AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 2003
REGISTRATION NO. 333-98651
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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)
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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
OF SECURITIES MAXIMUM MAXIMUM AMOUNT OF
TO BE AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
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 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.
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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 April 2, 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. AmeriFirst Fund I,
LLC's income will be generated from life insurance policies which we intend to
purchase through AmeriFirst Funding Group, Inc., an affiliated insurance
provider. AmeriFirst 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 AmeriFirst Fund I, LLC involves a high degree of risk.
Prospective investors should consider the following factors, among others, set
forth under "Risk Factors" commencing on page 15.
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 AmeriFirst 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 no viable business if unable to generate an adequate return on investment
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 7.5% of the face amount of insurance policies may be paid to our
provider for origination fees, and up to 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 April __, 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. Units may
be sold by officers of the Fund who are sales representatives licensed by the
NASD and will receive commissions where permitted. 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.
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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 in this offering, 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
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WHERE YOU CAN FIND MORE INFORMATION ..................................... -v-
SUMMARY OF THE OFFERING ................................................. 1
ORGANIZATIONAL CHART .................................................... 13
RISK FACTORS ............................................................ 15
FORWARD-LOOKING STATEMENTS .............................................. 32
INVESTOR SUITABILITY STANDARDS .......................................... 32
USE OF PROCEEDS ......................................................... 36
CAPITALIZATION OF AMERIFIRST FUND I, LLC ................................ 37
TERMS OF THE OFFERING ................................................... 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF AMERIFIRST FUND I, LLC ........................... 40
NOTICE TO CALIFORNIA RESIDENTS .......................................... 42
BUSINESS ................................................................ 42
DESCRIPTION OF THE UNITS ................................................ 67
DESCRIPTION OF VIATICAL
SETTLEMENT CONTRACTS .................................................... 74
OTHER OPERATING POLICIES ................................................ 75
OUR MANAGER, PROVIDER AND UNDERWRITER ................................... 75
COMPENSATION OF OUR MANAGER, PROVIDER AND UNDERWRITER ................... 79
CONFLICTS OF INTEREST ................................................... 81
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......................... 83
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT ................................................... 84
FIDUCIARY RESPONSIBILITIES OF OUR MANAGER ............................... 85
vi
ERISA CONSIDERATIONS .................................................... 86
FEDERAL INCOME TAX CONSEQUENCES ......................................... 87
SUMMARY OF OPERATING AGREEMENT .......................................... 93
PLAN OF DISTRIBUTION .................................................... 98
INVESTMENT COMPANY ACT OF 1940 .......................................... 100
LEGAL PROCEEDINGS ....................................................... 101
LEGAL OPINIONS .......................................................... 101
EXPERTS ................................................................. 101
ADDITIONAL INFORMATION .................................................. 101
SIGNATURES .............................................................. II-5
EXHIBITS
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 is not
currently but may 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.
Each entity affiliated with the Fund has
a different business plan, scope and
purpose and is governed by different
regulatory bodies. Our underwriter is
physically located in Florida and will
be registered with the NASD and its
personnel will be licensed securities
personal aside from administrative
support. Our provider is physically
located in Georgia and will be subject
to different rules and regulations by
the insurance or securities departments
in each state in which it is regulated.
Its sole business will be to purchase
policies on behalf of the Fund, except
for non-affiliates on a non-securitized
basis. Our manager is physically located
in Florida and is regulated by the state
of Florida and will provide management
services to the Fund, our provider and
our underwriter. However, our manager
can also provide services to
non-affiliated persons for a fee
including competitors of our provider
and the Fund and is also licensed as a
mortgage broker and a real estate broker
in the State of Florida. Each entity is
controlled by John Tooke, who has
experience with
1
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 .................. The 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
18 experienced employees have been hired
by our manager, provider and their
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 have
contracted with 21st Holdings, LLC, an
affiliate of one of those service
companies, to monitor or track the
2
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, pay the independent
broker's fee, establish the premium
escrow account and the balance to pay
for all services required in connection
with the policies, including all related
fees and all sales commissions on the
units offered in this offering.
Return on Investment .............. We are offering proportionate 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 $2.5 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. In
both instances, our investors would
receive a rate of return of at least 8%
interest compounded annually. 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 rates, the estimated premiums
to be paid by our manager for the policy
over the expected life of the
3
insured, the insured's estimated life
expectancy and certain other costs of
the life settlement. Approximately 20
states require a minimum amount to be
paid to an insured. We will attempt to
create a pool of life insurance policies
where the blended rate of return on the
gross proceeds invested in life
insurance policies will provide a return
of approximately 8-10% interest
compounded annually. We will purchase
life insurance policies which, based on
the estimated life expectancy, would
provide a return of at least 8% interest
compounded annually to the investors.
Based on the Fund purchasing life
insurance policies with estimated life
expectancies of between 1 and 8 years,
we estimate that the pool will have a
weighted average estimated life
expectancy of between 3 and 6 years.
Only when we acquire the proceeds from
life insurance policies will you receive
a distribution consisting of your
proportionate 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, pay
the independent broker's fee, establish
the premium escrow account at SouthTrust
Bank with the balance to pay all fees
associated with the purchase, including
the underwriter's selling commission
which will be paid at the time of
purchase. The estimated rate of return
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 overall return to investors
is paid only when the Fund is paid by
the insurance carrier after the actual
date the insurance policy matures. Since
the pool of insurance policies will have
different maturity dates, an investor in
the Fund receives an undetermined 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 proportionate 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
4
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, from the face value of
such policy when the policy matures.
When all insurance 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 return will be increased to
the extent that there is an account
balance and interest earned in the
premium escrow account at the end of the
Fund which will be distributed to the
members. The actual overall 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 fund has 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 are exhausted.
The rate of return, the blended rate of
return, the actual rate of return on
investments in life insurance policies
and the actual overall rate of return
are projected using an annual compounded
interest rate.
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
Offering .......................... million from 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
5
$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 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. Each of
the escrow accounts, as shown in the
"Investors' Cash Flow" table on page 14,
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
6
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 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 Fees .................... Origination Fee. The fee to be paid by
the Fund to AmeriFirst Funding Group,
Inc., our provider, or an unaffiliated
provider in the secondary market, will
be up to a maximum of 7.5% of the face
amount of the policy to the extent
possible. 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 to the extent possible. 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."
7
Underwriter's Selling Commissions. The
fee to be paid to our underwriter will
be up to 10% of the gross proceeds of
the units sold which is the maximum fee
permitted by the NASD. This fee will be
paid to the underwriter upon the Fund's
purchase of life insurance policies.
Broker-dealers, other than the
underwriter, will be paid upon
acceptance of the investor as a member
of the Fund unless the broker-dealer
agrees to defer payment.
Maximum Fees Which May Be Paid to
AmeriFirst, Inc. The maximum fees which
may be paid to AmeriFirst, Inc. (through
the provider, the manager and the
underwriter) the holding company, which
is owned by John Tooke (50%), Irving
Strickstein (25%) and Denise
Mugerdichian (25%), are described above
in this section and total approximately
20% of the face amount of the life
insurance policies purchased, or
approximately 25% of the gross proceeds
of this offering. However, the actual
amount of fees received by AmeriFirst,
Inc. will depend on market conditions
and our not purchasing any policy which
will not provide a return of at least 8%
interest compounded annually, certain
state statutes which require a minimum
amount to be paid to the policy holder,
the market based fee required by the
independent broker and by the terms and
conditions of the insurance policy
together with the estimated life
expectancy (using the formula of 1 1/2
times the estimated life expectancy with
a minimum of 2 years beyond the
estimated life expectancy) to determine
the amount necessary to escrow for the
Premium Reserve Account. Only by
determining all of the foregoing can the
Fund determine the actual amount of fees
that it will be able to pay the
affiliates of AmeriFirst, Inc. If the
minimum, $2,500,000, the midpoint $50
million and the maximum $100 million
proceeds are raised and the Fund
purchases approximately $3.25 million,
$63 million and $126 million face amount
of policies, respectively, and
AmeriFirst receives the maximum
percentage of fees it would receive
$250,000, $5,000,000 and $10,000,000,
respectively, of selling commissions and
approximately $236,000, $4,725,000, and
$9,456,000 of provider's fees and
$157,000, $3,150,000 and $6,300,000 of
manager's fees. Therefore, the maximum
aggregate fees payable to AmeriFirst
will be approximately $644,000,
$12,875,000 and $25,746,000.
