AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 2004
REGISTRATION NO. 333-98651
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERIFIRST FUND I, LLC
(Exact name of registrant as specified in its charter)
Florida 6189 16-1628-844
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employee
Classification Code Number) Identification number)
1712-H Osborne Rd.
St. Mary's, Georgia 31558
(912) 673-9100
(Name, address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
John Tooke,
AmeriFirst Fund I, LLC
1712-H Osborne Rd.
St. Mary's, 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.
If any of the securities being 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|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
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.
PROSPECTUS
MAXIMUM -- $100,000,000 of Units
MINIMUM -- $2,500,000 of Units
MINIMUM INVESTMENT: $100,000
[LOGO] AmeriFirst(TM)
FUND I, L.L.C., 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.
Proceeds to Price to Selling
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. Units
are only being offered to accredited investors who should not invest money that
they need to live on. 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 viable business if unable to generate an
adequate return on investment
o no guarantees in estimates of timing when the
policy matures o substantial doubt raised by accountants as to
our ability to continue as a going concern due
o lack of liquidity to our being a development stage company which
has not yet begun operations, nor raised funds
o no actual experience by John Tooke in the life to commence such operations
settlements business
o lack of ownership interest in our manager and
o dependence on John Tooke as controlling person provider which are controlled by John Tooke
of our manager, provider and underwriter for the
proposed investment program o 5% of the gross proceeds of this offering will
be paid to our provider for origination fees; 5%
o lack of operating history, assets or established of the gross proceeds to our manager to service
financing sources the life settlements and the investors; and 2.5%
of the gross proceeds of this offering will be
o independent physicians providing services to us paid as selling commissions to our underwriter
do not personally examine the insured
o limited ability to invest in insurance contracts
o the proceeds have not been committed to any if only the minimum is reached
identifiable insurance policies
o the incentive fee structure could result in our
o conflicts between AmeriFirst Fund, our manager, manager recommending riskier or more speculative
provider and underwriter including, the payment investments
of substantial fees and expenses, non
arms-length agreements and competition for the o risks associated with the fact that we have no
time and services of John Tooke assets
o our investment policies and strategies may be
changed without unitholder consent
o investors will have to pay premiums once the
Fund's money is exhausted
AMERIFIRST CAPITAL CORP.
The date of this prospectus is _______, 2004.
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Footnote to table on previous page
(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.
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,
AmeriFirst Capital Corp., may also engage other NASD broker-dealers and entities
outside of the United States which are not licensed with the NASD to sell our
units, provided such foreign entities are in compliance with their respective
country's laws. Our underwriter will receive selling commissions at the time of
purchase of life insurance policies equal to 2.5% of the gross proceeds of the
sale of units by our underwriter. Our underwriter may also negotiate fees to be
paid to selected dealers and foreign entities on units sold by them. The total
selling commissions to our underwriter, selected dealers and foreign entities
cannot exceed 10% of the gross proceeds of units sold, which is the maximum fee
permitted by the NASD.
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 October 17, 2004, unless extended up until April 17, 2005.
AmeriFirst, Inc., the holding company controlled by John Tooke, will pay at its
own expense all organizational and offering expenses including without
limitation, legal and accounting expenses, photocopy costs, selling expenses,
and filing fees paid to the Securities and Exchange Commission and state
securities commissions, estimated to be approximately $300,000.
------------------------
Currently we intend to offer the units for sale in California, Colorado,
Connecticut, Florida, Georgia, Hawaii, Illinois, Minnesota, Nevada, New Jersey,
New York and Utah. We will end this offering in these states on April 17, 2005,
unless extended until April 17, 2006, or at such earlier time that all $100
million of units are sold. If we desire to extend this offering up until April
17, 2006, 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 October 17, 2004, unless extended up until April 17, 2005, 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 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.
ii
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.
iii
TABLE OF CONTENTS
Page
----
WHERE YOU CAN FIND MORE INFORMATION .......................................-iii-
SUMMARY OF THE OFFERING.......................................................1
ORGANIZATIONAL CHART.........................................................13
INVESTORS' CASH FLOW ........................................................14
RISK FACTORS.................................................................15
FORWARD-LOOKING STATEMENTS...................................................33
INVESTOR SUITABILITY STANDARDS................................................34
USE OF PROCEEDS...............................................................38
CAPITALIZATION OF AMERIFIRST FUND I, LLC......................................40
TERMS OF THE OFFERING.........................................................40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF AMERIFIRST FUND I, LLC.................................43
NOTICE TO CALIFORNIA RESIDENTS................................................45
BUSINESS......................................................................46
DESCRIPTION OF THE UNITS......................................................74
DESCRIPTION OF VIATICAL SETTLEMENT CONTRACTS..................................80
OTHER OPERATING POLICIES......................................................82
OUR MANAGER, PROVIDER AND UNDERWRITER.........................................83
COMPENSATION OF OUR MANAGER, PROVIDER AND UNDERWRITER.........................87
CONFLICTS OF INTEREST.........................................................89
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................91
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.........................................................93
iv
FIDUCIARY RESPONSIBILITIES OF OUR MANAGER.....................................93
ERISA CONSIDERATIONS..........................................................94
FEDERAL INCOME TAX CONSEQUENCES...............................................95
SUMMARY OF OPERATING AGREEMENT...............................................102
PLAN OF DISTRIBUTION.........................................................107
INVESTMENT COMPANY ACT OF 1940...............................................109
LEGAL PROCEEDINGS............................................................110
LEGAL OPINIONS...............................................................110
EXPERTS......................................................................110
ADDITIONAL INFORMATION.......................................................110
FINANCIAL STATEMENTS......................................................F-1-30
EXHIBITS
A. Form of Subscription Agreement.........................................A-1
B. Operating Agreement....................................................B-1
v
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 is registered with the
NASD and its personnel are licensed securities personnel
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 or
not required to be licensed, from other providers, or
from a 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. Our provider will be managed
by two persons who have been hired 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 and 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 senior software architect, 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 the four
medical review service
2
companies, to monitor or track the medical status and
location of an insured and file the claim to the insurer
once a policy has matured. The principal offices of our
manager and underwriter are located at 814 North Highway
A1A, Suite 300, Ponte Vedra Beach, Florida 32082; tel:
(904) 373-3034; although our manager expects to also have
office space at the Fund's facility in St. Marys,
Georgia.
Use of Proceeds .... The gross proceeds of the offering will be used to:
purchase life insurance policies for less than the face
amount of the policy, pay the referring 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. 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 insured, the insured's estimated
life expectancy and certain
3
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 in which our manager generally does not intend
to purchase any life insurance policy which based on the
estimated life expectancy would not provide a return to
investors of at least 8% interest compounded annually.
However, the estimated rate of return on investment is
not a guaranteed rate of return and the hypothetical
figures presented throughout the prospectus are based on
estimated life expectancies. However, if the insured
lives longer than the estimated life expectancy, the
return on investment would be lower than 8%, as set forth
under "Business--Description of Return on Investment."
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
referring broker's fee, establish the premium escrow
account at SouthTrust Bank with the balance to pay all
fees associated with the purchase, including our
underwriter's selling commission which will be paid at
the time of purchase. See "Business - Description of
Return on Investment -- Estimated Life Expectancy" Table
for a hypothetical example of how returns on investment
will be calculated.
The actual return to investors is paid 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 actual return on investment to members is
determined by subtracting the discounted amount paid for
each policy purchased (including all fees paid), as well
as any capital calls paid, and payments to the premium
escrow account,
4
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's
existence 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 (e.g., if the
premium escrow account fund has been exhausted); (v)
payments from the premium escrow account; and (vi)
policies that terminate, lapse or the refusal or
inability of the insurance carrier to pay the claim when
the policy matures.
The estimated 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
Offering ........... We must receive a minimum of $2.5 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 $1,000
in excess of such minimum denomination. Our underwriter
reserves the right to accept subscriptions of less than
$100,000.
5
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 where it will earn 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 transferred into our provider's escrow account.
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 October 17, 2004, unless
extended up until April 17, 2005, 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 April 17, 2005, unless
extended up until April 17, 2006, or, such earlier time
that 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 $2.5 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, Minnesota, Nevada, New Jersey, New York
and Utah. If we elect to extend this offering up until
April 17, 2006, 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
6
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, a
selected dealer or from a foreign entity. 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 5%
of the gross proceeds of this offering. This is exclusive
of fees, which our provider or the insured is obligated
to pay to the referring 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 5% of the gross proceeds of
this offering. 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 by our
manager/servicer include the following steps: (a) due
diligence review, which includes evaluating the terms of
each policy and of all medical records of the insured;
(b) obtaining the estimated life expectancy of the
insured from a medical review service company, which has
contracted with independent medical specialists; (c)
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; (d) servicing the
insurance policies on an ongoing basis, and (e)
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."
Underwriter's Selling Commissions. The fee to be paid to
our underwriter, AmeriFirst Capital Corp., will be 2.5%
of the gross proceeds of the units sold by our
underwriter. This fee will be paid to our underwriter
upon the Fund's
7
purchase of life insurance policies. Our underwriter may
also negotiate fees to be paid to selected dealers and
foreign entities on units sold by them where permitted.
The total selling commissions to our underwriter,
selected dealers and foreign entities cannot exceed 10%
of the gross proceeds of units sold, which is the maximum
fee permitted by the NASD.
Aggregate Fees To Be Paid to Affiliates of AmeriFirst,
Inc. The fees which will be paid to AmeriFirst, Inc.,
(through our provider, our manager and our underwriter)
the holding company, which is owned by John Tooke (50%),
Irving Strickstein (25%) and Denise Mugerdichian Lachman
(25%), are described above in this section and total
12.5% of the gross proceeds of this offering. Our
manager, provider and underwriter reserve the right to
reduce the fees which they receive on certain policies.
The policies purchased and fees paid will depend on
market conditions, providing investors with a competitive
rate of return, certain state statutes which require a
minimum amount to be paid to the policy holder, the
market based fee required by the referring broker and by
the terms and conditions of the insurance policy together
with the estimated life expectancy and the amount
escrowed into the premium escrow account which is
determined by using the formula of the estimated life
expectancy of the insured plus an additional 2 years
beyond such estimated life expectancy.
If the minimum, $2,500,000, the midpoint $50 million and
the maximum $100 million proceeds are raised, our
underwriter would receive $62,500, $1,250,000 and
$2,500,000, respectively, of selling commissions; our
provider and our manager would each receive fees of
$125,000, $2,500,000 and $5,000,000, respectively.
Therefore, the aggregate fees payable to affiliates of
AmeriFirst, Inc. will be approximately $312,500,
$6,250,000 and $12,500,000.
Premium Escrow
Account ............ The Fund shall escrow at SouthTrust Bank an amount
generally equal to the annual premiums of each policy
purchased by the Fund for the estimated life expectancy
of the insured plus an additional two years beyond such
estimated life expectancy. Upon final liquidation of the
Fund, the remaining premium escrow account balance shall
be transferred to our members on a proportionate
8
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 regardless of whether the
insured dies within the estimated life expectancy,
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 benefit of members at SouthTrust 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 make premium payments; and the third is the
provider's escrow account through which the insurance
policies are purchased and in certain instances the
referring broker's fee is paid. Investors will be
entitled to a pro-rata share of the short-term interest
(expected to be market rates of 1-
9
2% according to market fluctuation) earned in the
operating escrow account. See "Investors' Cash Flow"
chart on page 14.
Material Federal
Income Tax
Consequences ....... The Fund will elect to be taxed as a partnership for
federal income tax purposes and for purposes of any state
or local tax if such election is recognized by the state
and local taxing authorities. Accordingly, in the opinion
of our counsel, Snow Becker Krauss P.C., which is the
discussion herein under "Federal Income Tax
Consequences," 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
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
10
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
o investors will have to pay premiums once the
Fund's money is exhausted
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 SEC's
public reading rooms or on the SEC's website. See
"Summary of Operating Agreement--Reports and
11
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 or foreign entity 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 this
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
preparer, 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 |
| 25% owned by Irving Strickstein, Chairman |
| and 25% owned by Denise Mugerdichian Lachman |
| ----------------------------------------------- |
| | |
- ------------------------------ ------------------------------- -------------------------------
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 A wholly-owned subsidiary of
A wholly-owned subsidiary of AmeriFirst, Inc. AmeriFirst, Inc.
AmeriFirst, Inc.
John Tooke, John Tooke,
John Tooke, Chief Executive Officer and Chief Executive Officer and
Chief Executive Officer Director Director
and Director
Thomas M. Kann and Dawn McKinley, President
Brittany M. Ellis, Dawn McKinley,
President, Secretary and Managing Directors
Director
- ------------------------------ ------------------------------- -------------------------------
13
AMERIFIRST FUND I, LLC
INVESTORS' CASH FLOW
--------------------------
- -------------------- ---------------- Contracts Provider Escrow
Subscription Operating Received Account Pay at ---------------
Escrow Account --> Escrow Account <--------- -Funds to purchase life Closing Insured
- -Minimum $2.5 milion -Controlled by: insurance policies and in --------> -Controlled by:
- -Controlled by: Manager --------> some states fee for broker Servicer
South Trust Bank ------------------ Funds -Controlled by: Servicer ---------------
- -------------------- | --------------------------
| |
| | -----------------------------
| Pay at | Fee for broker in the
| Closing | broker network
| | -4.8% of face amount of life
| | Pay at insurance policies,
| |--------------------------> estimated at $10.1 million
| Closing of maximum proceeds
| -Controlled by: Servicer
-------------------------------------- -----------------------------
| |
| |
---------------------------- |
Premium Escrow Account |
-Annual premiums for ------------------------
the estimated life Manager's Account
expectancy of the insured -Fee for manager is 5%
plus an additional 2 years of the gross proceeds of
beyond such estimated life this offering
expectancy -Controlled by: Manager
-Controlled by: Manager ------------------------
---------------------------- |
|
--------------------------|-----------------------------
| | |
| | |
------------------------ ------------------------ ------------------------
Fee Paid: Fee for unaffiliated Fee for broker in the
--------- medical review service broker network
-Underwriter-2.5% of companies -4.8% of face amount of
gross proceeds and up to -$225-250 per life insurance policies,
10% when combined with evaluation, plus $15 per estimated at $10.1
other selected dealers month to monitor. million on maximum
and foreign entities -Controlled by: Manager proceeds
-Provider-5% of the ------------------------ -Controlled by: Manager
gross proceeds of ------------------------
this offering.
-Controlled 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, 2003, the Fund had
no assets other than deferred financing costs of $326,509 and our provider had
assets of $467,781. 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 proposed operations and future performance of the Fund. The
estimated rate of return on investment is based on the insured's estimated life
expectancy and is not a guaranteed rate of return. There is no basis for
comparison for the hypothetical figures presented under "Use of Proceeds,"
"Business--Description of Return on Investment," and throughout the Prospectus.
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
insurance policies on behalf of the Fund, either directly from the insured when
it is licensed or not required to be licensed, from other providers, or from a
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.
15
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. In addition, the various fees when added together are substantial
and that, in turn, also reduces the 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.
In order to generate an adequate return on investment, the various related
entities providing services to the Fund may reduce their fees on certain
policies. However, if there are not enough policies available to provide an
adequate return on investment and compensate the various entities, the Fund may
have to terminate its operations.
