AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY __, 2003
REGISTRATION NO. 333-98651
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERIFIRST FUND I, LLC
(Exact name of registrant as specified in its charter)
Florida 6189 16-1628-844
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employee
Classification Code Number) Identification number)
1712-H Osborne Rd.
St. Marys, Georgia 31558
(912) 673-9100
(Name, address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
John Tooke
AmeriFirst Fund I, LLC
1712-H Osborne Rd.
St. Marys, Georgia 31558
(912) 673-9100
Facsimile: (912) 673-8434
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications to:
Elliot H. Lutzker, Esq.
Snow Becker Krauss P.C.
605 Third Avenue
New York, New York 10158-0125
(212) 687-3860
Facsimile: (212) 949-7052
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement has been effective.
If any of the securities registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. |X|
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS PROPOSED PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES AMOUNT TO MAXIMUM OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE FEE
Units 100,000 Units (1) $1,000 $100,000,000 $9,200
(1) The registrant is offering units at $1,000 per Unit. Units will initially be
sold at a minimum of one hundred (100) Unit(s) with additional purchases in
multiples of $1,000. The registrant will issue and sell up to 100,000 units for
$100 million.
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 Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
ii
The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED February __, 2003
PROSPECTUS MAXIMUM -- $100,000,000 of Units
MINIMUM -- $2,500,000 of Units
MINIMUM INVESTMENT: $100,000
AMERIFIRST FUND I, LLC, ISSUER
The units offered by AmeriFirst Fund I, LLC, a newly formed Florida
limited liability company, represent membership interests in the Fund. The
Fund's income will be generated from life insurance policies which we intend to
purchase through AmeriFirst Funding Group, Inc., an affiliated insurance
provider. The Fund is not a mutual fund or any other type of investment company
within the meaning of the Investment Company Act of 1940 and is not subject to
such regulation. No trading market currently exists or will exist for the units
in this offering and transfer restrictions prevent assignment.
Price to Selling Proceeds to
Net Proceeds to the Fund Investors Commissions(1) Issuer
- ------------------------ --------- -------------- ------
Per Unit $1,000 $100 $900
Total Maximum $100,000,000 $10,000,000 $90,000,000
Total Minimum $2,500,000 $250,000 $2,250,000
(Footnote on following page)
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE UNITS OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
An investment in the Fund involves a high degree of risk. Prospective investors
should consider the following factors, among others, set forth under "Risk
Factors" commencing on page 13.
o no guarantee of a return on investment
o no guarantees in estimates of timing when the policy matures
o lack of liquidity
o no actual experience by John Tooke in the life settlements business
o dependence on John Tooke as controlling person of our manager, provider
and underwriter for the proposed investment program
o lack of operating history, assets or established financing sources
o independent physicians providing services to us do not personally examine
the insured
o the proceeds have not been committed to any identifiable insurance
policies
o conflicts between the Fund, our manager, provider and underwriter
including, the payment of substantial fees and expenses, non arms-length
agreements and competition for the time and services of John Tooke
o substantial doubt raised by accountants as to our ability to continue as a
going concern due to our being a development stage company which has not
yet begun operations, nor raised funds to commence such operations
o lack of ownership interest in our manager and provider which are
controlled by John Tooke
o up to 5% of the face amount of insurance policies may be paid to our
provider for origination fees, and 5% to our manager to service the life
settlements and the investors
o limited ability to invest in insurance contracts if only the minimum is
reached
o the incentive fee structure could result in our manager recommending
riskier or more speculative investments
o risks associated with the fact that we have no assets
o our investment policies and strategies may be changed without unitholder
consent
o up to 10% of the gross proceeds of this offering to be paid upon closing
of life insurance policy purchases as selling commissions to our
underwriter.
AMERIFIRST CAPITAL CORP.
The date of this prospectus is ____________ __, 2003.
iii
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(1) Units will be offered and sold by broker-dealers registered with the
Securities and Exchange Commission and licensed by the NASD to sell the units.
We expect to complete the registration of our underwriter, AmeriFirst Capital
Corp., with the NASD prior to the effective date of this prospectus. Our
underwriter may also engage other NASD broker-dealers and foreign dealers who
agree to abide by the NASD's rules to sell our units. Our underwriter will
receive selling commissions at the time of purchase of life insurance polices
equal to up to 10% of the gross proceeds of the sale of units by the underwriter
and may negotiate fees to be paid to selected dealers on units sold by them.
We are offering and selling to the public a minimum of 2,500 units and up to a
maximum of 100,000 units at $1,000 per unit, with an initial minimum investment
of one hundred (100) units at $100,000, although our underwriter reserves the
right to accept subscriptions of less than $100,000. All subscriptions are
non-cancellable and irrevocable. The units are being distributed on a "best
efforts" basis by AmeriFirst Capital Corp. The proceeds of this offering will be
held in escrow with SouthTrust Bank, 110 Office Park Drive, 2nd Floor,
Birmingham, Alabama, 35223 until the $2,500,000 minimum amount is received, and
promptly returned to investors, with interest, if the minimum amount is not
received by ____________, 2003 [six months from the date of this prospectus
unless extended].
AmeriFirst, Inc., the holding company controlled by John Tooke, will pay at its
own expense all organizational and offering expenses including without
limitation, legal and accounting expenses, photocopy costs, selling expenses,
and filing fees paid to the Securities and Exchange Commission and state
securities commissions, estimated to be approximately $300,000.
----------
Currently we intend to offer the units for sale in California, Colorado,
Connecticut, Florida, Georgia, Hawaii, Illinois, Michigan, Minnesota, Nevada,
New Jersey and New York. We will end this offering in these states on
____________, 2004 [12 months from the date of this prospectus unless extended]
or at such earlier time that all $100 million of units are sold. If we desire to
extend this offering up until ____________ 2004 [24 months from the date of the
prospectus], each of these states requires us to file the appropriate documents
with such state's agency and we will provide investors in these states with
written notice of such extension. We may register in additional states to sell
the units and will comply with applicable state "blue sky" laws to extend the
offering.
If we do not receive acceptable subscriptions for $2,500,000 or more of
units by ____________ 2003 [six months from the date of this prospectus unless
extended], we will notify you in writing and the escrow agent will promptly
return all subscription amounts together with interest earned while the funds
were held in escrow to you and the other subscribers. You will earn interest on
the funds held in the escrow account as soon as your funds clear at an average
money market rate of approximately 1-2%, according to market rates. You will not
be a member of the Fund while your funds are held in the subscription escrow
account and you will only become a member once we accept your subscription and
transfer your funds out of the subscription escrow and into the Fund's own
operating escrow account. After the minimum offering amount has been raised, we
will accept or reject all subscriptions within five business days after receipt
and will instruct the escrow agent promptly to release the funds of the accepted
subscriptions to us and to refund the funds of any rejected subscriptions. We
may terminate this offering at
iv
any time and refund any subscriptions that we have not accepted. Unless you are
an insured who also purchases units offered hereby, you will not know the
identity of the insured.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
WHERE YOU CAN FIND MORE INFORMATION
We will file reports, proxy statements and other information with the SEC.
You may read and copy any document we file at the Public Reference Room of the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Regional Offices of the SEC at 233 Broadway, New York, New York 10048 and at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call
1-800-SEC-0330 for further information concerning the Public Reference Room. Our
filings will be available to the public from the SEC's website at www.sec.gov.
We will distribute to our members annual reports containing audited financial
statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements.
v
TABLE OF CONTENTS
Page
----
WHERE YOU CAN FIND MORE INFORMATION ........................................-v-
SUMMARY OF THE OFFERING.......................................................1
ORGANIZATIONAL CHART.........................................................12
RISK FACTORS.................................................................13
FORWARD-LOOKING STATEMENTS...................................................29
INVESTOR SUITABILITY STANDARDS...............................................29
USE OF PROCEEDS..............................................................33
CAPITALIZATION OF AMERIFIRST FUND I, LLC.....................................35
TERMS OF THE OFFERING........................................................35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF AMERIFIRST FUND I, LLC................................38
NOTICE TO CALIFORNIA RESIDENTS...............................................39
BUSINESS.....................................................................39
DESCRIPTION OF THE UNITS.....................................................64
DESCRIPTION OF VIATICAL
SETTLEMENT CONTRACTS.........................................................71
OTHER OPERATING POLICIES.....................................................72
OUR MANAGER, PROVIDER AND UNDERWRITER........................................73
COMPENSATION OF OUR MANAGER, PROVIDER AND UNDERWRITER........................76
CONFLICTS OF INTEREST........................................................78
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................80
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................................................81
FIDUCIARY RESPONSIBILITIES OF OUR MANAGER....................................81
vi
ERISA CONSIDERATIONS.........................................................83
FEDERAL INCOME TAX CONSEQUENCES..............................................83
SUMMARY OF OPERATING AGREEMENT...............................................89
PLAN OF DISTRIBUTION.........................................................94
INVESTMENT COMPANY ACT OF 1940...............................................96
LEGAL PROCEEDINGS............................................................96
LEGAL OPINIONS...............................................................96
EXPERTS......................................................................96
ADDITIONAL INFORMATION.......................................................97
SIGNATURES.................................................................II-5
EXHIBITS
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A. Form of Subscription Agreement
B. Operating Agreement
vii
SUMMARY OF THE OFFERING
The following information is only a brief summary of the units being
offered for sale in this prospectus. We recommend that you thoroughly read this
prospectus. This summary is not as complete or accurate as the longer
descriptions you will find in the main body of this prospectus.
Fund......................... AmeriFirst Fund I, LLC, is a Florida Limited
Liability Company, which was recently formed
to engage in this offering. We are offering
membership interests in the Fund which will
entitle you to a fractional beneficial
interest in the income to be generated from
individual life insurance policies which we
intend to purchase at a discount to face value
to create a "pool." The Fund was formed to
provide a return on investment to our
investors. However, we will also provide
financial benefits to terminally ill and
chronically ill (a continuing disease which
may or may not become terminal) persons of all
ages and senior citizens, age 65 and older,
with estimated life expectancies based solely
on actuarial tables (collectively, defined as
"life settlements"). Under our operating
agreement, attached hereto as Exhibit B, our
existence ends on December 31, 2027, unless
liquidated sooner. Our offices, as well as
those of our provider are located at 1712-H
Osborne Rd., St. Marys, Georgia 31558; Tel:
(912) 673-9100.
Management of the Fund believes that it is
preferable to keep the operations and
financial statements of the regulated entities
separate and apart from the non-regulated
entities. Our underwriter will be licensed by
the NASD and its personnel will be licensed
securities personal aside from administration
support. Similarly, our provider is subject to
different rules and regulations in each state
in which it is regulated. Its sole business
will be to purchase policies on behalf of the
Fund, except on a non-securitized basis. Our
manager, on the other hand, will not be
regulated and acts as a service company to the
Fund and our provider. It can also provide
services to non-affiliated persons for a fee
including competitors of our provider and the
Fund. The Fund believes that it is preferable
to keep the books and records and financial
statements of a non-regulated entity separate
from the Fund, provider and underwriter, each
of which is regulated. The Fund will be
registered with the Securities and Exchange
Commission and its financial accounts and
1
statements are separate and apart from the
regulated entities. Each entity is controlled
by John Tooke, who has experience with selling
mortgage backed and other securities, but has
no actual experience purchasing and
securitizing life settlements. He has
researched the life settlements industry
starting in April 2001 and conducted all
organizational activities necessary for the
Fund.
Provider .................... The provider for the Fund is AmeriFirst
Funding Group, Inc., a Delaware corporation
recently formed by John Tooke. Our provider
will originate policy purchases either
directly from the insured, when it is
licensed, from other providers, or from an
unaffiliated broker network. Our provider has
agreed in writing to assign all policies which
it purchases to the Fund, except those it may
sell on a non-securitized basis to
unaffiliated third parties. The provider will
be managed by two persons who have been hired
to report to John Tooke, both for policy
origination. Our provider is in compliance
with the laws of the State of Georgia to
conduct life settlement business and will
comply with the laws of all other states which
regulate the purchase and/or sale of insurance
policies.
Manager/Servicer ............ Our manager of the Fund is AmeriFirst
Financial Services, Inc., a Delaware
corporation recently formed by John Tooke. Our
manager will be responsible for making all
investment decisions on behalf of the Fund and
dealing directly with members of the Fund. In
addition, our manager currently intends to
service the insurance policies purchased by
the Fund, however, our manager may decide to
outsource any or all non-financial services to
a third party. Approximately 13 experienced
employees have been hired by our manager and
its parent company AmeriFirst, Inc. to handle
these responsibilities. Investment decisions
for the Fund will be made by the management of
our manager who has substantial prior
experience with securities, but not with life
settlements. The service function will be
managed by a chief information officer,
in-house legal staff, accounting staff,
insurance review, medical review, policy
administration, computer and data processing
personnel, customer service and medical
administration. We have not entered into any
other agreements with a third party servicer.
Our manager has entered into consulting
agreements with four unaffiliated medical
review service companies to determine
estimated life expectancies. In addition, we
2
have contracted with 21st Holdings, LLC, an
affiliate of one of those service companies,
to monitor or track the medical status and
location of an insured and file the claim to
the insurer once a policy has matured. The
principal offices of our manager and
underwriter are located at 814 North Highway
A1A, Suite 300, Ponte Vedra Beach, Florida
32082; tel: (904) 373-3034; although our
manager expects to also have office space at
the Fund's facility in St. Marys, Georgia.
Use of Proceeds ............. The gross proceeds of the offering will be
used to purchase life insurance policies for
less than the face amount of the policy and to
pay for all services required in connection
with the policies, all related fees, establish
the premium escrow account, sinking fund and
pay all sales commissions on the units offered
hereby. Ownership of the insurance policy
carries with it the right to secure the
insurance proceeds when the policy matures. It
also generally carries with it the obligation
to make premium payments.
Return on Investment......... We are offering pro rata interests in the
income to be generated primarily from
individual life insurance policies which we
will purchase to create a pool. The pool is
intended to reduce risk by purchasing a large
number of policies from a diverse group of
terminally ill and chronically ill persons of
all ages, and senior citizens, age 65 and
older, with estimated life expectancies based
solely on actuarial tables. The pool of life
insurance policies will range from face values
of $25,000 to $2 million or more. Life
settlements help relieve the financial burden
of terminally ill and chronically ill persons
who are often faced with enormous stress
resulting from loss of employment and
extraordinary medical expenses. The pool
should provide a blended rate of return closer
to the estimated rate of return, rather than
if you were to purchase a single life
insurance policy. We will attempt to purchase
insurance policies at a discount to face value
based on our estimates of life expectancies.
The discount is directly connected with life
expectancy and will increase along with
estimated life expectancy. A one-year life
expectancy may have a relatively small
discount of perhaps 10%, while a 10-year life
expectancy may have a 50% discount. The amount
of the discount to the insured is negotiated
and varies depending upon the nature of the
life insurance policy, the stability of the
insurer, prevailing
3
interest rates, the estimated premiums to be
paid by our manager for the policy over the
expected life of the insured, the insured's
estimated life expectancy and certain other
costs of the life settlement. We will attempt
to create a pool of life insurance policies
whereby the blended rate of return on the
gross proceeds invested in life insurance
policies will provide an estimated rate of
return of approximately 10% per annum.
Only when we acquire the proceeds from life
insurance policies will you receive a
distribution consisting of your "pro rata
share" of such proceeds. The estimated rate of
return is based on our investing and returning
to you the gross proceeds of this offering
together with a return on your gross
investment. The gross proceeds will be used to
purchase life insurance policies inclusive of
all fees associated with the purchase, as well
as the underwriter's sales commission which
will be paid at the time of purchase, and to
establish the premium escrow account and the
sinking fund at SouthTrust Bank. It is
projected by dividing the aggregate fixed rate
of return by the insured's estimated life
expectancy determined by medical and insurance
underwriting and actuarial tables. See
"Business - Description of Return on
Investment -- Estimated Life Expectancy" Table
for a hypothetical example of how returns on
investment will be calculated.
The actual return to investors is paid on the
determination date (as defined) only when the
Fund is paid by the insurance carrier after
the actual the insurance policy matures. Since
the pool of insurance policies will have
different maturity dates, an investor in the
Fund receives an indeterminate cash flow. Upon
cash payment of insurance proceeds to the
Fund, a distribution will be paid generally on
the fifth day of the following month to
members consisting of your "pro rata share" of
such proceeds. Accordingly, the greater the
total investments, the smaller your ownership
interest in the Fund will be since your
ownership interest will be diluted; however,
your rate of return will remain the same. The
actual return on investment to members is
determined by subtracting the discounted
amount paid for each policy purchased
(including all fees and policy premiums paid),
as well as any capital calls paid, and
payments to the premium escrow account and
sinking fund, from the face value of such
policy when the policy matures. When all
insurance
4
policies have matured, the Fund's existence
will end. We cannot guarantee you the full
return of your investment.
The actual overall rate of return to all
members can only be determined when all
policies have matured at the end of the Fund.
The actual rate of return may be adversely
affected by, among other things; (i) policies
maturing after the estimated life expectancy;
(ii) delays in tracking or disbursement of
claims at maturity by the insurance company,
(iii) delays in investing gross proceeds of
this offering resulting in investors receiving
1-2% interest in the operating escrow account,
as opposed to the estimated rate of return
from the dollars invested in insurance
policies, (iv) any capital calls (if the
premium escrow account and the sinking fund
have been exhausted); (v) payments from the
premium escrow amount; and (vi) policies that
terminate, lapse or the refusal or inability
of the insurance carrier to pay the claim when
the premium escrow account and the sinking
fund are exhausted.
The rate of return on investments, the blended
rate of return and the actual rate of return
are determined by using simple interest as
opposed to compounded interest.
See the Fund's operating agreement attached as
Exhibit B to this prospectus and "Summary of
the Operating Agreement" in this prospectus
for the precise definition of "pro rata
share."
Minimum and Maximum We must receive a minimum of $2.5 million from
Offering .................... investors before funds will be released from
the subscription escrow account at SouthTrust
Bank and we can begin our operations and
acquire the first life settlements. Each
investor must subscribe to purchase units in
denominations of $1,000 for a minimum of one
hundred (100) units or $100,000 and integral
multiples of $1,000 in excess of such minimum
denomination. Our underwriter reserves the
right to accept subscriptions of less than
$100,000.
If the minimum amount of subscriptions has
been timely received, then, with two days
prior notice, the escrow agent shall release
to the Fund, funds equal to units in the same
principal amount. The funds shall be put in
the Fund's operating escrow account earning
money market rates until the purchase of life
settlement policies. Prior to
5
the purchase of life settlement policies,
funds equal to the purchase price of policies
available for purchase, and broker fees, where
required will be sent to our provider. In
addition, funds equal to the premiums based on
life expectancy of the insured will be placed
in the premium escrow account along with
escrow of the sinking fund. Each of the escrow
accounts shall be maintained at SouthTrust
Bank, Birmingham, Alabama.
After the minimum offering amount has been
raised, we will accept or reject all
subscriptions within five business days of
receipt. If we do not receive and accept $2.5
million in subscriptions by _________________,
2003 [six months from the date of this
prospectus unless extended], we will notify
investors in writing that we are terminating
this offering and your funds, together with
the interest or other income earned thereon
will promptly be returned to you by the escrow
agent. Until we receive a total of $2.5
million, any payments received from you or
other subscribers will be held in an
interest-bearing escrow account. All
subscriptions are non-cancellable and
irrevocable during this period. After we issue
the first $2.5 million or more in units, we
intend to continue to offer and sell the units
until __________ 2003, [12 months from the
date of this prospectus unless extended] or,
until a total of l00,000 units for $100
million are sold. In the event that the entire
$100 million of units are sold, our
underwriter will receive up to $10 million in
sales commissions at the time of purchase of
life insurance policies.
Currently we intend to offer the units for
sale in California, Colorado, Connecticut,
Florida, Georgia, Hawaii, Illinois, Michigan,
Minnesota, Nevada, New Jersey and New York. If
we elect to extend this offering up until
__________ 2005 [24 months from the date of
this prospectus], each of these states
requires us to file the appropriate documents
with such state's securities commission and we
will provide investors in those states with
written notice of such extension. We may
register in additional states to sell the
units and will comply with applicable "blue
sky" laws to extend the offering. We may
terminate this offering at any time by written
notice to investors and refund any
subscriptions that we have not accepted. If we
terminate this offering, our manager will
promptly prepare a form of notice and furnish
our
6
underwriter and selected dealers, if any, with
copies to distribute to all persons who have
received this prospectus either directly from
our underwriter or from a selected dealer. See
"Plan of Distribution."
Permitted Life Origination Fee. The fee to be paid by the
Settlement Fees ............. Fund to AmeriFirst Funding Group, Inc., our
provider, or an unaffiliated provider in the
secondary market, will be up to a maximum of
5% of the face amount of the policy. This is
exclusive of fees, which our provider or the
insured is obligated to pay to the independent
broker selling the insured's policy to our
provider.
Our Manager's and/or Servicer's Fees. The fees
to be paid by the Fund to our manager, who
also currently intends to service the
policies, will be up to a maximum of 5% of the
face amount of the policy. We believe that the
fees paid to our manager are consistent with
fees paid to third parties. If we outsource to
a third party we will enter into a servicing
agreement. The services to be provided include
the following steps: (a) due diligence review,
which includes evaluating the terms of each
policy with the assistance of a medical review
service company, which has contracted with
independent medical specialists, who will
estimate the life expectancy of the insured;
(b) closing the transaction, which includes
obtaining releases of prior beneficiaries and
designation and recording of the Fund as
beneficiary, as well as payment of the
purchase price to the insured; (c) servicing
the insurance policies on an ongoing basis,
and (d) monitoring the life status of the
insured through a contracted affiliate of one
of our medical review service companies. See
"Compensation of our Manager, provider and
underwriter."
Premium Escrow Account ...... The Fund shall escrow at SouthTrust Bank an
amount generally equal to 150% of the annual
premiums of all policies purchased by the Fund
for the estimated life expectancies of the
insureds with a minimum of two years beyond
the estimated life expectancy. Upon final
liquidation of the Fund, the remaining premium
escrow account balance shall be transferred to
our manager with all accrued interest thereon.
Sinking Fund ................ Our Manager shall escrow at SouthTrust Bank at
each closing 10% of the gross proceeds of this
offering as a
7
sinking fund intended to be used in the event
of insurance company policy payout failure(s),
policy termination and policy lapses and/or
for operating expenses the latter of which
shall not exceed 3% of the gross proceeds
(collectively, a "default"). Such sum shall be
used to pay the Fund's members in case of a
default. The sinking fund is intended to
promote due diligence and good underwriting
practices in order to avoid a default.
Therefore, if successful, the sinking fund
remainder balance upon final liquidation of
the Fund shall be distributed to our manager
as additional incentive compensation including
all interest accrued in any manner permitted
by law.
Conflicts of Interest ....... Certain relationships exist among the Fund,
our provider, our underwriter, our manager and
John Tooke, who through a Delaware holding
company, AmeriFirst, Inc., owns a majority of
the equity of each such entity, which could
result in various conflicts of interest
including, but not limited to, payment of
substantial fees and expenses, purchase of
life insurance policies from our provider, non
arms-length agreements, competition for the
time and services of John Tooke and the lack
of separate representation. See "Conflicts of
Interest."
Membership Interests......... You will not be a member of the Fund while
your funds are held in escrow and you will
only become a member once we accept your
subscription and transfer your funds out of
the subscription escrow and into the Fund's
operating escrow account upon completion of
the minimum offering. Your rights as a member
are described in the Fund's operating
agreement, attached hereto as Exhibit B, and
are also governed by Florida law.
Units ....................... The units will represent membership interests
in the Fund which will represent fractional
pro rata beneficial interests in the income to
be generated primarily from a pool of life
insurance policies. The units do not represent
interests in, or obligations of, our manager,
our provider, or any affiliate thereof. The
units are not insured or guaranteed by any
federal or state governmental agency.
Cash ........................ Funds held by the Fund after the minimum
offering has been completed that have not yet
been used to purchase life insurance policies
and to pay policy premiums will be temporarily
deposited by our manager in interest-bearing
8
bank accounts, money market funds or used to
purchase short-term U.S. Treasury bills. It is
our present intention to have money market
accounts each paying money market rates of
1-2% according to market fluctuations. The
first account is the operating escrow account
in which funds are transferred to our
provider's escrow account to purchase life
insurance policies; the second is the premium
escrow account to make premium payments; the
third is the provider's escrow account to hold
the purchase prices and fees pending closing,
and the fourth account is the sinking fund to
provide for payment to members in the event of
a default. Investors will be entitled to a
pro-rata share of the short-term interest
earned in the operating escrow account.
Tax Considerations .......... The Fund will elect to be taxed as a
partnership for federal income tax purposes
and for purposes of any state or local tax if
such election is recognized by the state and
local taxing authorities. Accordingly, in the
opinion of our counsel, Snow Becker Krauss
P.C., which is the discussion herein under
"Federal Income Tax Consequences," there will
be no company level tax in any jurisdiction
that recognizes that election. Most, if not
all, of the return paid to you from the
interest we earn on the life settlements will
be taxed as ordinary income to you if you are
subject to federal income tax. If we have more
than 100 members and the membership interests
are "publicly traded" as that term is used in
the Internal Revenue Code (and defined under
"Federal Income Tax Consequences" in this
prospectus), then the Fund will be taxed as a
corporation and therefore, will incur double
taxation. Our operating agreement provides
that no transfer will be permitted if it
results in our being a publicly traded
partnership; however, there can be no
assurance that we will be able to identify
transfers that would result in the Internal
Revenue Service determining that there has
been a secondary market in the stock and that
would result in such determination. Under
partnership tax rules, you will report on your
federal income tax for each year during which
you are a partner, your distributive share of
the Fund's items of income gain, loss,
deduction and credit of the partnership,
irrespective of whether you receive a cash
payment.
Risk Factors ................ An investment in the Fund involves a high
degree of risk. You should consider the risk
factors commencing on page
9
13 including, among others:
o no actual experience by John Tooke in the
life settlements business
o lack of operating history, assets or
established financing sources
o dependence on John Tooke as controlling
person of our manager, provider and
underwriter for the proposed investment
program
o no trading market for securities will
exist and transfer restrictions prevent
assignment
o conflicts between the Fund, our manager,
provider and our underwriter including,
but not limited to, non arms-length
agreements and competition for the time
and services of John Tooke
o substantial fees to be paid to affiliates
of the Fund for origination and servicing
of life insurance policies may create
conflicts of interest among such parties
Investor Suitability
Standard .................... To purchase units you must meet the
requirements set forth in the definition of an
accredited investor in Regulation D under the
Securities Act of 1933. See "Investor
Suitability Standards."
Limited Right to Resell ..... There will be no public market for resale of
the units. To resell or transfer your units in
a private transaction, you must first obtain
the approval of our manager, which it is not
required to grant. In addition, our manager
may not approve a resale, if as a result, the
Fund would become a "publicly traded
partnership" or which would otherwise cause
the Fund to be taxable as a corporation or
which will violate any federal or state
securities laws.
Limited Right to Withdraw ... You may only withdraw or partially withdraw
from the Fund and obtain the return of all or
part of your capital account commencing one
year after you purchase your units and receive
back 85% of the face amount of your
investment, less any distributions paid to
such date, within 90 days after you deliver
written notice of withdrawal to our manager.
Notwithstanding the foregoing, we can only
make cash payments in return for outstanding
capital amounts from net proceeds and capital
contributions.
Reports to Members .......... Once every year the financial statements of
the Fund will be audited by independent public
accountants and the statements will be made
available to members. Additionally, a
semi-annual members statement and an
10
annual members tax statement will be sent to
each member. Our quarterly, annual and other
reports that we file with the SEC will also be
accessible to you at the SEC's public reading
rooms or on the SEC's website. See "Summary of
Operating Agreement--Reports and Records."
To Purchase Units ........... To purchase units, you must complete and sign
the subscription agreement, attached as
Exhibit A to this prospectus, and deliver it
to our underwriter or the selected dealer who
has solicited your investment, together with
your payment for the number of units as
specified in the subscription agreement. We
may accept or reject your subscription in
whole or in part. Our acceptance of your
subscription is effective when the
subscription agreement is signed by our
manager.
The units offered are subject to cancellation or modification of the
offering without notice. Our manager reserves the right, in its discretion, to
reject subscriptions in whole or in part for the purchase of units offered
hereby, notwithstanding the tender of payment by check or otherwise.
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized by our manager. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any securities other than the units, or an
offer or solicitation of any person in any jurisdiction in which such offer or
solicitation would be unlawful.
The Fund will be taxed as a partnership and your tax information will be
furnished to you on Form K-1, a partner information return. These returns, which
we will distribute to you, will contain information regarding the income items
and expense items of the Fund. If you have not received K-1s from other
investments, you may find that preparing your tax return may require additional
time, or it may be necessary for you to retain an accountant or other tax
prepared, at an additional expense to you, to assist you in the preparation of
your return.
11
ORGANIZATIONAL CHART
----------------------------------------
AmeriFirst, Inc.
(Delaware) Parent Holding Company 55% of
-------------- the equity owned by John Tooke, Chairman, ---------
| Chief Executive Officer and Director |
| ---------------------------------------- |
| | |
| | |
- ---------------------------- ----------------------------- ----------------------------
AmeriFirst Financial AmeriFirst Capital Corp. AmeriFirst Funding Group,
Services, Inc. (Florida) Inc.
(Delaware) Underwriter of the Fund (Delaware)
Manager of the Fund Provider of the Fund
A wholly-owned subsidiary of
A wholly-owned subsidiary of AmeriFirst, Inc. Wholly-owned subsidiary of
AmeriFirst, Inc. AmeriFirst, Inc.
John Tooke, President,
John Tooke, President, Chief Executive Officer and John Tooke, President,
Chief Executive Officer and Director Chief Executive Officer and
Director Director
- ---------------------------- ----------------------------- ----------------------------
| | |
| | |
|------------------------------------------------------------------|
|
|
|
-----------------------------
AmeriFirst Fund I, LLC
(Florida) Issuer
-----------------------------
12
RISK FACTORS
You should be aware that an investment in the Fund involves a high degree
of risk. You should carefully consider the following risk factors and other
information in this prospectus before purchasing units. We also caution you that
this prospectus includes forward-looking statements that are based upon our
beliefs and assumptions and on information currently available to us. You should
carefully consider the following risk factors and other information in this
prospectus before purchasing units.
Risks Related to Our Business and Industry
We may not have a viable business because of our lack of an operating history.
The Fund and our provider were recently incorporated in 2002, and together
with our manager have no operating history. At December 31, 2002, the Fund had
no assets and our provider had assets of $10,000. Furthermore, the life
settlements industry is relatively new. There can be no assurance that life
settlements will remain a viable industry or that the Fund will be able to
compete in this industry. See "Business - Competition."
There is little, if any, precedent for a public company engaged in the life
settlements industry.
There are very few, if any, public companies engaged in the life
settlements industry. Therefore, there are no models for investors to view in
which to compare the operations and future performance of the Fund.
The inability of our provider to purchase policies will have a material adverse
effect on the Fund.
The Fund will depend upon our provider for the acquisition of life
settlement policies on behalf of the Fund, either directly from the insured when
it is licensed, from other providers, or from an unaffiliated broker network.
There can be no assurance that our provider will be able to purchase a
sufficient amount of insurance policies to utilize the entire gross proceeds
which may be raised from this offering of units. If AmeriFirst Funding Group,
Inc. were to cease acting as our provider of insurance policies, this would be
expected to have a material adverse effect on the Fund's ability to purchase
life insurance policies.
The loss of services of John Tooke could adversely affect the business and
operations of our manager, underwriter and provider.
John Tooke is the president and controlling shareholder of our manager,
underwriter and our provider. Mr. Tooke has no actual experience in the purchase
of life settlements, although he has researched the industry since at least
April 2001. Since an investment in the Fund is substantially dependent on the
efforts and expertise of John Tooke, he is currently irreplaceable. Our
underwriter has a non-compete provision in its employment contract with John
Tooke, should he terminate employment, which prevents him from engaging in any
business, which is competitive with the business of our manager and soliciting
any past or present customer or employee of our manager. Neither the Fund nor
any of its affiliated entities maintains key man
13
life insurance on John Tooke's life and the loss of his services would be
expected to cause us to cease operations unless a replacement could be found.
The loss of Mr. Tooke's services would be expected to adversely affect the
Fund's business and its affiliated entities' ability to perform their duties and
obligations in connection with this offering. Under our operating agreement we
will indemnify our manager from any liability and related expense incurred in
dealing with the Fund, investors or third parties. See "Our Manager, Provider
and Underwriter."
Our manager has no prior track record relating to the sale of life settlements.
We are relying on our manager to conduct our business. Our manager has not
commenced operations and we cannot present a track record for our manager. John
Tooke, the controlling shareholder of our manager, has experience with the
placement of investor funds in mortgage backed financing. While Mr. Tooke's
prior performance in real estate may give some indication of the future
performance of the Fund, any relevant prior performance of Mr. Tooke's
experience is more than 10 years old and not in his possession. Mr. Tooke has no
experience selling life settlements and thus there is no prior performance data
available.
You are relying entirely on our manager to direct the Fund without independent
review.
You will have no right or power to take part in the operations of the Fund
except through the exercise of your limited voting rights described in the
operating agreement. However, the investment and operating policies of the Fund
may change without a vote of unitholders. You should not purchase units unless
you are willing to trust our manager to direct the Fund.
We do not have any of our own employees or facilities and are relying
completely on those of our manager, our provider and our underwriter. Our
manager is our sole managing member and we have no ownership interest in our
manager. Nobody has the responsibility of making an independent review for us of
our manager's performance of its duties.
Our manager has limited assets and will primarily fund its operations from fees
it earns in the purchase of life settlements.
Our manager has nominal capitalization and intends to fund its operations
from fees it earns in life settlements.
Conflicts of interests may arise among our manager, our provider, our
underwriter, the Fund and John Tooke, which could adversely affect the
operations of the Fund.
The selection, purchase and servicing of our policies are controlled by
our manager, all of whose stock is owned by AmeriFirst, Inc., a Delaware holding
company, 55% of whose stock is beneficially owned by John Tooke. Our manager
will purchase policies on behalf of the Fund from our provider, AmeriFirst
Funding Group, Inc., which is also owned by AmeriFirst, Inc. either buying
directly from the insured, when it is licensed, from other providers, or
utilizing an unaffiliated broker network. While our manager has agreed to act
within the best interest of the Fund and its members, the potential value of the
Fund's portfolio of policies will be affected by our manager's selection of
policies. Our provider will have conflicts between its duty to the Fund and its
own interests. Our provider has agreed to sell policies it purchases to the
Fund. However, our provider may sell, on a non-securitized basis, the life
insurance policies it
14
purchases to other companies that have similar objectives of the Fund and our
provider may have conflicts of interest in determining which client will
purchase the life insurance policy purchased by our provider. As beneficial
owner of our manager and our provider, circumstances may arise from time to time
which make it more advantageous to AmeriFirst, Inc., and, in turn, John Tooke,
to act in the best interest of either our manager or our provider, rather than
in the best interest of the Fund and its members.
The Fund will not have its own staff and is completely dependent upon its
manager for management, administration and servicing the polices. Our manager
believes it has a sufficient staff to be capable of discharging its
responsibility to us. However, there may arise a time in which we are handling a
high volume of policies, and our manager may not be able to service the policies
on a timely basis. Any delays in servicing our policies could have an adverse
effect upon our operations.
Our manager, provider and underwriter will receive substantial fees in
connection with the transactions described herein. Although we believe that such
fees are reasonable, these fees are not the result of arm's length negotiations
and may create conflicts of interest among such parties. See "Use of Proceeds,"
"Compensation of Our Manager, Provider and Underwriter" and "Conflicts of
Interest."
Our inability to accurately predict estimated life expectancies would adversely
affect our financial results and may lead to payment delays or losses.
The Fund's operations and financial results are dependent on the ability
of our manager, with the assistance of unaffiliated medical review service
companies to conduct medical reviews through independent physicians, to
accurately predict the estimated life expectancies of the insureds. Life
expectancy is a significant factor in our determination of the purchase price of
an insurance policy. Insureds can live significantly beyond the predicted life
expectancy. Unanticipated delays in the collection of policies, whether caused
by underestimating an insured's life expectancy, or otherwise, could have a
material adverse effect on the Fund's financial results and will reduce your
rate of return. See "Business - Description of Return on Investment"
Inaccurate forecasting of an insured's life expectancy by our manager
could result from, among other things:
o advances in medical treatment resulting in deaths occurring later
than forecasted;
o inaccurate diagnosis or prognosis on terminally ill insureds;
o improved living habits resulting in better health; or
o fraud or misrepresentation by the insured.
15
We may not have a commercially viable business as a result of competition from
other life settlement companies.
The market for the purchase of life settlements is highly competitive.
There are few substantial barriers to prevent new competitors from entering this
market. The Fund expects to face additional competition from existing
competitors and new market entrants in the future. As a result, we may not be
able to compete on a commercially viable basis. Many competitors may have
substantially greater financial, technical and marketing resources, longer
operating histories, greater name recognition and more established relationships
in the industry than the Fund is expected to have. As a result, some of these
competitors may be able to:
o develop and expand their service offerings more rapidly;
o take advantage of institutional financing and other financing
opportunities more readily;
o devote greater resources to the marketing and sales of their
service, and
o adopt more aggressive pricing policies.
We may face additional competition from benefits offered by insurance
companies. Other companies could choose to enter the Fund's target market and
devote greater resources and capital to the acquisition of insurance policies
from insureds. In addition, many major insurance companies now offer terminally
ill policyholders "accelerated benefits" options with their existing or
newly-acquired policies which provide a way for terminally ill policyholders to
draw on their life insurance benefits before death. The life insurance industry
may become more aggressive in offering such benefits to terminally ill and
chronically ill persons and senior citizens, although we believe insurance
companies have generally offered accelerated death benefits on terms more
restrictive than the terms of life settlements. See "Business--Competition."
Regulation as an investment company may terminate the Fund.
While the Fund may be considered similar to an investment company, it does
not intend to register as such under the Investment Company Act of 1940.
Accordingly, the provisions of such Act, which, among other matters, require
investment companies to have a majority of disinterested directors and regulate
the relationship between the investment advisers and the investment company,
will not be applicable in the opinion of Snow Becker Krauss P.C., which is
included as an exhibit to the registration statement of which this prospectus
forms a part. If the Fund is deemed to be an investment company, our manager may
terminate the Fund and distribute its assets which will affect the Fund's
profitability. See "Investment Company Act of 1940."
The Fund has no proprietary information or rights to give us a competitive
advantage.
Except for information represented by the existing business relationships
of the Fund's management, the Fund will have no protected or proprietary
information. This means that the Fund will not enjoy a competitive advantage on
any protected basis over other potential industry entrants or over existing life
settlement companies. The Fund is applying to register its name or a depiction
thereof under the federal trademark laws to enjoy protected "brand" recognition
for the securities offered in this offering.
16
Risks Related to this Offering
You may experience a loss in excess of your initial investment.
The Fund will purchase life insurance policies based on the estimated life
expectancy of the individual policy holder. If the insured lives beyond the
estimated life expectancy, the return on investment can become as low as the
initial investment and investors may experience a loss in excess of their
initial investment. This would occur if the premium escrow account and sinking
fund are exhausted and there are insufficient proceeds from any maturing life
insurance policies. The Fund would have to make a capital call from all
investors to prevent policies from lapsing. Once the capital calls exceed the
return an investor is to receive, the overall return would be less than an
initial investment and you may experience a loss in excess of your initial
investment.
Our underwriter's lack of experience could adversely effect the business and
operations of the Fund.
Our underwriter is a newly formed broker-dealer with no prior operating
experience. Furthermore, the management of our underwriter have no experience in
the offer and sale of units relating to life settlements. Our underwriter
expects to complete the registration process with the NASD prior to the
effective date of this prospectus, but there can be no assurance of its ability
to do so. Our underwriter may also engage other NASD broker-dealers and foreign
dealers who agree to abide by the NASD's rules to sell our units. However,
neither we, nor our underwriter has identified any brokers or dealers which will
participate in this offering and neither of us has any agreement, arrangement or
understanding with any such broker or dealer.
A reduced supply of life insurance policies could adversely affect your rate of
return.
Changes in the economy and other changed circumstances may result in a
reduced supply of life insurance policies and could result from, among other
things:
o improvement in the economy, generating higher investment returns to
individuals from their investment portfolios;
o improvements in health insurance coverage, limiting the need of insureds
to use the funds received to pay the cost of their medical treatment;
o a change in law that requires our manager to apply more stringent credit
standards in purchasing life insurance policies; or
o the introduction into the market of less reputable third party brokers
who submit inaccurate information to the provider on behalf of insureds.
If our provider is not licensed or able to comply with state insurance laws, we
must purchase policies from unaffiliated brokers, none of which are obligated to
sell to us.
Our provider is required to be licensed in the states requiring a license
before it can be permitted to purchase life insurance policies. In addition, it
must comply with the laws of each
17
state which regulates the purchase and/or sale of insurance policies. Our
provider is in compliance with the laws of the State of Georgia which regulates
the sale of insurance policies as a security through the Division of Securities
and Business Regulation. Our provider will seek to comply with the insurance
laws of all other states which regulate the purchase and/or sale of life
insurance policies. However, our provider may not be able to comply with every
state's laws, or to renew or prevent revocation of a previously issued license
or approval. Our provider may be precluded from doing business in any state in
which it is unable to obtain or otherwise maintain a required license or
otherwise comply with the insurance or securities laws of that state. In the
event our provider is not licensed or approved to do business, it may only
purchase polices referred by other licensed providers or brokers.
Newly issued life insurance policies carry special risks which could decrease
the return on your investment.
An insurance company may contest the payment of a death benefit or cancel
the life insurance policy should the insured die within a certain time period or
under certain conditions, or should the policy have been obtained fraudulently.
Typically, the time period in which an insurance company can contest an
insurance policy is two years. In the event that an insurance company
successfully contested a policy and did not pay death benefits, the Fund would
incur a loss, which unless there were sufficient funds in the sinking fund would
decrease your return on investment. Examples of reasons to cancel a policy would
be if the insured did not truthfully answer a question on the policy
application, or if the insured commits suicide within the two-year
contestability period. The Fund intends to only purchase life insurance
policies, which are beyond their contestability periods. See "Business ---
Evaluating the Insured and the Insurance Policy."
General risks of types of policies purchased.
Our portfolio will consist mainly of the following types of life insurance
policies: whole life insurance, universal life insurance, variable adjustable
life insurance, Retired Federal Employees Group Life Insurance (FEGLI) and term
policies.
o Whole life insurance offers protection for the life of the insured based
on a fixed premium payment. Policies may provide coverage on a single life or
joint lives, either first to die or survivorship. The greatest risk lies with
the purchase of whole life contracts from insureds who may outlive their
estimated maturity dates.
o Adjustable whole life and combination whole life/term rider policies can
have limited guaranteed protection periods, or in the case of combination
policies, the term portion decreases. In both cases, dividends are used to
extend the coverage period or purchase paid-up whole life to replace the
decrease in the amount of term insurance. The dividends are not guaranteed and
the risk is that the insurance carrier would fail to make a dividend payment.
o Flexible premium universal life and variable adjustable life policies
are designed to mature or expire at 95 and beyond for specific amounts. Policies
may provide coverage on a single life or joint lives, either first to die or
survivorship. Insurance costs may become prohibitive at higher ages and there is
the possibility of the insured outliving the coverage.
18
o The only group life insurance which the Fund intends to purchase is
Retired Federal Employees Group Life Insurance (FEGLI) policies which provide
coverage for the life of the insured without any termination or decrease in
death benefits. Our manager will need to reimburse the insured on a quarterly or
semi-annual basis for premium payments as payroll deduction is the only mode
available. There is a risk that either the government could discontinue this
insurance program and terminate the policy or the premiums could increase
significantly. Either of these factors could adversely affect the Fund's
investment performance.
o Term policies are issued for a specific period and generally expire
without a death benefit at ages from 90 to 100. The risks are that premiums
become prohibitive and the possibility of the insured outliving the coverage.
If only the minimum funds are raised, we will not create a diverse pool of life
insurance policies and your rate of return will be lower.
Our ability to reduce risk by creating a pool of life insurance policies
will be limited by the amount of funds we raise. If only the minimum $2.5
million is raised, we will be able to acquire only a few insurance policies and
your return on investment may be low if we do not predict accurately the life
expectancies of the insureds. Also, we would not necessarily be able to follow
the diversification requirements and strategies described under "Business -
General Description of Different Types of Insurance Policies to be Purchased by
the Fund and Investment Strategies." The pool of life insurance policies will
have different maturity dates and you will receive your proportionate share of
an indeterminate cash flow.
We may lack funds to pay policy premiums and you may need to make capital calls
to prevent the lapse of policies.
The Fund will establish a premium escrow account at SouthTrust Bank with
proceeds of this offering generally equal to l50% of the premiums for the
estimated life expectancy of the individual insureds, with a minimum of two
years beyond the estimated life expectancy, which is believed to be appropriate
and necessary to cover anticipated premiums owed. However, if a policy lapses,
the Fund will suffer a loss equal to the purchase price of the insurance policy.