Premium Escrow Account ............ The Fund shall escrow at SouthTrust Bank
an amount
8
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 members on a
proportionate basis with all accrued
interest thereon.
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., controls 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 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 and Escrow Accounts .......... All funds shall be maintained in
separate escrow accounts maintained for
the benefits of members at South Trust
Bank, Birmingham, Alabama. After the
completion of the minimum offering funds
that have not yet been used to purchase
life insurance policies and to pay
policy premiums will be deposited by our
manager in an interest-bearing operating
escrow account. 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
9
make premium payments; and the third is
the provider's escrow account to
temporarily hold the purchase prices and
fees between the contract and closing.
Investors will be entitled to a pro-rata
share of the short-term interest
(expected to be market rates of 1-2%
according to market fluctuation) earned
in the operating escrow account. See
"Investors' Cash Flow" chart on page 14.
Material Federal Income Tax The Fund will elect to be taxed as a
Consequences ...................... 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 reflected in the discussion
herein under "Federal Income Tax
Consequences," the Fund will not be
taxed as a corporation and will not be
subject to tax other than as a
partnership. 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.
However, 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. In the opinion of our counsel,
the Fund will not be taxable as a
publicly traded partnership. Our
operating agreement provides that no
transfer will be permitted if it results
in our being a publicly traded
partnership. Finally, our counsel has
opined that the Fund represents an
effort to obtain a rate of return in a
manner consistent with commercial
practices in this area and will not be
treated as a "tax shelter" for Federal
Income Tax purposes. 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 15
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
10
o no viable business if unable to
generate an adequate return on
investment
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 Standards .... 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
gross 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 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
11
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 in
this offering, 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.
12
ORGANIZATIONAL CHART
Entities That Provide Services To:
AmeriFirst Fund I, LLC
----------------------------------------------
AmeriFirst, Inc.
(Delaware) Parent Holding Company 50% of
|--------------------- the equity owned by John Tooke, ----------------|
| Chief Executive Officer and Director |
| Irving Strickstein, Chairman |
| ---------------------------------------------- |
| |
| |
| |
- ------------------------------- ----------------------------- ------------------------------
AmeriFirst Financial AmeriFirst Capital Corp. AmeriFirst Funding Group, Inc.
Services, Inc. (Florida) (Delaware)
(Delaware) Underwriter of the Fund Provider of the Fund
Manager of the Fund
A wholly-owned subsidiary of Wholly-owned subsidiary of
A wholly-owned subsidiary of AmeriFirst, Inc. AmeriFirst, Inc.
AmeriFirst, Inc.
John Tooke, President, John Tooke, President,
John Tooke, Chief Executive Officer and Chief Executive Officer and
Chief Executive Officer and Director Director
Director
Denise Mugerdichian,
President
- ------------------------------- ----------------------------- ------------------------------
13
AMERIFIRST FUND I, LLC
INVESTORS' CASH FLOW
- ------------------ ---------------- ------------------------- ---------------
Contracts Provider Escrow
Subscription Operating Escrow Received Account
Escrow Account Account <---------------- -Funds to purchase life Pay at Insured
- -Min. $2.5 million ------> -Controlled by: insurance policies and in ---------------> -Controlled by:
- -Controlled by: Manager ----------------> some states fee for Closing Provider
SouthTrust Bank Funds broker -Controlled by:
Servicer
- ------------------ ---------------- ------------------------- ---------------
| |
| | --------------------------
| Pay at | Fee for broker in the
|Closing | unaffiliated broker
| | Pay at network
| ------------------------------> -4-8% of face amount of
|-----------------------------------------| Closing life insurance policies,
| | estimated at $10.1 million
| | of maximum proceeds
| | -Controlled by: Provider
-------------------------- ----------------------- --------------------------
Premium Escrow Account Manager's Account
-150% of annual premiums -Fee for manager up to
of all policies purchased 5% of face amount of
by the Fund of the life insurance policies
insureds with a min. of 2 (estimated at $6.3
yrs. beyond estimated life million of maximum
expectancy -Controlled by: proceeds) -Controlled
Manager by: Manager
-------------------------- -----------------------
|
|
--------------------------------|----------------------------------
| | |
| | |
| | |
----------------------- ------------------------ ------------------------
Fees Paid: Fee for unaffiliated Fee for broker in the
-Underwriter- up to 10% medical review service unaffiliated broker
of gross proceeds companies network
- Provider- up to 7.5% - $225-250 per -4-8% of face amount of
of face amount of life evaluation, plus $15 per life insurance policies,
insurance policies month to monitor. estimated at $10.1
(estimated at $9.4 -Controlled by: Manager million on maximum
million of maximum ------------------------ proceeds -Controlled by:
proceeds) -Controlled Manager
by: Manager
----------------------- ------------------------
14
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. In addition, we may have to pay
broker's selling commissions to unaffiliated broker-dealers upon the sale of
units. This would adversely affect the Fund's return on investment if there were
delays in purchasing insurance policies with such net proceeds. 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.
We may not have a viable business because of our inability to generate an
adequate return on investment.
The purchase price of life insurance policies to be paid to the insureds
is determined by market conditions of supply and demand and by various state
regulations. On the other hand, the Fund will purchase any life insurance policy
which, based on the estimated life expectancy, will provide investors of this
offering a return of at least 8% interest compounded annually. In addition, the
various fees when added together are substantial and that, in turn, also reduces
the
15
potential yield to the Fund. There is no precedent for the Fund to know whether
it will be able to balance such objectives while still being able to compensate
the various entities providing services to the Fund.
The loss of services of John Tooke could adversely affect the business and
operations of our manager, underwriter and provider.
John Tooke is the chief executive officer 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. An investment in the Fund is substantially dependent on the
efforts and expertise of John Tooke. Until such time as the Fund establishes an
operating history 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 life insurance on John Tooke's life and the loss of
his 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. While other officers of AmeriFirst Inc. each has
significant business experience to carry on the operations of the Fund, there
can be no assurance the Fund will be able to recover from Mr. Tooke's loss and
continue its operations. 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.
16
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, 50% of whose stock is beneficially owned by John Tooke. Our manager
will purchase policies on behalf of the Fund through 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 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"
17
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.
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
18
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."
We may not be able to recover accounting losses recorded on acquisition of life
settlements.
Pursuant to Financial Accounting Standards Board Technical Bulletin 85-4
"Accounting for Purchases of Life Insurance," acquired policies will be recorded
at their cash surrender value and not at the amount of cash paid for the policy.
This treatment will have a negative impact on our balance sheet as well as our
statement of operations, because we will incur an immediate loss on the
acquisition of a life settlement contract. There is a risk that we may not be
able to recover the losses recorded on the acquisition of life settlements
contracts.
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.
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 is 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.
19
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 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 and the Insurance
Commissioner for the State of Georgia. 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 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."
20
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.
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.
21
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, there is no other
reserve fund (e.g., a sinking fund) and the Fund will not be able to pay
premiums on outstanding policies.
If the Fund is unable to make any premium payments or meet any other
operating expenses to preserve the Fund, our manager will make a capital call
(of up to 6 months of premiums) where the members will need to make a
proportionate 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."
We can only estimate and cannot guarantee your rate of return.
Your actual overall 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."
22
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 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, 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.
23
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 those funds will be adequate in any one instance.
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
24
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 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 from a policy owner,
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.
25
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."
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
26
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, where 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).
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 are
accepted as a member in the Fund 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.
27
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 are accepted
as a member of the Fund, 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 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, 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
28
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.
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
29
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. Counsel notes that a partnership will be taxed as an
association taxable as a corporation if we have more than 100 members and were a
publicly traded partnership. In such event, 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. It is counsel's opinion that if the provisions in the
Fund's operating agreement are enforced, they would prevent us from being a
publicly traded partnership and we will be subject to tax 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.
30
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.
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.
31
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:
(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
32
(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.
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 investors to represent 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.
33
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. 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.
34
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 15.
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 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.
