorporated association or other legal entity.
2.36 Profits and Losses. mean, for each Fiscal Year or any other
period, an amount equal to the Company's taxable income or loss for such 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 pursuant to Code Section 703(a)(1) shall be included in
taxable income or loss), with the following adjustments (without duplication):
(a) Any income of the Company that is exempt from federal
income tax and not otherwise taken into account in computing Profits or Losses
pursuant to this Section shall be added to such taxable income or loss;
(b) 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 pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and
not otherwise taken into account in computing Profits or Losses pursuant to this
Section, shall be subtracted from such taxable income or loss.
(c) In the event any Company asset has a Gross Asset Value
which differs from its adjusted cost basis, gain or loss resulting from the
disposition of such Company asset shall be computed using the Gross Asset Value
(rather than adjusted cost basis) of such Company asset.
(d) 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(a), 7.5(b) and 7.6, shall not be taken into account
in computing Profits or Losses.
2.37 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.
2.38 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.
2.39 Property Management Fee. means any fee paid for day-to-day
professional property management services.
2.40 Prospectus. means the prospectus that forms a part of the initial
Registration
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Statement on Form S-11 under the Securities Act of 1933, as amended, filed by
the Company with the Securities and Exchange Commission and any supplement or
amended Prospectus or new prospectus that forms a part of a supplement to such
Registration Statement filed by the Company, including offering circulars under
Regulation A under the Securities Act of 1933, as amended.
2.41 Real Property. means and includes land and any buildings,
structures, improvements, fixtures, and equipment or other personal property
located on or used in connection with land, but does not include mortgages,
deeds of trust, mortgage loans or interests therein.
2.42 Regulations. means, except where the context indicates otherwise,
the permanent, temporary, proposed, or proposed and temporary regulations of the
United States Department of the Treasury under the Code, as such regulations may
be lawfully changed from time to time.
2.43 Reinvested Distributions. means Units purchased under the
Company's Reinvested Distribution Plan that is described in Article 8 of this
Agreement.
2.44 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. Such term 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.
2.45 Roll-Up Entity. means a Company, real estate investment trust,
corporation, limited liability company or other entity that would be created or
would survive after the successful completion of a proposed Roll-Up.
2.46 Sales Commissions. means the amount of compensation that may be
paid to Participating Broker Dealers in connection with the sale of Units.
2.47 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 such
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
attorneys, accountants or underwriters), whose only compensation is as such, or
(b) is a "Sponsor" as otherwise defined in the NASAA Guidelines.
2.48 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
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full payment for such Units and which, among other provisions, contains the
written consent of each Member to the adoption of this Agreement.
2.49 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 pursuant to the Prospectus or (b) transferred to those who become
substituted Members pursuant to Section 10.2 hereof. The Manager shall be
permitted to purchase Units on the same basis as other Members. Units purchased
at different times do not necessarily represent the same underlying amount of
Interests.
2.50 Writedown. means a determination by the Manager with respect to 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 such
investment at the time such determination is made is less than the amount
actually paid or allocated to the purchase of such 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 such Writedown shall be
effective on the last day of each such calendar quarter during the term of this
Agreement.
2.51 Writedown Amount. means, in respect of any Mortgage Investment or
other Company investment, the amount by which, at the time that a Writedown is
determined with respect to such Investment, the amount actually paid or
allocated to the purchase of such investment exceeds the fair market value of
such investment.
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, 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 such position, including, but not limited to, 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 with
respect to Company loans that are in default; and has all the powers with
respect and ancillary thereto. Without limiting the generality of the foregoing,
such powers include the right (except as otherwise specifically stated elsewhere
in this Agreement, including under Section 3.2):
(a) To evaluate potential Company investments and to expend
the capital of the Company in furtherance of the Company's business;
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(b) To acquire, hold, lease, sell, trade, exchange, or
otherwise dispose of all or any portion of Company property or any interest
therein at such price and upon such terms and conditions as the Manager may deem
proper;
(c) To cause the Company to become a joint venturer, partner
or member of an entity formed to own, develop, operate and dispose of properties
owned or co-owned by the Company acquired through foreclosure of a Mortgage
Loan;
(d) 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;
(e) To borrow money from banks and other lending institutions
for any Company purpose, and as security therefor, to encumber Company property;
(f) To repay in whole or in part, refinance, increase, modify,
or extend, any obligation, affecting Company property;
(g) 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 such persons on such terms and for such
compensation as the Manager determines to be reasonable; and to give receipts,
releases, and discharges with respect to all of the foregoing and any matters
incident thereto as the Manager may deem advisable or appropriate; provided,
however, that any such agreement or contract between the Company and the Manager
or between the Company and an Affiliate of the Manager shall contain a provision
that such 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 such contract or agreement resigns or is removed
pursuant to the terms of this Agreement. Whenever possible, contracts between
the Company and others shall contain a provision recognizing that the Members
shall have no personal liability for performance or observance of the contract;
(h) 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;
(i) To purchase, at the expense of the Company, liability and
other insurance to protect the property of the Company and its business;
(j) To refinance, recast, modify, consolidate, extend or
permit the assumption of any Mortgage Loan or other investment owned by
the Company;
(k) To pay all expenses incurred in connection with the
operation of the Company;
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(l) To file tax returns on behalf of the Company and to make
any and all elections available under the Code;
(m) Without the consent of the Members, 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:
(a) do any act in contravention of this Agreement;
(b) do any act which would make it impossible to carry on the
ordinary business of the Company;
(c) confess a judgment against the Company;
(d) possess Company property or assign the rights of the
Company in property for other than a Company purpose;
(e) admit a person as a Manager without the prior affirmative
vote or consent of a Majority-in Interest, or such higher vote as may be
required by applicable law;
(f) voluntarily withdraw as Manager without the prior
affirmative vote or consent of a Majority-in-Interest unless such withdrawal
would not materially adversely affect the Members;
(g) 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-in-Interest;
(h) amend this Agreement without the prior affirmative vote or
consent of a Majority-in-Interest, except as permitted by Section 15.4 of this
Agreement;
(i) dissolve the Company without the prior affirmative vote or
consent of a Majority-in-Interest;
(j) cause the merger or other reorganization of the Company
without the prior affirmative vote or consent of a Majority-in-Interest;
(k) grant to the Manager or any of its Affiliates an exclusive
right to sell any Company assets;
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(l) 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;
(m) 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;
(n) commingle the Company's assets with those of any other
Person;
(o) use or permit another to use the Company's assets in any
manner, except for the exclusive benefit of the Company;
(p) 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 such advisor to advise the purchase of Units;
provided, however, that this clause shall not prohibit the normal sales
commissions payable to a registered broker-dealer or other properly licensed
person for selling Units;
(q) make loans to the Manager or an Affiliate of the Manager;
or
(r) pay, directly or indirectly, a commission or fee to the
Manager in connection with the reinvestment or distribution of Net Proceeds.
3.3 Right to Purchase Receivables and Loans. As long as the
requirements of Article 4 are met and the restrictions set forth therein adhered
to, the Manager, in its sole discretion, may at any time, but is not obligated
to:
(a) purchase from the Company the interest receivable or
principal on delinquent Mortgage Loans held by the Company;
(b) purchase from a senior lien holder the interest receivable
or principal on mortgage loans senior to Mortgage Loans held by the Company held
by such senior lien holder; and/or
(c) 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 such of its time to the business of the Company as it determines,
in good faith, to be reasonably necessary to conduct its 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
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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 such 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 such Member by
the Manager under common law. If at any time the Manager owns any Units as a
Member, its right to vote such Units will be waived and not considered
outstanding in any vote for removal of the Manager or for amendment of this
Agreement (except as provided in Sections 3.1(m) and 15.4) or otherwise.
3.5 Liability and Indemnification of Manager.
(a) 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, its receiver or trustee 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 such
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 such Indemnified Party or the Company and all reasonable costs of
investigation in connection therewith) (collectively referred to as
"Liabilities" for the remainde of this Section) which may be imposed on,
incurred by, or asserted against such Indemnified Party or the Company in any
way relating to or arising out of any action or inaction on the part of the
Company or on the part of such Indemnified Party in connection with services to
or on behalf of the Company (and with respect to an Indemnified Party which is
an Affiliate of the Manager for an act which the Manager would be entitled to
indemnification if such act were performed by it) which such Indemnified Party
reasonably believed to be in or not opposed to the best interest of the Company,
and with respect to any criminal action or proceeding, 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 Indemnitor shall be liable to an Indemnified Party, for any portion
of such Liabilities which resulted from such 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 such 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 such action or inaction, such Indemnified
Party shall have the right to employ, at the reasonable expense of the Company
(subject to the provisions of Subsection 3.5(b), below), separate counsel of
such Indemnified Party's choice in such 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.
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(b) Cash advances from Company funds to an Indemnified Party
for legal expenses and other costs incurred as a result of any legal action
initiated against an Indemnified Party by a Member are prohibited. 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) such 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) such
suit, action or proceeding is initiated by a third party who is not a Member;
and (iii) the Indemnified Party undertakes by written agreement to repay any
funds advanced pursuant to this Section in the cases in which such Indemnified
Party would not be entitled to indemnification under Subsection 3.5(a) above. If
advances are permissible under this Section, 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 such Indemnified Party shall become
obligated to make payments therefor, any and all amounts for which such
Indemnified Party believes in good faith that such Indemnified Party is entitled
to indemnification under Subsection 3.5(a) above. The Company shall pay any and
all such bills and honor any and all such requests for payment within 60 days
after such bill or request is received. In the event that a final determination
is made that the Company is not so obligated for any amount paid by it to a
particular Indemnified Party, such Indemnified Party will refund such amount
within 60 days of such final determination, and in the event that a final
determination is made that the Company is so obligated for any amount not paid
by the Company to a particular Indemnified Party, the Company will pay such
amount to such Indemnified Party within 60 days of such final determination.
(c) Notwithstanding anything to the contrary contained in
Subsection 3.5(a) above, neither the Manager nor any of its Affiliates, agents,
or attorneys, nor any person acting as a broker-dealer with respect to the 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 unless (i) there
has been a successful adjudication on the merits of each count involving alleged
securities law violations as to the particular Indemnified Party, or (ii) such
claims have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular Indemnified Party, or (iii) a court of
competent jurisdiction approves a settlement of the claims against the
particular Indemnified Party and finds that indemnification of the settlement
and related costs should be made. Prior to 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 with respect to indemnification
for securities violations.
(d) The Company shall not incur the cost of the portion of any
insurance which insures any party against any liability as to which such party
is prohibited from being indemnified as set forth above.
(e) 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 such person has performed an act on behalf of the Company or
the Manager within the scope of the authority of
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the Manager and for which the Manager would have been entitled to
indemnification had such act been performed by it.
(f) 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 86.401, 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.
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:
(a) By written consent or vote of a Majority-in-Interest
(excluding any Interest of the Manager being removed), the Manager may be
removed. Such 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-in-Interest.
(b) During the 120 days set forth in (a), the
Majority-in-Interest (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 agrees to continue the existence of the
Company.
(c) 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 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.
(d) Failure of a Majority-in-Interest 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:
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(a) The identity of the Manager or any Member;
(b) 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;
(c) The persons who are authorized to execute and deliver any
instrument or document of the Company; or
(d) Any act or failure to act by the Company or any other
matter whatsoever involving the Company or any Member.
3.10 Sole Discretion. Except as may otherwise provided in this
Agreement, all actions which the Manager may take pursuant to this Agreement are
within its sole discretion.
3.11 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 normally commit at least eighty-four percent (84%) of Capital
Contributions to Investments in Mortgage Loans. 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. Such
Mortgage Loans may be senior to other mortgage loans on such property, or junior
to other mortgage loans on such property, all in the sole discretion of the
Manager.
4.2 Limitation on Single Property Loans. The Company normally shall not
invest in a Mortgage Loan on any one property if at the time of the acquisition
of the loan the aggregate amount of all mortgage loans outstanding on the
property, including loans of the Company, would exceed an amount equal to eighty
percent (80%) of the appraised value of the property as determined by
independent appraisal, unless substantial justification exists because of the
presence of other underwriting criteria.
4.3 Limitations on Company Indebtedness. The Company will not incur
indebtedness for the purpose of investing in or purchasing Mortgage Loans,
except:
(a) to prevent defaults under existing loans when it has taken
over the operation of a property, or if there otherwise is a need for additional
capital with respect to such a property, and
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(b) to assist in the development or operation of any real
property on which the Company has theretofore invested in or purchased a
Mortgage Loan and has subsequently taken over the operation thereof as a result
of default or to protect such Mortgage Loan.
The total amount of indebtedness incurred by the Company shall at no
time exceed the sum of seventy percent (70%) of the aggregate fair market value
of all Company Mortgage Investments.
4.4 Limitation on Single Mortgage Loans and To Any One Borrower. The
Company will limit its investment in any single Mortgage Loan and will limit its
investments in Mortgage Loans to any one borrower to not more than twenty
percent (20%) of the Capital Contributions to be raised by the Company.
4.5 Limitation of Mortgage Loans on Unimproved Real Property. The
Company may not invest in or purchase Mortgage Loans on unimproved Real Property
in an amount in excess of twenty-five percent (25%) of the Capital Contributions
to be raised by the Company.
4.6 Limitation on Investment in Land Sale Contracts. The Company may
not invest in real estate contracts of sale (otherwise known as land sale
contracts) unless such contracts of sale are in recordable form and are
appropriately recorded in the chain of title.
4.7 Title Insurance Policy Required. The Company shall require that a
mortgagee's or owner's title insurance policy as to the priority of a mortgage
or the condition of title be obtained in connection with the investing in or
purchasing of each Mortgage Loan. The Company shall also receive an independent,
on-site appraisal for each property in which it invests or purchases a Mortgage
Loan. All such appraisals shall be conducted by an Independent Expert. Such
appraisals will be retained at the office of the Company and will be available
for review and duplication by any Member for a period of at least six years
after the last day that the Company holds a mortgage secured by the subject
property.
4.8 Insurance Coverage Required. There shall at all times be title,
fire, and casualty insurance in an amount equal to the Company's Mortgage Loan
plus any outstanding senior lien on the security property naming the Company and
any senior lien-holder as loss payees, and, where such senior lien-holder
exists, a Request for Notice of Default shall be recorded in the county where
the security property is situated.
4.9 Sale of Mortgage Investments to Manager or Affiliates. The Company
shall not sell a mortgage to the Manager or an Affiliate.
4.10 Limitations on Purchase of Mortgage Investments from Manager.
Mortgage Investments may be purchased from the Manager or its Affiliates only if
the manager acquires such mortgage loans in its own or an Affiliate's name and
temporarily (up to 90 days) holds title thereto for the purpose of facilitating
the acquisition of such loans, and provided that such loans are purchased by the
Company for a price no greater than the cost of such loans to the Manager
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(except compensation in accordance with Article 14 of this Agreement), such
loans are not in default, and otherwise satisfy all requirements of this Section
4.10. Accordingly, all income generated and expenses associated with a Mortgage
Investment so acquired shall be treated as belonging to the Company. The Manager
shall not sell a loan to the Company if the cost of the loan exceeds the funds
reasonably anticipated to be available to the Company to purchase the loan.
4.11 Criteria For Selection of Mortgage Investments. The Manager shall
be permitted to conduct business other than for the Company and in connection
therewith to originate or purchase mortgage loans and sell them either to the
Company or to other Affiliated or non-Affiliated investors. In most instances,
the Manager will originate a loan for the Company first, if the Manager believes
that the loan is suitable for the Company as a Mortgage Investment. At times
when the Manager originates a loan that it believes is not suitable for or
exceeds the funds available from the Company, the loan will normally be offered
to other investors. In some cases, other factors are considered in determining
which loans are ultimately sold to the Company or other investors. These factors
may include: (i) generally all loans that are greater than $2,000,000 in face
value will be acquired by the Company; and (ii) all hypothecation loans will be
acquired by the Company. For Mortgage Loans acquired by th Manager or its
Affiliates on behalf of the Company, the Manager or its Affiliates will retain
interest in the loan until such time that the funds become available for the
Company to purchase such loan.
4.12 Limitation on Payments on Loans to the Company by the Manager or
its Affiliates. The Manager or its Affiliates may not receive interest or
similar charges or fees in excess of the amount which would be charged by
non-Affiliated lending institutions on comparable loans for the same purpose, in
the same locality of the property if the loan is made in connection with a
particular property. No prepayment charge or penalty shall be required by the
Manager on a loan to the Company secured by either a first or junior or
all-inclusive trust deed, mortgage, or encumbrance on the property, except to
the extent that such prepayment charge or penalty is attributable to the
underlying encumbrance. The Company shall have an independent adviser for any
such loan.
4.13 Restriction on Acquisition of or Sale of Mortgage Loans to
Affiliated Programs. The Company shall not acquire a Mortgage Investment from,
or sell a Mortgage Investment to, another Program in which the Manager or its
Affiliates has an interest, except in accordance with NASAA Guidelines.
4.14 Sale of Foreclosed Property to Manager or Affiliated Program. 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.
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ARTICLE 5
CAPITAL CONTRIBUTIONS; LOANS TO COMPANY
5.1 Capital Contribution by Manager. The Manager 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 Other Contributions.
(a) Capital Contributions of Members. The Members shall
contribute to the capital of the Company an amount equal to one dollar ($1.00)
for each Unit subscribed for by each Member, with a minimum subscription of two
thousand (2,000) Units per Member (including subscriptions from entities of
which such Member is the sole beneficial owner).
(b) Names, Addresses, Date of Admissions, and Contributions of
Members. The names, addresses, date of admissions and Capital Contributions of
the Members shall be set forth in Schedule A of 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 further need to obtain consent, 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. Subject to Section 4.12 hereof, 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 such 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. Subject to
Section 4.12 hereof, the amount of any such 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 mak any loan or
advance to the Company.
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ARTICLE 6
VOTING AND OTHER RIGHTS OF MEMBERS
6.1 No Participation in Management. Except as expressly provided
herein, the Member shall take no part in the conduct or control of the Company
business and shall have no right or authority to act for or bind the Company.
6.2 Rights and Powers of Members. In addition to the rights to Members
pertaining to removal and replacement of the Manager provided in Section 3.8 of
this Agreement, the Members shall have the right to vote upon and take any of
the following actions upon the approval of a Majority-in-Interest, without the
concurrence of the Manager, and such affirmative vote of a Majority-in-Interest
shall be required to allow or direct the Manager to:
(a) Dissolve and windup the Company prior to the expiration of
the term of the Company as stated in Section 1.6 above;
(b) 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;
(c) Merge the Company or sell, exchange, lease, mortgage,
pledge or otherwise transfer, or grant a security interest in, all or
substantially all of the assets of the Company, otherwise than in the ordinary
course of its business.
(d) Change the nature of the Company's business;
(e) Elect to continue the business of the Company other than
in the circumstances described in Section 3.8 of this Agreement; and
(f) Voluntarily withdraw as Manager, unless such withdrawal
would neither affect the tax status of the Company nor materially adversely
affect the Members (subject to any delay in effectiveness of such withdrawal as
set forth elsewhere herein).
6.3 Meetings. Meetings of Members may be held 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. Any matter upon which the Members are entitled to vote at a duly
convened meeting of the Members may also be approved by the written consent of a
Majority-in-Interest, which consents will have the effect of a vote held at a
duly convened meeting of the Members.
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
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Company meeting, or the Manager calls the meeting, the Manager shall fix a date
for such meeting and shall (within ten (10) days after receipt of such
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 prior to the date of the meeting, to all Members of the date,
place and time of such 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. at the principal office of the Company.