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., the
parent company of our manager, underwriter and provider, have 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 therefore, there is no prior performance
data available.
16
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 manager and we have no ownership interest in our manager.
Nobody has the responsibility of making an independent review for us of our
manager's performance of its duties.
Our manager has limited assets and will primarily fund its operations from fees
it earns in the purchase of life settlements.
Our manager has nominal capitalization and intends to fund its operations
from fees it earns in life settlements. If our manager is unable to meet its
obligations to the Fund in order to enable the Fund to continue its operations,
the Fund's members may be required to vote to replace our manager. In such an
event, the Fund may be required to make a capital call upon members in order to
continue the Fund's operations without interruption. See "Description of
Units--Capital Calls."
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 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 or not required to be licensed, from other
providers, or utilizing a 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 policies. 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
17
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. Our manager and provider will
each receive their fees based on the gross proceeds of this offering, regardless
of whether the insured dies within the estimated life expectancy, whereas the
investors' return on investment will depend on the insured dying within his
estimated life expectancy. Although we believe that such fees are reasonable,
these fees are not the result of arm's length negotiations and may create
conflicts of interest among such parties. See "Use of Proceeds," "Compensation
of Our Manager, Provider and Underwriter" and "Conflicts of Interest."
Our inability to accurately predict estimated life expectancies would adversely
affect our financial results and may lead to payment delays or losses.
The Fund's operations and financial results are dependent on the ability
of our manager, with the assistance of unaffiliated medical review service
companies to conduct medical reviews through independent physicians, to
accurately predict the estimated life expectancies of the insureds. Life
expectancy is a significant factor in our determination of the purchase price of
an insurance policy. Insureds can live significantly beyond the predicted life
expectancy. Unanticipated delays in the collection of policies, whether caused
by underestimating an insured's life expectancy, or otherwise, could have a
material adverse effect on the Fund's financial results and will reduce your
rate of return. See "Business - Description of Return on Investment."
Inaccurate forecasting of an insured's life expectancy by our manager
could result from, among other things:
o advances in medical treatment resulting in deaths occurring later
than forecasted;
o inaccurate diagnosis or prognosis on terminally ill insureds;
o improved living habits resulting in better health; or
o fraud or misrepresentation by the insured.
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:
18
o develop and expand their service offerings more rapidly;
o take advantage of institutional financing and other financing
opportunities more readily;
o devote greater resources to the marketing and sales of their
service; and
o adopt more aggressive pricing policies.
We may face additional competition from benefits offered by insurance
companies. Other companies could choose to enter the Fund's target market and
devote greater resources and capital to the acquisition of insurance policies
from insureds. In addition, many major insurance companies now offer terminally
ill policyholders "accelerated benefits" options with their existing or
newly-acquired policies which provide a way for terminally ill policyholders to
draw on their life insurance benefits before death. The life insurance industry
may become more aggressive in offering such benefits to terminally ill and
chronically ill persons and senior citizens, although we believe insurance
companies have generally offered accelerated death benefits on terms more
restrictive than the terms of life settlements. See "Business--Competition."
Regulation as an investment company may terminate the Fund.
While the Fund may be considered similar to an investment company, it does
not intend to register as such under the Investment Company Act of 1940.
Accordingly, the provisions of such Act, which, among other matters, require
investment companies to have a majority of disinterested directors and regulate
the relationship between the investment advisers and the investment company,
will not be applicable in the opinion of Snow Becker Krauss P.C., which is
included as an exhibit to the registration statement of which this prospectus
forms a part. If the Fund is deemed to be an investment company, our manager may
terminate the Fund and distribute its assets which will affect the Fund's
profitability. See "Investment Company Act of 1940."
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
19
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/or 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 may
also engage other NASD broker-dealers and foreign dealers who agree to abide by
the NASD's rules to sell our units. However, neither we, nor our underwriter has
identified any brokers or dealers which will participate in this offering and
neither of us has any agreement, arrangement or understanding with any such
broker or dealer.
A reduced supply of life insurance policies could adversely affect your rate of
return.
Changes in the economy and other changed circumstances may result in a
reduced supply of life insurance policies and could result from, among other
things:
o improvement in the economy, generating higher investment returns to
individuals from their investment portfolios;
o improvements in health insurance coverage, limiting the need of
insureds to use the funds received to pay the cost of their medical
treatment;
o a change in law that requires our manager to apply more stringent
credit standards in purchasing life insurance policies; or
o the introduction into the market of less reputable third party
brokers who submit inaccurate information to our provider on behalf
of insureds.
20
If our provider is not licensed or able to comply with state insurance laws, we
must purchase policies from 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 policies 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."
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
21
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.
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 the annual premiums of each policy
purchased by the Fund for the estimated life expectancy of the insured plus an
additional two years beyond such 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.
22
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."
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.
23
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, you could suffer a loss of your 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 a 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 and/or purchases an
interest in a broker. No sourcing broker is under a contractual agreement to
refer policies to our provider, and none is prohibited from referring policies
to our competitors. Sourcing brokers tend to be relatively small independent
businesses with limited capital resources. Therefore, no assurance can be given
that relationships with sourcing brokers can be established or that existing
sourcing brokers will remain in business. In the event that our provider is not
licensed or our provider's relationships with the sourcing brokers are not
established or cease, our operations could be adversely affected.
We will have limited assets other than insurance policies.
The Fund does not have any assets nor will it purchase any insurance
policies prior to completing this offering. The Fund will not be permitted to
have any assets other than interests
24
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 A- 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 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.
25
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 our
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, 21st Holdings, LLC, an affiliate of
21st Services, one of our medical review service companies, to track each
insured on a monthly basis. However, some states further limit the frequency
with which the Fund through its tracking firm may contact the insured or obtain
his medical records.
Possible costs relating to and delays attributable to government regulation will
reduce our profitability.
Our provider will be required to comply with the laws of each state which
regulates the purchase of life insurance policies as described in this
prospectus. In addition, our underwriter is registered with the NASD and is
regulated by the NASD.
26
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."
We may be unable to prevent certain fraudulent activities including
clean-sheeting.
One of the fraudulent practices in the life settlements industry has been
referred to as "clean-sheeting." This is when either an insured or his agent
submits an original application for insurance containing false or misleading
information. The Fund does not intend to purchase any life insurance policy
prior to the end of the time period in which an insurance company can contest a
policy or during the suicide period for which an insurance company does not have
to pay the claim, both of which are typically two years. Notwithstanding that
fact, in the event of fraud, if an insurance company will refuse to pay the
claim on a policy which the Fund purchases, the members would lose part of their
investment which would adversely affect the rate of return of the Fund.
Notwithstanding the Fund's above stated policy, there can be no guarantee
to protect investors from "clean-sheeting." Accordingly, the Fund has
established a written internal anti-fraud policy and an education program for
the Fund's employees to perform proper due diligence to ensure that
clean-sheeting and other fraud has not been committed. If the Fund's employees
suspect possible fraud in the application for an insurance policy or in the
insured's medical records, they will not purchase such policy and are instructed
to report such impropriety to the appropriate insurance authorities. 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
27
life settlement is an "investment contract" that falls within the definition of
a "security" under state securities acts. Some state legislatures have amended
state securities acts to specifically add viatical settlements to the definition
of a "security."
With respect to federal law, the D.C. circuit, as well as certain other
circuits, held that interests in viatical and other life settlements are not
securities because profits do not derive predominantly from the efforts of
people other than the investors themselves. S.E.C. v. Life Partners, Inc., 87
F.3d 536 (D.C. Cir. l996). However, by our forming a pool of insurance policies
and offering an undivided interest in the pool, rather than reselling the life
insurance policy itself, we believe the units offered in this offering would be
deemed to be a security. Our failure to comply with applicable federal or state
securities laws may have a material adverse impact on the Fund. Securities
regulators may impose civil fines or penalties on the Fund and, under certain
circumstances, may require it to make a rescission offer to some or all of its
investors, as a result of which the Fund's financial position could be
materially adversely affected.
Privacy laws and other factors may limit the information the Fund receives about
the insured.
Federal and state privacy laws may limit the information the Fund receives
about the insured after your investment, such as the insured's current medical
condition. In addition, other factors, such as the insured's unwillingness to
cooperate, may limit the information the Fund receives after your investment.
Being a beneficiary of a policy and not also an owner carries special risks.
The person who buys a life insurance policy is the owner of the policy and
decides who the beneficiaries of the policy will be, that is, who will receive
the death benefit when the owner dies. If the owner sells that policy to our
provider who then assigns it to the Fund, the investors become the owners and
therefore, are entitled to receive the death benefit when the insured dies. Some
states however, will only allow a provider to directly purchase a life insurance
policy and become the owner of the policy, 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
28
at a 15% discount to the principal amount of your investment. Accordingly, you
must be prepared to forego your use of the invested funds until we return your
investment to you. We cannot make any distributions to you prior to the maturity
of any life insurance policy which will affect your liquidity. The timing and
frequency of distributions will depend on the size and scope of the pool of life
insurance policies. Transfer of the units is restricted by the operating
agreement. You may not transfer the units:
o to persons who do not meet the investor suitability requirements
described in this prospectus;
o unless the transfer is approved by our manager in its sole
discretion; or
o in violation of the securities laws or if the transfer would cause
the Fund to be a publicly traded partnership.
You cannot revoke your subscription and will not have use of your invested
funds.
Once you sign the subscription documents and forward such documents
together with payment for a unit, you will not be able to revoke your
subscription. The offering period can be held open until October 17, 2004,
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
29
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 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.
30
Tax Risk Factors
General tax risks.
Before you make a decision to invest, you should assess the tax risks and
your willingness and ability to comply with ongoing federal income tax filing
and compliance requirements described under "Federal Income Tax Consequences"
which is the opinion of our counsel, Snow Becker Krauss P.C. The tax
consequences mentioned in this prospectus are general in nature. Each potential
investor should consult with his/her/its own tax professional to assess the tax
impact of an investment in the Fund.
There are risks of loss of tax benefits by investment of IRA funds in exchange
for units.
Investing money held in an Individual Retirement Account ("IRA") involves
special risks. We offer investors the option of using funds from their IRAs to
purchase interests in life settlements. Section 408(a)(3) of the Internal
Revenue Code of 1986, as amended, requires that "no part of the trust [IRA]
funds will be invested in life insurance contracts." We are not aware of any
ruling or judicial decision concerning the investment of IRA funds in life
settlements. Therefore, because the question is not settled, there is the
possibility that the Internal Revenue Service ("IRS") will not allow investors
the tax benefits of their IRA on funds invested in life settlements. There is
also the possibility that the IRS would not allow investors the tax benefits of
any portion of their IRA accounts if any part of the IRA funds are invested in
viatical or senior settlements.
In addition, there are certain IRS rules pertaining to minimum
distributions from IRAs for persons who are age 70 1/2 or older. The Internal
Revenue Code requires that persons begin receiving distributions from their IRAs
by a "required beginning date" (April 1 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
31
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.
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
32
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.
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.
33
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
(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
34
(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.
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
35
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.
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.
36
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, selected dealer or foreign entity 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.
37
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) $1,748,000 $ 69,924,000
Provider's fees (2) 125,000(3) 5,000,000(3)
Manager's fees (4) 125,000(3) 5,000,000(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. We will attempt to create a pool of life insurance policies in which
our manager generally does not intend to purchase any life insurance policy
which based on the estimated life expectancy would not provide a return to
investors of at least 8% interest compounded annually. The estimated rate of
return on investment is not a guaranteed rate of return and the hypothetical
figures presented throughout the prospectus are based on estimated life
expectancies. However, if the insured lives longer than the estimated life
expectancy, the return on investment would be lower than 8%, as set forth under
"Business--Description of Return on Investment."
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
(footnotes continued on following page)
38
(footnotes continued from prior page)
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 expected to generally equal the annual premiums of each
policy purchased by the Fund for the estimated life expectancy of the insured
plus an additional two years beyond such estimated life expectancy.
(2) We will pay to our provider or to an unaffiliated provider for origination
of each policy, a fee equal to 5% of the gross proceeds of this offering.
(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 equal to 5% of the gross proceeds of this offering.
(5) The referring 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 we 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 2.5% of the gross proceeds of the number of
units sold by our underwriter. The total selling commissions to our underwriter,
selected dealers and foreign entities cannot exceed 10% of the gross proceeds of
units sold, which is the maximum fee permitted by the NASD. To the extent we pay
other selected dealers and foreign entities more than 2.5% selling commissions,
less funds will be available for the purchase of life insurance policies and
other allocations. Broker-dealers, other than AmeriFirst Capital Corp., 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 a 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 through which the insurance policies are purchased and
in certain instances the referring broker's fee is paid. Investors will be
entitled to a proportionate share of the short-term interest earned, including
39
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
December 31, 2003, 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, selected dealers
and foreign entities.
Actual As Adjusted for As Adjusted for
Minimum Offering Maximum Offering
---------------- ----------------
Capital Contributions -- $2,250,000 $90,000,000
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, or entities outside of the
United States which are not licensed with the NASD provided such foreign
entities are in compliance with their respective country's securities laws. Our
sales representatives are employed by our underwriter, AmeriFirst Capital Corp.,
which is registered with the NASD as a broker-dealer. However, units may also 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, Minnesota, Nevada,
New Jersey, New York and Utah. We will end this offering on April 17, 2005,
unless extended up until April 17, 2006, 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 April 17, 2006, 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
40
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 October 17, 2004,
unless extended up until April 17, 2005, 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
prepare a form of notice and furnish our underwriter and selected dealers and
foreign entities, 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
deemed 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
41
purchase your units and receive back 85% of the principal amount of your
investment, less any distributions paid to such date, within 90 days after you
deliver written notice of withdrawal to our manager. Notwithstanding the
foregoing, we can only make cash payments in return for outstanding capital
amounts from net proceeds and capital contributions.
In addition, our manager may, in its sole discretion, withhold its consent
to any sale or transfer. In granting a consent to a sale or transfer, our
manager may require a legal opinion from our lawyer that the sale or transfer
does not violate federal or state securities laws or cause the Fund to be
treated as an association taxable as a corporation for Federal income tax
purposes. In addition, our manager intends to require reasonable documentation
of the sale or transfer, acceptance by the purchaser or transferee of the
operating agreement and certain additional representations of the purchaser or
transferee, including the representation by the transferee that it is acquiring
the unit for its own account and not with a view to distribution. Certain states
may require that the purchaser or transferee satisfy the same investor
suitability standards as a purchaser of the units. We will require 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.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF AMERIFIRST FUND I, LLC
Twelve Month Plan of Operations
As of December 31, 2003, the Fund had $326,509 of assets consisting of
deferred financing costs and had not commenced operations. Total liabilities of
$218,100 as of September 30, 2002 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
contributed capital. This occurred pursuant to the Restated Expense Agreement
dated December 23, 2003 between the Fund and AmeriFirst, Inc., under which
AmeriFirst, Inc. agreed to pay at its own expense all organizational and
offering expenses of this offering, including without limitation, legal and
accounting expenses, photocopy costs, selling expenses and filing fees paid to
the SEC and state securities commission. Accordingly, the Fund will receive all
proceeds from this offering. The Fund had total liabilities of $11,075 as of
December 31, 2003, consisting of accrued expenses. As a result of the foregoing,
the Fund had total liabilities and members' equity of $326,509 at December 31,
2003. Total contributed capital from April 22, 2002 (Inception) through December
31, 2003, was $440,068. 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.