35
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) $1,604,500 $ 64,181,000
Provider's fees (2) 236,100(3) 9,446,000(3)
Manager's fees (4) 157,400(3) 6,297,000(3)
Broker's fees (5) 252,000(3) 10,076,000(3)
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 usually be negotiated between
the broker on behalf of the insured and our provider. The price paid to an
insured for a life insurance policy is based primarily on market conditions,
statutes and 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. In any event, we will not purchase any policy with an expected life
expectancy that would provide a rate of return of less than 8% interest
compounded annually. We will purchase life insurance policies which, based on
the estimated life expectancy, would provide a return of at least 8% interest
compounded annually to the investors. Based on the Fund purchasing life
insurance policies with estimated life expectancies of between 1 and 8 years, we
estimate that the pool will have a weighted average estimated life expectancy of
between 3 and 6 years. We have researched the life settlement companies in
business on a non-securitized private basis. Much of our industry research was
done through our four medical review companies, as well as through other
providers and brokers. The costs to purchase life insurance policies are based
on actual estimates we have found in the industry.
While we have not lined up specific policies to purchase, we have
determined, solely for purposes of this calculation, that the minimum and
maximum gross proceeds described in the above table may be used to purchase
$3,148,615 and $125,944,584 face amount of life insurance 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
36
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 7.5% of the face amount of each policy to the extent
possible.
(3) The estimated fees in the above table are based on the minimum $3,148,615
and maximum $125,944,584 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
to the extent possible.
(5) The non-affiliated brokers will be paid a market based fee which we estimate
to be between 4% and 8% of the face amount of the policies and have assumed a
fee of 8% in the above table.
(6) We intend to pay to our underwriter 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. Broker-dealers, other than our underwriter, will be paid upon
acceptance of the investor as a member of the Fund unless the broker-dealer
agrees to defer payment.
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 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.
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, 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. Investors will be entitled to a proportionate share 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 in this offering after deducting up
to 10% sales commissions which will be paid to our underwriter only upon the
purchase of life insurance policies.
37
Actual As Adjusted for As Adjusted for
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. Our sales representatives
will be 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. However, until such time as our underwriter is registered with
the NASD and thereafter units may be sold by our sales representatives employed
as officers of the Fund, who are sales representatives registered with the NASD
and who will receive commissions where permitted. 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
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 any funds of subscriptions
rejected by 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
38
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 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
39
purchaser of the units. We will require 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.
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 organizational expenses and costs 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
40
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 March 13, 2003, our manager,
provider and their affiliate employed 18 persons, including John Tooke, chief
executive officer, a chief information officer, in-house legal staff, accounting
staff, insurance review, insurance analyst, 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 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.
41
The purchase price for life insurance policies (which includes all related
acquisition costs) is expected to be higher than the cash surrender value. We
will record the cash surrender value of the policy as an asset and not the
amount of cash invested in such policy. This accounting policy will have a
negative effect on our balance sheet and an operating loss will be recorded on
the initial purchase of the policy. 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 effect on the Fund's cash flows and estimated
rate of return per individual 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 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 is not currently
but may 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 premiums payable under the policy over
the expected life of the insured, certain other costs of the life settlement,
certain state law minimum purchase requirements 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.
42
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 or
by the provider in states where required to do so. 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 four 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 7.5% 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.
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. Each entity affiliated with the Fund has a different
business plan, scope and purpose and is governed by different regulatory bodies.
Our underwriter is physically located in Florida and will be licensed by the
NASD and its personnel will be licensed securities personal aside from
administrative support. Our provider is physically located in Georgia and will
be subject to different rules and regulations by the insurance or securities
departments in each state in which it is regulated. Its sole business will be to
purchase policies on behalf of the Fund, except for non-affiliates on a
non-securitized basis. Our manager is physically located in Florida and will
provide management services to the Fund, our provider and our underwriter.
However, our manager can also provide services to non-
43
affiliated persons for a fee including competitors of our provider and the Fund
is also licensed as a mortgage broker and a real estate broker.
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 50% 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. He has researched the life
settlements industry starting in April 2001 and conducted all organizational
activities necessary for the Fund.
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. We expect that our underwriter will be registered by the NASD before
the effective date of this prospectus. However, units may also be sold by
officers of the Fund who are sales representatives licensed by the NASD and who
will receive commissions where permitted.
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 a policy was to surrender it for cash value.
Life settlement firms, like 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.
44
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.
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 chief
executive officer 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. 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
45
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, chief executive officer of our manager is also
chief executive officer of our provider and underwriter. Our provider has four
employees, 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, 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 here. 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. Many 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 market based fee which we estimate to be
between 4% and 8% of 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
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, 50% 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 6 persons, as well as 8 employees of
AmeriFirst, Inc., as of March 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
46
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 four unaffiliated medical review service companies to
determine estimated life expectancies and monitor the lives of the insureds. Our
manager and its affiliate employed 14 persons as of March 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.
Our servicer will track on a daily basis the status of the Fund and the
members' interests in the Fund. Investors will be able to monitor their
investment on a daily basis through the Fund's Internet web site which they can
access using a pass-code. Investors will see the financial statements of the
Fund every quarter.
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 to the
extent possible. In the event that we determine to use 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.
47
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;
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.
48
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.
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.
49
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 consulting
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.
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.
50
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 is not currently
but may 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.
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
51
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.
Each of our medical consulting service companies has extensive experience
in the viatical industry. Fasano & Associates is a consulting practice that
began in 1990 and incorporated in 1997. Their group of underwriters and medical
directors have experience in all aspects of the underwriting function. They
maintain a network panel of practicing medical specialists providing quality
standards and determination for life settlement evaluations. SARA was
incorporated in March 1989 when the viatical market began. Their medical
underwriters and medical directors have many years of experience and are
comprised of a panel of medical specialists providing quality standards for life
settlements, underwriting and administration. The three founding principals of
21st Services have more than 20 years combined experience in financial modeling,
life expectancy evaluation, insurance underwriting, post-purchase portfolio
management, and compliance. They gained their experience while working for one
of the first institutionally funded viatical purchasing companies, which is
still in business today. In 1998, 21st Services created 21st Diagnostics that
introduced a statistically based model to provide life determinations for the
senior clients in the senior settlement market. It is the first comprehensive
model of its kind in the life insurance settlement industry. They maintain a
national network of practicing medical specialists who are leading field
researchers and attend major conferences where medical advances are discussed
and evaluated. Many of these physicians have authored books, articles and
research publications used in the medical field and life insurance underwriting
industry. American Viatical Services, LLC, created in 1994 to provide third
party medical evaluations for the terminally ill and senior citizens, employs
two physicians, one Ph.D. in immunology, 3 RN's and support personnel. They
currently employ 10 professionals to provide evaluation and tracking services.
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 individuals of all ages. Our manager is to
submit
52
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. The medical review service will not confirm the existence of a
terminal illness. It will only evaluate to estimate a life expectancy.
Similarly, the medical review companies will base an estimated life expectancy
on seniors with a diagnosed chronic illness which would contribute to a lesser
life expectancy than a healthy person of that age. The eligibility for the
Fund's purchase will then be established.
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."
53
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 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.
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
54
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.
Effects of applying Financial Accounting Standards Board Technical Bulletin 85-4
"Accounting for Purchases of Life Insurance" ("FTB No. 85-4")
For illustrative purposes only, set forth below is a hypothetical example of the
effects of application of FTB No. 85-4 on the Fund's Balance Sheet and Statement
of Operations (which is based upon current market conditions that exist):
Assumptions:
o $100,000 investment into Amerifirst Fund I LLC by outside investors
o Purchase a 100% interest in a $100,000 face amount universal whole
life insurance policy for $50,383
o At acquisition date the cash surrender value of the policy is $4,000
or 4% of face amount of the policy, based upon a typical whole life
policy in place for 10 years
o Insured is a 50 year old who is terminally ill with a life
expectancy of three years
o Acquisition costs of $21,000
o Monies have been deposited in escrow in the amount of $4,500 for the
future payment of premiums
Opening Balance Adjusted
Balance Sheet Sheet Balance Sheet
------------- ----- -------------
Assets
Cash $ 100,000 $ 24,117
Investment in life insurance policies (1) 4,000
Premium escrow account (2) 4,500
--------
Total Assets $ 100,000 $ 32,617
========= ========
Liabilities and Members' Equity
Liabilities $ -- $ --
Member's Equity $ 100,000 32,617
--------
Total Liabilities & Members Equity $ 100,000 $ 32,617
========= ========
Statement of Operations
Revenues $ --
---------
Acquisition costs (3) 21,000
Cost of life insurance policy, net of cash surrender value 46,383
---------
Total expenses 67,383
---------
Net loss $ (67,383)
=========
55
(1) Amount of Cash Surrender Value of policy
(2) Funds to be used to pay future premiums*
(3) Includes Independent broker's fee -- $8,000, Provider's commission --
$5,300 origination and underwriter's selling commissions-$7,700*
(4) Does not include manager's and servicer's fee estimated at $3,500 payable
to our manager over the life expectancy of the insured.*
*See "Description of Return on Investment" below.