If the premium escrow account is depleted for any reason, the Fund will not be
able to pay premiums on outstanding policies. In addition, our manager shall be
entitled to receive the remaining funds with interest accrued thereon in the
premium escrow account upon liquidation as additional incentive compensation.
If the Fund is unable to make any premium payments or meet any other
operating expenses to preserve the Fund, and the sinking fund is exhausted then
our manager will make a capital call (of up to 6 months of premiums) whereby the
members will need to make a pro rata capital contribution to the Fund. A capital
call will not result in higher revenue for the Fund. Such a contribution would
result in lower returns to you. If enough additional capital is not contributed
to cover additional premiums required, the individual policy on the insured's
life will lapse. If less than all of the members contribute to the capital call,
those members who contribute to the capital call will receive a premium to be
determined by our manager of the membership interest attributable to the
defaulted capital contribution. Those who do not contribute to the capital call
will have a reduced membership interest in the Fund and their return on
investment will be reduced. See "Description of the Units - Capital Calls."
19
We can only estimate and cannot guarantee your rate of return.
Your actual annualized rate of return can only be determined at the
maturity of the individual policies. We can only estimate and cannot predict or
guarantee your rate of return. The estimated rate of return is based on the
insured's estimated life expectancy. This estimate is based on medical and
insurance underwriting and actuarial tables. Factors affecting the accuracy of
our estimate include the experience and qualifications of the medical personnel
estimating the life expectancy, the nature and progress of the insured's illness
and the future developments in treatments and cures. If an insured passes away
before the estimated life expectancy, the actual rate of return will be more
than the estimated rate of return, but if the insured dies after the estimated
life expectancy, the actual rate of return will be less than the estimated life
expectancy. The actual rate of return may also be adversely affected by delays
in payment or non-payment by carriers, delays in purchasing policies, capital
calls and policies that terminate or lapse. In addition, we are attempting to
securitize a diverse pool of terminally ill and chronically ill persons of all
ages and senior citizens, age 65 and older, with estimated life expectancies
based solely on actuarial tables. There is little, if any, precedent as a public
company, there can be no meaningful historical data regarding the life
expectancies of an undetermined pool. We have no historical data regarding
losses experienced with life settlements and/or delays experienced in collecting
amounts due under life insurance policies. See "Business - Description of Return
on Investment."
Your rate of return may be lower than expected if the third party information we
receive to predict life expectancy is not accurate.
Your rate of return is highly dependent on our ability to predict
accurately the life expectancy of the insured. In a pool of life insurance
policies, you cannot monitor the insured's medical progress on your own. The
Fund and our manager must rely on third party information to assess the accuracy
and validity of life insurance policy information. We must rely on third party
medical and actuarial information when estimating the life expectancies of the
insureds. We will rely on life expectancy estimates of independent physicians
who may not have sufficient data available.
We will depend on third party information to predict estimated life
expectancies.
The independent physicians on whom we will rely to assist us in estimating
the life expectancies of the insureds who are terminally or chronically ill do
not personally examine any of the insureds. The independent physicians working
for the medical review service companies with whom we have contracted will rely
instead on the insured's medical records and the reports provided to them by the
attending physician with whom they can communicate, as well as on certain
actuarial assumptions. See "Business - Description of Return on Investment."
Cures and advances in medical treatments for terminal illnesses will reduce your
rate of return and the number of persons seeking life settlements.
The development of a cure for, or vaccine against, terminal and chronic
illnesses, or the development of new drugs or other treatments which extend the
life expectancy of individuals with such illnesses could have a material adverse
effect on your rate of return. In addition, such
20
medical developments would likely reduce the number of individuals seeking life
settlements. Substantial reductions in the cost of treating terminal illnesses,
including reductions from the development of less costly treatments, may also
reduce the number of individuals seeking life settlements.
Our working capital reserves may not be adequate to meet our obligations.
We intend to maintain small working capital reserves to meet our
obligations, including operating expenses. We will, however, maintain a premium
escrow account to pay life insurance premiums. If we do not have adequate cash
reserves, we could suffer a loss of our investment unless we make a capital
call. In the event our manager cannot or does not pay our operating costs or
have funds available in the sinking fund, it will be necessary to borrow funds,
and there can be no assurance that such borrowing will be on acceptable terms or
even available to us. Such a result may require us to liquidate our investments
and abandon our activities unless we are able to successfully raise the
necessary funds in a capital call.
We will depend on an unaffiliated broker network, but will have no contractual
rights to policies.
Our provider can only purchase policies referred by other providers or
sourcing brokers unless it becomes a licensed broker. No sourcing broker is
under a contractual agreement to refer policies to our provider, and none is
prohibited from referring policies to our competitors. Sourcing brokers tend to
be relatively small independent businesses with limited capital resources.
Therefore, no assurance can be given that relationships with sourcing brokers
can be established or that existing sourcing brokers will remain in business. In
the event that our provider is not licensed or our provider's relationships with
the sourcing brokers are not established or cease, our operations could be
adversely affected.
We will have limited assets other than insurance policies.
The Fund does not have any assets nor will it purchase any insurance
policies prior to completing this offering. The Fund will not be permitted to
have any assets other than interests in life insurance policies and temporary
investments. Therefore, you must rely on policies beneficially owned by the Fund
maturing and paying proceeds in order to receive distributions.
The failure of an insurance company to pay proceeds will reduce distributions to
you.
The value of the collateral of the Fund, which are assignments of life
insurance policies and beneficial interests in the proceeds of such policies, is
directly dependent upon the financial stability of the life insurance companies.
While the Fund intends to purchase life insurance policies only from life
insurance companies rated B+ or better by A.M. Best, an established insurance
company may fail or not have enough money to pay the Fund the proceeds upon the
death of the insured. The number of life insurance company insolvencies has been
increasing in recent years, mainly due to poor investment results, inadequate
underwriting or reinsurance, a lack of diversified investments and fraud. If the
insurance company that has issued a policy acquired by the Fund becomes bankrupt
or otherwise defaults in payment to the Fund, the Fund would have less income to
make distributions. Most states have insurance guaranty funds to help liquidate
the obligations of a terminated insurance company, but there can be no assurance
that
21
those funds will be adequate in any one instance. The Fund has established a
sinking fund to make payment to you in the event of a default, however, there
can be no assurance such funds will be sufficient.
Delays in payment and non-payment of policy proceeds will reduce your potential
profits and distributions.
A number of arguments may be addressed by former beneficiaries under a
life insurance policy or by the insurance company issuing a policy to deny or
delay payment to the Fund of the proceeds of a policy following an insured's
death, including arguments related to lack of mental capacity of the insured or
applicable periods of contestability or suicide provisions. Delays for any
reason in the Fund's collection of the face value of a life insurance policy
following the death of the insured could have an adverse effect on the Fund's
profits and distributions. If the death of an insured cannot be verified and no
death certificate can be produced, the insurance company may not pay the
proceeds of a policy until after the passage of a statutory period (usually five
to seven years) for the presumption of death without proof.
Negative effect of increase in interest rates will reduce our profitability.
Changes in interest rates and expectations about changing interest rates
will affect the Fund's business. The Fund's profitability is dependent to a
significant degree on the difference or the spread between the cost of the life
settlements and the face value of its portfolio of policies. An increase in
interest rates may affect the price that our manager is willing to pay for the
life insurance policies. Any substantial increase in interest rates will result
in either a decrease in the purchase price that our manager is willing to pay
for insurance policies or a lower spread. If the Fund's purchase prices were to
become significantly lower than its competitor's purchase prices, the number of
policies available to the Fund could decrease. In addition, due to current and
proposed regulations in several states which provide minimum purchase prices for
life insurance policies, our manager may be unable to decrease its purchase
prices to fully account for the increase in interest rates.
Our compliance with minimum purchase price requirements may significantly reduce
our profitability.
Approximately 20 states have adopted and others are considering the
adoption of legislation that regulates the minimum purchase prices to be paid
for life settlements. The Fund and our manager will comply with any and all
legislation enacted. Compliance with minimum purchase price requirements may
significantly reduce the Fund's profitability and ability to make distributions.
Because minimum purchase price requirements may prevent the Fund from earning an
acceptable profit margin on the life settlements in its portfolio, such
requirements may force the Fund not to purchase life insurance policies in
states imposing such restrictions.
Delays in purchasing life settlements will reduce our profitability and the
return to investors.
The gross proceeds raised from this offering will be invested in low risk
eligible investments until utilized to purchase life settlements. Such
investments are expected to provide an estimated rate of return of 1-2% per
annum, or a substantially lower rate of return than the
22
Fund anticipates can be obtained through our procurement of life settlements.
Therefore, the Fund believes that any delays in investing funds allocated to the
purchase of life settlements will reduce our profitability and the return to the
members.
Our inability to track the insured may adversely affect the Fund's financial
performance.
After the Fund has purchased a life settlement with an insured, through
our provider, it must monitor or "track" the insured until he passes away and
obtain documents establishing the insured's death in order to collect under the
life insurance policy. Our manager will require each insured to furnish
information that should enable adequate tracking and that obligates such insured
to inform our medical review service company periodically of changes in his
health status, and immediately notify our manager of any change in the insured's
residence. Nevertheless, there is a risk that an insured with whom the provider
has entered into a contract may become "missing," or that there may be a delay
in ascertaining that an insured has passed away or in obtaining required
documentation needed to claim the insured's death benefit. Either could have a
material adverse effect on the Fund's financial performance. Where permitted by
law, our manager has hired a consultant to track each insured on a monthly
basis. However, some states further limit the frequency with which the Fund
through its tracking firm may contact the insured or obtain his medical records.
Possible costs relating to and delays attributable to government regulation will
reduce our profitability.
Our provider will be required to comply with the laws of each state which
regulates the purchase of life insurance policies as described in this
prospectus. In addition, our underwriter expects to complete the registration
process with the NASD prior to the effective date of this prospectus and will be
regulated by the NASD.
The life settlements industry has been tainted by fraud. Accordingly,
industry groups including the National Association of Insurance Commissioners
(NAIC) and the North American Securities Administrators Association (NASAA)
perceived there to be an industry void and passed a Viatical Settlements Model
Act and subsequent Guidelines Regarding Viatical Investments. A summary of the
provisions of the Viatical Settlements Model Act appear in this prospectus under
the heading "Business-Government Regulation of Life Settlements." In addition to
the states which adopt the NASAA guidelines, other states which license
insurance purchases follow many of the provisions of the Viatical Settlements
Model Act. Since the Securities and Exchange Commission does not regulate life
settlements, except in an offering such as this one in which the policies are
securitized, some states treat the sale of life settlements to individuals as
the sale of securities and require registration in such states.
In any event, we will comply with any and all applicable rules and
regulations. At present, we have no reason to believe that we will not be able
to comply with the regulatory and licensing requirements of any particular
jurisdiction. There can be no assurance that in the future there will not be
periods when we are not in compliance with state regulations. Most states
regulate life settlements through their insurance departments, while some states
regulate life settlements through securities administrations. As the Fund enters
the marketplace in states having such regulations, it will incur significant
compliance costs. See "Business-Government Regulation of Life Settlements."
23
Our failure to comply with federal or state securities laws could have a
material adverse effect on the Fund.
Almost all state securities regulators have begun to regulate interests in
life settlements as securities. Some state securities regulators have taken the
position that the sale of an interest in a life settlement is an "investment
contract" that falls within the definition of a "security" under state
securities acts. Some state legislatures have amended state securities acts to
specifically add viatical settlements to the definition of a "security."
With respect to federal law, the D.C. circuit, as well as certain other
circuits, held that interests in viatical and other life settlements are not
securities because profits do not derive predominantly from the efforts of
people other than the investors themselves. S.E.C. v. Life Partners, Inc., 87
F.3d 536 (D.C. Cir. l996). However, by our forming a pool of insurance policies
and offering an undivided interest in the pool, rather than reselling the life
insurance policy itself, we believe the units offered in this offering would be
deemed to be a security. Our failure to comply with applicable federal or state
securities laws may have a material adverse impact on the Fund. Securities
regulators may impose civil fines or penalties on the Fund and, under certain
circumstances, may require it to make a rescission offer to some or all of its
investors, as a result of which the Fund's financial position could be
materially adversely affected.
Privacy laws and other factors may limit the information the Fund receives about
the insured.
Federal and state privacy laws may limit the information the Fund receives
about the insured after your investment, such as the insured's current medical
condition. In addition, other factors, such as the insured's unwillingness to
cooperate, may limit the information the Fund receives after your investment.
Being a beneficiary of a policy and not also an owner carries special risks.
The person who buys a life insurance policy is the owner of the policy and
decides who the beneficiaries of the policy will be, that is, who will receive
the death benefit when the owner dies. If the owner sells that policy to our
provider who then assigns it to the Fund, the investors become the owners and
therefore, are entitled to receive the death benefit when the insured dies. Some
states however, will only allow a provider to directly purchase a life insurance
policy and become the owner of the policy, whereby the Fund would become an
irrevocable beneficiary of the policy.
Group policies carry special risks.
A group policy insures the members of a specific group of people, usually
the employees of a company. The biggest risk for someone who invests in a group
policy is that the policy can be terminated by the employer or the insurance
company. The Fund intends to only purchase group policies of retired Federal
Employees Group Life Insurance (FEGLI).
24
Sale and transfer of the units is severely restricted and may cause you to
forego use of your invested funds.
You are not permitted to sell your units and you will only be permitted to
withdraw your investment from the Fund commencing one year after you close at a
15% discount to the principal amount of your investment. Accordingly, you must
be prepared to forego your use of the invested funds until we return your
investment to you. We cannot make any distributions to you prior to the maturity
of any life insurance policy which will affect your liquidity. The timing and
frequency of distributions will depend on the size and scope of the pool of life
insurance policies. Transfer of the units is restricted by the operating
agreement. You may not transfer the units:
o to persons who do not meet the investor suitability requirements
described in this prospectus;
o unless the transfer is approved by our manager in its sole
discretion; or
o in violation of the securities laws or if the transfer would cause
the Fund to be a publicly traded partnership.
You cannot revoke your subscription and will not have use of your invested
funds.
Once you sign the subscription documents and forward such documents
together with payment for a unit, you will not be able to revoke your
subscription. The offering period can be held open until ____________, 2003 [six
months from the date of this prospectus unless extended] without any
subscriptions being accepted if subscriptions in the amount of the minimum
offering are not achieved before then. Accordingly, if you subscribe before we
close on the minimum offering, your subscription amount will be held in escrow,
earning a low rate of return and will not be available to you.
No public market exists for the units and transfer restrictions prevent
assignment of the units.
There is no public market for the units. Therefore, it may not be possible
for you to liquidate your investment in the Fund. In addition, you cannot
privately sell, gift, pledge or otherwise transfer your units without the prior
written consent of our manager. See "Terms of the Offering -- Restrictions on
Transfer; Permitted Transferees." Although you will be permitted to withdraw
your investment at a 15% reduction to the principal amount of your investment
(less any distributions paid to you) commencing one year after you close on your
investment, you will not be able prior to such one year period to sell your
units promptly in the event of a financial emergency or at the price you want
and you may not be able to use your units as collateral for a loan. You should
purchase the units only with the intent of holding the units until we return
your investment to you.
Risk of fraud by insureds may adversely affect our operating results.
Although we are required to conduct certain due diligence in advance to
buying a life insurance policy, there is a risk that we will be defrauded. Among
other types of fraud that may exist, an insured may misrepresent the status of
his illness, may fail to disclose all beneficiaries or may sell a policy to more
than one purchaser. In the event that brokers submit inaccurate life
25
settlement information to our provider, we may not be able to uncover the
presence of defects through our due diligence. There will be no provisions in
the viatical settlement contracts for any repurchases of policies owned by the
Fund and we may incur losses as a result of such breaches of warranties. If the
Fund is subject to such fraud, unless our sinking fund is able to cover such
fraud our operating results would be expected to be adversely affected.
Some decisions will be approved, whether or not you agree, by less than all
members of the Fund.
You may be outvoted by other members of the Fund on some key decisions.
Set forth below are actions that require the approval of members, but, except as
indicated, do not require unanimous approval. There may accordingly be
significant changes in our capital structure or management of which you do not
approve.
o Amendment to the operating agreement requires the approval of members
with aggregate capital accounts that are a majority of the capital accounts of
all members, except for (i) admission of additional members on the terms this
offering, which does not require the approval of the members, or (ii) changes
that would increase your liabilities or decrease your interest in the Fund's
income, gains or distributions, and (iii) early termination of the Fund, which
require approval of all the members.
o Removal of our manager in the case of commission of a felony, gross
negligence or willful misconduct requires the approval of members with aggregate
capital accounts that are a majority of the capital accounts of all members, or
removal of our manager after our manager has received distributions from the
Fund that equal 125% of the aggregate expenses incurred by our manager, provider
and underwriter requires the approval of members whose capital accounts exceed
two-thirds of all members' capital accounts.
o Approval of the recapitalization, sale of substantially all of the
Fund's assets, restructuring of the Fund or merger of the Fund with or into
another entity, that in each case adversely affects the members requires a vote
of the members whose total capital accounts exceed two-thirds of the total of
all members' capital accounts at such time.
o Election of a successor manager, after a manager has been removed or has
resigned requires the approval of members with aggregate capital accounts that
are a majority of the capital accounts of all members. See "Summary of Operating
Agreement."
Our manager can dissolve the Fund at any time, even if the insurance policies
are sold below cost.
Our manager can dissolve the Fund at any time. You could lose a
significant part of your investment if our manager decides to terminate the Fund
when many of the insurance policies are still outstanding. Our manager will sell
the insurance policies to be able to distribute cash to the members and it may
have to sell the insurance policies at significant losses.
26
Tax Risk Factors
General tax risks.
Before you make a decision to invest, you should assess the tax risks and
your willingness and ability to comply with ongoing federal income tax filing
and compliance requirements described under "Federal Income Tax Consequences"
which is the opinion of our counsel Snow Becker Krauss P.C. The tax consequences
mentioned in this prospectus are general in nature. Each potential investor
should consult with his/her/its own tax professional to assess the tax impact of
an investment in the Fund.
There are risks of loss of tax benefits by investment of IRA funds in exchange
for units.
Investing money held in an Individual Retirement Account ("IRA") involves
special risks. We offer investors the option of using funds from their IRAs to
purchase interests in life settlements. Section 408(a)(3) of the Internal
Revenue Code of 1986, as amended, requires that "no part of the trust [IRA]
funds will be invested in life insurance contracts." We are not aware of any
ruling or judicial decision concerning the investment of IRA funds in life
settlements. Therefore, because the question is not settled, there is the
possibility that the Internal Revenue Service ("IRS") will not allow investors
the tax benefits of their IRA on funds invested in life settlements. There is
also the possibility that the IRS would not allow investors the tax benefits of
any portion of their IRA accounts if any part of the IRA funds are invested in
viatical or senior settlements.
In addition, there are certain IRS rules pertaining to minimum
distributions from IRAs for persons who are age 70 1/2 or older. The Internal
Revenue Code requires that persons begin receiving distributions from their IRAs
by a "required beginning date" (April l following the calendar year in which a
person reaches age 70 1/2 ) and then again by December 31 of the same year and
every year thereafter. The minimum distribution is calculated on the aggregate
value of all IRA accounts; however, the minimum total amount may be distributed
from any one account rather than from each individual account. Because death
benefits under a life insurance policy are not payable until the insured dies,
investors with large percentages of their IRA funds invested in life settlements
may not have sufficient funds in any other IRA account(s) from which they may
satisfy the Internal Revenue Code requirements while awaiting the payment of
death benefits. Substantial penalties may be assessed if these minimum
distribution requirements are not met.
If we lose our "partnership" status we would be taxed as a corporation and
deductions otherwise available won't be deductible.
Our legal counsel, Snow Becker Krauss P.C., has given the opinion under
"Federal Income Tax Consequences," that we will be treated as a "partnership"
for federal income tax purposes and that we will not be treated as an
association taxable as a corporation subject to the publicly-traded partnership
rules discussed below. If we were to be reclassified as an association taxable
as a corporation because we have more than 100 members and were a publicly
traded partnership or for any other reason, we would be taxed on our taxable
income at rates of up to 35% for federal income tax purposes and would thus
incur double taxation. If the provisions in the Fund's operating agreement are
enforced, they would prevent us from being a publicly traded
27
partnership and it is unlikely that we will be subject to tax other than as a
partnership. All items of our income, gain, loss, deduction and credit would be
reflected only on our tax returns and would not be passed through to you. If we
were treated as a corporation, distributions to you would be ordinary dividend
income to the extent of our earnings and profits, and the payment of such
dividends would not be deductible by us.
The IRS may challenge our allocations of income, gain, loss, and deduction.
The Fund's operating agreement provides for the allocation of income,
gain, loss and deduction among the members. The rules regarding partnership
allocations are complex. It is possible that the IRS could successfully
challenge the allocations in the operating agreement and reallocate items of
income, gain, loss or deduction in a manner which reduces benefits or increases
income allocable to you.
You may be taxed on income which exceeds the cash distributions made to you.
In any year in which we report income or gain in excess of expenses, you
will be required to report your share of such net income on your personal income
tax returns even though you may have received total cash distributions which are
less than the amount of net income you must report.
The state or locality in which you are a resident or in which we own properties
may impose income or other taxes on us or on your share of our taxable income.
Although we have been advised by our tax counsel that we should be taxed
as a partnership for federal income tax purposes, some jurisdictions in which we
may do business may impose an entity based tax on our operations. Also, many
states have implemented or are implementing programs to require entities taxed
as partnerships to withhold and pay state income taxes owed by nonresident
members. We may be required to withhold state taxes from cash distributions
otherwise payable to you. These collection and filing requirements at the state
or local level, and the possible imposition of state or local income, franchise
or other taxes on the Fund, may result in increases in our administrative
expenses which would reduce cash available for distribution to you. Your tax
return filing obligations and expenses may also be increased as a result of
expanded state and local filing obligations. We encourage you to consult with
your own tax advisor on the impact of applicable state and local taxes and state
tax withholding requirements.
All losses from "passive activities" are generally not deductible by a
non-corporate taxpayer, a Subchapter S corporation or a personal service
corporation, except against income derived from "passive activities" of the tax
payer. "Passive activities" are those business activities in which a taxpayer
does not materially participate. A member's investment in the Fund would be
treated as a "passive activity" for purposes of this limitation. Accordingly, so
long as the member maintains his investment in the Fund, such member's share of
the Fund's losses will not be deductible against his salary, active business
income, income from dividends, interest, royalties, and capital gains from
non-business properties. However, Fund losses, if any, generally will be
deductible from such a member's gain and income from the Fund or from other
passive activities.
28
You may deduct losses only to the extent of amounts "At Risk."
Under section 465 of the Internal Revenue Code, losses from certain
activities may be deducted by a taxpayer only to the extent to which the
taxpayers is "at risk" in the activity. Accordingly, the "at risk" rules will
apply to a member's share of the losses from the Fund. Each member initially
will be "at risk" only to the extent of the amount of capital that he
contributes to the Fund. In future years, such amount will be increased to the
extent the member recognizes income from his investment in the Fund or
contributes additional cash to the Fund, and reduced to the extent he has
deducted losses or receives cash distributions from the Fund. See "Federal
Income Tax Consequences - Limitations on Deductibility of Losses from Passive
Activities."
You will receive partner information tax return on Form K-1 which could increase
the complexity of your tax return.
The partner information tax returns on Form K-1 which we will distribute
to you will contain information regarding the income items and expense items of
the Fund. If you have not received K-1s from other investments, you may find
that preparing your tax return may require additional time, or it may be
necessary for you to retain an accountant or other tax preparer, at an
additional expense to you, to assist you in the preparation of your return.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology including "could," "may," "will," "should," "expect," "intend,"
"plan," "anticipate," "believe," "estimate," "predict," "potential," "continue,"
or "opportunity," the negative of these terms or other comparable terminology.
These statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks described above and in other parts of this
prospectus. These factors may cause our actual results to differ materially from
any forward-looking statements. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance, or achievements.
INVESTOR SUITABILITY STANDARDS
You should only purchase units if you meet one of the standards of an
accredited investor (as set forth below), desire a relatively long term
investment, and are prepared to forego use of the invested funds until the Fund
returns your investment. We have established these standards for two reasons:
(1) to exclude investors who clearly do not have the necessary liquidity to
place funds in a long-term investment that cannot be readily sold, and (2) to
exclude investors who clearly do not have sufficient assets to afford a loss of
a significant portion of their investment.
Minimum Investor Suitability Standards
You may only purchase units if you meet one of the following standards of
an "accredited investor," as such term is defined in Rule 501 of Regulation D
under the Securities Act of 1933, as amended:
29
(i) a bank as defined in Section 3(a)(2) of the Securities Act, or any savings
and loan association or other institution as defined in Section 3(a)(5)(A)
of the Securities Act whether acting in its individual or fiduciary
capacity; any broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934; any insurance company as defined in
Section 2(13) of the Securities Act; any investment company registered
under the Investment Company Act of 1940 or a business development company
as defined in Section 2(a)(48) of that Act; any Small Business Investment
Company licensed by the U.S. Small Business Administration under Section
301(c) or (d) of the Small Business Investment Act of 1958; any plan
established and maintained by a state, its political subdivisions, or any
agency or instrumentality of a state or its political subdivisions, for
the benefit of its employees, if such plan has total assets in excess of
$5,000,000; any employee benefit plan within the meaning of the Employee
Retirement Income Security Act of 1974 if the investment decision is made
by a plan fiduciary, as defined in Section 3(21) of such Act, which is
either a bank, savings and loan association, insurance company, or
registered investment adviser, or if the employee benefit plan has total
assets in excess of $5,000,000 or, if a self-directed plan, with
investment decisions made solely by persons that are accredited investors;
or
(ii) a private business development company as defined in Section 202(a)(22) of
the Investment Advisers Act of 1940; or
(iii) an organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000; or
(iv) a director or executive officer of the Fund; or
(v) a natural person whose individual net worth, or joint net worth with your
spouse, at the time of your purchase exceeds $1,000,000; or
(vi) a natural person who had an individual income in excess of $200,000 in
each of the two most recent years or joint income with your spouse in
excess of $300,000 in each of those years and has a reasonable expectation
of reaching the same income level in the current year; or
(vii) a trust, with total assets in excess of $5,000,000 not formed for the
specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person (i.e., directed by a person who has
such knowledge and experience in financial and business matters that he or
she is capable of evaluating the merits and risks of the prospective
investment); or
(viii) entity in which all of the equity owners are accredited investors.
We do not intend to qualify this offering in all states, and you will not
be permitted to purchase units if you reside in a state in which this offering
is not qualified.
30
You will be required to represent in writing to us that you or the
fiduciary account for which you are purchasing meet the applicable investor
suitability standards
Our underwriter and any other participating broker dealers will make
certain that every prospective investor complies with the investor suitability
standards. We will not accept subscriptions from you if you are unable to
represent in your subscription agreement that you meet such standards. Under the
laws of certain states, any transferees may be required to comply with the
suitability standards set forth herein as a condition to substitution as a
member. We will require certain assurances that such standards are met before
agreeing to any transfer of the units, including the resale of units.
Minimum Purchase Amount
The minimum investment we will accept is $100,000 for 100 units, although
we reserve the right to accept initial subscriptions of less than $100,000. We
may accept subscriptions in excess of $100,000 in increments of $1,000. Your
return will depend on the size of your investment.
IRA Investors and ERISA Plans
IRA Investors. One hundred units in a minimum amount of $100,000 may be
purchased, transferred, assigned or retained by an Individual Retirement Account
and incremental amounts in excess thereof for spousal IRA's established under
Section 408 of the Internal Revenue Code of 1986, as amended. You should be
aware however, that an investment in the Fund will not, in and of itself, create
an IRA for you and that, in order to create an IRA, you must comply with the
provisions of Section 408 of the Internal Revenue Code.
ERISA Investors. The investment objectives and policies of the Fund have
been designed to make the units suitable investments for employee benefit plans
under current law. In this regard, the Employee Retirement Income Security Act
of 1974 ("ERISA") provides a comprehensive regulatory scheme for "plan assets."
In accordance with final regulations published by the Department of Labor in the
Federal Register on November 13, 1986, our manager will manage the Fund so as to
assure that an investment in the Fund by a qualified plan will not, solely by
reason of such investment, be considered to be an investment in the underlying
assets of the Fund so as to make the assets of the Fund "plan assets." The final
regulations are also applicable to an IRA.
We are not permitted to allow the purchase of units with assets of any
qualified plans if we (i) have investment discretion with respect to the assets
of the qualified plan invested in the Fund, or (ii) regularly give
individualized investment advice that serves as the primary basis for the
investment decisions made with respect to such assets. This prohibition is
designed to prevent violation of certain provisions of ERISA.
Subscription Agreement Warranties
If you choose to purchase units, you will be submitting to us a signed
subscription agreement with power of attorney and you will pay the purchase
price of the units to the escrow agent until the completion of the minimum
offering and thereafter directly to our underwriter.
31
Payment should be made by check or by wire transfer in accordance with the
subscription agreement instructions.
The subscription agreement is included in full as Exhibit A attached to
this prospectus. The subscription agreement requires you to make representations
to us and our manager about your knowledge of the Fund, your financial ability
to invest and your understanding of the investment procedures. The following is
a short description of some key representations:
o You acknowledge that your subscription may be rejected in whole or
in part by our manager in its sole and absolute discretion, and that
this offering may be terminated at any time by our manager.
o In making this investment you are relying only on the information
contained in this prospectus.
o You or the fiduciary account for which you are purchasing is an
accredited investor as such term is defined in Rule 501 of
Regulation D under the Securities Act of 1933, as amended.
o You understand that there will be no public market for resale of the
units and you cannot privately sell, gift, pledge or otherwise
transfer the units without the prior written consent of our manager,
and therefore, it may not be possible for you to liquidate your
investment in the Fund.
o You acknowledge that you have been advised to read the "Risk
Factors" set forth in this prospectus commencing on page 13.
o You understand that an investment in the Fund may involve tax
consequences and you acknowledge that you must retain your own
professional advisor to evaluate the tax and other consequences of
an investment in the Fund.
o You understand that counsel representing the Fund, our manager and
provider, does not and will not represent you in any respect.
The purpose of the representations is to ensure that you fully understand
the terms of our offering, the risks of an investment with us and that you have
the capacity to enter into a subscription agreement. Our manager, on behalf of
the Fund, intends to rely on the representations in accepting your subscription.
In any claim or action against our manager or the Fund, our manager and the Fund
may use the representations against you as a defense or basis for seeking
indemnity from you. Notwithstanding that fact by executing the subscription
agreement an investor is not waiving any rights he has under the Securities Act
of 1933, as amended.
Subscription Procedure
If you want to purchase units, you should complete the subscription
agreement. A copy of the subscription agreement will be provided by our
underwriter or selected dealer that offered you the units. You should return the
subscription agreement and full payment for the units being
32
purchased to such dealer, who will tell you whether to make your payment to "
SouthTrust Bank, as Escrow Agent" or, to "AmeriFirst Fund I, LLC". You may
obtain additional copies of the subscription agreement from AmeriFirst Capital
Corp., whose address is 814 North Highway A1A, Suite 300, Ponte Vedra Beach,
Florida 32082; telephone number (904) 373-3034.
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. If we accept your subscription agreement, you will be
the owner of the units and a member of the Fund. We will mail to you a
countersigned subscription agreement evidencing your membership interest in the
Fund. By signing the subscription agreement and power of attorney, you are
giving our manager the authority to sign the operating agreement of the Fund on
your behalf and to sign amendments to the operating agreement which either do
not require your consent, or to which your consent was given. Our manager is
also given the authority to sign on your behalf in your capacity as a member of
the Fund, if necessary, certain government filings, that will not change the
business or legal terms of your investment.
Neither our underwriter, nor any other securities brokerage firm, will
permit sales to discretionary accounts without prior specific written approval
of the owner of the account.
USE OF PROCEEDS
In the event that maximum offering proceeds are received, the Fund will
receive gross proceeds of $100,000,000. In the event that minimum offering
proceeds are received, the Fund will receive gross proceeds of $2,500,000.
The following table summarizes the estimated principal uses of gross
proceeds received from the sale of the units, assuming the minimum and maximum
amount is received:
Amount of Proceeds
Minimum Offering Maximum Offering
---------------- ----------------
Purchase of life insurance policies(1) $1,675,000 $ 67,000,000
Provider's fees(2) 162,500(3) 6,500,000(3)
Manager's fees(4) 162,500(3) 6,500,000(3)
Sinking fund(5) 250,000 10,000,000
Sales commissions(6) 250,000 10,000,000
---------- ------------
Total $2,500,000 $100,000,000
---------- ------------
- ----------
(1) With the gross proceeds from the sale of the units, we will purchase
policies, at a discount to face value, which will be negotiated between the
insured and our provider. The price
33
paid to an insured for a life insurance policy is based primarily on the
estimated life expectancy of the insured and the estimated premiums payable by
the Fund over the expected life of the insured. Generally, the shorter the life
expectancy of the insured, the greater the price paid for the policy. It is
expected that the minimum and maximum gross proceeds described in the above
table will all be used to purchase life insurance policies in the amounts of
$3,250,000 and $130,005,000 face amount of policies, respectively. Included in
these amounts are the funds, which will be placed in the premium escrow account,
which will be used exclusively to pay policy premiums, which are expected to
generally equal 150% of the premiums for the estimated life expectancy of the
individual insureds with a minimum of two years beyond the estimated life
expectancy.
(2) We will pay to our provider or to an unaffiliated provider for origination
of each policy, up to 5% of the face amount of each policy.
(3) The estimated fees in the above table are based on the minimum $3,250,000
and maximum $130,005,000 face amount of life insurance policies set forth in
Note (1), above.
(4) We will pay to our manager, as servicer, or to a third party for servicing
such policy, a fee of up to a maximum of 5% of the face amount of such policies.
(5) We intend to escrow at each closing 10% of the gross proceeds of the
offering available to purchase life insurance policies as a sinking fund in the
event of a default by an insurance carrier and, if needed for operating expenses
(not to exceed 3% of the gross proceeds). The sinking fund is intended to
promote good underwriting practices in order to avoid a default. These funds
will be distributed to members upon a default. If the sinking fund is
successful, the sinking fund remainder balance will be distributed to our
manager upon liquidation of the Fund as additional incentive compensation.
(6) We intend to pay to our underwriter, or unaffiliated broker-dealers, at the
time of purchase of insurance policies a selling commission of up to 10% of the
gross proceeds of the number of units sold.
See "Business - Description of Return on Investment" for a hypothetical
example of the purchase of a life insurance policy by the Fund.
A minimum of $2.5 million must be raised in this offering prior to the
funding or acquisition of the first life settlement. The Fund expects to
purchase existing life settlements from our provider, who will purchase
policies, either directly from insureds or by utilizing an independent broker
network or from other licensed providers. However, neither us nor our provider
has any commitments or agreements to acquire any life insurance policies.
We will not proceed with an identified life settlement that cannot be
closed on or before ____________, 2004 [12 months from the effective date of
this prospectus].
Funds held by us that have not yet been used to purchase life insurance
policies will be deposited in interest-bearing bank accounts, with SouthTrust
Bank, Birmingham, Alabama, money market funds or used to purchase short-term
U.S. Treasury bills. These funds will earn interest at short-term interest
rates. Our present intention is to have money market accounts,
34
paying overnight money market rates of approximately 1-2% according to market
fluctuations. The first account, the operating escrow account, will be used to
purchase life insurance policies. The second account is the premium escrow
account used to pay premiums on all policies purchased by the Fund. The third
account is the provider's escrow account used to hold the purchase prices and
fees pending closings. The fourth account is the sinking fund to provide payment
to members in the event of default. Investors will be entitled to a pro rata
portion of the short-term interest earned, including interest earned on your
funds while they were held in the subscription escrow account prior to the first
closing.
CAPITALIZATION OF AMERIFIRST FUND I, LLC
The following table sets forth the capitalization of the Fund as of
September 30, 2002, and as adjusted to give pro forma effect to the sale of the
minimum and maximum amount of units offered hereby after deducting up to 10%
sales commissions which will be paid to our underwriter only upon the purchase
of life insurance policies.
As Adjusted for As Adjusted for
Actual Minimum Offering Maximum Offering
---------------- ----------------
Capital Contributions -- $2,237,500 $89,750,000
from Unit Members
TERMS OF THE OFFERING
This offering is made only to persons that meet the investor suitability
standards described in this prospectus. The minimum subscription we will accept
is one hundred thousand dollars ($100,000) for one hundred units, and units will
be issued in higher initial denominations in multiples of $1,000, although our
underwriter reserves the right to accept subscriptions of less than $100,000.
Minimum-Maximum Offering
Units will be offered and sold by sales representatives licensed by the
NASD Inc. to sell the units and similar securities. Units may also be sold by
officers of the Fund who may receive commissions where permitted. Some of the
sales representatives are employed by our underwriter, AmeriFirst Capital Corp.,
which expects to be registered with the NASD as a broker-dealer prior to the
effective date of this prospectus. Currently, we intend to offer the units for
sale in California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois,
Michigan, Minnesota, Nevada, New Jersey and New York. We will end this offering
on _______ , 2004 [12 months from the date of this prospectus unless extended],
or at such earlier time that all $100 million of units are sold. All
subscriptions are non-cancellable and irrevocable.
If we desire to extend this offering up until ________ 2005 [24 months
from the date of this prospectus], each of these states requires us to file the
appropriate documents with such state's agency and we will provide investors in
these states with written notice of such extension. We may register in
additional states to sell the units and will comply with applicable state "blue
35
sky" laws to extend the offering. All subscriptions will be held in a
subscription escrow account at SouthTrust Bank, 110 Office Park Drive, 2nd
Floor, Birmingham, Alabama 35223, which will serve as escrow agent until the
$2.5 million minimum amount is received. If we do not receive acceptable
subscriptions for $2.5 million or more of units by __________ 2003 [six months
from the effective date of this prospectus unless extended], the escrow agent
will return all subscription amounts together with interest earned while the
funds were held in escrow to you and to the other subscribers. You will earn
interest on the funds held in the subscription escrow account as soon as your
funds clear. You will not be a member of the Fund while your funds are held in
the subscription escrow account and you will only become a member once we accept
your subscription and transfer your funds out of escrow and into the Fund's own
account. After the minimum offering amount has been raised, we will accept or
reject all subscriptions within five business days after receipt and will
instruct the escrow agent promptly to release the funds of the accepted
subscriptions to us. We may terminate this offering at any time and refund any
subscriptions that we have not accepted. If we terminate this offering, our
manager will promptly prepare a form of notice and furnish our underwriter and
selected dealers, if any, with copies to distribute to all persons who have
received this prospectus either directly from our underwriter or from a selected
dealer.
Subscription Agreements
By executing a subscription agreement, an investor unconditionally and
irrevocably agrees to purchase a unit with the denomination shown thereon on a
"when-issued basis." Accordingly, upon executing a subscription agreement, an
investor is not yet an owner of the units or a member of the Fund. Units will be
issued when the subscription agreement is accepted by our manager. Subscription
agreements are non-cancellable and irrevocable. Subscription funds are
non-refundable for any reason, unless the $2.5 million minimum amount of units
are not sold or our manager decides not to accept the subscription.
Our manager reserves the right at any time to cease soliciting for the
sale of the units and to stop accepting subscription agreements if it believes,
in its sole discretion, that suitable loan opportunities are not available or
for any other business reason.
Restrictions on Transfer; Permitted Transferees
There will be no public market for the resale of the units. In addition,
you cannot privately sell, gift, pledge or otherwise transfer your unit without
the prior written consent of our manager. Our manager is required to withhold
consent if the sale or transfer of the unit or our admission of the intended
purchaser or transferee of the unit as a member would:
o cause the Fund to be treated as an association taxable as a
corporation for Federal income tax purposes either because it would
be a "publicly traded partnership" within the meaning of Section
7704 of the Internal Revenue Code of 1986, as amended, or for any
other reason; or
o violate or cause the Fund to violate federal or state securities
law.
Notwithstanding the foregoing, you may withdraw or partially withdraw from
the Fund and obtain the return of all or part of your capital account commencing
one year after you
36
purchase your units and receive back 85% of the principal amount of your
investment, less any distributions paid to such date, within 90 days after you
deliver written notice of withdrawal to our manager. Notwithstanding the
foregoing, we can only make cash payments in return for outstanding capital
amounts from net proceeds and capital contributions.
In addition, our manager may, in its sole discretion, withhold its consent
to any sale or transfer. In granting a consent to a sale or transfer, our
manager may require a legal opinion from our lawyer that the sale or transfer
does not violate federal or state securities laws or cause the Fund to be
treated as an association taxable as a corporation for Federal income tax
purposes. In addition, our manager intends to require reasonable documentation
of the sale or transfer, acceptance by the purchaser or transferee of the
operating agreement and certain additional representations of the purchaser or
transferee, including the representation by the transferee that it is acquiring
the unit for its own account and not with a view to distribution. Certain states
may require that the purchaser or transferee satisfy the same investor
suitability standards as a purchaser of the units. We will require certain
assurances that such standards are met before agreeing to any transfer of the
units, including the resale of the units.
You may transfer your right to receive distributions and allocations of
profits and losses and other economic benefits under the Fund's operating
agreement to the following persons:
(i) your spouse, children, siblings or grandchildren or a trust of which
one or more of these family members are the sole beneficiaries;
(ii) if you are a partnership, corporation or limited liability company,
to your partners, shareholders, members, directors, executive officers or
managers or members of their family of the type described above;
(iii) if you invest through a trust, the beneficiaries of the trust; or
(iv) another member.
Our manager is not required to admit such transferee as a substitute or
additional member of the Fund.
A notice substantially in the form set forth below will be set forth in
the subscription agreement distributed to all unitholders, including units that
are issued in connection with a permitted sale or transfer.
THIS UNIT MAY NOT BE SOLD, TRANSFERRED, OR ASSIGNED TO ANY PERSON EXCEPT IN
ACCORDANCE WITH THE TERMS OF THE FUND'S OPERATING AGREEMENT, AS AMENDED FROM
TIME TO TIME, A COPY OF WHICH IS ON FILE AT THE FUND'S OFFICES.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF AMERIFIRST FUND I, LLC
Twelve Month Plan of Operations
As of December 31, 2002, the Fund has $183,718 of assets consisting of
deferred financing costs and had not commenced operations. Total liabilities of
$218,100 owed by the Fund for organizational and offering expenses to
AmeriFirst, Inc., the holding company controlled by John Tooke, were forgiven by
AmeriFirst, Inc. on February 13, 2003 and recorded as contributal capital.
AmeriFirst, Inc. has agreed to pay all expenses of this offering. During the
next 12 months, if we raise at least $2,500,000, we plan to purchase a pool of
life insurance policies, created by the purchase of insurance policies at a
discount from the face amount of the policies from terminally ill and
chronically ill persons of all ages and senior citizens, age 65 and older, with
estimated life expectancies based solely on actuarial tables. Upon raising $2.5
million and the release of such funds from escrow, our manager will create a
pool of life insurance policies. John Tooke, president and controlling
shareholder of our manager, provider and underwriter, has extensive experience
in investment banking and selling mortgage backed securities. Although he has no
actual experience in purchasing life settlement policies, he has researched the
life settlements industry since at least April 2001 and conducted all
organizational activities necessary for the Fund. Our manager intends to service
the insurance policies with experienced employees it has hired, as described
below. However, our manager may outsource any or all of the non-financial
services of servicing the life insurance policies to an unaffiliated third party
servicer to assist us in reviewing each policy, closing the purchases of such
policies, monitoring life status of the insureds and filing death benefit
claims. Our manager has entered into agreements with four unaffiliated
organizations to conduct its medical due diligence review (See "Business -
Medical and Insurance Due Diligence Review") to determine estimated life
expectancies and with one of such companies to track the status of the insured.
Neither the Fund nor our manager, provider or underwriter has entered into any
other arrangements, agreements or understandings with any third parties to act
as our servicer. If it did enter into such an agreement, the Fund would be
dependent upon the services of third parties for its overall success.
We do not anticipate hiring any employees or acquiring any fixed assets
like office equipment or furniture, or incurring material office expenses during
the next twelve (12) months because we will be utilizing our manager's and its
affiliate's personnel and office equipment. As of January 13, 2003, our manager
and its affiliate employed 13 persons, including John Tooke, chief executive
officer, a chief information officer, in-house legal staff, accounting staff,
insurance review, medical review, policy administration, computer and data
processing personnel, customer service and medical administration. Our manager
occupies approximately 7,349 square feet of office space in Florida, and also
occupies space at the Fund's offices in St. Marys, Georgia. This facility is
equipped with office furniture, telephones, fax machines, photo copiers,
multiple computers in a server system and whatever else will be needed to
operate. See "Business-Our Servicer" for additional information on our back-up
computer system. The fees which we will pay our manager as compensation will be
in lieu of all other payments for operating expenses. See "Compensation of Our
Manager, Provider and Underwriter."
The Fund has not committed itself to purchase any life insurance policies,
and has not entered into any arrangements or other transactions other than with
the underwriter of this offering and other affiliates, and four unaffiliated
medical review service companies, the latter of
38
which are terminable without penalty after 90 days. We do not intend to incur
any indebtedness at the commencement of our operations, although we may later
establish a line of credit for future use.