Our auditors have qualified their report dated November 26, 2003, a copy
which is included in this prospectus and prepared pursuant to the Fund's Annual
Report on Form 10-KSB for its fiscal year ended September 30, 2003, as there is
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.
John Tooke, chief executive officer and controlling shareholder of our
manager, provider and underwriter, has extensive experience in investment
banking and selling mortgage backed securities. Although he has no actual
experience in purchasing life settlement policies, he has researched the life
settlements industry since at least April 2001 and conducted all organizational
activities necessary for the Fund. Our manager intends to service the insurance
policies with experienced employees it has hired, as described below. However,
our manager may outsource any or all of the non-financial services of servicing
the life insurance policies to an unaffiliated third party servicer to assist us
in reviewing each policy, closing the purchases of such policies, monitoring
life status of the insureds and filing death benefit claims. Our manager has
entered into agreements with four unaffiliated organizations to conduct its
medical due diligence review (See "Business - Medical and Insurance Due
Diligence Review") to determine estimated life expectancies and with one of such
companies to track the status of the insured. Neither the Fund nor our manager,
provider or underwriter has entered into any other arrangements, agreements or
43
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 the personnel and
office equipment of our manager, provider and their affiliate, AmeriFirst, Inc.
As of April 15, 2004, our manager, provider and their affiliate, AmeriFirst,
Inc., employed a total of 18 persons, including John Tooke, chief executive
officer, a senior software architect, in-house legal staff, accounting staff,
insurance review, insurance analyst, medical review, policy administration,
computer and data processing personnel, customer service, medical administration
and administrative assistants. There is an overlap in employees among certain of
the above mentioned entities. For example, John Tooke is an employee of each of
our manager, provider and AmeriFirst, Inc. and has been regarded as one employee
for purposes of calculating the foregoing number of aggregate employees of our
manager, provider and AmeriFirst, Inc. Our manager occupies approximately 8,112
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
our 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.
On February 9, 2004, the Fund changed its fiscal year end from September
30th to December 31st.
Critical Accounting Policy
Recognition For Purchased Life Insurance Policies
We will record our investment in life insurance policies pursuant to
Financial Accounting Standards Board Technical Bulletin 85-4 "Accounting for
Purchases of Life Insurance" ("FTB 85-4"). FTB 85-4 requires the amount to be
realized (the policy's cash surrender value) under the insurance contract to be
recorded as an asset. The change in cash surrender value during the period will
be recorded as an adjustment of premiums paid in determining the expense or
income to be recognized for the period.
The 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
44
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 unitholders 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."
45
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, providing investors with a competitive rate of
return, 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. Our provider will purchase policies
either directly from the insured, when it is licensed or not required to be
licensed, from other providers, or from a broker network, and assign them to the
Fund.
A typical client will contact a broker after being diagnosed with a
terminal or chronic illness from persons of all ages or a senior citizen
policyholder, who is age 65 and older. This person desires to obtain as much
money as possible from their life insurance policy today to assist him in
financial expenses during his remaining years.
Our provider is only permitted to purchase life insurance policies through
licensed brokers unless it becomes licensed as a broker. The broker will obtain
information on the insured including copies of his medical records and a copy of
the insurance policy. The broker is paid his commission by the policyholder 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.
46
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 of all medical research of the insured, (b) obtaining the estimated
the life expectancy of the insured from a medical review service company which
has contracted with independent medical specialists, (c) 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, (d) servicing the policies on an ongoing basis,
and (e) monitoring the life status of the insured.
The fee to be paid by the Fund to our provider will be 5% of the gross
proceeds of this offering. The fee to be paid by the Fund to our manager, which
intends to service the Fund's policies, but may outsource any or all
non-financial services to an unaffiliated third party, will be equal to 5% of
the gross proceeds of this offering. In the event we outsource non-financial
services to a third party, the fees of 5% of the gross proceeds of this offering
will be paid to such third party rather than to our manager. Our manager,
provider and underwriter reserve the right to reduce the fees which they receive
on certain policies.
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 is licensed by the NASD and
its personnel are 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-affiliated persons for a fee including competitors
of our provider and 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 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
47
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 "Our Servicer."
Our provider will originate policy purchases either directly from the
insured, when it is licensed or not required to be licensed, or from other
providers, or from a 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. Certain states permit the provider or its affiliates to have an
ownership interest in the referring insurance broker. Although we have no
agreement or understanding to acquire an interest in a referring insurance
broker we may acquire an interest in the future. Employees of our provider
involved in the purchasing of the policies 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. However, units may also be sold by officers of the Fund who are sales
representatives licensed by the NASD and by other selected dealers who will
receive commissions where permitted. Entities outside of the United States and
not licensed with the NASD may also be permitted to sell our units and receive
commissions, provided such foreign brokers are in compliance with their
respective country's securities laws.
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.
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.
48
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, who will purchase such policies either directly from the insured, when
our provider is licensed as a broker or is not required to be licensed, or by
using other providers or from a broker. 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. If our provider is licensed as a broker it may purchase policies
directly from an insured. Our provider was formed in the State of Delaware in
August 2002 and is in compliance with the laws of the State of Georgia to
conduct life settlement business. It will comply with the insurance and/or
securities laws of all states which regulate the purchase and/or sale of life
insurance policies. John Tooke, 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
49
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 or not required to be licensed, from other
providers, or from a nationwide network of 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, through our manager, 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 9 persons, as well as 7 employees of
AmeriFirst, Inc., as of April 15, 2004. 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 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.
50
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 exceed 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 any or 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 17 persons as of April
15, 2004, 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 senior software architect, in-house legal staff, accounting staff,
insurance review, medical review, policy administration, computer and data
processing personnel, customer service and medical administration.
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 equal to 5% of the gross proceeds of this offering. 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 our 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.
51
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 and of all medical records of the insured and reviewing
insurance and final underwriting for proposed policies;
o obtaining the estimated life expectancy of the insured from an
independent medical review service company, which has contracted
with independent medical specialists;
o closing the transaction, which includes obtaining releases of all
beneficiaries and an insurance policy assignment and recording of
the Fund as beneficiary, or irrevocable change of beneficiary, as
well as payment of the purchase price of the policy;
o monitoring the life status of the insured through a contracted
affiliate of a medical review service company; 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;
52
o maintain data on pool characteristics;
o audit premium calendar database; and
o prepare reports as agreed.
Evaluating the Insured and the Insurance Policy
The due diligence review process is designed to obtain accurate
information regarding both the insured and the life insurance policy (a) to
determine whether our provider will offer to purchase the policy and, if so, the
price it will offer and (b) to ensure that certain criteria are met to minimize
challenges by former beneficiaries or by an insurance company to payment of the
face value of the policy.
The insurance review is our process of evaluating life insurance policies
and their suitability for purchase. Our provider will obtain an insurance policy
directly from the insured when it is licensed as a broker or when states do not
require a broker's license, or from other providers, or from a 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 A- 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;
53
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.
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 estimated life
expectancies," 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;
54
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.
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 our 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;
55
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 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 companies 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. Each
agreement is substantially the same, and each 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
56
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 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 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
57
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 80 under "Description of Viatical Settlement Contracts."
The Fund will become the owner of an individual policy, or absolute
assignee of the insured's rights in a group policy, by filing a change of
ownership or absolute assignment form and an irrevocable change of beneficiary
form with the applicable insurance company, employer or plan administrator.
Following receipt of appropriate acknowledgment of the receipt of such changes,
a closing occurs and funds are disbursed as directed to the insured. Our manager
anticipates that the closing process will take one to three weeks and the entire
purchase process, from application to closing will take from four to eight
weeks. Our provider will provide a rescission option through which the insured
may, for any reason, return the disbursed funds and any premium payments made by
the Fund in the interim, and be unconditionally released from the viatical
settlement contract. The rescission period is at least 15 days from receipt of
the purchase price and is longer (i.e., 30 days), if required by applicable law.
See "Business -- Government Regulation of Life Settlements."
Monitoring
When the funds from this offering are released from the subscription
escrow account, a premium escrow account will be established with SouthTrust
Bank to pay the premiums during the life of the insureds. The funds held in the
premium escrow account are expected to generally equal the annual premiums of
each policy purchased by the Fund for the estimated life expectancy of the
insured plus an additional two years beyond such 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.
58
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 or "tracking" the insureds' whereabouts
and/or ongoing medical condition. They will monitor the insureds through their
attending physician's office when possible. They will make quarterly calls to
the insured's physician to determine when the insured was last seen or the
insured's next scheduled appointment. All records will be kept in the insured's
file and on a monthly basis all updates will be sent to our manager for its
files. If the insured does not regularly visit his physician then his personal
references will be contacted and if they cannot be reached, then the insured
itself will be contacted unless precluded by state or federal rules or
regulation. 21st Holdings, LLC will also be responsible to notify the insurance
company of the insured's death and will file the claim for benefits.
Representatives of our manager in our Georgia office will receive all notices of
change in status of the insurance policy, a change in premium payments, annual
statements, or any reduction in death benefits. For all of the above services of
monitoring the insured, 21st Services will be paid a one-time set up fee of
$15.00 and monthly fee of $15.00 for each life settlement policy until the
policy matures.
Collection of Policy Proceeds
Once a policy matures, one of the Consultants which is monitoring the life
status of the insured will file a request for a copy of the death certificate in
the appropriate governmental office. Often the insured's family or companion
will also submit a copy of the death certificate to the insurance company. The
Consultant will then file the death certificate with the insurance company and
request payment of the policy proceeds. The Consultant will monitor the
collection status until the Fund receives the face value of the policy.
Monitoring the collection status will be assisted by our servicer's management
information system, which will reflect the filing of the death certificates, the
filing of claim forms with the insurance companies by our servicer and provide
for a status update until the claims have been paid. Insurance companies have an
incentive to pay promptly on policies because most states require insurance
companies to pay interest on claims which take more than 30 days to settle.
Actual collections will generally occur within 30 to 55 days following the
maturity of the policy. However, in certain states (i.e., New York), actual
collections may take a longer period of time due to delays in processing of
documents by state authorities.
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):
59
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 $50,507
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 $19,907
o Monies have been deposited in escrow in the amount of $5,000 for the
future payment of premiums
o $3,969 paid to manager and servicer at the time of the closing
Opening Balance Adjusted Balance
Balance Sheet Sheet Sheet
------------- ----- -----
Assets
Cash $100,000 $ 20,617
Investment in life insurance policies (1) 4,000
Premium escrow account (2) 5,000
Manager and servicer fee (3) 3,969
--------
Total Assets $100,000 $ 33,586
======== ========
Liabilities and Member's Equity
Liabilities $ -- $ --
Member's Equity $100,000 33,586
--------
Total Liabilities & Members' Equity $100,000 $ 33,586
======== ========
Statement of Operations
Revenues $ --
--------
Acquisition costs (4) 19,907
Cost of life insurance policy, net of cash surrender value 46,507
--------
Total expenses 66,414
--------
Net loss $(66,414)
========
60
- ----------------
(1) Amount of Cash Surrender Value of policy
(2) Funds to be used to pay future premiums*
(3) Manager and servicer fee estimated at $3,969 payable at acquisition of the
policy
(4) Includes referring broker's fee -- $8,000, provider's commission for
origination -- $3,969, and underwriter's selling commissions -- $7,938
consisting of up to a combined 10% selling commission to be paid to our
underwriter, other selected dealers and foreign entities*
*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. 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 in which
our manager generally does not intend to purchase any life insurance policy
which based on the estimated life expectancy would not provide a return to
investors of at least 8% interest compounded annually. However, the estimated
rate of return on investment is not a guaranteed rate of return and the
hypothetical figures presented throughout the prospectus are based on estimated
life expectancies. However, if the insured lives longer than the estimated life
expectancy, the return on investment would be lower than 8%.
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.
61
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; reflects our underwriter's selling commission
which will be paid at the time of purchase, and payments made to the premium
escrow account. 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 from the face value of such policy when the policy matures.
The actual overall rate of return to all members can only be determined
when all policies have matured at the end of the Fund. We cannot guarantee you
the full return of your investment. The 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 (e.g., 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 policy matures.
The estimated 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
an $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. 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 $20,617, or a
return on investment of 8% interest compounded annually.
The estimated rate of return on investment is not a guaranteed rate of
return and the hypothetical figures presented throughout the prospectus are
based on estimated life expectancies. Accordingly, if the insured lives one year
beyond the estimated life expectancy of three years, or a total of four years,
then the rate of return is 5.26% interest compounded annually for the four
years. If the insured lives two years beyond the estimated life expectancy of
three years, or a total of five years, the rate of return is 4.73% compounded
annually for the five years. The longer the insured lives beyond the estimated
life expectancy the greater the likelihood that the Fund will exhaust the
premium escrow account and need to make a capital call. See "Risk Factors - We
may lack funds to pay policy premiums and you may need to make capital calls to
prevent the lapse of policies."
62
Expenditure Amount
----------- ------
Payment to seller (1) $50,507
Broker's fee (2) $ 8,000
Deposit to premium escrow account (3) $ 5,000
Provider's origination fee (4) $ 3,969
Manager's and servicer's fee (5) $ 3,969
Selling commissions (6) $ 7,938
-------
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,
approximately 30 states do not set any minimum amount which must be paid to an
insured. See "Government Regulation of Life Settlements" below.
(2) 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. Although we have no agreement or understanding to acquire an
ownership interest in a broker, certain states permit a provider or its
affiliates to have an ownership interest and we may acquire such an interest in
the future.
(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 the annual premiums of each policy purchased by the Fund for the estimated
life expectancy of the insured for each of the three-year life expectancy in the
above example plus an additional two years beyond such 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.
(footnotes continued on following page)
63
(footnotes continued from prior page)
(4) Provider's Origination Fee. The fee to be paid to the provider, which may be
our provider or another provider in the secondary market, will be equal to 5% of
the gross proceeds of this offering.
(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 be negotiated and determined by our manager, and will
equal 5% of the gross proceeds of this offering. 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) Selling Commissions. We intend to pay to our underwriter, at the time of
purchase of insurance policies, a selling commission of 2.5% of the gross
proceeds of the number of units sold by our underwriter. Our underwriter may
also negotiate fees to be paid to selected dealers and foreign entities on units
sold by them. The total selling commissions to our underwriter, selected dealers
and foreign entities cannot exceed 10% of the gross proceeds of units sold,
which is the maximum fee permitted by the NASD. Broker-dealers, other than our
underwriter, AmeriFirst Capital Corp., will be paid upon acceptance of the
investor as a member of the Fund unless the broker-dealer agrees to defer
payment.