Description of Return on Investment
We are offering proportionate 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 is not currently, but may 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 $2.5 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 perhaps 10%, while a 10-year life expectancy may have a 50% discount. In both
instances, our investors would receive a rate of return of at least 8% interest
compounded annually. The amount of the discount to the insured is negotiated
based on market conditions and statutes 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. Approximately 20 states require a
minimum amount to be paid to an insured. We will attempt to create a pool of
life insurance policies where the blended rate of return on the gross proceeds
invested in life insurance policies will provide a return of approximately 8-10%
interest compounded annually. We will purchase life insurance policies which,
based on the estimated life expectancy, would provide a return of at least 8%
interest compounded annually to the investors. Based on the Fund purchasing life
insurance policies with estimated life expectancies of between 1 and 8 years, we
estimate that the
56
pool will have a weighted average estimated life expectancy of between 3 and 6
years. We will purchase life insurance policies which based on the estimated
life expectancy would provide a return of at least 8% interest compounded
annually to investors.
Only when we acquire from insurance carriers the proceeds after maturity
of insurance policies will you receive a distribution consisting of your
proportionate 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. 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 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 from the face value of such policy when the policy matures.
The actual overall 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 return will be increased to the extent that there
is an account balance and interest earned in the premium escrow account at the
end of the Fund which will be distributed to the members. The actual overall
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 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 has been exhausted.
The rate of return, the blended rate of return and the actual rate of
return on investments in life insurance policies and the overall rate of return
are projected using annual compounded interest rates.
For illustrative purposes only, set forth below is a hypothetical of how a
$79,383 investment might be used to purchase a 100% interest in a $100,000 face
amount of a universal 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 $79,383 inclusive of all fees, and if the insured were in fact to pass away
in three years, the aggregate return on investment would be $20,618 divided by
the $79,383 purchase price, or a return on investment of 8% interest compounded
annually.
57
Expenditure Amount
----------- ------
Payment to seller (1) $50,383
Independent broker's fee (2) $ 8,000
Deposit to premium escrow account (3) $ 4,500
Provider's commission (4) $ 5,300
Manager's and servicer's fee (5) $ 3,500
Underwriter's selling commission (6) $ 7,700
-------
Total: $79,383
=======
- ----------
(1) Payment to Seller. 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 generally on market conditions. In
management's opinion the information upon which this example is based uses
reasonable current market assumptions. The above example meets the minimum
payment of 50% to the insured, based on certain states' requirements; however,
31 states do not set any minimum amount which must be paid to an insured. See
"Government Regulation of Life Settlements" below.
(2) Independent Broker's Fee. 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 conditions and we currently estimate to be between 4% and 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. However, we have assumed the maximum 8% fee for
purposes of the above table.
(3) 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.
(4) 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
7.5% of the face amount of the policy to the extent possible.
(5) 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
58
be negotiated and determined by our manager, and will be up to 5% of the face
amount of the policy to the extent possible. 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.
(6) We intend to pay to our underwriter, 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 which is the maximum fee permitted by the NASD. Broker-dealers,
other than our underwriter, will be paid upon acceptance of the investor as a
member of the Fund unless the broker-dealer agrees to defer payment. In the
above example, because the payments to seller are determined by statute or
market conditions, and payments to the independent broker and premium escrow
account are set by market conditions, the compensation to be paid to our
provider, manager and underwriter is the remainder which will enable the Fund to
return 8% interest compounded annually. Therefore, in the example, each fee to
the provider, manager and underwriter was reduced proportionately from the
maximum fee permitted.
General Description of Different Types of Insurance Policies to be Purchased by
the Fund and Investment Strategies
o 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.
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.
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.
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.
o 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.
o The only group life insurance which the Fund intends to purchase is
Retired Federal Employees Group Life Insurance (FEGLI) policies
which provide
59
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.
o 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
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 twenty-five percent of the total
number of policies from one insurance company.
o We will only purchase policies where the estimated life expectancy
of the insured is between one and eight years.
o We will only purchase policies beyond the contestable and suicide
periods.
60
o We will only purchase group insurance policies from Federal
Employees' Group Life Insurance (Retired).
o 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.
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. For insureds with
Acquired Immune Deficiency Syndrome the maximum policy size we will
accept is $500,000.
o We will require an outside medical review to establish the estimated
life expectancy for all terminally and chronically ill (a continuing
disease which is not currently, but may become terminal) insureds.
o We will not purchase more than forty percent of the policies in the
pool from any one type of terminal or chronic illness.
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 tables, is $2.5 million dollars.
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. Also, for policies over
$1.25 million, we will require two medicals and will rely upon the
more conservative of the two medicals.
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
61
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:
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.
62
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.
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.
63
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 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:
64
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 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 where 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.
65
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.
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.
66
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 March 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.
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 with a
non-affiliate 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 with a non-affiliate is 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 represent 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 proportionate 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;
67
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 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
underwriter 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.
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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.
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.
69
Investor Accounts and Allocation of Collections
The Fund's assets shall include investor accounts which consist of the
operating escrow account, premium escrow account and a provider escrow account,
each of which shall be established and maintained by the manager or provider
with SouthTrust Bank for the benefit of the members only upon the completion of
the minimum offering and the release of funds.
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,
provider escrow account and pay fees to our manager, provider and underwriter.
All funds will be deposited into the operating escrow account after the minimum
offering is completed. Notwithstanding that fact, if a broker-dealer other than
the underwriter requests payment of selling commissions at the time of
acceptance of an investor as a member of the Fund such fees will be paid then.
Provider Escrow Account. The provider escrow account shall be established
by the provider and maintained by our servicer 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 members of the Fund together with
accrued interest thereon.
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 deposit in the operating escrow account, premium
escrow account, and provider escrow account 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
70
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 proportionate share of proceeds from life insurance policies. Funds shall
be paid, proportionately, 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 has been exhausted. There will be no
other reserve fund (e.g., a sinking fund) available to pay policy premiums. 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 proportionately 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 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.
71
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.
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.
72
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 the offering of units in
connection with this offering 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
73
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 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
74
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 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
75
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 was formed to be
a real estate broker, mortgage broker and to provide managerial services not
only for the underwriter, provider and the Fund, but may also provide services
to other outside companies or funds for a fee. The Manager will market its
services to other outside entities and to additional funds and it does not
believe for competitive reasons it would be able to do so, as part of the
provider or the broker-dealer. AmeriFirst Financial Services also holds a
mortgage broker's license and real estate broker's license in the State of
Florida. AmeriFirst Financial Services is regulated by the Department of
Business and Professional Regulation--Division of Real Estate and the Florida
Office of the Comptroller--Department of Banking and Finance along with the
Secretary of State for the State of Florida. 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;
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.
The loss of John Tooke's services would not terminate the Fund's business and
operations. At this point in time, each company is established with experienced
staff with the knowledge and
76
ability to continue their departments in the case that Mr. Tooke is unable to
fulfill his duties. AmeriFirst Inc. has two other shareholders, as described
below under "Officers and Directors of AmeriFirst, Inc." who intend to become
active participants in the operations of the corporations at a later point in
time. They would be able to immediately step in to work if Mr. Tooke's services
were not available. The contingency plan would also have AmeriFirst, Inc.'s
counsel, Mr. Dan Armstrong, actively run the operations of the companies in Mr.
Tooke's absence. Mr. Armstrong has been with Mr. Tooke during the entire
establishment of the operations and has been in the life settlements business
for more than a year and he has extensive experience in senior management for
several decades with multi-national companies and his own companies. Management
believes that the business and operations of all the companies of AmeriFirst
Inc. would continue to be operational even with the loss of Mr. Tooke's
services.
Executive Officers and Directors of our Manager
The following persons are the sole executive officers and directors of our
manager.
