U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 333-32800
VESTIN FUND I, LLC
(Exact Name of Registrant as Specified in Its Charter)
NEVADA 88-0446244
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2901 EL CAMINO AVENUE, SUITE 206, LAS VEGAS, NEVADA 89102
(Address Of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: 702.227.0965
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of January 31, 2003, the Issuer had 9,734,955 of its Units outstanding.
TABLE OF CONTENTS
ITEM 1. FINANCIAL STATEMENTS
Page
----
Balance sheets as of December 31, 2002 (unaudited),
and September 30, 2002.................................................... 3
Statements of income for the three months ended December 31, 2002
and 2001 (unaudited)...................................................... 4
Statement of members' equity for the three months ended
December 31, 2002 (unaudited)............................................. 5
Statements of cash flows for the three months ended December 31, 2002
and 2001 (unaudited)...................................................... 6
Notes to financial statements (unaudited)................................... 7
2
VESTIN FUND I, LLC
BALANCE SHEETS
ASSETS
(UNAUDITED)
DECEMBER 31, 2002 SEPTEMBER 30, 2002
----------------- ------------------
Cash $ 405,615 $ 2,762,334
Certificates of deposit 2,200,000 2,775,000
Receivables under secured borrowing 6,586,054 6,637,370
Interest and other receivables 1,292,719 1,175,972
Real estate held for sale 9,196,778 1,541,258
Investment in mortgage loans, net of allowance for loan
losses of $200,000 and $100,000, respectively 84,870,609 91,091,308
Deferred bond offering costs 92,384 83,631
------------ ------------
Total assets $104,644,159 $106,066,873
============ ============
LIABILITIES AND MEMBERS' EQUITY
Liabilities
Due to Managing Member $ 531,144 $ 430,447
Secured borrowing 6,586,054 6,637,370
------------ ------------
Total liabilities 7,117,198 7,067,817
------------ ------------
Members' equity - authorized 10,000,000 units
9,844,154 and 9,928,052 units issued and oustanding
at $10 per unit at December 31, 2002 and
September 30, 2002, respectively 97,526,961 98,999,056
------------ ------------
Total members' equity 97,526,961 98,999,056
------------ ------------
Total liabilities and members' equity $104,644,159 $106,066,873
============ ============
The accompanying notes are an integral part of these statements.
3
VESTIN FUND I, LLC
STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------------
2002 2001
---------- ----------
Revenues
Interest income from investment in
mortgage loans $2,516,526 $3,291,416
Loan fees 104,788 --
Other income 34,932 133,103
---------- ----------
Total revenues 2,656,246 3,424,519
---------- ----------
Operating expenses
Interest expense 176,303 --
Management fees to Managing Member 62,655 123,667
Provision for loan losses 100,000 --
Other 30,085 --
---------- ----------
Total operating expenses 369,043 123,667
---------- ----------
NET INCOME $2,287,203 $3,300,852
========== ==========
Net income allocated to members $2,287,203 $3,300,852
========== ==========
Net income allocated to members per
weighted average membership units $ 0.23 $ 0.33
========== ==========
Weighted average membership units 9,920,256 9,982,276
========== ==========
The accompanying notes are an integral part of these statements.
4
VESTIN FUND I, LLC
STATEMENT OF MEMBERS' EQUITY
(UNAUDITED)
UNITS AMOUNT
------------ ------------
Members' equity at September 30, 2002 9,928,052 $ 98,999,056
Distributions -- (2,920,314)
Reinvestments of distributions 63,731 637,310
Members' withdrawals (147,629) (1,476,294)
Net income -- 2,287,203
------------ ------------
Members' equity at December 31, 2002 9,844,154 $ 97,526,961
============ ============
The accompanying notes are an integral part of these statements.