General Description of Different Types of Insurance Policies to be Purchased by
the Fund and Investment Strategies
Our portfolio will consist mainly of the following types of life insurance
policies: whole life insurance, adjustable whole life, universal life insurance,
variable adjustable life insurance, Retired Federal Employees' Group Life
Insurance (FEGLI) and term policies as described in detail below.
o Whole Life (including joint and survivorship): 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 Retired Federal Employees Group Life Insurance: The only group life
insurance which the Fund intends to purchase is Retired Federal
Employees Group Life Insurance (FEGLI) policies which provide
coverage for the life of the insured without any termination or
decrease in death benefits. An absolute assignment will be made so
that the Fund will be the only person able to make changes on the
policy or terminate the policy. Our manager will need to reimburse
the insured for premium payments, on a quarterly or semi-annual
basis as payroll deductions are the only mode available and an
insured will be required to mail pay stubs to the Fund.
o Adjustable Whole Life and Combination Whole Life/Term Rider:
Adjustable whole life and combination whole life/term rider policies
can have limited
64
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
(including joint and survivorship): 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 (must be convertible or exchangeable): 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.
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 the guidelines set forth below.
Policy Origination Guidelines
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 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 A- or better by A.M. Best as discussed in further
detail below.
o We will not invest more than twenty percent of the proceeds of the
Fund in policies from any one insurance company. To the extent that
we sell less than $100 million of units, at any given time we will
use our best efforts to, but may not be able to stay in line with
these strategies.
o We will only purchase policies where the estimated life expectancy
of the insured is between one and ten years.
o We will only purchase policies beyond the contestable and suicide
periods.
65
o We will only purchase group insurance policies from Retired Federal
Employees' Group Life Insurance.
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.
Also, for policies over $500,000, we will require two medicals and
will use the average weighted life expectancy from the two
estimates.
o We will not purchase more than twenty percent of the policies from
one specific type of a primary terminal or chronic illness (i.e.,
lung cancer, colon cancer, coronary artery disease or pulmonary
artery disease, etc.). We will also not purchase more than forty
percent of the policies from one category of a primary terminal or
chronic illness (i.e., cancer, heart disease, ALS, etc.). To the
extent that we sell less than $100 million of units, at any given
time we will use our best efforts to, but may not be able to stay in
line with these strategies.
o The maximum policy size for terminally and chronically ill insureds
of all ages and seniors, age 65 and older with a life expectancy
based solely on actuarial 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 prior to the termination date of the
policy, whichever is greater.
66
A.M. Best's Ratings
The objective of the A.M. Best rating system is to provide an overall
opinion of an insurer/insurance company's ability to meet its obligations to
policyholders.
According to A.M. Best, their company ratings are based on three main
factors used to measure an insurer's financial strength and ability to meet
obligations to policyholders, as compared with industry composites. The factors
are:
1. Balance Sheet Strength
2. Operating Performance
3. Business Profile
Balance sheet strength is determined by measurement of growth in
underwriting, ratio of premiums written to capital and surplus, capital adequacy
ratio, ratio of capital and surplus to liabilities, ratio of re-insurance
expenses to capital and surplus funds, annual change in capital, capital
structure of holding companies, quality and appropriateness of reinsurance,
adequacy of policy reserves, quality and diversification of assets and various
liquidity tests.
Operating performance is centered around the insurer's profitability from
insurance operations, using various tests such as benefits paid as a percentage
of net premiums, commissions and expenses incurred as a percentage of net
premiums written, and return on equity.
Business profile issues analyze the diversification of an insurer as to
how the book of business is spread geographically, by product and distribution.
In addition, A.M. Best analyzes the insurer's market position, management,
revenue composition, insurance market risk, and event risk.
The range of A.M. Best ratings are as follows:
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.
67
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.
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 our provider's internal ability to meet demand, the cooperation
received from the potential client's insurance company and the insured's doctor
and, ultimately, our 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
68
policy, often only 25-50%. This is a reflection of this industry's assumption
that life insurance is for those left, not the living. Of course, this varies
among insurers.
An article from insure.com on April 17, 2001, states that most companies
require that the insured's life expectancy be 12 months or less from the time
the insureds applies for accelerated death benefits. Most policies specify that
the insured has a "dread disease" such as a heart attack, life-threatening
cancer, stroke, coronary artery bypass surgery or kidney failure. Some policies
charge the insured a higher premium for the option of accelerating your death
benefit. However, there are others that charge only if the benefit is
accelerated, while others do not charge at all. Most life insurance companies
limit the amount of the insured's death benefit he can accelerate, either by
restricting the percentage of his death benefit or the dollar amount that the
insured can receive.
Our manager believes that insurance companies, on an industry-wide basis,
have not aggressively participated in the market for terminally ill, chronically
ill and senior citizen life settlements or related products or services
primarily because of the undeveloped nature of the market and the potential for
public relations problems for the insurance industry resulting from insurance
companies redeeming policies for less than the death benefit promised to their
policyholders.
Given the restrictions typically imposed on the availability of
accelerated death benefits, life settlements have, to date, been an attractive
alternative to accelerated death benefits for insureds. Life settlements can
also offer some people with terminal illnesses the opportunity to pursue
lifelong goals while they are still relatively healthy. Although our manager
believes that insurance companies may continue to be reluctant to enter the life
settlement market they may reduce their restrictions applicable to accelerated
death benefits, may begin to provide life settlements directly or through
separate settlement companies or may offer other competing products or services
on a broader basis.
Our manager believes that the Fund will be well-positioned within the life
settlements industry to compete. The Fund intends to establish a reputation in
the industry for providing life 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.
69
Government Regulation of Life Settlements
We will monitor the progress of new legislation and regulations in each
state in which we purchase policies. However, given the emerging nature of life
settlement regulations, there may be periods in which we may not be in
compliance, or are unable to comply with the effective provisions of each
applicable, statute and regulation.
The Viatical Settlements Model Act was developed by the National
Association of Insurance Commissioners (NAIC) to encourage states to adopt
uniform standards to regulate the life settlements industry. Viatical and life
settlements are regulated by state laws of either the departments of insurance
or securities departments. A number of states have adopted the NAIC Model Act
and others have implemented certain provisions of the NAIC Model Act in the
regulations they have enacted. Accordingly, a generic form of viatical
settlement contract, which includes much of the NAIC Model Act, has been filed
as an exhibit to the registration statement of which this prospectus forms a
part. Set forth below are all material provisions of the NAIC Model Act, as well
as any material state variations, as follows:
o requires life settlement providers, brokers or investment agents to
be in compliance with state insurance laws in the state of residence
of the insured, and specifies the requirements for obtaining a
license, where applicable, and circumstances under which state
regulators may refuse to issue, suspend or revoke a license.
o requires that life settlement contracts and related disclosure
statements be submitted and approved by the state insurance
regulator prior to use.
o requires the licensee to file an annual statement with each state's
insurance regulator and gives the regulator flexibility regarding
the form and content of that statement. The reporting requirements
for Texas are believed to be the most extensive and require an
annual report of all viatical or life settlement transactions in
Texas, and a separate complete and accurate annual report of all
viatical or life settlement transactions for all states in the
aggregate. The reports shall contain the information set forth in
paragraphs as follows: for each viatical or life settlement
contracted during the reporting period; the date the settlement
contract was signed by all necessary parties; insurance carriers
name, age, life expectancy in months, insured's state of residence,
face amount of policy, net death purchased, estimated total premium
to keep policy in force for total life expectancy or not applicable
because the policy is paid up or no premiums are due. Net amount
paid to the owner, source of policy, type of policy, age of the
policy at the time 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
70
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 our
provider utilizes to perform medical evaluations of any kind
relating to life settlors, the name and address or any provider or
broker that our 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, our 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.
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.
71
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 policies as a
security through the Division of Securities and Business Regulation. Most other
states regulate the purchase, rather than the sale, of life settlement policies.
Our provider will seek to become licensed where required or otherwise comply
with the laws of all other states which regulate the purchase and/or sale of
life settlement policies. However, our provider may not be able to obtain a
license in every state when required, or to renew or prevent revocation of a
previously issued license or approval. Our provider may be precluded from doing
business in any state in which it is unable to obtain or maintain a required
license or otherwise comply with the insurance or securities laws. In the event
our provider is not licensed or approved to do business, in a limited number of
states it may purchase policies referred by other licensed providers.
Although we are not aware of any judicial authority interpreting whether
the life settlement business constitutes conducting an insurance business, some
states may consider life settlements to be an insurance company and preclude the
Fund, which is not an insurance company, from operating in those states. See
"Risk Factors--Possible costs relating to and delays attributable to government
regulation will reduce our profitability."
Most states require each viatical and life settlement company to develop a
written anti-fraud policy, along with an anti-fraud training and education
program. AmeriFirst, Inc. has established such a written policy and has
developed a training program to educate its employees about the danger of fraud
and how to prevent it, along with a procedure to report any suspected fraud that
the employee may encounter in the normal course of business. If the insurance
review or medical review indicates any material discrepancies that have not been
adequately explained, then the policy must be a "non-bid," and the information
must be immediately forwarded to the Fund's compliance department. Once reported
to the compliance department, incidents of possible fraud will be reviewed, and
if appropriate, reported to the applicable state Department of Insurance.
72
Employees
As of April 15, 2004, our manager employed 9 persons, and AmeriFirst,
Inc., our controlling shareholder, employed 7 persons, all of whom are full-time
employees. They each include, John Tooke, the founder and principal of the Fund,
an executive assistant, a senior software architect, in-house legal and
accounting staff, insurance review, medical review, policy administration,
computer and data processing personnel, customer service, medical review and
administrative assistants. None of our manager's employees is covered by a
collective bargaining agreement. In addition, as of April 15, 2004, our provider
employed 5 persons to handle policy origination, and our underwriter employed 5
persons in broker-dealer operations. There is an overlap in employees among
certain of the above mentioned entities. For example, John Tooke is an employee
of each of our manager, AmeriFirst, Inc., our provider and our underwriter and
has been regarded as an employee of each such entity for purposes of
illustrating the number of employees of each entity.
Facilities
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.
Our manager, underwriter and AmeriFirst, Inc. lease 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 approximately
$17,198. The lease is between AmeriFirst, Inc. and a non-affiliate for 18 months
ending on February 28, 2004. The facility consists of approximately 8,112 square
feet of office space.
Our manager also has a branch office located at 1712-D Osborne Road, St
Marys, Georgia 31558 at a monthly rental of $1,020. The lease is with a
non-affiliate for 24 months ending on February 28, 2006. The facility consist of
approximately 1,220 square feet of office space.
Our provider leases its offices located at 1712-H Osborne Road, St. Marys,
Georgia 31558; tel no. 912-673-9100, at a current monthly rental of $900. The
lease is 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. The Fund's
principal office is located at this Georgia office.
Legal proceedings
The company is not currently subject to any legal proceedings.
73
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;
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
policies. 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.
74
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.
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.
75
List of Members
Our manager will furnish or cause to be furnished by the transfer agent
and registrar, if other than our manager, to the Fund within five business days
after receipt by our manager of a request therefor from the Fund, in writing, a
list in such form as the Fund may reasonably require, of the names and addresses
of the members as of the most recent record date for payment of distributions to
members. Members holding an aggregate amount of not less than 10% of the units
then outstanding may apply in writing to our manager that they desire to
communicate with other members with respect to their rights under the Fund's
operating agreement. If such request is accompanied by a copy of the
communication which such applicant proposes to transmit, then our manager, after
having been adequately indemnified by such applicant for its costs and expenses,
shall afford or shall cause the transfer agent and registrar if other than our
manager, to afford such applicant access during normal business hours to the
most recent list of members held by our manager. The list shall be as of a date
not more than 45 days prior to the date of receipt of such applicant's request
and shall give our manager notice that such request has been made, within five
business days after the receipt of such application. Every member, by receiving
and holding units, agrees with our manager that neither our manager, the
transfer agent and registrar, if other than our manager, nor any of their
respective agents shall be held accountable by reason of the disclosure of the
names and addresses of the members, regardless of the source from which such
information was obtained.
Investor Accounts and Allocation of Collections
The Fund's assets shall include investor accounts which consist of the
operating escrow account, premium escrow account and a provider escrow account,
each of which shall be established and maintained by our 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
and 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 our 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 our provider and maintained by our servicer as a segregated, interest bearing
escrow account through which the insurance policies are purchased and in certain
instances the referring broker's fee is paid. The funds deposited by the Fund in
this account shall be used by our provider to purchase
76
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 the annual premiums of each policy purchased by the Fund
for the estimated life expectancy of the insured, plus an additional two years
beyond such 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 and provider escrow account. If, for any reason,
the Fund does not provide investment instructions to our escrow agent, then the
availability of funds or the balances in the 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
77
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 the annual
premiums of each policy purchased by the Fund for the estimated life expectancy
of the insured, plus an additional two years beyond such estimated life
expectancy) 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.
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
78
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.
Indemnification. The Fund has indemnified and held harmless our manager
and its affiliates 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. Any indemnification shall only be from assets of the
Fund.
79
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. 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 not required to be licensed, or
from other licensed providers, or from a 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
80
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 insurer 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
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 , and engaging in activities incidental to, or necessary or
convenient to accomplish the foregoing.
81
OTHER OPERATING POLICIES
o We do not intend to issue any additional securities with rights that
are senior to your rights as a member.
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 April 17, 2005,
unless the offering is extended up until April 17, 2006.
o We intend to provide the periodic reports to you that are described
in the summary of the operating agreement in this prospectus.
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OUR MANAGER, PROVIDER AND UNDERWRITER
Management
Our manager was incorporated in Delaware on September 4, 2002, under the
name AmeriFirst Financial Services, Inc. The address and telephone number for
our manager is 814 North Highway A1A, Suite 300, Ponte Vedra Beach, Florida,
32082, telephone number (904) 373-3034. Our manager has qualified to do business
in Georgia and maintains office space at 1712-D Osborne Road, St Marys, Georgia
31558. Our manager was formed to be a real estate broker, mortgage broker and to
provide managerial services not only for our underwriter, provider and the Fund,
but may also provide services to other outside companies or funds for a fee. Our
manager will market its services to other outside entities and to additional
funds. However, it does not believe for competitive reasons it would be able to
do so, unless it was a separate entity from our 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 not
required to be licensed, or from other providers or from a 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,
servicer and/or provider will include:
o dealings with members;
o accounting, tax and legal matters;
o communications and filings with regulatory agencies;
83
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 ability to continue their departments in the case
that Mr. Tooke is unable to fulfill his duties. The contingency plan would have
Irving Strickstein, Chairman and a stockholder of AmeriFirst, Inc., become Chief
Executive Officer and actively run the operations of the companies other than
AmeriFirst Capital Corp, our underwriter, which would be run by its current
management, until a replacement for Mr. Tooke could be found. 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. See below under "Officers and Directors of AmeriFirst, Inc." for the
biography of Irving Strickstein.
Executive Officers and Directors of our Manager
The following persons are the executive officers and directors of our
manager.
Name Age Office
---- --- ------
John Tooke 62 Chief Executive Officer and Director
Brittany M. Ellis 29 President, Secretary 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. Mr. Tooke also acted as President of our manager from
June 20002 to November 2003. Since April 2002, when the predecessor of our
provider was formed, Mr. Tooke has been Chief Executive Officer and director of
our provider, AmeriFirst Funding Group, Inc. Since October 2002, Mr. Tooke has
been Chief Executive Officer and director of our underwriter, AmeriFirst Capital
Corp. In addition, Mr. Tooke is Chief Executive Officer, director and a
controlling shareholder of AmeriFirst, Inc., the parent company of our manager,
provider and underwriter. 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
84
Capital Real Estate Investment Fund I, LLC, of fractional units in a fund to
make loans, or purchase entire or fractional interest in loans secured by
mortgages or deeds of trust.