Name Age Office
---- --- ------
John Tooke 61 Chief Executive Officer and Director
Denise Mugerdichian Lachman 47 President and Director
John Tooke has been Chief Executive Officer, 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
77
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.
Denise Mugerdichian Lachman has been President and a director of
AmeriFirst Financial Services since March 2003 and a director and shareholder of
AmeriFirst, Inc. since November 2002. Since 1991, Ms. Lachman has owned Nolet
Associates, an interior design and flooring company.
All of the capital stock of our manager, provider and underwriter is owned
by AmeriFirst, Inc., a Delaware holding company. John Tooke owns 50% of the
common stock, and Irving Strickstein and Denise Mugerdichian Lachman each
beneficially own 25% 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 47 Director; President and Director of AmeriFirst Financial
Lachman Services
See " Executive Officers and Directors of Our Manager" above for
biographical information on John Tooke, Chairman, and Denise Mugerdichian
Lachman, President, 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,
78
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 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 also holds a life insurance license in the
State of Florida. 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.
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
79
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
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 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 to the extent possible. 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, provider and underwriter
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,
competition in the area of life settlement contracts and certain states'
requirements as to minimum amounts to be paid to an insured. In addition, our
manager will purchase life insurance policies which based on the estimated life
expectancy would provide a return to investors of at least 8% interest
compounded annually. These limitations are expected to reduce the fees which can
be paid to less than the maximum amount allowed. 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
Person Receiving Form and Method of
Compensation Compensation
- ------------ ------------
Provider Policy origination or brokerage commissions up to a
maximum of 7.5% of the face value of each life insurance
policy to the extent possible, depending upon market
conditions. The fees will be paid one time on each
policy to the entity acting as a qualified provider
80
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 servicing the
and/or Servicer 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 insurance
policies on an ongoing basis.
Underwriter Our underwriter will be paid up to 10% of the gross
proceeds of the offering as selling commissions at the
time of purchase of insurance policies. Broker-dealers,
other than our underwriter, will be paid upon acceptance
of the investor as a member of the Fund unless the
broker-dealer agrees to defer payment. See "Plan of
Distribution."
John Tooke AmeriFirst Inc. is paying John Tooke a salary of $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. 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, proportionately, 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
81
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. 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 18 employees as of March 13, 2003, including Mr. Tooke, a chief
information officer, an executive assistant, in-house legal staff, accounting
staff, insurance review, insurance analyst, 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
82
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.
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, 50% of whose capital stock is owned by John Tooke, 25% is beneficially
owned by Irving Strickstein and 25% 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 February 13, 2003, AmeriFirst entered into an expense agreement whereby
AmeriFirst agreed to forgive approximately $218,000 of expenses which were
incurred on the Fund's behalf. In addition AmeriFirst, Inc. agreed that the Fund
would not have to repay any additional offering expenses paid by AmeriFirst,
Inc.
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 500 shares (25%), as amended, of the common stock of
AmeriFirst and a proportionate 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
83
note in the principal amount of $500,000. In consideration of the loan, Dow
Ridge received 500 shares (25%), as amended, of the common stock of AmeriFirst
and a proportionate 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, 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.
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
-------------------- -------------- --------------
Name Unit Percent of Unit Percent of Unit Percent of
- ---- Dollar Amount Units Dollar Amount Units Dollar Amount Units
Beneficially Beneficially Beneficially Beneficially Beneficially Beneficially
Owned Owned Owned Owned Owned Owned
----- ----- ----- ----- ----- -----
Investors -- -- $2,500,000 100% $100,000,00 100%
in the
aggregate
84
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 50% of the common stock and Irving
Strickstein and Denise Mugerdichian each beneficially own 25% 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 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 where 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
85
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.
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.
86
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.
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
87
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.
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 based
on private letter rulings of the Internal Revenue Service that such limitation,
if enforced, will be effective to preclude the company from being treated as a
publicly traded partnership for income tax purposes. However, private letter
rulings are only binding with respect to the taxpayer to which they are
addressed. Nevertheless, since the Fund intends to enforce the provisions in the
operating agreement, it is counsel's opinion that the Fund will not be taxed as
a corporation and will not be subject to tax other than as a partnership.
Taxation of Partnership and Partner
The Federal income tax laws recognize a partnership as an entity having
its own taxable year and having its own income and losses. A partnership
computes its income much as an individual does. However, once its income for its
tax year is determined, the partnership does not, in general, pay taxes.
The partnership reports to each individual partner that partner's share of
income, gains, losses, deductions and credits on Schedule K, Form 1065. A
partner then reports his or her individual income tax return and subject to any
limitations applicable to him or her, his or her distributive share of the
partnership's taxable income or loss, and separately stated items of partnership
income, gain, loss, deductions and credits.
As a consequence of this "flow through" system of taxability,
distributions during the year are not the measure of a partner's share of
partnership income for a year. A partner may have taxable income without the
receipt of a distribution.
88
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.
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
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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 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.
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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.
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.
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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 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.
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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 and in the opinion of counsel
will 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 March 12, 2003 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 the capital accounts of the Fund may approve any of the
following matters, generally subject to the approval of our manager as well:
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Percentage of the Capital
Accounts to be
Action held by Consenting
------ Members for
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.
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
94
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
proportionate share as the transferor.
1. Net income of the Fund shall be allocated to the members on their
proportionate share.
2. All net losses shall be allocated to the members on their proportionate
share.
Distributions
We intend to make distributions to members only of their proportionate
share of the proceeds paid on life insurance policies. A member's proportionate
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 premium escrow account 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.
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
95
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.
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
96
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 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 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, proportionately, in accordance with the positive balance in
their respective capital accounts.
97
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, to the extent possible which is the maximum amount permitted by
the NASD, for selling the units and for managing selected dealers. We expect to
complete the broker-dealer registration of our underwriter with the NASD prior
to the effective date of this prospectus. Units may also be sold by officers of
AmeriFirst, Inc., who are sales representative licensed by the NASD, who will
receive commissions, where permitted.
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.
Broker-dealers, other than an underwriter, will be paid upon acceptance of the
investor as a member of the Fund unless the broker-dealer agrees to defer
payment. Brokers' sales commissions will not be segregated and escrowed. All
funds received from investors after the minimum offering is completed will be
disbursed form the operating escrow account when the managers does the pricing
for purchasing a policy. The commission will be paid at closing of the purchase
of an insurance policy which occurs when information is received by the manager
from the insurance company that ownership and beneficiary information has been
properly changed.
Our underwriter is a newly formed Florida broker-dealer, all of whose
stock is owned by AmeriFirst, Inc., an affiliate of the Fund. 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 manager and our provider are also
wholly-owned subsidiaries of AmeriFirst, Inc. Our manager may receive up to 5%
and our provider may receive up to 7.5% of the face amount of each insurance
policy purchased to the extent possible. AmeriFirst, Inc. has agreed to pay all
expenses of this offering, estimated as follows:
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
--------
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
98
units to the extent possible. 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.
Our underwriter will solicit solely accredited investors on a direct basis
or through other broker-dealers. On a direct basis, the underwriter, the Fund or
other broker-dealers will solicit institutions, pension funds, banks, credit
unions and other broker dealers or financial advisors in the securities
industry. Our underwriter will also seek other broker-dealers or financial
advisors for them to solicit their high net worth, accredited investors with
units of this offering. Our underwriter may either personally solicit these
individuals or do a mass-mailing. Any advertising or mailing material will be
approved by the NASD's advertising department before being submitted to the
public.
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 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
99
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.
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
100
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 in the offering 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 in
this offering.
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, 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.
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.
101
AMERIFIRST FUND I, LLC
(A Development Stage Company)
CONTENTS
- --------------------------------------------------------------------------------
Page
----
CONDENSED FINANCIAL STATEMENTS -
For the Three Months Ended December 31, 2002 (Unaudited)
FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET (UNAUDITED) 1
CONDENSED STATEMENT OF OPERATIONS AND
MEMBER'S DEFICIT (UNAUDITED) 2
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) 3
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 4-5
AUDITED FINANCIAL STATEMENTS -
For the Period April 22, 2002 (Inception) Through September 30, 2002
INDEPENDENT AUDITORS' REPORT 6
FINANCIAL STATEMENTS
BALANCE SHEET 7
STATEMENT OF OPERATIONS AND MEMBER'S DEFICIT 8
STATEMENT OF CASH FLOWS 9
NOTES TO FINANCIAL STATEMENTS 10-12
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 DEFICITACCUMULATED DURING THE
DEVELOPMENT STAGE (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)
NOTES TO FINANCIAL STATEMENT
- --------------------------------------------------------------------------------
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)
NOTES TO FINANCIAL STATEMENT
- --------------------------------------------------------------------------------
NOTE 2 - 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 of 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.
