<PAGE>
As filed with the Securities and Exchange Commission on April 14, 2000
Registration No. 333- 32800
- --------------------------------------------------------------------------------
Securities And Exchange Commission
Washington, D.C. 20549
-----------------
AMENDMENT NO. 1
Form S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
DM MORTGAGE INVESTORS, LLC
(Exact name of registrant as specified in governing instruments)
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
(Address of principal executive offices)
-----------------
Michael V. Shustek
Director
CAPSOURCE, INC.
2901 El Camino Avenue, Suite 206
Las 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. [ ]
<PAGE>
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
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> <C>
1. Forepart of Registration Statement and Outside Outside Front Cover Page of Prospectus
Front Cover Page
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages
Prospectus
3. Summary Information, Risk Factors and Ratio of Summary; Risk Factors
Earnings to Fixed Charges
4. Determination of Offering Price *
5. Dilution Risk Factors; Summary of the Operating Agreement, Rights
of Members and Descriptions of Units
6. Selling Security Holders *
7. Plan of Distribution Plan of Distribution
8. Use of Proceeds Use of Proceeds; Plan of Distribution
9. 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; Investment
Objectives and Policies; Management; Summary of Operating
Agreement, Rights of Members and Description of Units
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
12. Policy with Respect to Certain Activities Conflicts of Interest; Compensation of Capsource and its
Affiliates; Investment Objectives and Policies; Summary
of Operating Agreement, Rights of Members and
Description of Units; Reports to Members
13. Investment Policies of Registrant Investment Objectives and Policies; How We Protect Our
Rights as a Lender; Summary of Operating Agreement,
Rights of Members and Description of Units
14. Description of Real Estate Investment Objectives and Policies
15. Operating Date Summary; Summary of the Operating Agreement, Rights of
Members and Description of Units
16. Tax Treatment of Registrant and Its Security Summary; Risk Factors; Federal Income Tax Consequences
Holders
17. Market Price of and Dividends on the Registrant's Summary of the Operating Agreement, Rights of Members and
Common Equity and Related Stockholder Matters Description of Units
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 Summary; Risk Factors; Management; Conflicts of Interest
and Management
21. Directors and Executive Officers Summary; Management; Conflicts of Interest
22. Executive Compensation Management; Compensation of Capsource and its Affiliates;
Conflicts of Interest
23. Certain Relationships and Related Transactions Management; Conflicts of Interest
24. Selection, Management and Custody of Registrant's Summary; Risk Factors; Management; Investment Objectives
Investments and Policies
25. Policies with Respect to Certain Transactions Risk Factors; Conflicts of Interest; Investment
Objectives and Policies; 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
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
27. Financial Statements and Information Financial Statements and Notes
28. Interests of Named Experts and Counsel Legal Matters; Experts
29. Disclosure of Commission Position on Fiduciary Responsibility; Undertakings
Indemnification for Securities Act Liabilities
30. Quantitative and Qualitative Disclosures About *
Market Risk
</TABLE>
- --------------
* Not Applicable
<PAGE>
SUBJECT TO COMPLETION
DATED APRIL , 2000
PRELIMINARY PROSPECTUS
DM MORTGAGE INVESTORS, LLC
100,000,000
Units of Limited Liability Company Interests
-----------------
DM Mortgage Investors, LLC is a Nevada limited liability company. We
invest in mortgage loans secured by commercial and residential real property,
primarily in Nevada, Arizona and California (including properties under
construction). The loans will be selected for us by our manager, Capsource, Inc.
We are offering and selling to the public up to 100,000,000 Units for
$1.00 per Unit, which including Units to be issued under our distribution
reinvestment plan, at a purchase price of $1.00 per Unit.
You must purchase at least 2,000 Units for $2,000.
The most significant risks to your investment include:
o There will be no public trading market for your Units. o Units must be
held for one year before redemption.
o Units may decrease in value to under $l.00 and the value of your Units
may be diluted by later investors.
o We rely on Capsource, Inc., our manager, to manage our business and
select our loans.
o Substantial fees will be paid to Capsource.
o Loans will not be insured or guaranteed and we will invest in loans to
borrowers who will not be required to meet the credit standards of
conventional mortgage lenders.
o No mortgages have been identified for investment. o Capsource and its
affiliates face various conflicts of interest.
You should see the complete discussion of the risk factors beginning on page 7.
The Offering:
The Units will be offered on a best efforts basis to investors at $1.00
per Unit. We will pay selling commissions to securities brokerage firms of up to
3.5% of the proceeds of this offering, and reimburse them for accountable
expenses of up to 0.5%, pay a dealer-manager fee of up to 1.0%, and reimburse
the dealer-manager for its expenses of up to 0.5%.
The dealer-manager, DM Financial Services, Inc., is an affiliate of
Capsource.
We anticipate that we will invest about 86% of the offering proceeds in
mortgage loans secured by real estate properties, and the balance will be used
to pay organization expenses, sales commissions, fees and expenses. Initially,
your money will be placed in an escrow account with BankWest of Nevada until the
earlier of our sale of the minimum 1,500,000 Units or December 31, 2000. If we
fail to sell the 1,500,000 Units on or before December 31, 2000, we will return
your money with any interest earned. If we sell the minimum on or before
December 31, 2000, we will continue to sell up to 100,000,000 Units.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the Units or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The use of forecasts in this offering is prohibited. No one is permitted
to make any oral or written predictions about the cash benefits or tax
consequences you will receive from your investment.
April __, 2000
<PAGE>
NOTICE TO CALIFORNIA RESIDENTS
All certificates representing Units resulting from any of
offers or sales of Units will bear the following legend restricting transfer:
It is unlawful to consummate a sale or transfer of this
security, or any interest therein, or to receive any
consideration therefor, without the prior written consent of
the Commissioner of 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
will be furnished to each California investor by Capsource.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY...........................................................................................................1
RISK FACTORS......................................................................................................7
Investment Risks.........................................................................................7
Conflicts of Interest Risks..............................................................................8
Risks of Lack of Control by Members......................................................................9
Dealer-Manager Risks....................................................................................10
Federal Income Tax Risks................................................................................10
Retirement Plan Risks...................................................................................11
INVESTMENT OBJECTIVES AND POLICIES...............................................................................12
Acquisition and Investment Policies.....................................................................12
Mortgage Loans to Affiliates............................................................................15
Purchase of Loans from Capsource and its Affiliates.....................................................15
Commitment of Offering Proceeds.........................................................................16
Types of Loans We Intend to Invest In...................................................................16
Prepayment Penalties....................................................................................17
Balloon Payment.........................................................................................17
Borrowing...............................................................................................17
Repayment of Mortgages on Sales of Properties...........................................................17
No Trust or Investment Company Activities...............................................................18
Various Other Policies and Procedures...................................................................18
Competition and General Economic Conditions.............................................................18
INVESTOR SUITABILITY STANDARDS...................................................................................19
MANAGEMENT.......................................................................................................21
Our Management..........................................................................................21
Capsource...............................................................................................21
Evaluation and Acquisition by Capsource.................................................................22
Management of Loan Portfolio............................................................................22
Mortgage Loans..........................................................................................23
Prior Experience........................................................................................23
Directors and Executive Officers of Capsource and Sunderland............................................24
Affiliated Companies....................................................................................25
USE OF PROCEEDS..................................................................................................27
COMPENSATION OF CAPSOURCE AND ITS AFFILIATES.....................................................................29
CONFLICTS OF INTEREST............................................................................................31
FIDUCIARY RESPONSIBILITY.........................................................................................34
Exculpation and Defenses................................................................................34
Indemnification.........................................................................................34
SUMMARY OF THE OPERATING AGREEMENT, RIGHTS OF MEMBERS
AND DESCRIPTION OF UNITS......................................................................................36
Our Manager.............................................................................................36
Your Status.............................................................................................36
Limited Liability Of Members............................................................................36
Term of DM LLC..........................................................................................36
Meetings ...............................................................................................37
Voting and Other Rights of Members......................................................................37
Members' Return on Investment...........................................................................37
Capital Accounts........................................................................................37
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Capital Contribution Of Capsource........................................................................38
Unit Repurchases and Deemed Distributions...............................................................38
Write-Down of Investments...............................................................................38
Valuation of Units......................................................................................38
Distributions...........................................................................................38
Distribution Reinvestment Plan..........................................................................39
Assignment and Transfer of Units........................................................................40
Repurchase of Units, Withdrawal from DM LLC.............................................................40
Special Power of Attorney...............................................................................41
FEDERAL INCOME TAX CONSEQUENCES..................................................................................42
Classification as a Partnership.........................................................................43
The Company Will Not Be Classified As A Publicly Traded Partnership.....................................43
General Principles of Partnership Taxation..............................................................46
Determination of Basis in Units.........................................................................46
Allocations of Profits and Losses.......................................................................46
Limitations on the Deduction of Losses..................................................................47
Computation of Gain or Loss on Sale or Redemption of Units..............................................48
Character of Gain or Loss...............................................................................48
Tax Rates on a Partner's Share of Ordinary Income from the Partnership..................................48
Depreciation............................................................................................48
Investment Interest.....................................................................................48
Tax Treatment of Tax-Exempt Entities....................................................................49
Partnership Tax Returns and Audits......................................................................50
Capsource is Tax Matters Partner........................................................................50
Original Issue Discount Rules...........................................................................51
Market Discount.........................................................................................51
No Section 754 Election - Impact on Subsequent Purchasers...............................................51
Taxation of Mortgage Loan Interest......................................................................51
Treatment of Compensation of Capsource..................................................................51
Possible Legislative Tax Changes........................................................................52
State and Local Taxes...................................................................................53
ERISA Considerations....................................................................................53
Annual Valuation........................................................................................53
Plan Assets Generally...................................................................................53
HOW WE PROTECT OUR RIGHTS AS A LENDER............................................................................55
Mortgages and Deeds of Trust Generally..................................................................55
Foreclosure.............................................................................................56
Environmental Risks.....................................................................................57
Junior Mortgage and Deeds of Trust; Rights of Senior Mortgages or Beneficiaries.........................58
Statutory Rights of Redemption..........................................................................59
Anti-Deficiency Legislation.............................................................................59
Bankruptcy Laws.........................................................................................60
Enforceability of Certain Provisions....................................................................60
REPORTS TO MEMBERS...............................................................................................63
PLAN OF DISTRIBUTION.............................................................................................64
LEGAL MATTERS....................................................................................................65
EXPERTS..........................................................................................................65
AVAILABLE INFORMATION............................................................................................65
</TABLE>
<PAGE>
SUMMARY
This Summary highlights some of the information from this prospectus.
It 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 7, and the
Financial Statements and Notes, beginning at page F-1.
DM Mortgage DM Mortgage Investors, LLC was organized in
Investors, LLC December 1999, as a Nevada limited liability
company. Under our Operating Agreement our
existence terminates on December 31, 2019,
unless a majority-in-interest of the members
extends our duration. In this prospectus we
refer to DM Mortgage Investors, LLC as "DM
LLC," "we," "us" or "our." Our offices are at
2901 El Camino Avenue, Suite 206, Las Vegas,
Nevada 89102, and our telephone number is (702)
227-0965.
Our Manager Our manager is Capsource, Inc., a Nevada
corporation, which was incorporated in 1997.
Its executive offices are at 2901 El Camino
Avenue, Suite 206, Las Vegas, Nevada 89102, and
its telephone number is (702) 227-0965.
Capsource is a mortgage broker licensed in the
State of Nevada.
Since 1997, Capsource and its predecessors have
acted as mortgage brokers for the investment by
about 4,500 investors in about 350 mortgage
notes totaling about $445 million. Capsource
also services the mortgage notes it sells.
Capsource currently services over 120 loans
totaling approximately $248 million. These
loans are secured by mortgages and deeds of
trust on properties primarily located in
Nevada, California and Arizona.
Investment Objectives We will invest in mortgage loans secured by
and Policies commercial and residential real property,
primarily in Nevada, Arizona and California
(including properties under construction). The
loans will be selected for us by Capsource from
among loans originated by Capsource or third
party mortgage brokers. We believe our loans
will be attractive to borrowers because of the
expediency of Capsource's loan approval process
(typically 10 to 20 days).
Our principal investment objectives are to:
o Produce revenues from the interest income on
our mortgage loans; o Provide monthly cash
distributions to you from the net income earned
on our mortgage loans;
o Preserve and return to you your capital
contributions; and o Reinvest payments of
principal and proceeds of prepayments, sales
and insurance, net of expenses.
We cannot assure you that we will attain these
objectives or that your capital will not
decrease. See "Investment Objectives and
Policies" and "Risk Factors."
Summary Risk Factors The following are some of the significant
risks concerning your investment:
o There is no public trading market for the
Units, and we do not expect one to ever
develop. Additionally, the transfer and
redemption of your Units is restricted.
Consequently, you will have a difficult
time trying to obtain cash for your Units.
o Units must be held for one year before
redemption.
o Units may decrease in value to under $l.00
per Unit and the value of your Units may
be diluted by later investors.
o We rely on Capsource, our manager, for the
day-to-day management of our
1
<PAGE>
business and the selection of our
mortgages.
o Capsource and its affiliates will receive
substantial fees from the proceeds of this
offering and our operations.
o We will invest in loans to borrowers who
will not be required to satisfy the credit
standards for conventional mortgage
lenders and our loans will not be insured
or guaranteed by a federally owned or
guaranteed mortgage agency.
o Capsource has not yet identified the
mortgage loans that we will invest in with
the proceeds of this offering.
o If we do not remain qualified as a
partnership for federal income tax
purposes, we would be subject to the
payment of tax on our income at corporate
rates, which would reduce the amount of
funds available for payment of
distributions to our members.
o The number of loans that we invest in from
the proceeds of this offering will be
reduced to the extent that we sell less
than all of the 100,000,000 Units offered,
which may limit the diversity of our
portfolio of mortgage loans.
o Units we issue in the future may dilute
your interest in DM LLC.
o Real estate investments are subject to
cyclical ecomonic trends which are out of
our control.
o You will not have an opportunity to
evaluate any of the properties that will
secure the loans in our portfolio before
investing.
Before you invest in DM LLC, you should see the
complete discussion of "Risk Factors" beginning
on page 7 of this prospectus.
Estimated Use of We anticipate that we will invest about 86% of
in Proceeds of Offering the proceeds of this offering mortgage loans.
We will use the remainder of offering proceeds
to pay organization expenses, commissions, fees
and expenses relating to the costs of this
offering and the selection, acquisition and
management of mortgage loans.
Conflicts of Interest Capsource will face various conflicts of
interest resulting from its activities,
including the following:
o We will pay substantial fees to Capsource
and its affiliates for transactions
involving the sale of Units and the
selection, purchase, management and sale
of loan mortgages, as well as for other
services, all of which have not been set
by arms-length negotiations.
o Capsource will be receiving fees from
borrowers that would otherwise increase
our returns.
o Capsource and its affiliates must allocate
their time between our activities and
other activities.
2
<PAGE>
<TABLE>
<S> <C>
Sunderland Corporation, Capsource and Their Affiliates
The following chart shows the ownership structure of the various persons and entities
that are affiliated with Sunderland and Capsource.
Michael V. Shustek
<S> <C> <C>
Sunderland Corporation Del Mar Mortgage, Inc.
Officers and Directors include: (Predecessor to the
business now operated by
Michael V. Shustek, Chairman of the Board, CEO, and Capsource)
majority shareholder Owned 100% by
Michael V. Shustek
Stephen Byrne, President
Lance Bradford, CFO, Secretary
<S> <C> <C>
DM Financial Services Capsource
(Dealer Manager) (Manager of DM LLC)
Owned 100% by Sunderland Owned 100% by Sunderland
</TABLE>
Compensation to Capsource and its affiliates will receive fees
Capsource and and reimbursement of expenses for performing
its Affiliates services in this offering and the investment
and management of our assets. The sales
commissions and expenses of this offering and
the brokerage, acquisition, selection and
origination fees and expenses for our loans, as
described below, shall not exceed 14% of the
proceeds of this offering. Any part of the fees
and expenses over 14% will be paid by
Sunderland. The most significant items of
compensation are as follows:
<TABLE>
<CAPTION>
Type of Compensation Form of Compensation
-------------------- --------------------
Offering Stage:
---------------
<S> <C> <C>
Paid by Fund
------------
Sales Commission (non-affiliates) 3.5% of gross offering proceeds
Expense Reimbursement (non-affiliates) 0.5% of gross offering proceeds
Dealer-Manager Fee 1.0% of gross offering proceeds
Expense Reimbursement 0.5% of gross offering proceeds
(latter two items paid to DM Financial
Services)
<CAPTION>
Organization Stage:
-------------------
<S> <C> <C>
Promotional Interest 0.5% ownership; no distributions
received until after all members
receive their initial capital
contributions
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Operational Stage:
------------------
<S> <C> <C>
Paid by Borrower
----------------
Loan Brokerage Fee for Loan Selection and 2%-6% of each loan, competitive fee
Origination based on local market conditions
Loan Evaluation and Processing Fees 2%-5% of each loan, competitive fee
based on local market conditions
Servicing Fee for Administering Loans 0.25% of outstanding principal
Escrow/ Reconveyance/ Loan Extension and 2%-5% of outstanding principal, as
Permitting Loan Assumption permitted by local law and local
market conditions
Late Fees/Prepayment Fees As permitted by local law and local
market conditions
Paid by Us
----------
Loan Management Fee Initially, 0.75% of the offering
proceeds used for mortgage loans
(including working capital reserves).
Beginning with the third year, 0.75%
of the fair market value of our assets
(including working capital), less any
of our indebtedness. For funds not
invested in mortgages, the fee is 0.5%.
Reimbursement of Our Operating Expenses Lesser of cost or third party rate
Real Estate Brokerage Fees on Resales of Up to 3% of proceeds to Capsource
Foreclosed Property where it substantially contributed to
sale; up to 6% for all persons
involved.
</TABLE>
Distribution Reinvestment Plan You may participate in our distribution
reinvestment plan under which you may have the
distributions you receive reinvested in DM LLC.
If you participate, you will be taxed on your
share of our taxable income even though you
will not receive any cash distributions. As a
result, you may have a tax liability with no
cash distributions to pay that liability. We
may terminate the distribution reinvestment
plan in our discretion at any time. (See
"Summary of Operating Agreement, Rights of
Members and Description of Units - Distribution
Reinvestment Plan.")
ERISA Considerations The section of this prospectus entitled "ERISA
Considerations" describes the effect the
purchase of Units will have on individual
retirement accounts (IRAs) and retirement plans
subject to the Employee Retirement Income
Security Act of 1974, as amended (ERISA), and
the Internal Code of 1986, as amended (the
"Internal Revenue Code"). ERISA is a federal
law that regulates the operation of certain
tax-advantaged retirement plans. Any retirement
plan trustee or individual considering
purchasing shares for a retirement plan or an
IRA should read this section of the prospectus
very carefully.
4
<PAGE>
Units Your investment will be recorded on our books
only. We will not issue Unit certificates. If
you wish to redeem your Units, you must send an
executed redemption form to us. We will provide
the required form to you upon request.
Operating Agreement Your relationship with DM LLC and with
Capsource will be governed by the Operating
Agreement. Some of the significant features of
the Operating Agreement are as follows:
Allocations of our income, gains, losses and
distributions will be made to you in the same
proportion that your capital account bears to
all of the capital accounts of the members of
DM LLC. The number of Units you own will be of
no significance in this determination.