Critical Accounting Policy
Recognition For Purchased Life Insurance Policies
We will record our investment in life insurance policies pursuant to
Financial Accounting Standards Board Technical Bulletin 85-4 "Accounting for
Purchases of Life Insurance" ("FTB 85-4"). FTB 85-4 requires the amount to be
realized (the policy's cash surrender value) under the insurance contract to be
recorded as an asset. The change in cash surrender value during the period will
be recorded as an adjustment of premiums paid in determining the expense or
income to be recognized for the period.
The expected purchase price for life insurance policies is expected to be
higher than the cash surrender value. An operating loss on the initial purchase
of the policy will be recorded. We expect operating losses during the early life
of the Fund until the benefits under such policies become payable. This
accounting policy should have no affect on the Fund's cash flows and estimated
rate of return per insurance policy.
NOTICE TO CALIFORNIA RESIDENTS
All unit holders resulting from any offer or sale in California will
receive the following restrictive notice:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFORE, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
BUSINESS
General
The Fund was organized to offer membership interests which will represent
fractional pro rata beneficial interests in the income to be generated primarily
from individual life insurance policies which we intend to purchase at a
discount to face value to create a "pool." The Fund will provide financial
benefits to terminally ill and chronically ill (a continuing disease which may
or may not become terminal) persons of all ages and to senior citizens, age 65
and older, with estimated life expectancies based solely on actuarial tables, in
exchange for ownership of their life insurance policies. A life settlement is
the payment of cash in return for an assignment of ownership or beneficial
interest in, and the right to receive the face value of, a life insurance
policy. The amount paid for an insurance policy is negotiated by our provider or
other providers based on various factors, including the estimated life
expectancy of the insured, the estimated
39
premiums payable under the policy over the expected life of the insured, certain
other costs of the life settlement and what our manager advises our provider is
the maximum amount budgeted.
Our provider will identify on behalf of the Fund insurance policies that
fit the criteria for our manager to review. We will use our provider buying
directly from the insured, when it is licensed, from other providers, or from an
unaffiliated broker network, to obtain policies and assign them to the Fund.
A typical client will contact a broker after being diagnosed with a
terminal or chronic illness from persons of all ages or a senior citizen
policyholder, who is age 65 and older. This person desires to obtain as much
money as possible from their life insurance policy today to assist him in
financial expenses during his remaining years.
Our provider is only permitted to purchase life insurance policies through
licensed brokers unless it becomes licensed as a broker. The broker will obtain
information on the insured including copies of his medical records and a copy of
the insurance policy. The broker is paid his commission by the policyholder. The
broker will contact a number of companies in order to get the highest bid for
its client. We will attempt to establish strong broker relationships across the
United States. We will succeed only if we are able to establish our reputation
of fast turnaround time in processing an application and are able to
successfully complete and fund transactions on a timely basis.
We currently intend to service the insurance policies directly with the
experienced staff our manager has hired. However, if the staff is unable to
effectively handle the volume of work or our manager otherwise decides it does
not wish to service the insurance policies, our manager may outsource any or all
non-financial services to an unaffiliated third party servicer. Our manager has
contracted with four unaffiliated third party medical review service companies,
described below, to conduct its medical due diligence review, to monitor or
"track" the lives of the insureds, and file claims for proceeds when the insured
passes away on behalf of investors. Other than these three agreements, no
arrangements, agreements or understandings have been made, as of the date of
this prospectus, with any third party to act as our servicer.
Our manager will service the insurance policies which will involve: (a)
conducting a due diligence review, which includes evaluating the terms of each
policy and, with the assistance of a medical review service company which has
contracted with independent medical specialists, estimating the life expectancy
of the insured; (b) closing the transaction, which includes obtaining releases
of prior beneficiaries, designation and recording of the Fund as beneficiary, as
well as payment of the purchase price to the insured, and (c) servicing the
policies on an ongoing basis.
The fee to be paid by the Fund to our provider will be up to 5% of the
face amount of the policy. The fee to be paid by the Fund to our manager, which
intends to service the Fund's policies, but may outsource all non-financial
services to an unaffiliated third party, will be a fee of up to 5% of the face
amount of the policy. In the event we outsource non-financial services to a
third party, the fees of up to 5% of the face amount of the policy will be paid
to such third party rather than to our manager.
40
Related Parties Involved in this Offering
AmeriFirst Financial Services, Inc., our manager, AmeriFirst Funding
Group, Inc., our provider, and AmeriFirst Capital Corp., our underwriter, are
three separate entities involved in the offer and sale of the units in the Fund,
as described below. Our provider and underwriter operate and are regulated by
different agencies and are subject to different rules and regulations. Our
provider is subject to different rules and regulations in each state in which it
is regulated. The rules and regulations governing each entity governs who can be
employed by the entities and their respective books and records and reporting
requirements. Our manager, on the other hand, is not regulated and acts as a
service company to the Fund and our provider. It can also provide services to
non-affiliated persons for a fee. The Fund believes that it is preferable to
keep the operations and financial statements of a non-regulated entity separate
from the Fund, provider and underwriter each of which is regulated.
All of the capital stock of our manager, provider and underwriter is owned
by AmeriFirst, Inc., a Delaware holding company of which John Tooke owns 55% of
its common stock. Accordingly, each of our manager, provider and underwriter is
controlled by John Tooke, who is also the president, chief executive officer and
a director of each of these companies. Mr. Tooke has experience with selling
mortgage backed securities and other securities, but has no actual experience
purchasing and securitizing life settlements.
Our manager is responsible for making all investment decisions on behalf
of the Fund and dealing directly with investors in the Fund. In addition, our
manager currently intends to act as servicer of the insurance policies acquired
by us from our provider. Our manager has contracted with four medical review
service companies to conduct medical evaluations and determine life expectancies
of prospective insureds. Our manager will not engage in the insurance business
except as permitted. See "Business --Our Manager" and "Business--Our Servicer."
Our provider will originate policy purchases either directly from the
insured, when it is licensed, or from other providers, or from an unaffiliated
broker network and assign them to the Fund. Our provider will comply with the
laws of each state in which it intends to conduct life settlement business which
regulates the purchase and/or sale of life insurance policies. Employees of our
provider involved in the purchasing of the polices will not engage in the
offering of units of the Fund. See "Business---Our Provider."
Our underwriter is solely responsible for the offer and sale of units in
the Fund. Our underwriter will be licensed by the NASD before the effective date
of this prospectus.
The Life Settlements Market
The life settlements market is an extension of the viatical market that
became popular in the late 1980s. Then, the focus was on buying policies of
terminally ill people (particularly AIDS patients) who had a life expectancy of
less than three years and needed money before their death. The focus has
expanded to currently include senior citizens with a limited life expectancy who
have insurance policies they no longer need or who require more liquidity.
Historically, the only option available for people who either did not want or
could not afford to pay premiums on
41
a policy was to surrender it for cash value. Life settlement firms, such as the
Fund, will pay significantly more than the cash surrender value.
Another option available to senior citizens is to use their accelerated
death benefit option on their policy if it is an option. See "Competition."
While these are not for every policyholder, they are a valuable option.
According to Senior Market Advisor, senior advisors should be aware of the
benefits of the life settlements. Seniors in the United States hold life
insurance policies worth nearly half a trillion dollars, according to insurance
industry experts. More than $100 billion of this amount is eligible for sale as
life settlements.
Seniors may have purchased large insurance policies when they had young
families and then, when they reached older age and their children became adults,
no longer needed the life insurance coverage that was necessary when they were
younger. In many cases, seniors might simply have stopped paying premiums and
allowed their policies to lapse. Senior settlements relieve seniors of the
obligation to pay insurance premiums, which on some types of policies may be
quite high for older insureds, and permit them to obtain a portion of their
policy limits to use while they are alive.
According to the National Center for Health Statistics and Center for
Disease Control in a report issued August 6, 1999, Americans have a longer life
expectancy in the twenty-first century due to the advancements in medical
technology and treatment. However, despite our remarkable progress, heart
disease and stroke remain leading causes of disability and death, especially in
older adults and seniors. In addition, declines in heart disease and stroke
mortality mask important differences in rates of decline by race/ethnicity, sex
socioeconomic status and geographic region. Also, according to American Cancer
Society, Surveillance Research, 2002, cancer is the second leading cause of
death in the United States, exceeded only by heart disease. Although many trends
have been positive, trends for some important indicators have not improved
substantially, have leveled off, or are reversing.
Life settlement companies have shifted their focus away from HIV insureds
to other "dread diseases" such as heart attack, life-threatening cancer, stroke,
or kidney failure. Many companies have also eliminated HIV policies from their
portfolios due to inconsistencies of the life expectancies in the past. We
believe this is a positive development for investors in life settlement
contracts due to a more accurate life expectancy rate for the policies which
they are purchasing.
The Fund
The Fund was formed in the State of Delaware in April 2002 and
reincorporated in Florida in September 2002. We plan to engage solely for the
restricted, limited purpose of purchasing life insurance policies from our
provider, either directly from the insured, when our provider is licensed as a
broker, or by using other providers or from an unaffiliated broker network. The
Fund has no operating history and has only nominal capital and will not have any
assets prior to the commencement of this offering. John Tooke, the President and
controlling shareholder of our manager, provider and underwriter, may be deemed
to be a founder and/or promoter of the Fund. Mr. Tooke has not received and will
not receive anything of value from the Fund, although our manager, provider and
underwriter, all of which are controlled by Mr.
42
Tooke, will receive substantial fees from the proceeds of the offering. See
"Compensation of Our Manager, Provider and Underwriter."
Our provider will enter into viatical settlement contracts, as described
above, with the insureds. In accordance with the terms of such agreements, our
provider will (a) transfer, assign, and convey to the Fund all of our provider's
right, title and interest in and to the insurance policies, or (b) in states
which prohibit an assignment of the insurance policy to anyone other than a
provider, our provider will be the owner and the Fund will hold an irrevocable
beneficial interest in the policy, and (c) take all actions that are required
under state law to establish the Fund's ownership interest in and to the
insurance policies. See "Description of Viatical Settlement Contracts."
Our Provider
The provider of our life settlements will be AmeriFirst Funding Group,
Inc., although the Fund may also use other licensed providers to obtain policies
in each instance utilizing an unaffiliated broker network. If our provider is
licensed as a broker it may purchase policies directly from an insured. Our
provider was formed in the State of Delaware in August 2002 and is in compliance
with the laws of the State of Georgia to conduct life settlement business. It
will comply with the insurance and/or securities laws of all states which
regulate the purchase and/or sale of life insurance policies. John Tooke,
president and chief executive officer of our manager, is also chief executive
officer of our provider. Our provider has no operating history and only nominal
capital. Our provider will purchase insurance policies on behalf of the Fund,
although it may also sell policies to others on a non-securitized basis. Our
provider's address is 1712-H Osborne Road, Suite 107, St. Marys, Georgia 31558.
Its telephone number is (912) 673-9100.
Our provider intends to be a nationwide specialty financial services
company that purchases insurance policies from terminally ill and chronically
ill persons of all ages and senior citizens, age 65 and older with estimated
life expectancies based solely on actuarial tables, in order to aggregate the
policies into a pool of policies, as we are offering hereby. Our provider
intends to enter into agreements to purchase insurance policies directly from
insureds where it is licensed as a broker, from other providers, or from a
nationwide network of unaffiliated life settlement brokers. Virtually all states
require an insured to be represented by an independent third party or a broker.
Since most states also require brokers to be licensed, the names of these
brokers are readily available. Our provider intends to establish its reputation
through strategies of compliance, integrity and due diligence.
We will make payments for the purchase of policies from our provider's
escrow account, maintained at SouthTrust Bank, as escrow agent, located at 110
Office Park Drive, 2nd Floor, Birmingham, Alabama 35223. The insured will
receive a settlement check or wire transfer upon closing of the life settlement.
The Fund will pay our provider for its services.
Brokers are typically paid a fee based on the face value of the policy.
Either our provider or the insured will pay the broker for negotiating the sale
of the insurance policy upon the funding of the policy. This is exclusive of the
fees which the Fund will pay to our provider. Our provider does not intend to
pay referral fees to doctors, lawyers or other professionals to whom our
provider is prohibited by applicable law from paying a referral fee and will not
do business with referral sources which our manager does not believe to be
reputable. Brokers and certain
43
other referral sources also handle other administrative functions, such as
collecting applications from potential clients and collecting medical and
insurance records.
Our Manager
Our manager of our Fund will be AmeriFirst Financial Services, Inc. Our
manager was initially formed in the State of Delaware in September 2002 and is
qualified to do business in Florida and Georgia. Our manager's main office is in
Florida, but it also maintains an office at the Fund's and our provider's
Georgia location. AmeriFirst, Inc., a Delaware holding company, 55% of whose
capital stock is beneficially owned by John Tooke, owns all of the capital stock
of our manager. Our manager currently intends to service the insurance policies
and investors directly by its staff of 7 persons, as well as 6 employees of
AmeriFirst, Inc., as of January 13, 2003. However, our manager may outsource any
and all non-financial services, as set forth below, to an unaffiliated third
party. Our manager's responsibilities on behalf of the Fund will include
identification of potential policy purchases through our provider and a
nationwide network of unaffiliated life settlement brokers. Our manager will
have sole fiduciary responsibility over all investor funds once obtained from
the escrow agent and thereafter directly from investors and the purchase of life
settlements.
Under the Fund's operating agreement, our manager may be removed for cause
(as defined in the Fund's operating agreement), for default (as defined in the
Fund's operating agreement), or otherwise after our manager has received
distributions that equal or exceeds 125% of the aggregate expenses of this
offering, including sales commissions. Such removal without cause may be
effected by the members holding at least 2/3 in interest of the Units.
Our Servicer
Our manager intends to act as servicer and service the life insurance
policies directly, but it may outsource all non-financial services to a third
party. As of the date of this prospectus, we have no agreements, arrangements or
understandings with any third party to act as our servicer, although our manager
has contracted with three unaffiliated medical review service companies to
determine estimated life expectancies and monitor the lives of the insureds. Our
manager and its affiliate employed 13 persons as of January 13, 2003, to
initially conduct such operations. Our manager would need to hire additional
employees, or outsource non-financial services, if we acquire a large number of
life insurance policies or is otherwise warranted. Current employees include a
chief information officer, in-house legal staff, accounting staff, insurance
review, medical review, policy administration, computer and data processing
personnel and customer service.
Our servicer, who is also our manager, has a computer system which
consists of a web server, mail server, database server, two firewalls, network
attached storage, an integrated T-1 for our web server, and an integrated T-1
for servers. Our servicer uses DVD backup that is taken off the premises in a
fire safe to back up our programs and information concerning the individual
insureds and policyholders. Windows XP workstations are located throughout the
offices attached to the servers.
The fee which will be paid by the Fund to our servicer, who is also our
manager, is expected to be up to 5% of the face amount of the policy. In the
event that we determine to use
44
the services of an unaffiliated third party, we expect to enter into a servicing
agreement. Servicing the insurance policies involves monitoring the life status
of the insured, tracking the maturing of the policy and filing claims for
proceeds when the policy matures.
Upon the closing of the provider's purchase of the policy, our servicer
will evaluate and process the life settlements. Our provider will then assign
the insurance policies, without recourse, to the Fund. Our provider will execute
an assignment of the life insurance policy to the Fund where permitted, or
otherwise name the Fund as irrevocable beneficiary of such insurance policy.
Our manager will undertake to service and administer the insurance
policies and to collect payments due under the insurance policies in accordance
with customary and usual servicing procedures and it shall have full power and
authority, acting alone or through any party properly designated by it to do, so
any and all things in connection with such servicing and administration which it
may deem necessary or desirable. Our manager is authorized and empowered, unless
such power and authority is revoked by the Fund on account of the occurrence of
a default by our manager, to execute and deliver, on behalf of the Fund for the
benefit of its members, any and all instruments of satisfaction or cancellation,
or of part or full release or discharge, and all other comparable instruments,
with respect to the insurance policies. Our manager will obtain any powers of
attorney and other documents reasonably necessary or appropriate to enable our
servicer to carry out its servicing and administrative duties.
Our manager is not obligated to use separate servicing procedures, offices
or employees for servicing the insurance policies from where it may service
other insurance policies, if any; provided, however, that our servicer is at all
times required to be able to accurately reflect the status of collections and
shall maintain separate accounts. Our servicer is not required to maintain
fidelity bond coverage insuring against losses through wrongdoing of its
officers and employees who are involved in the servicing of the insurance
policies.
Our manager's business will involve the following principal steps which
are described in further detail below:
o due diligence review, which includes evaluating the terms of each
policy, reviewing insurance and final underwriting for proposed
policies and with the assistance of an independent medical review
service company, estimating the life expectancy of the insured;
o closing the transaction, which includes obtaining releases of all
beneficiaries and an insurance policy assignment, or irrevocable
change of beneficiary, as well as payment of the purchase price of
the policy;
o monitoring the policy; and
o collecting the policy proceeds following the policy's maturity.
In addition, our manager will also provide the following functions:
o review financial analysis of each policy and its relationship to the
aggregate pool of policies;
45
o audit integrity of financial model on a periodic basis;
o maintain data on pool characteristics;
o audit premium calendar database; and
o prepare reports as agreed.
Evaluating the Insured and the Insurance Policy
The due diligence review process is designed to obtain accurate
information regarding both the insured and the life insurance policy (a) to
determine whether our provider will offer to purchase the policy and, if so, the
price it will offer and (b) to ensure that certain criteria are met to minimize
challenges by former beneficiaries or by an insurance company to payment of the
face value of the policy.
The insurance review is our process of evaluating life insurance policies
and their suitability for purchase. Our provider will obtain an insurance policy
directly from the insured when it is licensed as a broker, or from other
providers, or from an unaffiliated broker network. Our provider will utilize our
manager, as our servicer, to execute the following procedures to verify that it
purchases a complete insurance policy.
The insurance review process includes:
o review of the broker's application for required identification and
personal information for the insured;
o examination of company records for previous policies on the life of
the insured;
o review of all insurance applications associated with the policy and
comparison of answers to any medical questions;
o ensuring the insurance company rating is B+ or better;
o examination of the policy to make sure it is complete, including,
among other things, that it is non-contestable and not a group
policy (other than a Retired Federal Employees' Group Life
Insurance, FEGLI);
o determination of the amount of death benefit available for purchase;
o thorough review of the insurance contract terms;
o escrowing sufficient premiums to fund the policy death benefit until
the maturity date;
o verification of coverage by the insurance company or administrator;
o ensuring the file is complete before forwarding to the bidding
department; and
o granting final approval for purchase once the bid has been accepted.
The purpose of the insurance review is to ensure the amount of benefit
purchased will be available to the Fund upon maturity for distribution to its
members. In accomplishing this goal, the insurance review declines policies with
unacceptable risks and accepts only policies of the highest quality.
46
Once a potential insured or broker contacts our provider, an application
and consent form permitting our provider to obtain medical and insurance
coverage information of the insured will be sent to the potential client. All
information obtained by our provider in connection with policy purchases,
including the identities of the insureds, will be held in confidence and access
thereto will be restricted by our provider to its employees and other
representatives. Upon receipt of the completed application, it will be reviewed
to determine the overall medical status and a preliminary estimated life
expectancy. The file will also be reviewed to determine whether the beneficiary
can be changed to the Fund rather than the insured or his family, and whether
the insurance company which issued the policy is of a credit quality deemed
acceptable by our manager.
If it appears from the application that the policy is one the Fund would
be interested in purchasing, our provider will obtain from the broker the
insured's attending physician's medical information which usually includes
several years' worth of laboratory reports and physicians' notes and a written
letter of competency signed by the attending physician. Our manager will forward
such documentation to an independent medical review service company, consisting
of a panel of specialists. Our manager has contracted with four different
unaffiliated third party organizations to provide independent medical
consultants as described below. In evaluating the life expectancy of the
insured, the medical consultant will review the file and other information
forwarded by our provider. We will make a decision to bid on the life insurance
policy based, in part, on the review of the medical review service company. See
"Risk Factors - We will depend on third party information to predict an
estimated life expectancy," and "Business--Medical Due Diligence Review."
Simultaneously, our provider, using the insured's consent form, will
obtain verification of insurance coverage and other policy information from the
insurance company, the employer or the group administrator. The insurance
documents will be reviewed to determine the type of policy, and any provisions
which may effectively reduce the face value of the policy, (i.e., loan against
the policy), and to ensure, among other things, that:
o the policy under consideration is past any contestability periods,
(i.e., the periods during which the insurance company may deny payment for
various reasons, including suicide and a misstatement of material fact);
o all current primary beneficiaries are willing to execute releases with
respect to any present or future claims they may have with respect to the
policy;
o the Fund is able to obtain ownership of or became the irrevocable
beneficiary of the policy and the associated policy proceeds. Our provider will
not purchase a policy if a minor is a named beneficiary at the time of purchase.
Our provider will also review the policy premium schedule and determine whether
the policy contains a disability waiver of premium rider which impacts future
premium payments. Our provider will attempt to ensure that the policy is
compatible with the Fund's portfolio in terms of cash on hand. The review
process for the insurance documents generally will take one to three weeks,
depending on the extent of cooperation received from third parties; and
o our provider will not purchase policies of insureds who are not
residents of the United States or whose insurance companies are not domiciled in
the United States.
47
Some of the documentation gathering described above, including collection
of necessary medical, personal and insurance information, may be performed prior
to submission of the application to our provider, but the determination of the
insured's life expectancy and compatibility with investment criteria, review of
insurance documents and determination of legal and contractual issues will be
made by our manager.
Medical Due Diligence Review
Our manager intends to utilize the services of four unaffiliated medical
review service companies, named below, to conduct a medical evaluation of
terminally ill and chronically ill (a continuing disease which mayor may not
become terminal) persons of all ages prior to our provider purchasing the life
insurance policies. These firms were selected on the basis of the quality of
their services, background of experienced underwriters and their panel of
medical specialists. However, each agreement is for only a 90 day initial term
and can be replaced by our manager at its discretion at any time. Each firm uses
a panel of physicians consisting of many specialties including, but not limited
to, oncology, geriatrics and infectious diseases. These specialists all have
extensive backgrounds in clinical practice and/or research.
Depending on the insured's medical condition, the life expectancy review
is accomplished through independent reviewing physicians. The life expectancy
review includes a review of the insured's medical records and related forms. The
insured's medical records may be furnished by the sourcing broker or requested
by our provider
The following medical records will be used by the servicer and/or our
medical review service companies in their medical review process of evaluating
the insured:
o progress notes from the primary care provider and physician
specialists;
o laboratory results;
o x-ray reports and other diagnostic tests;
o surgical reports;
o communications with insured's attending physicians
o hospital admit/discharge summaries;
o pathology reports;
o previous and current therapy/treatment;
o lifestyle risk factors;
o functional impairments; and
o psychological parameters.
48
The above components are necessary to establish an accurate overall view
of the health status of the insured. After this evaluation is reviewed, our
manager then decides if the policy meets the Fund's objectives.
Continuous insight into new medical advancements, treatments and
medications is important for the medical review process. We will incorporate
this information into each medical file reviewed and it is a vital part of
maintaining the high standards necessary for our medical review department.
Medical Consulting Services
Our manager entered into four separate consulting agreements with medical
service companies. These include Fasano & Associates Inc. of Washington, D.C.,
Systems for Advanced Risk Analysis, L.P. (SARA/ALI Group), of San Antonio,
Texas, 21st Services of Minneapolis, Minnesota and American Viatical Services,
LLC, of Woodstock, Georgia (collectively, the "Consultants"). The Consultants
have no relationship to the Fund or its affiliates or to the insureds themselves
or the brokers representing the insureds. Each agreement is on a non-exclusive
basis for an initial 90-day term. The Consultant is paid approximately $225 to
$250 for each evaluation. The terms of such relationships are industry standard
and were negotiated on an arm's length basis. A form of such agreement, each of
which is substantially the same, has been filed as an exhibit to the
registration statement of which this prospectus forms a part.
The Consultants are experienced medical review companies used by our
manager for evaluating and determining an estimated life expectancy. The
Consultants have state of the art medical underwriters and a panel of medical
physicians who rely on extensive clinical and research experience to make their
determinations of estimated life expectancy. The specialists include
cardiologists, oncologists, hospice specialists, geriatric specialists,
infectious disease specialists and internists. Many of the physicians hold
positions as medical directors of major institutions. The Consultants provide a
comprehensive review of medical records and a mortality profile on the
terminally ill or chronically ill (a continuing disease which may or may not
become terminal) individuals of all ages. Our manager is to submit life
settlement files, including all medical and other information needed to produce
a life expectancy estimate. Our manager must warrant that the information is
accurate and complete. The Consultant is permitted to contact attending
physicians of the insured to obtain clarification or verbal updates, but does
not examine or speak directly with the insured. Life expectancy estimates may be
based on underwriting mortality tables converted into life expectancy by using
statistical studies and clinical judgment or by a combination of the foregoing.
Factors influencing each Consultant's determination or an insured's life
expectancy may include the specialist's own clinical experience, peer review,
rigorous analysis of medical journals, library, non-public information
concerning clinical trials, investigational new drugs, and statistical
information.
The medical review process involves conducting an evaluation of available
medical records that confirm the existence of a terminal illness, including the
stage, progression and overall status of that illness. The eligibility for the
Fund's purchase will then be established.
49
Purchase of Policies
If our manager determines that the policy meets the Fund's criteria,
including due diligence review and investment criteria, our manager will
instruct our provider to make an offer to the insured or to the broker
representing the insured to purchase the policy. The purchase price will be
based upon the face value of the policy, our medical review service company's
estimate of the insured's life expectancy, the premiums estimated to be paid
under the policy over the insured's estimated life expectancy, and certain other
costs of the policy. If the insured or broker accepts the offer, purchase
documents are prepared from forms generated by our manager's management
information system. The documents include a viatical settlement contract, a
consent to change of beneficiary and authorization to release medical
information of the insured, each of which has been filed as an exhibit to the
registration statement of which this prospectus forms a part. The process by
which our provider will purchase the policies on behalf of the Fund and
accordingly enter into a viatical settlement contract is set forth in detail
beginning on page 71 under "Description of Viatical Settlement Contracts."
The Fund will become the owner of an individual policy, or absolute
assignee of the insured's rights in a group policy, by filing a change of
ownership or absolute assignment form and an irrevocable change of beneficiary
form with the applicable insurance company, employer or plan administrator.
Following receipt of appropriate acknowledgment of the receipt of such changes,
a closing occurs and funds are disbursed as directed to the insured. Our manager
anticipates that the closing process will take one to three weeks and the entire
purchase process, from application to closing will take from four to eight
weeks. Our provider will provide a rescission option through which the insured
may, for any reason, return the disbursed funds and any premium payments made by
the Fund in the interim, and be unconditionally released from the viatical
settlement contract. The rescission period is at least 15 days from receipt of
the purchase price and is longer (i.e., 30 days), if required by applicable law.
See "Business -- Government Regulation of Life Settlements."
Monitoring
When the funds from this offering are released from escrow, a premium
escrow account will be established with SouthTrust Bank generally equal to l50%
of the funds expected to pay the premiums during the estimated life expectancy
of the insureds with a minimum of two years beyond the estimated life
expectancy. We will attempt to pay premiums up front when possible or establish
a bank draft for automatic payment to avoid frequent monitoring of the premium
escrow account. At all times, however, an internal accountant will monitor the
premium escrow account to maintain required balances. We are also developing a
custom software application to house information regarding the policies,
insureds, brokers, agents, money market accounts and any other aspect that needs
to be monitored internally.
We will also attempt to maximize returns on investment by increasing the
death benefit where the insurance policy by the servicer continually permits
benefit increases. The insured will be regularly monitored to obtain timely
information concerning the insured so that proceeds may be collected as promptly
as possible following the maturity of the policy.
50
Our manager will monitor the policy to ensure it does not lapse because of
a failure to timely pay premiums. Some protection against the failure to pay
premiums is provided by statutory or policy provisions that require insurance
companies to provide written notice before terminating a policy for failure to
pay premiums. As owner of record of the policy, or as absolute assignee of all
of the insured's rights under the policy, the Fund generally receives such
notice directly.
Our manager has contracted with an independent third party, 21st Holdings,
LLC, an affiliate of 21st Services, one of our medical review service companies,
which will be responsible for monitoring the insureds' whereabouts and/or
ongoing medical condition. They will monitor the insureds through their
attending physician's office when possible. They will make quarterly calls to
the insured's physician to determine when the insured was last seen or the
insured's next scheduled appointment. All records will be kept in the insured's
file and on a monthly basis all updates will be sent to our manager for its
files. If the insured does not regularly visit his physician then his personal
references will be contacted and if they cannot be reached, then the insured
itself will be contacted unless precluded by state or federal rules or
regulation. 21st Holdings, LLC will also be responsible to notify the insurance
company of the insured's death and will file the claim for benefits.
Representatives of our manager in our Georgia office will receive all notices of
change in status of the insurance policy, a change in premium payments, annual
statements, or any reduction in death benefits. For all of the above services of
monitoring the insured, 21st Services will be paid a one-time set up fee of
$15.00 and monthly fee of $15.00 for each life settlement policy until the
policy matures.
Collection of Policy Proceeds
Once a policy matures, one of the Consultants which is monitoring the life
status of the insured will file a request for a copy of the death certificate in
the appropriate governmental office. Often the insured's family or companion
will also submit a copy of the death certificate to the insurance company. The
Consultant will then file the death certificate with the insurance company and
request payment of the policy proceeds. The Consultant will monitor the
collection status until the Fund receives the face value of the policy.
Monitoring the collection status will be assisted by our servicer's management
information system, which will reflect the filing of the death certificates, the
filing of claim forms with the insurance companies by our servicer and provide
for a status update until the claims have been paid. Insurance companies have an
incentive to pay promptly on policies because most states require insurance
companies to pay interest on claims which take more than 30 days to settle.
Actual collections will generally occur within 30 to 55 days following the
maturity of the policy. However, in certain states (i.e., New York), actual
collections may take a longer period of time due to delays in processing of
documents by state authorities.
Description of Return on Investment
We are offering pro rata beneficial interests in the income to be
generated primarily from individual life insurance policies, which we will
purchase to create a pool. The pool is intended to reduce risk by purchasing a
large number of policies from a diverse group of terminally ill and chronically
ill (a continuing disease which may or may not become terminal) persons of all
ages and senior citizens, age 65 and older with estimated life expectancies
based solely on actuarial tables. The pool of life insurance policies will range
from face values between $25,000 and $2
51
million or more. In addition, the pool should provide a blended rate of return
closer to the estimated rate of return, rather than if you were to purchase a
single life insurance policy.
We will attempt to purchase insurance policies at a discount to the face
value of the policy based on our estimates of life expectancies. The discount is
directly connected with life expectancy and will increase along with estimated
life expectancy. A one-year life expectancy may have a relatively small discount
of about 10%, while a 10-year life expectancy may have a 50% discount. The
amount of the discount to the insured is negotiated and varies depending upon
the nature of the life insurance policy, the stability of the insurer,
prevailing interest rate, the estimated premiums to be paid by our manager for
the policy over the expected life of the insured, the insured's estimated life
expectancy and certain other costs of the life settlement. We will attempt to
create a pool of life insurance policies whereby the blended rate of return on
the gross proceeds invested in life insurance policies will provide an estimated
rate of return of approximately 10% per annum.
Only when we receive from insurance carriers the proceeds after maturity
of insurance policies will you receive a distribution consisting of your pro
rata share of such proceeds. After the policy is underwritten and medical and
actuarial tables are examined, our manager will estimate the maturity of the
policy. The estimated rate of return on the purchase price of a life insurance
policy is inclusive of all fees connected with the purchase; the underwriter's
selling commission which will be paid at the time of purchase, and payments to
the premium escrow account and the sinking fund. Once we have determined the
estimated maturity of the policy, the estimated rate of return can be determined
by dividing the aggregate fixed rate of return (not compounded) by the insured's
estimated life expectancy determined by medical and insurance underwriting and
actuarial tables. The actual rate of return can only be determined when the Fund
is paid by the insurance carrier after the policy matures. The actual return on
investment to investors is determined by subtracting the discounted amount paid
for each policy purchased (including all fees and policy premiums paid or
escrowed), as well as any capital calls paid, and payments to the premium escrow
account and sinking fund, from the face value of such policy when the policy
matures.
The actual rate of return to all members can only be determined when all
policies have matured at the end of the Fund. We cannot guarantee you the full
return of your investment. The actual rate of return may be adversely affected
by, among other things; (i) policies maturing after the estimated life
expectancy; (ii) delays in tracking or disbursements of claims at maturity by
the insurance company, (iii) delays in investing gross proceeds of this offering
resulting in investors receiving 1-2% interest in the operating escrow account,
as opposed to the estimated rate of return from gross proceeds invested in
insurance policies, (iv) any capital calls (if the premium escrow account and
the sinking fund have been exhausted), (v) payments from the premium escrow
amount; and (vi) policies that terminate, lapse or the refusal or inability of
the insurance carrier to pay the claim, when the premium escrow account and the
sinking fund have been exhausted.
The rate of return on investments, the blended rate of return and the
actual rate of return are determined by using simple interest as opposed to
compounded interest.
For illustrative purposes only, set forth below is a hypothetical of how a
$76,920 investment might be used to purchase a 100% interest in a $100,000 face
amount of a universal
52
life insurance policy from a 50 year old terminally ill insured with a
three-year life expectancy. This would be required in order to provide the
return of the gross proceeds of an investment together with the return on your
investment. In this example, if a $100,000 policy is purchased for $76,920
inclusive of all fees, and if the insured were in fact to pass away in three
years, the aggregate return on investment would be $23,080 (or 30%) divided by
the $76,920 purchase price, or a return on investment of 10% per annum.
Expenditure Amount
----------- ------
Payment to seller and independent broker of policy (1) $47,036
Provider's commission (2) $ 5,000
Manager's and servicer's fee (3) $ 5,000
Deposit to premium escrow account (4) $ 4,500
Deposit to sinking fund (5) $ 7,692
Underwriter's selling commission (6) $ 7,692
Total: $76,920
- ----------
(1) Payment to Seller and Independent Broker of Policy. The price paid to an
insured for a life insurance policy is based primarily on the life expectancy of
the insured and the estimated premiums payable by the Fund over the expected
life of the insured. Competitive bidding (i.e., offers made on the same policies
by other life settlement companies) also influences the percentage of the face
value that will be paid for the policy. Generally, the shorter the life
expectancy of the insured, the greater the price paid for the policy. This is an
arm's length negotiation between the buyer and seller and depends totally on
market conditions. Either our provider or the insured will pay the broker for
negotiating the sale of the insurance policy. Broker's fees are based on market
statements and currently range from 6-8% of the face amount of the policy.
Vermont is currently the only state which limits broker's fees to 2% of the
amount paid to the insured while other states say it must be a reasonable fee.
(2) Origination Fee. The fee to be paid to the provider, which may be our
provider or another provider in the secondary market, will be up to a maximum of
5% of the face amount of the policy which percentage we have assumed in the
above table.
(3) Our Manager's and/or Third Party Outsourcing Fees. The fees to be paid to
our manager, who intends to service the policies and monitor the insureds on
behalf of the Fund, will be negotiated and determined by our manager, and will
be up to 5% of the face amount of the policy, as assumed in the above table.
Services provided by our manager will include: due diligence and policy review,
independent medical review for estimating the life expectancy of the insured,
closing costs, which include legal fees, administering the policy and the
investors and monitoring the life status of the insured.
53
(4) Deposit to Premium Escrow Account. The funds in the premium escrow account,
which will be used exclusively to pay policy premiums, are expected to generally
equal l50% of the premiums for the estimated life expectancy of the individual
insured for each of the three-year life expectancy in the above example with a
minimum of two years beyond the estimated life expectancy. Such escrowed funds
will be invested in interest bearing bank accounts, money market funds, or used
to purchase U.S. Treasury Bills.
(5) Deposit to Sinking Fund. We intend to escrow at each closing 10% of the
gross proceeds of this offering available as a sinking fund in the event of a
default, by an insurance carrier, to replenish the premium escrow account, if
needed, and for operating expenses (not to exceed 3% of the gross proceeds) of
the Fund in the Event our manager is unable to pay such expenses. The sinking
fund is intended to promote good underwriting practices in order to avoid a
default. These funds will be paid to members upon a default. If the sinking fund
is successful, however, the sinking fund reminder balance will be distributed to
our manager upon liquidation of the Fund, as additional incentive compensation.
(6) We intend to pay to our underwriter or an unaffiliated broker-dealer at the
time of purchase of insurance policies, a selling commission of up to 10% of the
gross proceeds of the number of units sold.
The following table illustrates how returns on investment will be
calculated. This chart is not based on any source of information, but is merely
management's estimate and is being presented in this prospectus merely as a
hypothetical example. The goal of the pool is to provide a blended rate of
return closer to the estimated rate of return, rather than if you were to
purchase a single life insurance policy. If an insured passes away at his
estimated life expectancy (equal to actual maturity) the annual rate of return
is 10%. If he passes away sooner, the rate of return is higher and if he lives
longer it is lower. Certain other factors which could adversely affect the rate
of return are set forth on page 52 directly preceding the hypothetical purchase
of a life insurance policy. In any event, however, we can only estimate and
cannot predict or guarantee your rate of return.
54
Estimated Life Expectancy
Actual Maturity
- -----------------------------------------------------------------------------------------------------------------------------
Years 1 2 3 4 5 6 7 8 9 10
- -----------------------------------------------------------------------------------------------------------------------------
1 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00%
- -----------------------------------------------------------------------------------------------------------------------------
2 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% 50.00%
- -----------------------------------------------------------------------------------------------------------------------------
3 3.33% 6.67% 10.00% 13.33% 16.67% 20.00% 23.33% 26.67% 30.00% 33.33%
- -----------------------------------------------------------------------------------------------------------------------------
4 2.50% 5.00% 7.50% 10.00% 12.50% 15.00% 17.50% 20.00% 22.50% 25.00%
- -----------------------------------------------------------------------------------------------------------------------------
5 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 20.00%
- -----------------------------------------------------------------------------------------------------------------------------
6 1.67% 3.33% 5.00% 6.67% 8.33% 10.00% 11.67% 13.33% 15.00% 16.67%
- -----------------------------------------------------------------------------------------------------------------------------
7 1.43% 2.86% 4.29% 5.71% 7.14% 8.57% 10.00% 11.43% 12.86% 14.29%
- -----------------------------------------------------------------------------------------------------------------------------
8 1.25% 2.50% 3.75% 5.00% 6.25% 7.50% 8.75% 10.00% 11.25% 12.50%
- -----------------------------------------------------------------------------------------------------------------------------
9 1.11% 2.22% 3.33% 4.44% 5.56% 6.67% 7.78% 8.89% 10.00% 11.11%
- -----------------------------------------------------------------------------------------------------------------------------
10 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%
- -----------------------------------------------------------------------------------------------------------------------------
11 0.91% 1.82% 2.73% 3.64% 4.55% 5.45% 6.36% 7.27% 8.18% 9.09%
- -----------------------------------------------------------------------------------------------------------------------------
12 0.83% 1.67% 2.50% 3.33% 4.17% 5.00% 5.83% 6.67% 7.50% 8.33%
- -----------------------------------------------------------------------------------------------------------------------------
13 0.77% 1.54% 2.31% 3.08% 3.85% 4.62% 5.38% 6.15% 6.92% 7.69%
- -----------------------------------------------------------------------------------------------------------------------------
14 0.71% 1.43% 2.14% 2.86% 3.57% 4.29% 5.00% 5.71% 6.43% 7.14%
- -----------------------------------------------------------------------------------------------------------------------------
15 0.67% 1.33% 2.00% 2.67% 3.33% 4.00% 4.67% 5.33% 6.00% 6.67%
- -----------------------------------------------------------------------------------------------------------------------------
16 0.63% 1.25% 1.88% 2.50% 3.13% 3.75% 4.38% 5.00% 5.63% 6.25%
- -----------------------------------------------------------------------------------------------------------------------------
17 0.59% 1.18% 1.76% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88%
- -----------------------------------------------------------------------------------------------------------------------------
18 0.56% 1.11% 1.67% 2.22% 2.78% 3.33% 3.89% 4.44% 5.00% 5.56%
- -----------------------------------------------------------------------------------------------------------------------------
19 0.53% 1.05% 1.58% 2.11% 2.63% 3.16% 3.68% 4.21% 4.74% 5.26%
- -----------------------------------------------------------------------------------------------------------------------------
20 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00%
- -----------------------------------------------------------------------------------------------------------------------------
55
General Description of Different Types of Insurance Policies to be Purchased by
the Fund and Investment Strategies
Our portfolio will consist mainly of the following types of life insurance
policies: whole life insurance, adjustable whole life, universal life insurance,
variable adjustable life insurance, Retired Federal Employees' Group Life
Insurance (FEGLI) and term policies.
Whole life insurance offers protection for the life of the insured based
on a fixed premium payment. Policies may provide coverage on a single life or
joint lives, either first to die or survivorship.
Adjustable whole life and combination whole life/term rider policies can
have limited guaranteed protection periods, or in the case of combination
policies, the term portion decreases. In both cases, dividends are used to
extend the coverage period or purchase paid-up whole life to replace the
decrease in the amount of term insurance.
Flexible premium universal life and variable adjustable life policies are
designed to mature or expire at 95 and beyond for specific amounts. Policies may
provide coverage on a single life or joint lives, either first to die or
survivorship.
Term policies are issued for a specific period and generally expire
without a death benefit at ages from 90 to 100. We will purchase only those
policies with coverage periods at least three times the insured's life
expectancy. All term policies must be convertible or exchangeable, without
medical evidence and reinstatement of contestability or suicide provisions.
The only group life insurance which the Fund intends to purchase is
Retired Federal Employees Group Life Insurance (FEGLI) policies which provide
coverage for the life of the insured without any termination or decrease in
death benefits. An absolute assignment will be made so that the Fund will be the
only person able to make changes on the policy or terminate the policy. Our
manager will need to reimburse the insured for premium payments, on a quarterly
or semi-annual basis as payroll deductions are the only mode available and an
insured will be required to mail pay stubs to the Fund.
Our manager intends to follow the following policy origination guidelines
in purchasing life insurance policies through our provider depending on the type
of life insurance policy purchased, as described above. An explanation of the
A.M. Best ratings appears following these guidelines.
Policy Origination Guidelines
Types of Policies
1. Whole Life (including joint and survivorship)
2. Retired Federal Employees Group Life Insurance (FEGLI)
3. Adjustable Whole Life and Combination Whole Life/Term Rider
56
4. Flexible Premium Universal Life and Variable Adjustable Life
(including joint and survivorship)
5. Term Policies (must be convertible or exchangeable).
Strategies
Our provider will follow the criteria described below when originating
policies. The number and scope of life insurance policies in the pool that we
intend to create will increase with the amount of proceeds we obtain. Our goal
is to create a diverse pool of between 250 and 500 life insurance policies owned
by terminally ill and chronically ill persons of all ages and senior citizens,
age 65 and over to be determined by medical and insurance underwriting and based
on actuarial tables. In any event, our manager which is controlled by John Tooke
will have sole discretion to oversee these strategies. We intend to use the
following strategies.
o All insurance carriers in the Fund covering the life settlements
must be rated B+ or better by A.M. Best as discussed in further
detail below.
o We will not purchase more than 25% of policies from one insurance
company.
o We will only purchase policies where the estimated life expectancy
of the insured is between one and ten years.
o We will only purchase policies beyond the contestable and suicide
periods.
o We will only purchase group insurance policies from Federal
Employees' Group Life Insurance (Retired).
o The Acquired Immune Deficiency Syndrome is the end stage of HIV
infection, characterized by opportunistic infections or a specific
blood test, CD4 count of less than 200/mm., malignancies,
generalized wasting and profound loss of the immune system as
defined by the Center for Disease Control. We will not purchase
policies from individuals who have been diagnosed HIV positive only;
the insured must have been diagnosed as having the terminal illness
of Acquired Immune Deficiency Syndrome.
o We will require an outside medical review to establish the estimated
life expectancy for all terminally and chronically ill (a continuing
disease which may or may not become terminal) insureds.
o The purchase of Acquired Immune Deficiency Syndrome polices will be
limited to 25% of the face value of the pool. To the extent that we
sell less than $100 million of units, at any given time, we will use
our best efforts to, but may not be able to stay in line with these
strategies.
o The maximum policy size for terminally and chronically ill insureds
of all ages and seniors, age 65 and older with a life expectancy
based solely on actuarial
57
tables, is $2 million dollars. For insureds with Acquired Immune
Deficiency Syndrome the maximum policy size we will accept is
$500,000.
o For seniors, age 65 and older, we have the right to base the
estimated life expectancy solely on actuarial tables for whole life
policies only. Mortality projections for Senior Life Settlements (65
years or older) are based on the 2001 CSO Mortality Tables for
females and males.
o We will not purchase Universal Life policies that terminate before
the insured is age 95 or Term policies that terminate prior to age
95 and cannot be converted or exchanged to extend the death benefit
to age 95. All Universal Life and Term policies must have a coverage
period of a minimum of three times the insured's estimated life
expectancy based on their age at the time the policy is purchased by
the fund until the termination date of the policy, or a minimum
coverage period of 10 years beyond the estimated life expectancy and
the termination date, whichever is greater.