NOTE 3 - 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 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.
5
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
6
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 ACCUMULATED DURING THE
DEVELOPMENT STAGE (34,382)
---------
TOTAL LIABILITIES AND MEMBER'S DEFICIT $ 183,718
=========
The accompany notes are an integral part of these financial statements.
7
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.
8
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.
9
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.
10
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 Investment in Insurance Policies
The Company recognizes revenue on its investment in life insurance
policies in accordance with Financial Accounting Standards Board Technical
Bulletin 85-4 "Accounting for Purchases of Life Insurance". ("FTB No.
85-4") At the acquisition date of a policy the difference between the cost
of the policy (including all related acquisition cost) and the policy's
cash surrender value will be expensed. Premiums on such policies will be
charged to expense as incurred. Revenue will be recognized upon an
increase in the policies' cash surrender value. When a policy's benefit
becomes payable, the Company will recognize revenue for the difference
between the benefit to be received and cash surrender value. 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.
11
AMERIFIRST FUND I, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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).
12
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-16 to A-17.
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 Financial Services, Inc. (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, AmeriFirst Capital Corp., the Fund's underwriter and any other 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: _____________ - ____________ - ______________
If Trust does not have a Tax I.D. Number, indicate the Social Security Number
("SSN") of the person having voting power over the Trust, including such
person's name and his/her relationship to the Trust (i.e., grantor, trustee,
beneficiary, etc.):
SSN:______________________________________
Name:_____________________________________
Relationship to Trust:____________________
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: ________________________________________
EACH INDIVIDUAL PARTICIPANT OF THE PLAN MUST ALSO COMPLETE THE FOLLOWING
INFORMATION.
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: ____________________________________________________
Employer: ______________________________________________________________________
Business Address: ______________________________________________________________
Occupation: ____________________________________________________________________
Is your 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-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: _______________________________________
Name: _________________________________
Title: ________________________________
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 MARCH 12, 2003
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 FUND AND ITS BUSINESS.....................................B - 6
SECTION 2.1 FORMATION OF FUND.....................................B - 6
SECTION 2.2 NAME..................................................B - 6
SECTION 2.3 TERM OF FUND..........................................B - 6
SECTION 2.4 PURPOSES OF FUND......................................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: FUND 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 PREMIUM ESCROW 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 - 9
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 - 12
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 - 13
SECTION 5.3 TIMING OF DISTRIBUTIONS..............................B - 14
SECTION 5.4 LIMITATIONS ON DISTRIBUTIONS.........................B - 14
SECTION 5.5 RESERVES.............................................B - 14
TABLE OF CONTENTS
Page
SECTION 5.6 TAX DISTRIBUTIONS....................................B - 14
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 FUND
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 - 22
SECTION 7.2 BANK ACCOUNTS........................................B - 22
SECTION 7.3 TAX RETURNS..........................................B - 22
SECTION 7.4 TAX MATTERS PARTNER..................................B - 22
SECTION 7.5 RECORDS..............................................B - 22
SECTION 7.6 MANAGER'S ANNUAL REPORT..............................B - 23
SECTION 7.7 ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS'
SUBSERVICING REPORTS..............................................B - 23
SECTION 7.8 REPORTS TO MEMBERS...................................B - 24
ARTICLE VIII: ADMISSION OF MEMBERS.......................................B - 24
SECTION 8.1 ADMISSION OF MEMBERS.................................B - 24
ARTICLE IX: TRANSFERS OF INTERESTS OF MEMBERS............................B - 25
SECTION 9.1 GENERAL PROHIBITION..................................B - 25
SECTION 9.2 GENERAL CONDITIONS TO PERMITTED TRANSFER.............B - 25
SECTION 9.3 VOID TRANSFERS.......................................B - 27
SECTION 9.4 PERMITTED TRANSFERS..................................B - 27
SECTION 9.5 NOTICE...............................................B - 27
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 FUND...........................................B - 28
SECTION 10.2 RIGHTS OF PERSONAL REPRESENTATIVE...................B - 28
SECTION 10.3 WITHDRAWAL OF MEMBERS OTHER THAN
MANAGERS..........................................................B - 28
TABLE OF CONTENTS
Page
ARTICLE XI: BANKRUPTCY, DISSOLUTION AND TERMINATION......................B - 29
SECTION 11.1 BANKRUPTCY..........................................B - 29
SECTION 11.2 DISSOLUTION.........................................B - 30
SECTION 11.3 LIQUIDATION.........................................B - 30
SECTION 11.4 TERMINATION.........................................B - 30
ARTICLE XII: AMENDMENT OF AGREEMENT AND POWER
OF ATTORNEY...............................................................B - 30
SECTION 12.1 AMENDMENTS..........................................B - 30
SECTION 12.2 AMENDMENT OF ARTICLE OF ORGANIZATION................B - 31
SECTION 12.3 POWER OF ATTORNEY...................................B - 31
ARTICLE XIII: MISCELLANEOUS PROVISIONS...................................B - 31
SECTION 13.1 NOTICES.............................................B - 31
SECTION 13.2 SEVERABILITY........................................B - 32
SECTION 13.3 COUNTERPARTS........................................B - 32
SECTION 13.4 ENTIRE AGREEMENT....................................B - 32
SECTION 13.5 FURTHER ASSURANCES..................................B - 32
SECTION 13.6 SUCCESSORS AND ASSIGNS..............................B - 32
SECTION 13.7 WAIVER OF ACTION FOR PARTITION......................B - 32
SECTION 13.8 CREDITORS...........................................B - 33
SECTION 13.9 REMEDIES............................................B - 33
SECTION 13.10 WRITING REQUIREMENT................................B - 33
SECTION 13.11 WAIVER.............................................B - 33
SECTION 13.12 APPLICABLE LAW.....................................B - 33
SECTION 13.13 SIGNATURES.........................................B - 33
MEMBER SIGNATURE PAGE.....................................................B - 34
SCHEDULE A................................................................B - 35
OPERATING AGREEMENT
OF
AMERIFIRST FUND I, LLC
OPERATING AGREEMENT, dated as of March 12, 2003 (the "Agreement"), by
AmeriFirst Financial Services, 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 "Fund") 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 Fund 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 Fund 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
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described in (i) above; (iii) any officer, member, director, trustee or general
partner of 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 Fund, 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 Fund and, throughout the term of the Fund, 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 Fund 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 Fund 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 Fund 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 Fund as determined in accordance
with Section 6.1 of this Agreement.
"GROSS PROCEEDS." The gross proceeds paid from the Life Insurance Policies
at Maturity.
"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 Fund.
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"INSURED." Any individual named as the insured in the Life Insurance
Policy.
"INTEREST." The ownership interest of a Member in the Fund as reflected in
the records maintained by the Fund at its offices, as the same may, from time to
time, be required to be amended (which shall be considered personal property for
all purposes), consisting of such Member's share in allocations and
distributions.
"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 Fund, 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 Fund for such period as determined in accordance with the method of
accounting followed by the Fund for Federal income tax purposes, including, for
all purposes, any income exempt from tax and any expenditures of the Fund 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 Fund's assets shall be computed as if
the adjusted basis of such asset of the Fund on the date of such disposition
equaled its book value as of such date, (ii) if any of the Fund'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 Fund's
assets shall be computed by assuming that the adjusted basis of such asset of
the Fund 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.
"OPERATING ESCROW 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.
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"PERSON." An individual, corporation, partnership, limited liability
company, trust, unincorporated organization, association or other entity.
"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 Fund and a
third party servicer, in connection with the servicing of the Life Insurance
Policies.
"SUBSCRIPTION AGREEMENT." The document that is an exhibit to and part of
the Prospectus that every Person who buys Units of the Fund 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 Fund 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.