From 1991-1996, Mr. Tooke was employed as a private investor in commercial
real estate projects as a principal for his own account. While he was an
investment banker, Mr. Tooke originated and produced commercial mortgages and
sold them to investors. Any relevant prior performance data of Mr. Tooke's
experience is more than 10 years old and not in his possession. From 1989 to
1991, Mr. Tooke was Senior Vice President of Security Pacific Merchant Bank,
responsible for the entire investment banking group, which originated and
securitized product for the bank. From 1985 to 1989, Mr. Tooke was Senior Vice
President of Sales and Trading for Drexel Burnham Lambert which sold and traded
multi-family and commercial mortgages and portfolios in the secondary markets.
From 1984 to 1985, Mr. Tooke was Vice President of Sales and Trading of Morgan
Stanley & Co. where he worked in all aspects of mortgage finance proposals such
as CMO's, mortgage backed bonds and private placements. From 1981 to 1984, Mr.
Tooke was a Vice President of Sales and Trading of Merrill Lynch where he traded
whole loans, participation and conventional mortgage backed securities and
analyzed and structured all securitized products. Mr. Tooke holds NASD Series 7,
Series 24, Series 28 and Series 63 securities licenses. Mr. Tooke is a qualified
securities principal. In addition, he is licensed in Nevada, California and
Florida for the sale of real estate mortgages and securities.
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."
Brittany M. Ellis has served as Secretary and a director of AmeriFirst,
Inc. since its inception in August 2002. Ms. Ellis has also served as President
of our manager since November 2003 and as Secretary and a Director of our
manager since its inception in September 2002. Ms. Ellis is responsible for the
management of the Fund, including overseeing the activities of underwriting and
servicing the insurance policies. In addition, Ms. Ellis is Secretary and a
member of the Boards of Directors of 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. Ms. Ellis holds a NASD Series 7 securities license.
Officers And Directors Of AmeriFirst, Inc.
The following persons are the officers and directors of AmeriFirst, Inc.
85
Name Age Officer
- ---- --- -------
John Tooke 61 Chief Executive Officer and Director; Chief
Executive Officer and Director of each of
AmeriFirst Financial Services, Inc., AmeriFirst
Funding Group, Inc. and AmeriFirst Capital Corp.
Brittany M. Ellis 29 Secretary and Director; President, Secretary and
Director of AmeriFirst Financial Services, Inc.;
Director of AmeriFirst Funding Group, Inc. and
Director of AmeriFirst Capital Corp
Dawn McKinley 28 Director; President of AmeriFirst Funding Group,
Inc., and Managing Director of AmeriFirst
Capital Corp.
Thomas M. Kann 57 Director; Senior Vice President of AmeriFirst
Funding Group, Inc., and Managing Director of
AmeriFirst Capital Corp.
Irving Strickstein 74 Chairman of the Board of Directors
See "Executive Officers and Directors of Our Manager" above for
biographical information on John Tooke, Chief Executive Officer, President and a
Director of AmeriFirst, Inc., and Brittany M. Ellis, Director of AmeriFirst,
Inc.
Dawn N. McKinley 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.
McKinley is also President of our provider, AmeriFirst Funding Group, Inc.,
since May 2003, and was Senior Vice President from January 2003 through April
2003, where she will manage policy origination for the Fund. From April 2002 to
October 2002, Ms. McKinley 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. McKinley 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. McKinley was a Registered Sales
Representative with Prudential Securities. From September 1997 until August
1998, Ms. McKinley 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. McKinley 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.
McKinley 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. McKinley was interning at Walden Capital Management, a
socially-responsible investment firm.
86
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. He is also 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 is a licensed life and variable annuity insurance agent in the States
of Florida and Delaware. 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 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.
87
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 and any selected dealers or foreign entity are based on
the number of units sold. However, sales commissions will only be paid to our
underwriter upon the Fund's purchase of life insurance policies. If all $100
million of units are sold by our underwriter, our underwriter would receive
$2,500,000 of commissions. However, the total sales commissions to our
underwriter and all selected dealers and foreign entities cannot exceed
10,000,000, which is the maximum fee permitted by the NASD. 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 referring 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.
Our manager, provider and underwriter reserve the right to reduce the fees
which they receive on certain policies purchased. 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. These limitations are expected to reduce the fees which
can be paid to less than the 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
- ------------ ------------
Underwriter Our underwriter will be paid selling commissions of 2.5%
of the gross proceeds of units sold by our underwriter at
the time of purchase of insurance policies.
Broker-dealers, other than AmeriFirst Capital Corp., will
be paid a portion of the selling commission upon
acceptance of the investor as a member of the Fund unless
the broker-dealer agrees to defer payment. The total
selling commissions to our underwriter, selected dealers
and foreign entities cannot exceed 10% of the gross
proceeds of units sold, which is the maximum fee
permitted by the NASD. See "Plan of Distribution."
88
Provider Policy origination fees will equal 5% of the gross
proceeds of this offering. The fees will be paid one time
on each policy to the entity acting as a qualified
provider which will either be our provider or other
providers. This is exclusive of fees which the insured is
obligated to pay to the broker selling his policy to the
Fund.
Manager The fees to be paid to our manager for servicing the
and/or Servicer policies and monitoring the insureds on behalf of the
Fund will be equal to 5% of the gross proceeds of this
offering and will include: a fee for due diligence, which
includes evaluating the terms of each policy and of all
medical records of the insured; 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 payment of the
purchase price to the insured; a fee for servicing the
insurance policies on an ongoing basis; and monitoring
the life status of the insured.
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 our underwriter
under a 3-year employment agreement ending July 31, 2005,
pursuant to which he agreed not to compete with our
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
89
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 not required to be
licensed, or from other licensed providers, or from a broker network. Our
manager and provider will each receive their fees based on a percentage of the
gross proceeds of this offering, regardless of whether the insured dies within
the estimated life expectancy, whereas the investors' return on investment will
depend on the insured dying within his estimated life expectancy. Although we
have no agreement or understanding to acquire an ownership interest in a broker,
certain states permit a provider or its affiliates to have an ownership interest
and we may acquire such an interest in the future. 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. The brokers will earn brokerage fees,
described above, on life insurance policies our provider purchases 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 in
managing 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, provider, underwriter and their
affiliate, AmeriFirst, Inc., had an aggregate of 18 employees as of April 15,
2004, each including Mr. Tooke, a senior software
90
architect, an executive assistant, in-house legal staff, accounting staff,
insurance review, insurance analyst, medical review, policy administration,
computer and data processing personnel, customer service, medical administration
and administrative assistants, all of whom are full-time employees. There is an
overlap in employees among certain of the above mentioned entities. For example,
John Tooke is an employee of each of our manager, AmeriFirst, Inc., our provider
and our underwriter and has been regarded as one employee for all entities for
purposes of illustration the number of employees of all these entities. Mr.
Tooke has in excess of 25 years of experience in selling mortgage backed
securities and other securities. He began to research the life settlement
industry in April 2001 (see "Our Manager, Provider and Underwriter" above),
however, he has no actual experience in purchasing and securitizing life
settlement policies. The staff of our manager includes one person with 33 years
of insurance experience, a nurse with 36 years of experience in the medical
industry and three other persons with between four and six years of experience
in the life settlements industry. Virtually all of our manager's employees will
devote all of their business time to the Fund's affairs until such time as the
offering is completed.
5. Provider Resells the Life Insurance Policies. Our provider may also retain or
sell existing life insurance policies purchased by our provider for itself, or
to other clients on a non-securitized basis, because this satisfies the
objectives of our provider. 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 beneficially 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; and
(c) AmeriFirst Financial Services, Inc., a Delaware corporation formed on
September 4, 2002, to be the manager/servicer of this offering. See "Security
Ownership of Certain Beneficial Owners and Management."
91
On February 13, 2003, AmeriFirst, Inc. entered into an expense agreement,
which was restated on December 23, 2003, whereby AmeriFirst, Inc. 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, Inc. and a proportionate equity interest in any affiliates or
subsidiaries of AmeriFirst, Inc., but not the net operating income of the Fund.
On October 28, 2002, Denise Mugerdichian Lachman, through her corporation
Dow Ridge Associates, LLC, entered into a loan agreement with AmeriFirst, Inc.
evidenced by a promissory note in the principal amount of $500,000. In
consideration of the loan, Dow Ridge received 500 shares (25%), as amended, of
the common stock of AmeriFirst, Inc. and a proportionate equity interest in any
affiliates or subsidiaries of AmeriFirst, Inc., 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 with some overlapping of employees between such entities,
John Tooke is the sole director of our provider and underwriter and is also one
of two directors of our manager, neither of which are independent. 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.
92
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
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 Lachman 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, provider and/or underwriter 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, provider and/or underwriter 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, provider and/or underwriter was material to the cause of action and
constituted either:
93
1. A violation of criminal law, unless our manager, provider and/or
underwriter had no reasonable cause to believe such conduct was
unlawful;
2. A transaction where our manager, provider and/or underwriter 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 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, provider and/or underwriter 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
94
is anticipated that some investors will be corporate pension or profit-sharing
plans and Individual Retirement Accounts, or other employee benefit plans that
are subject to ERISA. In these situations, the person making the investment
decision concerning the purchase of the units will be a "fiduciary" of such plan
and will be required to conform to ERISA's fiduciary responsibility rules.
Persons making investment decisions for employee benefit plans (i.e.,
"fiduciaries") must discharge their duties with the care, skill and prudence
which a prudent man familiar with such matters would exercise in like
circumstances. In evaluating whether the purchase of units is a "prudent"
investment under this rule, fiduciaries should consider all of the risk factors
set forth in this prospectus. Fiduciaries should also carefully consider the
possibility and consequences of unrelated business taxable income (see "Federal
Income Tax Consequences"), as well as the percentage of plan assets which will
be invested in the Fund insofar as the diversification requirements of ERISA are
concerned. An investment in the Fund is relatively illiquid, and fiduciaries
must not rely on an ability to convert an investment in the Fund into cash in
order to meet liabilities to plan participants who may be entitled to
distributions.
DUE TO THE COMPLEX NATURE OF ERISA, EACH PROSPECTIVE INVESTOR IS URGED TO
CONSULT HIS OWN TAX ADVISOR OR PENSION CONSULTANT TO DETERMINE THE APPLICATION
OF ERISA TO HIS/HER/ITS PROSPECTIVE INVESTMENT.
Plan Asset Regulations
In order to avoid application of the U.S. Department of Labor's plan asset
regulations, the Fund will limit subscriptions for units from ERISA plan
investors such that, immediately after each sale of units, ERISA plan investors
will hold less than 25% of the total outstanding membership interests in the
Fund.
Annual Valuation
Fiduciaries of plans subject to ERISA are required to determine annually
the fair market value of the assets of such plans as of the close of any such
plan's fiscal year. Although our manager will provide annually upon the written
request of an investor, an estimate of the value of the units based upon, among
other things, outstanding life insurance policies, it may not be possible to
value the units adequately from year to year because there will be no market for
them.
FEDERAL INCOME TAX CONSEQUENCES
The following section is the opinion of our counsel, Snow Becker Krauss
P.C., regarding the material United States federal income tax considerations
which are relevant to a prospective investor. The federal tax considerations
discussed below are necessarily general and may vary depending upon a member's
particular circumstances. The tax aspects of this offering are complex and
certain of them are not free from doubt.
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
95
towards economic profit apart form the tax benefits, if any, which may arise as
a result of investment in the Fund.
This discussion is based on the facts described herein. Any alteration of
the facts may adversely affect the discussion. Furthermore, the discussion is
based on existing law and applicable current and proposed Treasury Regulations
and current published administrative positions of the service and judicial
decisions, all of which are subject to change either prospectively or
retroactively. For the reasons set forth below in Classification as a
Partnership for Tax Purposes, it is counsel's opinion that the Fund will be
subject to tax as a Partnership for Federal Income Tax purposes.
EACH INVESTOR SHOULD SEEK, AND MUST DEPEND UPON, THE ADVICE OF HIS TAX
ADVISOR, TAX COUNSEL OR ACCOUNTANT WITH RESPECT TO THIS INVESTMENT IN THE FUND,
AND EACH INVESTOR WILL BE RESPONSIBLE FOR THE FEES OF SUCH ADVISORS, TAX COUNSEL
AND ACCOUNTANTS. INVESTORS SHOULD BE AWARE THAT THE INTERNAL REVENUE SERVICE MAY
NOT AGREE WITH ALL TAX POSITIONS TAKEN BY THE FUND AND THAT LEGISLATION,
ADMINISTRATION OR COURT DECISIONS MAY REDUCE OR ELIMINATE ANY ANTICIPATED TAX
BENEFITS TO AN INVESTOR.
Taxation of the Fund and its Members
Under Federal Income Tax Regulations, a business entity formed as a
limited liability company, such as the Fund, may elect to be taxed for Federal
income tax purposes as either a partnership or a corporation. The Fund will
elect to be taxed as a partnership. Therefore, it is counsel's opinion that
pursuant to the Income Tax Regulations, it will be subject to taxation as a
partnership. A partnership is not subject to federal income taxation. Each
member reports on his federal income tax return his distributive share of the
Fund's income, gains, credits, losses and deductions, whether or not actual
distributions of cash or property is made to such member with respect to the
member's taxable year. A member may realize taxable income in excess of his cash
distributions if the Fund retains cash to meet its needs and distributes no cash
or cash in an amount less than taxable income.
Classification as a Partnership for Tax Purposes
As noted above, the Income Tax Regulations make it possible for an
unincorporated entity such as the Fund to elect to be taxed either as a
partnership or a corporation. The Fund intends to elect to be taxed as a
partnership. Notwithstanding such election, the Internal Revenue Code of 1986,
as amended (the "Code"), provides that a publicly traded partnership is treated
as a corporation. The Code provides that a partnership is publicly traded if
there are more than 100 partners and the interests in the partnership (i.e.,
membership interests in the Fund) are (1) traded on an established securities
market or (2) readily tradable on a secondary market or the substantial
equivalent thereof.
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
96
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.
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
97
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 Sale or Exchange
In general, except as otherwise provided in section 751, the sale or
exchange of a partnership interest is treated as the sale or exchange of a
capital asset. Section 751(a), in turn, states that any portion of a selling
partner's amount realized attributable to (1) unrealized receivables or (2)
inventory items, shall be treated as being an amount realized from the sale or
exchange of a noncapital asset and, therefore, taxable at ordinary income tax
rates. Essentially, unrealized receivables include any amount that would be
treated as ordinary income if the Fund had sold its property for its fair market
value. Since the assets of the Fund will essentially be life insurance contacts,
the appreciation in the value of those contracts will represent ordinary income,
and therefore, to the extent of that value, the sale of an interest in the Fund
will not be entitled to capital gains treatment.
98
Tax Treatment on Liquidation of the Fund
Upon the liquidation of the Fund, liquidating cash distributions will be
made to the members in accordance with their positive capital accounts. On
dissolution, the Fund may distribute assets in kind or sell its assets and
distribute cash. If cash is distributed, it may result in capital gain (or
ordinary gain to the extent section 751 applies) 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.