Members owning a majority by amount of all of
the members' capital accounts (the
"majority-in-interest") may vote to:
o amend the Operating Agreement, subject to
certain limitations;
o cause us to merge with or into another
company;
o dissolve DM LLC; o sell all or a majority of
our assets; or
o remove and replace Capsource.
If such a vote occurs, you will be bound by the
majority vote even if you did not vote with the
majority.
The Operating Agreement is discussed in more
detail in the "Summary of Operating Agreement,
Rights of Members and Description of Units"
section of this prospectus on page 35. 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.
Tax Considerations In the opinion of our tax counsel, we will be
treated for federal income tax purposes as a
partnership. You should consult your own tax
advisor for advice on personal tax consequences
that might be associated with investing in the
Units. See "Federal Income Tax Risks,"
beginning at page 10, and "Federal Income Tax
Consequences," beginning at page 41 of this
prospectus.
The Offering We are offering for sale 100,000,000 Units of
limited liability company interests at $1.00
per Unit, which includes Units issued under our
distribution reinvestment plan. The minimum
initial purchase is 2,000 Units for $2,000,
except to the extent that state suitability
standards dictate otherwise.
Terms of the Offering We will begin selling Units in this offering on
a best efforts basis upon the effective date of
this prospectus. Your money will be initially
placed in an escrow account with BankWest of
Nevada until the earlier of our sale of the
minimum 1,500,000 Units or December 31, 2000.
If we fail to sell the 1,500,000 Units on or
before December 31, 2000, we will return your
money with any interest earned. If we do sell
the minimum 1,500,000 Units on or before
December 31, 2000, we will continue to sell up
to 100,000,000 Units. We may pay selling
commissions to securities brokerage firms of up
to 3.5% of the offering proceeds, and reimburse
them for accountable expenses of up to 0.5%,
pay a dealer-manager fee of up to 1.0%, and
reimburse the dealer-manager for its expenses
up to 0.5%, of the offering proceeds.
5
<PAGE>
Suitability Generally, to invest in Units, you must have
either:
o a net worth (exclusive of home, home
furnishings and automobiles) of at least
$45,000 and a minimum annual gross income
of at least $45,000; or
o a minimum net worth of $150,000.
Nevertheless, some states have enacted
different suitability standards which will
govern members in those states. These are
appended to the Subscription Agreement, which
is Exhibit B. See also "Investor Suitability
Standards."
To Purchase Units To purchase Units you must complete and sign
the Subscription Agreement and Power of
Attorney, which is Exhibit B at page B-l of
this prospectus, and deliver it to the
securities brokerage firm that has solicited
your investment, together with the payment for
the Units specified in the Subscription
Agreement. If we accept your Subscription
Agreement, you will then be an owner of the
Units and a member of DM LLC. We may accept or
reject your subscription in whole or in part.
If we do not accept your subscription, your
purchase payment will be returned to you
promptly without interest.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risks and other information
in this prospectus before purchasing Units.
1. Investment Risks
Your Units Lack Liquidity
There will be no public trading market for your Units, and you can not
freely sell or transfer your Units or use them as collateral for a loan. Our
operating agreement restricts transfer of Units so that we may avoid being
classified as a "publicly traded partnership," under Section 7704 of the
Internal Revenue Code. Because classification as a publicly-traded partnership
would significantly decrease the value of the Units of all our members,
Capsource must consent to any assignment of your Units, and its consent will be
withheld to the maximum extent needed to prohibit transfers that could cause us
to be classified as a "publicly traded partnership." Further, the resale of the
Units may be restricted by state securities laws. Consequently, you may not be
able to obtain cash for your Units timely and the Units should be purchased as a
long-term investment only.
Limitations on Redemptions
Your ability to have your shares redeemed by us is limited even though
our share redemption program provides you with the opportunity to redeem your
Units after you have held them for one year. See "Summary of Operating
Agreement, Rights of Members and Description of Units" for a description of the
restrictions. This restriction does not apply to Units purchased through our
distribution reinvestment plan. Some of the other limitations on our
repurchasing your Units are the following:
o You must give a written request to withdraw at least 60 days before
the withdrawal;
o Redemption payments only return all or the requested part of your
capital account and are not affected by the value of our underlying
assets, except for any payment made upon final liquidation;
o Payments are made only to the extent we have available cash from
proceeds and capital contributions;
o There is no reserve fund for repurchases;
o You may withdraw a maximum of $100,000 during any calendar year;
o The total amount withdrawn by all members during any calendar year
cannot exceed 10% of the amount of capital accounts of all the
members;
o Redemption payments are only made by us on the last day of any
month.
If we do not sell enough Units in this offering or if principal
payments on existing loans decrease, your ability to have your Units redeemed
may be adversely affected, especially if the amount of requested withdrawals
should increase substantially. To help permit redemptions, we will not refinance
or invest in new loans using payments of loan principal by borrowers or new
invested capital of members, unless we have sufficient funds to cover requested
withdrawals.
Risk of Default.
We are in the business of investing in loans and, as such, we risk
defaults by borrowers. Our loans will not be insured or guaranteed by a
federally owned or guaranteed mortgage agency. We will likely invest in
construction mortgage loans, which are generally riskier than loans secured by
income producing properties. We may invest in loans secured by leasehold
interests, which are riskier than loans secured by actual real property, or in
second mortgage loans or wraparound mortgage loans, which are riskier than first
mortgage loans. We may also invest in commercial property loans that have
substantial remaining principal balances, "balloon payments," which are riskier
than self-amortizing loans because the borrower's repayment depends on its
ability to refinance the loan or sell the property profitably. Sometimes we may
invest in large loans, which are risky because they diminish our loan
diversification. Last, we will invest in loans to borrowers who will not be
required to meet the credit standards of
7
<PAGE>
conventional mortgage lenders, which is riskier than investing in loans made to
borrowers who are required to meet those credit standards. See "Investment
Objectives and Policies - Acquisition and Investment Policy."
We must rely on Capsource to manage our operations and select new
loans for investment
Our ability to achieve our investment objectives and to pay
distributions to you depends upon Capsource's performance in selecting loans for
us to invest in and determining the financing arrangements for borrowers. You
will have no opportunity to evaluate the terms of mortgages or other economic or
financial data concerning our loans. You must rely entirely on the judgment of
Capsource in investing the proceeds of this offering. See "Investment Objectives
and Policies" and "Management."
You may face a delay before distributions begin
Neither we nor Capsource have identified any specific loans that we
will invest in. Consequently, there may be a substantial period of time before
Capsource invests the proceeds of this offering, and therefore you may
experience a delay in receiving a return on your investment.
We depend on key personnel of Capsource
We do not have any officers or employees. Our success depends upon the
continued contributions of certain key personnel of Capsource, including Michael
V. Shustek, Stephen J. Byrne and Lance Bradford, each of whom would be difficult
to replace. If any of Capsource's key employees were to cease employment, our
operating results could suffer. Our future success also depends in large part,
upon Capsource's ability to hire and retain highly skilled managerial,
operational and marketing personnel. Competition for these people is intense,
and we cannot assure you that Capsource will be successful in attracting and
retaining skilled personnel.
Competition for mortgage loans may increase costs and reduce returns
The mortgage lending business is highly competitive. We compete with
banks, insurance companies, savings banks, thrifts, mortgage bankers, pension
funds, real estate investment trusts, and other lenders with objectives similar
to ours. Some of these entities have more financial resources and experience in
the mortgage lending business than us or Capsource. Competition for loans could
increase other costs and reduce the yields our loans produce, thereby reducing
our distributions to you.
2. Conflicts of Interest Risks
Capsource will face conflicts of interest concerning the allocation of
its personnel's time.
Capsource and its affiliates may sponsor other real estate programs
having investment objectives and legal and financial obligations similar to
ours. Because Capsource and its affiliates have interests in other real estate
programs and also engage in other business activities, they may have conflicts
of interest in allocating their time and resources between our business and
those other activities. During times of intense activity in other programs and
ventures, Capsource may devote less time and resources to our business than is
necessary or appropriate. See "Conflicts of Interest."
Capsource will face conflicts of interest relating to other investments
in mortgage loans.
We may be investing in mortgage loans when one or more of the other
Capsource programs or entities are investing in other mortgage loans. There is a
risk that Capsource may select for us a mortgage loan investment that provides
lower returns than a mortgage loan investment purchased by another Capsource
program or entity. See "Conflicts of Interest."
8
<PAGE>
Joint ventures with affiliates and third parties
We may also participate in loans with other lenders (including other
affiliates of Capsource) by providing funds for, or purchasing an interest in a
loan. Although we intend to only participate in loans with other publicly
registered entities, we may invest with other entities in the future. In joint
ventures with related parties, there is a risk that neither co-venturer may
control the venture, which could result in an impasse on joint venture
decisions. There is also the risk that although we may have the right to buy an
asset from our co-venturer or the joint venture itself, we may not have the
resources to do so in the future. We will only invest in joint ventures with
unrelated parties if we have a controlling interest in the joint venture.
3. Risks of Lack of Control by Members
Right to vote is restricted and you are bound by majority vote
You cannot exercise control over our affairs; that is entirely in the
hands of Capsource. You may vote only in a limited number of specific instances,
in which case a majority-in-interest of the members can take action and bind all
of the members. These situations include votes to:
o dissolve DM LLC;
o change the nature of our business;
o amend the Operating Agreement;
o remove and replace Capsource; or
o approve a merger with or into another company;
o approve a sale of all or a majority of our assets.
Your capital account in DM LLC will result in the value of your Units
fluctuating
When you purchase Units, Capsource will establish for you an individual
capital account on our books, which will initially be the amount of your first
capital contribution for Units. Your capital account will then be allocated your
percentage of our income, gains, losses and distributions. Your percentage will
be the amount of your capital account divided by the amount all of the capital
accounts of our members as of the date of the allocation, not your proportionate
share of the Units held by all members. Your capital account is adjusted by
being credited with your percentage of our income, and gains, and debited with
your percentage of our losses and distributions to you.
Your proportionate share of our distributions and the value of your
proportionate share of our underlying assets at any point in time may be less or
more than $1.00 per Unit, depending on when the Unit was purchased. For example,
if the fair market value of our assets at the time of a capital contribution
(including under our distribution reinvestment plan) is less than its cost on
our books, then the value of your Units, (as your proportionate share of the
fair market value of our underlying assets) immediately after a capital
contribution to DM LLC may be less than one dollar.
Your interest in DM LLC may be diluted as we sell additional Units
Capital accounts generally are not adjusted for unrealized appreciation
or (except for write-downs) depreciation of our underlying assets. As a result,
your capital account may not reflect your allocable portion of the fair market
value of our underling assets especially immediately after a capital
contribution (and sale of Units). For example, if the fair market value of the
sale of assets at the time of a capital contribution (including under our
dividend reinvestment plan) is greater than its cost on our books, then, because
there are no interim reevaluations of the capital accounts (except for
write-downs), your right to a later allocation of the unrealized gains will be
shared
9
<PAGE>
with new members (or members making reinvestments). Thus, the underlying
value of your Units as a percentage of the fair market value of our assets, will
be diluted by sales of Units after you purchased your Units.
4. Dealer-Manager Risks
Dealer-Manager is Newly Formed
DM Financial Services, the dealer-manager in this offering, is a newly
formed securities brokerage firm that has not previously participated in a
public offering of securities. As a result, DM Financial Services has no history
of selling publicly offered securities itself or in recruiting selected dealers
to assist in the sale of publicly offered securities, which may make it more
difficult for it to sell our Units.
Dealer-Manager is an Affiliate of Capsource
DM Financial Services, Inc., the dealer-manager of this offering, is an
affiliate of Capsource. Consequently, DM Financial Services may have a conflict
of interest in performing its obligations to conduct a "due diligence"
investigation of the statements made in this prospectus and may not conduct the
investigation with the same degree of care as a non-related third party.
5. Federal Income Tax Risks
Risk of Taxation as a Corporation
If we fail to qualify as a partnership for any taxable year, we would
then be subject to federal income tax on any taxable income in that taxable year
at regular corporate rates. You could not then take into account your
distributive share of our deductions or credits, and would be subject to tax on
your share of our 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 your Units. If we were taxed as a corporation, your cash flow, the
return on your investment and the value of your Units will be significantly
reduced. See "Federal Income Tax Consequences - General Principles of
Partnership Taxation," at page 45 and "-Tax Rates on a Partner's Share of
Ordinary Income from the Partnership," at page 47.
Other Tax Risks
You should consider all of the tax risks of an investment in DM LLC,
including:
o the possibility that we might not be considered to be engaged in a
trade or business, and that income or loss of DM LLC might be
considered portfolio income or loss and your share of our expenses
would be "miscellaneous itemized deductions," deductible only to
the extent all your miscellaneous itemized deductions exceed 2% of
your adjusted gross income (subject to additional limitations for
high-income taxpayers);
o the possibility that interest incurred to carry Units may not be
deductible under the "investment interest" limitation of Section
163(d) of the Internal Revenue Code;
o the possibility that an audit of DM LLC may result in the
disallowance of certain deductions, and an audit of the income tax
returns of our members, which could result in adjustments to your
tax return for items of income, deductions or credits, and the
imposition of penalties and interest for the adjustments and
additional expenses for filing amended income tax returns;
o if we invest in or purchase any loan in which we participate in the
appreciation of the mortgaged property or in the cash flow from its
operations, the IRS may attempt to recharacterize the entire loan
as an equity interest in the underlying property;
10
<PAGE>
o the possibility that state or local income tax treatment may not be
similar to federal income tax treatment; and
o for tax-exempt entities investing in DM LLC, the possibility that
all or a portion of the income from DM LLC may be deemed "unrelated
trade or business income" subject to tax.
6. Retirement Plan Risks
There are special considerations that apply to pension or profit
sharing trusts or IRAs investing in shares.
If you are investing the assets of a pension, profit sharing, 401(k),
Keogh or other qualified retirement plan or the assets of an IRA in DM LLC, you
should satisfy yourself that:
o your investment is consistent with your fiduciary obligations under
ERISA and the Internal Revenue Code;
o your investment is made in accordance with the documents and
instruments governing your plan or IRA, including your plan's
investment policy;
o your investment satisfies the prudence and diversification
requirements of Sections 404(a)(1)(B) and 404(A)(1)(C) of ERISA;
o your investment will not impair the liquidity of the plan;
o your investment will not produce "unrelated business taxable
income" for the plan or IRA;
o you will be able to value the assets of the plan annually in
accordance with ERISA requirements; and
o your investment will not constitute a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Internal Revenue Code.
For a more complete discussion of the above issues and other risks
associated with an investment in shares by retirement plans, please see the
"Federal Income Tax Consequences - ERISA Considerations" section of this
prospectus on page 52.
11
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
We intend to invest in mortgage loans secured by commercial and
residential real property, primarily in Nevada, Arizona and California
(including properties under construction). The loans we invest in will be
selected for us by Capsource from among loans originated by Capsource or third
party mortgage brokers. We believe our loans will be attractive to borrowers
because of the expediency of Capsource's loan approval process (typically 10 to
20 days). Capsource will negotiate and purchase all loans, on a loan-by-loan
basis, after which we will acquire the loan.
Our principal investment objectives are to:
o Produce revenues from the interest income on our mortgage loans;
o Provide monthly cash distributions to you from the net income
earned on our mortgage loans;
o Preserve and return your capital contributions; and
o Reinvest payments of principal and proceeds of prepayments, sales
and insurance proceeds, net of expenses.
We cannot assure you that we will attain these objectives or that your
capital will not decrease. We may not change our investment objectives, except
upon the approval of members holding a majority-in-interest of our capital
accounts. Capsource has no authority to do anything that would impair our
ability to carry on our ordinary business as a mortgage investor.
Decisions relating to all loans and secured property will be made by
Capsource. You should review the "Management" section of this prospectus for a
description of the background and experience of Capsource's directors and
executive officers.
See "How We Protect Our Rights as a Lender" for a discussion of
mortgages, deeds of trust, foreclosures and certain risks related to an
investment in mortgages.
Capsource may modify these investment objectives without the vote of
members but has no authority to do anything that would impair our ability to
carry on our ordinary business as a mortgage investor.
Acquisition and Investment Policies
We will seek to invest substantially all of the offering proceeds after
fees and expenses in mortgage loans. We anticipate that we will invest about 86%
of the offering proceeds in mortgage loans and the balance will be used to pay
the sales commissions and expenses of this offering and the brokerage,
acquisition, selection and origination fees and expenses for our loans. Any part
of the fees and expenses over 14% will be paid by Sunderland. See "Use of
Proceeds."
The mortgage loans in our portfolio will be secured by mortgages or
deeds of trust (which terms are used interchangeably in this prospectus unless
the context indicates otherwise) on the respective properties. While we may
invest in other types of loans, we believe that most of the loans in which we
invest will have been made to real estate developers with a lesser proportion of
loans involving land, bridge financing and other types of real estate loans. We
anticipate that about 20-65% of the loans invested in with the offering proceeds
will be secured by commercial properties, 15-25% by unimproved land, 10-20% by
apartments and income-producing properties and 5% by single family residences.
Our mortgage investments will not be insured.
Although we are not limited as to the geographic area where we may
conduct our operations, we intend to primarily invest in loans secured by
properties located in the western United States, particularly in Nevada, Arizona
and California.
12
<PAGE>
Capsource will select all mortgages in which we invest and make all
investment decisions on our behalf in its sole discretion, unless the Operating
Agreement provides otherwise. You are not entitled to act on any proposed
investment. In evaluating prospective mortgage loan investments, Capsource
considers such factors as the following:
o the ratio of the amount of the investment to the value of the
property by which it is secured;
o the potential for capital appreciation of the property securing
the investment;
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 the status and condition of the record title of the property
securing the investment;
o geographic location of the property securing the investment; and
o the financial condition of the borrowers and their principals, if
any, who guarantee the loan.
Capsource will continuously evaluate prospective investments. Capsource
will select loans for us or obtain loans from mortgage brokers, previous
borrowers, and by solicitations of new borrowers in those states where
permissible. We may purchase existing loans that were originated by third party
lenders, and acquired by Capsource for us. Capsource may sell the loans to us
for the lower of Capsource's cost or the then-current market value.
Capsource will adhere to the following guidelines, which are intended
to control the quality of the security given for loans, when selecting mortgage
loans for us:
1. Priority of Mortgages. The lien securing each mortgage loan will not
be junior to more than one other encumbrance (a first deed of trust) on the real
property that is to be used to secure the loan. Although we 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. We
anticipate that our mortgage loans will be diversified as to priority
approximately as follows: first mortgages - 90%; second mortgages - 10%.
2. Loan-to-Value Ratio. The amount of our loan combined with the
outstanding debt secured by a senior deed of trust on the security property
generally will not exceed the following percentage of the appraised value of the
security property.
<TABLE>
<CAPTION>
Type of Secured Property Loan-to-Value Ratio
- ------------------------ -------------------
<S> <C>
Residential 75%
Unimproved Land 60%
Commercial Property 75%
Property under Development/Construction Loan 75% (of anticipated post-development value)
Leasehold Interest 75% (of leasehold interest)
</TABLE>
3. Construction Mortgage Loans. We anticipate that we will invest
20-65% of the offering proceeds in construction loans (other than home
improvement loans on residential property), subject to the following guidelines:
o We will not invest more than 25% of our loan portfolio in
unimproved real property, and
13
<PAGE>
o The loan-to-value ratio on construction loans in which we invest
will not exceed 80% of the independently appraised, completed
value of the security property.
We will not invest in or purchase construction loans secured by
properties Capsource considers to be special-use properties, other than loans to
casinos.