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"UNITS." Represent fractional undivided beneficial Interests in the income
to be generated from Life Insurance Policies acquired by the Fund and that are
(a) issued to Members upon their admission to the Fund under the Subscription
Agreement and the Prospectus, or (b) Transferred to those who become Substituted
Members.
"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
Family Member ................................................Section 10.4(b)(i)
Florida Act...................................................1st Recital
Fund..........................................................1st Recital
Fund Counsel..................................................Section 6.7(d)
Life Insurance Policies.......................................2nd Recital
Life Settlements..............................................2nd Recital
Manager Default...............................................Section 6.8
Permitted Transferee..........................................Section 9.4(b)
Premium Escrow Account........................................Section 3.3
Rules.........................................................Section 6.7(d)
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
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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.
ARTICLE II: THE FUND AND ITS BUSINESS
SECTION 2.1 FORMATION OF FUND. The Fund 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 Fund
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 Fund shall be AmeriFirst Fund I, LLC,
but the Manager, in its discretion, may change the name of the Fund at any time
and from time to time upon written notice to the Members.
SECTION 2.3 TERM OF FUND. The existence of the Fund 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 FUND. The Fund 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 Fund 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 Fund 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 Fund 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 Fund 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 Fund
may own property or conduct business, including, without limitation,
qualification of the Fund as a foreign limited liability company in any state in
which such qualification is required. The Manager is authorized to execute, file
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and publish, or cause to be filed and published, with the proper authorities in
each jurisdiction where the Fund conducts business, such certificates or
documents in connection with the conduct of business pursuant to a fictitious
name or similar statute.
(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 Fund as a limited partnership in
all jurisdictions in which the Fund 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 Fund 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
Fund 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: FUND INTERESTS AND CAPITALIZATION
SECTION 3.1 CAPITAL CONTRIBUTION OF THE MANAGER. (a) The Manager has
contributed $10.00 to the capital of the Fund in cash or property and is a
Member of the Fund.
(b) The Manager shall not be required to contribute any additional capital
to the Fund or, except as expressly set forth in this Agreement, to lend any
funds to the Fund.
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.
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"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.
SECTION 3.3 PREMIUM ESCROW ACCOUNT; CAPITAL CALL. (a) The Fund shall
establish a premium escrow account (the "Premium Escrow Account")to pay premiums
on all Life Insurance Policies. The Premium Escrow Account shall equal
approximately 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 Members
with all accrued interest thereon.
(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 Fund. 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 Fund, 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
Fund. Upon the termination of the Fund, 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 Fund,
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.
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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
Fund or upon its liquidation, to pay to the Fund 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 liabilities
of the Fund, whether arising in contract, tort or otherwise, shall be solely the
debts, obligations and liabilities of the Fund; 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 Fund 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 Fund, as an initial Capital Contribution in
exchange for Units in the Fund, 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 Fund'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 Fund shall be allocated to the Members on
their Pro Rata Share.
SECTION 4.2 OTHER ALLOCATION PROVISIONS. (a) Items of tax expense payable
by the Fund or withheld on income received by the Fund 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 Fund or where
a withholding tax on income or payments received by the Fund 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 Fund, 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 Fund and
distributions to the Members shall be adjusted appropriately.
(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
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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 Fund 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 Fund.
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 Fund
has any discretion as to an exception, the Manager may exercise such discretion
on behalf of the Fund) 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 Fund 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 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
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to restore on liquidation of the Fund 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 Fund 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 Fund 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).
(h) Except to the extent otherwise required by the Code and Regulations,
if an Interest in the Fund or part thereof is Transferred in any Fiscal Year,
the Net Income, Net Loss and items of
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income, gain, loss, deduction and credit allocable to the Interest in the Fund
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 Fund.
(i) In determining the Members' share of the excess nonrecourse
liabilities of the Fund, if any, for purposes of Section 1.752-3(a)(3) of the
Regulations, the Members' share of Fund 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 Fund shall be allocated in the same manner
as the items 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
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Capital Account purposes--income, gain, loss and deduction with respect to any
property properly carried, on the Fund'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 Fund 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 Fund 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 Fund may, at its option,
(i) require the Member to reimburse the Fund 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 Fund with any representations and forms as shall reasonably be
requested by the Fund to assist it in determining the extent of, and in
fulfilling, its withholding obligations.
SECTION 4.5 CAPITAL ACCOUNTS. The Fund 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 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 Fund 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 Gross 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.
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
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(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 Fund
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 in the following manner: 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"). Distributions will only be made following months in
which insurance proceeds are received on matured policies.
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 Fund if the Member knew that, immediately after giving
effect to the distribution, all liabilities of the Fund, other than liabilities
for which the recourse of creditors is limited to specified property of the
Fund, exceed the Value of the assets of the Fund (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 Fund 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 Fund 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 Fund to establish such
reserves as it deems reasonably necessary for any contingent or unforeseen Fund
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).
SECTION 5.6 TAX DISTRIBUTIONS. For each Fiscal Year, the Fund 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
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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 Fund, the recipients shall promptly repay all incorrect
payments and the Fund 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 Fund, 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 Fund 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 Fund's business, and no power to
bind the Fund or to act on behalf of the Fund 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 Fund as set forth in this Agreement. The Manager shall not
permit the Fund to undertake any activity that would cause the Fund 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 Fund's assets to be "plan assets"
or the trading and investment activity of the Fund to constitute "prohibited
transactions" under the Code and the Employee Retirement Income Security Act of
1974, as may be amended.
(c) Without limiting the generality of the foregoing Sections 6.1(a) and
(d) the Manager shall have the power on behalf of the Fund to:
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(i) authorize and engage in transactions and dealings on behalf of
the Fund, 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 Fund, Interests
which may be so redeemed, repurchased or exchanged;
(vi) appoint (and dismiss from appointment) attorneys and agents on
behalf of the Fund, and employ (and dismiss from employment) any and all persons
providing legal, accounting or financial services to the Fund, or such other
employees or agents as the Manager deems necessary or desirable for the
management and operation of the Fund, including any Member or any Affiliate of
any Member;
(vii) open accounts and deposit, maintain and withdraw funds in the
name of the Fund in banks, savings and loan associations, brokerage firms or
other financial institutions;
(viii) effect a dissolution of the Fund and act as liquidating
trustee or the Person winding up the Fund's affairs, all in accordance with the
provisions of this Agreement and the Florida Act;
(ix) bring and defend, on behalf of the Fund, 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 Fund, (b) a merger or consolidation or similar transaction of
the Fund (whether the Fund or another Person is the surviving entity of such
transaction), (c) a sale of all of the Interests of the Fund, 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
Fund; and
(xiii) execute all other documents or instruments, perform all
duties and powers and do all things for and on behalf of the Fund 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 Fund in the ordinary course of business, including without limitation,
identifying potential life insurance policies for the Fund 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 Fund, 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.
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SECTION 6.4 MANAGER'S DUTY TO DEVOTE TIME. The Manager shall be
responsible for the conduct of the business of the Fund as set forth in this
Agreement in such a manner as to maximize the value of the Fund's assets, and
the Manager shall devote such resources to the Fund business as shall be
necessary or useful to manage and supervise the Fund'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 Fund, 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 Fund.
SECTION 6.6 INDEMNIFICATION.
(a) To the fullest extent permitted by applicable law, an Indemnified
Person shall be entitled to indemnification from the Fund 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
Fund 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 Fund 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 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.
SECTION 6.7 CERTAIN TRANSACTIONS BETWEEN THE FUND 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
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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 Fund may also be counsel to the Manager or any
Affiliate of the Manager. The Manager may execute on behalf of the Fund and the
Members any consent to the representation of the Fund that counsel may request
pursuant to any applicable rules of professional conduct or similar rules
("Rules"). The law firm engaged as legal counsel to the Fund in connection with
the formation of the Fund and the offer and sale of Units ("Fund Counsel") is
not involved in the underwriting, documentation or routine servicing of the Life
Insurance Policies acquired by the Fund. Each Member acknowledges that Fund
Counsel does not and will not represent any Member, and that in the absence of a
clear and explicit written agreement, Fund 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 Fund, or between any
Member or the Fund, on the one hand, and the Manager or its Affiliate, on the
other hand, then each Member agrees that Fund Counsel may represent either the
Fund 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 Fund Counsel has represented
only the interests of the Manager and not the Members in connection with the
formation of the Fund 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 Fund and the Fund 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
Fund in writing or, if no date is specified in the termination notice, until a
date agreed upon by the Fund.