Members may vote in person or by proxy. A Majority-in-Interest, present
in person or by proxy, shall constitute a quorum at any Company meeting. 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
consent 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, and no
Members shall be personally liable for any of the expenses, liabilities, or
obligations of the Company or for any of the losses thereof beyond the amount of
such Member's Capital Contribution to the Company and such 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
normal business hours. An alphabetical list of the names, addresses and business
telephone numbers 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 and
shall be made 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 and may include a reasonable charge
for the copy work. 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 such refusal or neglect. It shall be a
defense that the actual purpose and reason for the request for inspection or for
a copy of the list is to secure such list or other information for the purpose
of selling such list or copies thereof, or of using the same 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 such a commercial purpose. The remedies provided
hereunder to Members requesting copies of such 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
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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 such 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. All Profits and Losses of the
Company shall be credited to and charged 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. Profits and Losses realized by the Company
during any month shall be allocated to the Members 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 such month that they
owned such Interests (i.e., a weighted average Capital Account), without regard
to Profits and Losses realized with respect to time periods within such month.
7.2 Net Income Available For Distribution. Net Income Available For
Distribution shall be distributed to Members according to the above allocations,
in cash to those Members who have on file with the Company their written
election to receive such cash distributions, as a pro rata share of the total
Net Income Available For Distribution, monthly in proportion to the weighted
average Capital Account of each Members 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.
7.3 Net Proceeds. Net Proceeds, if any, may be reinvested in new
Mortgage Investments for up to seven (7) years after the effectiveness of the
registration statement containing the Prospectus. Net Proceeds may be used to
improve or maintain properties acquired by the Company through foreclosure, to
pay operating expenses or may be distributed to Members, in each event in the
sole discretion of the Manager. In the event of distributions of Net Proceeds,
such distributions shall be made to Members according to the allocations
described in Section 7.1 above, provided that no such 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, Net Income Available for Distribution and Net Proceeds
available for distribution, if any, shall thereafter be distributed to Members
in accordance with the provisions of Section 12.3 of this Agreement.
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7.5 Special Allocation Rules.
(a) 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
such debt (excluding any portion of such principal balance which would not be
treated as an amount realized under Section 1001 of the Code and Treasury
Regulation Section 1.1001-2(c) if such debt were foreclosed upon) over the
adjusted basis of such property. This excess is herein defined as "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 l.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 such allocation does
not cause the sum of the deficit Capital Account balances of the Members
receiving such allocations to exceed the Minimum Gain determined at the end of
the Company's taxable year to which the allocations relate. The balance of such
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 such 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).
(b) In the event any Member receives any adjustments,
allocations or distributions, not covered by Subsection 7.5(a), so as to result
in a deficit Capital Account, items of Company income and gain shall be
specially allocated to such Members in an amount and manner sufficient to
eliminate the deficit balances in his Capital Account created by such
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).
(c) 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 such Interests is
in the same proportion as the Members' Interests bears to the aggregate capital
of the Company. In the event the Manager shall determine that such 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.
(d) The 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 such Capital Contribution, which expense shall be
specially allocated to the Member whose Capital Contribution gave rise to the
Promotional Interest.
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(e) For purposes of determining the Profits, Losses, Net
Income Available for Distribution or any other items allocable to any period,
any such 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.
(f) Notwithstanding Sections 7.1 and 7.2 hereof, (i) Net
Losses, if any, allocable to the period prior to the admission of any additional
Members pursuant to 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 pursuant to
Section 7.1.
(g) 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.
(a) Income, gains, losses and deductions, as determined for
Federal income tax purposes, with respect to any Company asset which has a Gross
Asset Value which 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
such 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).
(b) In the event that the Gross Asset Value of any Company
asset is adjusted under and pursuant to Section 2.17, subsequent allocations of
income, gain, losses and deductions, as determined for Federal income tax
purposes, with respect to such Company asset shall, solely for Federal income
tax purposes, take account of any variation between the adjusted basis of such
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.
(c) Allocations pursuant to 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.
(d) 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 such manner as reasonably reflects the
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purpose and intention of this Agreement.
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 with respect to the admission of Members
to reflect Members' interests in the Company at the close of the years.
7.8 Quarterly Valuation of Assets With respect to each of the Company's
Mortgage Investments and other investments, the Manager shall review such
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 such determination was made in compliance with generally accepted
accounting principles. Any Writedown of an asset resulting from such a valuation
shall be effective on the last day of the respective calendar quarter during the
term of this Agreement.
ARTICLE 8
REINVESTED DISTRIBUTIONS PLAN
8.1 Members' Reinvested Distributions. A Member may elect to
participate in the Company's Reinvested Distributions Plan (the "Plan") at the
time of his purchase of Units, by making such election in the form of the
Subscription Agreement for Units executed by each Member. Participation in the
Plan will commence as of the date of acceptance by the Company of 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. Such notice shall be effective for the month in which the notice is
received, if received at least ten (10) days prior to the end of the calendar
month; otherwise the notice is effective the following month.
8.2 Purchase of Additional Units. Under the Plan, distributions to
which a participating Member is entitled shall be used to purchase additional
Units at one dollar ($1.00) per Unit. Units so purchased under the Plan shall be
credited 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, distributions made by
the Company subsequent to the month in which the revocation notice is received
by the Company shall be made in cash to the Member instead of being reinvested
in Units.
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8.3 Statement of Account. The Manager will mail to each Member who is a
participant in the Plan a statement of account describing the Reinvested
Distributions received, the number of Units purchased thereby, the purchase
price per Unit (if other than one dollar ($1.00) per Unit), and the total number
of Units held by the Member, within thirty (30) days after the Reinvested
Distributions have been credited. Prior to 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 for participation in each
reinvestment. 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.
(a) 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 prior to the effective date of such action to each Member who is a
participant in the Plan 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:
(a) Complete books and records of account in which shall be
entered fully and accurately all transactions and other matters relating to the
Company;
(b) 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;
(c) A copy of the filed Articles of Organization, and all
amendments thereto;
(d) Copies of the Company's federal, state and local income
tax returns and reports, if any, for the six (6) most recent years;
(e) Copies of this Agreement, including all amendments
thereto; and
(f) the financial statements of the Company for the three (3)
most recent years.
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All such 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 reasonable business hours.
9.2 Annual Statements. (a) The Manager shall cause to be prepared at
least annually, at Company 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 (i) audited balance sheet,
statements of income or loss, Members' equity, and a statement of Cash Flow;
(ii) 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 (iii) a report identifying distributions from (A) cash flow from
operations during that year, (B) cash flow from operations of prior years that
had been held as reserves, (C) proceeds from capital transactions, (D) lease
payments on net leases with builders and sellers, and (E) reserves from the
gross proceeds of the offering originally obtained from the Members.
Reimbursement to the Manager or its Affiliates shall be 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.
(b) Costs of any verification performed by the Company's
accountants will be itemized by said accountants and may be reimbursed to the
Manager by the Company only to the extent that such reimbursement when added to
the costs for administrative services rendered does not exceed the competitive
rate for such services as determined in the above paragraph.
(c) Notwithstanding the 120 day period specified in clause (a)
above, the Manager shall cause to be prepared and distributed to the Members not
later than seventy-five (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 [Reserved]
9.4 Quarterly Reports. (a) The Manager shall cause to be prepared
during each quarter in which there were Mortgage Loans or origination or
evaluation fees incurred, a special report (which may be included in the
quarterly report described below) for so long as the proceeds of the offering
are not fully committed and / or returned to investors, at the Company's
expense, a statement of the amount of the Mortgage Loans, the material terms of
such loans, the identity of the borrower and the real property and the appraised
value of such real property. Copies of the statements shall be distributed to
each Member within sixty (60) days after the end of each such quarterly period.
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(b) The information required by Form 10-Q (if required to be
filed with the Securities and Exchange Commission) will be supplied to each
Member within forty-five (45) days of the end of the quarterly period covered
thereby.
(c) 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 sixty (60) days after the close of the quarter covered by the report of
the Company.
9.5 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 appropriate federal and state regulatory and
administrative bodies, all reports required to be filed with those entities
under then current applicable laws, rules and regulations. The reports shall be
prepared by the accounting or reporting basis required by the regulatory bodies.
Any Member shall be provided with a copy of any of the reports upon request
without expense to him. The Manager, at Company expense, shall file, with the
Administrators for the states in which this Company is registered, as required
by such states, a copy of each report referred to this Article 9.
9.6 Suitability Requirements. The Manager, at Company expense, shall
maintain for a period of at least six years a record of the information obtained
to indicate that a member complies with the suitability standards set forth in
the Prospectus.
9.7 Fiscal Matters.
(a) Fiscal Year. The Company shall adopt 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, the Manager in its sole discretion may, at any time without
the approval of a Majority-in -Interest, change the Company's fiscal year to a
period to be determined by the Manager.
(b) Method of Accounting. The accrual method of accounting
shall be used for both income tax purposes and financial reporting purposes.
(c) Adjustment of Tax Basis. Upon the transfer of an interest
in the Company, the Company may, at the sole discretion of the Manager, elect
pursuant to Code Section 754, to adjust the basis of the Company property as
allowed by Sections 734(b) and 743(b) thereof.
9.8 Tax Matters Partner. The Manager shall act as the Tax Matters
"Partner"
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("TMP") and shall have all the powers and duties assigned to the TMP under
Sections 6221 through 6232 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:
(a) With the consent of all managers (should there be any
manager other than the Manager) and a Majority-in-Interest, the Manager may at
any time designate one or more Persons to be a successor to such Manager or to
be an additional manager, in each case with such participation in such Manager's
Interest as they may agree upon, so long as the Company and the Members shall
not be adversely affected thereby.
(b) Upon any sale or transfer of the 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 such 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 not be deemed to be a sale or
transfer of such 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 such 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:
(a) No transfer may be made of a fractional Unit, and no
transfer may be made if, as a result of such transfer, a transferring Member
would, after the transfer, own fewer than two thousand (2,000) Units, except
where such transfer occurs by operation of law.
(b) The assignor shall designate such intention in a written
instrument of assignment, which shall be in a form and substance reasonably
satisfactory to the Manager;
(c) The written consent of the Manager to such substitution
shall be obtained, which consent shall not be unreasonably withheld, but which,
in any event, shall not be given if
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the Manager determines that such sale or transfer may jeopardize the continued
ability of the Company to qualify as a "partnership" for federal income tax
purposes or that such sale or transfer may violate any applicable securities
laws (including any investment suitability standards);
(d) The assignor and assignee named therein shall execute and
acknowledge such other instruments as the Manager may deem necessary to
effectuate such substitution, including, but not limited to, a power of
attorney;
(e) 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;
(f) Such assignee shall pay or, at the election of the
Manager, obligate himself to pay all reasonable expenses connected with such
substitution, including but not limited to reasonable attorneys' fees associated
therewith; and
(g) The Company has received, if required by the Manager, a
legal opinion satisfactory to the Manager that such 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 herein, the following restrictions shall also apply to
any and all proposed sales, assignments and transfer of Interests, and any
proposed sale, assignment or transfer in violation of same shall be void ab
initio:
(a) 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 purposes.
(b) 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.
(c) Appropriate legends (including the legend above) under
applicable
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securities laws shall be affixed to certificates evidencing the Units and issued
or transferred to purchasers in other states.
(d) No Member shall make any transfer or assignment of all or
any of his Interest if the Manager determines that such 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:
(1) the Manager will not permit trading of Units on
an established securities market within the meaning of Section
7704(b);
(2) 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
(3) 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 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 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:
(a) 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 with respect to 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.
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(b) to assure that the payments to a Member or his
representative do not impair the capital or the operation of the Company, any
such cash payments in return of an outstanding Capital Account shall be made by
the Company only from Net Proceeds and Capital Contributions.
(c) a maximum of one hundred thousand dollars ($100,000) may
be withdrawn by any Member during any calendar year;
(d) the Member shall have the right to receive such
distributions of cash from their Capital Accounts only to the extent that funds
described in Subsection 11.3 (b) are available; the Manager shall not be
required to establish a reserve fund for the purpose of funding such payments;
the Manager shall not be required to use any other sources of Company funds
other than those set forth in Subsection 11.3(b) above; 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 pursuant to this Section 11.3;
(e) 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;
(f) 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 such Member's Capital Account as of the date of
such distribution, as to which the Member has given a notice of withdrawal under
this Section 11.3, notwithstanding that such amount may be greater or lesser
than such Member's proportionate share of the current fair market value of the
Company's net assets;
(g) 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 pursuant to this Agreement;
(h) 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(a)), the Manager will so
notify the requesting Member in writing, whose request, if not withdrawn by the
Member, will subsequently be honored if and when the limitation no longer is
imposed; and
(i) 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 such Member the entire balance in
such account.
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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-in-Interest. 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 such
withdrawal.
11.5 Payment to Terminated Manager. If the business of the Company is
continued as provided in Section 12.1 below upon the withdrawal, removal,
dissolution, or bankruptcy of the Manager, then the Company shall pay to such
Manager a sum equal to such Manager's outstanding Capital Account as of the date
of such removal, withdrawal, dissolution or bankruptcy, payable in cash within
thirty (30) days after such date. If the business of the Company is not so
continued, then such Manager shall receive from the Company such sums as it may
be entitled to receive 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:
(a) Expiration of the term of the Company as stated in Section
1.6 of this Agreement.
(b) With written consent of the Manager and any other Person
who is then a manager, and the affirmative vote or consent of a
Majority-in-Interest.
(c) The withdrawal, removal, dissolution or bankruptcy of the
Manager, unless, if there is no remaining manager, a Majority-in-Interest 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 NRS. 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:
(a) No new Mortgage Investments shall be made or purchased;
(b) The Manager 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
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servicing the Company's outstanding Mortgage Investments in accordance with
their terms;
(c) 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
winding up process from any source whatsoever, shall be distributed in
accordance with Section 12.3 below.
12.3 Order of Distribution of Assets. In the event of dissolution as
provided in Section 12.1 above, the assets of the Company shall be distributed
in accordance with NRS Section 86.521.
12.4 No Recourse to Manager. Upon dissolution and winding up under the
NRS, 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. In the event of insolvency, dissolution,
bankruptcy withdrawal or removal of the Manager by the Members, the winding up
of the affairs of the Company and the distribution of its assets shall be
conducted by such person or entity as may be selected by a vote of a
Majority-in-Interest, 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. In the event
the Company is "liquidated" within the meaning of Treasury Regulation Section
1.704-1(b)(2)(ii)(g), (a) distributions shall be made pursuant to 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 (b) 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 AND INVESTMENTS IN OTHER PROGRAMS
13.1 Investment in or with Non-Affiliates. The Company shall be
permitted to invest in partnerships or joint ventures (including entities in
limited liability company and limited liability partnership form) with
non-Affiliates that own one or more particular Mortgage Loans of the Company,
alone or together with any publicly registered Affiliate of the Company meeting
the requirements of 13.2 below, if it acquires a controlling interest in such
partnership or joint venture, but in no event shall duplicate fees be permitted.
For purposes of this Section 13.1,
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"Controlling Interest" means an equity interest possessing the power to direct
or cause the direction of the management and policies of the partnership or
joint venture, including the authority to:
(a) review all contracts entered into by the partnership or
joint venture that will have a material effect on its business or assets;
(b) cause a sale of the Mortgage Loan or its interest therein
subject in certain cases where required by the partnership or joint venture
agreement, to limits as to time, minimum amounts, and/or a right of first
refusal or consent by the joint venture partner;
(c) approve budgets and capital expenditures, subject to a
stated minimum amount;
(d) veto any sale of the Mortgage Loan, or alternatively, to
receive a specified preference or sale or proceeds; and
(e) exercise a right of first refusal on any desired sale by
the joint venture partner of its interest in the Mortgage Loan, except for
transfer to an Affiliate of the joint venture partner.
13.2 Investments In or With Affiliates. The Company shall be permitted
to invest in partnerships or joint ventures with other publicly registered
Affiliates of the Company if all of the following conditions are met:
(a) The other Programs have substantially identical investment
objectives with the Company;
(b) there are no duplicate fees;
(c) the compensation to the Manager and to the Sponsors is
substantially identical in each Program;
(d) each Program must have a right of first refusal to buy if
the other Programs wish to sell assets held in the joint venture; and
(e) the investment of each Program is on substantially the
same terms and conditions.
13.3 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 of
the Company, the appraisal shall be filed with the Securities and Exchange
Commission and the states as an exhibit to the Registration Statement for the
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offering. The assets of the Company will be appraised on a consistent basis, and
the appraisal shall be based on an evaluation of the Company's assets as of a
date immediately prior to the announcement of the proposed Roll-Up. The
appraisal 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. A summary of the Independent Expert's appraisal, indicating all
material assumptions underlying the appraisal, shall be included in a report to
the Members in connection with the proposed Roll-Up.
13.4 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 the
Members who vote against the Roll-Up the choice of (a) accepting the securities
of the Roll-Up Entity that were offered in the proposed Roll-Up, or (b) one of
the following: (i) remaining as a Member of the Company and preserving their
interests therein unchanged; or (ii) receiving cash in an amount equal to the
Member's pro-rata share of the appraised Net Asset Value of the Company. The
Company's ability to participate in a Roll-Up is also subject to the following:
(a) 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 3.2 and Article 6 of this Agreement. 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.
(b) 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).
(c) 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 number of the Units or the
value of the Interest held by the Member.
(d) The Company will not participate in any proposed Roll-Up
in which the Members' rights as securities holders of 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
14.1 Offering Sales Commissions to Dealer Manager and Selected Dealers/
Reimbursement of Organizational and Offering Expenses. The Members hereby
approve,
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ratify and confirm the Company's Offering to the public on a best-efforts basis
through DM Financial Services, Inc., the Dealer Manager and an Affiliate of the
Manager ("DMFS"). The Members hereby authorize the Manager to enter into such
contracts, including without limitation a "Dealer Manager" contract, and to
facilitate the performance of obligations under any Selected Dealer agreements
to be entered into by the dealer manager with any third party. The Members
hereby approve, ratify and confirm the payment to DMFS of up to one and one-half
percent (1.5%) of the gross proceeds of the Offering for all fees and expenses
in connection with the Offering, including a maximum of one half of one percent
(0.5%) of the proceeds for reimbursement of accountable expenses. With respect
to the dealers entering into "Selected Dealer" agreements, the Members hereby
approve, ratify and confirm the Company's paying sales commissions for the offer
and sale of the Units of up to three percent (3.0%), marketing incentive fees of
up to one-half of one percent (0.5%) and reimbursement of accountable expenses
of up to one-half of one percent (0.5%) of gross proceeds of the offering.
14.2 Compensation for Loan Evaluation and Processing Fees. Payment to
the Manager or its Affiliates of Acquisition and Investment Evaluation Fees
(including without limitation evaluation, certain document preparation, notarial
and credit investigation services) shall be reasonable and shall be payable only
for services actually rendered and to be rendered directly or indirectly and
subject to the following conditions:
(a) The total of all such compensation paid to everyone
involved in the transaction by the Company and/or any other Person shall be
deemed to be presumptively reasonable if it does not exceed the compensation
customarily charged in arms' length transactions by others rendering similar
services as an ongoing public activity in the same geographical location and for
comparable property;
(b) The amount payable pursuant to this Section 14.2, combined
with all amounts owing under Section 14.1 and 14.3 and any other fees that are
classified as Front-End Fees under the NASAA Guidelines, is subject to an
aggregate fourteen percent (14%) maximum computed on the gross proceeds of the
Offering.
14.3 Loan Brokerage Commissions. The Company will enter into Mortgage
Investment transactions where the borrower has employed and agreed to compensate
the Manager, an Affiliate of the Manager or a non-Affiliated third party to act
as a broker in arranging the loan. The exact amount of the Loan Brokerage
Commissions are negotiated with prospective borrowers on a case by case basis.
It is estimated that such commissions will be approximately two percent (2%) to
six percent (6%) of the principal amount of each Mortgage Investment made during
that year.
14.4 Promotional Interest. The Manager shall receive the Promotional
Interest as defined in Article 2.
14.5 Management Fee. The Company shall pay the Manager an annual
management fee of up to three-quarters of one percent (0.75%) of the original
capital contributions committed
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to 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 the Company's assets (including working capital), less any indebtedness of
the Company. For funds not invested in mortgages, the percentage paid as a
management fee is one-half of one percent (0.5%).