99
Investors are therefore urged to consult their tax advisors as to the
application and effect of the passive loss limitation with respect to their
respective tax situations.
Life Insurance Contracts
The assets of the Fund are expected to be a pool of life insurance
policies on the lives of the terminally ill and chronically ill of all ages and
senior citizens, age 65 and older with life expectancies based solely on
actuarial tables.
The Code provides that, with certain exceptions, gross income of a
taxpayer does not include amounts received under a life insurance contract if
such amounts are paid by reason of the death of the insured. One exception to
this rule provides that if a life insurance contract or any interest in it is
transferred for valuable consideration, the exclusion from gross income is
limited to an amount equal to the sum of the actual value of the consideration
and the other amount subsequently paid by the Fund after it acquires the policy.
Accordingly, it is in the opinion of counsel, that in the usual case, any income
of the Fund upon the maturity of a life insurance contract will be taxed as
ordinary business income.
Fees and Other Payments
The Fund intends to take the position that the payment of management fees,
legal fees, accounting fees and fees to other service providers, to the extent
deducted, represents a reasonable expense amortizable over the period benefited
or an "ordinary and necessary" business expense payable for services rendered or
obligations undertaken for the benefit of the Fund.
The Code provides that organization expenses of the Fund are not
deductible in the year paid. It provides that the Fund may elect to deduct
ratably over a period of not less than 60 months, amounts paid or incurred in
organizing a business, such as the Fund. This period begins with the month in
which the Fund begins to do business. Organization expenses for this purpose are
expenditures which are incident to the Fund's creation, chargeable to its
capital account and of a character which, if expended in connection with the
creation of a Fund having an ascertainable life, would be amortized over such
life. In addition to such costs, another provision of the Code allows a taxpayer
to elect to amortize over a 60-month period "start-up expenditures" in any
amount (1) paid or incurred in connection with (a) investigating the creation or
acquisition of an active trade or business, or (b) creating an active trade or
business, or (c) any activity engaged in for profit and for the production of
income before the day on which the active trade or business begins, anticipation
of such activity becoming an active trade or business, and (2) which, if paid or
incurred in connection with the operation of an existing active trade or
business (in the same field as the trade or business referred to in (1)), would
be allowable as a deduction for the taxable year in which paid or incurred.
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
100
the Fund's trade or business even where the contract is between the Fund and one
of its members and syndication expenses.
Allocation of Profits and Losses to Partners
The Code provides that allocations of income, gain, loss, deduction or
credit among partners will be controlled by the partnership agreement (i.e., the
Fund's operating agreement) if the allocation has "substantial economic effect."
The legislative history of this provision indicates that an allocation will be
deemed to have substantial economic effect if the allocation will actually
affect the dollar amount of the partner's shares of total partnership income or
loss independently of tax consequences. If an allocation made by the partnership
agreement does not have substantial economic effect, a member's shares of
income, gain, loss, deduction or credit (or item thereof) will be determined in
accordance with the partner's "interest in the partnership" taking into account
all facts and circumstances. According to the legislative history, among the
relevant factors to be considered are the partners' respective interests in cash
flow and distributions upon liquidation, as well as their interests in
partnership profits and losses (if different from that in taxable income or
loss).
The Fund's operating agreement provides that the Fund's profits and losses
are allocated in accordance with members' capital accounts and that cash
distributions will generally be made in accordance with the allocation of
profits and losses. It is the opinion of counsel that such allocations have
substantial economic effect.
Cash Distributions
Cash distributions to the members from the Fund may not be equal to Fund
income as determined for Federal income tax purposes. If cash distributions to a
member by the Fund in any year are less than his share of taxable income, the
member may be required to pay the income taxes attributable to his share of Fund
income from funds not associated with his investment in the Fund. If cash
distributions to a member by the Fund in any year exceed his share of the Fund's
taxable income for that year, the excess will not be reportable as taxable
income by the member for Federal income tax purposes, although it will reduce
the tax basis of his membership interests. If the tax basis of a member in his
membership interests is reduced to zero, his share of any subsequent cash
distributions for any year, including his share in any reduction in nonrecourse
liabilities, in excess of his shares of taxable income for such year, will be
taxable to him as though it were a gain on the sale or exchange of his
membership interest.
Alternative Minimum Tax
All taxpayers are subject to a minimum tax at a rate of 21% (20% for
corporations) in lieu of the regular income tax where the alternative minimum
tax exceeds taxpayer's regular income tax for a taxable year. A taxpayer's
alternative minimum taxable income, computed for purposes of the regular tax, in
significant ways. Depending on a member's particular tax 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
101
computing estimated tax liability. Each prospective member should consult and
depend upon his personal tax advisor with respect to the possible effects on him
of tax preference items.
Fund Not a Tax Shelter
Certain provisions of the Code apply to tax shelters. For this purpose,
tax shelter means an entity including a limited liability company such the Fund
if the principal purpose of the entity, plan, or arrangement, based on objective
evidence, is the avoidance or evasion of Federal income tax. The principal
purposes of an entity, plan or arrangement is the avoidance or evasion of
Federal income tax if that purpose exceeds any other purpose. Typical of tax
shelters are transactions structured with little or no motive for the
mismatching of income and deductions, overvalued assets, non-recourse financing
or financing techniques which do not conform to standard commercial business
practices. The Fund represents an effort to obtain a rate of return in a manner
consistent with commercial practices in this area 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 May 13, 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.
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The Fund Contributions
Units, which represent ownership interests in the Fund, will be sold in
multiples of $1,000, and no person may initially invest less than $100,000 with
additional purchases in multiples of $1,000, although our underwriter reserves
the right to accept subscriptions for less than $100,000. To purchase units you
must deliver to the Fund a subscription agreement in the form attached to this
prospectus as Exhibit A, together with your contribution. Contributions shall be
made in cash, payable by check or wire transfer, or through a rollover of assets
from a qualified plan, such as an IRA.
Rights, Powers and Duties of Manager
Subject to the rights of members to vote on specified matters, our manager
will have complete charge of our business. Our manager is not required to devote
its full resources to our business and affairs but only such resources as shall
be necessary or useful to manage and operate our business and affairs in a
proper and efficient manner. Our manager acting alone, has the power and
authority to act for and bind the Fund.
Our manager is granted the special power of attorney of each member for
the purpose of executing amendments to the operating agreement and confirming
amendments to the Articles of Organization and any other governmental filings
required as a result of these changes.
Profits and Losses
Our net income and net losses for each fiscal year will be allocated to
the members on their proportionate share. In the event of a permitted transfer
of a unit, the transferee will have the same proportionate share as the
transferor.
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 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
104
you must meet the investor suitability requirements described in this
prospectus. Our manager must approve any new member and no transfers which cause
us to be classified as a publicly traded partnership under the Internal Revenue
Code will be permitted.
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 for such purposes as our manager
shall determine. Meetings may be called upon not less than 7 nor more than 30
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
105
the Fund. 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. Members whose
aggregate capital accounts constitute a majority of all members' capital
accounts shall constitute a quorum at any meeting of the members. Our manager
may establish such additional and reasonable procedures (in the form of by-laws
or otherwise) relating to notice of the time, place or purpose of a meeting of
the members, the waiver of any such notice, action by consent without a meeting,
the establishment of a record date, quorum requirements, voting by proxy or any
other matter with respect to the exercise of any such right to vote.
Reports and Records
Our manager 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 unanimous consent of the members;
(d) the sale of all or substantially all of the assets of the Fund; or
(e) the entry of a decree of judicial dissolution of the Fund.
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.
106
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 is an NASD member, compensation
equal to 2.5% of the gross proceeds of this offering on units sold by our
underwriter. Units may also be sold by officers of AmeriFirst, Inc., who are
sales representatives licensed by the NASD, who will receive commissions, where
permitted.
Our underwriter may also engage non-affiliated securities brokerage firms
that are members of the NASD to act as selected dealers to sell units to the
public. Entities outside of the United States and not licensed with the NASD may
also be permitted to sell our units and receive commissions, provided such
foreign brokers are in compliance with their respective country's securities
laws. Our underwriter has not identified any selected dealers or foreign
entities which will participate in the offering and has no agreement,
arrangement or understanding with any selected dealer or foreign entity. The
total selling commissions to our underwriter, selected dealers and foreign
entities cannot exceed 10% of the gross proceeds of units sold, which is the
maximum amount permitted by the NASD. Selected dealers, other than our
underwriter, and foreign entities will be paid upon acceptance of the investor
as a member of the Fund unless the selected dealer or foreign entity agrees to
defer payment.
Selling commissions will only be paid to our underwriter 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. Selected dealers' and foreign entities' sales commissions
will not be segregated and escrowed. All funds received from investors after the
minimum offering is completed will be disbursed from the operating escrow
account when our manager does the pricing for purchasing a policy. The selected
dealers and foreign entities will be paid at closing of the purchase of an
insurance policy which occurs when information is received by our 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 and our provider will
each receive 5% of the gross proceeds of this offering. See "Compensation of Our
Manager, Provider and Underwriter."
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
107
Legal Fees and Expenses 200,000
Printing Fees and Expenses 10,000
Mailing 5,300
Miscellaneous 7,300
--------
Total $300,000
========
Our underwriter will solicit solely accredited investors on a direct basis
or through other selected dealers or foreign entities. On a direct basis, our
underwriter, the Fund or other selected dealers or foreign entities 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 October 17, 2004, unless extended up
until April 17, 2005, 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 April 17, 2005, unless extended up until April 17, 2006, 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. 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 in exchange for units.
We will continue to sell units to the public through our underwriter and
any selected dealers and/or foreign entities. 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,
Minnesota, Nevada, New Jersey, New York and Utah, and we will end this offering
in these states on April 17, 2005, unless extended up until April 17, 2006, or
at such earlier time that all $100,000,000 of units are sold. If we desire to
extend this offering up until April 17, 2006, 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
108
may register in additional states to sell the units and will comply with
applicable state "blue sky" laws to extend the offering. We may terminate this
offering at any time by written notice to the investors and refund any
subscriptions that we have not accepted.
Your purchase of units in the Fund entitles you to receive a return in
proportion to your investment over the total amount of investments made in the
Fund. Accordingly, the greater the total investments, the smaller your ownership
interest in the Fund will be since your ownership interest will be diluted;
however, your rate of return will remain the same. You are entitled to receive,
to the extent we receive proceeds on each life insurance policy that we acquire,
a current return equal to your proportionate share of the face amount of the
life insurance policy.
There is no established public trading market and no comparable securities
for reference purposes, nor are there expected to be a market for comparable
securities following this offering.
The underwriting agreement provides for reciprocal indemnification between
the Fund and our underwriter against certain liabilities in connection with the
registration statement of which this prospectus forms a part, including
liabilities under the Securities Act of 1933. To the extent this section may
purport to provide exculpation from possible liabilities arising under the
federal securities laws, it is the opinion of the SEC that such indemnification
is against public policy and is therefore unenforceable.
If you want to purchase units, you should complete the subscription
agreement, which you can find at Exhibit A to this prospectus and which will be
provided by our underwriter or any selected dealer or foreign entity 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.
109
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 September, 2003
and the statements of stockholder's equity and cash flows of the Fund for the
year ended September 30, 2003 and the period from inception through September
30, 2002 and cumulative from inception (April 22, 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.
110
FINANCIAL STATEMENTS
AMERIFIRST FUND I, LLC
(A Development Stage Company)
TABLE OF CONTENTS
PAGE
----
Audited Financial Statements ---
For the year ended September 30, 2003 and the period April 22, 2002 (Inception)
through September 30, 2002 and cumulative from April 22, 2002 (Inception)
Independent Auditor's Report .................................................. F-1
Balance Sheets as of September 30, 2003 and 2002 .............................. F-2
Statements of Operations and Member's Equity for the year ended
September 30, 2003 and the period April 22, 2002 (Inception) through
September 30, 2002 and cumulative from April 22, 2002 (Inception) .......... F-3
Statements of Cash Flows for the year ended
September 30, 2003 and the period April 22, 2002 (Inception) through
September 30, 2002 and cumulative from April 22, 2002 (Inception) .......... F-4
Notes to Condensed Financial Statements ....................................... F-5
Condensed Financial Statements --
For the three months ended December 31, 2003 and December 31, 2002
and cumulative from April 22, 2002 (Inception) through December 31, 2003
Condensed Balance Sheets as of December 31, 2003 (Unaudited)
and September 30, 2003 (Audited) ........................................... F-9
Condensed Statements of Operations and Member's Equity (Deficiency) (Unaudited)
for the three months ended December 31, 2003 and 2002 and cumulative
from April 22, 2002 (Inception) through December 31, 2003 .................. F-10
Condensed Statements of Cash Flows (Unaudited) for the
three months ended December 31, 2003 and 2002 and cumulative
from April 22, 2002 (Inception) through December 31, 2003 .................. F-11
Notes to Condensed Financial Statements (Unaudited) ........................... F-12
111
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
AmeriFirst Fund I, LLC
We have audited the accompanying balance sheets of AmeriFirst Fund I, LLC ("the
Fund") (a development stage company) as of September 30, 2003 and 2002, and the
related statements of operations, member's equity, and cash flows for the year
ended September 30, 2003, the period from April 22, 2002 (inception) through
September 30, 2002 and cumulative from April 22, 2002 (inception) through
September 30, 2003. 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 audits.
We conducted our audits 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 audits provide 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, 2003 and 2002, and the results of their operations and their cash
flows for the year ended September 30, 2003, the period from April 22, 2002
(inception) through September 30, 2002 and cumulative from April 22, 2002
(inception) through September 30, 2003 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 3 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
November 26, 2003, except for Note 4(B), which is December 23, 2003
New York, NY
F-1
AMERIFIRST FUND I LLC.
(A Development Stage Company)
BALANCE SHEETS
September 30, 2003 and 2002
- --------------------------------------------------------------------------------
ASSETS
2003 2002
-----------------------
Current assets $ -- $ --
Deferred offering costs 326,509 183,718
-------- ---------
TOTAL ASSETS $326,509 $ 183,718
======== =========
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
Accrued expenses $ 13,159 $ --
Due to related party -- 218,100
-------- ---------
TOTAL LIABILITIES 13,159 218,100
COMMITMENTS AND CONTINGENCIES
MEMBER'S EQUITY (DEFICIT) ACCUMULATED DURING
THE DEVELOPMENT STAGE 313,350 (34,382)
-------- ---------
TOTAL LIABILITIES AND MEMBER'S EQUITY $326,509 $ 183,718
======== =========
The accompanying notes are an integral part of these financial statements.
F-2
AMERIFIRST FUND I LLC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS AND MEMBER'S EQUITY
For the Year Ended September 30, 2003 and the Period
April 22, 2002 (Inception) Through September 30, 2002 and
Cumulative From April 22, 2002 (Inception)
- --------------------------------------------------------------------------------
Year Period April 22, 2002 Cumulative
Ended (inception) through From
September 30, September 30, April 22, 2002
2003 2002 (Inception)
---------------------------------------------------
REVENUES FROM POLICIES
HELD IN TRUST $ -- $ -- $ --
EXPENSES 57,767 34,382 92,149
--------- -------- ---------
NET LOSS (57,767) (34,382) (92,149)
MEMBER'S (DEFICIT) EQUITY -
Beginning (34,382) -- --
Contribution of Capital 405,499 -- 405,499
--------- -------- ---------
MEMBER'S EQUITY (DEFICIT) -
Ending $ 313,350 $(34,382) $ 313,350
========= ======== =========
The accompanying notes are an integral part of these financial statements.