A.M. Best's Ratings
The objective of the A.M. Best rating system is to provide an overall
opinion of an insurer/insurance company's ability to meet its obligations to
policyholders.
According to A.M. Best, their company ratings are based on three main
factors used to measure an insurer's financial strength and ability to meet
obligations to policyholders, as compared with industry composites. The factors
are:
1. Balance Sheet Strength
2. Operating Performance
3. Business Profile
Balance sheet strength is determined by measurement of growth in
underwriting, ratio of premiums written to capital and surplus, capital adequacy
ratio, ratio of capital and surplus to liabilities, ratio of re-insurance
expenses to capital and surplus funds, annual change in capital, capital
structure of holding companies, quality and appropriateness of reinsurance,
adequacy of policy reserves, quality and diversification of assets and various
liquidity tests.
Operating performance is centered around the insurer's profitability from
insurance operations, using various tests such as benefits paid as a percentage
of net premiums, commissions and expenses incurred as a percentage of net
premiums written, and return on equity.
Business profile issues analyze the diversification of an insurer as to
how the book of business is spread geographically, by product and distribution.
In addition, A.M. Best analyzes the insurer's market position, management,
revenue composition, insurance market risk, and event risk.
The range of A.M. Best ratings are as follows:
58
A.M. Best Ratings
A++, A+ Superior
A, A- Excellent
B++, B+ Very Good
B,B- Fair
C++, C+ Marginal
C, C- Weak
D Poor
E Under Regulatory Supervision
F In Liquidation
S Rating Suspended
An A.M. Best rating may be lowered or withdrawn entirely by A.M. Best if,
in its judgment, circumstances so warrant.
Ratings of A+ to A++ are assigned to insurance companies which have, on
balance, superior financial strength, operating performance and market profile
when compared to the standards established by A.M. Best. A.M. Best believes that
these companies have a very strong ability to meet their ongoing obligations to
policyholders. Ratings of A- to A are assigned to insurance companies which
have, on balance, excellent financial strength, operating performance and market
profile when compared to the standards established by A.M. Best. A.M. Best
believes that these companies have a strong ability to meet their ongoing
obligations to policyholders. Ratings of B+ to B++ are assigned to insurance
companies which have, on balance, very good financial strength, operating
performance and market profile when compared to the standards established by
A.M. Best. A.M. Best believes these companies have a good ability to meet their
ongoing obligations to policyholders.
Competition
Our manager believes potential insureds distinguish insurance settlement
companies based on three principal factors:
o price;
o response time; and
o sensitivity and professionalism in dealing with the insured and his
friends and relatives.
A life settlement company typically determines the price that it is
willing to pay for a life insurance policy principally based upon its estimate
of the life expectancy of the insured and the present value of such policy
discounted at a rate as determined by such life expectancy. Response time is
affected by the provider's internal ability to meet demand, the cooperation
received from the potential client's insurance company and the insured's doctor
and, ultimately, the provider's access to capital to fund its purchase of a
policy.
59
Our manager believes that approximately 50 to 60 life settlement companies
currently operate in the United States. Although lack of traditional funding
sources and high financing costs have limited the industry's growth in the past,
competition has recently increased. The increased competition has contributed to
higher purchase prices and lower original estimated annual rates of return.
Most insurance companies also offer some form of accelerated death
benefits to holders of their policies with terminal illnesses, but the costs
thereof vary substantially among such companies. A recent article appearing on
The Northwestern Mutual Life Insurance Company website, states that while
insurers began developing accelerated death benefits only a few years ago, today
more than 200 companies offer people with terminal and chronic illnesses
accelerated benefits, protecting over 18 million policyholders. As with any new
product, there are substantial variations in design, cost and coverage.
According to "Gay Money Magazine," accelerated benefits or acceleration often
requires a special rider on your life insurance policy in order to pay part or
all of the policy face amount directly through separate life settlement
companies from the insurer if your doctor signs a statement certifying the
insured's life expectancy is less than 6 or 12 months. Also, most insurers allow
acceleration on only part of policy, often only 25-50%. This is a reflection of
this industry's assumption that life insurance is for those left, not the
living. Of course, this varies among insurers.
An article from insure.com on April 17, 2001, states that most companies
require that the insured's life expectancy be 12 months or less from the time
the insureds applies for accelerated death benefits. Most policies specify that
the insured has a "dread disease" such as a heart attack, life-threatening
cancer, stroke, coronary artery bypass surgery or kidney failure. Some policies
charge the insured a higher premium for the option of accelerating your death
benefit. However, there are others that charge only if the benefit is
accelerated, while others do not charge at all. Most life insurance companies
limit the amount of the insured's death benefit he can accelerate, either by
restricting the percentage of his death benefit or the dollar amount that the
insured can receive.
Our manager believes that insurance companies, on an industry-wide basis,
have not aggressively participated in the market for terminally ill, chronically
ill and senior citizen life settlements or related products or services
primarily because of the undeveloped nature of the market and the potential for
public relations problems for the insurance industry resulting from insurance
companies redeeming policies for less than the death benefit promised to their
policyholders.
Given the restrictions typically imposed on the availability of
accelerated death benefits, life settlements have, to date, been an attractive
alternative to accelerated death benefits for insureds. Life settlements can
also offer some people with terminal illnesses the opportunity to pursue
lifelong goals while they are still relatively healthy. Although our manager
believes that insurance companies may continue to be reluctant to enter the life
settlement market they may reduce their restrictions applicable to accelerated
death benefits, may begin to provide life settlements directly or through
separate settlement companies or may offer other competing products or services
on a broader basis.
Our manager believes that the Fund will be well-positioned within the life
settlements industry to compete. The Fund intends to establish a reputation in
the industry for providing life
60
settlements in a professional, efficient and responsible manner. In addition,
our manager believes that it will be able to establish relationships with other
providers which will provide it with a competitive advantage. Our manager also
believes that the confidentiality afforded the insureds by having their policies
beneficially owned by the Fund, which will not disclose any confidential
information, will be an additional incentive for them to do business with our
provider rather than sell their policies to persons who will hold the policies
directly and know confidential information. Finally, if this offering is
successful, the proceeds from this offering will allow our provider to have
significant financial flexibility in such a fragmented market since it will have
more resources which will allow it to purchase more insurance policies at more
favorable prices than if it was only purchasing policies on an individual basis
for one investor rather than for a pool of investors.
Government Regulation of Life Settlements
We will monitor the progress of new legislation and regulations in each
state in which we purchase policies. However, given the emerging nature of life
settlement regulations, there may be periods in which we may not be in
compliance, or are unable to comply with the effective provisions of each
applicable, statute and regulation.
The Viatical Settlements Model Act was developed by the National
Association of Insurance Commissioners (NAIC) to encourage states to adopt
uniform standards to regulate the life settlements industry. Viatical and life
settlements are regulated by state laws of either the departments of insurance
or securities departments. A number of states have adopted the NAIC Model Act
and others have implemented certain provisions of the NAIC Model Act in the
regulations they have enacted. Accordingly, a generic form of viatical
settlement contract, which includes much of the NAIC Model Act, has been filed
as an exhibit to the registration statement of which this prospectus forms a
part. Set forth below are all material provisions of the NAIC Model Act, as well
as any material state variations, as follows:
o requires life settlement providers, brokers or investment agents to be
in compliance with state insurance laws in the state of residence of the
insured, and specifies the requirements for obtaining a license, where
applicable, and circumstances under which state regulators may refuse to issue,
suspend or revoke a license.
o requires that life settlement contracts and related disclosure
statements be submitted and approved by the state insurance regulator prior to
use.
o requires the licensee to file an annual statement with each state's
insurance regulator and gives the regulator flexibility regarding the form and
content of that statement. The reporting requirements for Texas are believed to
be the most extensive and require an annual report of all viatical or life
settlement transactions in Texas, and a separate complete and accurate annual
report of all viatical or life settlement transactions for all states in the
aggregate. The reports shall contain the information set forth in paragraphs as
follows: for each viatical or life settlement contracted during the reporting
period; the date the settlement contract was signed by all necessary parties;
insurance carriers name, age, life expectancy in months, insured's state of
residence, face amount of policy, net death purchased, estimated total premium
to keep policy in force for total life expectancy or not applicable because the
policy is paid up or no premiums are due. Net amount paid to the owner, source
of policy, type of policy, age of the policy at the time
61
of contract, primary diagnostic code at time of settlement contract, type of
funding, status as of ending date, death if applicable; sold if sold, appoint if
appointed to another provider or broker. Where death occurred, unique
identifying number, date contract signed, age and life expectancy, insured's
state or residence, net death benefit collected, total amount of premiums paid,
net amount paid to owner, primary diagnostic code, date of death, difference
between the actual number of months the insured lived after the date the
contract was signed, and total life expectancy used by the reporting provider,
name and address of each provider, representative, or broker, from which the
reporting provider was referred a policy; name and address of any person from
which the reporting provider was referred a policy for which a fee was given for
referral; name and address of each provider or broker to whom the reporting
provider referred a policy; number of policies reviewed and rejected, secondary
market purchases as percentage of total policies purchased, name and address of
any person whom the provider utilizes to perform medical evaluations of any kind
relating to life settlors, the name and address or any provider or broker that
the provider utilizes to track a life settlor's health status after a settlement
contract has been signed by all necessary parties, and payment has been made to
the owner, or to indicate tracking performed by in house employees. The report
shall not include any confidential information. For those states which require
financial responsibility, the provider's net capital will have to be verified
each year and a bond kept in place.
o prohibits any person, including the licensee, in the context of a life
settlement transaction, with the knowledge of an insured's identity, from
disclosing that identity or the insured's financial or medical information, to
any person, unless an exception applies, such as when such information is
directly related to and necessary to be disclosed for the completion of the life
settlement contract following the death of the insured.
o maintains broad procedures whereby state insurance regulators can
examine and investigate licensees in the life settlement business and requires
licensees to keep all records for a period of 5 years.
o requires disclosure of information to the insured, including, but not
limited to: (i) disclose to insured that his or her medical, financial or
personal information, as given to the life settlement provider or broker, may be
disclosed to others in order to effectuate the life settlement, (ii) possible
alternatives to life settlement contracts, (iii) implications of proceeds
received from the life settlement (i.e. creditors rights to proceeds, any effect
on insured's eligibility to receive some form of governmental benefit, taxes on
proceeds), (iv) name, address and telephone number of the life settlement
provider, and (v) the amount and method of calculating the broker's
compensation.
o requires disclosure of information to potential investors (not including
investors who are accredited investors, a financing entity, a special purpose
entity, a related provider trust or a licensee under the NAIC Model Act),
including, but not limited to: (i) annual rate of return, (ii) the risks
involved in this investment, including no returns will be received until the
insured dies and investor will lose all benefits or received substantially
reduced benefits if the insurer goes out of business during the term of the
viatical investment, (iii) type of policy being viaticated, its current status
and any additional benefits in the policy, (iv) whether the policy is
contestable, and (v) information with respect to monitoring the insured's
condition and the frequency of such monitoring.
62
o list general rules relating to the procedure for entering into a life
settlement contract, and provisions regarding advertising and fraud.
Approximately 20 regulated states have enacted statutes or adopted or
proposed regulations that establish minimum purchase prices to be paid to the
insured according to the insured's life expectancy. Those 20 states include,
Arkansas, California, Connecticut, Mississippi, North Carolina, Tennessee,
Washington, Minnesota, Wisconsin, Virginia, Iowa, Massachusetts, Nebraska,
Louisiana, Alaska, Oklahoma, Montana, Maine and Vermont. These states generally
provide that if the life expectancy is 0-6 months, at least 75-85% (but
generally 80%) of the face amount of the policy must be paid; 6-12 months, at
least 65-80% (generally 70%) must be paid; 12-18 months, at least 65-75% must be
paid; 18-24 months, at least 60-70% must be paid; 24-30 months, at least 50%-60%
must be paid; 30 months or longer, at least 50% must be paid. Many of these
states reduce the required amounts to be paid for insurance carriers lower than
the 4 highest A.M. Best ratings.
Most states have statutes that regulate conducting a life settlement
business. Many states regulate the life settlement business through their
respective departments of insurance, while others, regulate through their
respective securities departments. Our provider is in compliance with the laws
of the State of Georgia which regulates the sale of insurance polices as a
security through the Division of Securities and Business Regulation. Most other
states regulate the purchase, rather than the sale, of life settlement policies.
Our provider will seek to become licensed where required or otherwise comply
with the laws of all other states which regulate the purchase and/or sale of
life settlement policies. However, our provider may not be able to obtain a
license in every state when required, or to renew or prevent revocation of a
previously issued license or approval. Our provider may be precluded from doing
business in any state in which it is unable to obtain or maintain a required
license or otherwise comply with the insurance or securities laws. In the event
our provider is not licensed or approved to do business, in a limited number of
states it may purchase policies referred by other licensed providers.
Although we are not aware of any judicial authority interpreting whether
the life settlement business constitutes conducting an insurance business, some
states may consider life settlements to be an insurance company and preclude the
Fund, which is not an insurance company, from operating in those states. See
"Risk Factors--Possible Costs of and Delays Attributable to Government
Regulation Will Affect Our Profitability."
Employees
As of January 13, 2003, our manager employed 7 persons, and AmeriFirst,
Inc., our controlling shareholder, employed 6 persons, all of whom are full-time
employees. They include, John Tooke, the founder and principal of the Fund, an
executive assistant, a chief information officer, in-house legal and accounting
staff, insurance review, medical review, policy administration, computer and
data processing personnel, customer service and medical review. Our provider
employed two managers exclusive of John Tooke. Our underwriter employed two
persons in broker-dealer operations exclusive of John Tooke. None of our
manager's employees is covered by a collective bargaining agreement.
63
Facilities
Our manager and underwriter sublease their executive offices, located at
814 North Highway A1A, Suite 300, Ponte Vedra Beach, Florida 32082; telephone
number (904) 373-3034, at a monthly rental of $15,000. The sublease is from Life
Settlements Service Corp., a Florida foreign corporation. The sublease is for 18
months ending on July 28, 2004. The facility consists of approximately 7,349
square feet of office space.
The Fund and our provider lease their offices located at 1712-H Osborne
Road, St. Marys, Georgia 31558; tel no. 912-673-9100, at a monthly rental of
$800. The lease is with Century 21 Tri City Realty for five years ending on
December 31, 2008. The facility consists of approximately 1,440 square feet of
office space.
Legal proceedings
The company is not currently subject to any legal proceedings.
DESCRIPTION OF THE UNITS
The Fund's Assets
The units issued in connection with this offering will evidence fractional
membership interests in the Fund. The units in the aggregate will represent a
100% interest in the Fund's assets up until the final maturity dates. Each unit
will represent the right to receive your pro rata share of proceeds from
collections attributable to payments by insurance companies pursuant to the
insurance policies. See "Description of the Units -- Investor Accounts and
Allocation of Collections." The Fund's assets will consist primarily of:
o an irrevocable beneficial interest in the insurance policies;
o monies due or to become due under the insurance policies;
o monies received from insurance companies in payment of the insurance
policies;
o monies on deposit in bank accounts of the Fund or other permitted
investments as described under "Use of Proceeds," inclusive of interest earned
or accrued on the funds deposited in said accounts; and
o all right, title, and interest with respect to the insurance policies,
including, but not limited to, an assignment of such policies where permitted or
designation as irrevocable beneficiary, and any supporting documentation or
agreements related to the insurance policies.
Distributions will be made by check mailed or electronic deposit to each
of the members as it appears on the register maintained by the Fund, or its
designee.
All cash payments of insurance proceeds to the Fund, including accrued
interest thereon, received between the 26th day of one month through the 25th
day of the following month, shall be paid to members on the fifth day of the
second following month (the "Determination Date"). All
64
cash proceeds received after the 25th day of the month shall be paid to members
on the fifth day of the second following month. For example, proceeds paid on
matured policies between January 26th and February 25th shall be paid on March
5th, but those received by the Fund on February 26th shall be paid on April 5th.
Distributions will only be made following months in which insurance proceeds are
received on matured polices. When there are no cash proceeds received by the
Fund, interest for the money market fund will continue to accrue until paid in a
month when insurance proceeds are received. The final payment on any unit,
however, subject to deduction of applicable withholding taxes, will be made only
upon presentation and surrender of such unit at the office or agency specified
in the notice of final distribution to members. The Fund will provide such
notice to registered members not later than the 5th day prior to the final
distribution.
The Units
The units will be issued in the minimum denomination of $1,000 with an
initial minimum investment of one hundred units, or $100,000; however, our
underwriters reserves the right to accept initial subscriptions of less than
$100,000, and integral multiples of $1,000 in excess thereof equal to the
original principal amount for which each investor subscribed to purchase. The
Fund shall have five (5) days from the tender of a subscription agreement to
accept or reject an investor's funds promptly following each closing date of
this offering. The Fund shall deliver countersigned subscription agreements and
any evidence of book entry of the units to the members against payment to the
Fund of the subscription proceeds for such units.
Registration, Transfer and Exchange of Units
Our manager shall cause a listing of the units to be kept at the office or
agency to be maintained by the transfer agent and registrar in which, subject to
such reasonable regulations as it may prescribe, the transfer agent and
registrar shall provide for the registration of the units and of transfers and
exchanges of the units. Our manager is initially appointed the transfer agent
and registrar, but shall be permitted to resign as transfer agent and registrar
upon 30 days written notice to the Fund, in which event, the Fund shall appoint
a successor transfer agent and registrar.
Upon surrender for registration of transfer of any unit at any office or
agency of the transfer agent and registrar for this purpose, the Fund shall
execute, and our manager shall authenticate and deliver, in the name of the
designated transferee or transferees, one or more new units in authorized
denominations of like aggregate principal amount. The transfer agent and
registrar will maintain at its expense, in Florida, an office or offices or
agency or agencies where units may be surrendered for registration of transfer
or exchange.
Every unit presented or surrendered for registration of transfer or
exchange shall be accompanied by a written instrument of transfer in a form
satisfactory to the transfer agent and registrar duly executed by the member
thereof or his attorney duly authorized in writing. No service charge to the
member shall be made for any registration of transfer or exchange of units, but
the transfer agent and registrar may require payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer or exchange of units. All units surrendered for registration of
transfer or exchange shall be cancelled in a manner satisfactory to our manager
and the transfer agent and registrar.
65
Prior to presentation of a unit for registration of transfer, our manager,
the transfer agent and registrar and any agent of any of them may treat the
person in whose name any unit is registered as the owner of such unit for the
purpose of receiving distributions and for all other purposes whatsoever, and
neither the Fund, our manager, the transfer agent and registrar, nor any agent
of any of them, shall be affected by any notice of the contrary.
Our manager shall make all withdrawals, deposits and payments and shall
have revocable power to transfer funds among investor accounts and make
distributions to members from the operating escrow account.
List of Members
Our manager will furnish or cause to be furnished by the transfer agent
and registrar, if other than our manager, to the Fund within five business days
after receipt by our manager of a request therefor from the Fund, in writing, a
list in such form as the Fund may reasonably require, of the names and addresses
of the members as of the most recent record date for payment of distributions to
members. Members holding an aggregate amount of not less than 10% of the units
then outstanding may apply in writing to our manager that they desire to
communicate with other members with respect to their rights under the Fund's
operating agreement. If such request is accompanied by a copy of the
communication which such applicant proposes to transmit, then our manager, after
having been adequately indemnified by such applicant for its costs and expenses,
shall afford or shall cause the transfer agent and registrar if other than our
manager, to afford such applicant access during normal business hours to the
most recent list of members held by our manager. The list shall be as of a date
not more than 45 days prior to the date of receipt of such applicant's request
and shall give our manager notice that such request has been made, within five
business days after the receipt of such application. Every member, by receiving
and holding units, agrees with our manager that neither our manager, the
transfer agent and registrar, if other than our manager, nor any of their
respective agents shall be held accountable by reason of the disclosure of the
names and addresses of the members, regardless of the source from which such
information was obtained.
Investor Accounts and Allocation of Collections
The Fund's assets shall include investor accounts which consist of the
operating escrow account, premium escrow account, provider escrow account and a
sinking fund, each of which shall be established and maintained by the Fund with
SouthTrust Bank for the benefit of the members only upon the completion of the
minimum offering and the release of funds from the subscription escrow account.
Operating escrow account. The operating escrow account shall be
established by the Fund and maintained by our manager as a segregated, interest
bearing money market escrow account and it shall bear a designation clearly
indicating that the funds deposited therein are held for the benefit of the
members and shall be subject to distribution in accordance with the Fund's
operating agreement. The operating escrow account shall contain collections
attributable to insurance policies and funds on hand from this offering to
purchase life insurance policies, transfer funds to the premium escrow account,
sinking fund and fees to our manager, provider
66
and underwriter. All funds will be deposited into the operating escrow account
after the minimum offering is completed.
Provider Escrow Account. The provider escrow account shall be established
by the Fund and maintained by our provider as a segregated, interest bearing
escrow account. This account will be used when required by various states to
hold all funds in escrow pending a closing of a purchase of an insurance policy.
The funds deposited by the Fund in this account shall be used by the provider to
purchase life insurance policies from the insured, when applicable pay the
broker's fee to the insured's broker and pay any other fees assumed with the
purchase.
Premium Escrow Account. The premium escrow account shall be established by
the Fund and maintained by our manager as a segregated interest bearing escrow
account. It shall bear a description clearly indicating that the funds deposited
therein are held in escrow solely to pay premiums for all policies purchased by
the Fund. The amount of premium payments set aside for each policy shall
generally be equal to 150% of the annual premiums for the estimated life
expectancies of the insureds with a minimum of two years beyond the estimated
life expectancy. Upon liquidation of the Fund, the remaining premium escrow
account shall be transferred in whole to our manager together with accrued
interest thereon.
Sinking Fund. The Fund shall escrow at each closing 10% of the gross
proceeds of this offering as a sinking fund intended to be used as a mechanism
in the event of insurance company policy payout failure(s), policy termination,
and policy lapses and, if needed, for operating expenses of the Fund, not to
exceed 3% of the gross proceeds of this offering, in the event our manager is
unable to meet the Fund's operating expenses (collectively, a "default").
The sinking fund, administered by our manager, will provide for payment to
the Fund's members of what they would have received if there had not been a
default. The sinking fund will also distribute funds as needed for the premium
escrow account or used to pay for operating expenses directly from this account.
The payment to members shall occur no later than twelve (12) months following
written notice of default from the insurer. The insurer by definition is the
insurance company named on the purchased insurance policy or its accepted
assignee. Payments shall be deemed by the managing member to be in the best
interests of all members.
The sinking fund will be used for many uses for the protection of members
of the Fund. It is intended to promote due diligence and good underwriting
practices in order to avoid defaults. Therefore, as additional incentive
compensation, our manager does a good job of underwriting the policies and there
is no unpaid default, upon final liquidation of the Fund, the sinking fund
remainder balance including all interest accrued in any manner permitted by law
shall be distributed to our manager. At the option of our manager, prior to
final Fund liquidation, our manager may elect to purchase the face amount of all
outstanding policies by directing that the sinking fund remainder be transferred
to pay the members for their pro rata interest in such remaining policies. In
the event our manager does not purchase the outstanding policies, upon
liquidation of the Fund, the remaining sinking fund shall be transferred in
whole to our manager together with accrued interest thereon as a result of the
elimination of the sinking fund's purpose and intent.
Distributions from Investor Accounts. Our manager shall have the revocable
authority to make withdrawals and distributions from, or transfers between, the
investor accounts. Funds on
67
deposit in the operating escrow account, premium escrow account, provider escrow
account and/or the sinking fund may at all times be invested in permitted
investments, including interest-bearing bank accounts, money market funds or
short-term U.S. treasury bills, provided that any investment shall mature and
the funds shall be available for withdrawal on or prior to the purchase of any
life insurance policy from an insured. Our manager shall hold for the benefit of
the members the negotiable instruments or securities, if any, evidencing the
permitted investments from the time of purchase until the time of sale or
maturity. Subject to the maturity restrictions set forth above, the Fund shall
instruct the escrow agent, in writing, as to the investment of funds on deposit
in the premium escrow, provider escrow account and the premium escrow account.
If, for any reason, the Fund does not provide investment instructions to our
escrow agent, then the availability of funds or the balances in the premium
escrow, provider escrow account and the premium escrow account, all investment
earnings on the funds shall be deemed not to be available or on deposit. Our
manager shall not be responsible for any losses incurred in connection with any
permitted investments.
Our manager is required to deposit immediately or cause to be deposited in
the operating escrow account all collections, which it receives.
Priority of Payments
Upon the maturity of a life insurance policy, a claim is filed with the
insurance company. Once a claim has been paid to the Fund, our manager shall
deposit the funds into the operating escrow account. Our manager will then
withdraw from the operating escrow account, to the extent funds are available,
funds for payment to each member's capital contribution and interest based on
their pro rata share of proceeds from life insurance policies. Funds shall be
paid, pro rata, to members on the Determination Date, which is generally the
fifth day of the month following the Fund's receipt of proceeds from an
insurance policy.
Capital Calls
In the event that sufficient funds are unavailable to pay any premium on
an insurance policy and an insurance policy would thereby lapse, our manager
shall have the right to require of the Fund's all members to make additional
capital contributions (e.g., a "capital call") of up to six months premiums to
insure that no policy lapses. A capital call to pay a policy premium shall only
be made when the premium escrow account and the sinking fund have been
exhausted. Our manager also has the discretion to make a capital call to cover
litigation costs and any other expenses to preserve the Fund and for which there
are insufficient funds on hand. The members will make the capital call in
proportion to their membership interests in the Fund. Capital contributions
pursuant to this provision shall be made within 30 days after receipt of notice
from our manager of the amount of the contributions. If a member shall default
in making any such capital contribution, the other members shall have, with
respect to the defaulted contribution, the right to contribute pro rata and
receive a substantial premium (expected to equal at least 150%) of the
membership interest attributable to the defaulted capital contribution.
Return on Investment
With respect to the return on investment, with the maturity of each
insurance policy and the payment of the proceeds to the Fund, our manager shall
withdraw from the operating escrow
68
account, proceeds attributable to insurance policies which are on deposit in the
operating escrow account for payment to the Fund's members on the above
described Determination Date.
With respect to the final maturity of the last insurance policy, our
manager shall withdraw from the amount deposited in the operating escrow account
an amount equal to the outstanding amount of principal of the units as of the
end of the day on the preceding record date. If the amounts on deposit in the
operating escrow account at the time of maturity of the last insurance policy
and the payment are less than the outstanding amount of principal of the units
as of the end of the day on the preceding record date, our manager will withdraw
from the sinking fund, if available, the amount of the deficiency and deposit
same in the operating escrow account for payment to the Fund's members on the
above-described Determination Date.
Additional Rights upon the Occurrence of a Bankruptcy Event
The Fund has no intention of filing a voluntary petition under the United
States Bankruptcy Code or any applicable state law so long as the Fund is
solvent and does not reasonably foresee becoming insolvent.
The voluntary or involuntary application for relief under the United
States Bankruptcy Code or any comparable state law with respect to our manager
should not necessarily result in a similar voluntary application with respect to
the Fund so long as the Fund is solvent and does not reasonably foresee becoming
insolvent by reason of our manager's insolvency or otherwise. The Fund believes
that:
o a voluntary application for relief under the United States Bankruptcy
Code or any similar applicable state law with respect to the Fund may not
lawfully be filed without the prior consent of all members of the Fund, and
o subject to the assumption that separateness and corporate formalities
are observed by our manager and the Fund, the assets and liabilities of the Fund
should not be substantively consolidated with the assets and liabilities of our
manager in the event of an application for relief under the United States
Bankruptcy Code with respect to our manager.
If the Fund voluntarily seeks, consents to or acquiesces in the benefit or
benefits of any debtor relief law or becomes party to, or is made the subject
of, any proceeding provided for by any debtor relief law, other than as a
creditor or claimant, and, in the event the proceeding is involuntary, and the
petition instituting same is not dismissed within 90 days after its filing, the
Fund shall on the date of the bankruptcy event immediately cease to acquire any
additional insurance policies within l5 days of the bankruptcy event. Our
manager shall then (a) publish a notice in the authorized newspapers that a
bankruptcy event has occurred and that our manager intends to sell, dispose of
or otherwise liquidate the insurance policies in a commercially reasonable
manner and (b) send written notice to the members describing the proceeding and
requesting instructions from the members. No sale, disposition or liquidation,
whether in whole or in part, of the insurance policies shall be consummated
until and unless our manager shall have first received written instructions, or
other written response or affirmative refusal to provide a written response from
members representing in excess of 51% of the principal amount of the units then
outstanding.
69
Matters Relating to the Liability of the Fund
Scope of Liability. The Fund shall be liable for the obligations
specifically undertaken by the Fund under its operating escrow agreement.
Neither the Fund, nor any of our manager, officers, employees or agents of the
Fund, shall be under any liability to the members or any other legal person for
taking any action or for refraining from taking any action under the operating
agreement whether arising from express or implied duties under the operating
agreement. However, this limitation on liability shall not protect the Fund or
any manager, officer, employee or agent of the Fund against any liability which
would otherwise be imposed by reason of willful malfeasance, bad faith or gross
negligence in the performance of duties or by reason of its willful misconduct
under the operating agreement.
Indemnification. The Fund has indemnified and held harmless our manager in
the Fund's operating agreement from and against any loss, liability, expense,
damage or injury suffered or sustained by reason of any acts, omissions or
alleged acts or omissions arising out of activities of our manager in connection
with the offering of units hereto or any agreement executed or delivered in
connection thereto or in any way relating to or arising out of the transactions
related thereto, including, but not limited to, any judgment, award, settlement,
reasonable attorneys' fees and other costs or expenses incurred in connection
with the defense of any actual or threatened action, proceeding or claim.
However, although the Fund shall indemnify our manager if such acts, omissions
or alleged acts or omissions constitute ordinary negligence, the Fund shall not
indemnify our manager if such acts, omissions or alleged acts or omissions
constitute willful malfeasance, bad faith or gross negligence by our manager.
The Fund shall not indemnify our manager or the members as to any losses, claims
or damages incurred by any of them in their capacities as investors. The Fund
shall not indemnify our manager or the members with respect to any federal,
state or local income or franchise taxes, or any interest or penalties with
respect thereto, required to be paid by the members to any taxing authority,
which taxes shall be the sole obligation of our manager and the members. Any
indemnification shall only be from assets of the Fund.
Matters Relating to the Liability of Our Manager
Scope of Liability. Our manager shall be liable for the obligations
specifically undertaken by our manager pursuant to this prospectus and under the
Fund's operating agreement. Neither our manager, its officers, employees or
agents shall be under any liability to the members, the Fund or any other legal
person for taking any action or for refraining from taking any action under the
operating agreement, whether arising from express or implied duties under the
operating agreement or this prospectus. However, this limitation on liability
shall not protect our manager, or any officer, employee or agent of our manager
against any liability which would otherwise be imposed by reason of willful
malfeasance, bad faith or gross negligence in the performance of duties or by
reason of its willful misconduct under the operating agreement. Our manager
shall not be under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its duties to service the insurance policies
and which in its reasonable opinion may involve our manager in any expense or
liability.
Indemnification. Our manager shall indemnify and hold harmless the Fund
from and against any loss, liability, expense, damage or injury suffered or
sustained by reason of any acts, omissions or alleged acts or omissions arising
out of activities of our manager in connection with
70
the offering of units hereby or any agreement executed or delivered in
connection thereto or in any way relating to or arising out of the transactions
related thereto, including, but not limited to, any judgment, award, settlement,
reasonable attorneys' fees and other costs or expenses incurred in connection
with the defense of any actual or threatened action, proceeding or claim.
However, although our manager shall indemnify the Fund if such acts, omissions
or alleged acts or omissions constitute ordinary negligence, our manager shall
not indemnify the Fund, if such acts, omissions or alleged acts or omissions
constitute willful malfeasance, bad faith or gross negligence by the Fund. Our
manager shall not indemnify any members for any liabilities, costs or expenses
of the Fund with respect to any action taken at the request of the members. Our
manager shall not indemnify the Fund or the members as to any losses, claims or
damages incurred by any of them in their capacities as investors. Our manager
shall not indemnify the Fund or the members with respect to any federal, state
or local income or franchise taxes, or any interest or penalties with respect
thereto, required to be paid by the Fund or the members to any taxing authority,
which taxes shall be the sole obligation of the Fund and the members. Any
indemnification shall only be from assets of our manager.
DESCRIPTION OF VIATICAL SETTLEMENT CONTRACTS
Viatical Settlement Contract
Our provider will originate policy purchases on behalf of the Fund either
directly from the insured when it is licensed, or from other licensed providers,
or from an unaffiliated broker network pursuant to a "viatical settlement
contract," a form of which is filed as an exhibit to this registration statement
of which this prospectus forms a part. Each viatical settlement contract may
vary depending upon each state's applicable laws. Our provider has agreed in
writing to assign all policies, which it purchases to the Fund except those it
sells on non-securitized basis to unaffiliated third parties. Under the viatical
settlement contract, our provider will acquire from the insured all of his
right, title and interest in and to such policy.
In addition to the viatical settlement contract, the insured will be
required to provide to our provider all documents required by our provider and
the insurer to effectuate the transfer of the insured's interest in and to the
policy to our provider and the original policy including, but not limited to:
(i) "disclosure statement" which discloses to the insured various risks relating
to entering into a life settlement, (ii) "authorization to release medical
information" of the insured to our provider, (iii) "release and consent to
change of beneficiary" of the policy to the Fund, (iv) "medical certification of
mental competency" of the insured, (v) "personal references" of the insured, and
(v) "distribution directions" which indicates how the insured wishes to receive
the life settlement proceeds of the policy, all of which will be attached as an
exhibit to the viatical settlement contract and deemed to be a part of viatical
settlement contract.
The viatical settlement contract, together with any and all additional
documents required to effectuate the transfer from the insured to our provider
shall become null and void at any time if it is determined that the policy was
purchased from the insured, issued by the issuer or sold by the insured to our
provider under fraudulent circumstances and/or the insured is in breach of the
representations and warranties provided in the viatical settlement contract or
any other documents provided by insured in connection therewith. If the viatical
settlement contract is deemed null and void, the insured shall return to our
provider, within up to thirty (30) days from
71
the date of cancellation, the life settlement proceeds paid to the insured for
the policy and premiums paid by the Fund or our provider, together with
interest.
Assignment of Insurance Policies
Our provider will assign, transfer and convey to the Fund all its right,
title and interest in and to each insurance policy being transferred. In any
state which does not permit an assignment of a policy to the Fund, but only to a
licensed provider, the Fund will become the irrevocable beneficiary of the
policy. Upon request of the Fund, our provider will notify the Fund of the
amount of insurance policies available for purchase. The Fund will purchase
insurance policies with the gross proceeds of this offering by forwarding the
purchase price together with broker's fees, where required, to the provider's
escrow account simultaneously with the execution of the agreement by the
insured. The monies advanced by the Fund with respect to any one insurance
policy shall not exceed an amount agreed upon between our provider and the Fund
as to the discount from the face amount of the insurance policy, excluding our
provider's fees. Such advance will be payable to our provider in cash or in some
other form of payment in which funds will be immediately available.
In connection with the assignment and transfer of the insurance policies
to the Fund, our provider will indicate in its computer's master file that the
insurance policies have been sold to the Fund by our provider. In addition, our
provider will furnish to the Fund a computer printout readable by the Fund
containing a true and complete list of all such insurance policies, identified
by account number and by the total outstanding face amount upon the purchase of
each life insurance policy. Furthermore, our provider will direct the insurers
to send all policy proceeds payments to the operating escrow account, which will
be owned by the Fund.
The Fund will not engage in any activities except acquiring insurance
policies from our provider or other licensed providers or through the
independent broker network, and engaging in activities incidental to, or
necessary or convenient to accomplish the foregoing.
OTHER OPERATING POLICIES
o We do not intend to issue any additional securities with rights that are
senior to your rights as a member. Our manager will be the only member of the
Fund other than the purchasers of units.
o Except for the purchase of life insurance policies in our usual
business, we do not intend to invest in the securities of similar life
settlement companies or other issuers for the purpose of exerting control or for
any other purpose.
o We do not intend to underwrite securities of other life settlement
funds, life insurance companies or any other issuers.
o We may issue units in exchange for life insurance policies that satisfy
our investment policies, but we will not issue securities in exchange for any
other property.
o We do not intend to purchase or otherwise re-acquire our units or other
securities, except that we will apply the principal returned to us on the
payment of insurance policy
72
proceeds to return your investment to you and we will also return any funds that
are not invested in life insurance policies on or before _______, 2004 [12
months from the date of this prospectus].
o We intend to provide the periodic reports to you that are described in
the Summary of the operating agreement in this prospectus.
OUR MANAGER, PROVIDER AND UNDERWRITER
Management
Our manager was incorporated in Delaware on September 4, 2002, under the
name AmeriFirst Financial Services, Inc. The address and telephone number for
our manager is 814 North Highway A1A, Suite 300, Ponte Vedra Beach, Florida,
32082, telephone number (904) 373-3034. Our manager has qualified to do business
in Georgia and maintains office space at our provider's facility. Our manager is
not regulated and acts as a service company to the Fund and our provider. It can
also provide services to non-affiliated persons for a fee. The Fund believes
that it is preferable to keep the books and records and financial statements of
a non-regulated entity separate from the Fund, provider and underwriter, each of
which is regulated. The management of our manager is described below.
Our provider is AmeriFirst Funding Group, Inc., a Delaware corporation, an
affiliate of our manager, which will operate as a life settlement provider in
the State of Georgia. The address and telephone number for our provider is
1712-H Osborne Road, St. Marys, Georgia 31558; telephone number (912) 673-9100.
Our provider is in compliance with the laws of the State of Georgia to conduct
life settlement business and will comply with the laws of all other states which
regulate the purchase and/or sale of life insurance policies. Our provider will
purchase insurance policies directly from the insured when it is licensed, or
from other providers or from an unaffiliated nationwide broker network. Our
provider, together with the assistance of our manager, as servicer, will
evaluate and choose the life insurance policies in which we will purchase in
accordance with the policies described in this prospectus. John Tooke is the
sole director of our provider.
Our manager will manage and control our affairs and have responsibility
and final authority in almost all matters affecting our business. In addition,
our manager currently intends to act as our servicer and service the policies we
purchase; however, we may outsource any or all non-financial services to a third
party. The Fund does not have its own employees or offices. The employees of our
manager and provider and their parent, AmeriFirst, Inc., will carry out our
operations at their offices or will outsource and oversee the services performed
by a third party servicer. See "Management's Discussion and Analysis of
Financial Condition of AmeriFirst Fund I, LLC." The duties of our manager and/or
our servicer will include:
o dealings with members;
o accounting, tax and legal matters;
o communications and filings with regulatory agencies;
o deciding what agreements we will enter into and whether we will
enter into joint ventures with other companies to invest in life
insurance policies;
73
o due diligence review of the insured and the life insurance policy,
estimate the life expectancy of the insured with the assistance of
medical review service companies, close the transaction, monitor the
life status of the insured and status of the policy, and file claims
for proceeds when the insured passes away; and
o managing our other operations, if any.
Sole Executive Officer and Director of our Manager
The following person is the sole executive officer and director of our
manager.
Name Age Office
---- --- ------
John Tooke 61 Chief Executive Officer, President and Director
John Tooke has been Chief Executive Officer, President, director and
through AmeriFirst, Inc., controlling shareholder of our manager since its
predecessor's formation in June 2002. Since April 2002, when the predecessor of
our provider was formed, Mr. Tooke has been Chief Executive Officer, President
and director of our provider, AmeriFirst Funding Group, Inc. Mr. Tooke has been
engaged in negotiations and start-up activities for the Fund and researching the
life settlements industry commencing in April 2001. From 1996, when Mr. Tooke
formed the predecessor to Global Express Securities, Inc. (previously known as
First Florida Securities, Inc.), a member of the NASD, until he sold it in March
2002, he was president and a director of Global Express Securities, Inc. This
firm is a regional NASD regulated broker-dealer originally located in Florida
which relocated to Nevada in 1999. The firm specializes in the placement of high
yield collateralized investment products through the sale of public and private
securities both to the retail market and to individual clients. The firm's sole
public offering which closed after Mr. Tooke left such Company, was a best
efforts offering under the name Global Express Capital Real Estate Investment
Fund I, LLC, of fractional units in a fund to make loans, or purchase entire or
fractional interest in loans secured by mortgages or deeds of trust.
From 1991-1996, Mr. Tooke was employed as a private investor in commercial
real estate projects as a principal for his own account. While he was an
investment banker, Mr. Tooke originated and produced commercial mortgages and
sold them to investors. Any relevant prior performance data of Mr. Tooke's
experience is more than 10 years old and not in his possession. From 1989 to
1991, Mr. Tooke was Senior Vice President of Security Pacific Merchant Bank,
responsible for the entire investment banking group, which originated and
securitized product for the bank. From 1985 to 1989, Mr. Tooke was Senior Vice
President of Sales and Trading for Drexel Burnham Lambert which sold and traded
multi-family and commercial mortgages and portfolios in the secondary markets.
From 1984 to 1985, Mr. Tooke was Vice President of Sales and Trading of Morgan
Stanley & Co. where he worked in all aspects of mortgage finance proposals such
as CMO's, mortgage backed bonds and private placements. From 1981 to 1984, Mr.
Tooke was a Vice President of Sales and Trading of Merrill Lynch where he traded
whole loans, participation and conventional mortgage backed securities and
analyzed and structured all securitized products. Mr. Tooke holds NASD Series 7,
Series 24, Series 28 and Series 63 securities licenses. Mr. Tooke is a qualified
securities principal. In addition, he is licensed in Nevada, California and
Florida for the sale of real estate mortgages and securities.
74
All of the capital stock of our manager, provider and underwriter is owned
by AmeriFirst, Inc., a Delaware holding company. John Tooke owns 55% of the
common stock, and Irving Strickstein and Denise Mugerdichian Lachman each
beneficially own 22 1/2 % of the common stock. See "Certain Relationships and
Related Transactions."
Officers And Directors Of AmeriFirst, Inc.
The following persons are the officers and directors of AmeriFirst, Inc.
Name Age Officer
- ---- --- -------
John Tooke 61 Chief Executive Officer, President and Director
Brittany Ellis 28 Secretary and Director
Dawn Arnett 27 Director; Senior V.P., AmeriFirst Funding Group, Inc., and
Managing Director of AmeriFirst Capital Corp.
Thomas M. Kann 56 Director; Senior V.P., AmeriFirst Funding Group, Inc., and
Managing Director of AmeriFirst Capital Corp.
Irving Strickstein 74 Chairman of the Board of Directors
Denise Mugerdichian
Lachman 47 Director
See "Sole Executive Officer and Director of Our Manager" above for
biographical information on John Tooke, Chairman, Chief Executive Officer,
President and Director of AmeriFirst, Inc.
Brittany M. Ellis has served as the Director of Legal and Compliance,
Secretary and a director of AmeriFirst Inc. since its inception in August 2002.
She is responsible for obtaining insurance licenses in all fifty states. In
addition, Ms. Ellis is Secretary and a member of the Boards of Directors of
AmeriFirst Financial Services, Inc., AmeriFirst Funding Group, Inc., and
AmeriFirst Capital Corp. Ms. Ellis graduated from Florida Coastal School of Law
in May 2002 and is a member of the Florida bar. Ms. Ellis received her Bachelors
degree from the University of Southern Mississippi in 1997. Prior to her legal
career, she worked in managed services for the Aramark Corporation and Maidpro,
Inc. in Massachusetts.
Dawn N. Arnett has served as a director of AmeriFirst, Inc. since November
2002. She is also serving as the compliance officer and Managing Director for
our underwriter AmeriFirst Capital Corp. since October 2002. Ms. Arnett is also
Senior Vice President of our provider, AmeriFirst Funding Group, Inc., since
January 2003, where she will manage policy origination for the Fund. From April
2002 to October 2002, Ms. Arnett worked as a registered sales representative for
Vestin Capital, Las Vegas, Nevada, a securities company specializing in real
estate investments. From March 2001 to April 2002, Ms. Arnett acted as
compliance officer and registered representative for Global Express Securities,
Inc., Las Vegas, Nevada, a securities company also specializing in real estate
investments. From January 2000 until February 2001, she served as a research
assistant at John Quillen East Tennessee State University Medical School. From
August 1999 until January 2000, Ms. Arnett was a Registered Sales Representative
with Prudential Securities. From September 1997 until August 1998, Ms. Arnett
served as an investment Associate and Marketing Representative with Merrill
Lynch, where she received her securities licenses to manage investor
relationships for new and existing clients. Ms. Arnett holds Series 7, Series 24
and Series 66 securities licenses and will be licensed in each
75
state in which the Fund intends to sell its securities. In 1997, Ms. Arnett
received her Bachelors Degree in Economics and Biology from Simmons College in
Boston, Massachusetts. From 1993 to 1997, she worked at Harvard Medical School
doing clinical research where she had several papers published. At that same
time, Ms. Arnett was interning at Walden Capital Management, a
socially-responsible investment firm.