The Manager shall engage an Independent Expert to determine the fair market
value of the Company's assets promptly after the end of the Company's fiscal
year, beginning at the close of the Company's second fiscal year, and the
determination by such Independent Expert shall be binding on the Company and the
Manager with respect to the management fees payable under this Section 14.5.
The Manager, in its discretion, may reduce such fee for any period of time, or
from time to time, and thereafter increase it to the limits set forth above.
14.6 Reimbursement. The Company shall reimburse the manager or its
Affiliates for the actual cost to the Manager or its Affiliates (or pay
directly), the cost 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,
provided that such reimbursement will be at the lower of (A) the actual cost to
the Manager or its Affiliates of providing such services, or (B) the amount the
Company would be required to pay to non- affiliated persons rendering similar
services in the same or comparable geographical location. The cost of
administrative services as used in this subsection shall mean the pro rata cost
of personnel, including an allocation of overhead directly attributable to such
personnel, based on the amount of time such personnel spent on such services, or
other method of allocation acceptable to the program's independent certified
public accountant.
14.7 Real Estate Brokerage Commissions in Resale of Property. The total
compensation paid to all Persons for the sale of a Real Property held by the
Company as a result of foreclosure shall be limited to a competitive real estate
commission, not to exceed six percent (6%) of the contract price for the sale of
the Real Property. If the Manager or its Affiliate provides a substantial amount
of the services in the sales effort, it may receive up to one-half (1/2) of the
competitive real estate commission, not to exceed three percent (3%) of the
contract price.
14.8 Loan Servicing Fees. The Manager or an Affiliate of the Manager
may act as servicing agent with respect to all Mortgage Investments, and in
consideration for such collection efforts shall be entitled to receive from the
respective borrower a servicing fee in an amount equal to one-fourth of one
percent (0.250%) of the total unpaid principal balance of each such Mortgage
Investment serviced. The Manager or an Affiliate may reduce such fee for any
particular Mortgage Investment or period of time, or from time to time, and
thereafter increase it to the limit set forth above.
14.9 Escrow Fees. The Manager or an Affiliate of the Manager may act
as escrow
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agent for Mortgage Investments made by the Company, for which services the
Manager shall 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.
14.10 Reconveyance Fees. The Manager may receive a fee from a borrower
for reconveyance of a property upon full payment of a loan in an amount as is
generally prevailing in the geographical area where the property is located.
14.11 Extension Fee. The Manager may receive a fee payable by a
borrower for extending the loan period, in an amount equal to a percentage of
the loan.
14.12 Assumption Fees. The Manager or an Affiliate of the Manager may
receive a fee payable by a borrower for permitting the borrower to assume an
existing a loan, in an amount equal to a percentage of the loan or a set fee.
14.13 Non-reimbursable and Other Expenses. The Manager or its
Affiliates will pay and will not be reimbursed by the Company for any general or
administrative overhead expenses incurred by the Manager or its Affiliates which
are not directly attributable to services for the Company the payment or
reimbursement for which is authorized by this Article 14. The Manager is not
entitled to receive reimbursement for Acquisition and Investment Evaluation
Expenses incurred by the Manager or its Affiliates for the origination,
selection and acquisition of Mortgage Loans. Acquisition and Investment
Evaluation Expenses incurred by the Company that are not otherwise paid by
borrowers will be billed directly to and paid directly by the Company.
14.14 Operating Expenses. Subject to other provisions of this Article
14, all expenses of the Company shall be billed directly to and paid by the
Company, which may include, but not be limited to: (i) all salaries,
compensation, travel expenses and fringe benefits of personnel employed by the
Company and involved in the business of the Company, including persons who may
also be employees of the Manager or Affiliates of the Manager, but excluding
control persons of either the Manager or Affiliates of the Manager; (ii) all
costs of borrowed money, taxes and assessments on Company properties foreclosed
upon and other taxes applicable to the Company; (iii) legal, audit, accounting,
and brokerage fees; (iv) printing, engraving and other expenses and taxes
incurred in connection with the issuance, distribution, transfer, registration
and recording of documents evidencing ownership of an interest in the Company or
in connection with the business of the Company; (v) fees and expenses paid to
leasing agents, consultants, real estate brokers, insurance brokers, and other
agents; (vi) costs and expenses of foreclosures, insurance premiums, real estate
brokerage and leasing commissions and of maintenance of such property; (vii) the
cost of insurance as required in connection with the business of the Company;
(viii) expenses of organizing, revising, amending, modifying or terminating the
Company; (ix) expenses in connection with Distributions to Members by the
Company, and communications, bookkeeping and clerical work necessary in
maintaining relations with the Members and outside parties, including the cost
of printing and mailing to such persons certificates for Units and reports of
meetings of the Company, and of preparation of
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proxy statements and solicitations of proxies in connection therewith; (x)
expenses in connection with preparing and mailing reports required to be
furnished to the Members for investor, tax reporting or other purposes, or other
reports to the Members which the Manager deems to be in the best interests of
the Company; (xi) costs of any accounting, statistical or bookkeeping equipment
and services necessary for the maintenance of the books and records of the
Company including, but not limited to, computer services and time; (xii) the
cost of preparation and dissemination of the information relating to potential
sale, refinancing or other disposition of Company property; (xiii) costs
incurred in connection with any litigation in which the Company may be involved,
as well as in the examination, investigation or other proceedings conducted by
any regulatory agency with jurisdiction over the Company, including legal and
accounting fees incurred in connection therewith; (xiv) costs of any computer
services used for or by the Company; (xv) expenses of professionals employed by
the Company in connection with any of the foregoing, including attorneys,
accountants and appraisers.
14.15 Deferral of Fees and Expense Reimbursement. The Manager may defer
payment to it or its Affiliates of any fee or expense reimbursement provided for
herein. The amount so deferred shall be treated as a non-interest bearing debt
of the Company and shall be paid from any source of current funds available to
the Company, prior to distributions of Cash Available for Distribution provided
for in Article 7.
14.16 Prepayment and Late Fees. The Manager shall be entitled to keep,
and the Company shall not be entitled to all or any portion of, prepayment
and/or late fees obtained or collected by the Manager or an Affiliate of the
Manager in connection with Mortgage Investments.
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 Company and to achieve its purposes,
including, without limitation, the Articles of Organization and all amendments
thereto, and all such 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 herein
shall
-41-
<PAGE>
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.
15.4 Amendment. This Agreement is subject to amendment by the
affirmative vote of a Majority-in-Interest in accordance with Section 6.2;
provided, however, that no such 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 judgment of the
Manager, such amendment does not adversely affect the rights of the Members,
including an amendment:
(a) 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;
(b) to cure any ambiguity, to correct or supplement any
provision which may be inconsistent with any other provision, or to make any
other provisions with respect to matters or questions arising under this
Agreement which will not be inconsistent with the provisions of this Agreement;
(c) to conform this Agreement to applicable laws and
regulations, including without limitation, federal and state securities and tax
laws and regulations, and NASAA Guidelines; and
(d) 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 such 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 with
respect to the subject matter contained herein.
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 with respect to any future breach or
-42-
<PAGE>
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 with respect to 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.
-43-
<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:
-44-
<PAGE>
EXHIBIT B
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 Make payable to order of "BankWest Make payable to the order of "DM
Certified 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>
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;
(c) recognizes that the Units as an investment involve a high degree of
risk and that the Investor may lose his entire investment;
B-1
<PAGE>
(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 in the "Business" section, i.e., to preserve the capital of the
Company and to provide monthly cash distributions 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 obligations therein imposed
upon a member with respect to Units to be purchased. By signing and completing
the
B-2
<PAGE>
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):
_____________________________________________________________ Date: _______
(Signature of Subscriber)
______________________________________________________________
(Print Name of Subscriber)
______________________________________________________________ Date: _______
(Signature of Co-Subscriber)
______________________________________________________________
(Print name of Co-Subscriber)
ENTITIES (other than Plans):
______________________________________________________________
(Print Name of Subscriber)
By: __________________________________________________________ Date: _______
(Signature of Authorized Signatory)
______________________________________________________________
(Print Name and Title of Signatory)
By: __________________________________________________________ Date: _______
(Signature of Required Authorized Co-Signatory)
______________________________________________________________
(Print Name and Title of Co-Signatory)
PLAN ENTITIES:
______________________________________________________________ Date: _______
(Signature of Individual Plan Participant) (Print Name)
______________________________________________________________ Date: _______
(Signature of Custodian or Trustee) (Print Name)
______________________________________________________________ Date: _______
(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>
California Investors must have either (i) a minimum net worth The following may appear on certificates
(exclusive of home, furnishings, and automobiles) issued to California residents:
of $30,000, and an annual gross income of at least
$30,000; or (ii) minimum net worth (exclusive of
home, furnishings, and automobiles) of $75,000 or IT IS UNLAWFUL TO CONSUMMATE A SALE OR
(iii) are purchasing in a fiduciary capacity for a TRANSFER OF THIS SECURITY, OR ANY INTEREST
person meeting the requirements of either (i) or THEREIN, OR TO RECEIVE ANY CONSIDERATION
(ii) above. THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT
OF THE COMMISSIONER OF CORPORATIONS OF THE
STATE OF CALIFORNIA, EXCEPT AS PERMITTED
IN THE COMMISSIONER'S RULES.
There are restrictions on the transfer of
the Units, which are set forth in the
status included in Appendix B on the
following two pages.
- ------------------- ---------------------------------------------------- ---------------------------------------------
New York Annual gross income of $35,000 and net worth Minimum Investment: $2,500 per individual
(exclusive of home, furnishings, and automobiles) subscriber.
of $35,000, or in lieu of the foregoing a net
worth of $100,000.
- ------------------- ---------------------------------------------------- ---------------------------------------------
</TABLE>
B-12
<PAGE>
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;
B-13
<PAGE>
(14) to the State Controller pursuant to the Unclaimed Property Law
or to the administrator of the unclaimed property law of
another state;
(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; or
(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.
B-14
<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 B 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 Operating Agreement of Registrant (included as
Exhibit A to the Prospectus)
4.1 Operating Agreement (included as Exhibit A to the
Prospectus)
4.2 Subscription Agreement and Power of Attorney
(included as Exhibit B to the Prospectus)
10.1 BankWest Escrow Agreement
5.1 Opinion of Berkley, Gordon, Levine, Goldstein &
Garfinkel, LLP with respect to legality of the
securities
5.2 Opinion of Wendel, Rosen, Black & Dean, LLP with
respect to federal income tax matters
23.1 Consent of Berkley, Gordon, Levine, Goldstein &
Garfinkel, LLP (contained in Exhibit 5.1)
23.2 Consent of Wendel, Rosen, Black & Dean, LLP
23.3 Consent of Grant Thornton LLP (DM Mortgage Investors,
LLC)
23.4 Consent of Grant Thornton LLP (Sunderland
Corporation)
24 Power of Attorney
27 Financial Data Schedule
II-1
<PAGE>
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 or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) 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 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.
II-2
<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 this Registration Statement on Form S-11 and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Las Vegas, State of
Nevada, on March 15, 2000.
DM MORTGAGE INVESTORS, LLC
By: CAPSOURCE, INC., sole Manager
By: /s/ STEPHEN BYRNE
-------------------------------
Stephen Byrne
President (Principal
Officer of Manager)
By: /s/ LANCE BRADFORD
-------------------------------
Lance Bradford
Secretary and Treasurer
(Chief Accounting
Officer of the Manager)
By: /s/ MICHAEL SHUSTEK
-------------------------------
Michael Shustek, Director
II-3
<PAGE>
DM MORTGAGE INVESTORS, LLC
a Nevada Limited Liability Company
INDEX TO EXHIBITS
1.1 Dealer Manager Agreement (1)
1.2 Selected Dealer Agreement (1)
3 Articles of Organization, as amended
4.1 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 Legal opinion of Berkley, Gordon, Levine, Goldstein &
Garfinkel, LLP, with respect to legality of the
securities
5.2 Opinion of Wendel, Rosen, Black & Dean, LLP with
respect to federal income tax matters
10.1 BankWest Escrow Agreement (1)
23.1 Consent of Berkley, Gordon, Levine, Gordon &
Garfinkel, LLP (contained in Exhibit 5.1)
23.2 Consent of Wendel, Rosen, Black & Dean, LLP
23.3 Consent of Grant Thornton LLP (DM Mortgage Investors,
LLC)
23.4 Consent of Grant Thornton LLP (Sunderland
Corporation)
24 Power of Attorney
27 Financial Data Schedule
- ----------
(1) Filed in preliminary form.
II-4
<PAGE>
Exhibit 1.1
DM MORTGAGE INVESTORS, LLC
Up To
$100,000,000
(Units of Limited Liability Company Interest)
DEALER MANAGER AGREEMENT
March ____, 2000
DM FINANCIAL SERVICES, INC.
2901 El Camino Avenue, Suite 207
Las Vegas, Nevada 89102
Ladies and Gentlemen:
CAPSOURCE, INC., a Nevada corporation, as the Manager (the "Manager") of DM
Mortgage Investors, LLC, a Nevada limited liability company (the "Company"),
proposes that the Company issue and sell up to $100,000,000 aggregate principal
amount of units of limited liability company interest ("Units") in the Company.
Such Units are to be sold for cash for $1.00 each; the minimum purchase by any
one person shall be 2000 Units (except as otherwise indicated in the Prospectus
or in any letter or memorandum from the Manager to you). Terms not defined
herein shall have the same meaning as in the Prospectus. In connection
therewith, the Company and the Manager hereby enter into this Dealer Manager
Agreement ("Agreement") with you (the "Dealer Manager") as follows:
1. Representations and Warranties of the Company
---------------------------------------------
The Company represents and warrants to the Dealer Manager and each
dealer with whom the Dealer Manager has entered into or will enter into a
Selected Dealer Agreement in the form attached to this Agreement as Exhibit A
(said dealers being hereinafter called the "Dealers") that:
1.1 A Registration Statement of the Company has been prepared by the
Company in accordance with applicable requirements of the Securities Act of
1933, as amended (the "Securities Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "SEC"), covering the 100,000,000 Units. Said Registration
Statement, which includes a preliminary prospectus, was filed with the SEC on or
about March ____, 2000. Copies of such Registration Statement and each amendment
thereto have been or will be delivered to the Dealer Manager. (The Registration
Statement and Prospectus, as finally amended and revised, are respectively
hereinafter referred to as the "Registration Statement" and the "Prospectus."
1.2 The Company has been duly and validly organized and formed as a
limited liability company under the Nevada Revised Statutes with the power and
authority to conduct its business as described in the Prospectus.
1.3 The Registration Statement and Prospectus comply with the
Securities Act and the Rule and Regulations and do not contain any untrue
statements of material facts or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading; provided, however, that the foregoing provisions of this Section 1.3
will not extend to such statements contained in or omitted from the Registration
Statement or Prospectus as are primarily within the knowledge of the Dealer
Manager or any of the Dealers and are based upon information furnished by the
Dealer Manager or any Dealer in writing to the Company specifically for
inclusion therein.
1.4 The Company intends to use the funds received from the sale
of the Units as set forth in the Prospectus.
1.5 No consent, approval, authorization or other order of any
governmental authority, including the Nevada Financial Institutions Division, is
required in connection with the execution or
1
<PAGE>
delivery by the Company of this Agreement, the issuance and sale by the
Company of the Units, or the conduct by the Company of its business as described
in the Prospectus, except such as may be required under the Securities Act or
applicable state securities laws.
1.6 There are no actions, suits or proceedings pending or to the
knowledge of the Company, threatened against the Company or its Manager , at law
or equity or before or by any federal or state commission, regulatory body or
administration agency or other governmental body, domestic or foreign, which
will have a material adverse effect on the business or property of the Company,
except as are described on Attachment 1.6 to this Agreement.
1.7 The execution and delivery of this Agreement, the consummation of
the transactions herein contemplated and compliance with the terms of this
Agreement by the Company will not conflict with or constitute a default under
the Company's Articles of Organization, Operating Agreement, or any charter,
by-law, indenture, mortgage, deed of trust, lease, rule, regulation, writ,
injunction or decree of any government, governmental instrumentality or court,
domestic or foreign, having jurisdiction over the Company, or the Manager,
except to the extent that the enforceability of the indemnity and/or
contribution provisions contained in Section 4 of this Agreement may be limited
under applicable securities laws.
1.8 The Company has full legal right, power and authority to enter into
this Agreement and to perform the transactions contemplated hereby, except to
the extent that the enforceability of the indemnity and/or contribution
provisions contained in Section 4 of this Agreement may be limited under
applicable securities laws.
1.9 At time of issuance of the Units, the Units will have been duly
authorized and validly issued, and upon payment therefor, will be fully paid and
nonassessable and will conform to the description thereof contained in the
Prospectus.
1.10 The respective financial statements contained in the Registration
Statement and the Prospectus fairly present the financial condition of the
Company and Manager and the results of their respective operations as of the
dates and for the periods therein specified; and such financial statements have
been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved; and the accountants who
have certified certain of such financial statements are independent public
accountants as required by the Securities Act and the Rules and Regulations.
2. Covenants of the Company
------------------------
The Company covenants and agrees with the Dealer Manager that:
2.1 It will, at no expense to the Dealer Manager, furnish the Dealer
Manager with such number of printed copies of the Registration Statement,
including all amendments and exhibits thereto, as the Dealer Manager may
reasonably request. It will similarly furnish to the Dealer Manager and others
designated by the Dealer Manager as many copies as the Dealer Manager may
reasonably request in connection with the offering of the Units of: (a) the
Prospectus in preliminary and final form and every form of supplemental or
amended prospectus; (b) this Agreement; and (c) any other printed sales
literature or other materials (provided that the use of said sales literature
and other materials has been approved for use by the Company and all appropriate
regulatory agencies).
2.2 It will furnish such proper information and execute and file such
documents as may be necessary for the Company to register or qualify the Units
for offer and sale under the securities laws of such jurisdictions as the Dealer
Manager may reasonably designate and will file and make in each year such
filings as may be required. The Company will furnish to the Dealer Manager a
copy of such papers filed by the Company in connection with any such
registration or qualification.
2.3 It will: (a) use its best efforts to cause the Registration
Statement to become effective; (b) file for review and use its best efforts to
obtain approval by the NASD Corporate Financing Department of
2
<PAGE>
the offering under Rule 2810 of the NASD Conduct Rules and applicable
Guidelines; (c) furnish copies of any proposed amendment or supplement of the
Registration Statement or Prospectus to the Dealer Manager; (d) file every
amendment or supplement to the Registration Statement or the Prospectus that may
be required by the SEC; and (e) if at any time the SEC shall issue any stop
order suspending the effectiveness of the Registration Statement, it will use
its best efforts to obtain the lifting of such order at the earliest possible
time.
2.4 If at any time when a Prospectus is required to be delivered under
the Securities Act any event occurs as a result of which, in the opinion of
either the Company or the Dealer Manager, the Prospectus or any other prospectus
then in effect would include an untrue statement of a material fact or, in view
of the circumstances under which they were made, omit to state any material fact
necessary to make the statements therein not misleading, the Company will
promptly notify the Dealer Manager thereof (unless the information shall have
been received from the Dealer Manager) and will effect the preparation of an
amended or supplemental prospectus which will correct such statement or
omission. The Company will then promptly prepare such amended or supplemental
prospectus or prospectuses as may be necessary to comply with the requirements
of Section 10 of the Securities Act.
3. Obligations and Compensation of Dealer Manager
----------------------------------------------
3.1 The Company hereby appoints the Dealer Manager as its agent and
principal distributor for the purpose of selling for cash up to a maximum of
100,000,000 Units through Dealers, all of whom shall be members of the NASD. The
Dealer Manager may also sell Units for cash directly to its own clients and
customers at the public offering price and subject to the terms and conditions
stated in the Prospectus. The Dealer Manager hereby accepts such agency and
distributorship and agrees to use its best efforts to sell the Units on said
terms and conditions. The Dealer Manager represents to the Company that it is a
member of the NASD and that it and its employees and representatives have all
required licenses and registrations to act under this Agreement.