Capsource, in its discretion, may increase any of the above
loan-to-value ratios if a given loan is supported by credit adequate to justify
a higher loan-to-value ratio. Additionally, the loan-to-value ratios may be
increased to the extent mortgage insurance is obtained. However, Capsource does
not anticipate obtaining mortgage insurance. Finally, these loan-to-value ratios
will not apply to purchase-money financing offered by us to sell any real estate
acquired through foreclosure or to refinance an existing loan that is in default
when it matures. In those cases, Capsource, in its sole discretion, shall be
free to accept any reasonable financing terms it deems to be in our best
interests. Nevertheless, in no event will the loan-to-value ratio on any loan
exceed 80% of the independently appraised completed value of the property. The
target loan-to-value ratio for our loan portfolio as a whole is approximately
70%.
We will receive an independent appraisal for each property securing a
mortgage loan in which we will invest or purchase. You may review copies of
these appraisals upon reasonable notice to us. Generally, appraisers we retain
will be licensed or qualified as independent appraisers and be certified by or
hold designations from one or more of the following organizations: The Federal
National Mortgage Association ("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 Capsource. However, appraisals are only estimates of value and
cannot be relied on as measures of realizable value. An employee of Capsource or
one of its affiliates will review each appraisal report and will conduct a
"drive-by" for each property on which an appraisal is made. A "drive by" means
an employee of Capsource 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 Capsource employee will also attempt to do so.
4. Terms of Mortgage Loans. Most of our loans will be for one to seven
years. Generally, loans will provide for payments of interest only with a
"balloon" payment of principal payable in full at the end of the term. Some
loans will provide for the deferral and compounding of all or a part of accrued
interest for various periods of time.
5. Equity Interests in Real Property. Most of our loans will provide
for interest rates comparable to rates for second mortgages prevailing in the
geographical area where the security property is located. However, Capsource may
make loans (up to a maximum of 25% of our mortgage loan portfolio) bearing a
reduced interest rate in exchange for an interest in the appreciation in value
of the security property during the term of the loan.
6. Escrow Conditions. Our loans will be funded by us through an escrow
account held by a title insurance company, subject to the following conditions:
o Borrowers will obtain satisfactory title insurance coverage for
all loans, with the title insurance policy naming us as the
insured and providing title insurance in an amount at least equal
to the principal amount of the loan. (Title insurance insures only
the validity and priority of our deed of trust, and does not
insure us against loss by other causes, such as diminution in the
value of the security property).
o Borrowers will obtain satisfactory fire and casualty insurance for
all loans secured by improved real property, naming us as loss
payee in an amount sufficient to cover the replacement cost of
improvements.
o All 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 us as payee
and beneficiary. Mortgage loans will not be written in the name of
Capsource or any other nominee.
14
<PAGE>
o Generally, Capsource does not intend to arrange for mortgage
insurance, which would afford some protection against loss if we
foreclosed on a loan and there was insufficient equity in the
security property to repay all sums owed.
7. Purchase of Mortgage Investments from Affiliates and Other Third
Parties. Mortgage loans may be acquired from Capsource 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 compensation to Capsource. Except for the compensation paid to
Capsource (and its affiliates) described elsewhere in this prospectus, Capsource
(or its affiliate) will remit to us all income it earns from a mortgage loan in
its portfolio that we subsequent purchase. See "Compensation of Capsource and
Its Affiliates."
8. Note Hypothecation. We may also acquire mortgage loans
secured by assignments of secured promissory notes. A mortgage loan secured by
an assigned note we acquire will satisfy our standards including our normal
loan-to-value ratios and also will not exceed 80% of the principal amount of the
assigned note. For example, if the property securing a note we acquire is
commercial property, the total amount of outstanding debts secured by the
property, including the debt represented by the assigned note and any senior
mortgages, must not exceed 75% of the appraised value of the property, and the
mortgage loan will not exceed 80% of the principal amount of the assigned note.
For mortgage loans secured by promissory notes, we will rely on the appraised
value of the underlying property, as determined by an independent written
appraisal which was conducted within the then-preceding twelve months. If an
appraisal was not conducted within that period, then we will arrange for a new
appraisal to be prepared for the property. All these appraisals will satisfy the
standards described above.
9. Joint Venturers. We may also participate in loans with other lenders
(including affiliates of Capsource), by providing funds for or purchasing a
undivided interest in a loan meeting our requirements described above. Because
we will not participate in a loan that would not otherwise meet our
requirements, and will only participate in a joint venture with third parties
where we hold a controlling interest, the risk of our participation is
minimized. We will not give Capsource or its affiliates any consideration
similar to rebates or give-backs or enter into reciprocal arrangements with
Capsource or its affiliates that might be entered into in lieu of joint
ventures.
10. Diversification. No single mortgage loan will exceed 20% of assets
when the loan is made. Additionally, no more than 20% of our loan portfolio will
be represented by mortgage loans in favor of any one borrower.
11. Reserve Fund. We will establish contingency working capital
reserves of up to three percent of the gross proceeds of this offering to cover
our unexpected cash needs.
12. Credit Evaluations. While Capsource may consider the income
level and general creditworthiness of a borrower to determine its ability to
repay the mortgage loan according to its terms, these considerations are
subordinate to Capsource's determination that a borrower has sufficient equity
in the security property to meet the loan-to-value ratios described above.
13. Sale of Mortgage Investments. Although Capsource has no plan to do
so, Capsource may sell our mortgage loans (or interests therein) to affiliated
third parties when Capsource believes that it is advantageous to us to do so.
Mortgage Loans to Affiliates
We will not invest in mortgage loans made to Capsource or its
affiliates. However, we may acquire an investment in a mortgage loan payable by
Capsource when Capsource has assumed by foreclosure the obligations of the
borrower under that loan.
Purchase of Loans from Capsource and its Affiliates
In addition to those loans Capsource selects for us, we may purchase
loans from Capsource or its affiliates that were originated and first held for
Capsource's own portfolio, as long as the loan is not in default and otherwise
15
<PAGE>
satisfies all of our lending criteria. Additionally, if the loan did not
originate within the 90 days before its purchase by us, Capsource must retain a
minimum of a 10% interest in the loan. This requirement also applies to any loan
originated by an affiliate of Capsource.
Commitment of Offering Proceeds
Capsource shall commit at least 86% of the offering proceeds received
by us to invest in or purchase mortgage loans (including the three percent held
as working capital reserves). If the sales commissions and expenses of this
offering and the brokerage, acquisition, selection and origination fees and
expenses for our loans exceed 14% of the offering proceeds, Sunderland will pay
the excess.
Types of Loans We Intend to Invest In
We invest in first and second mortgage loans, wraparound mortgage
loans, and construction mortgage loans on real property. Ordinarily, we will
invest in loans having terms of one to seven years and we will not invest in
mortgage loans with a maturity of more than 15 years. All loans provide for
monthly payments of interest and some also provide for principal amortization
although our loans may provide for payments of interest only and a payment of
principal in full at the end of the loan term. Capsource does not intend to
select loans for us that have negative amortization provisions.
First Mortgage Loans
First mortgage loans are secured by first mortgages or deeds of trust
on real property. These loans are generally for terms of one to seven years.
Second and Wraparound Loans
Second and wraparound mortgage loans are secured by second or
wraparound deeds of trust on real property that is already subject to prior
mortgage indebtedness. 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, we generally make principal and interest
payments on behalf of the borrower to the holders of the prior mortgage loans.
Construction Loans
Construction loans are loans originally made for both original
development and renovation of property. Our construction loans are generally
secured by first deeds of trust on real property for terms of six months to two
years.
Usually, we will not disburse funds on a construction loan until work
in the previous phase of the project has been completed, and an independent
inspector has verified certain aspects of the construction and its costs.
Additionally, we require the submission of signed labor and material lien
releases by the borrower for each completed phase of the project before making
any periodic disbursements of loan proceeds.
Leasehold Interest Loans
Loans on leasehold interests are secured by an assignment of the
borrower's leasehold interest in the particular real property. These loans are
generally for terms of up to 15 years. The leasehold interest loans are either
amortized over a period that is shorter than the lease term or have a maturity
date prior to the date the lease terminates. These loans all permit Capsource to
cure any default under the lease.
Variable Rate Loans
Variable rate loans originated by Capsource may use as indices the one
and five year Treasury Constant Maturity Index, the Prime Rate Index and the
Monthly Weighted Average Cost of Funds Index for Eleventh District
16
<PAGE>
Savings Institutions (Federal Home Loan Bank Board). Capsource may negotiate
spreads over these indices of 2.5% to 5.5%, depending upon market conditions
when the loan is made.
It is possible that the interest rate index used in a variable rate
loan will rise (or fall) more slowly than the interest rate of other loan
investments available to us. Capsource attempts to minimize this interest rate
differential by tying variable rate loans to indices that are sensitive to
fluctuations in market rates. Additionally, most variable rate loans originated
by Capsource contain provisions under which the interest rate cannot fall below
the initial rate.
Interest Rate Caps
All our variable rate loans 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. For these loans there is the risk that
the general market rate may exceed the interest cap rate.
Assumable Loans
Variable rate loans of five to ten year maturities are generally not
assumable without the prior consent of Capsource. We will not typically invest
in or purchase other assumable loans. To minimize our risk, any borrower
assuming an existing mortgage loan will be subject to the same underwriting
criteria as the original borrower.
Prepayment Penalties
Our loans typically will not contain prepayment penalties. If our loans
are at a high rate of interest in a market of falling interest rates, the
failure to have a prepayment penalty provision in the loan allows the borrower
to refinance the loan at a lower rate of interest, thus providing a lower yield
to us on the reinvestment of the prepayment proceeds. However, these loans will
usually be written with relatively high minimum interest rates, which generally
would minimize the risk of lower yields.
Balloon Payment
A majority of the loans we invest in or purchase will require the
borrower to make a "balloon payment" on the principal amount upon maturity of
the loan. To the extent that a borrower has an obligation to pay mortgage loan
principal in a large lump sum payment, its ability to repay the loan may be
dependent upon its ability to sell the property, obtain suitable refinancing or
otherwise raise a substantial amount of cash. As a result, these loans involve a
higher risk of default than fully amortizing loans.
Borrowing
We will not incur indebtedness to invest in mortgage loans. However, we
may incur indebtedness to prevent a default under mortgage loans that are senior
to our mortgage loans or to discharge senior mortgage loans if this becomes
necessary to protect our investment in mortgage loans. This short-term
indebtedness may be with recourse to our assets. Additionally, we may incur
indebtedness to operate or develop a property that we acquired under a defaulted
loan.
Repayment of Mortgages on Sales of Properties
We may require a borrower to repay a mortgage loan upon the sale of the
mortgaged property rather than allow the buyer to assume the existing loan. We
will require repayment if we determine that repayment appears to be advantageous
to us based upon then-current interest rates, the length of time that the loan
has been held by us, the credit-worthiness of the buyer and our objectives. Our
net proceeds from any sale or repayment will be invested in new mortgage loans,
held as cash or distributed to the members, as Capsource in its sole discretion
determines. After seven years, we will be prohibited from reinvesting proceeds
of capital transactions, which include foreclosures and prepayments of
mortgages, to the extent classified as a return of capital under the Internal
Revenue Code, and any other disposition of a mortgage or property.
17
<PAGE>
No Trust or Investment Company Activities
We have not qualified as a real estate investment trust under the
Internal Revenue Code, and therefore are not subject to the restrictions on its
activities that are imposed on real estate investment trusts. We intend to
conduct our business so that we are not an "investment company" within the
meaning of the Investment Company Act of 1940. Last, we intend to conduct our
business so that we are not to be deemed a "dealer" in mortgage loans for
federal income tax purposes.
Various Other Policies and Procedures
We will not:
o issue securities senior to the Units or issue any Units or other
securities for other than cash;
o invest in the securities of other issuers for the purpose of
exercising control, except when exercising our rights as a
secured lender;
o underwrite securities of other issuers; or
o offer securities in exchange for property.
Competition and General Economic Conditions
Banks, thrifts, conduit lenders and other entities both larger and
smaller than us may compete with Capsource to make the type of loans in which we
invest. For the past few years, the major institutional lenders have not been as
active in the commercial mortgage market as in prior years. Recently, however,
many major institutional lenders have reentered the commercial mortgage market
due to a stronger economy, stabilized property values and leasing rates, and the
decrease in demand for residential loans. As a result, we anticipate competition
for investments in mortgages secured by commercial properties, which creates
pressure on lenders to lower interest rates. Consequently, we may not be able to
obtain as high interest rates on mortgage investments as we would otherwise
obtain, which would affect our net income and the yield you earn.
18
<PAGE>
INVESTOR SUITABILITY STANDARDS
Your investment in DM LLC involves significant risks. You may not be
able to resell your Units due to the restrictions on their transfer in the
Operating Agreement and because no public market for the Units exists or is
likely to develop. Accordingly, the Units are suitable only for persons who have
adequate financial means and desire a relatively long term investment for which
they do not need immediate liquidity.
You must meet the investor suitability standards in this section and
the Subscription Agreement to purchase Units and to participate in our
reinvestment plan. The Subscription Agreement outlines the suitability
standards. If you sign the Subscription Agreement, you will be confirming that
you meet these minimum standards. We cannot accept subscriptions from any person
or entity where the representations required are either not provided or are
provided but are inconsistent with the determination that the investment is
suitable for the subscriber.
Units are suitable for you only if you have either:
o a minimum net worth of $45,000, not including your home, home
furnishings and automobiles, plus a minimum annual gross income
of at least $45,000; or
o a minimum net worth of $150,000, irrespective of annual gross
income, not including your home, home furnishings and
automobiles.
Fiduciaries must also meet one of these conditions. If the investment
is a gift to a minor, the custodian or the donor must meet these conditions.
Due to the nature of our investments, it is likely that all or
substantially all of our income will be taxable to the members as ordinary
income. See "Federal Income Tax Consequences" at page 41. The Units may,
therefore, be suitable for:
o persons seeking current taxable income;
o corporations, pension or profit sharing plans ("Corporate Plan");
o Keogh Plan accounts ("Keogh Plan") (Corporate Plans and Keogh
Plans are referred to herein, collectively, as "Qualified
Plans");
o an Individual Retirement Accounts ("IRA's" or "Roth IRA's");
o Simplified Employee Pensions ("SEP's"); and
o other entities exempt from federal income taxation such as
endowment partnerships and foundations, and charitable,
religious, scientific or educational organizations (assuming the
provisions of their governing instruments and the nature of their
tax exemptions permit such investment).
You will not create an IRA by investing in DM LLC. To create an IRA,
you must comply with the provisions of Section 408 of the Internal Revenue Code.
Our investment objectives and policies are intended to make the Units
suitable investments for employee benefit plans under current law. In this
regard, ERISA provides a comprehensive regulatory scheme for "plan assets." In
accordance with applicable regulations, Capsource intends to manage us so that
an investment by a Qualified Plan will not make our assets "plan assets under
ERISA." The ERISA regulations are also applicable to an IRA. See "Federal Income
Tax Consequences - ERISA Considerations" at page 52.
Capsource is not permitted to allow any Qualified Plan to purchase
Units if Capsource has investment discretion over the assets of the Qualified
Plan that invested in DM LLC, or if Capsource regularly gives
19
<PAGE>
individualized investment advice that serves as the primary basis for the
investment decisions made for these assets. This prohibition is designed to
prevent a violation of certain provisions of ERISA. You should obtain the advice
of your attorney, tax advisor, or business consultant for the legal, tax and
business aspects of this investment before subscribing for Units.
Each person selling Units on our behalf is required to:
o make reasonable efforts to assure that purchasing Units is
suitable for each investor in light of the investor's age,
educational level, knowledge of investments, financial means and
other pertinent factors; and
o 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 agreements with the selling securities brokerage firms require the
firms to (l) inquire diligently as required by law of all prospective investors
to ascertain whether a purchase of Units is suitable for the investor, and (2)
transmit promptly to us all fully completed and duly executed Subscription
Agreements.
20
<PAGE>
MANAGEMENT
Our Management
Our business is managed by Capsource, Inc., as the manager of our
limited liability company. The telephone number for Capsource's offices is (702)
227-0965. Capsource is a mortgage broker licensed in the State of Nevada and a
wholly owned subsidiary of Sunderland Corporation. Sunderland is a Delaware
corporation with publicly held common stock that trades in the OTC Bulletin
Board under the symbol "DLMA." Sunderland had a net worth of approximately
$4,700,000 as of December 31, 1999. Sunderland is briefly described later in
this section.
Capsource
Capsource manages and controls our affairs and has general
responsibility and final authority in almost all matters affecting our business.
These duties include dealings with members, accounting, tax and legal matters,
communications and filings with regulatory agencies and all other needed
management and operational duties. Capsource may also, at its sole discretion
and subject to change at any time, and as further set forth in the Operating
Agreement:
o purchase from us the interest receivable or principal on
delinquent mortgage loans held by us;
o purchase from a senior lien holder the interest receivable or
principal on mortgage loans senior to mortgage loans held by us;
o use its own funds to cover any other costs associated with
mortgage loans held by us such as property taxes, insurance and
legal expenses; and
o purchase from us real estate acquired through foreclosure.
You will have no right to participate in the management or control of
our business or affairs other than to exercise the limited voting rights
provided for in the Operating Agreement. See "Summary of Operating Agreement,
Rights of Members and Description of Units." Capsource has primary
responsibility for the initial selection, evaluation and negotiation of our
mortgage loans. Capsource or its affiliates well provide all executive,
supervisory and certain administrative services for our operations, including
servicing the mortgage loans we hold. Our books and records are maintained by
Capsource, subject to audit by independent certified public accountants.
The fiduciary duties of Capsource owed to us and our members are set
forth elsewhere in this prospectus, as is the description of the indemnification
of Capsource and other limits on its potential liability to us and our members.
See "Fiduciary Responsibility."
You and the other members will be able to remove Capsource as our
manager upon the following conditions:
o by written consent or vote of members owning a majority in
interest of all capital accounts (excluding the amount in
Capsource's capital account). If the members have not previously
elected an additional manager, this removal will not become
effective for at least 120 days following the consent or
authorizing vote of the members;
o during the 120 days set forth above, the members (by the same
vote) shall have the right to agree in writing to continue our
business and, within six months following the termination date of
the last remaining manager, elect and admit a new manager who
agrees to continue our existence; and
o the substitution of a new manager shall be effective upon written
acceptance by the new manager of the duties and responsibilities
of a manager; provided that upon effective substitution of a new
21
<PAGE>
manager, the Operating Agreement shall remain in full force and
effect, except for the change in the manager.
Our failure to obtain the majority vote described and designate and
admit a new manager within the time specified will result in our dissolution in
accordance with the provisions of the Operating Agreement. Capsource's interest
in DM LLC may be assigned, but our manager may not be changed except as set
forth above.
As described elsewhere in this prospectus, a majority-in-interest of
our members will also have the final right to authorize or deny Capsource the
authority to do any of the following:
o to amend the Operating Agreement, except that Capsource may amend
it to cure any ambiguity or formal defect or omission, to conform
the Operating Agreement to applicable laws and regulations and
any change which, in its judgment, does not prejudice you;
o to dissolve us and wind up our business;
o to impair our ability to carry on or change the nature of our
business;
o to add or remove a manager;
o to cause us to merge with or into another company; or
o to sell all or a majority of our assets.