Thomas M. Kann has served as a director of AmeriFirst, Inc. since November
2002. He is also serving as Managing Director of AmeriFirst Capital Corp. since
October 2002, and as Senior Vice President of AmeriFirst Funding Group since
November, 2002. Prior thereto, from April 2001 to March 2002, he was a
registered sales representative of Global Express Securities, Inc., Las Vegas,
Nevada. From October 1992 to October 2001, Mr. Kann was founder and President of
World Access Telecom, Inc., a full-service telecommunications business, from the
startup stages through full development. His experience as President of World
Access Telecom, as well as Raleigh Enterprises, spans the international sector
having serviced clients in over 50 countries. His more than 25 years' of
experience on Wall Street encompass expertise as a trader and institutional
salesman in fixed income securities with UBS Securities, Morgan Stanley & Co.,
Smith Barney, Loeb Rhoades, Shearson, First Interstate Bank of California and
Bache & Co. Mr. Kann holds NASD Series 7, Series 22, Series 24 and Series 63
securities licenses and will be licensed in each state in which the Fund intends
to sell its securities. Mr. Kann received his Bachelor of Arts Degree in Finance
from Colorado Alpine College. In addition to being a charter member of the
Republican Presidential Task Force since 1989, he is a fluent speaker of
Hungarian, his native language.
Irving Y. Strickstein has been Chairman of the Board of Directors and a
shareholder of AmeriFirst, Inc. since November 2002. Since February 1954, Mr.
Strickstein has been a part-owner, officer and director of National Lumber
Company in Warren, Michigan.
Denise Mugerdichian Lachman has been a director and shareholder of
AmeriFirst, Inc. since November 2002. Since 1991, Ms. Lachman has owned Nolet
Associates, an interior design and flooring company.
COMPENSATION OF OUR MANAGER, PROVIDER AND UNDERWRITER
Set forth below is a description of the compensation that the Fund may pay
our manager, as servicer, our provider and underwriter. No other compensation
will be paid to our manager, provider, underwriter or John Tooke in connection
with the Fund. These compensation arrangements have been established by our
manager and the Fund and are not the result of arms-length negotiations. Our
manager has compared its compensation arrangements to those of unrelated parties
providing the same services. They have determined the following compensation
levels are fair and reasonable. In their view, our manager has:
o analyzed the compensation arrangement in other offerings,
o spoken to other professionals in the industry including issuers,
promoters and broker dealers,
o examined rates from A.M. Best which set forth the rates being
charged by those institutions for the same or similar services, and
76
o collected data regarding compensation from trade association
meetings and/or other relevant periodicals. The amounts are
approximately equivalent to those which would customarily be paid to
unrelated parties for the same services.
The exact amount of future compensation payable to our manager, provider
and underwriter cannot be precisely determined. The compensation to be received
by our manager and provider is based upon the total amounts of units sold and
the face amounts of the life insurance policies purchased. The sales commissions
paid to our underwriter is based solely on the number of units sold, however,
will only paid at the time of purchase of insurance policies. If all $100
million of units are sold, AmeriFirst Capital Corp. would receive up to
$10,000,000 of commissions. All other fees are based on the face amount of life
insurance policies purchased, which cannot at this time be determined since the
purchase price is a policy by policy decision negotiated between our provider
and the independent broker for the insured. Based upon our manager's current
knowledge of the industry and upon its review of similar programs and upon
certain assumptions made as set forth below, our manager estimated the fees it
and its affiliates will receive.
The amount of fees to be paid to our manager or provider will vary from
those estimated below due to varying economic factors, over which they have no
control, including, but not limited to, the state of the economy and competition
in the area of life settlement contracts. We will be subject to public reporting
requirements and the Fund will file quarterly and annual reports with the SEC.
These reports will be available to you and will set forth, among other things,
the exact amount of compensation and/or fees being paid to our manager, provider
and underwriter.
The relationships among our manager, provider and underwriter referred to
herein are described under the caption "Our Manager, provider and underwriter."
OPERATIONAL STAGE
Entity Receiving Form and Method of
Compensation Compensation
- ------------ ------------
Provider Policy origination or brokerage
commissions up to a maximum of 5% of the
face value of each life insurance policy,
depending upon market conditions. The
fees will be paid one time on each policy
to the entity acting as a qualified
provider which will either be our
provider or other providers. This is
exclusive of fees which the insured is
obligated to pay to the broker selling
his policy to the Fund.
Manager The fees to be paid to our manager for
and/or Servicer servicing the policies and monitoring the
insureds on behalf of the Fund will be up
to 5% of the face amount of the policy
and will include: a fee for due
diligence, which includes evaluating the
terms of each policy; medical
consultant's review fee for estimating
the life expectancy of the insured; fees
for closing the transaction, which
includes obtaining releases of prior
beneficiaries and designation and
recording the Fund as beneficiary; and a
fee for servicing the
77
insurance policies on an ongoing basis.
Underwriter Our underwriter, or non-affiliated
broker-dealers, will be paid up to 10% of
the gross proceeds of the offering as
selling commissions at the time of
purchase of insurance policies. See "Plan
of Distribution."
John Tooke AmeriFirst Inc. is paying John Tooke
$8,000 per month which will not be
reimbursed from proceeds of this
offering. Mr. Tooke is employed by the
underwriter under a 3-year employment
agreement ending July 31, 2005, pursuant
to which he agreed not to compete with
the underwriter or its affiliates for a
two-year period following termination of
employment.
LIQUIDATION STAGE
Upon the dissolution of the Fund, our manager shall proceed, within a
reasonable time, to sell or otherwise liquidate the assets of the Fund. Our
manager may then elect to purchase the outstanding units of the Fund from
members. Our manager shall also be entitled to receive the remaining funds with
interest accrued thereon in the premium escrow account and sinking fund upon
liquidation as additional incentive compensation. After paying or making due
provision by the setting up of reserves for all liabilities to creditors of the
Fund, the remaining assets will be distributed to the members, pro rata, in
accordance with the positive balance in their respective capital accounts,
without the payment of any fees to any affiliates of the Fund. See "Business -
Investor Accounts and Allocation of Collections."
CONFLICTS OF INTEREST
The relationships among the Fund, our manager, provider, underwriter, and
John Tooke, may result in various conflicts of interest. Our manager, provider
and underwriter are each controlled by John Tooke. Our manager and its officers
and directors, in their capacity as such, are required to exercise their
fiduciary duties to us and to you in a manner they believe will preserve and
protect your rights as a member. Mr. Tooke has no intention to purchase life
settlements for his own account or for the account of others, other than the
Fund, except on a non-securitized basis.
The paragraphs below describe material conflicts of interest of which we
are aware that may arise in the course of the Fund's operation of our business.
1. Payment of Fees and Expenses. Our manager, provider and underwriter will
receive substantial fees in connection with this offering and our ongoing
operations which are described above under the caption "Compensation of Our
Manager, Provider and Underwriter."
2. Purchase of Life Insurance Policies from our Provider. The officers and
directors of our manager, which is controlled by John Tooke through AmeriFirst,
Inc., a Delaware holding company, will make all final decisions regarding the
life insurance policies we will purchase.
78
Our provider is also controlled by John Tooke through AmeriFirst, Inc.
Accordingly, although a purchase will be made on terms no more favorable to our
provider and underwriter than to other persons, we may face a conflict of
interest in determining whether a life insurance policy is appropriate for our
portfolio. We will acquire many of our life insurance policies from or through
our provider, AmeriFirst Funding Group, Inc., either directly from insureds,
when it is licensed, or from other licensed providers, or from an unaffiliated
broker network. Our provider is in compliance with the laws of the State of
Georgia to conduct life settlement business and will comply with the laws of all
other states which regulate the purchase and/or sale of insurance policies by
the Fund. Our provider and the brokers will earn brokerage fees, described
above, on life insurance policies we purchase through them or from them.
Accordingly, since John Tooke controls our manager and our provider, he will
face a conflict of interest in determining whether the life insurance policies
meet our guidelines and are appropriate investments.
3. Non-Arm's Length Agreements. Our agreements and arrangements for compensating
our manager, provider and underwriter and the interest of our manager as
managing member of the Fund are not the result of arm's-length negotiations.
Additionally, none of the directors of our manager, provider and underwriter are
independent.
4. Competition for the Time and Services of John Tooke. We will rely on our
manager, provider and underwriter and their directors and officers for the
management of our operations. The directors and officers of our manager,
provider and underwriter will devote such time to our affairs and as they
determine in good faith and in compliance with their fiduciary obligations to us
and to our members, to be necessary for our benefit.
Our manager believes it has sufficient staff to be capable of discharging
its responsibility to us. Our manager and its affiliate, AmeriFirst, Inc., had
an aggregate of 13 employees as of January 13, 2003, including Mr. Tooke, a
chief information officer, an executive assistant, in-house legal staff,
accounting staff, insurance review, medical review, policy administration,
computer and data processing personnel, customer service and medical
administration, all of whom are full-time employees. Mr. Tooke has in excess of
25 years of experience in selling mortgage backed securities and other
securities. He began to research the life settlement industry in April 2001 (see
"Our Manager, Provider and Underwriter" above), however, he has no actual
experience in purchasing and securitizing life settlement policies. The staff of
our manager includes one person with 33 years of insurance experience, a nurse
with 36 years of experience in the medical industry and three other persons with
between four and six years of experience in the life settlements industry.
Virtually all of our manager's employees will devote all of their business time
to the Fund's affairs until such time as the offering is completed.
5. Provider Resells the Life Insurance Policies. Our provider may also retain or
sell existing life insurance policies purchased by our provider for itself, or
to other clients on a non-securitized basis, because this satisfies the
objectives of our provider, or such other clients of our provider objectives of
the Fund. Our provider will base the decision on factors such as the amount of
funds available for investment, yield, portfolio diversification between
terminally ill, chronically ill and senior citizens, insurance carriers, or
other transaction terms. The Fund and our provider have entered into an
agreement, a copy of which is attached as an exhibit to the registration
statement of which this prospectus forms a part, that our provider may sell
policies to entities other than our Fund only on a non-securitized basis.
79
6. Lack of Separate Representation. We are represented by the same counsel as
our manager, provider and underwriter and we anticipate that this multiple
representation by our attorneys will continue in the future. If a dispute arises
between us and our manager, provider or underwriter, they will either obtain
separate counsel or facilitate our retaining separate counsel for such matters.
However, we do not anticipate obtaining separate counsel should there be a need
in the future to negotiate or prepare contracts or other agreements between us
and our manager for services including those contemplated by this prospectus,
and as a result these agreements will not reflect arm's length bargaining.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AmeriFirst, Inc. is a Delaware holding company incorporated on August 19,
2002, 55% of whose capital stock is owned by John Tooke, 22.5% is beneficially
owned by Irving Strickstein and 22.5% is owned by Denise Mugerdichian Lachman.
AmeriFirst, Inc. owns all of the capital stock of (a) AmeriFirst Funding Group
Inc., a Delaware corporation formed on August 28, 2002, to be a qualified
provider of the Fund; (b) AmeriFirst Capital Corp., a Florida corporation formed
in October 2002, to be the underwriter of this offering upon registration with
the NASD; and (c) AmeriFirst Financial Services, Inc., a Delaware corporation
formed on September 4, 2002, to be our manager/servicer of this offering. See
"Security Ownership of Certain Beneficial Owners and Management."
On October 28, 2002, Irving Strickstein, through his corporation, I.Y.S.
III, LLC entered into a loan agreement with AmeriFirst Inc. evidenced by a
promissory note in the principal amount of $500,000. In consideration of the
loan, I.Y.S. received 450 shares (22.5%) of the common stock of AmeriFirst and a
pro rata equity interest in any affiliates or subsidiaries of AmeriFirst, but
not the net operating income of the Fund.
On October 28, 2002, Denise Mugerdichian, through her corporation Dow
Ridge Associates, LLC, entered into a loan agreement with AmeriFirst, Inc.
evidenced by a promissory note in the principal amount of $500,000. In
consideration of the loan, Dow Ridge received 450 shares (22.5%) of the common
stock of AmeriFirst and a pro rata equity interest in any affiliates or
subsidiaries of AmeriFirst, but not the net operating income of the Fund.
The payment of principal and interest of all notes are to be re-paid
solely from the net operating income of AmeriFirst Inc., as it becomes available
and based on the discretion of John Tooke and the ongoing capital reserve
requirements of AmeriFirst Inc. All notes bear interest at 1% over the prime
rate charged by Comerica Bank.
Although each of our manager, provider and underwriter will have their own
independent employees, John Tooke is the sole director of each entity. Only the
parent company of each entity, AmeriFirst, Inc. has independent directors
serving on its board of directors.
See "Conflicts of Interest" for information concerning conflicts of
interest among the Fund, our manager, provider and underwriter, including the
payment of substantial fees and expenses, non-arm's length agreements and
compensation for the time and services of John Tooke.
80
See "Our Manager, Provider and Underwriter" for information concerning the
relationship among the Fund, our manager, provider and underwriter and
biographical information of the management of our manager and AmeriFirst, Inc.
See "Compensation of Our Manager, Provider and Underwriter" for
information concerning the fees to be paid by the Fund to our manager, provider
and underwriter.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table indicates the security ownership of persons known to
be the beneficial owner of units of the Fund and giving effect to the sale of
the minimum amount and maximum amount of units in this offering.
After this offering After this offering
Before this offering Minimum Amount Maximum Amount
------------------------------- -------------------------------- ------------------------------
Unit Percent of Unit Percent of Unit Percent of
Dollar Amount Units Dollar Amount Units Dollar Amount Units
Beneficially Beneficially Beneficially Beneficially Beneficially Beneficially
Name Owned Owned Owned Owned Owned Owned
- ---- ----- ----- ----- ----- ----- -----
Investors -- -- $2,500,000 100% $100,000,00 100%
in the
aggregate
All of the capital stock of our manager, provider and underwriter is
beneficially owned by AmeriFirst, Inc. AmeriFirst, Inc. was formed in Delaware
on August 19, 2002. John Tooke owns 55% of the common stock and Irving
Strickstein and Denise Mugerdichian each beneficially own 22 1/2% of the common
stock of AmeriFirst, Inc.
FIDUCIARY RESPONSIBILITIES OF OUR MANAGER
Our manager is accountable to you and the Fund as a fiduciary. This
requires our manager to exercise good faith and integrity in handling our
affairs. Our manager has fiduciary responsibility for the safekeeping and use of
all of our funds, property and assets, whether or not in its control, and shall
not employ or permit another to employ such funds, property or assets in any
manner except as otherwise expressly set forth in the Fund's operating agreement
or for our benefit.
The Fund's operating agreement requires us to indemnify our manager,
provider and underwriter from any loss, reasonable legal expenses, damage or
claim arising by reason of any act or omission performed or omitted by our
manager in good faith on behalf of the Fund and in a manner reasonably believed
to be within the scope of authority conferred on our manager by
81
the operating agreement. This right of indemnification includes the right to
advance payments or to reimburse our manager, provider and underwriter for the
reasonable expenses incurred from being threatened to be made a named defendant
or respondent in a proceeding. Indemnity payments will be made only from our
assets. You are not required to make payments from your separate assets. In
accordance with Florida limited liability company law, we will not indemnify
persons or advance payments if such manager was material to the cause of action
and constituted either:
1. A violation of criminal law, unless our manager had no reasonable cause
to believe such conduct was unlawful;.
2. A transaction where our manager derived an improper personal benefit;
3. An improper distribution whereby the Fund became insolvent; or
4. Willful misconduct or conscious disregard for the best interests of the
Fund in a proceeding by or in the right of the Fund to procure a judgment in its
interest or in a proceeding by or in the right of a member of the Fund.
The Fund's operating agreement provides that except as otherwise provided
by applicable law, the debts, obligations and liabilities of the Fund, whether
arising in contract, tort or otherwise, shall be solely the debts, obligations
and liabilities of the Fund; neither our manager nor any member nor any person
affiliated with our manager or any member shall be obligated personally for any
such debt, obligation or liability of the Fund solely by reason of being a
manager or member or being a person affiliated with either of them.
Our manager may be removed for cause and as otherwise specifically
provided in the Fund's operating agreement. "Cause" means our manager (i) has
been convicted of a felony, (ii) has committed fraud against the Fund or (iii)
has acted or omitted to take action on behalf of the Fund, which act or omission
constitutes gross negligence or willful misconduct. Such removal shall be
automatically effective upon a final determination by a court of competent
jurisdiction that an event or circumstances constituting cause has occurred or
exists; provided that any removal of our manager for cause shall be effectuated
by a vote of the members whose aggregate capital accounts exceed 50% of the
aggregate of all members' capital accounts at such time.
Our manager will not be indemnified against liabilities arising under the
Securities Act of 1933 unless we succeed in defending against the claims or the
indemnification is approved by the court. The court will be advised that the
Securities and Exchange Commission believes that indemnification for violations
of securities law violates the Securities Act of 1933. In the opinion of the
Securities and Exchange Commission, indemnification for liabilities arising
under the Securities Act of 1933 is against public policy and therefore
unenforceable.
This is a rapidly changing and developing area of law. If you have
questions concerning the duties of our manager, you should consult with your own
legal counsel.
82
ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974 ("ERISA") contains
strict fiduciary responsibility rules governing the actions of "fiduciaries" of
employee benefit plans. It is anticipated that some investors will be corporate
pension or profit-sharing plans and Individual Retirement Accounts, or other
employee benefit plans that are subject to ERISA. In these situations, the
person making the investment decision concerning the purchase of the units will
be a "fiduciary" of such plan and will be required to conform to ERISA's
fiduciary responsibility rules. Persons making investment decisions for employee
benefit plans (i.e., "fiduciaries") must discharge their duties with the care,
skill and prudence which a prudent man familiar with such matters would exercise
in like circumstances. In evaluating whether the purchase of units is a
"prudent" investment under this rule, fiduciaries should consider all of the
risk factors set forth in this prospectus. Fiduciaries should also carefully
consider the possibility and consequences of unrelated business taxable income
(see "Federal Income Tax Consequences"), as well as the percentage of plan
assets which will be invested in the Fund insofar as the diversification
requirements of ERISA are concerned. An investment in the Fund is relatively
illiquid, and fiduciaries must not rely on an ability to convert an investment
in the Fund into cash in order to meet liabilities to plan participants who may
be entitled to distributions.
DUE TO THE COMPLEX NATURE OF ERISA, EACH PROSPECTIVE INVESTOR IS URGED TO
CONSULT HIS OWN TAX ADVISOR OR PENSION CONSULTANT TO DETERMINE THE APPLICATION
OF ERISA TO HIS/HER/ITS PROSPECTIVE INVESTMENT.
Plan Asset Regulations
In order to avoid application of the U.S. Department of Labor's plan asset
regulations, the Fund will limit subscriptions for units from ERISA plan
investors such that, immediately after each sale of units, ERISA plan investors
will hold less than 25% of the total outstanding membership interests in the
Fund.
Annual Valuation
Fiduciaries of plans subject to ERISA are required to determine annually
the fair market value of the assets of such plans as of the close of any such
plan's fiscal year. Although our manager will provide annually upon the written
request of an investor, an estimate of the value of the units based upon, among
other things, outstanding life insurance policies, it may not be possible to
value the units adequately from year to year because there will be no market for
them.
FEDERAL INCOME TAX CONSEQUENCES
The following section is the opinion of our counsel, Snow Becker Krauss
P.C., regarding the material United States federal income tax considerations
which are relevant to a prospective investor. The federal tax considerations
discussed below are necessarily general and may vary depending upon a member's
particular circumstances. The tax aspects of this offering are complex and
certain of them are not free from doubt.
83
The discussion which follows assumes that a prospective investor is a
citizen or resident of the United States, is not a tax-exempt organization and
will become a member with a view towards economic profit apart form the tax
benefits, if any, which may arise as a result of investment in the Fund.
This discussion is based on the facts described herein. Any alteration of
the facts may adversely affect the discussion. Furthermore, the discussion is
based on existing law and applicable current and proposed Treasury Regulations
and current published administrative positions of the service and judicial
decisions, all of which are subject to change either prospectively or
retroactively. For the reasons set forth below in Classification as a
Partnership for Tax Purposes, it is counsel's opinion that the Fund will be
subject to tax as a Partnership for Federal Income Tax purposes.
EACH INVESTOR SHOULD SEEK, AND MUST DEPEND UPON, THE ADVICE OF HIS TAX
ADVISOR, TAX COUNSEL OR ACCOUNTANT WITH RESPECT TO THIS INVESTMENT IN THE FUND,
AND EACH INVESTOR WILL BE RESPONSIBLE FOR THE FEES OF SUCH ADVISORS, TAX COUNSEL
AND ACCOUNTANTS. INVESTORS SHOULD BE AWARE THAT THE INTERNAL REVENUE SERVICE MAY
NOT AGREE WITH ALL TAX POSITIONS TAKEN BY THE FUND AND THAT LEGISLATION,
ADMINISTRATION OR COURT DECISIONS MAY REDUCE OR ELIMINATE ANY ANTICIPATED TAX
BENEFITS TO AN INVESTOR.
Taxation of the Fund and its Members
Under Federal Income Tax Regulations, a business entity formed as a
limited liability company, such as the Fund, may elect to be taxed for Federal
income tax purposes as either a partnership or a corporation. The Fund will
elect to be taxed as a partnership. Therefore, it is counsel's opinion that
pursuant to the Income Tax Regulations, it will be subject to taxation as a
partnership. A partnership is not subject to federal income taxation. Each
member reports on his federal income tax return his distributive share of the
Fund's income, gains, credits, losses and deductions, whether or not actual
distributions of cash or property is made to such member with respect to the
member's taxable year. A member may realize taxable income in excess of his cash
distributions if the Fund retains cash to meet its needs and distributes no cash
or cash in an amount less than taxable income.
Classification as a Partnership for Tax Purposes
As noted above, the Income Tax Regulations make it possible for an
unincorporated entity such as the Fund to elect to be taxed either as a
partnership or a corporation. The Fund intends to elect to be taxed as a
partnership. Notwithstanding such election, the Internal Revenue Code of 1986,
as amended (the "Code"), provides that a publicly traded partnership is treated
as a corporation. The Code provides that a partnership is publicly traded if
there are more than 100 partners and the interests in the partnership (i.e.,
membership interests in the Fund) are (1) traded on an established securities
market or (2) readily tradable on a secondary market or the substantial
equivalent thereof.
84
It is the opinion of counsel that the membership interests in the Fund
will not be traded on an established securities market for income tax purposes.
The Income Tax Regulations provide that interests in a partnership are not
readily tradable on a secondary market or the substantial equivalent if (i) all
interests in the partnership were issued in a transaction (or transactions) that
was not required to be registered under the Securities Act of 1933; and (ii) the
partnership does not have more than 100 partners at any time during the taxable
year.
The Fund's operating agreement precludes recognizing transfers of
membership interests if the effect of such transfer will be to cause the Fund to
be treated as a publicly traded partnership. It is the opinion of counsel that
such limitation, if enforced, will be respected for income tax purposes.
Accordingly, since the Fund intends to enforce the provisions in the operating
agreement, it is counsel's opinion that the Fund should not be taxed as a
corporation and will not be subject to tax other than as a partnership.
Administrative and Judicial Proceedings at Partnership Level
In an administrative or judicial proceeding concerning partnership items,
the determination of the tax treatment of partnership items is made at the
partnership level, in a single administrative proceeding, rather than in
separate proceedings with each partner. Special rules governing proceedings that
must be conducted at the partnership level for the assessment and collection of
tax deficiencies or for tax refunds arising out of the partner's distributive
shares of income, deduction, credits, etc.
Notice of the beginning of administrative proceedings and, in general, the
resulting final partnership administrative adjustments must be given to all
partners (whose names and addresses are furnished to the IRS). However, a group
of partners having an aggregate profits interest of 5% or more may request
notice to be mailed to a designated partner. Each partnership is supposed to
name a "tax matters partner" who is to receive notice on behalf of small
partners not entitled to notice and to keep all partners informed of all
administrative and judicial proceedings at the partnership level. Settlement
agreements may be entered into between the tax matters partner and the IRS that
bind the parties to the agreement and may extend to other partners who request
to enter into consistent settlement agreements. AmeriFirst Financial Services,
Inc. will be the "tax matters partner."
Consistency Requirement
Each partner is required to treat partnership items on his return in a
manner consistent with the treatment of such items on the partnership return and
may be penalized for intentional disregard of the consistency requirement. The
consistency requirement may be waived if the partner files a statement (Form
8082) identifying the inconsistency or shows that it resulted from an incorrect
schedule furnished by the partnership.
Tax Basis
The tax basis to a member of his membership interest will be determined
initially by the amount of his capital contribution. Such basis will be
increased by the member's cumulative distributable share of Fund income and
share of nonrecourse debt, if any. Such basis is decreased by a member's
cumulative shares of the Fund's losses and distributions.
85
If the basis of a member in his membership interest should be reduced to
zero, the amount of any distributions to him in excess of his share of Fund
taxable income for any year would be treated as a gain from the sale of his
membership interest which could be treated as an ordinary gain or as a capital
gain depending on the facts existing at that time. A member cannot, on an annual
basis, use losses from the Fund in excess of his basis in his membership
interest. Such excess losses may be carried forward and used when such member
has sufficient basis. It is anticipated that the members will have sufficient
basis in the membership interests for losses, if any, generated by the Fund.
Tax Treatment on Liquidations of the Fund
Upon the liquidation of the Fund, liquidating cash distributions will be
made to the members in accordance with their positive capital accounts. On
dissolution, the Fund may distribute assets in kind or sell its assets and
distribute cash. If cash is distributed, it may result in capital gain (or
ordinary gain to the extent of substantially appreciated inventory) to the
members. If property is distributed, there may be no immediate taxable income to
members.
Amounts "At Risk"
Under Section 465 of the Code, losses from certain activities may be
deducted by a taxpayer only to the extent to which the taxpayer is "at risk" in
the activity. Accordingly, the "at risk" rules will apply to a members' share of
the losses from the Fund. Each member initially will be "at risk" to the extent
of the amount of capital that he contributes to the Fund. In future years, such
amount will be increased to the extent the member recognizes income from his
investment in the Fund or contributes additional cash to the Fund, and reduced
to the extent that he has deducted losses or received cash distributions from
the Fund.
Limitations on Deductibility of Losses from Passive Activities
All losses from "passive activities" are generally not deductible by a
non-corporate taxpayer, a Subchapter S corporation, or a personal service
corporation, except against income derived from "passive activities" of the
taxpayer. "Passive activities" are those business activities in which a taxpayer
does not materially participate. Thus, for those whose only activity is an
investment in the Fund their participation would be treated as a "passive
activity" for purposes of this limitation. Accordingly, so long as the member
maintains his investment in the Fund, such member's share of the Fund's losses
will not be deductible against his salary, active business income, income from
dividends, interest, and royalties, and capital gains from nonbusiness
properties. However, Fund losses, if any, generally will be deductible from such
a member's gain and income from the Fund or from other passive activities.
Investors should note that interest earned on the funds of the Fund may be
considered "portfolio income" rather than passive income and, therefore, may not
be offset by passive losses such as those that may result from the operations of
the Fund.
Losses from a passive activity which are not allowed in a taxable year may
be carried forward indefinitely and be allowed against income from passive
activities in subsequent years. Furthermore, losses from such an activity would
be allowed in full to offset any income of the taxpayer when the taxpayer
disposes of his entire interest in the activity (in a taxable
86
disposition). Accordingly, any current or carried forward losses of a member
with respect to the Fund will be deductible in full upon the liquidation of the
Fund or upon a taxable disposition by a member of all of his membership interest
in the Fund.
The Treasury Department has broad regulatory authority with respect to the
implementation of the limitation on losses from passive activities. Furthermore,
the Code places a modified limitation on the deductibility of such losses by
"closely held" corporations. Investors are therefore urged to consult their tax
advisors as to the application and effect of the passive loss limitation with
respect to their respective tax situations.
Life Insurance Contracts
The assets of the Fund are expected to be a pool of life insurance
policies on the lives of the terminally ill and chronically ill of all ages and
senior citizens, age 65 and older with life expectancies based solely on
actuarial tables.
The Code provides that, with certain exceptions, gross income of a
taxpayer does not include amounts received under a life insurance contract if
such amounts are paid by reason of the death of the insured. One exception to
this rule provides that if a life insurance contract or any interest in it is
transferred for valuable consideration, the exclusion from gross income is
limited to an amount equal to the sum of the actual value of the consideration
and the other amount subsequently paid by the Fund after it acquires the policy.
Accordingly, it is in the opinion of counsel, that in the usual case, any income
of the Fund upon the maturity of a life insurance contract will be taxed as
ordinary business income.
Fees and Other Payments
The Fund intends to take the position that the payment of management fees,
legal fees, accounting fees and fees to other service providers, to the extent
deducted, represents a reasonable expense amortizable over the period benefited
or an "ordinary and necessary" business expense payable for services rendered or
obligations undertaken for the benefit of the Fund.
The Code provides that organization expenses of the Fund are not
deductible in the year paid. It provides that the Fund may elect to deduct
ratably over a period of not less than 60 months, amounts paid or incurred in
organizing a business, such as the Fund. This period begins with the month in
which the Fund begins to do business. Organization expenses for this purpose are
expenditures which are incident to the Fund's creation, chargeable to its
capital account and of a character which, if expended in connection with the
creation of a Fund having an ascertainable life, would be amortized over such
life. In addition to such costs, another provision of the Code allows a taxpayer
to elect to amortize over a 60-month period "start-up expenditures" in any
amount (1) paid or incurred in connection with (a) investigating the creation or
acquisition of an active trade or business, or (b) creating an active trade or
business, or (c) any activity engaged in for profit and for the production of
income before the day on which the active trade or business begins, anticipation
of such activity becoming an active trade or business, and (2) which, if paid or
incurred in connection with the operation of an existing active trade or
business (in the same field as the trade or business referred to in (1)), would
be allowable as a deduction for the taxable year in which paid or incurred.
87
Neither the Fund nor any member is entitled to deduct amounts paid or
incurred to promote the sale of (or sell) an interest in the Fund. Also, the
Income Tax Regulations set forth the following examples of expenses which are
not organization expenses: expenses connected with acquiring assets of the Fund,
expenses connected with a contract relating to the operation of the Fund's trade
or business even where the contract is between the Fund and one of its members
and syndication expenses.
Allocation of Profits and Losses to Partners
The Code provides that allocations of income, gain, loss, deduction or
credit among partners will be controlled by the partnership agreement (i.e., the
Fund's operating agreement) if the allocation has "substantial economic effect."
The legislative history of this provision indicates that an allocation will be
deemed to have substantial economic effect if the allocation will actually
affect the dollar amount of the partner's shares of total partnership income or
loss independently of tax consequences. If an allocation made by the partnership
agreement does not have substantial economic effect, a member's shares of
income, gain, loss, deduction or credit (or item thereof) will be determined in
accordance with the partner's "interest in the partnership" taking into account
all facts and circumstances. According to the legislative history, among the
relevant factors to be considered are the partners' respective interests in cash
flow and distributions upon liquidation, as well as their interests in
partnership profits and losses (if different from that in taxable income or
loss).
The Fund's operating agreement provides that the Fund's profits and losses
are allocated in accordance with members' capital accounts and that cash
distributions will generally be made in accordance with the allocation of
profits and losses. It is the opinion of counsel that such allocations have
substantial economic effect.
Cash Distributions
Cash distributions to the members from the Fund may not be equal to Fund
income as determined for Federal income tax purposes. If cash distributions to a
member by the Fund in any year are less than his share of taxable income, the
member may be required to pay the income taxes attributable to his share of Fund
income from funds not associated with his investment in the Fund. If cash
distributions to a member by the Fund in any year exceed his share of the Fund's
taxable income for that year, the excess will not be reportable as taxable
income by the member for Federal income tax purposes, although it will reduce
the tax basis of his membership interests. If the tax basis of a member in his
membership interests is reduced to zero, his share of any subsequent cash
distributions for any year, including his share in any reduction in nonrecourse
liabilities, in excess of his shares of taxable income for such year, will be
taxable to him as though it were a gain on the sale or exchange of his
membership interest.
Alternative Minimum Tax
All taxpayers are subject to a minimum tax at a rate of 21% (20% for
corporations) in lieu of the regular income tax where the alternative minimum
tax exceeds taxpayer's regular income tax for a taxable year. A taxpayer's
alternative minimum taxable income, computed for purposes of the regular tax, in
significant ways. Depending on a member's particular tax
88
situation, the alternative minimum tax could reduce the after-tax economic
benefit of an investment in the Fund. Also, the alternative minimum tax is taken
into account for purposes of computing estimated tax liability. Each prospective
member should consult and depend upon his personal tax advisor with respect to
the possible effects on him of tax preference items.
Fund Not a Tax Shelter
Certain provisions of the Code apply to tax shelters. For this purpose,
tax shelter means an entity including a limited liability company such the Fund
if the principal purpose of the entity, plan, or arrangement, based on objective
evidence, is the avoidance or evasion of Federal income tax. The principal
purposes of an entity, plan or arrangement is the avoidance or evasion of
Federal income tax if that purpose exceeds any other purpose. Typical of tax
shelters are transactions structured with little or no motive for the
mismatching of income and deductions, overvalued assets, non-recourse financing
or financing techniques which do not conform to standard commercial business
practices. The Fund represents an effort to obtain a rate of return in a manner
consistent with commercial practices in this area. Accordingly, it is the
opinion of counsel that the investment should not be treated as a "tax shelter"
for Federal Income Tax purposes.
State Taxation
The foregoing disclosure does not discuss the State tax consequences of an
investment in the Fund. Potential investors should discuss possible State tax
ramifications of an investment in the Fund with their tax advisors. Since the
business will be principally carried on in the State of Florida, nonresidents of
Florida should consider the availability of tax credits in their state of
residence in determining the state tax impact on their investment.
SUMMARY OF OPERATING AGREEMENT
The following is a summary of the operating agreement for the Fund dated
as of September 25, 2002 and is qualified in its entirety by the terms of the
operating agreement itself. You are urged to read the entire operating
agreement, which is set forth as Exhibit B to this prospectus.
Rights and Liabilities of Members
Your rights, duties and powers as a member, will be governed by the
operating agreement and by the Florida Limited Liability Company Act ("FLLCA").
If you become a member in the Fund by purchasing units in this offering,
you will not be responsible for the obligations of the Fund and will be liable
only to the extent of the purchase price you pay for the units, which is your
capital contribution to the Fund. You may be liable for any return of capital
plus interest, if necessary, to discharge liabilities existing at the time of
such return. Any cash distributed to you may constitute, wholly or in part, a
return of capital.
You and other members will have no control over the management of the Fund
except that in some cases, members who own together the percentages indicated on
the table below of
89
the capital accounts of the Fund may approve any of the following matters,
generally subject to the approval of our manager as well:
Percentage of
the Capital Accounts to be held by
Consenting Members for
Action Approval of Action
------ ------------------
Amendment to the operating agreement (except for admission
of additional members on the terms of this offering, which
does not require the approval of the members) 51%
Amendment to the operating agreement that would increase
your liabilities or decrease your interest in the Fund's
income, gains or distributions 100%
Removal of our manager in the case of commission of a
felony, gross negligence or willful misconduct 51%
Removal of our manager after our manager has received
distributions from the Fund that exceed 125% of the
aggregate expenses incurred by our manager, provider and
underwriter in making this offering and in operating the
Fund in the ordinary course 66 2/3%
Removal of our manager in the case of a default by our
manager or waiver of our manager's default 51%
Election of a successor manager 51%
Recapitalization of the Fund, sale of substantially all of
the Fund's assets, restructuring of the Fund or merger of
the Fund with or into another entity, in each case which
adversely affects the members 66 2/3%
Dissolution and termination of the Fund, if the Fund is not
terminated in accordance with the operating agreement 100%
Term of the Fund
The Fund will cease operating on December 31, 2027. The Fund is
self-liquidating and will dissolve sooner upon the maturity of all life
insurance policies purchased by the Fund. The Fund may dissolve earlier if
AmeriFirst Financial Services, Inc. ceases serving as our manager and the
members cannot agree on a new manager within six months.
90
The Fund Contributions
Units, which represent ownership interests in the Fund, will be sold in
multiples of $1,000, and no person may initially invest less than $100,000 with
additional purchases in multiples of $1,000, although our underwriter reserves
the right to accept subscriptions for less than $100,000. To purchase units you
must deliver to the Fund a subscription agreement in the form attached to this
prospectus as Exhibit A, together with your contribution. Contributions shall be
made in cash, payable by check or wire transfer, or through a rollover of assets
from a qualified plan, such as an IRA.
Rights, Powers and Duties of Manager
Subject to the rights of members to vote on specified matters, our manager
will have complete charge of our business. Our manager is not required to devote
its full resources to our business and affairs but only such resources as shall
be necessary or useful to manage and operate our business and affairs in a
proper and efficient manner. Our manager acting alone, has the power and
authority to act for and bind the Fund.
Our manager is granted the special power of attorney of each member for
the purpose of executing amendments to the operating agreement and confirming
amendments to the Articles of Organization and any other governmental filings
required as a result of these changes.
Profits and Losses
Our net income and net losses for each fiscal year will be allocated to
the members and to our manager generally in the manner set forth below. In the
event of a permitted transfer of a unit, the transferee will have the same pro
rata share as the transferor.
1. Net income of the Fund shall be allocated to the members on their pro rata
share.
2. All net losses shall be allocated to the members on their pro rata share.
Distributions
We intend to make distributions to members only of their pro rata share of
the proceeds paid on life insurance policies. A member's pro rata share will
entitle him to a return in proportion to his investment of the total amount of
investments in the Fund. Any cash or other property remaining after distribution
of the sinking fund shall be distributed to members of the Fund.
All distributions to members of cash payments received from insurance
proceeds between the 26th day of one month through the 25th day of the following
month shall be paid to members on the fifth day of the following month. All cash
payments received after the 25th day of the month shall be paid to members on
the fifth day of the second following month.
91
Assignment and Transfer of Units
Your rights to sell or transfer units are limited. There is no public
trading market in which you may sell your units and we do not expect a public
market to emerge anytime in the future. You may transfer your units using a form
approved by our manager and must obey all relevant laws when you are permitted
to transfer your units. Any person who buys the units from you must meet the
investor suitability requirements described in this prospectus. Our manager must
approve any new member and all transfers that would cause us to be classified as
a publicly traded partnership under the Internal Revenue Code.
Repurchase of Units, Withdrawal from the Fund
You may withdraw or partially withdraw from the Fund and obtain the return
of all or part of your capital account within 90 days after you deliver written
notice of withdrawal to our manager, subject to the following conditions:
o You should not expect to be able to withdraw from the Fund until one
year after you purchased the units.
o Commencing one year after your purchase of the units, you may obtain
all or part of your investment and receive back 85% of the principal
amount of your investment less all distributions paid to date.
o We can only make cash payments in return of an outstanding capital
account from net proceeds and capital contributions.
o We are not required to sell any portion of our assets to fund a
withdrawal.
o Our manager will not reinvest 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 distribution, even if this is not the same as
your proportionate share of the fair market value of the Fund's
assets.
o If your capital account is reduced below $100,000 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 request for withdrawal are on a "first-come,
first-served" basis. If the sums needed to fund withdrawals in any
particular month exceed the amount of cash available for
withdrawals, funds will be distributed first to the member whose
request we received first, until his withdrawal request is paid in
full.
92
Meetings and Action by Written Consent
Our manager may call meetings of members or any class or series thereof,
on reasonable notice, for such purposes as our manager shall determine. Meetings
may be called upon not less than 7 days notice to the members. In lieu of a
meeting, members may give any approval or consent under the operating agreement
in writing and delivered to our manager with the required percentage of
interests in the Fund, followed by notice to all members. If not otherwise
specified in the operating agreement, the members shall vote in accordance with
the percentage that their capital accounts represent of the aggregate of all
capital accounts of members. Our manager may establish such additional and
reasonable procedures (in the form of by-laws or otherwise) relating to notice
of the time, place or purpose of a meeting of the members, the waiver of any
such notice, action by consent without a meeting, the establishment of a record
date, quorum requirements, voting by proxy or any other matter with respect to
the exercise of any such right to vote.
Reports and Records
Our manager is required to deliver to the Fund (i) at least 2 days prior
to each purchase of life insurance policies, an officer's certificate setting
forth the amount of insurance policies to be purchased on such closing date;
(ii) a quarterly certificate regarding, among other things, the aggregate amount
of collections processed by our manager and the amount of insurance policies for
such period; and (iii) annual subservicing reports of the Fund prepared by
independent public accountants in accordance with the Fund's operating
agreement, a copy of which may be obtained by any member upon request in
writing.
Our manager shall prepare and forward to each member of the Fund, every
six months, a statement setting forth certain information regarding
distributions paid and payable, including information regarding the funds
deposited in the premium escrow account. In addition, our manager will forward
annually to each member an annual tax statement prepared by independent public
accountants containing certain information that our manager deems necessary to
enable the members to prepare their respective tax returns.
Dissolution of the Fund
The Fund shall be dissolved upon the earliest to occur of the following:
(a) payment to the Fund of all proceeds of all life insurance policies;
(b) the express written consent of our manager;
(c) the entry of a decree of judicial dissolution of the Fund; or
(d) the unanimous consent of the members.
The outside date for termination of the Fund is December 31, 2027.
Upon the dissolution of the Fund, our manager shall proceed, within a
reasonable time, to sell or otherwise liquidate the remaining non-cash assets,
if any, and, after paying or making due
93
provision by the setting up of reserves for all liabilities to creditors of the
Fund, and distribution of the remaining sinking fund to our manager and/or
provider, to distribute the remaining assets to the members, pro rata, in
accordance with the positive balance in their respective capital accounts.
PLAN OF DISTRIBUTION
AmeriFirst Capital Corp., our underwriter, is using this prospectus to
offer units on a "best efforts" $2,500,000 or none basis to the public on our
behalf. The Fund will pay our underwriter, which has applied for registration as
an NASD member, compensation of up to a maximum of 10% of the gross proceeds of
this offering for selling the units and for managing selected dealers. The
underwriter may engage non-affiliated securities brokerage firms that are
members of the NASD to act as selected dealers to sell units to the public.
Units may also be sold by officers of the Fund, who may receive commissions,
where permitted.
Our underwriter is a newly formed Florida broker-dealer, all of whose
stock is owned by AmeriFirst, Inc., an affiliate of the Fund. Mr. Tooke expects
to complete the broker-dealer registration of our underwriter with the NASD
prior to the effective date of this prospectus. The principal business of our
underwriter will be to sell the securities to be registered under this offering.
Our underwriter does not intend to commence operations prior to commencement of
this offering.
Our underwriter has not identified any brokers or dealers which will
participate in the offering and has no agreement, arrangement or understanding
with any broker or dealer. Our manager expects to pay to our underwriter and
officers of the Fund (if permitted), even if it does not engage other selected
dealers a fee of up to 10% of the gross proceeds from the sale of the units. Our
underwriter, at its own expense, will negotiate fees of up to 10% of the gross
proceeds of this offering to selected dealers on their respective sales of
units. However, selling commissions will only be paid to our underwriter and, to
the extent possible, to selected dealers upon the Fund's purchase of life
insurance policies. Accordingly, the entire gross proceeds should be available
to purchase life insurance policies and the return on investment to members
shall be determined on the basis of the principal amount of their investments.
We will be reviewing subscription applications as they are received. We
will indicate our acceptance of your subscription agreement by countersigning it
and indicating the amount of units that we will issue to the subscriber.
Subscriptions are non-cancellable and irrevocable. We will place all proceeds
from the sale of units in a segregated subscription escrow account until at
least $2,500,000 in units have been sold. The escrow account will be with
SouthTrust Bank, whose address is 1100 Office Park Drive, 2nd Floor, Birmingham,
Alabama 35223. We have entered into escrow agreement with the escrow agent which
you can find as an exhibit to the registration statement of which this
prospectus forms a part.
If we sell $2,500,000 in units by ___________, 2003 [six months from the
date of this prospectus unless extended], the escrow account will be closed and
the proceeds, after deduction of the escrow agent's fees, together with amounts
earned as interest on those proceeds, will be delivered to us. If we have not
sold $2,500,000 in units on or before ___________, 2003 [six months from the
date of this prospectus unless extended], the escrow agent will promptly return
to all investors the amounts they have paid to buy units, with interest earned
thereon less the
94
escrow agents fees. We will then stop selling units and the subscription
agreements will be canceled, regardless of whether or not previously accepted.
Neither the Fund, our manager nor any of their affiliates intend to
purchase units in this offering. However, our manager may accept in lieu of cash
from any one other than an affiliate of itself or the Fund, an interest in a
life insurance policy.
We will continue to sell units to the public through our underwriter and
selected dealers. We will seek to sell a total of 100,000 units for
$100,000,000. Currently, we intend to offer the units for sale in California,
Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Michigan, Minnesota,
Nevada, New Jersey and New York, and we will end this offering in these states
on _______, 2004 [12 months from the date of this prospectus unless extended] or
at such earlier time that all $100,000,000 of units are sold. If we desire to
extend this offering up until ___________, 2005, [24 months from the date of
this prospectus], each of these states requires us to file the appropriate
documents with such state's agency and we will provide investors in these states
with written notice of such extension. We may register in additional states to
sell the units and will comply with applicable state "blue sky" laws to extend
the offering. We may terminate this offering at any time by written notice to
the investors and refund any subscriptions that we have not accepted.