The Dealer Manager agrees to be bound by the terms of the Bank Escrow
Agreement executed as of March _________________, 2000 ("Escrow Agreement") by
BankWest of Nevada ("Bank"), as escrow agent, the Dealer Manager and the
Company, a signed copy of which the Dealer Manager acknowledges has been
furnished to it by the Manager, and a conformed copy of which is attached to
this Agreement and incorporated herein by this reference.
3.2 Promptly after the effective date of the Registration Statement,
the Dealer Manager and the Dealers shall commence the offering of the Units for
cash to the public in jurisdictions in which the Units are registered or
qualified for sale or in which such offering is otherwise permitted. The Dealer
Manager and the Dealers will suspend or terminate offering of the Units upon
request of the Company at any time and will resume offering the Units upon
subsequent request of the Company.
3.3 As provided in the "Plan of Distribution" section of the
Prospectus, as compensation for the services rendered by the Dealer Manager, the
Company agrees that it will pay the Dealer Manager up to one and one-half
percent (1.5%) of gross proceeds of this offering, of which a maximum of
one-half of one percent (0.5%) of gross proceeds is for the reimbursement of
expenses, all or any portion of which may be reallocated to any Dealer under the
Selected Dealer Agreement for that Dealer's accountable expenses in this
offering. (Such aggregate percentage of gross proceeds, excluding the portion
reimbursed as expenses, is hereinafter referred to as the "Dealer Management
Fee".) Without in any way limiting the foregoing, no commissions, Dealer Manager
Fee or expense reimbursement will be paid to the Dealer Manager or any Dealer in
excess of the maximum permitted by NASD Rules of Conduct and applicable
Guidelines pertaining to sales compensation in offerings of this kind.
Notwithstanding the foregoing, no commissions, payments or amount whatsoever
will be paid to the Dealer Manager under this Section 3.3 unless or until
1,500,000 Units have been sold by the Dealer Manager and the Dealers (the
"Minimum Offering"). Until the Minimum Offering is obtained, investments will be
held in the escrow account and, if the Minimum Offering is not obtained, will be
returned to the investors in accordance with the Prospectus and Escrow
Agreement. The Company will not be liable or responsible to any Dealer for
direct payment of
3
<PAGE>
commissions to such Dealer, it being the sole and exclusive responsibility of
the Dealer Manager for payment of commissions and reimbursements of expenses to
Dealers.
3.4 The Dealer Manager represents and warrants to the Company, the
Manager and each person and firm that signs the Registration Statement that the
information under the caption "Plan of Distribution" in the Prospectus and all
other information furnished to the Company by the Dealer Manager in writing
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus, or any amendment or supplement thereto does not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
3.5 The Dealer Manager represents and warrants to the Company that it
will not represent or imply that the Bank, under the Escrow Agreement, has
investigated the desirability or advisability of investment in the Units, or has
approved, endorsed or passed upon the merits of the Units or the Company, nor
will it use the name of said Bank in any manner whatsoever in connection with
the offer or sale of the Units other than by acknowledgment that it has agreed
to serve as escrow agent.
4. Indemnification
---------------
4.1 The Company and Manager will indemnify and hold harmless the
Dealers and the Dealer Manager, their officers and directors and each person, if
any, who controls such Dealer or Dealer Manager within the meaning of Section 15
of the Securities Act from and against any losses, claims, damages or
liabilities, joint or several, to which such Dealers or Dealer Manager, their
officers and directors, or such controlling person may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (a)
any untrue statement or alleged untrue statement of a material fact contained
(i) in the Registration Statement (including the Prospectus as a part thereof)
or any post-effective amendment thereto or in the Prospectus or any amendment or
supplement to the Prospectus or (ii) in any application or other document
executed by the Company or on its behalf specifically for the purposes of
registering or qualifying any or all of the Units for sale under the securities
laws of any state or based upon written information furnished by the Company
under the securities laws thereof (any such application, document or information
being hereinafter called a "Blue Sky Application"), or (b) the omission or
alleged omission to state in the Registration Statement (including the
Prospectus as a part thereof) or any post-effective amendment thereof or in any
Blue Sky Application a material fact required to be stated therein or necessary
to make the statements therein not misleading, or (c) any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus, if used prior to the effective date of the Registration Statement,
or in the Prospectus or any amendment or supplement to the Prospectus or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, and will reimburse
each Dealer or Dealer Manager, its officers and directors and each such
controlling person for any legal or other expenses reasonably incurred by such
Dealer or Dealer Manager, its officers and directors, or such controlling
persons in connection with investigating or defending such loss, claim, damage,
liability or action; provided that the Company and Manager will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of, or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company or Manager by or on behalf of any
Dealer or Dealer Manager specifically for use with reference to such Dealer or
Dealer Manager in the preparation of the Registration Statement or any such
post-effective amendment thereof, any such Blue Sky Application or any such
preliminary prospectus or the Prospectus or any such amendment thereof or
supplement thereto; and further provided that the Company will not be liable in
any such case if it is determined that such Dealer or Dealer Manager was at
fault in connection with the loss, claim, damage, liability or action.
4.2 The Dealer Manager will indemnify and hold harmless the Company,
the Manager and each person or firm which has signed the Registration Statement
and each person, if any, who controls the Company and Manager within the meaning
of Section 15 of the Securities Act, from and against any losses, claims,
damages or liabilities to which any of the aforesaid parties may become subject,
under the
4
<PAGE>
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (a)
any untrue statement of a material fact contained (i) in the Registration
Statement (including the Prospectus as a part thereof) or any post-effective
amendment thereof or (ii) any Blue Sky Application, or (b) the omission to state
in the Registration Statement (including the Prospectus as a part thereof) or
any post-effective amendment thereof or in any Blue Sky Application a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or (c) any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus, if used prior to the
effective date of the Registration Statement, or in the Prospectus, or in any
amendment or supplement to the Prospectus or the omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein in the light of the circumstances under which they were made
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or omission was made in reliance upon and in conformity with
written information furnished to the Company or Manager by or on behalf of the
Dealer Manager specifically for use with reference to the Dealer Manager in the
preparation of the Registration Statement or any such post-effective amendments
thereof or any such Blue Sky Application or any such preliminary prospectus or
the Prospectus or any such amendment thereof or supplement thereto, or (d) any
unauthorized use of sales materials or use of unauthorized oral representations
concerning the Units by the Dealer Manager and will reimburse the aforesaid
parties, in connection with investigation or defending such loss, claim, damage,
liability or action. This indemnity agreement will be in addition to any
liability which the Dealer Manager may otherwise have.
4.3 Each Dealer severally will indemnify and hold harmless the Company,
Manager, Dealer Manager, all directors thereof (including any persons named in
the Registration Statements with his consent, as about to become a director),
each of their officers who has signed the Registration Statement and each
person, if any, who controls the Company, the Dealer Manager within the meaning
of Section 15 of the Securities Act from and against any losses, claims, damages
or liabilities to which the Company, the Dealer Manager, the Manager, any such
director or officer, or controlling person may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (a)
any untrue statement or alleged untrue statement of a material fact contained
(i) in the Registration Statement (including the Prospectus as a part thereof)
or any post-effective amendment thereof or (ii) in any Blue Sky Application, or
(b) the omission or alleged omission to state in the Registration Statement
(including the Prospectus as a part thereof) or any post-effective amendment
thereof or in any Blue Sky Application a material fact required to be stated
therein or necessary to make the statements therein not misleading, or (c) any
untrue statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, if used prior to the effective date of the Registration
Statement, or in the Prospectus, of in any amendment or supplement to the
Prospectus or the omission therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company or the Dealer Manager by or on behalf of such Dealer specifically for
use with reference to such Dealer in the preparation of the Registration
Statement or any such post-effective amendments thereof or any such Blue Sky
Application or any such preliminary prospectus or the Prospectus or any such
amendment thereof or supplement thereto, or (d) any unauthorized use of sales
materials or use of unauthorized verbal representations concerning the Units by
such Dealer and will reimburse the Company, the Dealer Manager, the Manager, any
such directors or officers, or controlling person, in connection with
investigating or defending any such loss, claim, damage, liability or action.
This indemnity agreement will be in addition to any liability which such Dealer
may otherwise have.
4.4 Promptly after receipt by an indemnified party under this Section 4
of notice of the commencements of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party under the
Section 4, notify in writing the indemnifying party of the commencement thereof
and the omission so as to notify the indemnifying party will relieve it from any
liability under this Section 4 as to the particular item for which
indemnification is then being sought, but not from any other liability which it
may have to any indemnified party. In case any such action is brought against
any indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled, to the extent it may wish,
jointly with any other indemnifying part
5
<PAGE>
similarly notified, to participate in the defense thereof, with separate
counsel. Such participation shall not relieve such indemnifying party of the
obligation to reimburse the indemnified party for reasonable legal and other
expenses (subject to Section 4.5) incurred by such indemnified party in
defending itself, except for such expenses incurred after the indemnifying party
has deposited funds sufficient to effect the settlement, with prejudice, of the
claim in respect of which indemnity is sought. Any such indemnifying party shall
not be liable to any such indemnified party on account of any settlement of any
claim effected without the consent of such indemnifying party.
4.5 The indemnifying party shall pay all legal fees and expenses of the
indemnified party in the defense of such claims or actions; provided, however,
the indemnifying party shall not be obliged to pay legal expenses and fees to
more than one law firm in connection with the defense of similar claims arising
out of the same alleged acts or omissions giving rise to such claims
notwithstanding that such actions or claims are alleged or brought by one or
more parties against more than one indemnified party. If such claims or actions
are alleged or brought against more than one indemnified party, then the
indemnifying party shall only be obliged to reimburse the expenses and fees of
the one law firm that has been selected by a majority of the indemnified parties
against which such action is finally brought; and in the event a majority of
such indemnified parties is unable to agree on which law firm for which expenses
or fees will be reimbursable by the indemnifying party, then payment shall be
made to the first law firm of record representing an indemnified party against
the action or claim. Such law firm shall be paid only to the extent of services
performed by such law firm and no reimbursement shall be payable to such law
firm on account of legal services performed by another law firm.
4.6 The indemnity agreements contained in this Section 4 shall remain
operative and in full force and effect regardless of (a) any investigation made
by or on behalf of any Dealer, or any person controlling any Dealer or by or on
behalf of the Company, the Dealer Manager or the Manager or any officer or
director thereof, or by or on behalf of the Company, the Dealer Manager or the
Manager, (b) delivery of any Units and payment therefore, and (c) any
termination of this Agreement. A successor of any Dealer or of any the parties
to this Agreement, as the case may be, shall be entitled to the benefits of the
indemnity agreements contained in this Section 4.
5. Survival of Provisions
----------------------
The respective agreements, representations and warranties of the
Company and the Dealer Manager set forth in this Agreement shall remain
operative and in full force and effect regardless of (a) any termination of this
Agreement, (b) any investigation made by or on behalf of the Dealer Manager or
any Dealer or any person controlling the Dealer Manager or any Dealer or by or
on behalf of the Company, its partners or any person controlling the Company,
and (c) the acceptance of any payment for the Units.
6. Applicable Law
--------------
This Agreement was executed and delivered in, and its validity,
interpretation and construction shall be governed by the laws of, the State of
Nevada.
7. Counterparts
------------
This Agreement may be executed in any number of counterparts. Each
counterpart, when executed and delivered, shall be an original contract, but all
counterparts, when taken together, shall constitute one and the same Agreement.
6
<PAGE>
8. Successors and Amendment
------------------------
8.1 This Agreement shall inure to the benefit of any be binding upon
the Dealer Manager, the Manager, the Company and their respective successors.
Nothing in this Agreement is intended or shall be construed to give to any other
person any right, remedy or claim, except as otherwise specifically provided
herein. This Agreement shall inure to the benefit of the Dealers to the extent
set forth in Sections 1 and 4 hereof.
8.2 This Agreement may be amended by the written agreement of the
Dealer Manager, the Company and the Manager.
9. Term
----
Any party to this Agreement shall have the right to terminate this
Agreement on 60 days' written notice.
10. Confirmation
------------
The Manager hereby agrees and assumes the duty to send an
acknowledgement to each investor whose subscription for Units is accepted in
whole or in part by the Manager.
11. Suitability of Investors
------------------------
The Dealer Manager will offer Units and in its agreements with Dealers
will require that the Dealers offer Units, only to persons who meet the
financial qualifications set forth in the Prospectus and the Subscription
Agreement in the form that is attached to the Prospectus as Exhibit B thereto
(or to those it reasonably believes to meet suitability standards in states that
deviate from those standards set forth in the Prospectus and Subscription
Agreement), and will only make offers to persons in the states in which it is
advised in writing that the Units are qualified for sale or that such
qualification is not required. In offering Units, the Dealer Manager will, and
in its agreements with Dealers the Dealer Manager will require that the Dealer
comply with the provisions of Rule 2310 of the Conduct Rules set forth in the
NASD Manual, as well as all other applicable rules and regulations relating to
suitability of investors, including without limitation, the provisions of
Article III.B. and C. of the Statement of Policy Regarding Mortgage Programs of
the North American Securities Administration Association, Inc.
12. Submission of Orders
--------------------
12.1 Those persons who purchase Units will be instructed by the
Dealer Manager or the Dealer to make their checks payable to the Bank as escrow
agent during the course of the Minimum Offering, and to the Company after the
Minimum Offering has been achieved. The Dealer Manager and any Dealer receiving
a check not conforming to the foregoing instructions shall return such check
directly to such subscriber not later than the end of the next business day
following its receipt. Checks received by the Dealer Manager or Dealer which
conform to the foregoing instructions shall be transmitted for deposit pursuant
to one of the methods described in this Section 12. Transmittal of received
investor funds will be made in accordance with the following procedures.
12.2 Where, pursuant to a Dealer's internal supervisory procedures,
internal supervisory review is conducted at the same location at which
subscription documents and checks are received from subscribers, checks will be
transmitted in care of the Dealer Manager by the end of the next business day
following receipt by the Dealer for deposit to the Bank, as escrow agent, during
the course of the Minimum Offering and to the Company after the Minimum Offering
has been achieved.
12.3 Where, pursuant to a Dealer's internal supervisory procedures,
final internal supervisory review is conducted at a different location, checks
will be transmitted by the end of the next business day following receipt by the
Dealer to the office of the Dealer conducting such final internal supervisory
review (the "Final Review Office"). The Final Review Office will in turn by the
end of the next business day
7
<PAGE>
following receipt by the Final Review Office, transmit such checks in care of
the Dealer Manager for deposit to the Bank, as escrow agent, during the course
of the Minimum Offering and to the Company after the Minimum Offering has been
achieved.
12.4 Where the Dealer Manager is involved in the distribution
process, checks will be transmitted by the Dealer Manager for deposit to the
Bank, as escrow agent, during the course of the Minimum Offering and to the
Company after the Minimum Offering has been achieved, as soon as practicable,
but in any event by the end of the second business day following receipt by the
Dealer Manager. Checks of rejected subscribers will be promptly returned to such
subscribers.
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter and your acceptance shall constitute a binding agreement
between us as of the date first above written.
Very truly yours,
DM MORTGAGE INVESTORS, LLC
By: CAPSOURCE, INC.
(Manager)
By:
--------------------------------------
Name:
Title:
Accepted and agreed as of the
date first above written.
DM FINANCIAL SERVICES, INC.
By:
--------------------------
President
8
<PAGE>
ATTACHMENT 1.6
TO THE DEALER MANAGER AGREEMENT
Response to Section 1.6 - Material Litigation
---------------------------------------------
9
<PAGE>
Exhibit 1.2
DM MORTGAGE INVESTORS, LLC
Up To
$100,000,000
100,000,000 Units of Limited Liability Company Interest
at $1.00 each
SELECTED DEALER AGREEMENT
Ladies and Gentlemen:
DM FINANCIAL SERVICES, INC., as the dealer manager ("Dealer Manager") for
DM MORTGAGE INVESTORS, LLC, a Nevada limited liability company (the "Company")
of which Capsource, Inc., a Nevada corporation is the Manager (the "Manager"),
invites you (the "Dealer") to participate in the distribution of units of
limited liability company interest in the Company ("Units") subject to the
following terms of this Selected Dealer Agreement ("Agreement"):
I. Dealer Manager Agreement
The Dealer Manager has entered into an agreement with the Company and the
manager called the Dealer Manager Agreement dated _________, 2000, in the form
to which this Agreement is attached as Exhibit A. By your acceptance of this
Agreement, you will become one of the Dealers referred to in such Dealer Manager
Agreement between the Company, the Manager and the Dealer Manager, you agree to
become subject to all terms and conditions of the Dealer Manager Agreement,
which is incorporated herein by this reference, and will be entitled and subject
to the indemnification provisions contained in such Dealer Manager Agreement,
including the provisions of such Dealer Manager Agreement (Section 4) wherein
the Dealers severally agree to indemnify and hold harmless the Company, the
Manager and Dealer Manager and each officer and director thereof, and each
person, if any, who controls the Company, the Manager and Dealer Manager within
the meaning of the Securities Act of 1933. Except as otherwise specifically
stated herein, all terms used in this Agreement have the meanings provided in
the Dealer Manger Agreement. The Units are offered solely through broker-dealers
who are members of the National Association of Securities Dealers, Inc.
("NASD").
Dealer hereby agrees to use its best efforts to sell the Units for cash on
the terms and conditions stated in the Prospectus. Nothing in this Agreement
shall be deemed or construed to make Dealer an employee, agent, representative
or partner of the Dealer Manager or of the Company or the Manager, and Dealer is
not authorized to act for the Dealer Manager, the Company or the Manager or to
make any representations on their behalf except as set forth in the Prospectus
and such other printed information furnished to Dealer by the Dealer Manager or
the Company to supplement the Prospectus ("supplemental information").
II. Submission of Subscription Agreements
Those persons who purchase Units will be instructed by the Dealer to make
their checks payable to "Bankwest of Nevada, as Escrow Agent for DM MORTGAGE
INVESTORS, LLC," during the course of the Minimum Offering and to the Company
after the Minimum Offering has been achieved. Dealer hereby agrees to be bound
by the terms of the Bank Escrow Agreement executed as of ___________________,
2000 by Bankwest of Nevada, as escrow agent, the Dealer Manager and the Company,
a copy of which Dealer hereby acknowledges having received and which is
enclosed. Any Dealer receiving a check not conforming to the foregoing
instructions shall return such check directly to such subscriber not later than
the end of the next business day following its receipt. Checks received by the
Dealer which conform to the foregoing instructions shall be transmitted,
together with a completed and executed Subscription Agreement in the form that
is Exhibit B to the Prospectus, for deposit pursuant to
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<PAGE>
one of the methods in this Article II. Transmittal of received investor funds
will be made in accordance with the following procedures:
Where, pursuant to the Dealer's internal supervisory procedures, internal
supervisory review is conducted at the same location at which subscription
documents and checks are received from subscribers, checks will be
transmitted in care of the Dealer Manager by the end of the next business
day following receipt by the Dealer for deposit to the escrow agent,
during the course of the Minimum Offering and to the Company after the
Minimum Offering has been achieved.
Where, pursuant to the Dealer's internal supervisory procedures, final and
internal supervisory review is conducted at a different location, checks
will be transmitted by the end of the next business day following receipt
by the Dealer to the office of the Dealer conducting such final internal
supervisory review (the "Final Review Office"). The Final Review Office
will in turn by the end of the next business day following receipt by the
Final Review Office, transmit such checks for deposit to the escrow agent
during the course of the Minimum Offering and to the Company after the
Minimum Offering has been achieved.
III. Pricing
Units shall be offered to the public at the offering price of $1.00 per
Unit payable in cash. Except as otherwise indicated in the Prospectus or in any
letter or memorandum sent to the Dealer by the Company or Dealer Manager, a
minimum initial purchase of 2,000 Units is required. Additional investments may
be made in cash in minimal increments of at least 2,000 Units. The Units are
nonassessable, and investors will not be required to contribute further sums to
the capital of the Company. Dealer hereby agrees to place any order for the full
purchase price.