Evaluation and Acquisition by Capsource
Capsource considers prospective loans for us. In that regard, Capsource
evaluates the credit of prospective borrowers, analyzes the return to us of
potential mortgage loan transactions, reviews property appraisals, and
determines which types of transactions appear to be most favorable to us. See
"Investment Objectives and Policies" at page 12. For these services, Capsource
generally receives mortgage placement fees (points) paid by borrowers when loans
are originally invested in or purchased, or when we extend or refinance mortgage
loans.
Management of Loan Portfolio
Capsource manages our mortgage loan portfolio, its services include:
o creating and implementing investment policies; in furtherance of
those contained in the Operating Agreement;
o preparing and reviewing budgets, economic surveys, cash flow and
taxable income or loss projections and working capital
requirements;
o preparing and reviewing of reports for securities filings,
distribution to our members or otherwise;
o communicating with members generally;
o supervising and reviewing our bookkeeping, accounting and audits;
o supervising and reviewing the preparation of our state and
federal tax returns; and
o supervising professionals employed by us, including attorneys,
accountants and appraisers.
For its ongoing management services, we will pay Capsource an annual
management fee of up to 0.75% of the offering proceeds committed to investing in
mortgage loans (including working capital reserves). Beginning with the third
year of operations, it will be 0.75% of the fair market value of our assets
(including working capital), less any of our indebtedness. For funds not
invested in mortgages, the percentage paid as a management fee is 0.5%. The
22
<PAGE>
management fee is payable on all loans, including non performing or delinquent
loans because of the expense involved in the administrating such loans. See
"Compensation of Capsource and its Affiliates" at page 28 generally for a
description of all fees to be paid to Capsource.
Mortgage Loans
Capsource originates, selects, places and services our mortgage loans.
Its mortgage loan services include:
o reviewing of loans;
o recommending changes in loans;
o employing and supervising employees who handle the loans;
o preparing and reviewing projected performance;
o reviewing of reserves and working capital;
o collecting and maintaining all loans; and
o selling and servicing the loans.
Prior Experience
In April 1999, Sunderland acquired the mortgage brokerage business of
Del Mar Mortgage, Inc. and Del Mar Holdings, Inc., which were controlled by
Michael Shustek, by purchasing their assets and assuming their liabilities in
exchange for shares of Sunderland's common stock. Sunderland has since
transferred to Capsource the mortgage brokerage business purchased from and
previously conducted by Del Mar Mortgage and Del Mar Holdings.
Since 1997, Capsource and its predecessors have acted as mortgage
brokers for the investment by about 4,500 investors in about 350 mortgage notes
totaling about $445 million. Capsource also services the mortgage notes it
sells. Capsource currently services over 120 loans totaling approximately $248
million. These loans are secured by mortgages and deeds of trust on properties
primarily located in Nevada, California and Arizona. Before selling these loans
as part of its mortgage brokerage business (and to the extent funding was not
arranged with investors prior to closing on the respective loan), Capsource and
its predecessors either invested in or originated these loans primarily with
working capital obtained from capital contributions, except for $1,980,000 of
indebtedness incurred to finance the transactions.
For the three year period ended December 31, 1999, the properties
securing these loans can be subdivided as follows:
<TABLE>
<CAPTION>
Aggregate amount invested
Property Type (as percentage of total purchases by these programs)
------------- ----------------------------------------------------
<S> <C> <C>
Commercial (total) 58%
Land Acquisition 36%
Residential 6%
</TABLE>
Of the loans described in the foregoing table, 90% (by dollar amount)
were development loans (including construction loans), the balance were land
acquisition loans and loans secured by developed properties.
The description above of Capsource and its predecessors is not intended
to provide a description of the loans to be invested in or purchased by us in
the future. That information can be found elsewhere in this prospectus.
23
<PAGE>
Our general investment policies are as set forth elsewhere in this
prospectus. See "Investment Objectives and Policies." Within these policies and
those contained in the Operating Agreement, Capsource may establish further
written policies on loans and borrowings and shall administer our operations and
performance to assure that the policies are fulfilled and remain in your best
interest.
Directors and Executive Officers of Capsource and Sunderland
The directors and executive officers of Capsource are as follows:
NAME AGE TITLE
- ----------------------- --------- ----------------------------
Michael V. Shustek 41 Director
Stephen J. Byrne 42 President and Director
Lance Bradford 33 Treasurer, Secretary and Director
The directors and officers of Sunderland are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ----------------------- --------- ----------------------------------------------------------------
<S> <C> <C>
Michael V. Shustek 41 Chairman of the Board, Chief Executive Officer and Director
Stephen J. Byrne 42 President and Director
Lance Bradford 33 Chief Financial Officer, Corporate Secretary and Director
Robert J. Aalberts 49 Director
Robert W. Fine 64 Director
John E. Dawson 42 Director
Robert L. Forbuss 51 Director
</TABLE>
All the directors of Capsource and Sunderland hold office until the
next annual meeting of shareholders or until their successors are elected and
qualified. The By-laws of Capsource and Sunderland provide for up to 10
directors and permit the Board of Directors to fill any vacancy on the Board of
Directors. Officers of both companies serve at the discretion of the Board of
Directors.
The principal occupation and business experience for each of our
officers and directors, for at least the last five years, are as follows:
MICHAEL V. SHUSTEK has been a director of Capsource and Chairman of the
Board of Directors, Chief Executive Officer and a director of Sunderland since
April 1999. In 1993, Mr. Shustek founded Del Mar Mortgage, and has been involved
in various aspects of the real estate industry in Nevada since 1990. In 1993, he
founded Foreclosures of Nevada, Inc., a large company specializing in
non-judicial foreclosures, and Goldell Development, Inc., a company that
specialized in residential and commercial construction. With the completion of
then 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 third-party
lenders or investors 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 has been the President and a director of Capsource
since its inception in 1997 and has been the President and a director of
Sunderland since April 1999. Mr. Byrne joined Del Mar Mortgage in June 1998 as
its Senior Lending Officer. In 1997, Mr. Byrne founded Capsource which he owned
and operated before joining Del Mar Mortgage. From 1991 to 1997, Mr. Byrne
served as Vice President of Wells Fargo Bank and of its predecessor First
Interstate Bank of Nevada. Mr. Byrne served in various capacities with First
Interstate Bank, including manager of the Diversified Asset Group based in Las
Vegas and the commercial Diversified Asset Group in Houston, Texas. Mr. Byrne
received a Bachelor's of Science degree in Business Administration from Hastings
College, Hastings, Nebraska.
24
<PAGE>
LANCE BRADFORD has been a director Treasurer and Secretary of Capsource
and the Chief Financial Officer, Corporate Secretary, and a director of
Sunderland since April 1999. Since 1992, Mr. Bradford has been a partner in
L.L. Bradford & Company, Las Vegas, Nevada, a Certified Public Accounting firm
that he founded. From 1988 to 1991, Mr. Bradford served as an accountant with
Ernst & Young International. Mr. Bradford received a Bachelor of Science degree
in Accounting from the University of Nevada, Reno.
JOHN E. DAWSON has been a director of Sunderland since March 2000.
Since 1995, Mr. Dawson has been a partner at the law firm of Marquis & Aurbach.
Before joining Marquis & Aurbach, Mr. Dawson was affiliated with the law firm of
Jeffrey L. Burr & Associates. Mr. Dawson co-authored the Asset Protection
Guidebook for Attorneys and Accountants and has presented seminars on asset
protection. Mr. Dawson received his Bachelor's Degree from Weber State and his
J.D. from Brigham Young University. Mr. Dawson received his Masters of Law
(L.L.M.) in Taxation from the University of San Diego in 1993. Mr. Dawson was
admitted to the Nevada Bar in 1988 and the Utah Bar in 1989.
ROBERT L. FORBUSS has been a director of Sunderland since March 2000.
Since February 1999, Mr. Forbuss has been the President of Strategic Alliances,
a business and government affairs consulting organization. From March 1998
through February 1999, he was the President of Medical Transportation of
America. From February 1997 to March 1998, Mr. Forbes was the Chief Executive
Officer of the Southwest Division of American Medical Response. From March 1994
to February 1997, he was Senior Vice President of LaidIaw Medical
Transportation, which had acquired Mercy Medical Services, Inc-, a company that
Mr. Forbuss founded, owned and managed for 22 years. The latter four companies
are all in the business of providing emergency ambulance and transportation
services. Mr. Forbuss received his Bachelor of Arts in Public Administration and
Political Science from the University of California at Long Beach.
ROBERT AALBERTS has been a director of Sunderland since April 1999.
Since 1991, Mr. Aalberts has held the Ernst Lied Professor of Legal Studies
professorship at the University of Nevada, Las Vegas. From 1984 to 1991, Mr.
Aalberts was an Associate Professor of Business Law at Louisiana State
University - Shreveport. From 1982 through 1984, he served as an attorney for
Gulf Oil Company. Mr. Aalberts has co-authored a book relating to the regulatory
environment, law and business of real estate; and he is the author of numerous
legal articles, dealing with various aspects of real estate, business, and the
practice of law. Mr. Aalberts received his Juris Doctor degree from Loyola
University, New Orleans, Louisiana and received a Master of Arts from the
University of Missouri. He is a member of the State Bar of Louisiana.
ROBERT W. FINE has been a director of Sunderland since April 1999.
Since 1998, Mr. Fine has been the President of Equisource Group Ltd., a company
providing investment-banking services to businesses seeking to raise capital or
to become public companies. From 1993 to 1998, Mr. Fine was President of
TransworId Healthcare, a company providing home healthcare products and
services, during which period the company grew from less than $7 million in
revenues to over $80 million. From 1990 to 1993, the year of its sale, Mr. Fine
served as President of the Fortress Company, a manufacturer of healthcare
mobility devices. For the seven years prior to joining Fortress, Mr. Fine was
President of ConAc, a company that specialized in mergers and acquisitions.
During this period, the company provided assistance to other companies in over
100 mergers, principally in the healthcare field. Mr. Fine received a Bachelor
of Arts in Accounting from Bentley College, Waltham, Massachusetts.
Affiliated Companies
SUNDERLAND CORPORATION
Sunderland is a holding company, incorporated in Delaware, which owns
and conducts its business primarily through Capsource. Sunderland also owns DM
Financial Services, our dealer-manager. The common stock of Sunderland trades
under the symbol "DLMA" in the OTC Bulletin Board. For a complete description of
Sunderland, potential investors should review Sunderland's most recent periodic
reports on file with the Securities and Exchange Commission, which can be found
in the Commission's EDGAR database on the Internet at http://www.sec.gov.
25
<PAGE>
DM FINANCIAL SERVICES, INC.
DM Financial Services, Inc., the dealer-manager, is a securities
brokerage firm registered with the Securities and Exchange Commission and a
member of the National Association of Securities Dealers, Inc. (NASD). DM
Financial Services is a Nevada corporation formed in 1998 to expand and develop
business opportunities, including offering real estate loans and private
investments in promissory notes secured by deeds of trust.
DM Financial will seek to obtain other securities brokerage firms to
sell the Units, sell the Units to its customers and provide us with sales,
promotional and marketing assistance for the distribution of the Units.
26
<PAGE>
USE OF PROCEEDS
If we raise $1,500,000 in this offering on or before December 31, 2000,
we will continue the offering with the goal of raising $100,000,000, which
includes Units sold in our distribution reinvestment plan. Once we have sold
1,500,000 Units, we cannot assure you that we will receive any further proceeds
from the offering. If we do not sell more than 1,500,000 Units, we would have to
restrict our mortgage loans and intended operations. Depending on the rates of
withdrawal by members and principal payments on loans by borrowers, withdrawals
by members could be further restricted by our lack of available cash.
The following table contains information about the estimated use of the
gross proceeds of this offering. Many of the figures represent our best estimate
since we cannot now precisely calculate the figures.
<TABLE>
<CAPTION>
Minimum Offering Pct of Maximum Offering Pct of
(1,500,000 Units) Offering (100,000,000 Units) Offering
----------------- -------- ------------------- --------
<S> <C> <C> <C> <C>
Gross Offering Proceeds......... $ 1,500,000 100.0% $100,000,000 100.0%
Less:
Selling Commissions and Expenses 45,000 3.0% 2,000,000 2.0%
Public Offering Expenses: (2) 165,000(3) 11.0% 500,000 0.5%
----------- ----- ------------ -----
Net Amount received in this
Offering(4).................. 1,290,000 86.0% 97,500,000 97.5%
Less:
Cash Reserves: (5)........... $45,000 3.0% 3,000,000 3.0%
----------- ----- ------------ -----
Cash Available for
Investments in
Mortgage Loans: (6) $ 1,245,000 83.0% $ 94,500,000 94.5%
=========== ===== ============ =====
</TABLE>
- --------------
(1) Amounts shown reflect our assumption that a majority of the Units will be
sold by DM Financial Services, an affiliate that we will compensate at
lower rates than we do non-affiliated broker-dealers, as indicated
elsewhere in this prospectus.
(2) Includes filing and review fees, legal, accounting, printing and other
expenses of this offering, which are described further in the registration
statement of which this prospectus forms a part.
(3) If the sales commissions, expenses of this offering and brokerage,
acquisition, selection and origination fees and expenses for our loans
exceed 14% of the gross offering proceeds, Sunderland has agreed to pay the
fees and expenses in excess of that amount. For example, assuming that
offering fees and expenses of $500,000 (excluding amounts paid to
broker-dealers, including DM Financial Services), if we raise the minimum
of $1,500,000 in the offering, Sunderland will pay $335,000 of these fees
and expenses. If we raise the maximum of $100,000,000, Sunderland will not
be required to pay any of these fees and expenses.
(4) Borrowers will pay all acquisition, selection and origination expenses for
loans made by Capsource. Consequently, these expenses do not appear in the
table.
(5) We will maintain working capital reserves of at least 3%, consisting of
2 1/2% of the aggregate capital accounts of the members other than
Capsource's. This reserve is available to pay expenses in excess of
revenues, satisfy obligations of underlying securities, expend money to
satisfy our unforeseen obligations and for other permitted uses of our
working capital. Working capital reserves of up to 3% are included in the
funds committed to mortgage investments in determining whether we have
invested at least 86% of the offering proceeds in mortgage loans.
(6) Capsource has not set the amount of sales proceeds to be allocated to the
various types of mortgage loans in which we invest. Each loan presented to
us is reviewed to determine if it meets the criteria established by
Capsource. See "Investment Objectives and Policies." We plan to invest the
majority of our funds in mortgage loans secured by commercial and
residential real property, primarily in Nevada, Arizona and California
(including properties currently under construction). We do not expect to
use any of the proceeds of this offering to acquire assets other than in
the ordinary course of our business.
27
<PAGE>
Pending investment in the mortgage loans, we may invest in relatively
safe, short-term liquid investments such as U.S. Treasury bills, notes or bonds,
certificates of deposit or commercial paper.
28
<PAGE>
COMPENSATION OF CAPSOURCE AND ITS AFFILIATES
Capsource and its affiliates will receive fees and expenses for
services relating to this offering and the investment and management of our
assets. The sales commissions and expenses of this offering and the brokerage,
acquisition, selection and origination fees and expenses for our loans shall not
exceed 14% of the proceeds of this offering. The fees that we and our borrowers
pay to Capsource and its affiliates are summarized in the table below.
<TABLE>
<CAPTION>
Type of Compensation Form of Compensation(1)
Offering Stage:
---------------
<S> <C>
Paid By Fund 1.0% of gross offering proceeds,
Dealer-Manager Fee 0.5% of gross proceeds expense reimbursement.
Expense Reimbursement Our total compensation to DM Financial can be $1.5
million (including up to $500,000 in expense
(paid to DM Financial Services) reimbursement).
Organization Stage:
-------------------
Promotional Interest of Capsource 0.5% ownership interest. Capsource may only receive distributions
on its entire interest, including the 0.5% for which it paid
consideration, after all members receive the return of their
initial capital contributions.
Operational Stage:
------------------
Paid by Borrowers
Loan Brokerage Fees for Loan Selection and Origination 2%-6% of each loan, competitive fee based on local
market conditions. Capsource and its affiliates may
receive up to $5,160,000 in loan brokerage fees.
Loan Evaluation and Processing Fees 2%-5% of each loan, competitive fee based on local market
conditions. Capsource and its affiliates may receive up to
$4,300,000 in loan evaluation and processing fees.
Service Fee for Administering Loans 0.25% of the outstanding principal balance of loans. Capsource
may receive up to $215,000 in servicing fees.
Escrow/Reconveyance/Loan Extension and Permitting Loan 2%-5% of outstanding principal, as permitted by
Assumption local law and local market conditions. The amount to
be received is not determinable at this time.
Late Fees/ Prepayment Fees
As permitted by local law and local market conditions. The
amount to be received is not determinable at this time.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Paid by Us
- ----------
<S> <C>
Loan Management Fees Initially 0.75% of the offering proceeds used for
mortgage loans (including working capital reserves).
Beginning with the third year, 0.75% of the fair
market value of our assets (including working
capital), less any of our indebtedness. For funds
not invested in mortgages, the fee is 0.5%.
Capsource may receive up to $645,000 in loan
management fees per year.
Reimbursement of Our Operating Expenses Lesser of cost or third party rate.
Real Estate Brokerage Fees on Resales of Foreclosed Up to 3% of proceeds where Capsource substantially
Property Capsource to contributed to the sale; up to 6% for all persons
involved. These fees are not yet determinable.
</TABLE>
(1) Where aggregate fees are provided, they are based upon our receipt of
$100,000,000 in gross proceeds in this offering and the investment of
$86,000,000 in mortgage loans. Our Operating Agreement provides that front
end fees, including the sales commissions and expenses of this offering and
the brokerage, acquisition, selection and origination fees and expenses for
our loans, will not exceed 14% of the gross proceeds of this offering, or
$14,000,000.
30
<PAGE>
CONFLICTS OF INTEREST
The relationships among us, Capsource and the directors and other
affiliates of Capsource will result in various conflicts of interest. Capsource
and its directors and other affiliates are engaged in business activities
involving real estate lending, and anticipate engaging in additional business
activities in the future that may be competitive with us. For the conflicts of
interest described in this prospectus, Capsource, and its directors and other
affiliates will exercise their fiduciary duties to us and our members in a
manner they believe will preserve and protect your rights as a member. See
"Fiduciary Responsibility."
Additionally, our Operating Agreement limits our ability to enter into
transactions with Capsource and its directors and other affiliates. See "Summary
of Operating Agreement, Rights of Members and Description of Units".
Certain conflicts of interest may arise in the course of Capsource's
management and operation of our business, including those described below. The
organizational structure of Sunderland, Capsource and their affiliates is as
follows:
<TABLE>
<CAPTION>
Michael V. Shustek
<S> <C>
Sunderland Del Mar Mortgage, Inc.
Officers and Directors include: (Predecessor to the
Michael V. Shustek, Chairman of the Board, CEO, business now operated by
majority shareholder Capsource)
Owned 100% by
Stephen Byrne, President Michael V. Shustek
Lance Bradford, CFO, Secretary
DM Financial Services Capsource
(Dealer Manager) (Manager of DM LLC)
Owned 100% by Sunderland Owned 100% by Sunderland
</TABLE>
1. Payment of Fees and Expenses. Capsource and its affiliates will
receive substantial fees and expenses from the proceeds of the offering and our
ongoing operations, including: (l) dealer-manager fees and expenses, (2) a
promotional interest, (3) loan brokerage fees, (4) loan evaluation and
processing fees, (5) loan servicing fees; (6) escrow, reconveyance loan
extension and assumption fees, (7) late and prepayment fees, (8) loan management
fees, and (9) reimbursement of operating expenses and (10) real estate brokerage
commissions payable upon the resale of foreclosed properties. These fees will be
payable even if we are not profitable or the particular transaction causes us to
incur a loss. See "Compensation of Capsource and Its Affiliates" for a more
detailed discussion of the fees payable.