Your purchase of units in the Fund entitles you to receive a return in
proportion to your investment over the total amount of investments made in the
Fund. Accordingly, the greater the total investments, the smaller your ownership
interest in the Fund will be since your ownership interest will be diluted;
however, your rate of return will remain the same. You are entitled to receive,
to the extent we receive proceeds on each life insurance policy that we acquire,
a current return equal to your proportionate share of the face amount of the
life insurance policy.
There is no established public trading market and no comparable securities
for reference purposes, nor are there expected to be a market for comparable
securities following this offering.
The underwriting agreement provides for reciprocal indemnification between
the Fund and our underwriter against certain liabilities in connection with the
registration statement of which this prospectus forms a part, including
liabilities under the Securities Act of 1933. To the extent this section may
purport to provide exculpation from possible liabilities arising under the
federal securities laws, it is the opinion of the SEC that such indemnification
is against public policy and is therefore unenforceable.
If you want to purchase units, you should complete the subscription
agreement, which you can find at Exhibit A to this prospectus and which will be
provided by our underwriter or selected dealer that offered you the units. You
should return the subscription agreement and full payment for the units being
purchased to that dealer. You may obtain additional copies of the subscription
agreement from AmeriFirst Capital Corp., whose address is 814 North Highway A1A,
Suite 300, Ponte Vedra Beach, FL 32082; telephone: (904) 373-3034.
95
INVESTMENT COMPANY ACT OF 1940
The Investment Company Act of 1940 (the "Act") applies to investment
companies as defined by the Act.
Section 3(b)(i) of the Act provides that an investment company does not
include "Any issuer primarily engaged, directly or through a wholly-owned
subsidiary or subsidiaries, in a business or businesses other than that of
investing, reinvesting, owning, holding or trading in securities." Since
insurance policies generally are not deemed to be investment securities as
defined in the Act, the Fund should be considered as being primarily engaged in
an activity other than investing, reinvesting, owning, holding or trading in
securities. Accordingly, in the opinion of Snow Becker Krauss P.C., the Fund is
not and its proposed activities will not result in it becoming an investment
company. In order to maintain its exemption from registration as an investment
company under the Act, the Fund will not purchase any insurance policy, such as
a variable annuity, which may be deemed an investment security under the Act.
However, the Securities and Exchange Commission has not passed upon any issues
presented by the Act
LEGAL PROCEEDINGS
In the normal course of business we may become involved in various types
of legal proceedings concerning life insurance policies, such as collecting the
proceeds of policies or otherwise protect or recoup our investment in such
policies. As of the date hereof, we are not involved in any legal proceedings.
LEGAL OPINIONS
Certain legal, federal income tax and Investment Company Act matters in
connection with the units offered hereby will be passed upon for the Fund by
Snow Becker Krauss P.C., 605 Third Avenue, New York, NY 10158. Such counsel does
not represent the members in connection with the units offered hereby.
EXPERTS
The balance sheet of the Fund at September 30, 2002 and the statements of
stockholder's equity and cash flows of the Fund for the period from inception
through September 30, 2002, the balance sheet of our manager at October 31, 2002
and the statements of revenue and expense, members' equity and cash flow of our
manager, all included in this prospectus have been audited by Marcum & Kliegman
LLP, independent certified public accountants, as set forth in their report,
which includes an explanatory paragraph as to an uncertainty with respect to the
Fund's and our manager's ability to continue as a going concern, thereon
appearing elsewhere herein and have been included herein in reliance on such
reports and the authority of such firm as experts in accounting and auditing.
The statements under the caption "Federal Income Tax Consequences" have
been reviewed by Snow Becker Krauss P.C. and are included herein in reliance
upon the authority of that firm as experts thereon.
96
ADDITIONAL INFORMATION
The Fund has filed with the Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549, a registration statement on Form S-1 under
the Securities Act of 1933, as amended, with respect to the units offered
pursuant to this prospectus. For further information, reference is made to the
registration statement and to the exhibits thereto which are available for
inspection at no fee in the Office of the Commission in Washington, D.C., 450
5th Street, N.W., Washington, D.C. 20549. Photostatic copies of the material
containing this information may be obtained from the Commission upon paying of
the fees prescribed by the rules and regulations at the Washington office only.
Additionally, the Commission maintains a website that contains reports, proxy
and information statements and other information regarding registrants, such as
the Fund, that file electronically. The address of the Commission's website is
http://www.sec.gov.
97
AMERIFIRST FUND I, LLC
(A Development Stage Company)
CONDENSED FINANCIAL STATEMENTS
For the Three Months Ended December 31, 2002 and
Cumulative From April 22, 2002 (Inception)
AMERIFIRST FUND I, LLC
(A Development Stage Company)
CONTENTS
- --------------------------------------------------------------------------------
Page
----
FINANCIAL STATEMENTS
Condensed Balance Sheet (Unaudited) 1
Condensed Statement of Operations and Member's Deficit (Unaudited) 2
Condensed Statement of Cash Flows (Unaudited) 3
UNAUDITED NOTES TO FINANCIAL STATEMENTS 4-5
AMERIFIRST FUND I LLC.
(A Development Stage Company)
CONDENSED BALANCE SHEET
(UNAUDITED)
December 31, 2002
- --------------------------------------------------------------------------------
ASSETS
Current assets $ --
Deferred offering costs 183,718
---------
TOTAL ASSETS $ 183,718
=========
LIABILITIES AND MEMBER'S DEFICIT
Due to related party $ 218,100
---------
TOTAL LIABILITIES 218,100
COMMITMENTS AND CONTINGENCIES
MEMBER'S DEFICIT (34,382)
---------
TOTAL LIABILITIES AND MEMBER'S DEFICIT $ 183,718
=========
The accompany notes are an integral part of these financial statements.
1
AMERIFIRST FUND I LLC.
(A Development Stage Company)
CONDENSED STATEMENT OF OPERATIONS AND MEMBER'S DEFICIT
(UNAUDITED)
For the Three Months Ended December 31, 2002 and
Cumulative From April 22, 2002 (Inception)
- --------------------------------------------------------------------------------
Cumulative From
April 22, 2002
2002 (Inception)
---------------------------------
REVENUES FROM POLICIES HELD IN TRUST $ -- $ --
EXPENSES -- 34,382
---------- --------
NET LOSS -- (34,382)
MEMBER'S DEFICIT - Beginning -- --
---------- --------
MEMBER'S DEFICIT - Ending $ -- $(34,382)
========== ========
The accompany notes are an integral part of these financial statements.
2
AMERIFIRST FUND I LLC.
(A Development Stage Company)
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended December 31, 2002 and
Cumulative From April 22, 2002 (Inception)
- --------------------------------------------------------------------------------
Cumulative From
April 22, 2002
2002 (Inception)
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ -- $ (34,382)
-------- ---------
Net Cash used in Operating Activities -- (34,382)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES -- --
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Advance from related party -- 218,100
Deferred offering costs -- (183,718)
-------- ---------
Net Cash Provided by Financing Activities -- 34,382
-------- ---------
CASH AND CASH EQUIVALENTS - Beginning -- --
-------- ---------
CASH AND CASH EQUIVALENTS - Ending $ -- $ --
======== =========
The accompany notes are an integral part of these financial statements.
3
AMERIFIRST FUND I, LLC
(A Development Stage Company)
UNAUDITED NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - Formation, Nature of Business, and Management Plans
Formation, Nature of Business and Management's Plans
AmeriFirst Fund I, LLC (the "Fund") was organized on April 22, 2002 to
offer units in a securitized pool of life insurance policies. The Fund
will provide living benefits to terminally ill and chronically ill persons
of all ages and senior citizens, age 65 and older with life expectancies
based solely on actuarial tables in exchange for ownership of their life
insurance policies. A life settlement is the payment of cash in return for
an assignment of ownership or beneficial interest in, and the right to
receive the face value of, a life insurance policy. The Fund will purchase
life insurance policies from AmeriFirst Funding Group, Inc. our
("Provider"), a related party. AmeriFirst Funding Group, Inc. will assign
and/or transfer beneficial interest to the Fund.
The Provider is a wholly owned subsidiary of AmeriFirst, Inc. The Provider
will originate policy purchases directly from the insured if licensed as a
broker, through other providers, or through an unaffiliated broker network
and transfer ownership or irrevocable beneficial interest to the Fund. In
addition, the Fund's principal offices will be located at the Provider's
offices.
AmeriFirst Financial Services, Inc. (the "Manager"), along with our
Provider or other licensed providers, will determine the amount paid for
an insurance policy based on various factors, including the estimated life
expectancy of the insured, the estimated premiums payable under the policy
over the expected life of the insured and certain other costs of the life
settlement. The Fund's existence ends on December 31, 2027, unless
liquidated sooner.
The Fund has not commenced principal operations as of December, 2002. The
Fund will be offering and selling to the public a minimum of 2,500 units
and up to a maximum of 100,000 units at $1,000 per unit, with an initial
minimum investment of one hundred units totaling $100,000. The units are
being distributed on a "best efforts" basis by AmeriFirst Capital Corp.
The proceeds of this offering will be held in escrow with a Bank until the
$2,500,000 minimum amount is received. If the minimum amount is not
received within six months from the effective date of the offering, then
all subscription amounts (including interest), will be returned to all
subscribers. These factors raise substantial doubt as to the Fund's
ability to continue as a going concern. The ability of the Fund to
continue as a going concern is dependent upon the success of the Fund to
raise the $2,500,000 minimum subscription needed within the specified time
pursuant to the Fund's operating agreement. The financial statements do
not include any disclosures that might be necessary should the Fund be
unable to continue as a going concern.
4
AMERIFIRST FUND I, LLC
(A Development Stage Company)
UNAUDITED NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Basis of Presentation
Our accompanying unaudited financial statements reflect all adjustments,
which are, in the opinion of management, necessary to a fair statement of
the results of the interim periods presented. All such adjustments are of
a normal recurring nature. The results of operations for the three months
ended December 31, 2002 are not necessarily indicative of the results that
may be expected for any other interim period or the full year. The
financial statements should be read in conjunction with the notes to the
financial statement and in conjunction with the Company's audited
financial statements contained in its Annual Report on Form S-1/A2 for the
period April 22, 2002 (inception) through September 30, 2002. The
accounting policies used to prepare the condensed financial statements are
consistent with those described in the September 30, 2002 financial
statements.
NOTE 3 - Subsequent Events
On February 13, 2003, the Fund and AmeriFirst, Inc. ("AmeriFirst) entered
into an expense agreement (the "Agreement"). Such Agreement provides that
the Fund is not required to repay amounts due to AmeriFirst arising from
expenses incurred on its behalf by AmeriFirst, or for services rendered by
AmeriFirst to the Fund through the date of the Agreement. In addition,
AmeriFirst will not charge the Fund for expenses incurred on the Fund's
behalf for services rendered to the Fund subsequent to February 13, 2003.
The Fund will record the effect of this Agreement as a contribution to
capital in the amount of $218,100 as of the date of the Agreement.
5
AMERIFIRST FUND I, LLC
(A Development Stage Company)
FINANCIAL STATEMENTS
For the Period April 22, 2002 (Inception)
Through September 30, 2002
AMERIFIRST FUND I, LLC
(A Development Stage Company)
CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations and Member's Deficit 3
Statement of Cash Flows 4
NOTES TO FINANCIAL STATEMENTS 5-7
INDEPENDENT AUDITORS' REPORT
To the Member
AmeriFirst Fund I, LLC
We have audited the accompanying balance sheet of AmeriFirst Fund I, LLC (the
"Fund") (a development stage company) as of September 30, 2002, and the related
statements of operations and member's deficit and cash flows for the period
April 22, 2002 (Inception) through September 30, 2002. These financial
statements are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AmeriFirst Fund I, LLC as of
September 30, 2002, and the results of its operations and its cash flows for the
period April 22, 2002 (Inception) through September 30, 2002, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Fund
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Fund is a development stage company and has not yet begun
operations nor raised any funds to fund such operations. These conditions raise
substantial doubt about the Fund's ability to continue as a going concern. The
financial statements do not include any disclosures that might result from the
outcome of this uncertainty.
/s/ Marcum & Kliegman LLP
January 2, 2003
New York, NY
1
AMERIFIRST FUND I LLC.
(A Development Stage Company)
BALANCE SHEET
September 30, 2002
- --------------------------------------------------------------------------------
ASSETS
Current assets $ --
Deferred offering costs 183,718
---------
TOTAL ASSETS $ 183,718
=========
LIABILITIES AND MEMBER'S DEFICIT
Due to related party $ 218,100
---------
TOTAL LIABILITIES 218,100
COMMITMENTS AND CONTINGENCIES
MEMBER'S DEFICIT (34,382)
---------
TOTAL LIABILITIES AND MEMBER'S DEFICIT $ 183,718
=========
The accompany notes are an integral part of these financial statements.
2
AMERIFIRST FUND I LLC.
(A Development Stage Company)
STATEMENT OF OPERATIONS AND MEMBER'S DEFICIT
For the Period April 22, 2002 (Inception) through September 30, 2002
- --------------------------------------------------------------------------------
REVENUES FROM POLICIES HELD IN TRUST $ --
EXPENSES 34,382
--------
NET LOSS (34,382)
MEMBER'S DEFICIT - Beginning --
--------
MEMBER'S DEFICIT - Ending $(34,382)
========
The accompany notes are an integral part of these financial statements.
3
AMERIFIRST FUND I LLC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
For the Period April 22, 2002 (Inception) through September 30, 2002
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (34,382)
---------
Net Cash used in Operating Activities (34,382)
---------
CASH FLOWS FROM INVESTING ACTIVITIES --
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Advance from related party $ 218,100
Deferred offering costs (183,718)
---------
Net Cash Provided by Financing Activities 34,382
---------
CASH AND CASH EQUIVALENTS - Beginning --
---------
CASH AND CASH EQUIVALENTS - Ending $ --
=========
The accompany notes are an integral part of these financial statements.
4
AMERIFIRST FUND I, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - Formation, Nature of Business, and Management Plans
Formation, Nature of Business and Management's Plans
AmeriFirst Fund I, LLC (the "Fund") was organized on April 22, 2002 to
offer units in a securitized pool of life insurance policies. The Fund
will provide living benefits to terminally ill and chronically ill persons
of all ages and senior citizens, age 65 and older with life expectancies
based solely on actuarial tables in exchange for ownership of their life
insurance policies. A life settlement is the payment of cash in return for
an assignment of ownership or beneficial interest in, and the right to
receive the face value of, a life insurance policy. The Fund will purchase
life insurance policies from AmeriFirst Funding Group, Inc. our
("Provider"), a related party (see Note 3). AmeriFirst Funding Group, Inc.
will assign and/or transfer beneficial interest to the Fund.
The Provider is a wholly owned subsidiary of AmeriFirst, Inc. (see Note
3). The Provider will originate policy purchases directly from the insured
if licensed as a broker, through other providers, or through an
unaffiliated broker network and transfer ownership or irrevocable
beneficial interest to the Fund. In addition, the Fund's principal offices
will be located at the Provider's offices.
AmeriFirst Financial Services, Inc. (the "Manager"), along with our
Provider or other licensed providers, will determine the amount paid for
an insurance policy based on various factors, including the estimated life
expectancy of the insured, the estimated premiums payable under the policy
over the expected life of the insured and certain other costs of the life
settlement. The Fund's existence ends on December 31, 2027, unless
liquidated sooner.
The Fund has not commenced principal operations as of December, 2002. The
Fund will be offering and selling to the public a minimum of 2,500 units
and up to a maximum of 100,000 units at $1,000 per unit, with an initial
minimum investment of one hundred units totaling $100,000. The units are
being distributed on a "best efforts" basis by AmeriFirst Capital Corp.
(See Note 3). The proceeds of this offering will be held in escrow with a
Bank until the $2,500,000 minimum amount is received. If the minimum
amount is not received within six months from the effective date of the
offering, then all subscription amounts (including interest), will be
returned to all subscribers. These factors raise substantial doubt as to
the Fund's ability to continue as a going concern. The ability of the Fund
to continue as a going concern is dependent upon the success of the Fund
to raise the $2,500,000 minimum subscription needed within the specified
time pursuant to the Fund's operating agreement. The financial statements
do not include any disclosures that might be necessary should the Fund be
unable to continue as a going concern.
5
AMERIFIRST FUND I, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Summary of Significant Accounting Principles
Fiscal Year End
The Fund's fiscal year end is September 30, 2002.
Revenue Recognition for Purchased Insurance Policies
Investment in Life Insurance Policies - In accordance with Financial
Standards Board Technical Bulletin 85-4 "Accounting for Purchases of Life
Insurance", the Company reduces its investment in life insurance policies
to their cash surrender value with any differences between cost and cash
surrender value being charged to expense. At September 30, 2002, the Fund
held no investments in life insurance policies.
Income Taxes
The members of a limited liability company are taxed on their
proportionate share of the Fund's taxable income. Accordingly, no
provision or liability for Federal and State income taxes are included in
the accompanying financial statements.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Deferred Offering Costs
Deferred offering costs in the amount of $183,718 include incremental
costs directly attributable to the public offering discussed in Note 1.
These costs will be charged directly to member's deficit against the gross
proceeds of the offering. If the offering is not completed then the Fund
will charge the costs to its operations.
NOTE 3 - Related Parties
As discussed in Note 1, AmeriFirst, Inc. through its wholly owned
subsidiaries, AmeriFirst Funding Group, Inc. and AmeriFirst Financial
Services, Inc., will be the Fund's Provider of insurance policies and
Manager, respectively. The Provider will originate policy purchases
directly from the insured if licensed as a broker, through other
providers, or through an unaffiliated broker network and transfer
ownership or irrevocable beneficial interest to the Fund. The Manager will
negotiate the Provider's fees for providing policies to the Fund at the
time of each transaction.
6
AMERIFIRST FUND I, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - Related Parties, continued
In addition, AmeriFirst, Inc. formed AmeriFirst Capital Corp. Upon the
registration with the National Association of Securities Dealers,
AmeriFirst Capital Corp. will become the underwriter of the Fund. There
can be no assurances the AmeriFirst Capital Corp. will become a registered
broker dealer.
During the three months ended September 30, 2002, AmeriFirst, Inc.
advanced the Fund approximately $218,100 in cash for offering costs,
professional fees and administrative expenses. These advances are
noninterest bearing and are expected to be repaid with the proceeds from
the public offering (see Note 1).
7
EXHIBIT A
AMERIFIRST FUND I, LLC
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT INSTRUCTIONS
A. Completion of Subscription Agreement: Please read carefully pages A-1 through
A-20 and Appendix A to this Subscription Agreement.
If Investor is an exiting member of AmeriFirst Fund I, LLC and wishes to
purchase additional units, skip to number 5 below of these instructions.
1. Subscription and related undertakings, representations and
warranties:
o Indicate how Investor will own the Units in Section 12 on page
A-7.
2. Investment Account Application
o If Investor is an "Individual," complete Section 13 on page
A-8.
o If Investor is a "Trust" (i.e., trust, estate,
conservatorship), complete Section 14 on page A-9.
o If Investor is a "Legal Entity" (i.e., corporation,
partnership, etc.), complete Section 15 on pages A-10.
o If Investor is a "Retirement Plan" (i.e., Employee Benefit
Plan, Keogh Plan, IRA), complete Section 16 on page A-11.
o All Investors must complete Section 17 on pages A-12 to A-14.
3. Registration Information for the Units.
o All Investors must complete Section 18 on page A-15.
4. Signature Page.
o All Investors must complete, sign and date, as applicable,
Section 19 on pages A-17 to A-18.
A-1
5. Additional Subscription Request (Existing Members Only)
o If Investor is an existing member of AmeriFirst Fund, LLC and
wishes to purchase additional units, complete Section 18 on
page 15 and complete, sign and date, as applicable, Section 20
on pages A-18 to A-19.
PLEASE NOTE: Section 21 is for Office Use Only. Do not make any marks in Section
21.
B. Payment. Initial subscriptions should be for at least 100 units at $100,000.
Additional subscriptions may be made in integral multiples of $1,000 per unit.
(AmeriFirst Capital Corp., the underwriter of AmeriFirst Fund I, LLC, reserves
the right to accept initial subscriptions of less than $100,000).
If Investor is purchasing If Investor is purchasing
during the course of following the period of
the Minimum Offering the Minimum Offering
------------------------------------- ----------------------------------
Payment by Bank Check
or Certified Check:.............. Make payable to the order of Make payable to the order of
"SouthTrust Bank" "AmeriFirst Fund I, LLC"
Payment by Wire Transfer:........ SouthTrust Bank SouthTrust Bank
ABA No. ____________ ABA No.___________
SouthTrust Bank AmeriFirst Fund I, LLC
Account No. ___________ Account No._____________
Re: Escrow No. _________
Attn: ___________
C. Questions. If Investor has any questions when completing this Subscription
Agreement, please call AmeriFirst Capital Corp. at (904) 373-3034.
D. Return of Documents. This Subscription Agreement should be returned to the
following address:
AmeriFirst Capital Corp.
814 North Highway A1A, Suite 300
Ponte Vedra Beach, FL 32082
A-2
AMERIFIRST FUND I, LLC
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, AN INVESTOR IS
NOT WAIVING ANY RIGHTS UNDER THE FEDERAL SECURITIES LAWS
1. SUBSCRIPTION. The undersigned investor ("Investor") hereby applies to become
a member in AmeriFirst Fund I, LLC, a Florida limited liability company (the
"Fund"). Investor hereby subscribes $__________________ for the purchase of
_____________________ units (the "Units") of limited liability interest in the
Fund, the price being $1,000.00 per Unit. Investor agrees to purchase the number
of Units stated above in accordance with the terms and conditions of the Fund's
operating agreement (the "Operating Agreement"), a copy of which is attached as
Exhibit B to the Fund's prospectus (the "Prospectus") to which this Subscription
Agreement forms a part. The Units which Investor offers to purchase shall not be
deemed issued to, or owned by, Investor until: (a) Investor has fully paid by
certified or bank check or by wire transfer for such Units, and (b) the Fund's
manager, AmeriFirst Capital Corp. (the "Manager") has, in its sole discretion,
accepted all or any portion of Investor's subscription herein.
2. PAYMENT OF SUBSCRIPTION. The amount of Investor's subscription set forth
above either (a) has already been delivered by wire transfer to the appropriate
account set forth in this Subscription Agreement, or (b) is enclosed with this
Subscription Agreement in the form of a certified or bank check.
3. ACCEPTANCE. Investor acknowledges that the Manager, in its sole discretion,
can accept or reject all or any part of Investor's subscription, and that this
offering may be terminated at any time by the Manager. Investor understands that
Investor's subscription will be held in escrow with SouthTrust Bank until the
minimum $2.5 million is raised in this offering and thereafter deposited into
the Fund's operating escrow account where it will earn interest at money market
rates until such funds are withdrawn to purchase life insurance policies or for
other proper purposes as provided in the Prospectus. The Fund will continue to
seek to distribute a total of 100,000 Units for $100,000,000. If Investor's
subscription is rejected in part or in whole, the funds delivered herewith by
Investor, 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. If any part of Investor's subscription
is accepted, the Manager will return a countersigned copy of this Subscription
Agreement to Investor, which copy will evidence Investor's purchase of the
number of Units indicated therein.
4. REPRESENTATIONS BY INVESTOR. The Units as an investment involve a high degree
of risk. Please read the "Risk Factors" beginning on page 13 of the Prospectus.
In connection with Investor's investment described in Section 1 of this
Subscription Agreement, Investor hereby represents and warrants to the Fund, the
Manager and any relevant broker-dealers the following:
(a) Investor has received the Prospectus five (5) days prior to the date
of this Subscription Agreement, and has read and understands the
Prospectus, and in making this investment is relying solely on the
information contained in the Prospectus.
A-3
(b) Investor acknowledges 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) Investor acknowledges that there will be no public market for resale
of the Units and Investor cannot privately sell, gift, pledge or
otherwise transfer Investor's Units without the prior written
consent of the Manager, and therefore, it may not be possible for
Investor to liquidate Investor's investment in the Fund.
(d) Investor represents that Investor is an "accredited investor" as
such term is defined in Rule 501 of Regulation D under the
Securities Act of 1933, as amended. (See page 29 under the heading
"Investor Suitability Standards" for the definition of an accredited
investor).
(e) Investor represents that Investor has sufficient knowledge and
experience in financial and business matters generally to be capable
of evaluating the merits and risk of an investment in the Fund, or
has employed the services of an investment advisor, attorney or
accountant to read the Prospectus and to evaluate the merits and
risks of such an investment on Investor's behalf.
(f) Investor, if an individual, has attained the age of majority (as
established in the state in which domiciled) and Investor has full
power, capacity and authority to enter into a contractual
relationship with the Fund, (i) on behalf of himself or herself, if
Investor is an individual, or (ii) if Investor is acting in a
fiduciary capacity for a corporation, partnership, trust or other
entity, or as custodian or agent for any person or entity, on behalf
of such person or entity.
(g) Investor, if a partner, corporation, trustee or other entity,
represents that (i) it was not formed for the specific purpose of
investing in the Fund, (ii) it is authorized and otherwise duly
qualified to purchase and hold the Units, and (iii) that this
Subscription Agreement has been duly and validly authorized,
executed and delivered by Investor and constitutes the legal,
binding obligation of Investor.
(h) Investor acknowledges that Investor has been advised to read the
"Risk Factors" set forth in the Prospectus beginning on page 13.
(i) Investor understands that an investment in the Fund may involve tax
consequences and acknowledges that he/she/it must retain his/her/its
own professional advisor to evaluate the tax and other consequences
of an investment in the Fund.
(j) Investor understands that counsel representing the Fund, the Manager
and their affiliates does not and will not represent Investor in any
respect.
(h) Investor represents that the information furnished in this
Subscription Agreement is accurate and compete in all material
respects.
A-4
5. PURCHASE BY FIDUCIARY. If 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 Investor is so
purchasing, except that such person(s) need not be over 18 years of age.
6. ADOPTION OF OPERATING AGREEMENT. Investor hereby adopts, accepts, and agrees
to be bound by all terms and provisions of the Operating Agreement and to
perform all obligations therein imposed upon a member with respect to the Units
to be purchased.
7. LIMITATION ON ASSIGNMENT. Investor acknowledges that the Units may be
assigned only as provided in the Operating Agreement, and Investor further
acknowledges the restrictions set forth in the Operating Agreement and as
described in the Prospectus relating to Investor's ability to resell, transfer,
or assign the Units.
8. SPECIAL POWER OF ATTORNEY.
A. Investor hereby makes, constitutes, and appoints the Manager to be
Investor's true and lawful attorney-in-fact, with full power of substitution, in
Investor's name, place and stead, to make, execute, sign, acknowledge, verify,
deliver, record, publish and file on Investor's behalf the following, as is
necessary or appropriate:
(i) the Operating Agreement and the Articles of Organization, as
well as any and all amendments thereto required under the laws of
the State of Florida or of any other state or which the Manager
deems advisable to prepare, execute and file;
(ii) any other certificate, instrument or document which may be
required to be filed by the Fund by any governmental agency or by
the laws of any state or other jurisdiction in which the Fund is
doing or intends to do business, or which the Manager deems
advisable to prepare, execute and file; and
(iii) any documents which may be required to effect the continuation
of the Fund, the admission of an additional or substituted member,
or the dissolution and termination of the Fund, provided such
continuation, admission, or dissolution and termination are in
accordance with the terms of the Operating Agreement.
B. Investor acknowledges and agrees that the foregoing grant of power
of attorney:
(i) is a Special Power of Attorney coupled with an interest, is
irrevocable, survives the death of Investor and shall not be
affected by the subsequent incapacity of Investor;
(ii) may be exercised by the Manager for Investor by a facsimile
signature of or on behalf of the Manager or by listing all of the
members of the Fund 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
A-5
(iii) shall survive the delivery of an assignment by a member of the
Fund of the whole or any portion of such member's interest, except
that where the assignee thereof has been approved by the Manager for
admission in the Fund 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.
9. 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 the Special Power of
Attorney set forth in Section 8 above of this Subscription Agreement, the
Operating Agreement shall govern.
10. INDEMNIFICATION. Investor agrees to fully indemnify and hold harmless the
Fund, the Manager and their affiliates, from any and all claims, actions, causes
of action, damages and expenses (including legal fees and expenses) whatsoever
which may result from (i) any false statement, omission or misrepresentation
furnished by Investor in this Subscription Agreement, or (ii) any breach of any
of the representations by Investor contained in Section 4 of this Subscription
Agreement.
11. NOTICE TO MANAGER. Investor agrees to notify the Manager immediately if any
of the statements made in this Subscription Agreement shall become untrue.
A-6
12. TYPE OF OWNERSHIP: (CHECK ONE)
1. |_| SINGLE PERSON (I)
(Investor and Trust Custodian must sign)
2. |_| MARRIED PERSON--SEPARATE
PROPERTY (I-2)
*3. |_| COMMUNITY PROPERTY WITH
RIGHTS OF SURVIVORSHIP (COM)
*4. |_| TENANTS IN COMMON (T)
(All parties must sign)
*5. |_| JOINT TENANTS WITH RIGHTS OF SURVIVORSHIP (J)
(All parties must sign)
6. |_| CORPORATION (C):
(Authorized party must sign)
7. |_| TRUST (TR)
(Trustee signature required)
|_| Taxable
|_| Tax Exempt
8. |_| PENSION PLAN (PP)
(Trustee signature required)
9. |_| PROFIT SHARING PLAN (PSP)
(Trustee signature required)
*10. |_| ROTH IRA (RRA)
(Investor and Trust Custodian must sign)
*11. |_| Rollover ROTH IRA (RRI)
(Investor and Trust Custodian must sign)
*12. |_| INDIVIDUAL RETIREMENT ACCOUNT (IRA)
*13. |_| IRA/SEP (SEP)
(Investor and Trust Custodian must sign)
*14. |_| ROLLOVER IRA (ROI)
(Investor and Trust Custodian must sign)
15. |_| KEOGH (H.R.10) (K)
(Custodian signature required)
16. |_| PARTNERSHIP (P)
(Authorized Party must sign)
17. |_| NON-PROFIT ORGANIZATION (NP)
(Authorized Party must sign)
18. |_| CUSTODIAN (CU)
(Custodian signature required)
19. |_| CUSTODIAN/UGMA (UGM)
(Custodian signature required)
20. |_| OTHER (Explain)
_____________________________________
_____________________________________
_____________________________________
- ----------
* Two or more signatures required. Complete Sections 1 through 6 where
applicable.
A-7
13. INDIVIDUAL INVESTOR: Complete this Section 13 if Investor is an Individual.
Name:___________________________________________________________________________
Address: ______________________________________________________________________
City: ____________________ State: __________ Zip:______________
Social Security #: ______ - ____ - ______
Home Phone: ____________________________________________________________________
Business Phone: _______________________________________________________________
E-Mail:_______________________________ Fax:____________________________________
Date of Birth:__________________________________________________________________
Marital Status (check one): Single |_| Married |_|
Country of Citizenship: U.S. |_| Other:_______________________________________
(Attach proof of Country of Citizenship)
If other than U.S. citizen: ____________________________________________________
(Indicate Passport#, alien#, or government ID#)
Country of Legal Residence: ___________________________________________________
(if different than mailing address)
Employer: _____________________________________________________________________
Business Address: ______________________________________________________________
________________________________________________________________________________
Occupation: ___________________________________________________________________
Is Subscriber's employer a registered broker/dealer?
|_| No |_| Yes
Co-Subscriber's Name:___________________________________________________________
Address (if different):_________________________________________________________
City: ______________ State: ______ Zip: _________
Co-Subscriber's Social Security #: ______ - ____ - ______
Co-Subscriber's Home Phone: ___________________________________________________
Co-Subscriber's Business Phone: _______________________________________________
Co-Subscriber's E-mail:__________________________ Fax:__________________________
Co-Subscriber's Date of Birth:__________________________________________________
Co-Subscriber's Marital Status (check one):
Single |_| Married |_|
Co-Subscriber's County of Citizenship: U.S. |_|
Other __________________________________________________________________________
(Attach proof of Country of Citizenship)
If other than U.S. citizen: ____________________________________________________
(Indicate Passport#, alien#, or government ID#)
Co-Subscriber's Country of Legal Residence :____________________________________
(if different than mailing address)
Co-Subscriber's Employer: ______________________________________________________
Co-Subscriber's Business Address: ______________________________________________
_______________________________________________________________________________
Co-Subscriber's Occupation: ___________________________________________________
Is Co-Subscriber's employer a registered broker/dealer?
|_| No |_| Yes
If Yes, see your compliance officer for written approval, which we must receive
prior to opening your account.
A-8
14. TRUST: Complete this Section 14 if Investor is a trust, estate,
conservatorship, etc.
Name of Investor (i.e., full legal name of trust, estate,
conservatorship):_______________________________________________________________
(Attach copy of certificate of trust or similar document)
Name of Trustee, Grantor, Executor or Conservator executing this agreement on
behalf of Investor:_____________________________________________________________
Address:________________________ City:_______________State:______ Zip:__________
Phone:___________________Fax:______________________Email:_______________________
Date of Formation of Investor:__________________________________________________
Jurisdiction in which Investor Formed: _________________________________________
Tax I.D. of Investor: _____________ - ____________ - ______________
A-9
15. LEGAL ENTITY: Complete this Section 15 if Investor is a sole proprietorship,
corporation, partnership, limited liability company, etc.
Check One:
|_| Sole Proprietorship |_| Corporation |_| Partnership
|_| Limited Liability Company |_| Unincorporated Organization
|_| Other____________
Name of Investor (Company Name):________________________________________________
Business Address:________________ City:_______________State:_____ Zip:__________
Phone:___________________Fax:______________________Email:_______________________
Tax Identification #:__________________________
Date of incorporation or
organization:______________________________________________________
(Attach a copy of a certified copy of the Certificate of Incorporation,
Articles of Organization, or similar document)
Jurisdiction of incorporation or organization: _________________________________
Tax Year End:___________________________________
Individual executing this agreement on behalf of Investor:
Name of Authorized Person or Officer: ______________________________
Title of Authorized Person: ________________________________________
A-10
16. RETIREMENT PLAN: Complete this Section 16 if Investor is an employee benefit
plan, Keogh Plan, Individual Retirement Account (IRA), etc.
Name of Investor (provide the full legal name of the retirement plan, "the
Plan"):_________________________________________________________________________
Individual executing this Agreement on behalf of the Plan (i.e., Administrator,
Custodian, etc.) ("Administrator"):
Name: ____________________________________________
Title: __________________________________________
Address:____________________________City:_______________State:_____ Zip:________
Phone Number:______________ Fax:_________________ Email:________________________
Date of Formation: ________________________________________________
Jurisdiction of Formation: ________________________________________
A-11
17. INVESTOR SUITABILITY. All Investors must complete this Section 17.
(A) The following information is required to ascertain whether you would be
deemed an "accredited investor" as defined in Rule 501 of Regulation D under the
Securities Act of 1933, as amended ("the Securities Act"). Please check whether
you are any of the following:
1. A bank as defined in Section 3(a)(2) of the Securities Act, or any
savings and loan association or other institution as defined in
Section 3(a)(5)(A) of the Securities Act whether acting in its
individual or fiduciary capacity; any broker or dealer registered
pursuant to Section 15 of the Securities Exchange Act of 1934; any
insurance company as defined in Section 2(13) of the Securities Act;
any investment company registered under the Investment Company Act
of 1940 or a business development company as defined in Section
2(a)(48) of that Act; any Small Business Investment Company licensed
by the U.S. Small Business Administration under Section 301(c) or
(d) of the Small Business Investment Act of 1958; any plan
established and maintained by a state, its political subdivisions,
or any agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees, if such plan has
total assets in excess of $5,000,000; any employee benefit plan
within the meaning of the Employee Retirement Income Security Act of
1974 if the investment decision is made by a plan fiduciary, as
defined in Section 3(21) of such Act, which is either a bank,
savings and loan association, insurance company, or registered
investment adviser, or if the employee benefit plan has total assets
in excess of $5,000,000 or, if a self-directed plan, with investment
decisions made solely by persons that are accredited investors.
Yes_____ No_____
2. A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940.
Yes_____ No_____
3. An organization described in Section 501(c)(3) of the Internal
Revenue Code, a corporation, a Massachusetts or similar business
trust, or a partnership, not formed for the specific purpose of
acquiring the Units offered, with total assets in excess of
$5,000,000.
Yes_____ No_____
4. A director or executive officer of AmeriFirst Fund I, LLC.
Yes_____ No_____
5. A natural person whose individual net worth, or joint net worth with
your spouse, at the time of your purchase exceeds $1,000,000.
Yes_____ No_____
A-12
Please indicate the amount of the current net worth, which relates
to your home, furnishings and automobiles.
$____________
6. A natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with your
spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the
current year.
Yes_____ No_____
7. A trust, with total assets in excess of $5,000,000 not formed for
the specific purpose of acquiring the Units offered, whose purchase
is directed by a sophisticated person (i.e., directed by a person
who has such knowledge and experience in financial and business
matters that he or she is capable of evaluating the merits and risks
of the prospective investment).
Yes_____ No_____
8. An entity in which all of the equity owners are accredited
investors.
Yes_____ No_____
(B) Frequency of prior investments (check one each row):
Frequently Occasionally Never
Life Settlements _______ _______ _______
Trust Deeds/Real Estate _______ _______ _______
Options _______ _______ _______
Stocks _______ _______ _______
Mutual Funds _______ _______ _______
Bonds _______ _______ _______
Variable Annuities _______ _______ _______
Fixed Annuities _______ _______ _______
Commodities _______ _______ _______
A-13
(C) Investment Objective:
Preservation of Capital/Income: |_|
Other: |_| Describe: ______________________________________________
(D) Describe Investor's investments in the last five years and discuss who made
the relevant investment decisions (you, trustee, beneficiary, director, officer,
manager, partner, financial adviser, broker, accountant, attorney, etc.):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(E) Please provide any other information that would help the Manager determine
whether Investor has sufficient knowledge and experience in financial and
business matters to evaluate the merits and risks of an investment in Units.
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(F) Is Investor subject to any regulatory or other constraints that may preclude
or limit Investor's participation in any potential company investment?
Yes_____ No_____
If yes, please explain:___________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(G) Is Investor associated with another member of the NASD? ____YES ____NO
A-14
18. REGISTRATION INFORMATION FOR THE UNITS
Subscriber Name(s)______________________________________________________________
Co-Subscriber Name (if applicable):_____________________________________________
Number of Units Subscribed For: ________________________________________________
Subscription Amount: $__________________________________________________________
Check One: |_| Initial Investment |_| Additional Investment
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 Sections 13, 14 , 15 or 16 of this Subscription
Agreement) is:
Name(s)_________________________________________________________________________
Address:______________ City:__________________ State:_____________Zip:__________
Telephone:_____________________Fax:____________________________ Email: _________
If the proceeds of distributions or redemptions, if any, are to be
electronically transferred rather than sent by check, provide the account
information to which such proceeds should be electronically transferred is:
Name of Financial Institution:__________________________________________________
Routing ABA Number-if bank:_____________________________________________________
Account Name:___________________________________ Account Number:________________
Address of Financial Institution:_______________________________________________
Telephone:________________________________________Fax:__________________________
Name of Contact Person at Financial Institution:________________________________
A-15
19. SIGNATURE PAGE
Investor hereby certifies that the information provided by Investor in this
Subscription Agreement is true, accurate and complete as of the date hereof, and
further agrees to notify the Manager immediately if any of the statements made
in this Subscription Agreement shall become untrue.
INDIVIDUAL(S)
Investor's primary residence is in (indicate State) ____________________________
____________________________ ______________________________ Date:____________
Signature of Subscriber Print Name
_____________________________ ______________________________ Date:____________
Signature of Co-Subscriber Print Name
TRUST (i.e., Trust, Estate, Conservatorship, etc.)
______________________________________
Print Legal Name of Trust
________________________ _____________________ Date:_____________________
Signature of Authorized Print Name and Title
Person (i.e., Trustee)
________________________ _____________________ Date:_____________________
Signature of Required Print Name and Title
Other Authorized Person
LEGAL ENTITY (i.e., Corporation, Partnership, etc.)
_________________________________________________________
Print Name of Legal Entity (name of company)
By:______________________________________________________ Date:_______________
Signature of Authorized Person
_________________________________________________________
Print Name and Title
By: _____________________________________________________ Date:_______________
Signature of Required Other Authorized Person
_________________________________________________________
Print Name and Title
A-16
RETIREMENT PLAN (i.e., Employee Benefit Plan, Keogh Plan, IRA, etc.)
______________________________________________________________
Print Legal Name of Retirement Plan
_______________________ ____________________________ Date:______________
Signature of Individual Print Name
Plan Participant
_______________________ ____________________________ Date:______________
Signature of Authorized Print Name and Title
Person (i.e.,
Administrator or Custodian)
_______________________ ____________________________ Date:______________
Signature of Required Print Name and Title
Other Authorized Person
FOR USE BY THE COMPANY ONLY
================================================================================
Subscription has been: |_| Accepted |_| Accepted in Part |_| Rejected |_| Other
Subscription Amount Accepted: $____________________________
Dated: _____________________
AmeriFirst Fund I, LLC
By: AmeriFirst Financial Services, Inc., Manager
By: __________________________________________
Name: ________________________________________
Title: _______________________________________
A-17
20. ADDITIONAL SUBSCRIPTION REQUEST
(TO BE COMPLETED BY ONLY BY EXISTING INVESTORS OF AMERIFIRST FUND I, LLC)
Name(s) 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 Prospectus. 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 information set
forth in the undersigned's original Subscription Agreement remains
accurate and complete on the date hereof.
INDIVIDUAL(S)
Investor's primary residence is in (indicate State) ____________________________
____________________________ ______________________________ Date:____________
Signature of Subscriber Print Name
_____________________________ ______________________________ Date:____________
Signature of Co-Subscriber Print Name
TRUST (i.e., Trust, Estate, Conservatorship, etc.)
______________________________________
Print Legal Name of Trust
________________________ _____________________ Date:_____________________
Signature of Authorized Print Name and Title
Person (i.e., Trustee)
________________________ _____________________ Date:_____________________
Signature of Required Print Name and Title
Other Authorized Person
LEGAL ENTITY (i.e., Corporation, Partnership, etc.)
_________________________________________________________
Print Name of Legal Entity (name of company)
By:______________________________________________________ Date:_______________
Signature of Authorized Person
_________________________________________________________
Print Name and Title
By: _____________________________________________________ Date:_______________
Signature of Required Other Authorized Person
_________________________________________________________
Print Name and Title
A-18
RETIREMENT PLAN (i.e., Employee Benefit Plan, Keogh Plan, IRA, etc.)
______________________________________________________________
Print Legal Name of Retirement Plan
_______________________ ____________________________ Date:______________
Signature of Individual Print Name
Plan Participant
_______________________ ____________________________ Date:______________
Signature of Authorized Print Name and Title
Person (i.e.,
Administrator or Custodian)
_______________________ ____________________________ Date:______________
Signature of Required Print Name and Title
Other Authorized Person
FOR USE BY THE COMPANY ONLY
================================================================================
Subscription has been: |_| Accepted |_| Accepted in Part |_| Rejected |_| Other
Subscription Amount Accepted: $____________________________
Dated: _____________________
AmeriFirst Fund I, LLC
By: AmeriFirst Financial Services, Inc., Manager
By: __________________________________________
Name: ________________________________________
Title: _______________________________________
A-19
21. ACCEPTANCE
(Office Use Only)
This Subscription Agreement will not be an effective agreement until it or
a facsimile is signed by AmeriFirst Fund I, LLC.