IV. Dealers' Commissions
The Dealer's compensation for the offering and sale of Units will be sales
commissions of up to three percent (3%), marketing incentive fees of up to one
half of one percent (0.5%) and reimbursement of accountable expenses of up to
one-half of one percent (0.5%) of gross proceeds of the offering. For these
purposes, a "sale of Units" shall occur if and only if a transaction has closed
with a purchaser of Units pursuant to all applicable offering and subscription
documents and the Company has thereafter distributed the commission to the
Dealer Manager in connection with such transaction. The Dealer hereby waives any
and all rights to receive payment of commissions due until such time as the
Dealer Manager is in receipt of the commission from the Company. The Dealer
affirms that the Dealer Manager's liability for commissions payable is limited
solely to the proceeds of commissions receivable associated therewith.
V. Payment
Payments of selling commissions will be made by the Dealer Manager to
Dealer within 30 days of the receipt by the Dealer Manager of the gross
commission payments from the Company.
VI. Right to Reject Order or Cancel Sales
All orders, whether initial or additional, are subject to acceptance by
and shall only become effective upon confirmation by the Manager; the Company
and the Manager reserve the right to reject any order in whole or in part.
Orders not accompanied by a Subscription Agreement and Signature page and the
required check payment for the Units may be rejected. Issuance and delivery of
the certificates for the Units will be made only after actual receipt of payment
therefor. Subject to the otherwise applicable terms of the Bank Escrow
Agreement, if any check is not paid upon presentment, or if the Company is not
in actual receipt of clearinghouse funds or cash, certified or cashier's check
or the equivalent in payment for the Units within 15 days of sale, the Company
reserves the right to cancel the sale without notice. If an order is rejected,
cancelled or rescinded for any reason, the Dealer agrees to return to the Dealer
Manager any commission theretofore paid with respect to such order.
2
<PAGE>
VII. Prospectus and Supplemental Information
Dealer is not authorized or permitted to give and will not give, any
information or make any representation concerning the Units except as set forth
in the Prospectus and supplemental information. The Dealer Manager will supply
Dealer with reasonable quantities of the Prospectus, any supplements thereto and
any amended Prospectus, as well as any supplemental information, for delivery to
investors, and Dealer will deliver a copy of the Prospectus and all supplements
thereto and any amended Prospectus to each investor to whom an offer is made
prior to or simultaneously with the first solicitation of an offer to sell the
Units to an investor. The Dealer agrees that it will not send or give any
supplements thereto and any amended Prospectus to that investor unless it has
previously sent or given a Prospectus and all supplements thereto and any
amended Prospectus to the investor or has simultaneously sent or given a
Prospectus and all supplements thereto and any amended Prospectus with such
supplemental information. Dealer agrees that it will not show or give to any
investor or reproduce any material or writing which is supplied to it by the
Dealer Manager and marked "dealer only " or otherwise bearing a legend denoting
that it is not to be used with respect to members of the public. Dealer further
agrees that it will not use in connection with the offer or sale of Units any
materials or writings which have not been previously approved by the Dealer
Manager. Each Dealer agrees, if the Dealer Manger so requests, to furnish a copy
of any revised preliminary Prospectus to each person to whom it has furnished a
copy of any previous preliminary Prospectus, and further agrees that it will
itself mail or otherwise deliver all preliminary and final Prospectuses required
for compliance with the provisions of Rule 15c2-8 under the Securities Exchange
Act of 1934. Regardless of the termination of this Selected Dealer Agreement,
Dealer will deliver a Prospectus in transactions in the Units for a period of 90
days from the effective date of the Registration Statement or such longer period
as may be required by the Securities Exchange Act of 1934. On becoming a Dealer,
and in offering and selling Units, Dealer agrees to comply with all the
applicable requirements under the Securities Act of 1933 and the Securities
Exchange Act of 1934, including, without limitation, the provisions of Rule
15c2-4 of the Securities and Exchange Commission. Notwithstanding the
termination of this Agreement or the payment of any amount to Dealer, Dealer
agrees to pay Dealer' proportionate share of any claim, demand or liability
asserted against Dealer and the other Dealers on the basis that Dealers or any
of them constitute an association, unincorporated business or other separate
entity, including in each case Dealer's proportionate share of any expenses
incurred in defending against any such claim, demand or liability.
VIII. License and Association Membership
Dealer's acceptance of this Agreement constitutes a representation to the
Company, the Manager and Dealer Manager that Dealer is a properly registered or
licensed broker-dealer, duly authorized to sell Units under Federal and state
securities laws and regulations and in all states where it offers or sells
Units, and that it is a member in good standing of the NASD. This Agreement
shall automatically terminate if the Dealer ceases to be a member in good
standing of to NASD, or in the case of a foreign dealer, so to conform. Dealer
agrees to notify the Dealer Manager immediately if Dealer ceases to be a member
in good standing, or in the case of a foreign dealer, so to conform. The Dealer
Manager also hereby agrees to abide by the Conduct Rules of the NASD.
IX. Limitation of Offer
Dealer will offer Units only to persons who meet the financial
qualifications set forth in the Prospectus or in any suitability letter or
memorandum sent to it by the Company or Dealer Manager and will only make offers
to persons in the states in which it is advised in writing that the Units are
qualified for sale or that such qualification is not required. Dealer Manager
will not assume any obligation or responsibility as to the right of Dealer to
sell the Units in any jurisdiction. In offering Units, Dealer will comply with
the provisions of Rule 2810(b)(1), (2) and (3) of the NASD Conduct Rules set
forth in the NASD Manual, attached hereto as Attachment No. 1, as well as all
other applicable rules and regulations relating to suitability of investors,
including without limitation, the provisions of Article III.B. and C. of the
Statement of Policy Regarding Mortgage Programs of the North American Securities
Administrators Association, Inc. Dealer shall provide such certification as
Dealer Manager may reasonably request regarding its compliance with applicable
law.
3
<PAGE>
X. Termination
Dealer will suspend or terminate its offer and sale of Units upon the
request of the Company or the Dealer Manager at any time and will resume its
offer and sale of Units hereunder upon subsequent request of the Company or the
Dealer Manager. Dealer shall not in any event sell Units after two years after
the effective date of the registration statement covering the Units. Any party
may terminate this Agreement by written notice. Such termination shall be
effective 48 hours after the mailing of such notice. This Agreement is the
entire agreement of the parties and supersedes all prior agreement, if any,
between the parties hereto.
This Agreement may be amended at any time by the Dealer Manager by written
notice to the Dealer, and any such amendment shall be deemed accepted by Dealer
upon placing an order for sale of Units after he has received such notice.
XI. Notice
All notices will be in writing and will be duly given to the Dealer
Manager when mailed to 2901 El Camino Avenue, Suite 207, Las Vegas, Nevada
89102, and to Dealer when mailed to the address specified by Dealer herein.
XII. Attorney's Fees and Applicable Law
In any action to enforce the provisions of this Agreement or to secure
damages for its breach, the prevailing party shall recover its costs and
reasonable attorney's fees. This Selected Dealer Agreement shall be construed
under the laws of the State of Nevada and shall take effect when signed by
Dealer and countersigned by the Dealer Manager.
THE DEALER MANAGER
DM FINANCIAL SERVICES, INC.
Attest:
By: By:
------------------------ ------------------------
Name:
------------------------ ------------------------
Title: President
------------------------
4
<PAGE>
We have read the foregoing Selected Dealer Agreement and we hereby accept
and agree to the terms and conditions therein set forth. We hereby represent
that the list below of jurisdictions in which we are registered or licensed as a
broker or dealer and are fully authorized to sell securities is true and
correct, and we agree to advise you of any change in such list during the term
of this Selected Dealer Agreement.
1. Identity of Dealer:
Name:
-----------------------------------------------------------------------
Type of entity:
-------------------------------------------------------------
(to be completed by Dealer) (corporation, partnership or
proprietorship)
Organized in the State of:
------------------------------------------------------
(to be completed by Dealer) (State)
Licensed as broker-dealer in the following states:
- --------------------------------------------------------------------------------
(to be completed by Dealer)
Tax I.D. #:
-------------------------------------------
2. Person to receive notice pursuant to Section XI.
Name:
---------------------------------------------------------------------------
Company:
------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
City, State and Zip Code:
-------------------------------------------------------
- ------------------------------------------------------
Telephone No.: (___)
----------------------------------
AGREED TO AND ACCEPTED BY THE DEALER:
- ------------------------------------------------------
(Dealer's Firm Name)
By:
---------------------------------------------------
Signature
Title:
---------------------------------------------------
5
<PAGE>
ATTACHMENT NO. 1
NASD CONDUCT RULES
RULE 2810 - DIRECT PARTICIPATION PROGRAMS
(b) Requirements
(1) Application
no member or person associated with a member shall participate in a public
offering or a direct participation program or a limited partnership rollup
transaction except in accordance with this paragraph (b).
(2) Suitability
(A) A member or person associated with a number shall not
underwrite or participate in a public offering of a direct
participation program unless standards of suitability have been
established by the program for participants therein and such
standards are fully disclosed in the prospectus and are
consistent with the provisions of subparagraph (B) of this
section.
(B) In recommending to a participant the purchase, sale or
exchange of an interest in a direct participation program, a
member or person associated with a member shall:
(i) have reasonable grounds to believe, on the basis of
information obtained from the participant concerning his
investment objectives, other investments, financial situation
and needs, and any other information known by the member or
associated person, that:
(a) the participant is or will be in a financial
position appropriate to enable him to realize to a
significant extent the benefits described in the
prospectus, including the tax benefits where they are a
significant aspect of the program;
(b) the participant has a fair market net worth
sufficient to sustain the risks inherent in the program,
including loss of investment and lack of liquidity; and
(c) the program is otherwise suitable for the
participant; and
(ii) maintain in the files of the member documents
disclosing the basis upon which the determination of
suitability was reached as to each participant.
(C) Notwithstanding the provisions of subparagraph (A) and (B)
hereof, no member shall execute any transaction in a direct participation
program in a discretionary account without prior written approval of the
transaction by the customer.
(D) Subsections 3(a) and 3(b) shall not apply to:
(i) a secondary public offering of or a secondary market
transaction in a unit, depository receipt, or other interest
in a direct participation
6
<PAGE>
program for which quotations are displayed are displayed on
NASDAQ or which is listed on a registered national securities
exchanges, or
(ii) an initial public offering of a unit, depository
receipt or other interest in a direct participation program
for which an application for inclusion on NASDAQ or listing on
a registered national securities exchange has been approved by
NASDAQ or such exchange and the applicant makes a good faith
representation that it believes such inclusion on NASDAQ or
listing on an exchange will occur within a reasonable period
of time following the formation of the program.
(3) Disclosure
(A) Prior to participating in a public offering of a direct
participation program, a member or person associated with a member shall
have reasonable grounds to believe, based on information made available to
him by the sponsor through a prospectus or other materials, that all
material facts are adequately and accurately disclosed and provide a basis
for evaluating the program.
(B) In determining the adequacy of disclosed facts pursuant to
subparagraph (A) hereof, a member or person associated with a member shall
obtain information on material facts relating at a minimum to the
following, if relevant in view of the nature of the program.
(i) items of compensation;
(ii) physical properties;
(iii) tax aspects;
(iv) financial stability and experience of the sponsor;
(v) the program's conflicts and risk factors; and
(vi) appraisals and other pertinent reports.
(C) For purposes of subsections (a) or (b) hereof, a member or
person associated with a member may rely upon the results of an inquiry
conducted by another member or members, provided that:
(i) the member or person associated with a member has
reasonable grounds to believe that such inquiry was conducted with
due care;
(ii) the results of the inquiry were provided to the member
or person associated with a member with the consent of the member or
members conducting or directing the inquiry; and
(iii) no member that participated in the inquiry is a sponsor
of the program or an affiliate of such sponsor.
(D) Prior to executing a purchase transaction in a direct
participation program, a member or person associated with a member shall
inform the prospective participant of all pertinent facts relating to the
liquidity and marketability of the program during the term of the
investment; provided, however, that this subparagraph (b) shall not apply
to an initial or secondary public offering of or a secondary market
transaction in a unit, depositary receipt or other interest in a direct
participation program which complies with subparagraph 2(D).
<PAGE>
Dean Heller Limited Liability
Secretary of State Company
101 North Carson Street, Suite 3 Articles of Organization
Carson City, Nevada 89707-4786 (PURSUANT TO NRS 86)
(775)684-5708
Important: Read attached instructions before completing form.
<TABLE>
<S> <C>
1. Name of Limited Liability DM MORTGAGE INVESTORS, LLC
Company
2. Resident Agent Name Michael V. Shustek
and Street Address: Name
(must be a Nevada address 2901 El Camino Avenue, Suite 206, Las Vegas, NV 89102
where process may be served) Street Address City, Zip Code
3. Dissolution Date: Latest date upon which the company is to dissolve (if existence is not perpetual) December 31,
(OPTIONAL - see instructions) 2035
4. Management: Company shall be managed by One _____________ Manager(s) or _______ Members
(Check one)
Names and Addresses of CAPSOURCE, INC., a Nevada Corporation
Manager(s) or Members: Name Name
(Attach additional pages as 2851 El Camino Avenue
necessary) Street Address Street Address
Las Vegas, NV 89102
City, State, Zip City, State, Zip
5. Other Matters: Number of additional pages attached:
(See instructions)
6. Names, Addresses Michael V. Shustek
and Signatures of Name Name
Organizer(s): 2901 El Camino Avenue, Suite 206
(Signatures must be Street Address Street Address
notarized) Attach Las Vegas, NV 89102
additional pages if there City, State, Zip City, State, Zip
are more than 2 organizers
Signature Signature
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
This instrument was acknowledged before me on This instrument was acknowledged before me on
December , 1999 by
Michael v. Shustek Name of Person
Name of Person
As organizer of As organizer of
DM Mortgage Investors, LLC
(Name of party on behalf of whom instrument is
executed (Name of party on behalf of whom instrument is
executed
---------------------------------------------- ----------------------------------------------
Notary Public Signature Notary Public Signature
(Affix notary stamp or seal here) (Affix notary stamp or seal here)
7. Certificate of Acceptance I, Michael V. Shustek hereby accept appointment as Resident Agent for the above named limited
-------------------
of Appointment of Resident liability company.
Agent
December , 1999
Signature of Resident Agent Date
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Filing Fee: $75.00
STATE OF NEVADA
AMENDMENT
TO
ARTICLES OF ORGANIZATION
(Limited-Liability Company)
Pursuant to NRS 86.221
(For filing office use) (For filing office use)
- -------------------------------------------------------------------------------------------------------------------
IMPORTANT - Read instructions on back before completing this form.
---- MUST BE SUBMITTED IN DUPLICATE----
Type or Print (black ink only)
1. Secretary of State File No.: 2. Secretary of State File Date:
LLC 9722-99 DECEMBER 14, 1999
3. Name of the Limited-Liability Company:
DM MORTGAGE INVESTORS, LLC
4. The Articles of Organization of the Limited-Liability Company are amended as follows: (Complete
appropriate sub-section(s)):
A. The Limited-Liability Company name is changed to:
B. Other:
C. The following member(s) ____, manager(s) ____, managing member(s) _____ have withdrawn:
D. The following member(s) ____, manager(s) ____, managing member(s) _____ have been added:
The latest date upon which the Limited-Liability Company is to dissolve has been changed to:
DECEMBER 31, 2019
Other matters included in the Articles of Organization of the
Limited-Liability Company are amended as indicated on the attached
page(s). Number of pages attached: ______________
We, the undersigned, verify that we are the person who executed this amendment
to the identified Limited-Liability Company, which execution is our act and
deed.
CAPSOURCE, INC., a Nevada corporation and the sole manager
By: _____________________________________
Signature of manager Date
- ------------------------ ---------------------------
Notary stamp or seal Signature of notarial officer
</TABLE>
<PAGE>
Exhibit 5.1
LETTERHEAD OF
BERKLEY, GORDON, LEVINE, GOLDSTEIN & GARFINKEL, LLP
March 16, 2000
DM Mortgage Investors, LLC
2901 El Camino Avenue
Suite 206
Las Vegas, Nevada 89102
Re: DM Mortgage Investors, LLC Form S-11 Registration Statement Under The
Securities Act of 1933
Ladies and Gentlemen:
We have acted as special Nevada counsel to DM Mortgage Investors, LLC,
a Nevada limited liability company (the "Company"), in connection with the
review of the Company"s Registration Statement (the "Registration Statement") on
Form S-11 to be filed with the Securities and Exchange Commission pursuant to
the Securities Act of 1933.
In our capacity as special Nevada counsel to the Company in connection
with the Registration Statement, we are generally familiar with the proceedings
taken and proposed to be taken by the Company in connection with the
Registration Statement. For purposes of this opinion, we have assumed that such
proceedings will be timely and properly completed, in accordance with all
requirements of applicable federal and state securities laws and other laws
applicable thereto, in the manner presently proposed.
As special Nevada counsel we have examined, among other things, the
following documents:
(a) the Registration Statement;
(b) the Articles of Organization of the Company, as amended;
(c) the Operating Agreement of the Company dated as of March 13,
2000;
(d) the Written Consent of the Sole Manager of the Company (the
"Manager Consent"); and
(e) such corporate and other constitutive documents and records of
the Company as we have deemed necessary or appropriate for the
purposes of this opinion.
We call your attention to the fact that we have not participated in the
preparation or negotiation of the Registration Statement, or any other
agreements, documents or instruments relating to the transactions contemplated
thereby. We are admitted to the Bar of the State of Nevada, and in rendering our
opinions hereinafter stated, we have relied on the applicable laws of the State
of Nevada as those laws presently exist and as they have been applied and
interpreted by courts having jurisdiction in the State of Nevada. We express no
opinion as to the laws of any
<PAGE>
DM Mortgage Investors, LLC
March 16, 2000
Page 9
other jurisdiction.
Our review has been limited to the above-described documents and we
have assumed (i) there have been no amendments to the documents we have
reviewed, and (ii) the representations, statements, and/or other information
contained in the documents, including the Registration Statement, are true and
correct as of the date of this opinion. In our examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, and the conformity to authentic original documents of all
documents submitted to us as copies.
We have been furnished with, and with your consent have relied upon,
the Manager Consent with respect to certain factual matters. In addition, we
have obtained and relied upon such certificates and assurances from public
officials as we have deemed necessary.
We are opining herein as to the effect on the subject transaction only
of the internal laws of the State of Nevada, and we express no opinion herein
with respect to the applicability thereto, or the effect thereon, of the laws of
any other jurisdiction or as to any matters of municipal law or the laws of any
local agencies within any state.
We have further assumed the Company has qualified to do business and is
in good standing in each jurisdiction other than Nevada in which the Company is
currently operating.
Subject to the foregoing and the other qualifications set forth herein,
it is our opinion that as of the date hereof:
1. The Company is a Nevada limited liability company duly
organized, validly existing and in good standing under the
laws of the State of Nevada.
<PAGE>
DM Mortgage Investors, LLC
March 16, 2000
Page 1
2. The Company"s 100,000,000 units being offered in accordance
with and subject to the terms and conditions of the
Registration Statement, are validly authorized and, when
issued for due consideration, shall be fully paid and
non-assessable.
We are members of the Bar of the State of Nevada and do not express any
opinion as to laws other than those of the State of Nevada. Our opinion herein
is based on the existing laws of the State of Nevada, and we express no opinion
as to any laws or regulations of other states or jurisdictions as they may
pertain to the Company, the Registration Statement, or the transactions
contemplated thereby, or with respect to the effect of non-compliance under any
such laws or regulations of any other jurisdictions. This opinion is effective
up to and including the date of this opinion, and we expressly decline any
undertaking to advise you of any matters arising subsequent to the date hereof
which would cause us to amend any portion of the foregoing in whole or in part.
This opinion is limited to the matters expressly set forth herein, and no
opinion is implied or may be inferred beyond the matters expressly stated
herein.