F-3
AMERIFIRST FUND I LLC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Year Ended September 30, 2003 and the Period
April 22, 2002 (Inception) Through September 30, 2002 and
Cumulative From April 22, 2002 (Inception)
- --------------------------------------------------------------------------------
Year Period April 22, 2002 Cumulative
Ended (inception) through From April 22,
September 30, September 30, 2002
2003 2002 (Inception)
----------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $ (57,767) $ (34,382) $ (92,149)
Changes in operating assets and liabilities:
Accrued expenses 13,159 -- 13,159
--------- --------- ---------
NET CASH USED IN
OPERATING ACTIVITIES (44,608) (34,382) (78,990)
--------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES -- -- --
--------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES
Contribution of Capital 187,399 -- 405,499
Advance from Related Party -- 218,100 --
Deferred offering costs (142,791) (183,718) (326,509)
--------- --------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 44,608 34,382 78,990
--------- --------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS -- -- --
CASH AND CASH EQUIVALENTS -
Beginning -- -- --
--------- --------- ---------
CASH AND CASH EQUIVALENTS -
Ending $ -- $ -- $ --
========= ========= =========
Non Cash Investing and Financing Activities
On February 13, 2003, the Fund converted $218,100 due to a related party to
contributed capital pursuant to an expense agreement (See Note 4).
The accompanying notes are an integral part of these financial statements.
F-4
AMERIFIRST FUND I, LLC
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - Formation, Nature of Business, and Management 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. (the
"Provider"), a related party. The Provider will assign and/or transfer
beneficial interest to the Fund.
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 principal offices of the Provider.
The Fund's Manager, AmeriFirst Financial Services, Inc. (the "Manager"),
along with the 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.
NOTE 2 - Significant Accounting Policies
Income Taxes
The Fund is a Florida limited liability company ("LLC"). The members of an
LLC are taxed on their proportionate share of the Fund's taxable income.
Accordingly, no provision or liability for Federal income taxes has been
included in the financial statements.
Use of Estimates
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 $326,509 include incremental
costs directly attributable to the public offering discussed in Note 1.
These costs will be charged directly to member's equity (deficit) against
the gross proceeds of the offering. If the offering is not completed then
the Fund will charge the costs to its operations.
F-5
AMERIFIRST FUND I, LLC
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
Revenue Recognition for Investment in Insurance Policies
The Company recognizes revenue on its investment in life insurance
policies in accordance with the 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, 2003 and 2002, the Fund held no investments in life insurance
policies.
New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 150, "Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities
and Equity" ("SFAS 150"), which is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003.
SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability. The adoption of SFAS 150 did not have a
material effect on the Company's financial statements.
In January 2003, FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), an interpretation of Accounting
Research Bulletin No. 51. FIN 46 expands upon and strengthens existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another
entity. A variable interest entity is any legal structure used for
business purposes that either does not provide sufficient financial
resources for the entity to be consolidated by a company if that company
is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. However, on October
8, 2003, FASB deferred the latest date by which all public entities must
apply FIN 46 to the first reporting period ended after December 15, 2003.
The Fund is still evaluating the effect of this new accounting
pronouncement on the Fund's financial statements.
F-6
AMERIFIRST FUND I, LLC
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - Going Concern
The Fund has not commenced principal operations as of November 26, 2003.
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 100 units (the "Offering"). The units are
being distributed on a "best efforts" basis by AmeriFirst Capital Corp.,
an affiliate of the Manager and Provider. 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 (October 17, 2003) of the Offering, unless extended for an
additional six months until October 17, 2004, then all subscription
amounts (including interest), will be returned to all subscribers. The
Fund has not raised any monies from this Offering. 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.
NOTE 4 - Related Parties
(A) As discussed in Note 1, AmeriFirst, Inc. ("AmeriFirst") 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 purchase 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.
AmeriFirst, through its wholly owned subsidiary AmeriFirst Capital
Corp. (the Underwriter") will act as the primary underwriter of the
Offering (See Note 3).
John Tooke is the Chief Executive Officer and controlling
shareholder of our Manager, Provider and Underwriter and may be
deemed to be a founder and /or promoter of the Fund.
(B) On February 13, 2003, the Fund and AmeriFirst entered into an
expense agreement, as restated on December 23, 2003 (the
"Agreement"). Such Agreement provides that the Fund is not required
to repay amounts due to AmeriFirst arising from organizational and
offering expenses incurred on its behalf by AmeriFirst, or for
services rendered by AmeriFirst to the Fund through the date of the
Agreement. In
F-7
AMERIFIRST FUND I, LLC
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - Related Parties, continued
addition, AmeriFirst will not charge the Fund for organizational and
offering expenses incurred on its behalf by AmeriFirst for services
rendered to the Fund subsequent to February 13, 2003.The Fund
recorded the cumulative effect of this Agreement as a contribution
to capital in the amount of $405,499 through September 30, 2003.
Subsequent to September 30, 2003 the Fund received $23,479 of
contributions from AmeriFirst for organizational and offering
expenses and deferred financing costs incurred by the Fund. The Fund
recorded the monies received as contributed capital.
F-8
AMERIFIRST FUND I, LLC
(A Development Stage Company)
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
December 31, September 30,
2003 2003
---------------------------
(Unaudited)
Current assets $ -- $ --
Deferred offering costs 326,509 326,509
-------- --------
TOTAL ASSETS $326,509 $326,509
======== ========
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
Accrued expenses $ 11,075 $ 13,159
-------- --------
TOTAL LIABILITIES 11,075 13,159
COMMITMENTS AND CONTINGENCIES
MEMBER'S EQUITY ACCUMULATED DURING
THE DEVELOPMENT STAGE 315,434 313,350
-------- --------
TOTAL LIABILITIES AND MEMBER'S EQUITY $326,509 $326,509
======== ========
See notes to condensed financial statements.
F-9
AMERIFIRST FUND I, LLC
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
AND MEMBER'S EQUITY (DEFICIENCY)
(UNAUDITED)
- --------------------------------------------------------------------------------
Cumulative
From
April 22,
2002
Three Months Three Months (Inception)
Ended Ended through
December 31, December 31, December 31,
2003 2002 2003
-------------------------------------------
REVENUES FROM POLICIES
HELD IN TRUST $ -- $ -- $ --
EXPENSES 32,485 -- 113,559
--------- --------- ---------
NET LOSS (32,485) -- (113,559)
MEMBER'S EQUITY (DEFICIENCY) -
Beginning 313,350 (34,382) --
Contribution of Capital 34,569 -- 440,068
--------- --------- ---------
MEMBER'S EQUITY (DEFICIENCY) -
Ending $ 315,434 $ (34,382) $ 326,509
========= ========= =========
See notes to condensed financial statements.
F-10
AMERIFIRST FUND I, LLC
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
Cumulative
From
April 22,
Three Three 2002
Months Months (Inception)
Ended Ended through
December 31, December 31, December 31,
2003 2002 2003
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (32,485) $ (34,382) $(113,559)
Changes in operating asset and liabilities accrued
expenses (2,084) -- --
--------- --------- ---------
NET CASH USED IN OPERATING
ACTIVITIES (34,569) (34,382) (113,559)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution of Capital 34,569 218,100 440,068
Deferred offering costs -- (183,718) (326,509)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 34,569 34,582 113,559
--------- --------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS -- -- --
CASH AND CASH EQUIVALENTS - Beginning -- -- --
--------- --------- ---------
CASH AND CASH EQUIVALENTS - Ending $ -- $ -- $ --
========= ========= =========
Non Cash Investing and Financing Activities
On February 13, 2003 the Fund converted $218,100 due to a related party to
contributed capital pursuant to an expense agreement (See Note 2).
See notes to condensed financial statements.
F-11
AMERIFIRST FUND I, LLC
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - Formation, Nature of Business, and Management 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. (the "Provider"), a related party. The Provider will assign
and/or transfer beneficial interest to the Fund.
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 principal
offices of the Provider.
The Fund's Manager, AmeriFirst Financial Services, Inc. (the "Manager"), along
with the 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.
On February 9, 2004, the Fund changed its fiscal year end from September 30th to
December 31st.
The Fund has not commenced principal operations as of February 6, 2004. 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 100 units (the "Offering"). The units being distributed on a "best efforts"
basis by AmeriFirst Capital Corp., an affiliate of the Manager and Provider. 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 (October 17, 2003) of the Offering
except if extended for an additional six months until October 17, 2004, 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.
F-12
AMERIFIRST FUND I, LLC
(A Development Stage Company)
CONTINUED--NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 - Related Party Transactions
On February 13, 2003, the Fund and AmeriFirst, Inc. ("AmeriFirst") entered into
an expense agreement, as restated on December 23, 2003 (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 its
behalf by AmeriFirst for services rendered to the Fund subsequent to February
13, 2003.
The Fund recorded the cumulative effect of this Agreement as a contribution to
capital in the amount of $440,068 through December 31, 2003. Subsequent to
December 31, 2003, the Fund received $5,126.10 of contribution from AmeriFirst
for organizational, offering expenses and deferred financing cost incurred by
the Fund. The Fund recorded the monies received from AmeriFirst as contributed
capital.
NOTE 3 - Basis of Presentation
Our accompanying unaudited condensed 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, 2003 are not necessarily indicative of the results that may
be expected for any other interim period or the full year. The condensed
financial statements should be read in conjunction with the notes to the
financial statements and in conjunction with the Fund's audited financial
statements for the year ended September 30, 2003 which are included in the
Fund's annual report on Form 10-KSB for the year ended September 30, 2003. The
accounting policies used to prepare the condensed financial statements are
consistent with those described in the September 30, 2003 financial statements.
F-13
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 page A-10.
o If Investor is a "Retirement Plan" (i.e., Employee Benefit
Plan, Keogh Plan, IRA), complete Section 16 on pages A-11 to
A-12.
o All Investors must complete Section 17 on pages A-13 to A-17.
3. Registration Information for the Units.
o All Investors must complete Section 18 on page A-18.
4. Signature Page.
o All Investors must complete, sign and date, as applicable,
Section 19 on pages A-19 to A-20.
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 A-18 and complete, sign and date, as applicable, Section
20 on pages A-21 to A-22.
PLEASE NOTE: Section 21 on page A-23 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. 062000080 ABA No. 062000080
Account to Credit: 69-639-388 Account to Credit: 69-639-388
Reference: AmeriFirst Reference: AmeriFirst
Account No. 1197 06 1606 Account No.1197 06 3409
Attn: Rebecca Brayman Attn: Rebecca Brayman
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 15 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.
(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
A-3
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 32 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 attorney, certified public
accountant or investment advisor 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 15.
(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.
(k) Investor represents that the information furnished in this
Subscription Agreement is accurate and complete in all material
respects.
(l) If Investor is a Michigan resident, Investor agrees the securities
will not be sold without registration under the Michigan Uniform
Securities Act or an exemption therefrom. The undersigned
acknowledges that the Units have not been registered under the
Michigan Uniform Securities Act; the Fund may not engage in any
general advertising or general solicitation and that the transfer
and sale of the Units is subject to the restrictions set forth in
the Prospectus and this Subscription Agreement. In addition, no
commission may be paid for soliciting any purchaser in Michigan
except to a registered broker-dealer who is not affiliated with the
Fund.
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.
A-4
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
(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.
A-5
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.
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: ______________________________________________________________________
A-11
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-12
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-13
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_____
9. If Investor is a Michigan resident, please check whether you are
either:
(i) A business entity having either net income from operations after
taxes in excess of $100,000.00 in its last fiscal year or its latest
12-month period or a net worth in excess of $1,000,000.00 at the
time of purchase, and after the purchase has less than 10% of its
total assets invested in the securities of the Fund.
Yes_____ No_____
(ii) An individual who after the purchase has an investment of
$50,000.00 or more in the securities of the Fund, including
installment payments to be made within 1 year after purchase by the
investor; has either personal income before taxes in excess of
$100,000.00 for his or her last fiscal year or latest 12-month
period and is capable of bearing the economic risk, or net worth in
excess of $1,000,000.00; and has the 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 has
obtained the advice of an attorney, certified public accountant, or
investment adviser registered under the Investment Advisers Act of
1940, or an investment adviser registered under the Michigan Uniform
Securities Act, with respect to the merits and risks of the
prospective investment.
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-14
(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-15
(H) Net worth, inclusive of the net worth of your spouse and of the value of
your principal residence, furnishings therein and personal automobiles (IT
IS IMPORTANT THAT YOU CHECK THE HIGHEST APPLICABLE AMOUNT):
( ) less than $100,000 ( ) $100,000 to $149,999
( ) $150,000 to $199,999 ( ) $200,000 to $249,999
( ) $250,000 to $349,999 ( ) $350,000 to $699,999
( ) $700,000 to $799,999 ( ) $800,000 to 1,000,000
( ) over $1,000,000
(I) Net worth, inclusive of the net worth of your spouse and excluding the
value of your principal residence, furnishings therein and personal
automobiles (HIGHEST APPLICABLE AMOUNT):
( ) less than $100,000 ( ) $100,000 to $149,999
( ) $150,000 to $199,999 ( ) $200,000 to $249,999
( ) $250,000 to $349,999 ( ) $350,000 to $699,999
( ) $700,000 to $799,999 ( ) $800,000 to 1,000,000
( ) over $1,000,000
(J) Indicate (a) your individual income from all sources for the calendar
years 2001 and 2002 and estimated income for 2003 or (b) your joint income
with your spouse from all sources for the calendar years 2001 and 2002 and
estimated income for 2003 (IT IS IMPORTANT THAT YOU CHECK THE HIGHEST
APPLICABLE AMOUNT):
(a) Individual income:
$60,000 $100,001 $150,000 $200,000
to to to to $300,000
$100,000 $149,999 $199,999 $299,999 and over
-------- -------- -------- -------- --------
2001 ( ) ( ) ( ) ( ) ( )
2002 ( ) ( ) ( ) ( ) ( )
2003 ( ) ( ) ( ) ( ) ( )
(b) Joint Income:
$60,000 $100,001 $150,000 $200,000
to to to to $300,000
$100,000 $149,999 $199,999 $299,999 and over
-------- -------- -------- -------- --------
2001 ( ) ( ) ( ) ( ) ( )
2002 ( ) ( ) ( ) ( ) ( )
2003 ( ) ( ) ( ) ( ) ( )
A-16
(K) Income tax rate:
(a) Was some portion of your income during your last taxable year taxed
at the highest rate for federal income tax purposes?
______ Yes ______ No
(b) At what rate do you anticipate that your income during your current
taxable year will be taxed for federal income tax purposes?