5
VESTIN FUND I, LLC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
----------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,287,203 $ 3,300,852
Adjustments to reconcile net income to net
cash provided by operating activities:
Change in operating assets and liabilities:
Due to Managing Member 100,697 159,291
Interest and other receivables (116,747) 43,667
Deferred bond offering costs (8,753)
Provision for loan losses 100,000 --
------------ ------------
Net cash provided by operating activities 2,362,400 3,503,810
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments in mortgage loans (17,000,967) (44,104,840)
Purchase of investments in mortgage loans from:
Vestin Fund II, LLC (12,575,000) --
other related party (3,870,000) --
Proceeds received from sale of mortgage loans to:
Vestin Fund II, LLC 12,520,000 --
other related party 4,665,938 --
Proceeds from loan payoff 14,725,208 44,325,485
Proceeds from certificates of deposit 575,000 550,000
------------ ------------
Net cash (used in) provided by investing activities (959,821) 770,645
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' withdrawals (1,476,294) --
Members' distributions, net of reinvestments (2,283,004) (2,865,967)
------------ ------------
Net cash used in financing activities (3,759,298) (2,865,967)
------------ ------------
NET INCREASE IN CASH (2,356,719) 1,408,488
CASH, BEGINNING 2,762,334 398,262
------------ ------------
CASH, ENDING $ 405,615 $ 1,806,750
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Non-cash investing and financing activities:
Reinvestment of members' distributions $ 637,310 $ 719,442
============ ============
Distributions payable to Manager $ 29,017 $ --
============ ============
Real estate held for sale acquired through foreclosure $ 7,655,520 $ --
============ ============
Loans funded through secured borrowing $ 51,316 $ --
============ ============
The accompanying notes are an integral part of these statements.
6
VESTIN FUND I, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
(Unaudited)
NOTE A -- ORGANIZATION
Vestin Fund I, LLC, a Nevada Limited Liability Company, (the "Company") is
primarily engaged in the business of mortgage lending. The Company invests in
loans secured by real estate through deeds of trust and mortgages. The Company
was organized on December 14, 1999 and will continue until December 31, 2019
unless dissolved prior or extended thereto under the provisions of its Operating
Agreement. The Company does not operate as an "investment company" within the
meaning of the Investment Company Act of 1940.
Prior to September 1, 2000, the Company was a development stage company. On
August 23, 2000, the Company's Form S-11/A filed with the Securities and
Exchange Commission became effective for the initial public offering of
10,000,000 units at $10 per unit. The Company commenced operations on September
1, 2000. By June 2001, the Company had sold all of the 10,000,000 units offered
pursuant to the Company's registration statement. No additional units will be
sold, however, current members may continue to participate in the Company's
Distribution Reinvestment Plan whereby the member's distribution may be used to
purchase additional units at $10.00 per unit. As of December 31, 2002, an
additional 497,708 units have been purchased under this plan.
The Manager of the Company is Vestin Mortgage, Inc. (the "Manager" or "Managing
Member"), a Nevada corporation engaged in the business of brokerage, placement
and servicing of commercial loans secured by real property. The Manager is a
wholly owned subsidiary of Vestin Group, Inc., a Delaware Corporation, whose
common stock is publicly held and traded on the Nasdaq National Market under the
symbol "VSTN." Through its subsidiaries, Vestin Group, Inc. is engaged in asset
management, real estate lending and other financial services and has managed
over $1 billion in real estate loans. The Operating Agreement provides that the
Manager has control over the business of the Company; including the power to
assign duties, to determine how to invest the Company's assets, to sign bills of
sale, title documents, leases, notes, security agreements, mortgage investments
and contracts, and to assume direction of the business operations.
Vestin Mortgage, Inc. is also the Manager of Vestin Fund II, LLC, ("Fund II") an
entity in the same business as the Company.
The financial statements have been prepared in accordance with Securities and
Exchange Commission requirements for interim financial statements. Therefore,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's annual report
on Form 10-K for the transition period ended September 30, 2002.
The results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the full year. In the
opinion of management, the information contained herein reflects all adjustments
necessary to make the results of operations for the interim periods a fair
statement of such operation. All such adjustments are of a normal recurring
nature.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
7
2. ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses on its investment in mortgage
loans for estimated credit impairment in the Company's investment in mortgage
loans portfolio. The Manager's estimate of losses is based on a number of
factors including the types and dollar amounts of loans in the portfolio,
adverse situations that may affect the borrower's ability to repay, prevailing
economic conditions and the underlying collateral securing the loan. Additions
to the allowance are provided through a charge to earnings and are based on an
assessment of certain factors including, but not limited to, estimated losses on
the loans. Actual losses on loans are recorded as a charge-off or a reduction to
the allowance for loan losses. Subsequent recoveries of amounts previously
charged off are added back to the allowance.
3. REAL ESTATE HELD FOR SALE
Real estate held for sale includes real estate acquired through foreclosure and
is carried at the lower of the recorded amount, inclusive of any senior
indebtedness, or the property's estimated fair value, less estimated costs to
sell.
4. INVESTMENTS IN MORTGAGE LOANS
Investments in mortgage loans are secured by trust deeds and mortgages.