We consent to the filing of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name under
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
/s/ BERKLEY, GORDON, LEVINE,
GOLDSTEIN & GARFINKEL, LLP
<PAGE>
[LOGO]
111 Broadway, 24th Floor
Oakland, CA 94607-4036
Post Office Box 2047
Oakland, CA 94604-2047
Telephone: (510) 834-6600
Fax: (510) 834-1928
[email protected]
Exhibit 5.2
March 15, 2000
DM Mortgage Investors, LLC
2901 El Camino Avenue, Suite 206
Las Vegas, NV 89102
Re: Federal Income Tax Consequences of an Investment in DM
Mortgage Investors, LLC
Ladies and Gentlemen:
We have acted as tax counsel for DM Mortgage Investors, LLC, a Nevada
limited liability company (the "Company") in connection with the preparation of
the prospectus (the "Prospectus") for the Company to be filed with the
Securities and Exchange Commission on or about March 17, 2000, pursuant to the
Securities Act of 1933, as amended, (the "Act") as part of its Registration
Statement on Form S-11 (the "Registration Statement"). This opinion as to
certain material federal income tax aspects of an investment in the Company is
being delivered at your request in connection with the disclosure requirements
under the Act and will be filed as an exhibit to the Prospectus. Capitalized
terms used herein and not otherwise defined herein shall have the meanings
ascribed to them in the Registration Statement.
In connection with our opinion, we have examined: (i) the Registration
Statement and the Prospectus; (ii) the Operating Agreement for the Company that
is attached as Exhibit A to the Prospectus (the "Operating Agreement"); (iii)
the certificate of the Manager (the "Certificate"), dated as of the date hereof;
and (iv) such other documents and records pertaining to the organization and
operation of the Company as we have considered necessary or appropriate as a
basis for the opinions set forth below. In our examination we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies, and the authenticity of the originals of such copies.
As to any facts material to this opinion, we have relied solely upon:
(i) the matters set forth in the Prospectus, (ii) the assumptions contained
herein, and (iii) the representations and statements of the Manager, and its
officers and representatives, including the facts set forth in the Certificate.
We have not undertaken any independent investigation or verification as to any
such factual matters.
In rendering our opinion, we have considered the applicable provisions
of the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), Treasury Regulations promulgated thereunder (the "Regulations"),
pertinent judicial and administrative authorities and interpretative rulings of
the Internal Revenue Service (the "IRS"). As indicated in the substantive
discussion which follows relative to the federal income tax
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WENDEL, ROSEN, BLACK & DEAN, LLP
DM Mortgage Investors, LLC
March 15, 2000
Page 2
consequences of an investment in the Company, as to certain issues, we are
unable to express an opinion because of uncertainty in the law or for other
reasons.
Whenever a statement herein is qualified by the expressions "to our
knowledge," "we are not aware" or a similar phrase or expression with respect to
our knowledge of matters of fact, it is intended to mean our knowledge is based
upon the documents, instruments and certificates described above and the current
actual knowledge of the attorneys in this firm who are presently involved in
substantive legal representation of the Company (but not including any
constructive or imputed notice of any information) and that we have not
otherwise undertaken any independent investigation for the purpose of rendering
this opinion.
Our opinion is limited to the matters discussed below. We give no
opinion with respect to other tax matters, whether federal, state or local, that
may relate to an investment in the Company.
No ruling will be requested from the IRS regarding any of the material
federal income tax issues discussed below. Our opinion is not binding on the IRS
and does not constitute a guarantee that the IRS will not successfully challenge
a Member's tax treatment of any aspect of any investment in the Company. We
caution that our opinion is based on the federal income tax laws as they exist
on the date hereof. It is possible that subsequent changes in the tax law could
be enacted and applied retroactively to an investment in the Company and that
such changes could result in a materially different result that the result
described in this opinion.
The opinions set forth below represent our conclusions based upon the
documents reviewed by us, the facts and assumptions presented to us and stated
herein. Any material amendments to such documents or changes in any significant
fact or assumption stated herein or in the Certificate could affect the opinions
expressed herein.
Based upon the foregoing and subject to the limitations,
qualifications, exceptions and assumptions set forth herein and the discussion
set forth below, we are of the opinion that:
1. The Company will be classified as a partnership rather than as an
association taxable as a corporation for federal income tax purposes.
2. The Company will not be classified as a "publicly traded
partnership" for federal income tax purposes.
3. The discussion set forth below under the heading "Other Federal
Income Tax Consequences" and in the Prospectus under the heading "Federal Income
Tax Consequences" is an accurate summary of all material matters discussed
therein.
1. The Company Will Be Classified As A Partnership
As discussed in greater detail below, a limited liability company
generally is not subject to federal income tax if it is classified as a
partnership for federal income tax purposes, but rather each member is required
to report on such member's federal income tax return the member's distributive
share of the taxable income or loss of the Company for each year. Historically
(i.e., prior to 1997), one of the more significant issues which had to be
addressed in connection with a discussion of the material federal income tax
consequences relative to a limited liability company formed to take advantage of
the favorable tax treatment afforded to partnerships was whether such entity may
be classified as an association taxable as a corporation for income tax purposes
under the entity classification system that existed at that time. However, under
Regulations promulgated in December 1996 (the so-called "Check-the-Box"
Regulations), 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.
See Regulation Section 301.7701-3(b)(3)(ii).
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WENDEL, ROSEN, BLACK & DEAN, LLP
DM Mortgage Investors, LLC
March 15, 2000
Page 3
The Company is a domestic limited liability company and if the minimum
offering of Units described in the Prospectus is completed will have more than
one member. The Manager has represented that it will not cause the Company to
make an election to be classified as an association taxable as a corporation.
Based on the foregoing and subject to the discussion which follows regarding the
tax treatment of publicly traded partnerships, it is our opinion that that the
Company will be classified as a partnership for federal income tax purposes.
In light of the foregoing opinion, as the context requires in the
discussion which follows: (i) 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 (e.g., the Company); (ii) the use of
the term "partner" will be construed to refer also to a member of a limited
liability company (e.g., a Member of the Company); and (iii) "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 (e.g., the
interest of a Member in the Company).
2. The Company Will Not Be Classified As A Publicly Traded Partnership
Section 7704 of the Code treats "publicly traded partnerships" as
corporations for federal income tax purposes. Section 7704(b) of the Code
defines the term "publicly traded partnerships" as any partnership (including a
limited liability company classified as a partnership for federal income tax
purposes) if the interests in such partnership are: (i) readily traded on an
established securities market; or (ii) readily tradable on a secondary market or
the substantial equivalent thereof.
In June 1988, the IRS issued Notice 88-75 which sets forth
comprehensive guidance concerning the application of Section 7704 prior to the
adoption of final Regulations under Section 7704. Notice 88-75 primarily
addresses the issue of when partnership interests will be considered to be
readily tradable on a secondary market or the substantial equivalent thereof
under Section 7704(b). In November, 1995, the IRS issued final Regulations under
Section 7704 (the "Final PTP Regulations"). See Regulation Section 1.7704-1. The
Final PTP Regulations generally retain the conceptual framework of Notice 88-75,
but contain a number of modifications. The Final PTP Regulations are generally
effective for taxable years beginning after December 31, 1995.
The Final PTP Regulations provide that an established securities market
includes: (i) a national securities exchange registered under the Securities
Exchange Act of 1934; (ii) a national securities exchange exempt from
registration because of the limited volume of transactions; (iii) a foreign
securities exchange; (iv) a regional or local exchange; and (v) an interdealer
quotation system that regularly disseminates firm buy or sell quotations by
identified brokers or dealers by electronic means or otherwise (i.e., an
over-the-counter market). See Final PTP Regulations Section 1.7704-1(b).
As indicated above, the primary focus of the Final PTP Regulations (and
Notice 88-75) is on determining when partnership interests will be treated as
"readily tradable on a secondary market or the substantial equivalent thereof."
The Final PTP Regulations provide a number of safe harbors relative to this
determination. Included as a safe harbor in the Final PTP Regulations is a safe
harbor described under the heading "Lack of Actual Trading" (the "Lack of Actual
Trading Safe Harbor"). The Lack of Actual Trade Safe Harbor provides that
interests in a partnership will not be considered readily tradable on a
secondary market or the substantial equivalent thereof within the meaning of
Section 7704(b) of the Code 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 2% of the total interests in partnership capital or
profits (the "Two Percent Safe Harbor").
As noted, certain transfers are disregarded for purposes of determining
whether the Two Percent Safe Harbor is met under the Final PTP Regulations. For
purposes of this safe harbor, the transfers which are disregarded include, but
are not limited to: (i) transfers between family members, transfers at death,
(ii) transfers in which the basis is determined under Section 732 of the Code,
(iii) interests issued by the partnership for cash, property or services, and
(iv) interests in the partnership which are redeemed pursuant to the "Redemption
and Repurchase Safe
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WENDEL, ROSEN, BLACK & DEAN, LLP
DM Mortgage Investors, LLC
March 15, 2000
Page 4
Harbor" discussed below.
The Final PTP Regulations contain a safe harbor for redemption and
repurchase agreements (the "Redemption and Repurchase Safe Harbor"). This safe
harbor provides that the transfer of an interest in a partnership pursuant to a
"redemption or repurchase agreement" is disregarded for purposes of determining
whether interests in the partnership are readily tradable on a secondary market
or the substantial equivalent thereof certain requirements are met. The Final
PTP Regulations provide that a redemption or repurchase agreement means a plan
of redemption or repurchase maintained by a partnership whereby the partners may
tender their interests in the partnership for purchase by the partnership,
another partner or certain persons related to another partner. See Section
1.7704-1(e)(3) of the Final Regulations.
The requirements which must be met in order to disregard transfers made
pursuant to a redemption or repurchase agreement are: (i) 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 right; (ii) the redemption agreement
requires that the redemption price not be established until at least 60 days
after receipt of such notification by the partnership (or the price is
established not more than 4 times during the partnership's taxable year); and
(iii) 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. See Section 1.7704-1(f) of the Final PTP Regulations.
The Operating Agreement provides that, subject to certain limitations,
a Member may withdraw or partially withdraw from the Company and obtain the
return of his outstanding capital account. These provisions of the Operating
Agreement constitute a redemption or repurchase agreement within the meaning of
the Final PTP Regulations.
The limitations on a Member's right to withdraw his capital account set
forth in the Operating Agreement include, without limitation: (i) a requirement
that the withdrawal will not be made until at least 61 days after written notice
of withdrawal is delivered to the Manager; (ii) the amount distributed to the
withdrawing Member will be a sum equal to such Member's capital account as of
the date of such distribution; and (iii) in no event will the Manager permit the
withdrawal during any calendar year of more than 10% of the outstanding Member
Units. In our opinion, these limitations satisfy the requirements of the Final
PTP Regulations set forth above.
The Operating Agreement provides that no transfer or assignment of a
Member's interest in the Company may be made, if the Manager determines that
such transfer or assignment would result in the Company being classified as a
publicly traded partnership within the meaning of Section 7704(b) of the Code.
To prevent such classification, the Operating Agreement provides that (i) the
Company will not register Units or permit any other persons to register Units
for trading on an established securities market within the meaning of Section
7704(b); (ii) the Manager will prohibit any transfer of Units which would cause
the sum of percentage interests in Company capital or profits represented by
Company interests that are transferred during any taxable year of the Company to
exceed the limitation under the Two Percent Safe Harbor under the Final PTP
Regulations (excluding for this purpose transfers which may be disregarded
pursuant to the safe harbor); and (iii) the Manager will not permit during any
fiscal year of the Company any withdrawal of Units except in compliance with the
provisions of the Operating Agreement.
Based upon the provisions of the Operating Agreement and the
representations of the Manager set forth in the Certificate, we are of the
opinion that: (i) interests in the Company will not be traded on an established
securities market within the meaning of Section 7704 of the Code; (ii) the
operation of the Company with regard to the withdrawal by Members will qualify
for the Redemption and Repurchase Safe Harbor; (iii) the operation of the
Company with regard to the transfer of Units by Members will qualify for the Two
Percent Safe Harbor; (iv) based on the opinions rendered in clauses (ii) and
(iii) of this paragraph, interests in the Company will not be considered as
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WENDEL, ROSEN, BLACK & DEAN, LLP
DM Mortgage Investors, LLC
March 15, 2000
Page 5
readily tradable on a secondary market or the substantial equivalent thereof;
and (v) based on the opinions rendered in clauses (i) through (iv) of this
paragraph, the Company will not be classified as a publicly traded partnership
for purposes of Section 7704 of the Code.
It should be noted that a partnership which is classified as a publicly
traded partnership under Section 7704 of the Code will not be treated as a
corporation for federal income tax purposes if 90% or more of its gross income
is "qualifying income." Section 7704(c) of the Code defines the term "qualifying
income" for this purpose to include, 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 may be treated as income from an unrelated trade or business under the
unrelated trade or business taxable income rules discussed below.
It is not clear whether the Company would satisfy the "qualifying
income" test of Section 7704(c). (As noted, this inquiry would be relevant only
if it were determined that the Company should be classified as a publicly traded
partnership.) It is anticipated that more than 90% of the Company's income will
be of the passive-type included in the definition of "qualifying income"
contained in Section 7704(c). However, it is not clear whether the Company would
be considered to be engaged in the conduct of a financial business. If the
Company were classified as a publicly traded partnership and considered to be
engaged in a financial business, the Company would be treated as a corporation
for federal income tax purposes.
3. Other Federal Income Tax Consequences
General Principles of Partnership Taxation
A partnership generally is not subject to any federal income taxes. The
Company will file, for federal income tax purposes, partnership information
returns reporting its operations on the accrual basis for each taxable year. The
taxable year of the Company will be the calendar year. The Company will provide
Members with income tax information relevant to the Company and their own income
tax returns, including each Member's share of the Company's taxable income or
loss, if any, capital gain or loss (net short-term and net long-term) and other
tax items for the Company's taxable year.
Each Member that is not exempt from federal income tax will be required
to report on his own income tax return the Member's share of the Company's items
of income, gain, loss, deduction and credit. Accordingly, a Member will be
subject to tax on his distributive share of the Company's taxable income whether
or not any cash distribution is made to the Member. Because the Company will
originate mortgage investments that may be subject to the "original issue
discount" rules (see "Original Issue Discount Rules" below), it is possible that
a Member's taxable income from the Company will exceed any cash distributed to
the Member by the Company with respect to a particular year. It is anticipated
that substantially all of the income generated by the Company will be taxed as
ordinary income for federal income tax purposes.
Determination of Basis in Units
In general, a Member will not be taxed on Company distributions unless
such distributions exceed the Member's adjusted basis in his Units. A Member's
adjusted basis in his Units is the amount originally paid for such interest
increased by (i) his proportionate share of Company indebtedness with respect to
which no partner is personally liable, (ii) his proportionate share of the
Company's taxable income, and (iii) any additional contributions to the
Company's capital by such Member, and decreased by (x) his proportionate share
of losses of the Company, (y) the amount of cash, and fair value of noncash,
distributions to such Member, and (z) any decreases in his share of any
nonrecourse liabilities of the Company. Any increase in nonrecourse liabilities
of the Company is treated as a cash contribution and a decrease in nonrecourse
liabilities is treated as a cash distribution, even though the Member
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WENDEL, ROSEN, BLACK & DEAN, LLP
DM Mortgage Investors, LLC
March 15, 2000
Page 6
contributes or receives no cash, respectively. Distributions in excess of such
basis generally will be treated as gain from the sale or exchange of a Member's
interest in the Company.
Allocations of Profits and Losses
The Members will receive allocations of the Company's profits and
losses and cash distributions in the manner described in Article 7 of the
Operating Agreement. Allocations of profits and losses under a partnership
agreement will be recognized as long as they have "substantial economic effect"
under the Regulations promulgated under Section 704(b) of the Code. In general,
the Regulations provide that an allocation contained in a partnership agreement
will be respected if it satisfies the requirements of one of three tests: (i) it
has "substantial economic effect" (the "substantial economic effect test"); (ii)
it is in accordance with the partners' interest in the partnership (determined
by taking into account all facts and circumstances) (the "partners' interest in
the partnership test"); or (iii) it is "deemed" to be in accordance with the
partners' interest in the partnership.
The substantial economic effect test is a substantially objective test
which effectively creates a safe harbor for compliance with the requirements of
Section 704(b). However, in order to comply strictly with the requirements of
that test, it would be necessary to include in the Operating Agreement a
lengthy, intricate and complex set of provisions which may have little practical
significance based on the Company's anticipated operations. As a result, and
based also on the fact that a principal thrust of the Regulations under Section
704(b) is to prevent losses from being allocated for tax purposes to partners
who do not bear the economic risk of loss associated with such allocations and
that it is not anticipated that the operation of the Company and the allocation
provisions of the Operating Agreement will ever produce a situation in which a
Member will be allocated losses in excess of the economic losses actually borne
by such Member, the Manager has decided not to include these complex provisions
in the Operating Agreement and to rely instead on the partners' interest in the
partnership test as the basis for justifying the allocations under the Operating
Agreement.
The allocations contained in the Operating Agreement are generally
intended to match, insofar as practicable, the allocation of profits for tax
purposes with the economic benefit of cash distributions among the Members and
the allocation of losses with the related economic burden borne by the
respective Members. In general, a Member's interest in profits, losses and cash
distributions are proportionate to his capital account. Since the allocation of
profits, losses and cash distributions under the Operating Agreement will be
substantially proportionate to the capital accounts of the Members, in most
instances such allocations should be substantially in accordance with the
"partners' interests in the partnership" within the meaning of this alternative
test. Therefore, such allocations should be substantially respected for tax
purposes.
Limitations on the Deduction of Losses
It is not anticipated that the Company will incur net losses for income
tax purposes in any taxable year. However, if the Company were to incur losses
in any year, the ability of a Member to deduct such losses would be subject to
the potential application of the limitations discussed below.
(i) The Basis Limitation
Section 704(d) of the Code provides that a partner's share of
partnership losses is allowed as a deduction 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) may be carried forward
indefinitely until adequate basis is available to permit their deduction. Due to
this limitation, a Member in the Company will be precluded from deducting losses
in excess of his adjusted basis in his Units.
(ii) The At Risk Limitation
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WENDEL, ROSEN, BLACK & DEAN, LLP
DM Mortgage Investors, LLC
March 15, 2000
Page 7
Under Section 465 of the Code, a taxpayer (other than a widely-held
corporation) may not deduct losses incurred in certain business activities,
including the lending activities contemplated by the partnership, in an amount
exceeding the aggregate amount the taxpayer is "at risk" in that activity at the
close of his taxable year. The effect of these rules generally is to limit the
availability of partnership tax losses as offsets against other taxable income
of a partner to an amount equal to such 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 such contributions.
(iii) The Passive Loss Rules
Section 469 of the 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.
Generally, 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 such as 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 (but not credits) 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 Regulations under Section 469 provide that in certain situations,
net income, but not net loss from a passive activity (or a portion thereof) is
treated as nonpassive. See Regulation Section 1.469-2T(f). One of the items
covered by this Regulation 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 such year.
Based on the manner in which it is anticipated that the Company will
conduct its operations, at no time will the average outstanding balance of
Company liabilities exceed 80% of the average outstanding balance of the
Company's interest earning assets. Consequently, if the Company is deemed to be
engaged in the trade or business of lending money, such business will constitute
an equity-financed lending activity, and income of the Company which arises from
that trade or business and would otherwise be considered income from a passive
activity will generally be recharacterized as nonpassive income, even though the
net losses of the Company or loss on the sale of a Unit will be treated as
passive activity losses. If the Company is not considered engaged in a trade or
business of lending money, then income and loss will be considered portfolio
income and loss. In either event, a Member will not be permitted to offset
passive losses from other activities against his share of the income of the
Company.
There are no cases or revenue rulings dealing with the question of
establishing the criteria for determining whether an entity (other than a bank)
is engaged in the ordinary conduct of a trade or business of lending money for
purposes of Section 469. Presumably, this determination would be dependent, at
least in part, on the facts and circumstances surrounding the Company's
operations, including the number of loans made during any particular year. Due
to this uncertainty, we cannot give an opinion as to whether the Company will be
considered to be engaged in an equity-based lending activity for this purpose.