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(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 Fund 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
(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 Fund, 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
Fund, 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 Fund 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
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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 Fund for Cause (as defined below) and as otherwise specifically
provided 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 Fund or (iii) has acted or omitted to take action on
behalf of the Fund 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 Fund 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 Fund, incurred by the Manager and its Affiliates in connection with the
business of the Fund, 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 Fund 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.
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 Fund or at such other office as the
Manager may designate. The Fiscal Year of the Fund 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 Fund shall end on
the date the Fund is terminated.
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SECTION 7.2 BANK ACCOUNTS. The Fund shall maintain one or more bank
accounts for such funds of the Fund 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 Fund shall prepare income tax returns for the
Fund and shall further cause such returns to be timely filed with the
appropriate authorities. It is contemplated that the Fund will be classified as
a "partnership" for federal, state and local income tax purposes. The Fund and
its Members will take such reasonable action as may be necessary or advisable,
as determined by the Manager, including the amendment of this Agreement to cause
or ensure that the Fund shall be treated as a "partnership" for federal, state
and local income tax purposes. All elections by the Fund 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 Fund, 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 Fund to keep the
following records, which shall be maintained at the Fund'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 Fund'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 Fund, if any, for the
three (3) most recent Fiscal Years; and
(v) The Fund's books and records as they relate to the internal
affairs of the Fund 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.
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(b) The Manager shall furnish or cause to be furnished by the transfer
agent and registrar, if other than the Manager, to the Fund within five (5)
business days after receipt by the 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 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 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 MANAGER'S ANNUAL REPORT. The Manager shall deliver to the Fund
for filing with the Department of State of Florida on or before January 15th of
each calendar year, the first annual certificate to be filed by May 1, 2003, in
the form as the Department of State of Florida prescribes setting forth (1) the
name of the Fund; (2) date of the Fund's organization; (3) the street and
mailing address of the Fund's principal office; (4) the Fund's federal employee
identification number; (5) the names and business of the Fund's managing member;
(6) the street address of the Fund's registered agent; and (7) any other
additional information as is required by the Department of State of Florida.
SECTION 7.7 ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SUBSERVICING REPORTS.
The Manager, at the sole expense of the Fund, shall undertake to cause annual
reports to be prepared by independent public accountants for the Fund, which
reports will be available for inspection by the Members at the offices of the
Manager during normal business hours. On or before January 15th of each calendar
year, beginning with January 15, 2004, the Manager shall cause, at cost and
expense of the Fund, 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.
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SECTION 7.8 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 $1,000 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 Fund as
of the date of this distribution.
(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 Fund 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 Fund's tax treatment of the
Units, as the Fund and the Manager deem necessary or desirable to enable the
Members to prepare their respective tax returns. The obligations of the Fund
shall be deemed to have been satisfied to the extent that the Fund 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 Fund shall only accept initial
Capital Contributions from Members in an amount not less than $100,000.
(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
Fund to be treated as an association taxable as a corporation for Federal income
tax purposes, (ii) cause the Fund to be treated as a "publicly traded company"
within the meaning of Section 7704 of the Code, (iii) violate or cause the Fund
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.
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(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 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 Fund to be treated as an association taxable as a
corporation for Federal income tax purposes, (ii) cause the Fund to be treated
as a "publicly traded partnership" within the meaning of Section 7704 of the
Code, (iii) violate or cause the Fund 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 Fund in connection with
such transaction;
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(iv) the transferee shall execute such other documents or
instruments as counsel to the Fund 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 Fund receives an opinion of
counsel (who may be counsel for the Fund), 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, Fund Counsel delivers to the Fund
an opinion that such Transfer (a) will not result in a termination of the Fund
under Section 708 of the Code; (b) will not cause the Fund to lose its status as
a partnership for United States federal income tax purposes; and (c) will not
cause the Fund 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 Fund 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 Fund 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 Fund 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 Fund 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 Fund insofar as the Interest Transferred is
concerned.
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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 Fund.
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 Fund 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 Fund Counsel.
(b) A "Permitted Transferee" means:
(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.
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ARTICLE X: DEATH, LEGAL INCOMPETENCY, OR WITHDRAWAL OF A MEMBER
SECTION 10.1 EFFECT OF DEATH OR LEGAL INCOMPETENCY OF A MEMBER OF THE
FUND. 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 Fund being classified as a "publicly
traded partnership" within the meaning of Section 7704(b) of the Code and the
Regulations thereunder. To withdraw or partially withdraw from the Fund, 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 Fund, any cash payments in
return of an outstanding Capital Account shall be made by the Fund only from
Gross 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 Gross 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 Fund's funds other than cash
from Gross Proceeds and Capital Contributions; (iii) sell or otherwise liquidate
any portion of the Fund'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 Gross Proceeds
or Capital Contributions in new Life Insurance Policies or other non-liquid
investments unless and until the Fund has sufficient funds
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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 Fund'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
(vii) If a Member's Capital Account would have a balance of less
than one hundred thousand dollars ($100,000) 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 Fund 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 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 ninety (90) days after its filing, the Fund 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.
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SECTION 11.2 DISSOLUTION. 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; or
(b) the express written consent of the Manager; or
(c) the unanimous consent of the Members; or
(d) the termination of the Fund in accordance with Section 2.3; or
(e) sale of all or substantially all of the assets of the Fund; or
(f) the entry of a decree of judicial dissolution of the Fund; 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 Fund and, within six (6) months after
the last remaining manager has ceased to be a manager, admit one or more
managers who agree to such election and join the Fund as managers.
SECTION 11.3 LIQUIDATION. (a) Upon the dissolution of the Fund, the
Manager shall proceed, within a reasonable time, to sell or otherwise liquidate
the assets of the Fund and, after paying or making due provision by the setting
up of reserves for all liabilities to creditors of the Fund 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
Fund for the return of their Capital Contributions. The winding up of the
affairs of the Fund 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 Fund shall terminate when all property owned
by the Fund shall have been disposed of and the assets, after payment of, or due
provision has been made for, and liabilities to Fund 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 Fund
and any and all other documents necessary in connection with the termination of
the Fund.
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
B-30
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 Fund, to the
to reflect such change if it deems, such amendments to be necessary or
appropriate.
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 Fund 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 Fund 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 Fund,
except that where the assignee thereof has been approved by the Manager for
admission to the Fund 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
B-31
addresses set forth on Schedule A or in the records maintained by the Fund 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.
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 Fund 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 Fund 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 Fund.
B-32
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 Fund 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.
SECTION 13.13 SIGNATURES. The signature of the Manager shall be sufficient
to bind the Fund 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
B-33
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:________________________________
B-34
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 IN THIS OFFERING 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.
102
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 (3)
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 (3)
10.8 Consulting Agreement between AmeriFirst Financial Services, Inc. and
Fasano Associates, Inc., dated as of November 1, 2002 (3)
10.9 Consulting Agreement between AmeriFirst Financial Services, Inc. and
Systems for Advanced Risk Analysis, L.P., dated as of November 1, 2002 (3)
10.10 Consulting Agreement between AmeriFirst Financial Services, Inc. and
American Viatical Services, dated February 12, 2003 (3)
10.11 Expense Agreement between AmeriFirst Fund I, LLC and AmeriFirst, Inc.
dated February 13, 2003 (3)
23.1 Consent of Snow Becker Krauss P.C. (included in the opinion filed as
Exhibit 5.1 to this Registration Statement) (3)
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.
II-2
(2) Filed with Amendment No. 2 to registrant's registration statement on
Form S-1, filed on January 15, 2003.
(3) Filed with Amendment No. 3 to registrant's registration statement on
Form S-1, filed on February 20, 2003.
(B) Financial Statement Schedules.
Item 17. Undertakings
The undersigned registrant undertakes 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 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
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Rule 430A and contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared effective.
(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. 5 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 April 2, 2003.
AMERIFIRST FUND I, LLC
By: AMERIFIRST FINANCIAL SERVICES, INC.,
MANAGER
/s/ John Tooke
-------------------------------------
John Tooke
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 April 2, 2003
- -------------- Chief Executive Officer of
John Tooke AmeriFirst Financial Services, Inc.
Manager of AmeriFirst Fund I, LLC
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