Account #: _____________________________________________________________________
Investor Check Date: ___________________________________________________________
Check Amount: __________________________________________________________________
Check #: _______________________________________________________________________
Entered by: ____________________________________________________________________
Checked by: ____________________________________________________________________
Date Entered: __________________________________________________________________
Subscription has been: ______Accepted ______Accepted in Part
______Rejected ______Other
Subscription Amount: $________________________ Dated:_________________________
|_| Initial Investment |_| Additional Investment
AmeriFirst Fund I, LLC
By: AmeriFirst Financial Services, Inc., Manager
By: _______________________________________
John Tooke, President
By:________________________________________ Date:____________________________
Registered NASD Representative
By:________________________________________ Date:____________________________
Principal
By:________________________________________ Date:____________________________
Principal
A-20
APPENDIX A
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 260.141.10 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 transferor's ancestors, descendants or spouse or any custodian
or trustee for the account of the transferor or the transferor's
ancestors, descendants or spouse; or to a transferee by a trustee or
custodian for the account of the transferee or the transferee's 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, 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;
(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;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities; or
(17) by way of an offer and sale of outstanding securities in an issuer
transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by
subdivision (f) of Section 25102; 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 THEREFORE, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
EXHIBIT B
OPERATING AGREEMENT
OF
AMERIFIRST FUND I, LLC
(A FLORIDA LIMITED LIABILITY COMPANY)
DATED AS OF SEPTEMBER 25, 2002
TABLE OF CONTENTS
Page
----
ARTICLE I: INTERPRETATION ..................................................................... B - 1
SECTION 1.1 DEFINITIONS ............................................................. B - 1
SECTION 1.2 TERMS DEFINED ELSEWHERE ................................................. B - 5
SECTION 1.3 CAPTIONS ................................................................ B - 5
SECTION 1.4 CONSTRUCTION ............................................................ B - 5
ARTICLE II: THE COMPANY AND ITS BUSINESS ...................................................... B - 6
SECTION 2.1 FORMATION OF COMPANY .................................................... B - 6
SECTION 2.2 NAME .................................................................... B - 6
SECTION 2.3 TERM OF COMPANY ......................................................... B - 6
SECTION 2.4 PURPOSES OF COMPANY ..................................................... B - 6
SECTION 2.5 REGISTERED OFFICE AND REGISTERED AGENT AND PRINCIPAL BUSINESS
OFFICE ............................................................................... B - 6
SECTION 2.6 FILINGS ................................................................. B - 6
SECTION 2.7 NAMES OF MEMBERS ........................................................ B - 7
SECTION 2.8 RECAPITALIZATION, ACQUISITIONS, RESTRUCTURING
AND MERGERS .......................................................................... B - 7
ARTICLE III: COMPANY INTERESTS AND CAPITALIZATION ............................................. B - 7
SECTION 3.1 CAPITAL CONTRIBUTION OF THE MANAGER ..................................... B - 7
SECTION 3.2 CAPITAL CONTRIBUTIONS OF MEMBERS ........................................ B - 7
SECTION 3.3 RESERVE ACCOUNT; CAPITAL CALL ........................................... B - 8
SECTION 3.4 NO WITHDRAWAL OF CAPITAL CONTRIBUTIONS; RETURN OF CAPITAL
CONTRIBUTIONS ........................................................................ B - 8
SECTION 3.5 NO OBLIGATION TO RESTORE NEGATIVE BALANCES IN CAPITAL
ACCOUNTS ............................................................................. B - 8
SECTION 3.6 LIABILITY OF MANAGER AND MEMBERS AND THEIR AFFILIATES ................... B - 9
SECTION 3.7 CONTRIBUTIONS OF LIFE INSURANCE POLICIES ................................ B - 9
ARTICLE IV: ALLOCATIONS OF PROFITS, LOSSES AND CAPITAL ACCOUNTS ............................... B - 9
SECTION 4.1 ALLOCATION OF NET INCOME AND NET LOSS ................................... B - 9
SECTION 4.2 OTHER ALLOCATION PROVISIONS ............................................. B - 9
SECTION 4.3 ALLOCATIONS FOR INCOME TAX PURPOSES ..................................... B - 13
SECTION 4.4 WITHHOLDING ............................................................. B - 13
SECTION 4.5 CAPITAL ACCOUNTS ........................................................ B - 13
ARTICLE V: DISTRIBUTIONS ...................................................................... B - 13
SECTION 5.1 DISTRIBUTIONS ........................................................... B - 13
SECTION 5.2 CERTAIN STATE AND LOCAL TAXES ........................................... B - 14
SECTION 5.3 TIMING OF DISTRIBUTIONS ................................................. B - 14
SECTION 5.4 LIMITATIONS ON DISTRIBUTIONS ............................................ B - 14
SECTION 5.5 RESERVES ................................................................ B - 14
SECTION 5.6 TAX DISTRIBUTIONS ....................................................... B - 15
TABLE OF CONTENTS
Page
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SECTION 5.7 INCORRECT DISTRIBUTIONS ................................................. B - 15
SECTION 5.8 DISTRIBUTIONS IN KIND ................................................... B - 15
ARTICLE VI: MANAGEMENT ........................................................................ B - 15
SECTION 6.1 MANAGEMENT POWERS OF THE MANAGER ........................................ B - 15
SECTION 6.2 MANAGER'S OBLIGATIONS ................................................... B - 17
SECTION 6.3 PROCEDURES .............................................................. B - 17
SECTION 6.4 MANAGER'S DUTY TO DEVOTE TIME ........................................... B - 18
SECTION 6.5 CONDUCT OF MANAGER; LIMITED LIABILITY OF THE MANAGER .................... B - 18
SECTION 6.6 INDEMNIFICATION ......................................................... B - 18
SECTION 6.7 CERTAIN TRANSACTIONS BETWEEN THE COMPANY AND THE
MANAGING MEMBER AND ITS AFFILIATES ................................................... B - 18
SECTION 6.8 DEFAULT OF MANAGER ...................................................... B - 19
SECTION 6.9 REMOVAL OF MANAGER; SUCCESSOR ........................................... B - 21
SECTION 6.10 BORROWING .............................................................. B - 21
ARTICLE VII: BOOKS, RECORDS, TAXES AND REPORTS ................................................ B - 21
SECTION 7.1 BOOKS OF ACCOUNT ........................................................ B - 21
SECTION 7.2 BANK ACCOUNTS ........................................................... B - 21
SECTION 7.3 TAX RETURNS ............................................................. B - 21
SECTION 7.4 TAX MATTERS PARTNER ..................................................... B - 22
SECTION 7.5 RECORDS ................................................................. B - 22
SECTION 7.6 CLOSING DATE REPORTS .................................................... B - 23
SECTION 7.7 MANAGER'S QUARTERLY CERTIFICATE ......................................... B - 23
SECTION 7.8 MANAGER'S ANNUAL CERTIFICATE ............................................ B - 23
SECTION 7.9 ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SUBSERVICING REPORTS ............. B - 24
SECTION 7.10 REPORTS TO MEMBERS ..................................................... B - 24
ARTICLE VIII: ADMISSION OF MEMBERS ............................................................ B - 25
SECTION 8.1 ADMISSION OF MEMBERS .................................................... B - 25
ARTICLE IX: TRANSFERS OF INTERESTS OF MEMBERS ................................................. B - 26
SECTION 9.1 GENERAL PROHIBITION ..................................................... B - 26
SECTION 9.2 GENERAL CONDITIONS TO PERMITTED TRANSFER ................................ B - 26
SECTION 9.3 VOID TRANSFERS .......................................................... B - 27
SECTION 9.4 PERMITTED TRANSFERS ..................................................... B - 28
SECTION 9.5 LEGENDS ................................................................. B - 28
ARTICLE X: DEATH, LEGAL INCOMPETENCY, OR WITHDRAWAL OF A MEMBER ............................... B - 28
SECTION 10.1 EFFECT OF DEATH OR LEGAL INCOMPETENCY OF A MEMBER OF
THE COMPANY .......................................................................... B - 28
SECTION 10.2 RIGHTS OF PERSONAL REPRESENTATIVE ...................................... B - 29
SECTION 10.3 WITHDRAWAL OF MEMBERS OTHER THAN MANAGERS .............................. B - 29
TABLE OF CONTENTS
Page
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ARTICLE XI: BANKRUPTCY, DISSOLUTION AND TERMINATION ........................................... B - 30
SECTION 11.1 BANKRUPTCY ............................................................. B - 30
SECTION 11.2 DISSOLUTION ............................................................ B - 30
SECTION 11.3 LIQUIDATION ............................................................ B - 31
SECTION 11.4 TERMINATION ............................................................ B - 31
ARTICLE XII: AMENDMENT OF AGREEMENT AND POWER OF ATTORNEY ..................................... B - 31
SECTION 12.1 AMENDMENTS ............................................................. B - 31
SECTION 12.2 AMENDMENT OF ARTICLE OF ORGANIZATION ................................... B - 32
SECTION 12.3 POWER OF ATTORNEY ...................................................... B - 32
ARTICLE XIII: MISCELLANEOUS PROVISIONS ........................................................ B - 32
SECTION 13.1 NOTICES ................................................................ B - 32
SECTION 13.2 SEVERABILITY ........................................................... B - 33
SECTION 13.3 COUNTERPARTS ........................................................... B - 33
SECTION 13.4 ENTIRE AGREEMENT ....................................................... B - 33
SECTION 13.5 FURTHER ASSURANCES ..................................................... B - 33
SECTION 13.6 SUCCESSORS AND ASSIGNS ................................................. B - 33
SECTION 13.7 WAIVER OF ACTION FOR PARTITION ......................................... B - 33
SECTION 13.8 CREDITORS .............................................................. B - 33
SECTION 13.9 REMEDIES ............................................................... B - 33
SECTION 13.10 WRITING REQUIREMENT ................................................... B - 33
SECTION 13.11 WAIVER ................................................................ B - 34
SECTION 13.12 APPLICABLE LAW ........................................................ B - 34
SECTION 13.13 SIGNATURES ............................................................ B - 34
MEMBER SIGNATURE PAGE ......................................................................... B - 35
SCHEDULE A .................................................................................... B - 36
OPERATING AGREEMENT
OF
AMERIFIRST FUND I, LLC
OPERATING AGREEMENT, dated as of September 25, 2002 (the "Agreement"), by
AmeriFirst Financial Sevices, Inc., and each of the Members (as defined below)
listed on Schedule A, annexed hereto, as the same shall be updated by the
Manager from time to time, and that have executed this Agreement by signing one
of the counterpart signature pages annexed hereto.
RECITALS
WHEREAS, AmeriFirst Fund I, LLC (the "Company") was formed on September
20, 2002, as a Florida limited liability company pursuant to Florida Limited
Liability Company Act, 608 Fla.C.Section 608.401, et seq., as amended from time
to time (the "Florida Act");
WHEREAS, the Company has been established for the purpose of acquiring
life insurance policies ("Life Insurance Policies") for less than the face
amount of the Life Insurance Policy by providing living benefits to terminally
ill and chronically ill persons and senior citizens in exchange for an
assignment of, and an irrevocable beneficial interest in, and right to receive
the face value of, such Life Insurance Policy ("Life Settlements"); and
WHEREAS, the Manager shall be the Manager of the Company and without
limiting any other rights, powers or duties specified in this Agreement, shall
have all of the rights, powers and duties specified under the Florida Act.
NOW THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Member(s) agree(s) as follows:
ARTICLE I: INTERPRETATION
SECTION 1.1 DEFINITIONS. Unless otherwise expressly provided herein or
unless the context clearly requires otherwise, the following terms as used in
this Agreement shall have the following meanings:
"AFFILIATE." (i) Any officer, member, partner, director or controlling
shareholder of the Person in question; (ii) any Person controlling, controlled
by or under common control with any Person described in (i) above; (iii) any
officer, member, director, trustee or general partner of
B-1
any Person described in (i) or (ii) above; and (iv) any Person who is a member,
other than as a limited partner, with any Person described in (i) or (ii) above
in a joint venture, limited liability company, general partnership or similar
form of unincorporated business association. For purposes of this definition,
the term `control' shall also mean the control or ownership of 10% or more of
the beneficial interest in the Person to whom referred.
"ARTICLES OF ORGANIZATION." The Articles of Organization of the Company,
and any amendments thereto, executed and filed in accordance with the Florida
Act.
"CAPITAL ACCOUNT." With respect to each Member, a single account
established and maintained for such Member in accordance with the principles of
Sections 1.704-1(b)(2)(iv) and 1.704-2 of the Regulations. Subject to the
preceding sentence, each Capital Account will initially equal the amount of the
Capital Contribution made by such Member at the time such Member is admitted as
a Member in the Company and, throughout the term of the Company, will be (i)
increased by the amount of (A) Net Income and income and gains allocated to such
Member pursuant to Article IV and (B) the amount of any cash and the Value of
any property (net liabilities secured by the property that the Company is
considered to assume or take subject to pursuant to the provisions of Section
752 of the Code) subsequently contributed by such Member to the Company and (ii)
decreased by the amount of (A) Net Losses and deductions and expenditures
described in Section 705(a)(2)(B) of the Code, allocated to such Member pursuant
to Article IV and (B) the amount of cash and the Value of (net of liabilities
secured by the property that the Member is considered to assume or take subject
to pursuant to the provisions of Section 752 of the Code) of any property
distributed to such Member pursuant to Articles V and IX.
"CAPITAL CONTRIBUTIONS." Any contributions made to the Company pursuant to
Article III by the Members or any one Member, as the case may be (or the
predecessor holders of the Interests of such Members).
"CODE." The Internal Revenue Code of 1986, as amended, and as may be
amended from time to time.
"FISCAL YEAR." The fiscal year of the Company as determined in accordance
with Section 6.1 of this Agreement.
"INDEMNIFIED PERSON." Any Member; any Affiliate of a Member; any officer,
director, manager, shareholder, partner, member, employee, representative or
agent of any Member; and any employee or agent of the Company.
"INSURED." Any individual named as the insured in the Life Insurance
Policy.
"INTEREST." The ownership interest of a Member in the Company as reflected
in the records maintained by the Company at its offices, as the same may, from
time to time, be
B-2
required to be amended (which shall be considered personal property for all
purposes), consisting of such Member's share in allocations and distributions.
"Life Settlements Account." A separate, interest-bearing account, for
which funds deposited therein are held for the benefit of the Members and shall
be subject to distribution in accordance with this Agreement and the Servicing
Agreement.
"MANAGER." AmeriFirst Financial Services, Inc. or any Person replacing
AmeriFirst Financial Services, Inc.
"MATURITY." The time at which the proceeds of a Life Insurance Policy
become due (i.e., upon the death of the Insured).
"MEMBER." An owner of the Units in the Company, unless the instruments
through which the Units were Transferred to the owner did not also convey the
transferor's status as a Member.
"NASD." NASD, Inc.
"NET INCOME OR NET LOSS." respectively, for any period means the income or
loss of the Company for such period as determined in accordance with the method
of accounting followed by the Company for Federal income tax purposes,
including, for all purposes, any income exempt from tax and any expenditures of
the Company which are described in Section 705(a)(2)(B) of the Code; provided,
however, that in determining Net Income and Net Loss and every item entering
into the computation thereof, solely for the purpose of adjusting the Capital
Accounts of the Members (and not for tax purposes), (i) any income, gain, loss
or deduction attributable to the taxable disposition of any of the Company's
assets shall be computed as if the adjusted basis of such asset of the Company
on the date of such disposition equaled its book value as of such date, (ii) if
any of the Company's assets is distributed in kind to a Member, the difference
between its Value and its book value at the time of such distribution shall be
treated as gain or loss, and (iii) any depreciation, cost recovery and
amortization as to any of the Company's assets shall be computed by assuming
that the adjusted basis of such asset of the Company equaled its book value
determined under the methodology described in Section 1.704-1(b)(2)(iv)(g)(3) of
the Regulations; provided, further, that any item (computed with the adjustments
in the preceding provision) allocated under Section 4.2 hereof shall be excluded
from the computation of Net Income and Net Loss.
"NET PROCEEDS." The net proceeds paid from the Life Insurance Policies at
Maturity.
"PERSON." An individual, corporation, partnership, limited liability
company, trust, unincorporated organization, association or other entity.
B-3
"PRESUMED TAX LIABILITY." For any Member for any Fiscal Year, an amount
equal to the product of (a) the amount of taxable income allocated to such
Member for that Fiscal Year and (b) the Presumed Tax Rate.
"PRESUMED TAX RATE." The highest effective combined Federal and state
income tax rate applicable during such Fiscal Year to a natural person residing
in one of the States in which individual Members reside, based on the highest
marginal Federal income tax rate and the highest marginal state income tax rates
(after giving effect to the Federal income tax deduction for such state taxes
and disregarding the effects of Section 67 and 68 of the Code).
"PRO RATA SHARE." A proportionate share equal to the Capital Account of
the Member divided by the aggregate Capital Accounts of all Members.
"PROSPECTUS." The final prospectus filed with the Securities and Exchange
Commission for the public offering of the Units.
"REGULATIONS." The Treasury Regulations promulgated under the Code as such
regulations may be amended from time to time (including the corresponding
provisions of succeeding regulations.)
"RETURN." The amount actually received, in proportion to such Member's Pro
Rata Share, on a Life Insurance Policy at Maturity.
"SERVICING AGREEMENT." The agreement entered into between the Company and
a third party servicer, in connection with the servicing of the Life Insurance
Policies, in the form attached as an exhibit to the Prospectus.
"SUBSCRIPTION AGREEMENT." The document that is an exhibit to and part of
the Prospectus that every Person who buys Units of the Company must execute and
deliver with full payment for the Units and which, among other provisions,
contains the written consent of each Member to the adoption of this Agreement.
"SUBSTITUTED MEMBER." Person admitted to the Company as a substituted
Member under Article IX.
"TRANSFER/TRANSFERRED." The mortgage, pledge, hypothecation, transfer,
sale, assignment, gift or other disposition, in whole or in part, of an
Interest, whether voluntarily, by operation of law or otherwise.
"UNITS." Represent fractional undivided beneficial Interests in the income
to be generated from Life Insurance Policies acquired by the Company and that
are (a) issued to Members upon their admission to the Company under the
Subscription Agreement and the Prospectus, or (b) Transferred to those who
become Substituted Members.
B-4
"VALUE." Fair market value.
SECTION 1.2 TERMS DEFINED ELSEWHERE. The following terms have been defined
in the locations set forth below.
DEFINED TERM LOCATION
Adjusted Capital Account ................................... Section 4.2(c)
Agreement................................................... Caption
Capital Call................................................ Section 3.3
Company..................................................... 1st Recital
Company Counsel............................................. Section 6.7(d)
Family Member .............................................. Section 10.4(b)(i)
Florida Act................................................. 1st Recital
Life Insurance Policies..................................... 2nd Recital
Life Settlements............................................ 2nd Recital
Manager Default............................................. Section 6.8
Permitted Transferee........................................ Section 9.4(b)
Rules....................................................... Section 6.7(d)
Special Reserve Escrow Account.............................. Section 3.3
TMP......................................................... Section 8.4
SECTION 1.3 CAPTIONS. The captions used in this Agreement are inserted for
convenience and identification only and are in no way intended to define or
limit the scope, extent or intent of this Agreement or any of the provisions
hereof.
SECTION 1.4 CONSTRUCTION. Unless the context otherwise requires, the terms
defined in Sections 1.1 and 1.2 shall have the meanings herein specified for all
purposes of this Agreement, applicable to both the singular and plural forms of
any of the terms defined herein. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. Whenever the words "include", "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." The use of the neuter gender herein shall be deemed to
include the masculine and feminine genders wherever necessary or appropriate;
the use of the masculine gender shall be deemed to include the neuter and
feminine genders wherever necessary or appropriate and the use of the feminine
gender shall be deemed to include the neuter and masculine genders wherever
necessary or appropriate.
B-5
ARTICLE II: THE COMPANY AND ITS BUSINESS
SECTION 2.1 FORMATION OF COMPANY. The Company has been organized as a
Florida limited liability company pursuant to the provisions of the Florida Act.
The rights and liabilities of the Members, the management of the affairs of the
Company and the conduct of its business shall be as provided in the Florida Act,
except as herein otherwise expressly provided.
SECTION 2.2 NAME. The name of the Company shall be AmeriFirst Fund I, LLC,
but the Manager, in its discretion, may change the name of the Company at any
time and from time to time upon written notice to the Members.
SECTION 2.3 TERM OF COMPANY. The existence of the Company shall be deemed
to have commenced as of the date of the initial filing of the Articles of
Organization with the office of the Department of State of the State of Florida
on September 20, 2002 and shall terminate on December 31, 2027, unless earlier
dissolved or terminated in accordance with Article XI of this Agreement or as
provided by law.
SECTION 2.4 PURPOSES OF COMPANY. The Company may engage in any lawful act
or activity for which limited liability companies may be formed under the
Florida Act and engage in any and all activities necessary or incidental.
SECTION 2.5 REGISTERED OFFICE AND REGISTERED AGENT AND PRINCIPAL BUSINESS
OFFICE. The registered office of the Company required by the Florida Act to be
maintained in the State of Florida shall be at such place as set forth in the
Articles of Organization, or at such other location as may hereafter be
determined by the Manager. The registered agent of the Company in the State of
Florida shall be the initial registered agent named in the Articles of
Organization or such other Person or Persons as the Manager may designate from
time to time. The principal office of the Company shall be at 814 Highway A1A,
Suite 300, Ponte Vedra Beach, Florida 32082 or at such other place as the
Manager may designate from time to time, and the Company shall maintain records
as such place as required by the Florida Act.
SECTION 2.6 FILINGS. (a) The Manager is authorized to execute, file and
record all such certificates and documents, including amendments to the Articles
of Organization, and to do such other acts as may be appropriate to comply with
all requirements for the formation, continuation and operation of a limited
liability company, the ownership of property, and the conduct of business under
the laws of the State of Florida and any other jurisdiction in which the Company
may own property or conduct business, including, without limitation,
qualification of the Company as a foreign limited liability company in any state
in which such qualification is required. The Manager is authorized to execute,
file and publish, or cause to be filed and published, with the proper
authorities in each jurisdiction where the Company conducts business, such
certificates or documents in connection with the conduct of business pursuant to
a fictitious name or similar statute.
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(b) The Members from time to time shall execute, acknowledge, verify,
file, record and publish all such applications, certificates and other
documents, and do or cause to be done all such other acts as the Manager may
deem necessary or appropriate to comply with the requirements of law for the
formation, qualification and operation of the Company as a limited partnership
in all jurisdictions in which the Company shall desire to conduct business.
SECTION 2.7 NAMES OF MEMBERS. The name of each Member is set forth on the
signature pages hereto and the name, address and Capital Contribution of each
Member are set forth on the records maintained by the Company at its offices for
such purpose. If necessary, such records shall from time to time be amended to
reflect any changes to the information set forth therein.
SECTION 2.8 RECAPITALIZATION, ACQUISITIONS, RESTRUCTURING AND MERGERS. The
Company may participate in or be a party to any recapitalization, sale of
substantially all of its assets, restructuring or merger in accordance with and
as allowed by the Florida Act and subject to any other applicable terms of this
Agreement and the Florida Act; provided, however, that no recapitalization, sale
of substantially all of its assets, restructuring or merger which adversely
affects the Members shall proceed without the approval of Members with Capital
Accounts that are more than two-thirds of the Capital Account of all Members.
ARTICLE III: COMPANY INTERESTS AND CAPITALIZATION
SECTION 3.1 CAPITAL CONTRIBUTION OF THE MANAGER. (a) The Manager has
contributed $10.00 to the capital of the Company in cash or property and is a
Member of the Company.
(b) The Manager shall not be required to contribute any additional capital
to the Company or, except as expressly set forth in this Agreement, to lend any
funds to the Company.
SECTION 3.2 CAPITAL CONTRIBUTIONS OF MEMBERS. The Members shall acquire
Units in accordance with the terms of the Subscription Agreement or any future
subscription material approved by the Manager. The names, addresses, date of
admissions and Capital Contributions of the Members shall be set forth in a
schedule maintained by the Manager in the form attached hereto as Schedule A.
The Manager shall update the schedule to reflect the then current ownership of
Units without any further need to obtain the consent of any Member, and the
schedule, as revised from time to time by the Manager, shall be presumed correct
absent manifest error. Any Member shall have a right to inspect such schedule
upon written request to the Manager.
"Capital Contribution" shall include cash contributions or otherwise,
including contributions of entire or fractional interest in Life Insurance
Policies, or a rollover of assets from a qualified plan, such as an Individual
Retirement Account.
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SECTION 3.3 RESERVE ACCOUNT; CAPITAL CALL. (a) The Company shall establish
a special reserve escrow account (the "Special Reserve Escrow Account")to pay
premiums on all Life Insurance Policies. The Special Reserve Escrow Account
shall equal approximately 150% of the annual premiums for the estimated life
expectancies of the individual insureds in the pool of Life Insurance Policies.
(b) In the event that sufficient funds are unavailable to pay the premiums
on the Life Insurance Policies and a Life Insurance Policy would lapse, the
Manager shall have the right, in its sole discretion, to require all Members to
make additional Capital Contributions ("Capital Call") of up to six (6) months
premiums to insure that no Life Insurance Policy lapses. The Members will make
the Capital Call in proportion to their Interests in the Company. Capital Calls
made pursuant to this provision shall be made within thirty (30) days after
receipt of notice from the Manager. If a Member shall default in making any such
Capital Call, then the other Members shall have, with respect to the defaulted
Capital Contribution, the right to contribute, pro rata, and receive a premium
to be determined by the Manager of the Interest attributable to the defaulted
Capital Contribution.
(c) In connection with any expenses incurred by the Company, not in the
ordinary course of business (i.e., costs in servicing Life Insurance Policies or
litigation costs), the Manager may, at its sole direction establish a
contingency reserve to cover such expenses. If the funds in such contingency
reserve are inadequate to cover such expenses, the Manager may require Members
to make a Capital Call to such reserve in proportion to their Interests in the
Company. Upon the termination of the Company, the balance of the Special Reserve
Escrow Account shall be distributed, pro rata to the contributing Members
adjusted to take into account any premiums set forth in subparagraph (b) above.
SECTION 3.4 NO WITHDRAWAL OF CAPITAL CONTRIBUTIONS; RETURN OF CAPITAL
CONTRIBUTIONS. (a) No Member shall be entitled to withdraw, reduce or demand any
part of its Capital Contribution or to receive any distributions from the
Company, except as expressly provided in Article V and Section 10.3 of this
Agreement. No Member shall have the right to receive interest on its Capital
Contribution.
(b) None of the Members, nor any of their respective Affiliates, nor any
officer, member, director, shareholder, employee or agent of the Members or
their Affiliates, shall be personally liable for the return or repayment of any
Capital Contribution.
SECTION 3.5 NO OBLIGATION TO RESTORE NEGATIVE BALANCES IN CAPITAL
ACCOUNTS. No Member shall have an obligation, at any time during the term of the
Company or upon its liquidation, to pay to the Company or any other Member or
third party an amount equal to the negative balance in such Member's Capital
Account.
SECTION 3.6 LIABILITY OF MANAGER AND MEMBERS AND THEIR AFFILIATES. Except
as otherwise provided by applicable law, the debts, obligations and
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liabilities of the Company, whether arising in contract, tort or otherwise,
shall be solely the debts, obligations and liabilities of the Company; neither
the Manager nor any Member nor any Affiliate of the Manager or any Member shall
be obligated personally for any such debt, obligation or liability of the
Company solely by reason of being a Manager or Member or being an Affiliate of
either of them.
SECTION 3.7 CONTRIBUTIONS OF LIFE INSURANCE POLICIES. The Manager, in its
sole discretion, may accept, in lieu of cash, from anyone other than an
Affiliate of the Manager or the Company, as an initial Capital Contribution in
exchange for Units in the Company, an entire or fractional interest in Life
Insurance Policies.
ARTICLE IV: ALLOCATIONS OF PROFITS, LOSSES AND CAPITAL ACCOUNTS
SECTION 4.1 ALLOCATION OF NET INCOME AND NET LOSS. Except as provided in
Section 4.2, the Company's Net Income or Net Loss, as the case may be, and each
item of income, loss and deduction entering into the computation thereof, for
each Fiscal Year shall be allocated as follows:
(a) Net Income and Net Loss for such Fiscal Year shall be allocated as
follows:
(i) Net Income of the Company shall be allocated to the Members on
their Pro Rata Share.
(ii) All Net Losses shall be allocated to the Members on their Pro
Rata Share after reimbursement to the parent of the Manager of .5% of the gross
proceeds of the Offering of Units to cover a portion of the expenses of the
offering.
(b) Notwithstanding the provisions of Sections 4.1 (a) hereof, in the
Fiscal Year in which the Company is liquidated, the Manager shall allocate Net
Income, Net Loss and items of income, gain, loss and deduction to the extent
possible to cause distributions to the Members, to equal the distributions the
Members would have received were liquidating distributions effected pursuant to
Article V hereof.
SECTION 4.2 OTHER ALLOCATION PROVISIONS. (a) Items of tax expense payable
by the Company or withheld on income received by the Company shall be included
in the computation of Net Income and Net Loss and allocated pursuant to Section
4.1 hereof, provided, that where an item of tax expense payable by the Company
or where a withholding tax on income or payments received by the Company is
allocated, under applicable law, with respect to income allocable to some (but
not all) of the Members or to the extent income allocable to some of the Members
is exempt from tax in the hands of the Company, such tax expense or withholding
shall be allocated, as reasonably determined by the Manager, only to such
Members to whom allocations of income are subject to tax in the hands of the
Company and distributions to the Members shall be adjusted appropriately.
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(b) If there is a net decrease in "Company minimum gain" (within the
meaning of Section 1.704-2(d) of the Regulations) for a Fiscal Year, then there
shall be allocated to each Member items of income and gain for that Fiscal Year
equal to that Member's share of the net decrease in "Company minimum gain"
(within the meaning of Section 1.704-2(g)(2)of the Regulations) subject to the
exceptions set forth in Sections 1.704-2(f)(2), (3) and (5) of the Regulations,
provided, that if the Company has any discretion as to an exception set forth
pursuant to Section 1.704-2(f)(5)of the Regulations, the Manager may exercise
such discretion on behalf of the Company. The Manager shall, if the application
of the "minimum gain chargeback" requirement pursuant to Section 1.704-2(f)(4)
of the Regulations would cause a distortion in the economic arrangement among
the Members, ask the Commissioner of the Internal Revenue Service to waive the
"minimum gain chargeback" requirement. The foregoing is intended to be a
"minimum gain chargeback" provision as described in Section 1.704-2(f) of the
Regulations and shall be interpreted and applied in all respects accordingly.
If during the Fiscal Year there is a net decrease in Member nonrecourse
debt minimum gain (as determined in accordance with Section 1.704-2(i)(3) of the
Regulations), then, in addition to the amounts, if any, allocated pursuant to
the preceding paragraph, any Member with a share of that Member nonrecourse debt
minimum gain (determined in accordance, with Section 1.704-2(i)(5)-2 of the
Regulations as of the beginning of the Fiscal Year shall, subject to exceptions
set forth in Section 1.704-2(i)(4)of the Regulations (provided, that if the
Company has any discretion as to an exception, the Manager may exercise such
discretion on behalf of the Company) shall be allocated items of income and gain
for the Fiscal Year (and, if necessary, for succeeding Fiscal Years) equal to
that Member's share of the net decrease in the Member nonrecourse debt minimum
gain. The Manager shall, if the application of the Member nonrecourse debt
minimum gain chargeback requirement would cause a distortion in the economic
arrangement among the Members, ask the Commissioner of the Internal Revenue
Service to waive the minimum gain chargeback requirement pursuant to Sections
1.704-2(f)(4) and 1-704-2(i)(4)of the Regulations. The foregoing is intended to
be the "chargeback of Member nonrecourse debt minimum gain" required by Section
1.704-2(i)(4) of the Regulations and shall be interpreted and applied in all
respects accordingly.
(c) If during any Fiscal Year a Member unexpectedly receives an
adjustment, allocation or distribution described in Sections
1.704-1(b),(2)(ii)(d), (5) or (6) of the Regulations, which causes or increases
a deficit balance in the Member's Adjusted Capital Account, there shall be
allocated to the Member items of income and gain (consisting of a pro rata
portion of each item of Company income, including gross income, and gain for
such year) in an amount and manner sufficient to eliminate such deficit as
quickly as possible. The foregoing is intended to be a "qualified income offset"
provision as set forth in Section 1.704-1 (b)(2)(ii)(d) of the Regulations and
shall be interpreted and applied in all respects accordingly.
A Member's "Adjusted Capital Account", at any time, shall equal the
Member's Capital Account at such time (x) increased by the sum of (A) the amount
of the Member's share of
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Company minimum gain (as defined in Sections 1.704-2(g)(1) and (3) of the
Regulations, (B) the amount of the Member's share of Member nonrecourse debt
minimum gain (as defined in Section 1.704-2(i)(5) of the Regulations), and (C)
any amount of the deficit balance in its Capital Account the Member is obligated
to restore on liquidation of the Company or other amount that the Member is
treated as obligated to restore pursuant to Sections 1.704-1 (b)(2)(ii)(c) and
(y) of the Regulations, decreased by reasonably expected adjustments,
allocations and distributions set forth in Sections 1.704-1(b)(2)(ii)(d)(4), (5)
and (6)of the Regulations. This definition shall be interpreted consistently
with Section 1.704-1 (b)(2)(ii)(d)of the Regulations.
(d) If any Member has a deficit in its Adjusted Capital Account, such
Member shall be specially allocated items of Company income and gain in the
amount of such deficit as rapidly as possible, provided, that an allocation
pursuant to this Section 4.2(d). shall be made if and only to the extent that
such Member would have a deficit in its Adjusted Capital Account after all other
allocations provided for in this Agreement have been tentatively made as if this
Section 4.2(d) were not in this Agreement.
(e) Notwithstanding anything to the contrary in this Article
(i) Company losses, deductions or expenditures described in Section
705(a)(2)(b) of the Code, that are attributable to a particular Member
nonrecourse liability shall be allocated to the Member that bears the economic
risk of loss for the liability in accordance with the rules of Section
1.704-2(i) of the Regulations; and,
(ii) Company losses, deductions or expenditures described in Section
705(a)(2)(b) of the Code, that are attributable to Company nonrecourse
liabilities shall be allocated to the Members in proportion to their Capital
Contributions.
(f) Notwithstanding any provision of Section 4.1 hereof, no allocation of
Net Losses, shall be made to a Member if it would cause the Member to have a
negative balance in its Adjusted Capital Account. Allocations of Net Losses that
would be made to a Member but for this Section 4.2(f) shall instead be made to
other Members pursuant to Section 4.1 to the extent not inconsistent with this
Section 4.2(f). To the extent allocations of Net Losses cannot be made to any
Member because of this Section 4.2(f), such allocations shall be made to the
Members in accordance with Section 4.1 hereof notwithstanding this Section
4.2(f).
(g) To the extent that any item of income, gain, loss or deduction has
been specially allocated pursuant to Paragraphs (c), (d), (f) or (h) of this
Section 4.2 and such allocation is inconsistent with the way in which the same
amount otherwise would have been allocated under Section 4.1, subsequent
allocations under Section 4.1 shall be made, to the extent possible and without
duplication, in a manner consistent with Paragraphs (b), (c), (d), (f), and
(h) of Section 4.2 hereof, which negate as rapidly as possible the effect of all
such inconsistent allocations under said Paragraphs (c), (d), (f) and (h).
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(h) Except to the extent otherwise required by the Code and Regulations,
if an Interest in the Company or part thereof is Transferred in any Fiscal Year,
the Net Income, Net Loss and items of income, gain, loss, deduction and credit
allocable to the Interest in the Company for such Fiscal Year shall be
apportioned between the transferor and the transferee in proportion to the
number of days in such Fiscal Year that such Interest is held by each of them,
except that, if they agree between themselves and so notify the Manager within
thirty (30) days after the Transfer, then at their option and expense, (i) all
items or (ii) extraordinary items, including capital gains and losses, may be
allocated to the Person who held the Interest on the date such items were
realized or incurred by the Company.
(i) In determining the Members' share of the excess nonrecourse
liabilities of the Company, if any, for purposes of Section 1.752-3(a)(3) of the
Regulations, the Members' share of Company profits shall be proportional to the
Members' Capital Contributions.
(j) Any allocations made pursuant to this Article IV shall be made in the
following order:
(i) Section 4.2(b);
(ii) Section 4.2(c);
(iii) Section 4.2(e);
(iv) Section 4.2(g);
(v) Section 4.2(a);
(vi) Section 4. 1; and
(vii) Section 4.2(d).
These provisions shall be applied as if all distributions and allocations
were made at the end of the Fiscal Year. Where any provision depends on the
Capital Account of any Member, that Capital Account shall be determined after
the operation of all preceding provisions for the Fiscal Year. These allocations
shall be made consistently with the requirements of Section 1.704-2(j)of the
Regulations.
(k) The Manager may vary the allocations provided for in this Article IV
to the extent it believes it reasonably necessary to comply with the
requirements of Sections 1-704-1(b)and 1.704-2 of the Regulations, provided,
that any variations in the amounts allocated to a Member shall not materially
affect the amounts distributed to such Member.
SECTION 4.3 ALLOCATIONS FOR INCOME TAX PURPOSES. The income, gains,
losses, deductions and credits of the Company shall be allocated in the same
manner as the items
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entering into the computation of Net Income and Net Loss were allocated under
Section 4.1 and 4.2; provided, however, that solely for Federal, state and local
income and franchise tax purposes not for book or Capital Account
purposes--income, gain, loss and deduction with respect to any property properly
carried, on the Company's books at a book value other than the tax basis of such
property shall be allocated in a manner determined in the Manager's discretion,
so as to take into account (consistently with Section 704(c) of the Code and
Section 1.704-3 of the Regulations) the difference between such property's book
value and its tax basis.
SECTION 4.4 WITHHOLDING. The Company shall comply with withholding
requirements under Federal, state and local laws and shall remit amounts
withheld to and file required forms with the applicable jurisdictions. To the
extent the Company is required to withhold and pay over any amounts to any
authority with respect to distributions or allocations to any Member, the amount
withheld shall be deemed to be a distribution in the amount of the withholding
to that Member. In the event of any claimed over-withholding, Members shall be
limited to an action against the applicable jurisdiction. If the amount withheld
has not been withheld from actual distributions, the Company may, at its option,
(i) require the Member to reimburse the Company for such withholding, which
reimbursement shall be treated as a reduction in the deemed distribution to the
Members referred to in the previous sentence by such Member, or (ii) reduce any
subsequent distributions by the amount of such withholding. Each Member agrees
to furnish the Company with any representations and forms as shall reasonably be
requested by the Company to assist it in determining the extent of, and in
fulfilling, its withholding obligations.
SECTION 4.5 CAPITAL ACCOUNTS. The Company shall establish and maintain a
separate Capital Account for each Member and its legal representatives,
successors and permitted assigns in accordance with the definition of "Capital
Account" in Article I above.
ARTICLE V: DISTRIBUTIONS
SECTION 5.1 DISTRIBUTIONS. Except for any distributions expressly required
or permitted to be made under this Article V and subject to Sections 5.4 and
5.5, the amount and timing of all distributions of cash and of property other
than cash, will be at the discretion of the Manager; provided, however, no
distribution is permitted, if after the distribution, the Company would be
insolvent. All distributions pursuant to this Section 5.1 will be made to the
Members as follows:
(a) An amount equal to the Net Proceeds, less all amounts previously
distributed to the Members, shall be distributed to the Members in proportion to
their respective Pro Rata Share; and
(b) Any cash or other property, other than Life Insurance Policies and
Capital Contributions that have not been invested, remaining after the
distributions set forth in Paragraph (a) above and after retention of any
reserves deemed appropriate by the Manager, in its sole discretion, shall be
distributed to the Manager.
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SECTION 5.2 CERTAIN STATE AND LOCAL TAXES. Notwithstanding Section 5.1
above, if the Manager, or any direct or indirect shareholder or other equity
owners of the Manager (other than a C corporation or an individual) is required
to recognize state or local income or franchise taxes, in the state of Florida
or any other state or interest or penalties in respect thereof, with respect to
any allocations or distributions made to the Members with respect to any Fiscal
Year, the Company shall distribute to the Manager an amount which, after
deducting all Federal, state and local income taxes payable by the Manager as a
result of receiving the distribution (taking into account the deductibility of
state and local income taxes against Federal income tax and the deductibility,
if any, of local income taxes against state taxes) shall equal the amount of
such state or local income or franchise taxes or interest or penalties, and the
distributions to the Member's shall be reduced to the extent of the
distributions hereunder.
SECTION 5.3 TIMING OF DISTRIBUTIONS. Unless as otherwise provided in this
Agreement, the Manager shall use reasonable efforts to make the distributions
provided in Sections 5.1(a) and (b) above promptly after the Company receives
Life Insurance Policy proceeds at Maturity but not later than the last business
day of the following month after receipt. In any event, such Life Insurance
Policy proceeds will be immediately deposited in an interest bearing account
upon receipt by the Manager. All other distributions shall be made in at the
sole discretion of the Manager.
SECTION 5.4 LIMITATIONS ON DISTRIBUTIONS. Notwithstanding anything herein
contained to the contrary, no distribution under this Agreement shall be made if
such distribution would violate the Florida Act. A Member who receives a
distribution in violation of the Florida Act shall be liable to return the
distribution to the Company if the Member knew that, immediately after giving
effect to the distribution, all liabilities of the Company, other than
liabilities for which the recourse of creditors is limited to specified property
of the Company, exceed the Value of the assets of the Company (except that the
Value of property that is subject to a liability for which recourse of creditors
is limited shall be included in the assets of the Company only to the extent
that the Value of that property exceeds that liability). A manager and managing
member who votes for or assents to a distribution in violation of this Agreement
or the Florida Act shall be personally liable to the Company for the amount of
the distribution that exceeds what could have been distributed without such
violation if it is established that person did not meet their duties as set
forth in the Florida Act. In addition, no distribution shall be made to any
Member to the extent that such Member has not satisfied any outstanding capital
call as set forth in Section 3.3 herein.
SECTION 5.5 RESERVES. In connection with any distribution to a Member
under this Article V, the Manager shall cause the Company to establish such
reserves as it deems reasonably necessary for any contingent or unforeseen
Company liabilities, and, at the expiration of such period as shall be deemed
advisable by the Manager, the balance shall be distributed to such Member (or
such Member's legal representative).
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SECTION 5.6 TAX DISTRIBUTIONS. For each Fiscal Year, the Company shall,
during such Fiscal Year or the immediately subsequent Fiscal Year, but no later
than sixty (60) days following the end of such Fiscal Year, use its best efforts
to distribute to each Member, with respect to such Fiscal Year, if a
distribution equal to or exceeding such amount has not been previously made, an
amount equal to such Member's Presumed Tax Liability for such Fiscal Year. Any
amount distributed pursuant to this Section 5.6 shall be deemed to be advance
distributions of amounts otherwise distributable to the Members pursuant to
Section 5.1 and shall reduce the amounts that would subsequently otherwise be
distributable to the Members pursuant to Section 5.1 in the order they would
otherwise have been distributable.
SECTION 5.7 INCORRECT DISTRIBUTIONS. To the extent distributions pursuant
to this Article V were incorrectly made, as determined by the financial
statements of the Company, the recipients shall promptly repay all incorrect
payments and the Company shall have the right to set off any current or future
sums owing to such recipients against any such incorrectly paid amount.
SECTION 5.8 DISTRIBUTIONS IN KIND. In the event any proceeds available for
distribution consist of items other than cash, the Members shall be entitled to
their shares of each such asset in the same proportions as if such distribution
were cash distributions in an amount equal to the Value thereof.
ARTICLE VI: MANAGEMENT
SECTION 6.1 MANAGEMENT POWERS OF THE MANAGER. (a) The Manager shall manage
the Company, and without limiting any other rights, powers or duties specified
in this Agreement, shall have all of the rights, powers and duties specified
under the Florida Act. Except as expressly limited by the provisions of this
Agreement and the Florida Act, the Manager shall have the full, exclusive and
absolute right, power and authority to manage and control the Company and the
property, assets, affairs and business thereof. Except as so expressly limited,
the Manager shall have all of the rights, powers and authority conferred upon it
by law or under the provisions of this Agreement. Except as expressly provided
herein or as otherwise required by the Florida Act, the Members shall have no
voice or participation in the management of the Company's business, and no power
to bind the Company or to act on behalf of the Company in any manner whatsoever.
However, a majority in interest of the Members shall designate, appoint, elect,
and replace the manager by a vote in person or by consent.
(b) The Manager shall have the power and authority to effectuate the
purposes of the Company as set forth in this Agreement. The Manager shall not
permit the Company to undertake any activity that would cause the Company to be
an investment company required to be registered under the Investment Company Act
of 1940, as amended, or cause some or all of the Company's assets to be "plan
assets" or the trading and investment activity of the Company to constitute
"prohibited transactions" under the Code and the Employee Retirement Income
Security Act of 1974, as may be amended.
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(c) Without limiting the generality of the foregoing Sections 6.1(a) and
(d) the Manager shall have the power on behalf of the Company to:
(i) authorize and engage in transactions and dealings on behalf of
the Company, including transactions and dealings with any Member or any
Affiliate of any Member;
(ii) call meetings of Members or any class or series thereof, on
reasonable notice, for such purposes as the Manager shall determine, and, in the
Manager's sole discretion, permit Members to vote by proxy at such meetings; the
Members with capital accounts that constitute a majority of the capital accounts
of all Members or class of Members for whom the meeting is called shall
constitute a quorum at any such meeting;
(iii) determine and make distributions, in cash or otherwise, on
Interests, in accordance with the provisions of this Agreement and the Florida
Act;
(iv) establish a record date with respect to all actions to be taken
hereunder that require a record date to be established, including with respect
to allocations, dividends and voting rights;
(v) redeem, repurchase or exchange, on behalf of the Company,
Interests which may be so redeemed, repurchased or exchanged;
(vi) appoint (and dismiss from appointment) attorneys and agents on
behalf of the Company, and employ (and dismiss from employment) any and all
persons providing legal, accounting or financial services to the Company, or
such other employees or agents as the Manager deems necessary or desirable for
the management and operation of the Company, including any Member or any
Affiliate of any Member;
(vii) open accounts and deposit, maintain and withdraw funds in the
name of the Company in banks, savings and loan associations, brokerage firms or
other financial institutions;
(viii) effect a dissolution of the Company and act as liquidating
trustee or the Person winding up the Company's affairs, all in accordance with
the provisions of this Agreement and the Florida Act;
(ix) bring and defend, on behalf of the Company, actions and
proceedings, at law or in equity, before any court or governmental,
administrative or other regulatory agency, body or commission or otherwise;
(x) prepare and cause to be prepared reports, statements and other
relevant information for distribution to Members, as may be required or
determined to be necessary or desirable by the Manager from time to time;
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(xi) effect: (a) a sale or exchange of all or substantially all of
the assets of the Company, (b) a merger or consolidation or similar transaction
of the Company (whether the Company or another Person is the surviving entity of
such transaction), (c) a sale of all of the Interests of the Company, or (d) any
similar transaction; provided, however, that if any transaction set forth in
(a), (b), (c) or (d) above adversely affects the Members, the vote of the
Members whose aggregate Capital Accounts equal or exceed two-thirds of the
aggregate of all Members' Capital Accounts shall be required to effect any such
transaction;
(xii) prepare and file all necessary returns and statements and pay
all taxes, assessments and other impositions applicable to the assets of the
Company; and
(xiii) execute all other documents or instruments, perform all
duties and powers and do all things for and on behalf of the Company in all
matters necessary or desirable or incidental to the foregoing.