Under Section 67(a) of the Code, most miscellaneous itemized deductions
are deductible by an individual taxpayer only to the extent that, in the
aggregate, 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. A Member's
allocable share of the expenses of the Company will be considered miscellaneous
itemized deductions subject to this 2% limitation only if the Company is not
considered to be in the trade or business of lending money.
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WENDEL, ROSEN, BLACK & DEAN, LLP
DM Mortgage Investors, LLC
March 15, 2000
Page 8
Computation of Gain or Loss on Sale or Redemption of Units
Gain or loss on the sale by a Member of his Units (including a
redemption by the Company) will be measured by the difference between the amount
realized (i.e., the amount of cash and the fair market value of property
received), including his share of Company nonrecourse liabilities and his
adjusted basis in such Units.
Character of Gain or Loss
Generally, gain recognized by a Member on the sale of Units which have
been held over 12 months will 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 Code, which would be treated as ordinary income. The definition of these
terms will not be considered here beyond noting that the Company may have
"unrealized receivables" arising from the ordinary income component of "market
discount bonds." In addition, if the Company holds property as a result of
foreclosure which is unsold at the time a Member sells his Units, or holds an
investment in a mortgage loan that is classified as an equity interest, the
amount of ordinary income that would result if the Company were to sell such
property is generally an "unrealized receivable."
For noncorporate taxpayers, long-term capital gain for capital assets
held longer than 12 months is subject to a maximum rate of 20% (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 in
the case of a married taxpayer filing a separate return $1,500) or the excess of
such losses of the taxpayer over the taxpayer's capital gain.
Tax Rates on a Member's Share of Ordinary Income from the Company
A taxpayer's tax liability with respect to an investment in the Company
will depend upon his individual tax bracket. Currently, there are five tax
brackets for individuals. For calendar year 2000, the first bracket is at 15%
(on taxable income not over $43,850 in the case of married taxpayers filing
joint returns), the second at 28% (on taxable income from $43,850-$105,950), the
third at 31% (on taxable income from $105,950-$161,450), the fourth at 36% (on
taxable income from $161,450-$288,350), and the fifth at 39.6% (on taxable
income over $288,350). (As noted above, the long-term capital gain for capital
assets held longer than 12 months is subject to a 20% tax rate (10% for
individuals in the 15% bracket).)
Depreciation
From time to time the Company anticipates that it may acquire equity or
leasehold interests in real property by direct investment, foreclosure or
otherwise. Generally, the cost of the improvements on any such owned real
property may be recovered through depreciation deductions over a period of 39
years. See Section 168(c) of the Code.
Investment Interest
Section 163(d) of the Code, applicable to noncorporate taxpayers and S
corporation shareholders, places a limitation upon the deductibility of interest
incurred on loans made 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 such property. In general, 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 of the Company and interest expense
incurred by Members to acquire Units will not be treated as investment interest
to the extent attributable to a passive activity of the Company. However, that
portion of interest expense
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DM Mortgage Investors, LLC
March 15, 2000
Page 9
allocable to portfolio investments is subject to the investment interest
limitations.
Interest attributable to debt incurred by a Member in order to purchase
or carry Units may constitute "investment interest" subject to the deductibility
limitations of Code Section 163(d). Therefore, Members should consider the
effect of investment interest limitations on using debt financing for their
purchase of Units.
Tax Treatment of Tax-Exempt Entities
Sections 511 through 514 of the Code impose a tax on the "unrelated
business taxable income" of organizations otherwise exempt from tax under
Section 501(a) of the Code. Entities subject to the unrelated business income
tax include qualified employee benefit plans, such as pension and profit-sharing
plans, Keogh or HR-10 plans, and individual retirement accounts. Other
charitable and tax-exempt organizations are also generally subject to the
unrelated business income tax. Such organization, plan or account is referred to
as a "Tax-Exempt Entity." Interest income is not subject to this tax unless it
constitutes "debt-financed income."
Unrelated business taxable income includes gross income, reduced by
certain deductions and modifications, derived from any trade or business
regularly carried on by a partnership of which the Tax-Exempt Entity is a
partner where the partnership is a publicly traded partnership (see the
discussion set forth above concerning the classification of the Company as a
partnership for federal income tax purposes) or which is an unrelated trade or
business with respect to the Tax-Exempt Entity. Among the items generally
excluded from unrelated business taxable income are (i) interest and dividend
income; (ii) rents from real property (other than debt-financed property or
property from which participating rentals are derived); and (iii) gains on the
sale, exchange or other disposition of assets held for investment.
In general, the receipt of unrelated business taxable income by a
Tax-Exempt Entity has no effect on such entity's tax-exempt status or on the
exemption from tax of its other income. However, in certain circumstances, the
continual receipt of unrelated business taxable income may cause certain
Tax-Exempt Entities to lose their exemption. Moreover, for certain types of
Tax-Exempt Entities, the receipt of any unrelated business income taxable may
cause all income of the 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 such year.
The Manager intends to invest Company assets in such a manner that
tax-exempt Members will not derive unrelated business taxable income or
unrelated debt-financed income with respect to their interests in the Company.
However, unrelated debt-financed income might be derived in the event that the
Manager deems it advisable to incur indebtedness in connection with foreclosures
on property where mortgagees have defaulted on their loans. Subject to certain
exceptions, if a Tax-Exempt Entity, or a partnership of which it is a partner,
acquires property subject to acquisition indebtedness, the income attributable
to the portion of the property which is debt financed (based on the ratio of the
average acquisition indebtedness to the average amount of the adjusted basis of
such property) may be treated as unrelated business taxable income. Sales of
foreclosure property might also produce unrelated business taxable income if the
Company is characterized as a "dealer" with respect to such property. Moreover,
mortgage loans invested in or funded by the Company which permit the Company to
participate in the appreciation value of the properties may be recharacterized
by the IRS as an equity interest and such recharacterization could result in
unrelated debt-financed income. However, there can be no assurance that the IRS
will agree that the Company's other income is not subject to tax under the
unrelated business income and unrelated debt-financed income tax provisions.
If a Qualified Plan's (defined below) income from the Company
constitutes unrelated business taxable income, such 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.
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DM Mortgage Investors, LLC
March 15, 2000
Page 10
In considering an investment in the Company of a portion of the assets
of a qualified employee benefit plan and an individual retirement account
("Qualified Plan"), a fiduciary should consider (i) whether the investment is in
accordance with the documents and instruments governing the plan; (ii) whether
the investment satisfies the diversification requirements of Section
404(a)(1)(C) of the Employee Retirement Income Security Act of 1974 ("ERISA");
(iii) whether the investment is prudent considering, among other matters, that
there will not be a market created in which the investment can be sold or
otherwise disposed of; and (iv) whether the investment would cause the IRS to
impose an excise tax under Section 4975 of the Code. An investment in the
Company of the assets of an individual retirement account generally will not be
subject to the aforementioned diversification and prudence requirements of ERISA
unless the individual retirement account 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.
Company Tax Returns and Audits
The Company's income tax returns will be prepared by the Manager.
Generally, all Members are required to report Company items on their individual
returns consistent with the treatment of such items on the Company's information
return. However, a Member may report an item inconsistently if he files a
statement with the IRS identifying the inconsistency. Otherwise, additional tax
necessary to make the partner's treatment of the item consistent with the
Company's treatment of the item may be summarily assessed without a notice of
deficiency or an opportunity to protest the additional tax in the Tax Court
being afforded to the partner. Penalties for intentional disregard of the
consistency requirements may also be assessed.
The Company's returns may be audited by the IRS. Tax audits and
adjustments are made at the Company level in one unified proceeding, the results
of which are binding on all Members. A Member may, however, protest the
additional tax by paying the full amount thereof and suing for a refund in
either the U.S. Claims Court or a U.S. District Court.
A Company must designate a "tax matters partner" to represent the
Company in dealing with the IRS. The Manager will serve as the "tax matters
partner" to act on behalf of the Company and the Members with respect to
"Company items," to deal with the IRS and to initiate any appropriate
administrative or judicial actions to contest any proposed adjustments at the
Company level. Members with less than a 1% interest in the Company will not
receive notice from the IRS of these Company administrative proceedings unless
they form a group with other Members which group has an aggregate interest of 5%
or more in the Company, and request such notice. However, all Members have the
right to participate in the administrative proceedings at the Company level.
Members will be notified of adjustments to their distributive shares agreed to
at the Company level by the "tax matters partner."
If the Company's return is audited and adjustments are proposed by the
IRS, the "tax matters partner" may cause the Company to contest any adverse
determination as to Company status or other matters, and the result of any such
contest cannot be predicted. Moreover, Members should be aware that any such
contest would result in additional expenses to the Company, and that the costs
incurred in connection with such an audit and any ensuing administrative
proceedings will be the responsibility of the Company and may adversely affect
the profitability, if any, of Company operations. To the extent that funds of
the Company are insufficient to meet such expenses, funds may have to be
furnished by Members, although they will be under no obligation to do so.
Adjustments, if any, resulting from any audit may require each Member to file an
amended tax return, and possibly may result in an audit of the Member's own
return. Any audit of a Member's return could result in adjustments of
non-Company items as well as Company income and losses.
The Company will endeavor to provide all required tax information to
the Members within 60 days after the close of each calendar year.
Original Issue Discount Rules
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DM Mortgage Investors, LLC
March 15, 2000
Page 11
The original issue discount rules of Section 1271 through 1275 of the
Code will apply to obligations to the Company by third parties, i.e., mortgage
loans and obligations issued by the Company, if any. The original issue discount
rules will result in the Company realizing as interest income from a mortgage
loan the amount that economically accrues under the loan during the course of
the year (using compound interest concepts) even where a lesser amount is
actually paid or accrued under the terms of the mortgage loan. Identical
concepts will be used for determining the Company's interest deduction on its
obligations, if any.
Market Discount
The Company may purchase mortgage investments for an amount
substantially less than the remaining principal balance of such mortgage
investments. In such circumstances, each monthly payment which the Company
receives from a mortgagor will consist of interest at the stated rate for the
investment in a mortgage loan and a principal payment. If the Company purchases
an investment in a mortgage loan at a discount, for federal income tax purposes
the principal portion of each monthly payment will constitute (1) the return of
a portion of the Company's investment in the investment in a mortgage loan and
(2) the payment of a portion of the market discount for the investment in a
mortgage loan. The amount of each monthly payment attributable to market
discount will be recognized by the Company as ordinary income and the amount of
each monthly payment representing the return of the Company's investment will
not constitute taxable income to the Company. Accrued market discount will also
be treated 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 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 such an election would be that, with respect to the
transferee partner only, the basis of partnership property would either be
increased or decreased by the difference between the transferee's basis for his
partnership interest and his proportionate share of the partnership's basis for
all partnership property.
The Manager has advised us that due to the accounting difficulties
which would be involved, it will not cause the Company to make an election
pursuant to Section 754 of the Code (a "754 Election"), although it is empowered
to do so by the Operating Agreement. Accordingly, the share of depreciation
deductions, if any, and gain or loss upon the sale of any Company assets
allocable to a subsequent purchaser of a Share will be determined by the
Company's tax basis in such assets which will not have been adjusted to reflect
such purchaser's purchase price for his Share (as would have been possible had
the Company made a 754 Election.) This treatment might not be attractive to
prospective purchasers of Units, and consequently, a Member might have
difficulty in selling these Units or might be forced to sell at a price lower
than the price that might have been obtained had such an election been made.
<PAGE>
DM Mortgage Investors, LLC
March 15, 2000
Page 12
Taxation of Mortgage Loan Interest
Mortgage loans invested in or purchased by the Company may, in certain
situations, be structured to permit the Company to participate in the
appreciation in the value of the properties to which such mortgage loans relate
or in the cash flow generated by the operation of such properties by the
borrowers. The Manager anticipates that the Company will report for tax purposes
all earnings attributable to mortgage loans as interest income. In each case the
determination of whether the Company will be treated for tax purposes as a
creditor or as a partner or other equity participant will depend on an analysis
of the facts and circumstances of the specific mortgage loan. Consequently, we
cannot render an opinion as to the tax consequences of any of these prospective
transactions, and there is no assurance that the IRS will not successfully
recharacterize a mortgage loan as an equity interest. If a mortgage loan is
recharacterized as an equity interest, the Company would be required to
recognize an allocable share of the income, gain, loss, deductions, credits and
tax preference items attributable to the property to which the mortgage loan
relates. Recharacterization of a loan as an equity interest also could result in
the receipt of unrelated business taxable income for certain tax-exempt Members.
Treatment of Compensation to Manager and its Affiliates
The Company will pay the Manager 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, the annual management fee will be three-quarters
of one percent (0.75%) of the fair market value of the Company's assets
(including working capital), less any indebtedness of the Company. For funds not
invested in mortgages, the percentage paid as a management fee is one-half of
one percent (0.5%). In addition, the Manager or an affiliate of the Manager (an
"Affiliate") may act as a servicing agent with respect to mortgage investments,
in which event it will be entitled to receive from the Company a monthly fee of
up to 1/4 of 1% of the unpaid balance of each mortgage investment serviced.
The Manager or an Affiliate may also act as escrow agent for mortgage
investments made by the Company and may also provide certain document
preparation, notarial and credit investigation services for which it 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.
The Manager intends to cause the Company to deduct the amount of any
such management fees, loan servicing fees and escrow agent/document preparation
fees paid each year in computing the taxable income of the Company for such
year. The deductibility of such fees depends in large measure 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, we cannot give an opinion as to
the proper tax treatment of the management fee, the loan servicing fee or the
escrow agent/document preparation fee, and the IRS may attempt to recharacterize
the Company's treatment of such fees by disallowing the deduction claimed by the
Company therefor. If successful, such a recharacterization could cause the tax
benefits generated by the payment of such fees to be deferred.
The Company will enter into mortgage investment transactions in which
the borrower has employed and agreed to compensate the Manager or an Affiliate
(as well as non-affiliated third parties) 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. The Manager 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, the Manager or an Affiliate may receive a fee
payable by a borrower for permitting the assumption of a loan. The Manager 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 any of the commissions or fees described in the preceding
paragraph will be payable by the borrowers, such payment should not have any
effect on the calculation of the Company's taxable income. However,
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DM Mortgage Investors, LLC
March 15, 2000
Page 13
the IRS could take the position that these commissions or fees, or any of them,
are constructively paid by the Company, in which case interest income of the
Company would be increased by the amount of the commissions, and the commissions
would be deductible by the Company only to the extent the commissions or fees
are reasonable compensation for the services rendered and otherwise considered
deductible expenditures. Once again since this is ultimately an issue of fact
which may depend on future events, we are not able to render an opinion
regarding the issue.
The Manager or its Affiliates will be entitled to reimbursement from
the Company for certain expenses advanced by the Manager or its Affiliates for
the benefit of the Company and for salaries and related expenses for
nonmanagement and nonsupervisory services performed for the benefit of the
Company. The reimbursement of such expenses by the Company will generally be
treated in the same manner as if the Company incurred such costs 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 such
proposal, the likely effect of any such proposals upon the income tax treatment
presently associated with investment in mortgage loans or the Company, or the
effective date, which could be retroactive, of any legislation which may derive
from any such past or future proposal.
State and Local Taxes
The Company may invest in or purchase loans in states and localities
which impose a tax on the Company's assets or income, or on each Member based on
his share of any income (generally in excess of specified amounts) derived from
the Company's activities in such jurisdiction. Members who are exempt from
federal income taxation will generally also be exempt from state and local
taxation. Members should consult with their own tax advisors concerning the
applicability and impact of state and local laws.
ERISA Considerations
ERISA generally requires that the assets of employee benefit plans be
held in trust and that the trustee, or a duly authorized investment manager
(within the meaning of Section 3(38) of ERISA), 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 ERISA and prohibits certain transactions between an employee benefit plan and
the parties in interest with respect to such plan (including fiduciaries). Under
the Code, similar prohibitions apply to all Qualified Plans, including IRA's,
Roth IRA's and Keogh Plans covering only self-employed individuals who are not
subject to ERISA. Under ERISA and the Code, any person who exercises any
authority or control respecting the management or disposition of the assets of a
Qualified Plan is considered to be a fiduciary of such Qualified Plan (subject
to certain exceptions not here relevant).
Furthermore, ERISA and the Code prohibit parties in interest (including
fiduciaries) of a Qualified Plan from engaging in various acts of self-dealing.
To prevent a possible violation of these self-dealing rules, the Manager and its
affiliates may not permit the purchase of Units with assets of any Qualified
Plan (including a Keogh Plan or IRA) if they (i) have investment discretion with
respect to the assets of the Qualified Plan invested in the Company or (ii)
regularly give individualized investment advice which serves as the primary
basis for the investment decisions made with respect to such assets.
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DM Mortgage Investors, LLC
March 15, 2000
Page 14
Annual Valuation
Fiduciaries of Qualified Plans subject to ERISA are required to
determine annually the fair market value of the assets of such Qualified Plans
as of the close of any such plan's fiscal year. Although the Manager 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,
it may not be possible to value the Units adequately from year to year, because
there will be no market for them.
Plan Assets Generally
If the assets of the Company are deemed to be "plan assets" under
ERISA, (i) the prudence standards and other provisions of Part 4 of Title 1 of
ERISA applicable to investments by Qualified Plans and their fiduciaries would
extend (as to all plan fiduciaries) to investments made by the Company, (ii)
certain transactions that the Company might seek to enter into might constitute
"prohibited transactions" under ERISA and the Code because the Manager would be
deemed to be a fiduciary of the Qualified Plan Members and (iii) audited
financial information concerning the Company 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" (the "Final DOL Regulations"). Under the Final DOL
Regulations, generally, when a plan makes an equity investment in another
entity, the underlying assets of that entity will be considered plan assets
unless (1) equity participation by benefit plan investors is not significant,
(2) the entity is a real estate operating company or (3) the equity interest is
a "publicly-offered security."
(i) Exemption for Insignificant Participation by Qualified Plans. The
Final DOL Regulations provide that the assets of a corporation or Company in
which an employee benefit plan invests would not be deemed to be assets of such
plan if less than 25% of each class of equity interests in the corporation or
Company is held in the aggregate by "benefit plan investors" (including, for
this purpose, benefit plans such as Keogh Plans for owner-employees and IRA's).
For purposes of this "25%" rule, the interests of any person (other than an
employee benefit plan investor) who has discretionary authority or control with
respect to the assets of the entity, or who provides investment advice for a fee
(direct or indirect) with respect to such assets, or any affiliate of such a
person, shall be disregarded. Thus, while the Manager and its affiliates are not
prohibited from purchasing Units, any such purchases will be disregarded in
determining whether this exemption is satisfied. The Company cannot assure
"benefit plan investors" that it will always qualify for this exemption.
(ii) Exemption For a Real Estate Operating Company. The Final DOL
Regulations also provide an exemption for securities issued by a "real estate
operating company." 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 the
Final DOL 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 the Company would
qualify for an exemption from "plan assets" treatment as a real estate operating
company.
(iii) Exemption for Publicly Offered Securities. Under the Final DOL
Regulations, a "publicly offered security" is a security that is (i) freely
transferable, (ii) part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another, and (iii) either is (a)
part of a class of securities registered under Section 12(b) or 12(g) of the
Securities Exchange Act of 1934, or (b) sold to the plan as part of an offering
of securities to the public pursuant to an effective registration statement
under the Securities Act of 1933 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,
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DM Mortgage Investors, LLC
March 15, 2000
Page 15
whether a security is "freely transferable" is a factual question to be
determined on the basis of all relevant facts and circumstances. If a security
is part of an offering in which the minimum is $10,000 or less, however, certain
customary restrictions on the transfer of partnership interests necessary to
permit partnerships to comply with applicable federal and state laws, to prevent
a termination or reclassification of the entity for federal or state tax
purposes and to meet administrative needs (which are enumerated in the Final DOL
Regulations) will 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 of 1933, and the
Manager has represented that it will cause the Company to register the Units
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 Company during which the offering of Units to the public
occurred. In addition, the Units will not be subject to any restrictions on
transfer other than those enumerated in the Final DOL Regulations and referenced
in the preceding paragraph.