Generally, all of the Company's mortgage loans require interest only payments
with a balloon payment of the principal at maturity. The Company has both the
intent and ability to hold mortgage loans until maturity and therefore, mortgage
loans are classified and accounted for as held for investment and are carried at
cost. Loan to value ratios are based on appraisals obtained at the time of loan
origination and may not reflect subsequent changes in value estimates. Such
appraisals are generally dated within 12 months of the date of loan origination.
Appraisals are also based on either an "as is basis" or "as-if completed basis".
These appraised values do not reflect immediate sales values, which may be
substantially less.
5. SECURED BORROWING
Certain loans that have been participated to third party investors ("Investor")
through an intercreditor agreement ("Agreement") are accounted for as secured
borrowing in accordance with SFAS No. 140, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES ("SFAS NO.
140"). Under the Agreement, investors may participate in certain loans with
Vestin Mortgage, Fund II, and the Company (collectively, "the Lead Lenders"). In
the event of borrower non-performance, the intercreditor agreement gives the
Lead Lenders the right to either (i) continue to remit to the Investor the
interest due on the participation amount; (ii) substitute an alternative loan
acceptable to the Investor; or (iii) repurchase the participation from the
Investor for the outstanding balance of the participation plus accrued interest.
Consequently, the Investor is in a priority lien position against the
collateralized loans and mortgage loan financing under the participation
arrangement is accounted for as a secured borrowing in accordance with SFAS No.
140.
NOTE C -- INVESTMENTS IN MORTGAGE LOANS
Investments in mortgage loans are as follows:
December 31, 2002
NUMBER
LOAN OF AVERAGE PORTFOLIO LOAN
TYPE LOANS BALANCE INTEREST RATE PERCENTAGE TO VALUE*
---- ----------- ----------- ------------- ----------- -----------
Acquisition and development .. 4 $10,864,790 14.50% 12.77% 45.10%
Bridge ....................... 4 7,149,023 12.88% 8.40% 63.99%
Commercial ................... 19 28,182,465 12.37% 33.13% 57.98%
Construction ................. 11 25,038,116 13.84% 29.43% 55.68%
Land ......................... 7 13,836,215 13.21% 16.27% 31.17%
----------- ----------- ----------- ----------- -----------
45 $85,070,609 13.57% 100.00% 52.86%
=========== =========== =========== =========== ===========
8
September 30, 2002
NUMBER
LOAN OF AVERAGE PORTFOLIO LOAN
TYPE LOANS BALANCE INTEREST RATE PERCENTAGE TO VALUE*
---- ----------- ----------- ------------- ----------- -----------
Acquisition and development .. 11 $17,379,074 13.66% 19.06% 50.89%
Bridge ....................... 3 9,129,025 13.17% 10.01% 69.20%
Commercial ................... 10 28,181,705 13.20% 30.90% 57.40%
Construction ................. 11 26,241,223 14.09% 28.78% 51.93%
Land ......................... 4 10,260,281 13.19% 11.25% 32.33%
----------- ----------- ----------- ----------- -----------
39 $91,191,308 13.58% 100.00% 52.54%
=========== =========== =========== =========== ===========
* Loan to value ratios are based on appraisals obtained at the time of loan
origination and may not reflect subsequent changes in value estimates. Such
appraisals are generally dated no greater than 12 months prior to the date of
loan origination. Appraisals are also based on either an "as is basis" or "as-if
completed basis". These appraised values do not necessarily reflect the value
which might be received upon an immediate sale of the property, which may be
substantially different from the appraised value.
DECEMBER 31, 2002 PORTFOLIO SEPTEMBER 30, 2002 PORTFOLIO
LOAN TYPE BALANCE PERCENTAGE BALANCE PERCENTAGE
--------- ----------- ----------- ----------- -----------
First mortgages .......... $85,060,115 99.99% $91,180,814 99.99%
Second mortgages** ....... 10,494 0.01% 10,494 0.01%
----------- ----------- ----------- -----------
$85,070,609 100.00% $91,191,308 100.00%
=========== =========== =========== ===========
** All of the Company's second mortgages are junior to a first trust deed
position held by either the Company or the Company's Manager.