The expression of any power or authority of the Manager in this Agreement
shall not in any way limit or exclude any other power or authority which is not
specifically or expressly set forth in this Agreement.
SECTION 6.2 MANAGER'S OBLIGATIONS. The Manager shall operate the business
of the Company in the ordinary course of business, including without limitation,
identifying potential life insurance policies for the Company to acquire,
management of cash and cash equivalents, providing office space as necessary and
telephones and any other necessary telecommunications and office support and
supplies. In addition, the Manager shall service the Life Insurance Policies,
monitor the Insured and conduct medical and insurance due diligence review of
the Life Insurance Policies, or outsource such responsibilities to a third
party.
SECTION 6.3 PROCEDURES. Any action requiring the affirmative approval or
vote of Members under this Agreement, unless otherwise specified herein, may be
taken by vote at a meeting called upon not less than seven (7) days notice to
the Members or, in lieu thereof, by consent of Members delivered to the Manager
with the required percentage of the Interests in the Company, followed by notice
to all the Members. To the extent any vote of the Members not covered by this
Agreement may be required under the Florida Act or any other law, the Members
shall vote in accordance with the percentage that their Capital Accounts
represent of the aggregate of all Capital Accounts of Members. The Manager may
establish such additional and reasonable procedures (in the form of By-laws or
otherwise) relating to notice of the time, place or purpose of a meeting of the
Members, the waiver of any such notice, action by consent without a meeting, the
establishment of a record date, quorum requirements, or any other matter with
respect to the exercise of any such right to vote and with respect to the
replacement of lost Certificates.
SECTION 6.4 MANAGER'S DUTY TO DEVOTE TIME. The Manager shall be
responsible for the conduct of the business of the Company as set forth in this
Agreement in such a manner as to maximize the value of the Company's assets, and
the Manager shall devote such
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resources to the Company business as shall be necessary or useful to manage and
supervise the Company's business and affairs in a proper and efficient manner.
SECTION 6.5 CONDUCT OF MANAGER; LIMITED LIABILITY OF THE MANAGER. (a) The
Manager shall perform its duties hereunder in accordance with the applicable
provisions (and any successor provision) of the Florida Act.
(b) The liability of the Manager shall be eliminated and limited to the
maximum extent permitted by the Florida Act and any other applicable law.
(c) The Manager shall have fiduciary responsibility for the safekeeping
and use of all funds, property and assets of the Company, whether or not in its
control, and shall not employ, or permit another to employ, such funds, property
or assets in any manner except as otherwise expressly set forth herein or for
the benefit of the Company.
SECTION 6.6 INDEMNIFICATION.
(a) To the fullest extent permitted by applicable law, an Indemnified
Person shall be entitled to indemnification from the Company for any loss,
damage or claim incurred by such Indemnified Person by reason of any act or
omission performed or omitted by such Indemnified Person in good faith on behalf
of the Company and in a manner reasonably believed to be within the scope of
authority conferred on such Indemnified Person by this Agreement; provided,
however, that any indemnity under this Section 6.6 shall be provided out of and
to the extent of company assets only, and no Member shall have any personal
liability on account thereof. The right of indemnification pursuant to this
Section 6.6 shall include the right to be paid, in advance, or reimbursed by the
Company for the reasonable expenses incurred by an Indemnified Person who was,
is, or is threatened to be made a named defendant or respondent in a proceeding.
(b) The Manager shall have the power to purchase and maintain insurance in
reasonable amounts on behalf of itself and each of the employees and agents of
the Company against any liability incurred by them in their capacities as such,
whether or not the Company has the power to indemnify them against such
liability.
SECTION 6.7 CERTAIN TRANSACTIONS BETWEEN THE COMPANY AND THE MANAGING
MEMBER AND ITS AFFILIATES.
(a) Nothing herein shall preclude the Manager and its Affiliates from
receiving any of the fees for due diligence review, medical review, processing,
administering, monitoring, closing and filing claims for the Life Insurance
Policies, as more fully described in the Prospectus, provided, that such
compensation does not reduce the Returns paid to the Members.
(b) Counsel to the Company may also be counsel to the Manager or any
Affiliate of the Manager. The Manager may execute on behalf of the Company and
the Members any consent to the representation of the Company that counsel may
request pursuant to any applicable rules of
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professional conduct or similar rules ("Rules"). The law firm engaged as legal
counsel to the Company in connection with the formation of the Company and the
offer and sale of Units ("Company Counsel") is not involved in the underwriting,
documentation or routine servicing of the Life Insurance Policies acquired by
the Company. Each Member acknowledges that Company Counsel does not and will not
represent any Member, and that in the absence of a clear and explicit written
agreement, Company Counsel shall owe no duties directly to any Member.
Notwithstanding any adversity that may develop, in the event any dispute or
controversy arises between any Member and the Company, or between any Member or
the Company, on the one hand, and the Manager or its Affiliate, on the other
hand, then each Member agrees that Company Counsel may represent either the
Company or such Manager or its Affiliate, or both, in any such dispute or
controversy to the extent permitted by the Rules, and each Member hereby
consents to such representation.
(c) Each Member further acknowledges that Company Counsel has represented
only the interests of the Manager and not the Members in connection with the
formation of the Company and the preparation and negotiation of this Agreement,
and each Member acknowledges that it has been afforded the opportunity to
consult with independent counsel with regard thereto.
SECTION 6.8 DEFAULT OF MANAGER. (a) Upon the occurrence of a Manager
Default (as defined below), the Manager shall give prompt written notice of the
Manager Default to the Company and the Company shall give written notice to the
Members at the addresses appearing in list of Members prepared in accordance
with Section 7.5(b) below. If the Manager fails to cure the Manager Default or
is incapable of curing the Manager Default, the Members whose aggregate Capital
Accounts exceed 50% of the aggregate of all Members' Capital Account at such
time, may (a) terminate all of the rights and obligations of the Manager, or (b)
elect to waive the Manager Default; provided, however, a Manager Default in
connection with the Manager's failure to make any required deposits or payments
may not be waived. Upon any waiver of a past Manager Default, the Manager
Default shall cease to exist, and any Manager Default arising therefrom shall be
deemed to have been remedied for every purpose. No waiver shall extend to any
subsequent or other Manager Default or impair any right of the Members in
connection with the Servicing Agreement except to the extent expressly so
waived.
Upon receipt by the Manager of a termination notice, the Manager shall
continue to perform all servicing functions under the Servicing Agreement until
the date specified in the termination notice or as otherwise specified by the
Company in writing or, if no date is specified in the termination notice, until
a date agreed upon by the Company.
(b) A Manager Default refers to any one of the following events which
shall occur and be continuing:
(i) any failure by the Manager to report or give instructions or
notice to the Company on or before the date occurring five (5) business days
after the date the report or the instruction or notice is required to be given,
as the case may be; or
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(ii) failure on the part of the Manager to observe or perform in any
material respect any other covenants or agreements which has a material adverse
effect on the Members and which continues unremedied for a period of thirty (30)
days after the date on which written notice of the failure requiring the same to
be remedied shall have been given to the Manager by the Company, or to by the
Members whose aggregate Capital Accounts exceed 50% of the aggregate of all
Members' Capital Account at such time; or
(iii) the Manager's delegation of its duties; or
(iv) any representation, warranty or certification made by the
Manager in the agreements comprising the Servicing Agreement(s), shall prove to
have been incorrect when made, which has a material adverse effect on the rights
of the Members and which continues to be incorrect in any material respect for a
period of thirty (30) days after the date on which written notice of the failure
requiring the same to be remedied shall have been given to the Manager by the
Company, or by the Members whose aggregate Capital Accounts exceed 50% of the
aggregate of all Members' Capital Account at such time; or
(v) the Manager shall:
o become insolvent,
o fail to pay its debts generally as they become due,
o voluntarily seek, consent to, or acquiesce in the
benefit or benefits of any debtor relief law, or
o become a party to, or be made the subject of, any
proceeding provided by any debtor relief law, other than
as a creditor or claimant, and, in the event the
proceeding is involuntary, the petition instituting same
is not dismissed within ninety (90) days after its
filing.
(c) In the event the Manager is terminated as a result of a Manager
Default, the Company may appoint any established financial institution whose
regular business includes purchasing Life Insurance Policies to act as successor
manager. Upon its appointment, the successor manager shall be the successor in
all respects to the Manager and shall be subject to all the responsibilities,
duties and liabilities placed on the Manager. All power and authority of the
Manager shall pass to and vest in the successor manager, and, without
limitation, the successor manager shall execute and deliver all documents and
other instruments required of the Manager to be executed or delivered, and to do
and accomplish all other acts or things necessary or appropriate to effect the
purposes of the transfer of servicing rights to the successor manager.
SECTION 6.9 REMOVAL OF MANAGER; SUCCESSOR. (a) The Manager may be removed
from the Company for Cause (as defined below) and as otherwise specifically
provided
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in Section 6.8 or this Section 6.9. For purposes of this Agreement, "Cause"
shall mean the Manager (i) has been convicted of a felony, (ii) has committed
fraud against the Company or (iii) has acted or omitted to take action on behalf
of the Company which act or omission constitutes gross negligence or wilful
misconduct. Such removal shall be automatically effective upon a final
determination by a court of competent jurisdiction that an event or
circumstances constituting Cause has occurred or exists, provided, that any
removal of the Manager for Cause shall be effected by a vote of the Members
whose aggregate Capital Accounts exceed 50% of the aggregate of all Members'
Capital Accounts at such time. The Manager may also be removed, other than for
Cause, after the Manager has received distributions from the Company that equal
or exceed 125% of the aggregate expenses, including without limitation, expenses
of, and commissions payable, in connection with the public offering of Interests
in the Company, incurred by the Manager and its Affiliates in connection with
the business of the Company, provided, that any removal of the Manager pursuant
to this Section 6.9 other than for Cause may be effected by a vote of the
Members whose aggregate Capital Accounts equal or exceed two-thirds of the
aggregate of all Members' Capital Accounts. In the event of the removal or
resignation of the Manager, nominations for a successor Manager may be made by
Members whose aggregate Capital Accounts exceed ten percent (10%) of the
aggregate of all Members' Capital Accounts at such time. Appointment of a
successor Manager shall be effected by a vote of the Members whose aggregate
Capital Accounts exceed 50% of the aggregate of all Members' Capital Accounts at
such time.
(b) If the Manager is removed from the Company pursuant to Section 6.8 or
this Section 6.9 or otherwise withdraws or resigns as Manager, the Manager will
have none of the powers of a Manager.
SECTION 6.10 BORROWING. The Company may borrow money and may borrow up to
100% of the principal amount of the Life Settlements Accounts.
ARTICLE VII: BOOKS, RECORDS, TAXES AND REPORTS
SECTION 7.1 BOOKS OF ACCOUNT. Complete books of account shall be kept by
the Manager at the principal office of the Company or at such other office as
the Manager may designate. The Fiscal Year of the Company shall begin on January
1 and end on December 31 or such other month as may hereafter be determined by
the Manager; provided, however, that the last Fiscal Year of the Company shall
end on the date the Company is terminated.
SECTION 7.2 BANK ACCOUNTS. The Company shall maintain one or more bank
accounts for such funds of the Company as it shall choose to deposit therein,
and withdrawals therefrom shall be made upon such signature or signatures as the
Manager shall determine.
SECTION 7.3 TAX RETURNS. The Company shall prepare income tax returns for
the Company and shall further cause such returns to be timely filed with the
appropriate authorities. It is contemplated that the Company will be classified
as a "partnership" for federal, state and local income tax purposes. The Company
and its Members will take such reasonable action as
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may be necessary or advisable, as determined by the Manager, including the
amendment of this Agreement to cause or ensure that the Company shall be treated
as a "partnership" for federal, state and local income tax purposes. All
elections by the Company for Federal income tax or other tax purposes shall be
made by the Manager.
SECTION 7.4 TAX MATTERS PARTNER. The Manager shall act as the "tax matters
partner" ("TMP") of the Company, as such term is defined in Section 6231(a)(7)
of the Code, and shall have all the powers and duties assigned to the TMP under
Sections 6221 through 6232 of the Code and the Regulations thereunder. The
Members agree to perform all acts necessary under Section 6231 of the Code and
the Regulations thereunder to designate the Manager as TMP.
SECTION 7.5 RECORDS. (a) The Manager shall cause the Company to keep the
following records, which 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, the Members, or their duly authorized representatives, during
reasonable business hours and upon at least five (5) business days' prior
written notice to the Manager:
(i) A copy of the Articles of Organization and any and all
amendments thereto, together with executed copies of any powers of attorney
pursuant to which the Articles of Organization or any amendments thereto have
been executed;
(ii) Copies of the Company's federal, state, and local income tax or
information returns and reports, if any, for the three (3) most recent taxable
years;
(iii) A copy of this Agreement and any and all amendments thereto,
together with executed copies of any powers of attorney pursuant to which this
Agreement or any amendments thereto have been executed for the three (3) most
recent fiscal years;
(iv) Copies of the financial statements of the Company, if any, for
the three (3) most recent Fiscal Years; and
(v) The Company's books and records as they relate to the internal
affairs of the Company for at least the current and past three (3) Fiscal Years,
including a list of all Members and Managers and their last known residence,
business or mailing address.
(b) The Manager shall furnish or cause to be furnished by the transfer
agent and registrar, if other than the Manager, to the Company within five (5)
business days after receipt by the Manager of a request therefor from the
Company, in writing, a list in such form as the Company may reasonably require,
of the names and addresses of the Members as of the most recent record date for
payment of distributions to Members. Members may apply in writing to the
Manager, that they desire to communicate with other Members with respect to
their rights under the servicing agreement or under the units. If such request
is accompanied by a copy of the communication which such applicants propose to
transmit, then the Manager, after having been
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adequately indemnified by such applicants for its costs and expenses, shall
afford or shall cause the transfer agent and registrar, if other than the
Manager, to afford such applicants access during normal business hours to the
most recent list of Members held by the Manager. The list shall be as of a date
not more than forty-five (45) days prior to the date of receipt of such
applicants' request and shall give the Manager notice that such request has been
made, within five (5) business days after the receipt of such application. Every
Member, by receiving and holding units, agrees with the Manager that neither the
Manager, the transfer agent and registrar, if other than the Manager, nor any of
their respective agents shall be held accountable by reason of the disclosure of
the names and addresses of the Members, regardless of the source from which such
information was obtained.
SECTION 7.6 CLOSING DATE REPORTS. The Manager shall prepare and deliver to
the Company at least two (2) business days prior to each closing date an
officer's certificate setting forth the amount of Life Insurance Policies to be
purchased on the closing date as measured by the Life Settlements purchase price
to be expended therefor and by their face value.
SECTION 7.7 MANAGER'S QUARTERLY CERTIFICATE. The Manager shall prepare and
forward quarterly to the Company, if someone other than the Manager, a Manager's
certificate setting forth:
o the aggregate amount of collections processed during the preceding
three months;
o the aggregate amount of Life Insurance Policies and the balance on
deposit in the Life Settlements Account, with respect to collections
processed as of the end of the last day of the preceding three
months;
o the aggregate amount, if any, of withdrawals from the Company
required to be made on the next succeeding closing date;
o the aggregate amount of funds, if any, to be deposited in the
Company on the next succeeding closing date;
o the three months Member statement; and
o the interest and earnings, net of losses and investment expenses,
from the Life Settlements Account for the preceding three months.
SECTION 7.8 MANAGER'S ANNUAL CERTIFICATE. In addition to the closing date
reports and the Manager's quarterly certificate, the Manager shall deliver to
the Company on or before April 15th of each calendar year, beginning with April
15, 2003, an officer's certificate stating that (1) a review of the activities
and the performance of the Manager during the preceding calendar year and was
made under the supervision of the officer signing the certificate and (2) to the
best of the officer's knowledge, based on the review, the Manager has fully
performed all its obligations throughout such year. If there has been a default
in the performance
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of any obligation, specifying each the default known to the officer and the
nature and status thereof. A copy of the certificate may be obtained by any
Member by a request in writing to the Company.
SECTION 7.9 ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SUBSERVICING REPORTS.
The Manager, at the sole expense of the Company, shall undertake to cause annual
reports to be prepared by independent public accountants for the Company, which
reports will be available for inspection by the Members at the offices of the
Manager during normal business hours. On or before April 15th of each calendar
year, beginning with April 15, 2003, the Manager shall cause, at cost and
expense of the Company, a firm of nationally recognized independent public
accountants to furnish a report to the Manager covering the preceding annual
period to the effect that the accountants have applied agreed-upon procedures to
documents and records relating to the servicing of the Life Insurance Policies,
compared the information contained in the Manager's units delivered during the
period covered by the report with the documents and records and that no matters
came to the attention of such accountants that caused them to believe that the
servicing was not conducted in compliance with the Servicing Agreement, except
for exceptions as the firm shall believe to be immaterial and other exceptions
as shall be set forth in such statement. In addition, each report shall set
forth the agreed upon procedures performed. A copy of the report may be obtained
by any Member by a request in writing to the Manager. In addition, on or before
April 15th of each calendar year, beginning with April 15, 2003, the Manager
shall also, at the Company's sole cost and expense, cause a firm of nationally
recognized independent public accountants to furnish a report to the Company to
the effect that they have compared the mathematical calculations of each amount
set forth in the Manager's quarterly certificates forwarded by the Manager
during the period covered by the report, which shall be the period from January
1, or the date which is the initial closing date, to and including December 31,
or the date which is the final Maturity date, of the calendar year, with the
Manager's computer reports which were the source of the amounts and that on the
basis of the comparison, the accountants are of the opinion that the amounts are
in agreement, except for the exceptions as they believe to be immaterial and the
other exceptions as shall be set forth in the statement. A copy of the report or
any other report described in this section may be obtained by any Member by a
request in writing to the Manager at no cost to the Member.
SECTION 7.10 REPORTS TO MEMBERS. (a) The Manager shall prepare and
distribute to each Member, semi-annually, a statement, which shall include the
following information stated on an original principal amount of $10,000 per
Unit:
(i) the original capital contribution to date;
(ii) the amount of principal and interest previously paid to
all Members on Life Insurance Policies;
(iii) the aggregate amount of funds on deposit for the Company
as of the date of this distribution.
B-24
(iv) the amount of accrued but unpaid interest on funds on
deposit.
(b) On or before January 31 of each calendar year, beginning with
calendar year 2003, the Company will furnish to each person who at any time
during the preceding calendar year was a Member, an annual Member's tax
statement prepared by an independent public accounting firm containing the
information required to be contained in the regular semi-annual report to
Members, as set forth in subparagraph (d) above, aggregated for the calendar
year or the applicable portion thereof during which the person was a Member,
together with the other customary information, consistent with the Company's tax
treatment of the Units, as the Company and the Manager deem necessary or
desirable to enable the Members to prepare their respective tax returns. The
obligations of the Company shall be deemed to have been satisfied to the extent
that the Company provides information which is substantially comparable to
information which is required by applicable requirements of the Code, as from
time to time in effect.
ARTICLE VIII: ADMISSION OF MEMBERS
SECTION 8.1 ADMISSION OF MEMBERS. (a) Subject to paragraph (b) of this
Section 8.1, the Manager, at its option and in its sole discretion, may, on such
terms as it shall determine in its sole discretion, at any time and from time to
time, admit one or more Persons as Members. The Company shall only accept
initial Capital Contributions from Members in an amount not less than $10,000.
(b) Notwithstanding the provisions of paragraph (a) of this Section 8.1,
no Person may be admitted as an Member if such admission would (i) cause the
Company to be treated as an association taxable as a corporation for Federal
income tax purposes, (ii) cause the Company to be treated as a "publicly traded
Company" within the meaning of Section 7704 of the Code, (iii) violate or cause
the Company to violate any applicable Federal or state law, rule or regulation
including, without limitation, the Securities Act of 1933, as amended, or any
other applicable Federal or state securities laws, rules or regulations.
(c) Each Member shall automatically be bound by all of the terms and
conditions of this Agreement applicable to a Member. Each Member shall execute
such documentation as requested by the Manager pursuant to which such Member
agrees to be bound by the term and provisions of this Agreement.
(d) The Manager shall reflect each admission authorized under this Article
VIII by preparing an amendment to Schedule A attached hereto, to reflect such
admission.
ARTICLE IX: TRANSFERS OF INTERESTS OF MEMBERS
SECTION 9.1 GENERAL PROHIBITION. Except as otherwise expressly provided
for in this Agreement or as otherwise provided in the Florida Act, a Member may
not Transfer its Interest without the prior written consent of the Manager,
which consent may be granted or
B-25
denied in its sole discretion. The Manager shall withhold consent to such
Transfer where required under the terms of this Agreement and may do so without
any liability or accountability to any Member or Person.
SECTION 9.2 GENERAL CONDITIONS TO PERMITTED TRANSFER. (a) No Transfer of
an Interest shall be effective unless permitted by the terms of this Agreement.
Notwithstanding any other provisions of this Article IX, no interest of a Member
may be Transferred or assigned to any Person, nor may such transferee or
assignee be admitted as an Member if such Transfer, assignment or admission
would (i) cause the Company to be treated as an association taxable as a
corporation for Federal income tax purposes, (ii) cause the Company to be
treated as a "publicly traded partnership" within the meaning of Section 7704 of
the Code, (iii) violate or cause the Company to violate any applicable Federal
or state law, rule or regulation including, without limitation, the Securities
Act of 1933, as amended, or any other applicable Federal or state securities
laws, rules or regulations. In addition, no Transfer shall be permitted unless
the following conditions are satisfied.
(i) such Transfer shall have been consented to in writing by the
Manager in accordance with the provisions of Section 8.1 hereof;
(ii) the transferee shall accept and adopt in writing, by an
instrument in form and substance satisfactory to the Manager, all of the terms
and provisions of this Agreement, as the same may be amended from time to time,
and shall have expressly assumed all of the obligations of the transferring
Member;
(iii) the transferee shall pay all filing, publication and recording
fees, if any, and all reasonable expenses, including, without limitation,
reasonable counsel fees and expenses incurred by the Company in connection with
such transaction;
(iv) the transferee shall execute such other documents or
instruments as counsel to the Company may require (or as may be required by law)
in order to effect the admission of such Person as a Member;
(v) the transferee shall execute a statement that it is acquiring
the Interest for its own account for investment and not with a view to the
distribution thereof and that it will Transfer the acquired Interest only to a
Person who so similarly represents and warrants;
(vi) if required by the Manager, the Company receives an opinion of
counsel (who may be counsel for the Company), in form and substance satisfactory
to the Manager, that such Transfer does not violate federal or state securities
laws or any representation or warranty of such transferring Member given in
connection with the acquisition of its Interest; and
(vii) if required by the Manager, Company Counsel delivers to the
Company an opinion that such Transfer (a) will not result in a termination of
the Company under Section 708 of the Code; (b) will not cause the Company to
lose its status as a partnership for United States
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federal income tax purposes; and (c) will not cause the Company to become
subject to the Investment Company Act of 1940.
(b) No Transfer of an Interest, where permitted by the terms of this
Agreement, shall be binding on the Company until all of the conditions to such
Transfer have been fulfilled. Upon the admission of a substitute or additional
Member, the Manager shall promptly cause any necessary documents or instruments
to be filed, recorded or published, wherever required, showing the substitution
or addition, as applicable, of the transferee as a substitute Member.
(c) A transferee of an Interest shall be entitled to receive distributions
of cash or other property from the Company attributable to the Interest acquired
by reason of such Transfer from and after the effective date of the Transfer of
such Interest to it; provided, however, that anything herein to the contrary
notwithstanding, the Company and the Manager shall be entitled to treat the
transferor of such Interest as the absolute owner thereof in all respects, and
shall incur no liability for allocations of income, gain, losses, credits,
deductions or distributions that are made in good faith to such transferor until
such time as all of the conditions of such Transfer have been fulfilled, the
written instrument of Transfer has been received by the Company and the
effective date of Transfer has passed.
(d) The effective date of a permitted Transfer of an Interest shall be no
earlier than the last day of the calendar month following receipt of notice of
assignment and such documentation as the Manager determines is required.
(e) The transferring Member shall cease to be a Member, and the transferee
shall become a Substituted Member, as to the Interest so Transferred as of the
effective date, and thereafter the transferring Member shall have no rights or
obligations with respect to the Company insofar as the Interest Transferred is
concerned.
SECTION 9.3 VOID TRANSFERS. Notwithstanding anything to the contrary in
this Agreement, any Transfer of an Interest in violation of the provisions of
this Agreement shall be void and shall not bind the Company.
SECTION 9.4 PERMITTED TRANSFERS. (a) A Member may Transfer its right to
receive distributions and allocations of Net Income and Net Loss and other
economic benefits under this Agreement to any Permitted Transferee (as defined
below); provided, however, that in no event shall any such transferee be
admitted as a substitute or additional Member of the Company or be entitled to
any other right of a Member under this Agreement (including, but not limited to,
the right to vote or consent) without the prior written consent of the Manager,
which consent may be withheld in its sole and absolute discretion; provided,
further, that if required by the Manager, a Transfer to a Permitted Transferee
may be conditioned upon the receipt of an opinion from Company Counsel.
(b) A "Permitted Transferee" means:
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(i) a Member's spouse, children (including adopted children),
siblings or grandchildren (a "Family Member") or a trust of which one or more
Family Members are the sole beneficiaries;
(ii) with respect to a Member which is a partnership, corporation or
limited liability company, such Member's partners, shareholders, members,
directors, executive officers or managers, as the case may be, and to a Family
Member of any such person;
(iii) with respect to a Member which is a trust, the beneficiaries
of such trust; or
(iv) another Member.
SECTION 9.5 Notice.
Appropriate notice, including the following, under applicable
securities laws shall be provided to purchasers in other states.
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 THEREFORE, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
ARTICLE X: DEATH, LEGAL INCOMPETENCY, OR WITHDRAWAL OF A MEMBER
SECTION 10.1 EFFECT OF DEATH OR LEGAL INCOMPETENCY OF A MEMBER OF 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.
SECTION 10.2 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 purposes of settling his estate or managing his property,
including the rights of assignment and withdrawal.
SECTION 10.3 WITHDRAWAL OF MEMBERS OTHER THAN MANAGERS. (a) With the sole
discretion of the Manager reasonably exercised, the Manager may modify,
eliminate or waive any such limitation on the withdrawal rights of a Member as
set forth below, on a case by case basis, so long as the modifying, waiving, or
elimination of the limitation does not: (a) adversely effect rights of the other
Members as a whole; or (b) results in the Company being classified as a
"publicly traded partnership" within the meaning of Section 7704(b) of the
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Code and the Regulations thereunder. 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 ninety (90) days after the
written notice of withdrawal is delivered to the Manager, subject to the
following limitations:
(i) Except with regard to the right of the personal representative
of a deceased Member, no notice of withdrawal shall be honored and no withdrawal
shall be made, of or for any Units, until the expiration of at least one year
from the date of purchase of those Units.
(ii) To assure that the payments to a Member or his representative
do not impair the capital or the operation of the Company, any cash payments in
return of an outstanding Capital Account shall be made by the Company only from
Net Proceeds and Capital Contributions.
(iii) A Member shall have the right to receive distributions in cash
from his Capital Account only to the extent that cash from Net Proceeds and
Capital Contributions are available. The Manager shall not be required to (i)
establish a reserve fund for the purpose of making a cash distribution of any
Capital Account; (ii) use any other sources of the Company's funds other than
cash from Net Proceeds and Capital Contributions; (iii) sell or otherwise
liquidate any portion of the Company's investments in Life Insurance Policies or
any other asset in order to make a cash distribution of any Capital Account.
(iv) During the ninety (90) days following receipt of written notice
of withdrawal from a Member, the Manager shall not reinvest any Net Proceeds or
Capital Contributions in new Life Insurance Policies or other non-liquid
investments 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.
(v) Subject to the restrictions on withdrawal contained in this
Agreement, the amount to be distributed to any withdrawing Member shall be an
amount equal to the amount of the Member's Capital Account as of the date of the
distribution, as to which the Member has given a notice of withdrawal under this
Section 10.3, notwithstanding that the amount may be greater or lesser than the
Member's proportionate share of the current Value of the Company's net assets.
(vi) Requests by Members for withdrawal will be honored in the order
in which the Manager receives them. If any request may not be honored, due to
any limitations imposed by this Section 10.3 (except the one year holding
limitation set forth in Subparagraph (i) of this Section 10.3), the Manager will
notify the requesting Member in writing, whose request, if not withdrawn by the
Member, will be honored if and when the limitation no longer is imposed; and
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(vii) If a Member's Capital Account would have a balance of less
than ten thousand dollars ($10,000) following a requested withdrawal, the
Manager, at its discretion, may distribute to the Member the entire balance in
the account.
(b) Subject to all of the limitations set forth in Paragraph (a) above, a
Member may withdraw or partially withdraw as a member of the Company commencing
one year after becoming a Member and obtain a Return of all or part of your
Capital Account and receive back 85% of the face amount of your Capital
Contribution, less any distributions paid to such date.
ARTICLE XI: BANKRUPTCY, DISSOLUTION AND TERMINATION
SECTION 11.1 BANKRUPTCY. If the Company voluntarily seeks, consents to or
acquiesces in the benefit or benefits of any debtor relief law or becomes party
to, or is made the subject of, any proceeding provided for by any debtor relief
law, other than as a creditor or claimant, and, in the event the proceeding is
involuntary, and the petition instituting same is not dismissed within ninety
(90) days after its filing, the Company shall within fifteen (15) days after the
date of the bankruptcy event (a) publish a notice in the authorized newspapers
that a bankruptcy event has occurred and that the Manager intends to sell,
dispose of or otherwise liquidate the insurance policies in a commercially
reasonable manner and (b) send written notice to the Members describing the
proceeding and requesting instructions from the Members. No sale, disposition or
liquidation, whether in whole or in part, of the Life Insurance Policies shall
be consummated until and unless the Manager shall have first received written
instructions, or other written response, or affirmative refusal to provide a
written response from Members whose aggregate Capital Accounts exceed 50% of the
aggregate of all Members' Capital Accounts at such time.
SECTION 11.2 DISSOLUTION. The Company shall be dissolved upon the earliest
to occur of the following:
(a) payment to the Company of all proceeds of all Life Insurance Policies;
or
(b) the express written consent of the Manager; or
(c) the unanimous consent of the Members; or
(d) the termination of the Company in accordance with Section 2.3; or
(e) sale of all or substantially all of the assets of the Company; or
(f) the entry of a decree of judicial dissolution of the Company; or
(g) the withdrawal, removal, dissolution or bankruptcy of the Manager,
unless, if there is no remaining manager, a majority of the Members agree in
writing to continue the business of the Company and, within six (6) months after
the last remaining manager has ceased
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to be a manager, admit one or more managers who agree to such election and join
the Company as managers.
SECTION 11.3 LIQUIDATION. (a) Upon the dissolution of the Company, the
Manager shall proceed, within a reasonable time, to sell or otherwise liquidate
the assets of the Company and, after paying or making due provision by the
setting up of reserves for all liabilities to creditors of the Company to
distribute the remaining assets to the Members, pro rata, in accordance with the
positive balance in their respective Capital Accounts.
(b) Upon dissolution, the Members shall look solely to the assets of the
Company for the return of their Capital Contributions. The winding up of the
affairs of the Company and the distribution of its assets shall be conducted
exclusively by the Manager, who hereby is authorized to do any and all acts and
things authorized by law for these purposes.
SECTION 11.4 TERMINATION. The Company shall terminate when all property
owned by the Company shall have been disposed of and the assets, after payment
of, or due provision has been made for, and liabilities to Company creditors
shall have been distributed as provided in this Agreement. Upon such
termination, the Manager shall execute and cause to be filed a certificate of
discontinuance of the Company and any and all other documents necessary in
connection with the termination of the Company.
ARTICLE XII: AMENDMENT OF AGREEMENT AND POWER OF ATTORNEY
SECTION 12.1 AMENDMENTS. Amendments to this Agreement which do not
adversely affect the right of any Member in any material respect may be made by
the Manager without the consent of any Member through use of the Power of
Attorney, if those amendments are for the purpose of admitting Members or
Substituted Members as permitted by this Agreement, including, without
limitation, amendments to Schedule A hereto to reflect the admission of such
Additional and Substituted Members and to reflect changes in the Capital
Contributions of the Members. Amendments to this Agreement other than those
described in the foregoing sentence may be made only if embodied in an
instrument signed by the Manager and by Members with Capital Accounts that
exceed 50% of the aggregate Capital Accounts of all Members; provided, however,
that, unless otherwise specifically contemplated by this Agreement, no amendment
to this Agreement shall, without the prior consent of each of the Members
adversely affected thereby, (i) increase the liability of any Member, (ii)
decrease any Member's interest in Net Income or items of income or gain and
distributions or (iii) increase any Member's interest in Net Loss or items of
deduction or loss. The Manager shall send to each Member a copy of any amendment
to this Agreement.
SECTION 12.2 AMENDMENT OF ARTICLES OF ORGANIZATION. In the event this
Agreement shall be amended under Section 12.1, the Manager shall amend the
Articles of Organization or any other governmental filings of the Company, to
the to reflect such change if it deems, such amendments to be necessary or
appropriate.
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SECTION 12.3 POWER OF ATTORNEY. Each Member hereby irrevocably constitutes
and appoints the Manager as its true and lawful attorney-in-fact, with full
power of substitution, in its name, place and stead to make, execute, sign,
acknowledge (including swearing to), verify, deliver, record and file, on its
behalf the following: (i) any amendment to this Agreement which complies with
the provisions of this Agreement and (ii) the Articles of Organization and any
other governmental filings and any amendment thereto required because this
Agreement is amended, including, without limitation, an amendment to effectuate
any change in the membership of the Company or in the Capital Contributions of
the Members. This power-of-attorney is a special power-of-attorney and is
coupled with an interest in favor of the Manager and as such (i) shall be
irrevocable and continue in full force and effect notwithstanding the subsequent
death or incapacity of any party granting this power-of-attorney, regardless of
whether the Company or the Manager shall have had notice thereof, (ii) may be
exercised for a Member by a facsimile signature of the Manager or, after listing
all of the Members, including such Member, by a single signature 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 its Interest in the
Company, except that where the assignee thereof has been approved by the Manager
for admission to the Company as a Substituted Member, this power-of-attorney
given by the assignor shall survive the delivery of such assignment for the sole
purpose of enabling the Manager to execute, acknowledge, and file any instrument
necessary to effect such substitution.
ARTICLE XIII: MISCELLANEOUS PROVISIONS
SECTION 13.1 NOTICES. (a) All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
addressed to the Members at their addresses set forth on Schedule A or in the
records maintained by the Company or to such other addresses as may have been
specified in a written notice duly given to the other.
(b) Any notices addressed as aforesaid shall be deemed to have been given
(i) on the date of delivery, if delivered by hand or overnight courier, (ii) on
the date of transmission, if transmitted by facsimile, provided, that if
transmitted by facsimile such transmittal is confirmed, and (iii) three (3) days
after the deposit of same in the United States certified mail, return receipt
requested.
SECTION 13.2 SEVERABILITY. If any covenant, condition, term or provision
of this Agreement is illegal, or if the application thereof to any Person or in
any circumstance shall to any extent be judicially determined to be invalid or
unenforceable, the remainder of this Agreement, or the application of such
covenant, condition, term or provision to Persons or in circumstances other than
those to which it is held invalid or unenforceable shall not be affected
thereby, and each covenant, condition, term and provision of this Agreement
shall be valid and enforceable to the full extent permitted by law.
SECTION 13.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall, for all purposes, be deemed an original and
all of such counterparts, taken together, shall constitute one and the same
Agreement.
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SECTION 13.4 ENTIRE AGREEMENT. This Agreement, the Exhibits hereto, and
any Subscription Agreement or other documents executed in connection herewith
represent the complete and entire agreement and understanding of the parties
hereto with respect to the matters covered therein and supersede any and all
previous written or oral negotiations, undertakings and commitments in writing
of any nature whatsoever.
SECTION 13.5 FURTHER ASSURANCES. The Members will execute and deliver such
further instruments and do such further acts and things as may be required by
the Company to carry out the intent and purposes of this Agreement.
SECTION 13.6 SUCCESSORS AND ASSIGNS. Subject in all respects to the
limitations on transferability contained herein, this Agreement shall be binding
upon, and shall inure to the benefit of, the heirs, administrators, personal
representatives, successors and permitted assigns of the respective parties
hereto.
SECTION 13.7 WAIVER OF ACTION FOR PARTITION. Each of the parties hereto
irrevocably waives, during the term of the Company and during the period of its
liquidation following any dissolution, any right that it may have to maintain
any action for partition with respect to any of the assets of the Company.
SECTION 13.8 CREDITORS. None of the provisions of this Agreement shall be
for the benefit of or enforceable by any of the creditors of the Company or any
other Person not a party to this Agreement.
SECTION 13.9 REMEDIES. The rights and remedies of the Members hereunder
shall not be mutually exclusive, and the exercise by any Member of any right to
which it is entitled shall not preclude the exercise of any other right it may
have.
SECTION 13.10 WRITING REQUIREMENT. Except as otherwise provided in this
Agreement, this Agreement may not be amended nor shall any waiver, change,
modification, consent or discharge be effected except by an instrument in
writing executed by or on behalf of the party seeking or against whom
enforcement of any amendment, waiver, change, modification, consent or discharge
is sought.
SECTION 13.11 WAIVER. No waiver or any breach or condition of this
Agreement shall be deemed to be a waiver of any other condition or subsequent
breach whether of the like or different nature.
SECTION 13.12 APPLICABLE LAW. This Agreement and the rights of the parties
hereto shall be interpreted in accordance with the laws of the State of Florida
without giving effect to principles of conflict of laws.
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SECTION 13.13 SIGNATURES. The signature of the Manager shall be sufficient
to bind the Company to any agreement or on any document, including, but not
limited to, documents drawn or agreements made in connection with the
acquisition, financing or disposition of any assets; provided, however, that the
action being taken in connection therewith shall be authorized under the terms
of this Agreement.
IN WITNESS WHEREOF, the undersigned have duly executed this Operating
Agreement the day and year first above written.
AMERIFIRST FINANCIAL SERVICES, INC.
By: /s/ John Tooke
------------------------
John Tooke, President
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MEMBER SIGNATURE PAGE
IN WITNESS WHEREOF, the undersigned has caused this Operating Agreement of
AmeriFirst Fund I, LLC to be duly executed and delivered as of the date set
forth below.
NAME OF MEMBER: ADDRESS FOR NOTICE (Please Print):
(Exact Name to appear on Certificate)
________________________________________ ____________________________________
____________________________________
____________________________________
____________________________________
SIGNATURE: _____________________________ Attention:__________________________
By: ____________________________________ Telecopy:___________________________
Printed Name:___________________________ Tax Identification #:_______________
Title:__________________________________
Dollar Amount of Capital Contribution: $_____________________
Dated:__________________________________
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SCHEDULE A
AMERIFIRST FUND I, LLC
MEMBERS
AMOUNT OF
NAME AND ADDRESS CAPITAL CONTRIBUTION
- ---------------- --------------------
AmeriFirst Financial Services, Inc. $10
TOTAL $____________
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================================================================================
$100,000,000 -- MAXIMUM
$2,500,000 -- MINIMUM
AMERIFIRST FUND I, LLC, ISSUER
----------
PROSPECTUS
----------
AMERIFIRST CAPITAL CORP.
__________ __, 2003
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND, MANAGER OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
UNTIL _____________________ , _____ 2003 (90 DAYS AFTER THE DATE OF THIS
PROSPECTUS) ALL DEALERS EFFECTING TRANSACTION IN THE UNITS, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
98
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Securities and Exchange Commission Registration Fee $ 9,200
NASD Registration Fee 10,500
Blue Sky Fees 20,000
Accounting Fees and Expenses 40,000
Legal Fees and Expenses 200,000
Printing Fees and Expenses 10,000
Mailing 5,300
Miscellaneous 7,300
--------
Total $300,000
Item 14. Indemnification of Directors and Officers.
Pursuant to Section 608.4229 of the Florida Limited Liability Company Act,
a Florida limited liability company may and shall have the power to indemnify
and hold harmless any member or manager or other person from and against any and
all claims and demands whatsoever, subject to such standards and restrictions,
if any, as are set forth in its limited liability company agreement.
Our operating agreement requires us to indemnify our manager, provider and
underwriter from any loss, reasonable legal expenses, damage or claim arising by
reason of any act or omission performed or omitted by our manager in good faith
on behalf of us and in a manner reasonably believed to be within the scope of
authority conferred on our manager by our operating agreement. This right of
indemnification includes the right to advance payments or to reimburse our
manager, provider and underwriter for the reasonable expenses incurred from
being threatened to be made a named defendant or respondent in a proceeding.
Indemnity payments will be made only from our assets. No member is required to
make payments from his/her separate assets. We will not indemnify persons or
advance payments for acts or omissions which are established to be intentional
misconduct, fraud or a knowing violation of the law and was material to the
cause of action.
Our operating agreement further gives our manager the power to purchase
and maintain insurance in reasonable amounts on behalf of itself and each of the
employees and agents of the Fund against any liability incurred by them in their
capacities as such, whether or not the Fund has the power to indemnify them
against such liability.
In addition, our operating agreement provides that except as otherwise
provided by applicable law, the debts, obligations and liabilities of the Fund,
whether arising in contract, tort or otherwise, shall be solely the debts,
obligations and liabilities of the Fund; neither our manager nor any member nor
any person affiliated with our manager or any member shall be
II-1
obligated personally for any such debt, obligation or liability of the Fund
solely by reason of being a manager or member or being a person affiliated with
either of them.
Item 15. Recent Sales of Unregistered Securities.
None.
Item 16. Exhibits and Financial Statement Schedules.
(A) Exhibits.
1.1 Form of Underwriting Agreement (2)
3.1 Articles of Organization (2)
4.1 Form of Subscription Agreement (included as Exhibit A to the
Prospectus)*
4.2 Operating Agreement of AmeriFirst Fund I, LLC, dated as of September
25, 2002 (included as Exhibit B to the Prospectus)*
5.1 Opinion of Snow Becker Krauss P.C. with respect to legality of the
securities*
8.1 Opinion of Snow Becker Krauss P.C. with respect to federal income
tax matters*
10.1 Subscription Escrow Agreement (2)
10.2 Employment Agreement between AmeriFirst Capital Corp. and John Tooke
(1)
10.3 Form of Viatical Settlement Contract (2)
10.4 Sublease Agreement effective September 4, 2002 by and between Life
Settlements Service Corp. and AmeriFirst Capital Corp. (2)
10.5 Form of Consulting Agreement (2)
10.6 Letter Agreement between the Registrant and AmeriFirst Funding
Group, Inc. dated December 26, 2002 (2)
10.7 Consulting Agreement between AmeriFirst Financial Services, Inc. and
21st Services, dated as of November 1, 2002*
10.8 Consulting Agreement between AmeriFirst Financial Services, Inc. and
Fasano Associates, Inc., dated as of November 1, 2002*
10.9 Consulting Agreement between AmeriFirst Financial Services, Inc. and
Systems for Advanced Risk Analysis, L.P., dated as of November 1,
2002*
10.10 Consulting Agreement between AmeriFirst Financial Services, Inc. and
American Viatical Services, dated February 12, 2003*
10.11 Expense Agreement between AmeriFirst Fund I, LLC and AmeriFirst,
Inc. dated February 13, 2003*
23.1 Consent of Snow Becker Krauss P.C. (included in the opinion filed as
Exhibit 5.1 to this Registration Statement)*
23.2 Consent of Marcum & Kliegman LLP*
99.1 Opinion of Snow Becker Krauss P.C. with respect to Investment
Company Act of 1940 (2)
- ----------
* Filed with this amendment
(1) Filed with registrant's registration statement on Form S-1, filed on
August 23, 2002.
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(2) Filed with Amendment No. 2 to registrant's registration statement on Form
S-1, filed on January 15, 2003.
(B) Financial Statement Schedules.
Item 17. Undertakings
The undersigned registrant hereby undertake to provide to the underwriter
on each closing date as specified in the underwriting agreement, certificates in
such denominations and registered in such names as required by the underwriter
to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. 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 in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule
II-3
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(5) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to the registration statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of St. Marys, State of Georgia on February 19, 2003.
AMERIFIRST FUND I, LLC
By: AMERIFIRST FINANCIAL SERVICES, INC.,
MANAGER
/s/ John Tooke
-------------------------------------------
John Tooke
President and Chief Executive Officer
(Principal Executive Officer,
Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ John Tooke President and February 19, 2003
- ------------------ Chief Executive Officer of
John Tooke AmeriFirst Financial Services, Inc.
Manager of AmeriFirst Fund I, LLC
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