2. Purchase Of Mortgage Notes from Capsource. We will acquire our
mortgage loans from or through Capsource. Capsource is in the business of
brokering, originating, placing, purchasing, selling and servicing mortgage
loans. All our mortgage loans purchased from Capsource will be at prices no
higher than the lesser of the cost of the mortgage loan to Capsource or the then
current market value of the mortgage loan. A committee of officers and directors
of Capsource makes all decisions concerning which mortgage loans we will invest
in or purchase. This committee is currently comprised of Michael V. Shustek, a
director of Capsource, Stephen J. Byrne, the President and a director of
Capsource, and Lance L. Bradford, the Treasurer and a director of Capsource. See
"Management."
31
<PAGE>
3. Non-Arm's-Length Agreements. Our agreements and arrangements
for compensating Capsource or its affiliates are not the result of arm's-length
negotiations. Additionally, none of the three directors of Capsource would be
deemed independent. However, Capsource may be removed, with or without cause, by
members owning a majority in interest of all capital accounts.
4. Competition for the Time and Services of Common Officers.
We will rely on Capsource and its affiliates for the management of our
operations. When performing their duties, the officers, directors and employees
of Capsource and its affiliates may, for their own account or that of others,
originate mortgages and acquire investments similar to those made or acquired by
us. The directors of Capsource also may act as trustees, directors or officers,
or engage in other activities, in other entities and may acquire, broker and
originate similar mortgage investments for their own account or that of others.
Accordingly, conflicts of interest may arise in operating more than one entity
for allocating time between the entities. The directors and officers of
Capsource will devote such time to our affairs and as they determine in their
sole discretion, exercised in good faith and in compliance with their fiduciary
obligations to us and our members, to be necessary for our benefit. See
"Management".
Capsource and its affiliates believe they have sufficient staff to be
capable of discharging their responsibility to us and to all other entities to
which they or their officers or affiliates are responsible.
5. Competition between us, Capsource and our Affiliates for the
Purchase and Sale Of Mortgage Loans. Various entities may in the future be
formed by Capsource or its affiliates to engage in businesses which may be
competitive with ours or which have the same management as we do. To the extent
that these other entities with similar investment objectives (or programs with
dissimilar objectives for which a particular mortgage loan may nevertheless be
suitable) have funds available for investment when we do and a potentially
suitable investment has been offered to us or one of these programs, conflicts
of interest will arise as to which entity should acquire the investment.
If any conflict arises between us and any other affiliated program as
to which company will have the right to invest in a particular mortgage loan (or
other investment), Capsource will initially review our loan portfolio and that
of the affiliated company and will determine whether we or the affiliated
company should be the entity investing in the mortgage loan (or other
investment), based upon such factors as the amount of funds available for
investment, yield, portfolio diversification, type and location of the property
on which Capsource will make the mortgage loan, and proposed loan or other
transaction terms. The officers and directors of Capsource will be responsible
for monitoring this allocation method (and that described below for new
affiliated programs established in the future) to be sure that it is applied
fairly to us.
The officers, directors and employees of Capsource and its affiliates
may for their own account or that of others broker, originate and acquire
mortgage investments similar to those made or acquired by us. Capsource is,
however, subject to a fiduciary duty to us and our members. See "Fiduciary
Responsibility." Subject to this fiduciary duty, neither Capsource nor its
affiliates will be obligated to present to us any particular investment
opportunity that comes to their attention, even if the opportunity is of a
character that might be suitable for us.
There may be conflicts of interest on the part of Capsource between us
and any other affiliate of Capsource that has similar investment objectives as
we do when we attempt to sell mortgage loans, as well as in other circumstances.
6. Because we are a newly formed company with no prior performance
history, we expected difficulty obtaining an unaffiliated brokerage firm to act
as our dealer-manager on terms and conditions that would be as favorable as
those that could be obtained from DM Financial Services. Accordingly, we believe
that the use of DM Financial Services as the dealer-manager for the offering of
the Units is in our best interests and those of our members.
7. Lack of Separate Representation. We are represented by the same
counsel as Capsource and its affiliates, and we anticipate that this multiple
representation by our attorneys will continue in the future. However, should a
dispute arise between us and Capsource or any of its affiliates, Capsource or
the affiliate will either obtain separate
32
<PAGE>
counsel or facilitate our retaining separate counsel for such matters. However,
we may not obtain separate counsel should there be a need in the future to
negotiate or prepare contracts or other agreements between us and Capsource for
services including those contemplated by this prospectus.
8. Rights of Affiliates. Any director or officer of Capsource and any
other affiliate may acquire, own, hold and dispose of Units for his individual
account and may exercise all rights of a member, except for certain voting
rights, to the same extent and in the same manner as if he were not an affiliate
of ours.
9. We may invest in mortgages acquired by Capsource or its affiliates.
Our portion of the total mortgage loan may be smaller or greater than the
portion of the loan made by Capsource or its affiliates but will generally be on
terms substantially similar to the terms of that company's investment. Such an
investment would be made after Capsource determines that the entire loan is not
suitable for our loan portfolio. However, investing with Capsource or its
affiliates could result in a conflict of interest between us and Capsource or
its affiliates if the borrower defaults on the loan and both we and Capsource or
its affiliates seek to protect our respective interests in the loan and in the
underlying security. You must rely on Capsource to act in accordance with its
fiduciary duty under the Operating Agreement to protect your interest.
33
<PAGE>
FIDUCIARY RESPONSIBILITY
Capsource is accountable to us and you as a fiduciary, and must
exercise good faith and integrity when handling our affairs. Capsource must not
take advantage of us, and must make full disclosure of any conflicts of interest
or benefit to it in its dealings with us. Capsource has fiduciary responsibility
for the safekeeping and use of all of our finds and assets, whether or not in
its possession or control, and Capsource will not employ, or permit another to
employ our funds or assets in any manner except for our exclusive benefit.
Capsource will not allow our assets to be commingled with its assets or the
assets of any other person or company. The Operating Agreement provides that
Capsource and its affiliates may engage in activities similar to or identical
with our business, but Capsource must devote such of its time to our business as
it determines, in good faith, to be reasonably necessary. Currently, Capsource
acts for its own account in the mortgage loan business, and also brokers,
arranges and services mortgage loans for other investors. When it acts in those
capacities, it has a fiduciary duty to each company as set forth in the
respective organizational documents and under applicable law, and is bound to
treat each fairly and with equal access to investment opportunities.
Based upon the present state of the law, you have the following legal
rights and remedies concerning Capsource and the conduct of our operations:
o you may bring individual actions on behalf of yourself or class
actions on behalf of yourself and other members to enforce your
rights under the Operating Agreement and Nevada limited liability
company law, including breaches by Capsource of its fiduciary
duty;
o you and other members owning a majority in interest of all
capital accounts may remove Capsource as our manager;
o you may bring actions on our behalf for claims we might have, as
"derivative" actions, if Capsource refuses to bring suit; and
o you may bring actions under federal or state securities laws,
either individually or as part of a class of members, if
Capsource has violated those laws in connection with the offer
and sale, or repurchase of Units.
This is a rapidly changing and developing area of law. If you have
questions concerning the duties of Capsource in its role as our manager, you
should consult with your own legal counsel.
Exculpation and Defenses
The Operating Agreement generally exculpates Capsource from liability
to the fullest extent permitted by law. Capsource may not be liable to us or to
you for errors in judgment or other acts or omissions not amounting to willful
misconduct or negligence. To the extent Capsource would be able to show that it
acted in good faith and in a manner reasonably believed to be in our best
interest, and with such care as a reasonably prudent person in a like situation
would use, Capsource would likely have an effective defense to any legal action.
You will have a more limited right of action than you might have absent this
limitation in the Operating Agreement.
Indemnification
Under the Operating Agreement, DM LLC and not the members personally,
generally indemnify Capsource, for liabilities Capsource and its affiliates
incur in dealing with third parties on our behalf where the relevant conduct was
reasonably believed to be in our best interest and, for criminal proceedings,
for which Capsource had no reasonable grounds to believe the action was against
the law. 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, that indemnification is
contrary to public policy and unenforceable. If any action suit or proceeding
shall be pending against Capsource that relates to or arises out of our
34
<PAGE>
operations, Capsource generally shall have the right to employ, at our
reasonable expense, separate counsel of its choice in such action, suit or
proceeding.
Nevertheless, Capsource is liable, responsible and accountable, and
neither we nor any other party shall be liable to Capsource, for any portion of
its liabilities which resulted from its:
o own fraud, negligence or misconduct or knowing violation of law,
o breach of fiduciary duty to us or any member, or
o breach of the Operating Agreement,
regardless of whether or not that act was first determined by Capsource, in good
faith, to be in our best interests. The satisfaction of our indemnification
obligations shall be from and limited to DM LLC's assets and no member shall
have any personal liability on account of it.
We are prohibited under our Operating Agreement from making cash
advances to a party seeking indemnification for legal expenses and other costs
incurred as a result of any legal action initiated against it by a member. Cash
advances from our funds to a party seeking indemnification for reasonable legal
expenses and other costs incurred as a result of any legal action or proceeding
are permissible if:
o the suit, action or proceeding relates to or arises out of
conduct on the part of the party in the performance of its duties
or provision of its services on our behalf;
o the suit, action or proceeding is initiated by a third party who
is not a member; and
o the indemnified party undertakes by written agreement to repay
any funds advanced where it would not be entitled to
indemnification (as described above).
If advances are permissible, the party shall have the right to bill us
for, or otherwise request that we pay amounts for which he believes in good
faith that he is entitled to indemnification. We will pay all of these bills and
honor all requests for payment within 60 days after the bill or request is
received. If a final determination is made that we are not obligated for any
amount already paid by us to a particular party, the party will refund the
amount paid within 60 days of the final determination. If a final determination
is made that we are obligated for any amount not yet paid by us to a particular
party, we will pay the amount to him within 60 days of the final determination.
Nevertheless, neither Capsource nor any of its affiliates, agents, or
attorneys, nor any person acting as a securities broker for 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:
o there has been a successful adjudication on the merits of each
count involving alleged securities law violations as to the
particular party;
o the claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction as to the particular party; or
o a court of competent jurisdiction approves a settlement of the
claims against the particular party and finds that
indemnification of the settlement and related costs should be
made.
Before seeking a court approval for indemnification, Capsource is
required to cause the party seeking indemnification to apprise the court of the
position of the Securities and Exchange Commission and the Nevada Administrator
concerning indemnification for securities violations.
We are prohibited from incurring the cost of the portion of any
insurance which insures any party against any liability as to which that party
is prohibited from being indemnified.
An affiliate, agent or attorney of Capsource shall be indemnified by us
only in circumstances where he has performed an act on our behalf or on behalf
of Capsource within the scope of its authority and for which Capsource would
have been entitled to indemnification had such act been performed by it.
35
<PAGE>
SUMMARY OF THE OPERATING AGREEMENT,
RIGHTS OF MEMBERS AND DESCRIPTION OF UNITS
This is a summary of the material provisions of the Operating Agreement
and is qualified in its entirety by the Operating Agreement itself. You will be
bound by the Operating Agreement by purchasing your Units. Consequently, you
should read this prospectus and the Operating Agreement which you can find as
Exhibit A.
Our Manager
We are a limited liability company managed by our manager, Capsource,
Inc., a Nevada corporation. As our only manager, Capsource has complete
authority and responsibility for managing DM LLC in the following:
o evaluating and choosing the mortgage loans in which we will invest;
o deciding what agreements we will enter into and whether we will
enter into joint ventures with other companies to invest in
mortgage loans;
o originating, servicing and managing our mortgage loan investments;
o managing all our other operations; and
o amending the Operating Agreement in limited circumstances.
Capsource will cease to be our manager upon its removal, withdrawal,
dissolution or if it is found to be bankrupt. Additionally, even though
Capsource has the broad authority described above, Capsource may not do any of
the following:
o impair our ability to carry on or change the nature of our
business;
o admit a manager without the prior approval of members owning a
majority-in-interest of all the capital accounts;
o sell all or a majority of our assets or dissolve DM LLC without the
prior approval of members owning a majority-in-interest of all the
capital accounts; and
o anything else not permitted in the Operating Agreement.
Your Status
If we accept your subscription and payment for Units, you will receive
Units in DM LLC when the escrow is broken (i.e., if we have received proceeds
for the sale of at least 1,500,000 Units on or before December 31, 2000). At the
same time or shortly after you have received the Units, we will send you a
confirmation of the number Of Units you have acquired. This will be evidence
that you are a member of DM LLC. As a member, you have the rights that are
outlined in this prospectus.
Limited Liability Of Members
The Nevada statute under which DM LLC has been formed provides that
members are not personally liable for the obligations of their limited liability
company. The Operating Agreement also provides that every written agreement
entered into by us is not enforceable against our members personally.
Term of DM LLC
DM LLC will cease operating on December 31, 2019. Before then, the
members may vote by a majority-in-interest to extend its life or to dissolve it
sooner. Additionally, DM LLC may dissolve earlier if Capsource ceases serving as
the manager and the members cannot agree on a new manager within six months.
36
<PAGE>
Meetings
Either Capsource or members owning capital accounts with at least 10%
of the amounts in all capital accounts may call meetings of the members.
Capsource has informed us that it has no present intention of calling any
meetings of the members. Any voting by the members is, therefore, anticipated to
be by written consent.
Voting and Other Rights of Members
We require the vote or consent of members with a majority-in-interest
of members' capital accounts to do any of the following:
o amend the Operating Agreement, except that Capsource may amend it
- to remedy any ambiguity or formal defect or omission,
- to conform it to applicable laws and regulations, and
- to make any change which, in the judgment of Capsource, is not
to the prejudice of the members;
o dissolve DM LLC and wind up our business;
o remove and replace Capsource as our manager; and
o approve or disapprove the sale of all or a majority of our assets.
You may inspect our books and records at our principal office during
our normal office hours. We also maintain a copy of each appraisal for the
security property where we have invested in a mortgage loan at our principal
office for at least six years after the last date that we held the related
mortgage. You may inspect and copy these appraisals during our normal office
hours. We may charge you a fee for copying them.
Members' Return on Investment
We will invest the proceeds of this offering in mortgage loans. These
loans will yield monthly payments of interest and/or principal to us, which for
tax purposes will be attributed to our members. These distributions will be paid
monthly in arrears. We will not accumulate cash on hand (except for working
capital reserves of up to 3% of capital contributions) or assets other than
mortgage notes or similar instruments. We cannot make distributions to you until
the month after we have sold 1,500,000 Units in this offering, received the
proceeds from the offering, and invested them in mortgage loans. Thereafter, our
first distribution to you will be your share of our distribution for the month
in which your contribution is received by us. We calculate the amount of your
distributions on a pro rata basis, based upon the monthly return, if any, on all
of our assets, the size of your contribution and when during the month we
received your contribution.
Capital Accounts
Capsource will establish on our books a capital account for you upon
our receipt of your initial investment, the amount of which will initially be
the amount of your investment. We will allocate to your capital account that
percentage of our income, gains, losses and distributions that the amount of
your capital account bears to all of the members' capital accounts. We will
credit your capital account by additional capital contributions you make
(including dividend reinvestments) and by your share of income and gains
realized by us. We will debit your capital account with your share of losses
realized by us and any income or capital we distribute to you. Except for
write-downs of our investments, we do not adjust capital accounts to reflect
unrealized appreciation or depreciation of our underlying assets. This means
that your capital account may not reflect your proportionate interest in the
fair market value of our underlying assets. Because this is a continuous
offering, in which allocations will be made based on the proportionate interest
of capital accounts, Units purchased by you and other members at different times
will have different values (i.e., different rights to distributions and income
from our mortgage loans and differing proportionate interests in the fair market
value of our underlying assets). See "Summary of the Operating Agreement, Rights
of Members and Description Units - Valuation of Units" below.
37
<PAGE>
Capital Contribution Of Capsource
Capsource must contribute to our capital an amount equal to at least
0.5% of the aggregate capital accounts of all our members. In addition,
Capsource is entitled to a promotional interest of 0.5% of the aggregate capital
accounts of all our members. If the minimum of 1,500,000 Units is sold in the
offering, $7,500 of Capsource's existing $115,100 contribution will be
considered Capsource's required minimum capital contribution. We will also
credit Capsource with an additional $7,500 in promotional interest. If the
maximum of 100,000,000 Units is sold in the offering, Capsource will contribute
$384,900 (plus the existing $115,100 contribution). In that case, we will credit
Capsource with an additional $500,000 in promotional interest. If a number of
Units between the minimum and the maximum number of Units is sold, these amounts
will be adjusted accordingly.
Unit Repurchases and Deemed Distributions
The number of Units you hold will decrease when we return capital to
you, which we do not anticipate doing until seven years after the effectiveness
of the registration statement. If we return capital to you, we will deem it a
redemption of Units in an amount proportionate to the amount in your capital
account. We will provide statements to you reflecting the number of Units that
we have redeemed and the number of Units that you still own as a result of the
redemption.
Write-Down of Investments
Within 30 days following the end of each calendar quarter, Capsource
will determine whether a write-down of any of our investments is required. Our
accountants will then confirm that the write-down conforms with generally
accepted accounting principles. If a write-down is required, the write-down
shall be effective on the last day of the calendar quarter and the capital
accounts of all members on that date shall be reduced accordingly.
Valuation of Units
The value of one of your Units is based on the proportional interest of
your capital account compared to all of the members' capital accounts. Your
capital account is adjusted by being credited with your percentage of our income
and gains, debited with your percentage of our losses and distributions to you.
Consequently, your distribution rights and value (as your proportionate share of
fair market value of our underlying assets) for a Unit at any point in time may
be less or more than $1.00. Additionally, we base the amount of income, gains,
losses and distributions that we allocate to you on your capital account as of
the date of the allocation. We do not base these items on your proportionate
ownership of Units. As a result, the value of an individual Unit may vary based
on when the Unit was purchased.
Even though Unit values may fluctuate, as described above, we will not
adjust capital accounts and distribution percentages to take into account an
increase or decrease (other than a write-down of an investment) in the fair
market value of our underlying assets at the time of a capital contribution (and
corresponding Unit issuance). Thus, if the fair market value of our assets at
the time of a capital contribution (including under our distribution
reinvestment plan) is less than its cost on our books, then the value of your
proportionate interest in the fair market value of our underlying assets
immediately after a capital contribution may be less than one dollar.
Conversely, if the fair market value of our assets at the time of a capital
contribution (including under the our distribution reinvestment plan) is greater
than its cost on our books, then, because there are no interim revaluations of
the capital accounts (except for write-downs), your right to a later allocation
of the unrealized gains in the fair market value of our assets will be shared
with new members (or members making reinvestments). This will result in a
dilution in the value of your proportionate interest in the fair market value of
our underlying assets.
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). We make
these distributions to you in the ratio that your respective capital account
bears to the aggregate amount in all members' capital accounts at the end of the
then-preceding month.
38
<PAGE>
Net proceeds are generally defined in the Operating Agreement to mean
the proceeds from the repayment of principal or prepayment of a mortgage loan.
Any net proceeds that we receive may be used as follows, in Capsource's
discretion:
o reinvesting in new loans, at any time prior to seven years after
the registration statement becomes effective,
o improving or maintaining any properties that we acquire through
foreclosure,
o paying permitted operating expenses, or
o distributing to the members.