The following is a schedule of maturities of investments in mortgage loans as of
December 31, 2002:
2003................................... $ 73,221,574
2004................................... 11,849,035
------------
$ 85,070,609
============
The following is a schedule by geographic location of investments in mortgage
loans as of:
DECEMBER 31, 2002 PORTFOLIO SEPTEMBER 30, 2002 PORTFOLIO
BALANCE PERCENTAGE BALANCE PERCENTAGE
----------- ----------- ----------- -----------
Arizona .................. $ 9,267,144 10.89% $16,225,981 17.79%
California ............... 8,741,417 10.28% 1,247,876 1.37%
Colorado ................. 1,214,800 1.43% 983,217 1.08%
Hawaii ................... 9,938,662 11.68% 11,750,000 12.88%
Nevada ................... 36,205,915 42.56% 43,288,748 47.47%
New Mexico ............... 1,157,505 1.36% 1,157,505 1.27%
Texas .................... 13,736,156 16.15% 11,568,971 12.69%
Utah ..................... 3,369,010 3.96% 3,369,010 3.69%
Washington ............... 1,440,000 1.69% 1,600,000 1.76%
----------- ----------- ----------- -----------
$85,070,609 100.00% $91,191,308 100.00%
=========== =========== =========== ===========
The Company has six mortgage loan products consisting of bridge, commercial,
construction, acquisition and development, land, and residential loans. The
effective interest rates on all product categories range from 10% to 17%.
Revenue by product will fluctuate based upon relative balances during the
period.
9
At December 31, 2002, ten of the Company's loans totaling $24.6 million were
non-performing (more than 90 days past due on interest payments) and past due on
principal. The Company has commenced foreclosure proceedings on these loans.
During January 2003, the Company completed foreclosure on two of the ten loans
totaling $372,784. These loans are included in the participation pool related to
secured borrowing. Pursuant to the terms of an intercreditor agreement, the
Company has continued to remit to the investor the interest due on the
participated amounts. The Company's Manager evaluated all of these loans and
concluded that the underlying collateral was sufficient to protect the Company
against a loss of principal or interest. Accordingly, no specific allowance for
loan losses was deemed necessary for these loans.
In addition to the above-mentioned loans, during the quarter ended December 31,
2002, the Company's Manager had granted extensions on 4 loans pursuant to the
terms of the original loan agreements, which permit extensions by mutual
consent. Such extensions are generally provided on loans where the original term
was 12 months or less and where a borrower requires additional time to complete
a construction project or negotiate take out financing. The aggregate amount due
to the Company from borrowers whose loans had been extended during the quarter
ended December 31, 2002 was approximately $9.5 million. The Company's Manager
concluded that no allowance was necessary with respect to these loans.
The Company's Manager has evaluated the collectibility of the loans in light of
the types and dollar amounts of loans in the portfolio, adverse situations that
may affect the borrower's ability to repay, prevailing economic conditions and
the underlying collateral securing the loan. The Company's Manager believes that
the allowance for loan losses totaling $200,000 included in the accompanying
balance sheet as of December 31, 2002 is adequate to address estimated credit
losses in the Company's investment in mortgage loans as of that date.
Decisions regarding an allowance for loan losses require management's judgment.
As a result, there is an inherent risk that such judgment will prove incorrect.
In such event, actual losses may exceed (or be less than) the amount of any
allowance. To the extent that the Company experiences losses greater than the
amount of its allowance, the Company may incur a charge to its earnings that
will adversely affect its operating results and the amount of any distributions
payable to its members.
NOTE D -- RELATED PARTY TRANSACTIONS
As of December 31, 2002, amounts due to the Company's Manager totaling $531,144
is primarily comprised of amounts related to management fees, bond offering
costs, and distributions payable on units owned by the Company's Manager. For
the three months ended December 31, 2002 and 2001, the Company recorded
management fees to the Company's Manager of approximately $62,655 and $123,667
respectively. Additionally, as of December 31, 2002, the Company recorded
distributions owed to the Company's Manager of $29,017 based upon the total of
100,000 units owned by the Company's Manager.
During the three months ended December 31, 2002, the Company purchased
$12,575,000 in investments in mortgage loans from Vestin Fund II, LLC and
$3,870,000 from other related parties. For the same period, the Company sold
$12,520,000 in investments in mortgage loans to Vestin Fund II, LLC and
$4,665,938 to other related parties.
NOTE E -- REAL ESTATE HELD FOR SALE
During the three months ended December 31, 2002, the Company foreclosed on two
loans totaling $10,739,520 and took title to the properties, which consisted of
land and a partially completed golf course in Mesquite, Nevada. Upon
foreclosure, the Company assigned the rights to any future judgment related to a
personal guarantee associated with the golf course loan to the Manager in
exchange for investments in mortgage loans, which are in default as of December
31, 2002, with a carrying amount of $3.1 million. The Company determined that
the carrying amount of the investments in mortgage loans received approximated
their fair value and, therefore, no gain or loss was recorded from this
transaction. The remaining assets were transferred to real estate held for sale
upon foreclosure at the estimated fair value of the land and golf course,
aggregating $7,655,520. Based on management's estimate of fair value of these
assets, no charge to the allowance for loan losses was required at the time the
assets were transferred. The balance of real estate held for sale in the
accompanying balance at December 31, 2002 was $9,196,778.