Based on the foregoing, the Units should be "publicly offered
securities" within the meaning of the Final DOL Regulations. As a result, the
underlying assets of the Company should not be considered to be plan assets
under the Final DOL Regulations.
This opinion is being rendered to the Company in connection with the
disclosure requirements under the Act and will be filed as an exhibit to the
Prospectus. It may not be used for any other purpose. In rendering this opinion,
we have not been asked to give nor do we express any opinion as to questions or
issues arising out of the investment by Members in the Company other than those
questions specifically discussed.
In reviewing this opinion, prospective investors should be aware that
this firm represents the Company and the Manager and its affiliates in
connection with the preparation of certain portions of the Registration
Statement and expects to continue to represent the Manager and its affiliates in
other matters.
Very truly yours,
/s/ WENDEL, ROSEN, BLACK & DEAN, LLP
<PAGE>
Exhibit 10.1
March 14, 2000
BankWest of Nevada
7251 W. Lake Mead Boulevard
Las Vegas, Nevada 89128
Attn: Mark Larson
Re: DM Mortgage Investors, LLC-Bank Escrow Agreement
Ladies and Gentlemen:
Capsource, Inc., a Nevada corporation, is the Manager of DM Mortgage
Investors, LLC, a Nevada limited liability company (the "Company"), the issuer
and registrant for an offering of shares of limited liability company interest
of the Company ("Shares"), under a Registration Statement on Form S-11, filed
with the Securities and Exchange Commission on or about March 15, 2000. The
Shares will be offered and sold by DM Financial Services, Inc., a Nevada
corporation (the "Dealer Manager") and other securities broker-dealers who
participate with the Dealer Manager in the offering of the Shares.
The terms of the offering require that the payments of the purchase price
of the first 1,500,000 Shares sold in the offering ($1,500,000) be placed in a
bank escrow account, and this Escrow Agreement ("Agreement") sets forth the
terms and conditions under which you will hold such funds (the "Required
Proceeds") as the Escrow Agent hereby appointed by the Company and the Dealer
Manager for the offering to obtain the Required Proceeds.
1. Persons subscribing to purchase the Shares will be instructed by the
Dealer Manager or any participating broker-dealers to remit the purchase price
in the form of checks, drafts or money orders (hereinafter called "instruments
of payment) payable to the order of, or funds wired in favor of, "Bankwest of
Nevada, as Escrow Agent." Within one business day after receipt of instruments
of payment from the offering, the Manager will send to you: (a) each accepted
subscriber's name, address, number of Shares purchased and purchase price
remitted ("Evidence of Subscriptions"), and (b) the instruments of payment from
such subscribers for deposit by you into the deposit account entitled Bankwest
of Nevada, as Escrow Agent for DM Mortgage Directors, which deposit will occur
within one business day after you receive such materials.
2. The aforesaid instruments of payment are to be promptly processed for
collection by you following deposit by the Manager for the Company into the
Escrow Account. The proceeds thereof are to be held in the Escrow Account until
such funds are either returned to the subscribers in accordance with paragraph 3
hereof or otherwise disbursed in accordance with paragraph 6 hereof. In the
event any of the instruments of payment are returned to you for non-payment
prior to receipt by you of the Required Proceeds, you shall promptly notify the
Manager in writing of such non-payment, and you are authorized to debit the
Escrow Account in the amount of such return payment as well as interest earned
on the investment represented by such payment.
3. In the event that at the close of your business on December 31, 2000
(the "Expiration Date") you are not in receipt of Evidence of Subscriptions, and
instruments of payment dated not later than that date (or actual wired funds),
for the purchase of Shares providing for total purchase proceeds that equal or
exceed the Required
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Proceeds (exclusive of any funds received from subscriptions for Shares from
entities which we have notified you are affiliated with the Company or Manager
and their Affiliates), you shall promptly notify the Manager that such
instruments of payment have not been received by you. Promptly following the
Expiration Date, and in any event no later than five business days after the
Expiration Date, you shall promptly return by your check the funds deposited in
the Escrow Account, or shall return the instruments of payment delivered to you
if such instruments have not been processed for collection prior to such time,
directly to each subscriber at the address given to the Company. Included in the
remittance shall be a proportionate share of the income earned in the account
allocable to each subscriber's investment in accordance with the terms and
conditions specified in paragraph 7 hereof, except that in the case of
subscribers who have not provided to you an executed Form W-9, you shall
withhold thirty-one percent (31%) of the earnings attributable to those
subscribers in accordance with IRS Regulations. In the event you receive an
executed Form W-9 from a subscriber after you have returned such subscriber's
proceeds, net of the thirty-one percent (31%) withholding, you shall promptly
refund by your check the amount withheld to such subscriber. Notwithstanding the
foregoing, you shall not be required to remit any payments until funds
represented by such payments have been collected by you.
In the event that the Company rejects any subscription for which you have
already collected funds, you will be so informed in writing by the Manager to
promptly issue a refund check to the rejected subscriber. If the Manager rejects
any subscription for which you have not yet collected funds but have submitted
the subscriber's check for collection, you shall promptly issue a check in the
amount of the subscriber's check to the rejected subscriber after such funds
clear. If you have not yet submitted a rejected subscriber's check for
collection, you shall promptly remit the subscriber's check directly to the
subscriber.
4. Following receipt by you of cash and instruments of payment (or wired
funds) of the Required Proceeds prior to the Expiration Date, you shall notify
the Company in writing within one business day when such funds have been
collected through normal banking channels and deposited in the Escrow Account.
5. Prior to the disbursement of funds deposited in the Escrow Account in
accordance with the provisions of paragraph 3 or 6 hereof, you shall invest all
of the funds deposited in the Escrow Account in "Short-term Investments" (as
defined below), and you are further authorized and you agree to reinvest all
earnings and interest derived therefrom in any of the Short-term Investment
specified below. In the event that instruments of payment are returned to you
for nonpayment, you are authorized to debit the Escrow Account in accordance
with paragraph 2 hereof. Escrow Agent will have no liability for any loss of
interest or penalties assessed if a Short-term Investment is liquidated before
maturity.
"Short-term Investment" include obligations of, or obligations guaranteed
by, the United States government or bank money-market accounts or certificates
of deposit of national or state banks that have deposits insured by the Federal
Deposit Insurance Corporation (including certificates of deposit of any bank
acting as a depository or custodian for any such funds, including, without
limitation, such certificates or instruments of Bankwest of Nevada), which
mature on or before the Expiration Date, unless such instruments cannot be
readily sold or otherwise disposed of for cash by the Expiration Date without
any dissipation of the offering proceeds invested.
The following securities are not permissible investments:
(a) money-market mutual funds;
(b) corporate equity or debt securities;
(c) repurchase agreements;
(d) bankers' acceptances;
(e) commercial paper; and
(f) municipal securities.
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6. All disbursements from the Escrow Account, except for disbursements
under the provisions of paragraph 3 hereof, shall be made by you only pursuant
to the provisions of this paragraph 6. Except for disbursements authorized upon
court order, you shall hold all funds in the Escrow Account until (i) the date
checks for Required Proceeds have cleared normal banking channels after receipt
by you of the Required Proceeds, and (ii) receipt of letter instructions from
the Company directing disbursements of such funds to the Company. In disbursing
such funds, you are authorized to rely solely upon such letter instructions
which you receive from the Company whether or not such instructions are correct,
true or authentic; provided that, if in your opinion such letter instructions
from the Company are unclear, you are authorized to rely upon the legal counsel
to the Company in distributing such funds to the effect that distribution of the
funds is authorized by the letter instructions of the Company and that
distribution of the funds in that manner is authorized by and in compliance with
such letter. However, you shall not be required to disburse any funds
attributable to instruments of payment which have not been collected by you,
provided that you shall use your best efforts to promptly collect such funds
after your receipt of disbursement instructions from the Company in accordance
with this paragraph, and shall disburse such funds in compliance with the
disbursement instructions from the Company.
7. In the event the offering of Shares terminates prior to receipt of the
Required Proceeds, income earned on subscription proceeds deposited in the
Escrow Account ("Gross Escrow Income") minus the total escrow expenses ("Net
Escrow Income") shall be remitted to subscribers in compliance with paragraph 3.
Each subscriber's pro rata portion of Net Escrow Income shall be determined as
follows: The total amount of Net Escrow Income shall be multiplied by a
fraction, the numerator of which is determined by multiplying the number of
Shares purchased by said subscriber times the number of days said subscriber's
proceeds are invested prior to termination of the offering, and the denominator
of which is the total of the numerators for all such subscribers.
Notwithstanding the foregoing, escrow expenses may be deducted from the Escrow
Account only to the extent of Gross Escrow Income, ant the Manager shall
reimburse the Escrow Agent for any escrow expenses in excess of such amount. You
shall promptly remit all such Net Escrow Income in accordance with paragraph 3.
8. As compensation for serving as Escrow Agent hereunder, you shall
receive a fee, as set forth on Schedule A attached hereto.
9. In performing any of your duties hereunder, you shall not incur any
liability to anyone for any damages, losses or expenses, except for willful
default, breach of trust, or gross negligence, and accordingly you shall not
incur any such liability with respect to any action taken or omitted (1) in good
faith upon advice of your counsel given with respect to any questions relating
to your duties and responsibilities under this Agreement, or (2) in reliance
upon any instrument, including any written instrument or instruction provided
for in this Agreement, not only as to its due execution and validity and
effectiveness of its provisions but also as to the truth and accuracy of
information contained therein, which you shall in good faith believe to genuine,
to have been signed or presented by a proper person or persons and to conform to
the provisions of this Agreement. You have no duty under this Agreement to
ascertain or assure that the Company shall be in compliance with the terms and
conditions of the offering of the Shares.
10. Company covenants to defend and indemnify Escrow Agent, its directors,
officers, employees and agents, against, and hold Escrow Agent, its directors,
officers, employees and agents harmless from any and all losses, liabilities,
claims, damages, costs or expenses (including without limitation reasonable
attorney's fees and disbursements) suffered or incurred by it arising out of or
in connection with Escrow Agent's status as a party to and in the administration
of this Agreement (including but not limited to the costs and expenses of
defending against any claim of liability in connection therewith), or in
connection with Escrow Agent's performance (excluding breach of trust, gross
negligence or willful misconduct) of any of the obligations hereunder, or Escrow
Agent's action pursuant to any instruction received by Escrow Agent from any
party hereto reasonably believed by Escrow Agent to have been properly given
hereunder, without the necessity of making any investigation with respect
thereto.
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Escrow Agent shall not be required to defend legal proceedings which
may be instituted against it with respect to the subject matter of this
Agreement or any written instructions, unless requested to do so by Company and
indemnified to Escrow Agent's satisfaction against the cost and expense of such
defense. Escrow Agent shall not be requested to institute legal proceedings of
any kind.
11. In the event of a dispute between the parties hereto or between any
person or persons who have subscribed for Shares and delivered an instrument of
payment therefor and the Company, the Manager, the Dealer Manager, or any
participating broker-dealer sufficient in your discretion to justify doing so,
you shall be entitled to tender into the registry or custody of any court of
competent jurisdiction of the State of Nevada all money or property in your
hands under this Agreement, together with such legal pleadings as you deem
appropriate, and thereupon be discharged from all further duties and liabilities
under this Agreement. In the event of any uncertainty as to your duties
hereunder, you may refuse to act under the provisions of this Agreement pending
order of such court of competent jurisdiction and you shall have no liability to
the Company or to any other person as a result of such action. Any such legal
action may be brought in such court as you shall determine to have jurisdiction
thereof. The filing of any such it legal proceedings shall not deprive you of
your compensation earned prior to such filing.
12. All written notices and letters required hereunder to you shall only
be effective if delivered personally or by certified mail, return receipt
requested to Bankwest of Nevada, 7251 W. Lake Mead Boulevard, Las Vegas, Nevada
89128, Attn: Mark Larson. All written notices and letters required hereunder to
the Company or the Dealer Manager shall only be effective if delivered
personally or by certified mail, return receipt requested to Capsource, Inc.,
Stephen J. Byrne, President, 2851 El Camino Ave., Las Vegas, Nevada 89102.
13. This Agreement shall be governed by the laws of the State of Nevada as
to both interpretation and performance.
14. The provisions of this Agreement shall be binding upon the legal
representatives, heirs, successors and assigns of the parties hereto.
15. The Company hereby acknowledges that you are serving as Escrow Agent
only for the limited purposes herein set forth, and hereby agrees that it will
not represent or imply that you, by serving as Escrow Agent hereunder or
otherwise, have investigated the desirability or advisability of investment in
the Company, or have approved, endorsed or passed upon the merits of the Shares
or Company. The Company further agrees to instruct the Dealer Manager, and each
of its representatives, and any other representatives who may offers Shares to
persons from time to time, that they shall not represent or imply that you have
investigated the desirability or advisability of investment in the Company, or
have approved, endorsed or passed upon the merits of the Shares or the Company,
nor shall they use your name in any manner whatsoever in connection with the
offer or sale of the Shares other than by acknowledgment that you have agreed to
serve as Escrow Agent for the limited purposes herein set forth.
16. This Agreement and any amendment hereto may be executed by the parties
hereto in one or more counterparts, each of which shall be deemed to be an
original.
17. In the event that you receive instruments of payment (or wired funds)
after the Required Proceeds have been received and the proceeds of the Escrow
Account have been distributed to the Company, you are hereby authorized to
deposit such instruments of payment to any deposit account as directed by the
Company. The application of said funds into a deposit account directed by the
Company shall be a full acquittance to you and you shall not be responsible for
the application of said funds.
18. The Escrow Agent shall be bound only by the terms of this Escrow
Agreement and shall not be bound or incur any liability with respect to any
other agreements or understanding between any other parties, whether or not the
Escrow Agent has knowledge of any such agreements or understandings.
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19. Indemnification provisions set forth herein shall survive the
termination of this Agreement.
20. Upon acceptance and distribution of the Required Proceeds, this Escrow
Agreement shall terminate and the Escrow Agent shall have no further
responsibility or liability with regard to the terms of this Agreement
21. The Escrow Agent has no responsibility for accepting, rejecting or
approving subscriptions.
22. This Agreement shall not be modified, revoked, released or terminated
unless reduced to writing and signed by all parties hereto, subject to the
following paragraph.
Should, at any time, any attempt be made to modify this Agreement in a
manner would increase the duties and responsibilities of the Escrow Agent or to
modify this Agreement in any manner which the Escrow Agent shall deem
undesirable, or at any other time, the Escrow Agent may resign by notifying the
Company in writing, by certified mail, and until (i) the acceptance by a
successor escrow agent as shall be appointed by the Company; or (ii) thirty (30)
days following the date upon which notice was mailed, whichever occurs sooner,
the Escrow Agent's only remaining obligation shall be to perform its duties
hereunder in accordance with the terms of the Agreement.
23. The Escrow Agent may resign at any time from its obligations under
this Escrow Agreement by providing written notice to the Company. Such
resignation shall be effective on the date specified in such notice which shall
be not less than thirty (30) days after such written notice has been given. The
Escrow Agent shall have no responsibility for the appointment of a successor
escrow agent. Unless otherwise provided in this Agreement, final termination of
this Escrow Agreement shall occur on the date all funds held in the Escrow
Account are distributed either (a) to the Company pursuant to paragraph 6
hereof, or (b) to subscribers pursuant to paragraphs 3 and 7 hereof.
24. The Escrow Agent may be removed for cause by the Company by written
notice to the Escrow Agent effective on the date specified in such notice. The
removal of the Escrow Agent shall not derive the Escrow Agent of its
compensation earned prior to such removal.
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Agreed to as of the 14 day of March, 2000.
DM MORTGAGE INVESTORS, LLC,
a Nevada limited liability company
By: Capsource, Inc. (Manager)
Attest: a Nevada corporation
By: /s/ Lance Bradford By: /s/ Michael V. Shustek
---------------------- ----------------------
Name: Lance Bradford Michael V. Shustek
Title: Secretary Director
Attest: DM FINANCIAL SERVICES, INC.,
a Nevada corporation
(Dealer Manager)
By: /s/ Paul R. Connaghan
----------------------
Name: Paul R. Connaghan By: /s/ Michael V. Shustek
Title: Principal ----------------------
Michael V. Shustek
Prsident
The terms and conditions contained above are hereby accepted and agreed to by:
BANKWEST OF NEVADA,
Attest: a Nevada State Bank
By: /s/ M. Paul Workman By: /s/ Mark Larson
---------------------- ----------------------
Name: M. Paul Workman Mark Larson
Title: Senior Vice President Senior Vice President
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Schedule A to
Bank Escrow Agreement
Fees subject to BankWest of Nevada's Master Disclosure Statement dated 3-1-2000.
Fees may be waived if earnings credits exceed monthly expenses on the account.
This is determined by Account Analysis.
In addition, in the event that BankWest of Nevada is directed to refund a
subscriber's funds, a fee of $25 per subscriber will be charged.
<PAGE>
Exhibit 23.2
[LETTERHEAD OF WENDEL, ROSEN, BLACK & DEAN, LLP]
March 16, 2000
DM Mortgage Investors, LLC
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
Re: Registration on Form S-11
Ladies and Gentlemen:
With regard to the Registration Statement on Form S-11 to be filed with the
Securities and Exchange Commission on or about March 17, 2000, by DM Mortgage
Investors, LLC, a Nevada limited liability company, we hereby consent to the
reference to our firm under the caption "Legal Matters" in the Prospectus which
is part of said Registration Statement.
Very truly yours
/s/ WENDEL, ROSEN, BLACK & DEAN, LLP
WENDEL, ROSEN, BLACK & DEAN, LLP
<PAGE>
Exhibit 23.3
CONSENT OF GRANT THORNTON LLP
We have issued our report dated January 10, 2000, accompanying the financial
statements of DM Mortgage Investors, LLC contained in the Registration Statement
and Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts."
/S/ GRANT THORNTON LLP
Reno, Nevada
March 14, 2000
<PAGE>
Exhibit 23.4
We have issued our report dated February 11, 2000, accompanying the financial
statements of Sunderland Corporation and Subsidiaries, contained in DM Mortgage
Investors, LLC's Registration Statement and Prospectus. We consent to the use of
the aforementioned report in DM Mortgage Investors, LLC's Registration Statement
and Prospectus, and to the use of our name as it appears under the caption
"Experts."
/S/ GRANT THORNTON LLP
Reno, Nevada
March 14, 2000
<PAGE>
Exhibit 24
POWER OF ATTORNEY
Each person or entity whose name is signed hereto, hereby constitutes
and appoints Michael V. Shustek with full power of substitution in the premises,
his or its true and lawful attorney-in-fact and agent, and in his or its name,
place and stead, to do any and all acts and things and to execute any and all
instruments and documents which said attorney-in-fact and agent may deem
necessary or advisable to enable DM Mortgage Investors, LLC a Nevada limited
liability company, to comply with the Securities Act of 1933, as amended, and
any rules, regulations or requirements of the Securities and Exchange Commission
in respect thereof, in connection with the registration under said Act pursuant
to a Registration Statement on Form S-11 (the "Registration Statement"), of
100,000,000 Units of limited liability company interests, including specifically
but without limiting the generality of the foregoing, power and authority to
sign the name of DM Mortgage Investors, LLC, a Nevada limited liability company,
and the name of the Manager thereof, in the capacity indicated below, to the
Registration Statement on Form S-11, and to any instruments or documents filed
as a part of or in connection therewith, and each of the undersigned hereby
ratifies and confirms all of the aforesaid that said attorney-in-fact and agent
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this power of Attorney has been executed below by the following in the
capacities indicated, as of the 15th day of March, 2000. This Power of Attorney
may be executed in any number of counterparts.
CAPSOURCE, INC.,
Manager
By: /s/ Stephen Byrne
--------------------------
STEPHEN BYRNE
President
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