When we distribute net proceeds, and assuming that the members have
received back cash equal to their capital contributions, the distributions will
be made to the members in the following ratios: 1% to Capsource and an aggregate
of 99% to the other members in the ratio that each member's respective capital
account bears to the aggregate amount in all capital accounts of the members.
Capsource determines this ratio as of the last day of the calendar month
preceding the month in which the respective distribution of net proceeds is
made. Capsource will not receive any distributions until the other members have
received distributions equaling the amount of their capital contributions.
Before making a distribution, Capsource will pay our expenses and other
liabilities and confirm that our working capital reserves are adequate.
Distribution Reinvestment Plan
After you become a member, you can choose to have your distributions
reinvested rather than receiving cash payments if you continue to meet the
suitability standards. For each $1.00 in distributions you reinvest, you will
acquire one Unit. Capsource may terminate (or later reinstate) the distribution
reinvestment plan at any time. We normally will invest your reinvested
distributions in mortgage loans. No fees shall be paid to Capsource when net
proceeds are reinvested.
We will treat you as a distribution reinvestment plan participant on
the date we receive your initial investment, if you indicate that you want to
participate in the plan. You may also make an election or revoke a previous
election at any time by sending us written notice. Units purchased under the
plan will be credited to your capital account as of the first day of the month
following the month in which the reinvested distribution was made. After you
make your initial investment, you may notify us in writing that you want your
distributions in cash rather than in additional Units. If you notify us prior to
10 days before the end of any given month, you will be removed from the
reinvestment plan during that month and any distribution you receive that month
will be paid in cash. If you notify us within ten days of the end of the month,
you will need to wait a month to receive cash instead of Units.
If you chose to reinvest your distributions in Units, we will send you
a report within 30 days after each time you receive Units describing the
distributions you received, the number of Units you purchased, the purchase
price per Unit, and the total number of Units accumulated. We will also send you
tax information for income earned on Units under the reinvestment plan for the
calendar year when you receive annual tax information from us. You must pay
applicable income taxes upon all distributions, whether the distribution is paid
in cash or reinvested.
No reinvestment participant shall have the right to draw checks or
drafts against his distribution reinvestment account.
Units you acquire through the distribution reinvestment plan carry the
same rights, including voting rights (generally based on the value of the
underlying capital account), as the Units you acquired through your original
investment. However, the value the new Units (as your proportionate share of our
distributions and the fair market value of our underlying assets) will not
necessarily be the same as those previously acquired. As previously described,
we will not adjust capital accounts and distribution percentages to take into
account an increase or decrease (other than a write-down of an investment) in
the fair market value of our assets at the time of a capital contribution (and
corresponding Unit issuance). See "Summary of the Operating Agreement, Rights of
Members and Description of Units - Valuation of Units."
39
<PAGE>
We may amend or end the distribution reinvestment plan for any reason
at any time by mailing a notice to you at your last address of record at least
30 days before the effective date of our action. Capsource specifically reserves
the right to suspend or end the distribution reinvestment plan if:
o Capsource determines that the distribution reinvestment plan
impairs our capital or operations;
o Capsource determines that an emergency makes continuing the plan
unreasonable;
o any governmental or regulatory agency with jurisdiction over us
requires us to do so;
o in the opinion of our counsel, the distribution reinvestment plan
is no longer permitted by federal or state law;
o if transactions involving Units within the previous twelve (12)
months would result in our being considered terminated under
Section 708 of the Internal Revenue Code; or
o Capsource determines that allowing any further reinvestments would
create a material risk that we would be treated as a "publicly
traded partnership" within the meaning of Section 7704 of the
Internal Revenue Code.
Assignment and Transfer of Units
Your options to sell or transfer Units are limited. There is no public
market in which you may sell your Units. We do not expect a public market to
emerge anytime in the future. You may not sell parts of Units unless required by
law and you may not transfer any Units if, as a result, you would own fewer than
2,000 Units. You may transfer your Units using a form approved by Capsource and
must obey all relevant laws when you are permitted to transfer Units. Any person
who buys Units from you must meet the investor suitability requirements in his
home state. Capsource must approve any new members and all transfers of
membership must comply with the Operating Agreement. Capsource's consent to
transfers will be withheld to the maximum extent needed to prohibit transfers
that would cause us to be classified as a "publicly traded partnership" under
the Internal Revenue Code.
Repurchase of Units, Withdrawal from DM LLC
You may withdraw, or partially withdraw, from DM LLC and obtain the
return of all or part of your capital account within 61 to 91 days after you
deliver written notice of withdrawal to Capsource, subject to the following
additional conditions:
o Generally, you may not withdraw from DM LLC until one year after
you purchased Units.
o We can only make cash payments in return of an outstanding capital
account from net proceeds and capital contributions.
o You will be limited to a maximum of $100,000 in withdrawals per
calendar year.
o We are not required to sell any portion of our assets to fund a
withdrawal.
o Capsource will not reinvest net proceeds for a period of up to 90
days after receiving a withdrawal notice from you if we do not have
sufficient funds available to distribute to you all of your capital
account in cash.
o The amount to be distributed to you depends solely on your capital
account on the date of the distribution, even if this is not the
same as your proportionate share of the then fair market value of
our assets.
o We will not permit more than 10% of the outstanding capital
accounts of members to be withdrawn during any calendar year,
except upon the dissolution of DM LLC.
o If your capital account is reduced below $2,000 due to any
withdrawal payment, we may distribute all remaining amounts in
your capital account to you in cancellation of your Units, and you
will then cease to be a member.
o All payments to meet requests for withdrawal are on a "first-come,
first-served" basis. If the sums needed to fund withdrawals in any
particular month exceed the amount of cash available for
40
<PAGE>
withdrawals, funds will be distributed first to the member whose
request we received first, until his withdrawal request is paid in
full.
Special Power of Attorney
Under the terms of the Operating Agreement and the Subscription
Agreement, you appoint Capsource your attorney-in-fact for certain documents,
including the signing of the Operating Agreement. You cannot revoke this special
power of attorney, which will survive your death and stays with your Units even
if they are assigned.
41
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated federal income tax
aspects of an investment in Units. It is impractical to discuss all aspects of
federal, state, and local law which may have tax consequences with respect to
such an investment. This summary is based on the Internal Revenue 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.
We and our members may be subject to state and local taxes in states
and localities in which we may be deemed to be doing business, and this
discussion does not cover state or local tax consequences you may incur in
connection with your investment.
Some of the deductions we intend to claim or positions we intend to
take for tax purposes may be challenged by the IRS. The IRS has increased its
audit efforts with respect to limited partnerships and limited liability
companies, and an audit of our information return may result in, among other
things, an increase in our gross income, the disallowance of certain deductions
or credits we have claimed or in an audit of your income tax returns.
Any audit adjustments made by the IRS could adversely affect you even
if no such adjustments are ultimately sustained, since you and the other members
will, directly or indirectly, bear the expense of contesting such adjustments.
We advise you to consult your own tax advisors, with specific reference
to your own tax situation and potential changes in applicable laws and
regulations.
Our information returns will be prepared by Capsource and will not be
reviewed by our independent accountant or tax counsel. Our tax matters will be
handled by Capsource, often with the advice of independent accountants, and may
be reviewed with tax counsel in certain circumstances.
Tax counsel has rendered an opinion to us that:
o we will be classified as a partnership rather than as an association
taxable as a corporation for federal income tax purposes;
o we will not be classified as a "publicly traded partnership" for
federal income tax purposes; and
o the discussion set forth below is an accurate summary of certain
material federal income tax aspects of an investment in Units by a
member.
The following discusses the material tax issues associated with an
investment in Units.
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 position we take for tax purposes, if contested, or
whether there might be legislative or administrative changes or court decisions
that would modify this discussion. Any 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 Units.
We urge you to consult and rely upon your own tax advisor with respect
to the federal and state consequences arising from an investment in Units. The
cost of such consultation could, depending on the amount thereof, decrease any
return anticipated on the investment. Nothing in this prospectus is or should be
construed as legal or tax advice to any specific investor as individual
circumstances may vary. This federal income tax
42
<PAGE>
consequences section of this prospectus only provides the current state of tax
laws. You should be aware that the IRS may not agree with all tax positions
taken by us and that legislative, administrative or court decisions may reduce
or eliminate 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.
We are 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 63, we will have more than one member. Capsource will not
cause us to make an election to be classified as an association taxable as a
corporation. Based on the foregoing 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 we will be classified as a partnership for
federal income tax purposes.
Based on the opinion that we 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 term "partnership" will
refer to us);
o the use of the term "partner" will be construed to refer also to a
member of a limited liability company (i.e., the term "partner"
will refer to our members); 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., such terms will refer to
Units).
We Will Not Be Classified As A Publicly Traded Partnership
Section 7704 of the Internal Revenue Code treats "publicly traded
partnerships" as corporations for federal income tax purposes. Section 7704(b)
of the Internal Revenue Code defines the term "publicly traded partnership" as
any partnership (including a limited liability company otherwise classified as a
partnership for federal income tax purposes) 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).
In 1995, 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;
o a regional or local exchange; and
43
<PAGE>
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 Internal Revenue 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 Five 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 Internal Revenue 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,
you may withdraw or partially withdraw as a member and obtain the return of your
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 your right to withdraw your 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
Capsource;
44
<PAGE>
o the amount distributed to you will be a sum equal to your capital
account as of the date of such distribution; and
o in no event will Capsource permit the withdrawal during any
calendar year of more than 10% of the outstanding Units. In the
opinion of tax counsel, the foregoing limitations satisfy the
requirements of the Final PTP Regulations set forth above.
The Operating Agreement provides that you may not transfer your Units
if Capsource determines that such a transfer would result in our being
classified as a publicly traded partnership within the meaning of Section
7704(b) of the Internal Revenue Code. To prevent such classification, the
Operating Agreement provides that:
o Capsource will not permit trading of Units on an established
securities market within the meaning of Section 7704(b);
o Capsource will prohibit any transfer of Units which would cause
the sum of percentage interests in our capital or profits
represented by partnership interests that are transferred during
any taxable year to exceed the limitation under the Two Percent
Safe Harbor under Notice 88-75, the Two Percent Safe Harbor; and
o Capsource 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 Units will not be traded on an established securities market within
the meaning of Section 7704 of the Internal Revenue Code;
o our operation with regard to the withdrawal by members will qualify
for the Redemption and Repurchase Safe Harbor;
o our operation with regard to the transfer of Units by members will
qualify for the Two Percent Safe Harbor;
o Units will not be considered as readily tradable on a secondary
market or the substantial equivalent thereof; and
o we will not be classified as a publicly traded partnership for
purposes of Section 7704 of the Internal Revenue Code.
A partnership which is classified as a publicly traded partnership
under Section 7704 of the Internal Revenue Code will not be treated as a
corporation for federal income tax purposes if 90% or more of its gross income
is "qualifying income." Section 7704(c) of the Internal Revenue 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 is 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 we would satisfy the "qualifying income" test
of Section 7704(c). (This would be relevant only if it were determined that we
should be classified as a publicly traded partnership.) Capsource expects that
more than 90% of our income will be of the passive-type included in the
definition of "qualifying income" contained in Section 7704(c). However, it is
not clear whether we will be engaged in the conduct of a financial
45
<PAGE>
business. If we were classified as a publicly traded partnership and considered
to be engaged in a financial business, we would be treated as a corporation for
federal income tax purposes.
General Principles of Partnership Taxation
A partnership generally is not subject to any federal income taxes. We
will file information returns reporting our operations on the accrual basis for
each calendar year.
Determination of Basis in Units
In general, you will not be taxed on distributions you receive from us
unless such distributions exceed your adjusted basis in your Units. Your
adjusted basis in your Units is the amount you originally paid for such Units
increased by:
o your proportionate share of partnership indebtedness with respect
to which no member is personally liable;
o your proportionate share of our taxable income, and
o any additional capital contributions made by you, and decreased by:
o your proportionate share of our losses,
o the amount of cash, and fair value of noncash, distributions to
you, and
o any decreases in your share of any of partnership nonrecourse
liabilities.
Any increase in nonrecourse liabilities is treated as a cash
contribution and a decrease in nonrecourse liabilities is treated as a cash
distribution, even though you do not actually contribute or receive cash.
Distributions in excess of such basis generally will be treated as gain from the
sale or exchange of your Units.
Allocations of Profits and Losses
We will allocate to the members profits and losses and cash
distributions in the manner described in Article 7 of the Operating Agreement.
These allocations of profits and losses 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 our anticipated operations.
We do not anticipate that our operation 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, we have 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.
46
<PAGE>
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
We do not expect that we will incur net losses in any taxable year.
However, if we were to incur losses in any year, your ability to deduct your
distributive share of such losses would be subject to the potential application
of the limitations discussed below.
(i) The Basis Limitation
Section 704(d) of the Internal Revenue 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, you will be precluded from deducting losses in excess of your
adjusted basis in your Units.
(ii) The At Risk Limitation
Section 465 of the Internal Revenue Code provides that a partner (other
than a partner which is a widely-held corporation) may not deduct losses
incurred in certain business activities, including the lending activities we
contemplate, 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 Internal Revenue Code limits the deductibility of
losses from "passive activities" for individuals, estates, trusts and certain
closely-held corporations. A passive activity includes an activity which
involves the conduct of a trade or business in which the taxpayer does not
materially participate. 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.
Capsource expects that at no time will the average outstanding balance
of our liabilities exceed 80% of the average outstanding balance of our mortgage
loans. If we are deemed to be engaged in the trade or business of lending money
(i.e., an equity-financed lending activity), our income will generally be
recharacterized as nonpassive income, even though our net losses or your loss on
the sale of a Unit will be treated as passive activity losses.
47
<PAGE>
If we are not considered engaged in a trade or business of lending
money, then income and loss will be considered portfolio income and loss, and
you will not be permitted to offset passive losses from other activities against
his share of our income.
Section 67(a) of the Internal Revenue Code provides that most
miscellaneous itemized deductions are deductible by an individual taxpayer only
to the extent that they exceed 2% of the taxpayer's adjusted gross income; and
are subject to additional limitations for certain high-income taxpayers.
Deductions from a trade or business are not subject to these limitations. Your
allocable share of our expenses will be considered miscellaneous itemized
deductions subject to this 2% limitation only if we are not considered to be in
the trade or business of lending money.
Computation of Gain or Loss on Sale or Redemption of Units
If you sell your Units (including a sale of your Units to us in a
redemption transaction), you will recognize gain or loss on such sale measured
by the difference between the amount realized (including your share of our
nonrecourse liabilities), and your 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 Internal Revenue
Code, which would be treated as ordinary income. We may have "unrealized
receivables" arising from the ordinary income component of "market discount
bonds." In addition, if we hold property as a result of foreclosure which is
unsold at the time you sell your Units, or holds an investment in a mortgage
loan that is classified as an equity interest, the amount of ordinary income
that would result if we were to sell 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
Your tax liability with respect to an investment in Units will depend
upon your individual tax bracket. Currently, there are five tax brackets for
individuals. For calendar year 1999, the first bracket is at 15% (on taxable
income not over $43,050 in the case of married taxpayers filing joint returns),
the second at 28% (on taxable income from $43,050-$104,050), the third at 31%
(on taxable income from $104,050-$158,550), the fourth at 36% (on taxable income
from $158,550-$283,150), and the fifth at 39.6% (on taxable income over
$283,150).
Depreciation
From time to time we 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 Internal Revenue 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.
48
<PAGE>
Net investment income is the excess of investment income over the sum
of investment expenses. Interest expense we incur and interest expense you incur
to acquire your Units will not be treated as investment interest to the extent
attributable to a passive activity conducted by us. However, that portion of
interest expense allocable to portfolio investments is subject to the investment
interest limitations.
Interest attributable to debt you incur in order to purchase or carry
Units may constitute "investment interest" subject to these deductibility
limitations. You should consider the effect of investment interest limitations
on using debt financing for your purchase of Units.
Tax Treatment of Tax-Exempt Entities
Sections 511 through 514 of the Internal Revenue Code impose a tax on
the "unrelated business taxable income" of organizations otherwise exempt from
tax under Section 501 (a) of the Internal Revenue Code. Entities subject to the
unrelated business income tax include qualified employee benefit plans, such as
pension and profit-sharing plans, Keogh or HR-IO 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 continuation 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. If you are a tax-exempt entity, we urge you to consult your own tax
advisors concerning the possible adverse tax consequences resulting from an
investment in Units.
Capsource intends to invest our assets 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 Capsource deems it advisable to incur
indebtedness in connection with foreclosures on property where mortgagees have
defaulted on their loans.
Subject to certain exceptions, if we acquire property subject to
acquisition indebtedness, the income attributable to the portion of the property
which is debt financed may be treated as unrelated business taxable income to
the Tax-Exempt Entity holding Units.
Sales of foreclosure property might also produce unrelated business
taxable income if we are characterized as a "dealer" with respect to that
property. Mortgage loans which we invest in or purchase which permit us to
participate in the appreciation value of the properties may be recharacterized
by the IRS as an equity interest and such recharacterization could result in
unrelated debt-financed income. The IRS might not agree that our other income is
not subject to tax under the unrelated business income and unrelated
debt-financed income tax provisions.
49
<PAGE>
If a Tax-Exempt Entity is a Qualified Plan (as defined below) and its
Partnership income 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.
In considering an investment in Units 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)(l)(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 Internal Revenue Code.
An investment in Units 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
Capsource will prepare our information income tax returns. Generally,
you are required to report your distributive share of the items set forth on our
tax returns on your individual tax return consistent with our treatment of such
items on our returns. You may report an item inconsistently if you file a
statement with the IRS identifying the inconsistency. Otherwise, additional tax
necessary to make your treatment of the item consistent with our 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
you. Penalties for intentional disregard of the consistency requirements may
also be assessed.
Our tax 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. You 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.
Capsource 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. Capsource will serve as the "tax matters partner" to act on our
behalf and on behalf of the members with respect to "partnership items," to deal
with the IRS and to initiate any appropriate administrative or judicial actions
to contest any proposed adjustments at the partnership level.
If you own less than a 1% of the Units, you will not receive notice
from the IRS of these administrative proceedings unless you form a group with
other members, which group has an aggregate interest of 5% or more, and request
such notice. However, all members have the right to participate in the
administrative proceedings at the partnership level. You will be notified of
adjustments to your distributive share of any tax items agreed to at the company
level by the "tax matters partner."
If our tax return is audited and adjustments are proposed by the IRS,
the "tax matters partner" may cause us to contest any adverse determination as
to partnership status or other matters, and the result of any such contest
cannot be predicted. You should be aware that any such contest would result in
additional expenses to us, and that the costs incurred in connection with such
an audit and any ensuing administrative proceedings will be our responsibility
and may adversely affect the profitability, if any, of our operations.
50
<PAGE>
Adjustments, if any, resulting from any audit may require you to file
an amended tax return, and possibly may result in an audit of your own tax
return. Any audit of your tax return could result in adjustments of items
unrelated to our operations as well as income and losses from our operations.
Original Issue Discount Rules
The original issue discount rules under the Internal Revenue Code
pertain to mortgage loans and obligations issued by us. The effect will be that
we will realize as interest income the amount that economically accrues under a
mortgage loan during the course of the year (using compound interest concepts)
even where a lesser amount is actually paid or accrued under its terms.
Identical concepts will be used for determining our interest deduction on our
obligations, if any.