NOTE F -- SECURED BORROWING
As of December 31, 2002, the Company had $6.6 million in secured borrowings
pursuant to an intercreditor agreement with the related amounts included in
receivables under secured borrowings. For the three month period ended December
31, 2002, the Company recorded interest expense of $176,303 related to the
secured borrowings.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
Vestin Fund I, LLC (the "Company") was organized in December 1999 as a Nevada
limited liability company, for the purpose of investing in mortgage loans. The
Company invests in loans secured by real estate through deeds of trust and
mortgages. Prior to September 1, 2000, the Company was a development stage
company.
The Company's manager is Vestin Mortgage, Inc., a licensed mortgage company in
the State of Nevada (the "Manager" or "Managing Member"). Vestin Mortgage is a
wholly-owned subsidiary of Vestin Group, Inc., a Delaware corporation, whose
common stock is traded on the Nasdaq National Market under the ticker symbol
"VSTN." Vestin Mortgage, Inc. is also the manager of Vestin Fund II, LLC, which
is a similar fund to Vestin Fund I, LLC.
The following is a financial review and analysis of the Company's financial
condition and results of operations for the three month period ended December
31, 2002. This discussion should be read in conjunction with the Company's
financial statements and accompanying notes and other detailed information
regarding the Company appearing elsewhere in this Form 10-Q and the Company's
report on Form 10-K for the transition period ended September 30, 2002.
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated," or similar
expressions are intended to identify "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties, including but not limited to
changes in interest rates, and fluctuations in operating results. Such factors
which are discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any opinion or statements expressed herein with respect
to future periods. As a result, the Company wishes to caution readers not to
place undue reliance on any such forward looking statements, which speak only as
of the date made.
OVERVIEW
On August 23, 2000, the Company's Registration Statement as filed with the
Securities and Exchange Commission became effective for the initial public
offering of up to 10,000,000 units at $10 per unit. The Company commenced
operations on September 1, 2000. The Company commenced raising funds through the
sale of its units in September 2000. By June 2001, the Company had sold all of
the 10,000,000 units offered pursuant to the Company's registration statement.
No additional units will be sold, however, current members may continue to
participate in the Company's Distribution Reinvestment Plan whereby the member's
distribution may be used to purchase additional units at $10.00 per unit. As of
December 31, 2002, an additional 497,708 units have been purchased under this
plan. Additionally, the Company issued approximately 100,000 units to its
Manager for offering costs paid by them to unrelated third parties on the
Company's behalf.
SUMMARY OF FINANCIAL RESULTS
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2002 2001
------------ ------------
Total revenues ................................ $ 2,656,246 $ 3,424,519
Total expenses ................................ 369,043 123,667
------------ ------------
Net income .................................... $ 2,287,203 $ 3,300,852
============ ============
Earnings per unit:
Net income allocated to members per weighted
average membership units .................... $ 0.23 $ 0.33
============ ============
Annualized net interest yield to members (a) .. 9.2% 13.2%
============ ============
Weighted average membership units ............. 9,920,256 9,982,276
============ ============
(a) The annualized net interest yield to unit holders is calculated based upon
the net income allocated to unit holders per weighted average units as of
December 30, 2002 and 2001 divided by the number of months during the
period and multiplied by twelve (12) months, then divided by ten (the $10
cost per unit).
11
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2001
Total Revenues. For the three months ended December 31, 2002, revenues totaled
$2.7 million compared to $3.4 million for the same period in 2001, a decrease of
$0.7 million or 21%. The decrease in revenue was primarily due to a decrease in
our average daily investments in mortgage loans of approximately 3%.
Additionally, during the three months ended December 31, 2002, we had
approximately $24.6 million in loans that were not performing. Consequently, our
average interest yields on our investments in mortgage loans during the three
months ended 2002 decreased compared to the same period in 2001.
Total Expenses. For the three months ended December 31, 2002, expenses totaled
$369,043 compared to $123,667 for the same period in 2001, an increase of
$245,376. Increase in total expenses for 2002 primarily related the provision
for loan losses totaling $100,000, and interest expense totaling $176,303
related to secured borrowing as further discussed in Note F in the footnotes to
the attached financial statements. Management fees for the quarter ended
December 31, 2002 totaled $62,655. Management fees are an annual recurring
expense based upon an amount up to 0.25% of aggregate outstanding capital
annually.