______ 0-10% ______ 10-20% ______ 20-30% _____ 30% or higher
A-17
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-18
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-19
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-20
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-21
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-22
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-23
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 MAY 13, 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 - 5
SECTION 2.1 FORMATION OF FUND.....................................B - 5
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
SECTION 2.9 MEETINGS OF MEMBERS....................................B - 7
ARTICLE III: FUND INTERESTS AND CAPITALIZATION.............................B - 8
SECTION 3.1 CAPITAL CONTRIBUTION OF THE MANAGER...................B - 8
SECTION 3.2 CAPITAL CONTRIBUTIONS OF MEMBERS......................B - 8
SECTION 3.3 PROVIDER ESCROW ACCOUNT...............................B - 8
SECTION 3.4 PREMIUM ESCROW ACCOUNT; CAPITAL CALL..................B - 8
SECTION 3.5 NO WITHDRAWAL OF CAPITAL CONTRIBUTIONS;
RETURN OF CAPITAL CONTRIBUTIONS....................................B - 9
SECTION 3.6 NO OBLIGATION TO RESTORE NEGATIVE BALANCES
IN CAPITAL ACCOUNTS................................................B - 9
SECTION 3.7 LIABILITY OF MANAGER AND MEMBERS AND THEIR
AFFILIATES.........................................................B - 9
SECTION 3.8 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 -10
SECTION 4.3 ALLOCATIONS FOR INCOME TAX PURPOSES..................B - 13
SECTION 4.4 WITHHOLDING..........................................B - 13
SECTION 4.5 CAPITAL ACCOUNTS.....................................B - 13
ARTICLE V: DISTRIBUTIONS.................................................B - 13
SECTION 5.1 DISTRIBUTIONS........................................B - 13
SECTION 5.2 OPERATING ESCROW ACCOUNT.............................B - 14
SECTION 5.3 CERTAIN STATE AND LOCAL TAXES........................B - 14
SECTION 5.4 TIMING OF DISTRIBUTIONS..............................B - 14
SECTION 5.5 LIMITATIONS ON DISTRIBUTIONS.........................B - 14
SECTION 5.6 RESERVES.............................................B - 15
TABLE OF CONTENTS
Page
SECTION 5.7 TAX DISTRIBUTIONS....................................B - 15
SECTION 5.8 INCORRECT DISTRIBUTIONS..............................B - 15
SECTION 5.9 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 MANAGER AND ITS AFFILIATES................................B - 18
SECTION 6.8 DEFAULT OF MANAGER...................................B - 19
SECTION 6.9 REMOVAL OF MANAGER; SUCCESSOR........................B - 20
ARTICLE VII: BOOKS, RECORDS, TAXES AND REPORTS...........................B - 21
SECTION 7.1 BOOKS OF ACCOUNT.....................................B - 21
SECTION 7.2 BANK ACCOUNTS........................................B - 21
SECTION 7.3 TAX RETURNS..........................................B - 21
SECTION 7.4 TAX MATTERS PARTNER..................................B - 22
SECTION 7.5 RECORDS..............................................B - 22
SECTION 7.6 MANAGER'S ANNUAL REPORT..............................B - 23
SECTION 7.7 ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS'
SUBSERVICING REPORTS..............................................B - 23
SECTION 7.8 REPORTS TO MEMBERS...................................B - 23
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 - 26
SECTION 9.4 PERMITTED TRANSFERS..................................B - 26
SECTION 9.5 NOTICE...............................................B - 27
ARTICLE X: DEATH, LEGAL INCOMPETENCY, OR WITHDRAWAL
OF A MEMBER...............................................................B - 27
SECTION 10.1 EFFECT OF DEATH OR LEGAL INCOMPETENCY
OF A MEMBER OF THE FUND...........................................B - 27
SECTION 10.2 RIGHTS OF PERSONAL REPRESENTATIVE...................B - 27
SECTION 10.3 WITHDRAWAL OF MEMBERS OTHER THAN
MANAGERS..........................................................B - 27
TABLE OF CONTENTS
Page
ARTICLE XI: BANKRUPTCY, DISSOLUTION AND TERMINATION......................B - 29
SECTION 11.1 BANKRUPTCY..........................................B - 29
SECTION 11.2 DISSOLUTION.........................................B - 29
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 ARTICLES OF ORGANIZATION...............B - 30
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 - 31
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 - 32
SECTION 13.9 REMEDIES............................................B - 32
SECTION 13.10 WRITING REQUIREMENT................................B - 32
SECTION 13.11 WAIVER.............................................B - 32
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 May 13, 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
B-1
any Person 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." The Manager; any Affiliate of the Manager; any
officer, director, manager, shareholder, partner, member, employee,
representative or agent of the Manager and any employee or agent of the Fund.
"INSURED." Any individual named as the insured in the Life Insurance
Policy.
B-2
"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.
"PERSON." An individual, corporation, partnership, limited liability
company, trust, unincorporated organization, association or other entity.
B-3
"PRESUMED TAX LIABILITY." For any Member for any Fiscal Year, an amount
equal to the product of (a) the amount of taxable income allocated to such
Member for that Fiscal Year and (b) the Presumed Tax Rate.
"PRESUMED TAX RATE." The highest effective combined Federal and state
income tax rate applicable during such Fiscal Year to a natural person residing
in one of the States in which individual Members reside, based on the highest
marginal Federal income tax rate and the highest marginal state income tax rates
(after giving effect to the Federal income tax deduction for such state taxes
and disregarding the effects of Section 67 and 68 of the Code).
"PRO RATA SHARE." A proportionate share equal to the Capital Account of
the Member divided by the aggregate Capital Accounts of all Members.
"PROSPECTUS." The final prospectus filed with the Securities and Exchange
Commission for the public offering of the Units.
"PROVIDER." AmeriFirst Funding Group, Inc. is the Provider of the Fund and
is responsible for purchasing Life Insurance Policies on behalf of the Fund
either directly from the Insured, when it is licensed or not required to be
licensed, from other providers or from a broker network.
"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.
"UNITS." Represent fractional undivided beneficial Interests in the income
to be generated from a pool of 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.
B-4
"VALUE." Fair market value.
SECTION 1.2 TERMS DEFINED ELSEWHERE. The following terms have been defined
in the locations set forth below.
DEFINED TERM LOCATION
Adjusted Capital Account .....................................Section 4.2(c)
Agreement.....................................................Caption
Capital Call..................................................Section 3.4
Family Member ................................................Section 10.4(b)(i)
Florida Act...................................................1st Recital
Fund..........................................................1st Recital
Fund Counsel..................................................Section 6.7(b)
Life Insurance Policies.......................................2nd Recital
Life Settlements..............................................2nd Recital
Manager Default...............................................Section 6.8
Operating Escrow Account......................................Section 5.2
Permitted Transferee..........................................Section 9.4(b)
Premium Escrow Account........................................Section 3.4
Provider Escrow Account.......................................Section 3.3
Rules.........................................................Section 6.7(b)
TMP...........................................................Section 8.4
SECTION 1.3 CAPTIONS. The captions used in this Agreement are inserted for
convenience and identification only and are in no way intended to define or
limit the scope, extent or intent of this Agreement or any of the provisions
hereof.
SECTION 1.4 CONSTRUCTION. Unless the context otherwise requires, the terms
defined in Sections 1.1 and 1.2 shall have the meanings herein specified for all
purposes of this Agreement, applicable to both the singular and plural forms of
any of the terms defined herein. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. Whenever the words "include", "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." The use of the neuter gender herein shall be deemed to
include the masculine and feminine genders wherever necessary or appropriate;
the use of the masculine gender shall be deemed to include the neuter and
feminine genders wherever necessary or appropriate and the use of the feminine
gender shall be deemed to include the neuter and masculine genders wherever
necessary or appropriate.
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
B-5
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 1712-H Osborne Road,
St. Marys, Georgia 31558 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
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
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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.
2.9 MEETINGS OF MEMBERS. (a) Meetings of the Members may be called by the
Manager, and shall be called by the Manager upon request of Members whose
aggregate Capital Accounts total at least 20% of all Members' Capital Accounts
at such time.
(b) Members whose aggregate Capital Accounts constitute a majority of all
Members' Capital Accounts, shall constitute a quorum at any meeting of Members.
(c) Written notice stating the place, day and hour of each meeting of
Members and the general purpose or purposes for which the meeting is called
shall be given not less than seven (7) nor more than thirty (30) days before the
date of the meeting to each Member.
(d) A Member may waive any notice required by law or this Agreement,
before or after the date and time of the meeting that is the subject of such
notice. Except as provided in the next sentence, the waiver shall be in writing,
signed by the Member entitled to the notice and delivered to the Manager for
inclusion in the Fund's minutes or records. A Member's attendance at or
participation in a meeting waives any required notice to such Member of the
meeting unless the Member, at the beginning of the meeting or promptly upon such
Member's arrival, objects to the transaction of any business at such meeting on
the ground that such meeting is not lawfully called or convened. A Member may
participate in a meeting in person or by proxy, subject to Manager's consent, in
its sole discretion.
(e) Any vote, consent or approval of the Members may be accomplished by
written consent in lieu of a meeting signed by Members constituting the required
vote for the action so taken.
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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.
(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.
"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 PROVIDER ESCROW ACCOUNT. A separate interest bearing escrow
account ("Provider Escrow Account") shall be established by the Provider for
which funds deposited therein by the Fund shall be used by the Provider to
purchase Life Insurance Policies from the Insured and when applicable, pay the
broker's fee to the Insured's broker, and pay any other fees assumed with the
purchase of the Life Insurance Policies. Funds on deposit in the 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.
SECTION 3.4 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 the annual premiums of each policy purchased by the Fund for the
estimated life expectancy of the Insured plus an additional two years beyond
such 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. Funds on deposit in the
Premium 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.
(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,
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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 3.5 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.
SECTION 3.6 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 3.7 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 3.8 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 to the Members on their Pro Rata Share.
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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 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.
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(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 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
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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 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,
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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 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:
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(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 Members.
SECTION 5.2 OPERATING ESCROW ACCOUNT. The Fund shall establish a separate,
interest bearing money market escrow account ("Operating Escrow Account") for
which funds received in connection with the Prospectus and proceeds received
upon Maturity of a Life Insurance Policy are deposited therein. Funds in the
Operating Escrow Account shall be used to purchase Life Insurance Policies and
to make the distributions provided in Section 5.1 (a) and (b) above. Funds on
deposit in the Operating 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.
SECTION 5.3 CERTAIN STATE AND LOCAL TAXES. Notwithstanding Section 5.1
above, if the Manager, or any direct or indirect shareholder or other equity
owners of the Manager (other than a C corporation or an individual) is required
to recognize state or local income or franchise taxes, in the state of Florida
or any other state or interest or penalties in respect thereof, with respect to
any allocations or distributions made to the Members with respect to any Fiscal
Year, the 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 5.4 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.
Distributions will only be made following months in which insurance proceeds are
received on matured policies.
SECTION 5.5 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). The Manager 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 3.4 herein.
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SECTION 5.6 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 5.7 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 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 5.7 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 5.8 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 5.9 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
B-15
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:
(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 on reasonable notice as provided in
this Agreement, for such purposes as the Manager shall determine, and, in the
Manager's sole discretion, permit Members to vote by proxy at such meetings;
(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;
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(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;
(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 the Fund's 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 MANAGER
AND ITS AFFILIATES. (a) Nothing herein shall preclude the Manager and its
Affiliates from receiving any of the fees for due diligence review, medical
review, processing, administering, monitoring, closing and filing
claims for the Life Insurance Policies, as more fully described in the
Prospectus, provided, that such compensation does not reduce the Returns paid to
the Members.
(b) Counsel to the 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
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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 (i) terminate all of the rights and obligations of the Manager, or
(ii) 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.
(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
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(ii) failure on the part of the Manager to observe or perform in any
material respect any other covenants or agreements which has a material adverse
effect on the Members and which continues unremedied for a period of thirty (30)
days after the date on which written notice of the failure requiring the same to
be remedied shall have been given to the Manager by the 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
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
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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.
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
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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.
(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
B-22
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.
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;
B-23
(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.
(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.
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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;
(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
B-25
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.
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
B-26
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.
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,
B-27
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
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
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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.
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
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(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 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
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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 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.
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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.
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.
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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
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MEMBER SIGNATURE PAGE
IN WITNESS WHEREOF, the undersigned has caused this Operating Agreement of
AmeriFirst Fund I, LLC to be duly executed and delivered as of the date set
forth below.
NAME OF MEMBER: ADDRESS FOR NOTICE (Please Print):
(Exact Name to appear on Certificate)
___________________________________ ____________________________________
____________________________________
____________________________________
____________________________________
SIGNATURE: ________________________ Attention:__________________________
By: _______________________________ Telecopy:___________________________
Printed Name:______________________ Tax Identification #:_______________
Title:_____________________________
Dollar Amount of Capital Contribution: $_____________________
Dated:________________________________
B-34
SCHEDULE A
AMERIFIRST FUND I, LLC
MEMBERS
AMOUNT OF
NAME AND ADDRESS CAPITAL CONTRIBUTION
- ---------------- --------------------
TOTAL $____________
B-35
- --------------------------------------------------------------------------------
$100,000,000 -- MAXIMUM
$2,500,000 -- MINIMUM
AMERIFIRST FUND I, LLC, ISSUER
----------
PROSPECTUS
----------
AMERIFIRST CAPITAL CORP.
________, 2004
- --------------------------------------------------------------------------------
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 _________, 2004 (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 SUBSCRIPTION.
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 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.
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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, dated as of May 13, 2003
(included as Exhibit B to the Prospectus)(5)
5.1 Opinion of Snow Becker Krauss P.C. with respect to legality of the
securities(5)
8.1 Opinion of Snow Becker Krauss P.C. with respect to federal income tax
matters (4)
10.1 Subscription Escrow Agreement by and among AmeriFirst Fund I, LLC,
AmeriFirst Capital Corp. and SouthTrust Bank (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 Restated Expense Agreement between AmeriFirst Fund I, LLC and AmeriFirst,
Inc. dated as of December 23, 2003 (7)
10.12 Servicing Agreement dated May 14, 2003 by and between AmeriFirst Financial
Services, Inc. and 21st Holdings, LLC (6)
10.13 Amendment No. 1 to Subscription Escrow Agreement by and among AmeriFirst
Fund I, LLC, AmeriFirst Capital Corp. and SouthTrust Bank, dated as of
December 23, 2003 (7)
23.1 Consent of Snow Becker Krauss P.C. (included in the opinion filed as
Exhibit 5.1 to this Registration Statement) (5)
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.
(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.
(4) Filed with Amendment No. 6 to registrant's registration statement on
Form S-1, filed on April 15, 2003.
(5) Filed with Amendment No. 9 to registrant's registration statement on
Form S-1, filed on May 13, 2003.
(6) Filed with Post-Effective Amendment No. 1 to registrant's
registration statement on Form S-1, filed on May 15, 2003.
(7) Filed with registrant's Annual Report on Form 10-KSB for its fiscal
year ended September 30, 2003.
II-2
(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 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
II-3
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.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Post-Effective Amendment No. 3 to the registration
statement on Form S-1 to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of St. Marys, State of Georgia on April 16, 2004.
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 Chief Executive Officer of April 16, 2004
- --------------------- AmeriFirst Financial Services, Inc.
John Tooke Manager of AmeriFirst Fund I, LLC
II-5