Market Discount
We may purchase mortgage investments for an amount substantially less
than the remaining principal balance of such mortgage investments. Each monthly
payment which we receive from a mortgagor will consist of interest at the stated
rate for the investment in a mortgage loan and a principal payment. If we
purchase an investment in a mortgage loan at a discount, for federal income tax
purposes the principal portion of each monthly payment will constitute the
return of a portion of our investment in the investment in a mortgage loan and
the payment of a portion of the market discount for the investment in a mortgage
loan,
We will recognize the amount of each monthly payment attributable to
market discount as ordinary income, but the amount of each monthly payment
representing the return of our investment will not constitute taxable income to
us. 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 Internal Revenue Code permits a partnership to elect
to adjust the basis of its property in the case of a transfer of an interest in
the partnership. The effect of such an election would be that, with respect to
the transferee member only, the basis of our property would either be increased
or decreased by the difference between the transferee's basis for his Units and
his proportionate share of our basis for all property we own.
Capsource has decided that due to the accounting difficulties which
would be involved, it will not cause us to make an election pursuant to Section
754 of the Internal Revenue Code. Accordingly, our basis in our assets will not
be adjusted to reflect the transferee's purchase price of his Units.
This treatment might not be attractive to prospective purchasers of
Units, and you might have difficulty for that reason in selling your Units or
might be forced to sell at a discounted price.
Taxation of Mortgage Loan Interest
Mortgage loans which we invest in or purchase may sometimes permit us
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, we would
be required to recognize an allocable share of the income, gain, loss,
deductions, credits and tax preference items attributable to the mortgaged
property. If you are a tax exempt member, recharacterization of a loan as an
equity interest also could result in your receipt of unrelated business taxable
income.
Treatment of Compensation of Capsource
We will pay Capsource an annual management fee of up to 0.75% of the
original capital contributions committed to investing in mortgage loans
(including working capital reserves). Beginning with the third year, it will
51
<PAGE>
be 0.75% of the fair market value of our assets (including working capital),
less any of our indebtedness. For funds not invested in mortgages, the
percentage paid as a management fee is 0.5%. Capsource will be entitled to loan
processing fees paid by us in connection with our investing in or purchasing a
mortgage loan, in addition to reimbursement from us of permitted expenses. In
addition, Capsource or an affiliate of Capsource will act as a servicing agent
with respect to our mortgage investments, for which it will be paid by the
relevant borrower a fee of up to 0.25% of the unpaid principal balance of the
respective mortgage loan serviced.
We will deduct the amount of all management, loan processing and other
fees paid by us each year in computing our taxable income. 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 our treatment of such fees by disallowing the deduction claimed
by us. Such a recharacterization could cause the tax benefits generated by the
payment of such fees to be deferred or lost.
Capsource or an affiliate may also act as escrow agent for mortgage
investments made by us 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.
We will enter into mortgage investment transactions in which the
borrower has employed and agreed to compensate Capsource 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. Capsource or an affiliate may also receive a
fee from a borrower for the reconveyance of property upon full payment of a loan
in an amount as is generally prevailing in the geographical area where the
property is located. In addition, Capsource and/or an affiliate may receive a
fee payable by a borrower for permitting the assumption of a loan. Capsource
will be entitled to fees from the borrower upon a delinquent payment under a
mortgage loan or, in some cases, the prepayment of a mortgage investment.
Since 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 our taxable income. The IRS could take the position
that these commissions or fees, or any of them, are constructively paid by us,
in which case our interest income would be increased by the amount of the
commissions, and we could deduct the commissions only to the extent the
commissions or fees are reasonable compensation for the services rendered and
otherwise considered deductible expenditures.
Since this is ultimately an issue of fact which may depend on future
events, tax counsel has not given an opinion regarding the issue.
Capsource or its affiliates will be entitled to reimbursement from us
for certain expenses advanced by Capsource or its affiliates for our benefit and
for salaries and related expenses for nonmanagement and nonsupervisory services
performed for our benefit. Our reimbursement of such expenses will generally be
treated in the same manner as if we 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 Units, or the
effective date, which could be retroactive, of any legislation which may derive
from any such past or future proposal.
52
<PAGE>
We strongly urge you to consider ongoing developments in this uncertain
area and to consult your own tax advisors in assessing the risks of investment
in Units.
State and Local Taxes
We may invest in or purchase loans in states and localities which
impose a tax on our assets or income, or on each member based on his share of
any income (generally in excess of specified amounts) derived from our
activities in such jurisdiction. If you are en entity which is exempt from
federal income taxation, you will generally also be exempt from state and local
taxation.
You should consult with your 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 Internal Revenue 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
Internal Revenue 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 Internal Revenue 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,
Capsource 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 DM LLC, 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 Capsource will provide
annually upon the written request of a member an estimate of the value of the
member's Units based upon, among other things, outstanding mortgage investments,
fair market valuation based on trading will not be possible because there will
be no market for the Units.
Plan Assets Generally
If our assets are deemed to be "plan assets" under ERISA:
o the prudence standards and other provisions of Part 4 of Title l
of ERISA applicable to investments by Qualified Plans and their
fiduciaries would extend (as to all plan fiduciaries) to
investments made by us,
53
<PAGE>
o certain transactions that we might seek to enter into might
constitute "prohibited transactions" under ERISA and the Internal
Revenue Code because Capsource would be deemed to be a fiduciary
of the Qualified Plans, and
o our audited financial information would have to be reported annually
to the Department of Labor.
In 1986, the Department of Labor promulgated final regulations defining
the term "plan assets" (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 Capsource and its affiliates are not prohibited from
purchasing Units, any such purchases will be disregarded in determining whether
this exemption is satisfied. We cannot assure "benefit plan investors" that we
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 we 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 occurred.
54
<PAGE>
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 Capsource
has represented that it will cause us 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 our fiscal year during
which the offering of Units to the public occurred. The Units will not be
subject to any restrictions on transfer other than those enumerated in 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, our underlying assets should be
considered to be plan assets under the Final DOL Regulations.
HOW WE PROTECT OUR RIGHTS AS A LENDER
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because many of the legal aspects of
mortgage loans are governed by applicable state laws (which may vary
substantially), the following summaries do not purport to be complete, to
reflect the laws of any particular state (other than where specifically
indicated), to reflect all the laws applicable to any particular mortgage loan
or to encompass the laws of all states in which the properties securing mortgage
loans in which we might invest are situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
mortgage loans. Unless the context indicates to the contrary, the terms
"mortgages" and "deeds of trust" are used interchangeably.
Mortgages and Deeds of Trust Generally
Mortgage loans are secured by either mortgages or deeds of trust or
other similar security instruments, depending upon the prevailing practice in
the state in which the related mortgaged property is located. Most of the loans
in which we invest will be secured by deeds of trust. There are two parties to a
mortgage, the mortgagor, who is the borrower and owner of the mortgaged
property, and the mortgagee, who is the lender. In a mortgage transaction, the
mortgagor delivers to the mortgagee a note, bond or other written evidence of
indebtedness and a mortgage. A mortgage creates a lien upon the real property
encumbered by the mortgage as security for the obligation evidenced by the note,
bond or other evidence of indebtedness. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties, the borrower-property owner called
the trustor (similar to a mortgagor), a lender called the beneficiary (similar
to a mortgagee), and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, until the debt is paid, in trust for
the benefit of the beneficiary to the trustee to secure payment of the
obligation generally with a power of sale. The trustee's authority under a deed
of trust and the mortgagee's authority under a mortgage are governed by
applicable law, the express provisions of the deed of trust or mortgage, and, in
some cases, the direction of the beneficiary.
The real property covered by a mortgage is most often the "fee estate"
in land and improvements. However, a mortgage may encumber other interests in
real property such as a tenant's interest in a lease of land and improvements
and the leasehold estate created by that lease. A mortgage covering an interest
in real property other than the fee estate requires special provisions in the
instrument creating the interest or in the mortgage to protect the mortgagee
against termination of the interest before the mortgage is paid.
Priority of liens on mortgaged property created by mortgages and deeds
of trust depends on their terms and, generally, on the order of filing with a
state, county or municipal office, although this priority may in some states be
altered by the mortgagee's or beneficiary's knowledge of unrecorded liens
against the mortgaged property. However, filing or recording does not establish
priority over governmental claims for real estate taxes and assessments. In
addition, the Internal Revenue Code provides priority for certain tax liens over
the lien of the mortgage.
55
<PAGE>
Foreclosure
Judicial Foreclosure
Foreclosure of a mortgage is generally accomplished by judicial actions
initiated by the service of legal pleadings upon all necessary parties having an
interest in the real property. Delays in completion of foreclosure may
occasionally result from difficulties in locating necessary parties defendant.
When the mortgagee's right to foreclose is contested, the legal proceedings
necessary to resolve the issue can be time-consuming. A judicial foreclosure is
typically subject to most of the delays and expenses of other litigation,
sometimes requiring up to several years to complete. At the completion of the
judicial foreclosure proceedings, if the mortgagee prevails, the court
ordinarily issues a judgment of foreclosure and appoints a referee or other
designated official to conduct the sale of the property. These sales are made in
accordance with procedures which vary from state to state. The purchaser at
these sales acquires the estate or interest in real property covered by the
mortgage. We do not anticipate using judicial foreclosure to protect our rights
due to the incremental time and expense involved in these procedures.
Non-judicial Foreclosure
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust
and/or applicable statutory requirements which authorize the trustee, generally
following a request from the beneficiary/lender, to sell the property to a third
party upon any default by the borrower under the terms of the note or deed of
trust. A number of states may also require that a lender provide notice of
acceleration of a note to the borrower. Notice requirements under a trustee's
sale vary from state to state. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest in the real property, including any junior lienholders. In
some states, the borrower, or any other person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expense incurred in enforcing
the obligations. Generally, state law controls the amount of foreclosure
expenses and costs, including attorneys' fees, which may be covered by a lender.
If the deed of trust is not reinstated, a notice of sale must be posted in a
public place and, in most states, published for a specific period of time in one
or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest in the real property.
In case of foreclosure under either a mortgage or deed of trust, the
sale by the referee or other designated official or by the trustee is often a
public sale. However, because of the difficulty a potential buyer at the sale
might have in determining the exact status of title to the property subject to
the lien of the mortgage or deed of trust and the redemption rights that may
exist (see "How We Protect Our Rights as a Lender" - "Statutory Rights of
Redemption" below), and because the physical condition of the property may have
deteriorated during the foreclosure proceedings and/or for a variety of other
reasons (including exposure to potential fraudulent transfer allegations), a
third party may be unwilling to purchase the property at the foreclosure sale.
For these and other reasons, it is common for the lender to purchase the
property from the trustee, referee or other designated official for an amount
equal to the outstanding principal amount of the indebtedness secured by the
mortgage or deed of trust, together with accrued and unpaid interest and the
expenses of foreclosure. In this case, if the amount bid by the lender equals
the full amount of the debt, interest and expenses, the debt owed to the
mortgagee will be extinguished. Thereafter, the lender will assume the burdens
of ownership, including paying operating expenses and real estate taxes and
making repairs. The lender is then obligated as an owner until it can arrange a
sale of the property to a third party. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. A lender commonly incurs substantial legal fees and court costs in
acquiring a mortgaged property through contested foreclosure and/or bankruptcy
proceedings.
Lenders also need to comply with procedure-related environmental rules
and regulations. An increasing number of states require that any environmental
hazards are eliminated before a property may be resold. A lender may be
responsible under federal or state law for the cost of cleaning up a mortgaged
property that is environmentally contaminated. See "How We Protect Our Rights as
a Lender" - "Environmental Risks" below. As a result, a lender could realize an
overall loss on a mortgage loan even if the related mortgaged property is sold
at
56
<PAGE>
foreclosure or resold after it is acquired through foreclosure for an amount
equal to the full outstanding principal amount of the mortgage loan, plus
accrued interest.
In foreclosure proceedings, courts frequently apply general equitable
principles. These equitable principles are generally designed to relieve the
borrower from the legal effects of his defaults under the loan documents.
Examples of judicial remedies that have been fashioned include judicial
requirements that the lender undertake affirmative and expensive actions to
determine the causes of the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have
substituted their judgment for the lender's judgment and have required that
lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other cases,
courts have limited the right of the lender to foreclose if the default under
the mortgage instrument is not monetary, including the borrower's failing to
maintain adequately the property or the borrower's executing a second mortgage
or deed of trust affecting the property. Finally, some courts have been faced
with the issue of whether or not federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
mortgages receive notices in addition to the statutorily-prescribed minimum. For
the most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protection to the borrower.
Environmental Risks
Real property pledged as security to a lender may be subject to
potential environmental risks. Of particular concern may be those mortgaged
properties which are, or have been, the site of manufacturing, industrial or
disposal activity. These environmental risks may give rise to a diminution in
value of property securing any mortgage loan or, as more fully described below,
liability for clean-up costs or other remedial actions, which liability could
exceed the value of the real property or the principal balance of the related
mortgage loan. In certain circumstances, a lender may choose not to foreclose on
contaminated property rather than risk incurring liability for remedial actions.
Under the laws of certain states, the owner's failure to perform
remedial actions required under environmental laws may in certain circumstances
give rise to a lien on mortgaged property to ensure the reimbursement of
remedial costs incurred by the same. In some states this lien has priority over
the lien of an existing mortgage against the real property. Because the costs of
remedial action could be substantial, the value of a mortgaged property as
collateral for a mortgage loan could be adversely affected by the existence of
an environmental condition giving rise to a lien.
The state of law is currently unclear as to whether and under what
circumstances clean-up costs, or the obligation to take remedial actions, can be
imposed on a secured lender. Under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended ("CERCLA"), current ownership or operation of a property provides a
sufficient basis for imposing liability for the costs of addressing releases or
threatened releases of hazardous substances on that property. Under these laws,
a secured lender who holds indicia of ownership primarily to protect its
interest in a property could under certain circumstances fall within the liberal
terms of the definition of "owner or operator". Consequently, these laws often
specifically exclude secured lenders, provided that the lender does not
participate in the facility's management of environmental matters. The United
States Environmental Protection Agency (the "EPA") and various courts have
determined that secured creditors may exercise some rights and remain exempt
from CERCLA lender liability. However, these determinations do not or would not
necessarily affect the potential for liability under other state laws or federal
laws other than CERCLA. Furthermore, it is not clear at the present time whether
any of these lender protections would be binding in actions brought by a party
other than the federal government.
We expect that at the time most, if not all, investments in mortgage
loans are made, a Phase I Environmental Site Assessment of the mortgaged
properties will have been conducted.
"Hazardous substances" are generally defined as any dangerous, toxic or
hazardous pollutants, chemicals, wastes or substances, including, without
limitation, those so identified pursuant to CERCLA or any other environmental
laws now existing, and specifically including, without limitation, asbestos and
asbestos containing materials, polychlorinated biphenyls, radon gas, petroleum
and petroleum products, and urea formaldehyde.
57
<PAGE>
If a lender is or becomes liable for clean up costs, it may bring an
action for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but these persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, an action against the
borrower may be adversely affected by the limitations on recourse in the loan
documents. Similarly, in some states anti-deficiency legislation and other
statutes requiring the lender to exhaust its security before bringing a personal
action against the borrower (see ""How We Protect Our Rights as a Lender
- -Anti-Deficiency Legislation" below) may curtail the lender's ability to recover
from its borrower the environmental clean up and other related costs and
liabilities incurred by the lender.
Junior Mortgage and Deeds of Trust; Rights of Senior Mortgages or Beneficiaries
The priority of our liens on mortgaged property created by mortgages or
deeds of trust depends on the terms of the mortgage or deed of trust and,
generally, on the order of filing with a state, county or municipal office. The
priority may in some states be undermined by the mortgagee's or beneficiary's
knowledge of unrecorded liens, leases or encumbrances against the mortgaged
property. However, filing or recording does not establish priority over
governmental claims for real estate taxes and assessments or, in some states,
for reimbursement of remediation costs of certain environmental conditions. See
"How We Protect Our Rights as a Lender - Environmental Risks". In addition, the
Internal Revenue Code provides priority to certain tax over the lien of a
mortgage.
We do not presently intend to acquire junior mortgages or deeds of
trust which are subordinate to senior mortgages or deeds of trust held by the
other lenders. Our rights as mortgagee or beneficiary under a junior mortgage or
deed of trust will be subordinate to those of the mortgagee as beneficiary under
the senior mortgage or deeds of trust, including the prior rights of the senior
mortgagee as beneficiary to receive rents, hazard insurance and condemnation
proceeds and to cause the property securing the mortgage loan to be sold upon
default of the mortgagor, thereby extinguishing the junior mortgagee's or
beneficiary's lien unless we assert our subordinate interest in foreclosure
litigation or satisfy the defaulted senior loan. As discussed more fully below,
in many states a junior mortgagee may satisfy a defaulted senior loan in full,
or may cure the default, and bring the senior loan current, in either event
adding the amounts expended to the balance due on the junior loan. Absent a
provision in the senior mortgage, no notice of default is required to be given
to the junior mortgagee or beneficiary.
The form of mortgage or deed of trust used by many institutional
lenders confers on the mortgagee or beneficiary the right both to receive
proceeds collected under any hazard insurance policy and awards made in
connection with any condemnation proceedings, and to apply the proceeds and
awards to any indebtedness secured by the mortgage or deed of trust, in the
order that the mortgagee determines. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under the senior
mortgage or deed of trust will have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgage or deed of trust. Proceeds in excess of the
amount of senior indebtedness will, in most cases, be applied to the
indebtedness secured by a junior mortgage or deed of trust. The laws of certain
states may limit the ability of mortgagees or beneficiaries to apply the
proceeds of hazard insurance and partial condemnation awards to the secured
indebtedness. In these states, the mortgagor or trustor must be allowed to use
the proceeds of hazard insurance to repair the damage unless the security of the
mortgagee or beneficiary has been impaired. Similarly, in some states the
mortgagee or beneficiary is entitled to the award for a partial condemnation of
the real property security only to the extent that its security is impaired.
The form of mortgage or deed of trust used by many institutional
lenders contains a "future advance" clause, which provides that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee or
beneficiary are to be secured by the mortgage or deed of trust. While this type
of clause is valid under the laws of most states, the priority of any advance
made under the clause depends, in some states, on whether the advance was an
"obligatory" or "optional" advance. If the mortgagee or beneficiaries obligated
to advance the additional amounts, the advance may be entitled to receive the
same priority as amounts initially made under the mortgage or deed of trust,
notwithstanding that there may be intervening junior mortgages or deeds of trust
and other liens between the date of recording of the mortgage or deed of trust
and the date of the future advance, and notwithstanding that the mortgagee or
beneficiary had actual knowledge of the intervening junior mortgages or deeds of
trust and other liens at the time of the advance. Where the mortgagee or
beneficiary is not obligated to
58
<PAGE>
advance the additional amounts and has actual knowledge of the intervening
junior mortgages or deeds of trust and other liens, the advance may be
subordinate to these intervening junior mortgages or deeds of trust and other
liens. Priority of advances under a "future advance" clause rests, in other
states, on state law giving priority to advances made under the loan agreement
up to a "credit limit" amount stated in the recorded mortgage or deed of trust.
Another provision typically found in the forms of mortgage and deed of
trust used by many institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when due,
all encumbrances, charges and liens on the property which appear prior to the
mortgage, to provide and maintain fire insurance on the property, to maintain
and repair the property and not to commit or permit any waste thereof, and to
appear in and defend any action or proceeding purporting to affect the property
or the rights of the mortgagee under the mortgage. Upon a failure of the
mortgagor or trustor to perform any of these obligations, the mortgagee or
beneficiary is given the right under the mortgage or deed of trust to perform
the obligation itself, at its election, with the mortgagor or trustor agreeing
to reimburse the mortgagee or beneficiary for any sums expended by the mortgagee
or beneficiary on behalf of the mortgagor or trustor. all sums so expended by
the mortgagee or beneficiary become part of the indebtedness secured by the
mortgage.
Statutory Rights of Redemption
In some states, after a foreclosure sale pursuant to a mortgage or deed
of trust, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The right of redemption
may defeat the title of any purchaser as a foreclosure sale or any purchaser
from the lender subsequent to a foreclosure sale. Certain states permit a lender
to avoid a post-sale redemption by waiving its right to a deficiency judgment.
Consequently, the practical effect of the redemption right is often to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run.
Anti-Deficiency Legislation
We may acquire interests in mortgage loans which are nonrecourse loans
as to which, in the event of default by a borrower, recourse may be had only
against the specific property pledged to secure the related mortgage loan and
not against the borrower's other assets. Even if recourse is available pursuant
to the terms of the mortgage loan against the borrower's assets in addition to
the mortgaged property, certain states have imposed statutory prohibitions which
impose prohibitions against or limitations on this recourse. Some state statutes
limit the right of the mortgagee or beneficiary to obtain a deficiency judgment
against the borrower following foreclosure. A deficiency judgment is a personal
judgment against the former borrower equal in most cases to the difference
between the net amount realized upon the public sale of the security and the
amount due to the lender. Other statutes require the mortgagee or beneficiary to
exhaust the security afforded under a mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting its security; however, in some
of these states, the lender, following judgment on the personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. The practical effect of this election requirement
is that lenders will usually proceed first against the security rather than
bringing personal action against the borrower. Other statutory provisions limit
any deficiency judgment against the former borrower following a judicial sale to
the access of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a mortgagee form obtaining a large deficiency judgment against the
borrower as a result of low bids or the absence of bids at the judicial sale.
In Nevada, we can pursue a deficiency judgment against the borrower or
a guarantor if the value of the property securing the loan is insufficient to
pay back the debt owed to us. In jurisdictions like California, however, if we
desire to seek a judgment in court against the borrower for the deficiency
balance, we may be required to seek judicial foreclosure of our deed of trust
and/or have other security from the borrower. This typically is a more prolonged
procedure, and is subject to most of the delays and expenses that affect other
lawsuits.
59
<PAGE>
Bankruptcy Laws
Statutory provisions, including the United States Bankruptcy Code of
1978, as amended (the "Bankruptcy Code"), and state laws affording relief to
debtors, may interfere with and delay the ability of the secured mortgage lender
to obtain payment of the loan, to realize upon collateral and/or to enforce a
deficiency judgment. Under the Bankruptcy Code, virtually all actions (including
foreclosure actions and deficiency judgment proceeding) are automatically stayed
upon the filing of the bankruptcy petition, and, often, no interest or principal
payments are made during the course of the bankruptcy proceeding. The delay and
consequences thereof caused by the automatic stay can be significant. Also,
under the Bankruptcy Code, the filing of a petition in bankruptcy by or on
behalf of a junior lienor, including, without limitation, any junior mortgagee,
may stay the senior lender form taking action to foreclose out the junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards for the lender are met, the amount and terms of a mortgage secured by
property of the debtor may be modified under certain circumstances. The
outstanding amount of the loan secured by the real property may be reduced to
the then current value of the property (with a corresponding partial reduction
of the amount of the lender's security interest) pursuant to a confirmed plan or
lien avoidance proceeding, thus leaving the lender a general unsecured creditor
for the differences between the property value and the outstanding balance of
the loan. Other modifications may include the reduction in the amount of each
monthly payment, which reduction may result from a reduction in the rate of
interest and/or the alteration of the repayment schedule (with or without
affecting the unpaid principal balance of the loan), and/or an extension (or
reduction) of the final maturity date. Some courts have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearage over a number of years. Also, under
the Bankruptcy Code, a bankruptcy court may permit a debtor through its
rehabilitative plan to de-accelerate a secured loan and to reinstate the loan
even though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the property
had yet occurred) prior to the filing of the debtor's petition. This may be done
even if the full amount due under the original loan is never repaid. Other types
of significant modifications to the terms of the mortgage or deed of trust may
be acceptable to the bankruptcy court, often depending on the particular facts
and circumstances of the specific case.
In a bankruptcy or similar proceeding action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related mortgage loan to the lender. Payments on long-term debt may be
protected from recovery as preferences if they are payments in the ordinary
course of business made on debts incurred in the ordinary course of business.
Whether any particular payment would be protected depends upon the facts
specific to a particular transaction.
Enforceability of Certain Provisions
Prepayment Provisions
In the absence of state statutory provisions prohibiting prepayment
fees (e.g., in the case of single-family residential loans) courts generally
enforce claims requiring prepayment fees unless enforcement would be
unconscionable. However, the laws of certain states may render prepayment fees
unenforceable for certain residential loans or after a mortgage loan has been
outstanding for a certain number of years, or may limit the amount of any
prepayment fee to a specified percentage of the original principal amount of the
mortgage loan, to a specified percentage of the outstanding principal balance of
a mortgage loan, or to a fixed number of month's interest on the prepaid amount.
In certain states, prepayment fees payable on default or other involuntary
acceleration of a mortgage loan may not be enforceable against the mortgagor or
trustor. Some state statutory provisions may also treat certain prepayment fees
as usurious if in excess of statutory limits. See "- Secondary Financing:
Due-on-Encumbrance Provisions" and "-- Applicability of Usury Laws". We
typically invest in mortgage loans that do not require the payment of specified
fees as a condition to prepayment or the requirements of which have expired, and
to the extent mortgage loans do require these fees, the fees generally may not
be a material deterrent to the prepayment of mortgage loans by the borrowers.
60
<PAGE>
Due-On-Sale Provisions
The enforceability of due-on-sale clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. The Garn-St. Germain Depository Institutions Act of 1982 (the
"Garn-St. Germain Act") preempts state constitutional, statutory and case law
that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these claims in accordance with their terms, subject to certain
exceptions. As a result, due-on-sale clauses have become generally enforceable
except in those states whose legislatures exercised their authority to regulate
the enforceability of these clauses with respect to certain mortgage loans. The
Garn-St. Germain Act "encourages" lenders to permit assumption of loans at the
original rate of interest or at some other rate less than the average of the
original rate and the market rates.
Under the Bankruptcy Code, due-on-sale clauses may not be enforceable
in bankruptcy proceedings and may, under certain circumstances, be eliminated in
any modified mortgage resulting from the bankruptcy proceeding.
Acceleration on Default
We may invest in mortgage loans which contain a "debt-acceleration"
clause, which permits the lender to accelerate the full debt upon a monetary or
nonmonetary default of the borrower. The courts of most states will enforce
clauses providing for acceleration in the event of a material payment default
after giving effect to any appropriate notices. The equity courts of any state,
however, may refuse to foreclose a mortgage or deed of trust when an
acceleration of the indebtedness would be inequitable or unjust or the
circumstances would render the acceleration unconscionable. Furthermore, in some
states, the borrower may avoid foreclosure and reinstate an accelerated loan by
paying only the defaulted amounts and the costs and attorneys' fees incurred by
the lender in collecting these defaulted payments.
State courts also are known to apply various legal and equitable
principles to avoid enforcement of the forfeiture provisions of installment
contracts. For example, a lender's practice of accepting late payments from the
borrower may be deemed a waiver of the forfeiture clause. State courts also may
impose equitable grace periods for payment of arrearage or otherwise permit
reinstatement of the contract following a default. If a borrower under an
installment contract has significant equity in the property, equitable
principles may be applied to reform or reinstate the contract or to permit the
borrower to share the proceeds upon a foreclosure sale of the property if the
sale price exceeds the debt.
Secondary Financing: Due-on-Encumbrance Provisions
Some mortgage loans may have no restrictions on secondary financing,
thereby permitting the borrower to use the mortgaged property as security for
one or more additional loans. Some mortgage loans may preclude secondary
financing (often by permitting the first lender to accelerate the maturity of
its loan if the borrower further encumbers the mortgaged property) or may
require the consent of the senior lender to any junior or substitute financing;
however, some courts have found these provisions to be unenforceable in some
cases.
Where the borrower encumbers the mortgaged property with one or more
junior liens, the senior lender is subjected to additional risk. First, the
borrower may have difficulty servicing and repaying multiple loans. Second, acts
of the senior lender which prejudice the junior lender or impair the junior
lender's security may create a superior equity in favor of the junior lender.
Third, if the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with, delay
and even prevent the taking of action by the senior lender. Fourth, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Applicability of Usury Laws
State and federal usury laws limit the interest that lenders are
entitled to receive on a mortgage loan. In determining whether a given
transaction is usurious, courts may include charges in the form of "points" and
"fees"
61
<PAGE>
as "interest", but may exclude payments in the form of "reimbursement of
foreclosure expenses" or other charges found to be distinct from "interest". If,
however, the amount charged for the use of the money loaned is found to exceed a
statutorily established maximum rate, the form employed and the degree of
overcharge are both immaterial. Statutes differ in their provision as to the
consequences of a usurious loan. One group of statutes requires the lender to
forfeit the interest above the applicable limit or imposes a specified penalty.
Under this statutory scheme, the borrower may have the recorded mortgage or deed
of trust canceled upon paying its debt with lawful interest, or the lender may
foreclose, but only for the debt plus lawful interest. Under a second, more
severe type of statute, a violation of the usury law results in the invalidation
of the transaction, thereby permitting the borrower to have the recorded
mortgage or deed of trust canceled without any payment and prohibiting the
lender from foreclosing.
Nevada law does not apply limitations on interest that may be charged
on the type of loans that we intend to invest in or purchase. In California, we
will only invest in loans that were made through real estate brokers licensed by
the California Department of Real Estate. Mortgage loans made or arranged by a
licensed real estate broker are exempt from the California usury law provisions
that restrict the maximum rate of interest on California loans. all underlying
mortgage loans on California property that are invested in or purchased by us
will be arranged for us by such a licensed California real estate broker.
62
<PAGE>
REPORTS TO MEMBERS
Within 75 days after the close of our fiscal year, Capsource will
prepare and distribute to you all information about us necessary in the
preparation of the your federal income tax return. The materials delivered to
you annually will include:
o audited financial statements: balance sheet, statements of income
or loss, Members' equity, and a statement of Cash Flow;
o a statement as to any transactions with Capsource or its
affiliates, and of fees, commissions, compensation and other
benefits paid by us or accrued to Capsource or its affiliates for
the fiscal year completed, showing the amount paid or accrued to
each recipient and the respective services performed; and
o a report identifying distributions from (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 our members.
Copies of the financial statements and reports referred to above (other
than those delivered for purposes of your income tax return) shall be
distributed to you within 120 days after the close of each taxable year. We will
reimburse Capsource for the costs of any verification performed by our
accountants in the preparation of their reports, but only to the extent that the
reimbursement when added to the costs for administrative services rendered by
Capsource does not exceed the competitive rate for such services.
For so long as the proceeds of this offering are not fully committed or
returned to investors, Capsource shall prepare a special report (which may be
included in the quarterly report described below) containing a statement of the
amount of the mortgage loans in which we have invested, the material terms of
these loans, the identity of the borrower and the real property securing the
mortgage loans and the appraised values of that real property. We will send you
copies of the report within sixty (60) days after the end of each quarter.
Capsource will not prepare a special report during quarters when there are no
mortgage loans or origination, placement or evaluation fees.
We will provide you with the information required by Form 10-Q (if
required to be filed with the Securities and Exchange Commission) within 45 days
of the end of each quarter. If we register under Section 12(g) of the Securities
Exchange Act of 1934, as amended, Capsource shall prepare, at our expense.,
o a quarterly report for each of the first three quarters in each
fiscal year containing unaudited financial statements (consisting
of a balance sheet, a statement of income or loss and a statement
of Cash Flow), and
o a statement of other pertinent information regarding DM LLC and its
activities during the period covered by the report.
We will distribute copies of these statements and information to you
within sixty (60) days after the close of the respective quarter.
63
<PAGE>
PLAN OF DISTRIBUTION
DM Financial Services, Inc., our dealer-manager, is using this
prospectus to offer Units to the public on our behalf. DM Financial Services is
an affiliate of Capsource and a wholly owned subsidiary of Sunderland
Corporation, the Delaware corporation that owns Capsource. DM Financial Services
is a securities broker-dealer registered with the Securities and Exchange
Commission and in certain states and is a member of the National Association of
Securities Dealers, Inc. ("NASD").
DM Financial Services intends to engage non-affiliated securities
brokerage firms that are members of the NASD to act as selected dealers to sell
Units to the public. We will pay DM Financial Services up to 1.0% of the gross
proceeds of the sale of Units as a dealer management fee, and reimburse DM
Financial Services for its accountable expenses up to a maximum 0.5% of the
gross proceeds of this offering. Additionally, we may pay the selected dealers
sales commissions of up to 3.5% and reimburse them for their accountable
expenses up to a maximum of 0.5% of the gross proceeds of this offering.
We will place all proceeds from the sale of Units in a segregated
escrow account until at least 1,500,000 Units have been sold and sales proceeds
of $1,500,000 have been obtained. The escrow account will be with BankWest of
Nevada, whose address is 2700 North Sahara Avenue, Las Vegas, Nevada 89102-1700.
We have entered into an escrow agreement with BankWest, which you can find as an
exhibit to our registration statement.
If we sell 1,500,000 Units on or before December 31, 2000, the escrow
account will be closed and the proceeds, after deduction of BankWest's escrow
agent fees, together with amounts earned as interest on those proceeds, will be
delivered to us. If we have not sold l,500,000 Units on or before 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. We will then stop selling Units and the Subscription Agreements will
be canceled.
If we sell 1,500,000 Units on or before December 31, 2000, we will
continue to sell Units to the public through DM Financial Services and selected
dealers. We will seek to sell a total of 100,000,000 Units for $100,000,000,
which includes Units to be issued under our distribution reinvestment plan. We
may sell Units for up to two years from the date we begin the offering, or we
may decide to end the offering. In certain states where the offering will be
made, we may not be allowed to extend the offering beyond one year unless we
have the permission of the appropriate state agency.
If you want to purchase Units, you should complete the Subscription
Agreement and Power of Attorney (the "Subscription Agreement"), which you can
find at Exhibit B, and which will be provided by the person or the securities
brokerage firm that offered you the Units. You should return the Subscription
Agreement and full payment for the Units being purchased to the person or firm
who offered the Units to you. The firm that sells you the Units will tell you
whether to make your payment to "BankWest of Nevada, as Escrow Agent" or, to "DM
Mortgage Investors, LLC." Additional copies of the Subscription Agreement may be
obtained from DM Financial Services, whose address is 2901 El Camino Avenue,
Suite 207, Las Vegas, Nevada 89102, telephone number (702) 247-1332.
By submitting the signed Subscription Agreement with payment for the
purchase of Units, you:
o agree to be bound by the Operating Agreement;
o grant a special and limited power of attorney to Capsource; and
o represent and warrant that you meet the relevant suitability
standards and are eligible to purchase Units.
Upon our commencing monthly distributions from cash flow, you will have
the opportunity to acquire additional Units in lieu of receiving cash dividends.
No fees or commissions will be paid for reinvested distributions. See,
generally, "Summary of Operating Agreement, Rights of Members and Description of
Units-Distribution Reinvestment Plan."
64
<PAGE>
LEGAL MATTERS
Certain legal matters concerning the issuance of Units offered will be
reviewed for us by Goodman Phillips & Vineberg and also by Berkley, Gordon,
Levine, Goldstein & Garfmkel, LLP, our and Capsource's attorneys. Our tax
counsel is Wendel, Rosen, Black & Dean, LLP, Oakland, California.
EXPERTS
Grant Thornton LLP, who are independent certified public accountants,
have audited our financial statements as of December 31, 1999, and for the
period from December 14, 1999 (the date we began business) through December 31,
1999. These financial statements are included in this prospectus and in the
registration statement of which this prospectus forms a part. We include Grant
Thornton's report here and elsewhere in this registration statement. We rely on
Grant Thornton as experts in accounting and auditing and on the Grant Thornton
report for the financial statements we include here.
Grant Thornton LLP has also audited the financial statements of
Sunderland Corporation as of December 31, 1999 and for the year then ended
included in this prospectus or in the Registration Statement. We include Grant
Thornton's report here and elsewhere in this Registration Statement. We rely on
the report of Grant Thornton for the financial statements included here.
AVAILABLE INFORMATION
This prospectus does not contain all the information in the
Registration Statement on Form S-11 (No. 333-32800) and accompanying exhibits
which we have filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933. Additionally, we anticipate that
we will become subject to the informational requirements of the Securities and
Exchange Act of 1934. If we become subject to the Securities and Exchange Act of
1934, we will file reports and other information with the Commission. Copies of
the Registration Statement on Form S-11 and other reports and information filed
by us can be inspected and copied at the public reference facilities (phone
number (800) SEC-0330) maintained by the Commission at 450 Fifth Street, N.W-,
Washington, D.C. 20549. Copies of that material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission also maintains a World Wide Web site
that contains reports, proxy and information statements and other information
for registrants that file electronically with the Commission. The address of
this site is http://www.sec.gov.
65
<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>
-i-
<PAGE>
<TABLE>
<S> <C>
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>
-ii-
<PAGE>
<TABLE>
<S> <C>
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>
-iii-
<PAGE>
<TABLE>
<S> <C>
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>
-iv-
<PAGE>
<TABLE>
<S> <C>
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>
-v-
<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
-1-
<PAGE>
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
-2-
<PAGE>
(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.
-3-
<PAGE>
(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
-4-
<PAGE>
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
-5-
<PAGE>
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
-6-
<PAGE>
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
-7-
<PAGE>
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
-8-
<PAGE>
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
-9-
<PAGE>
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;
-10-
<PAGE>
(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;
-11-
<PAGE>
(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;
-12-
<PAGE>
(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
-13-
<PAGE>
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.
-14-
<PAGE>
(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
-15-
<PAGE>
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:
-16-
<PAGE>
(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
-17-
<PAGE>
(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
-18-
<PAGE>
(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.
-19-
<PAGE>
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.
-20-
<PAGE>
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
-21-
<PAGE>
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
-22-
<PAGE>
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.
-23-
<PAGE>
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.
-24-
<PAGE>
(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
-25-
<PAGE>
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.
-26-
<PAGE>
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.
-27-
<PAGE>
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.
-28-
<PAGE>
(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"
-29-
<PAGE>
("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
-30-
<PAGE>
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
-31-
<PAGE>
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.
-32-
<PAGE>
(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.
-33-
<PAGE>
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
-34-
<PAGE>
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,
-35-
<PAGE>
"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
-36-
<PAGE>
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,
-37-
<PAGE>
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 percent
(1.0%) of the gross proceeds of the Offering for all fees and expenses in
connection with the Offering and 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
-38-
<PAGE>
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
-39-
<PAGE>
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
-40-
<PAGE>
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 A to the
Prospectus.
Item 35. Treatment of Proceeds from Stock Being Registered
Not Applicable
Item 36. Financial Statements and Exhibits
(a) Financial Statements: See "Index to Financial Statements" and
the financial statements appearing thereafter in Part I of
this registration statement.
(b) Exhibits:
1.1 Dealer Manager Agreement
1.2 Selected Dealer Agreement
3 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 Amendment No. 1 to its 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 April 14, 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
1.2 Selected Dealer Agreement
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
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
- ----------
* All exhibits previously filed.
II-4