Net Income. Overall, net income for the three months ended December 31, 2002
totaled $2.3 million compared to $3.3 million for the same period in 2001, a
decrease of $1.0 million or 30%.
Our operating results are affected primarily by (i) the amount of capital we
have to invest in mortgage loans, (ii) the level of real estate lending activity
in the markets we service, (iii) our ability to identify and work with suitable
borrowers, (iv) the interest rates we are able to charge on our loans and (v)
the level of delinquencies, foreclosures and related loan losses which we
experience.
Although the US economy has suffered from a mild recession over the recent past,
we have not experienced a material slowdown in commercial real estate lending in
the markets we service. As a result, we have generally been able to keep our
funds invested in mortgage loans and we have not encountered any material
reduction in demand for our loan products. However, if the recession deepens or
is prolonged, we would face a number of potential risks. A prolonged recession
may dampen real estate development activity, thereby diminishing the market for
our loans. In addition, the continuing decline in interest rates, which is
largely attributable to the weak economy, may be expected to diminish the
interest rates we can charge on our loans. Moreover, a prolonged recession or
poor credit decisions by our Manager may increase the default rate on our loans.
The establishment of an allowance for loan losses, and the general decline in
interest rates contributed to the decline in our annualized net interest yield
to members from 13.2% at December 31, 2001 to 9.2% at December 31, 2002.
INVESTMENTS IN MORTGAGE LOANS SECURED BY REAL ESTATE PORTFOLIO
As of December 31, 2002, the Company invested in mortgage loans secured by real
estate approximating $85,070,609, including 45 loans with an aggregate principal
value of $85,060,115 secured by first deeds of trust. Three of these loans are
also secured by second deeds of trust totaling $10,494. All of the Company's
second mortgages are junior to a first trust deed position held by either the
Company or the Company's Manager.
As of December 31, 2002, the weighted average contractual interest yield on the
Company's investment in mortgage loans is 13.57%. These mortgage loans mature
over the next 18 months.
Losses may occur when investing in mortgage loans. The amount of losses will
vary as the loan portfolio is affected by changing economic conditions and the
financial position of borrowers. There is no precise method of predicting
potential losses.
The conclusion that a mortgage loan is uncollectible or that collectibility is
doubtful is a matter of judgment. On a quarterly basis, the Manager evaluates
the Company's mortgage loan portfolio for impairment. The fact that a loan is
past due does not necessarily mean that the loan is impaired. Rather, all
relevant circumstances are considered by the Manager to determine impairment and
the need for specific reserves. This evaluation considers among other matters:
* prevailing economic conditions;
* historical experience;
12
* the nature and volume of the loan portfolio;
* the borrowers' financial condition and adverse situations that may affect
the borrowers' ability to pay;
* evaluation of industry trends;
* review and evaluation of loans identified as having loss potential; and
* estimated net realizable value of any underlying collateral.
Based upon this evaluation the Company's Manager believes that the allowance for
loan losses totaling $200,000 included in the accompanying balance sheet as of
December 31, 2002 is adequate to address estimated credit losses.
Decisions regarding an allowance for loan losses require judgment about the
probability of future events. As a result, there is an inherent risk that such
judgment will prove incorrect. In such event, actual losses may exceed (or be
less than) the amount of any allowance. To the extent that the Company
experiences losses greater than the amount of its allowance, the Company may
incur a charge to its earnings that will adversely affect its operating results
and the amount of any distributions payable to its members.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Interest income on loans is accrued by the effective interest method. The
Company does not recognize interest income from loans once they are determined
to be impaired. A loan is impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan agreement or when the payment
of interest is 90 days past due.
REAL ESTATE HELD FOR SALE
Real estate held for sale includes real estate acquired through foreclosure and
is carried at the lower of the recorded amount, inclusive of any senior
indebtedness, or the property's estimated fair value, less estimated costs to
sell.
INVESTMENTS IN MORTGAGE LOANS
Investments in mortgage loans are secured by trust deeds and mortgages.
Generally, all of the Company's mortgage loans require interest only payments
with a balloon payment of the principal at maturity. The Company has both the
intent and ability to hold mortgage loans until maturity and therefore, mortgage
loans are classified and accounted for as held for investment and are carried at
cost. Loan to value ratios are based on appraisals obtained at the time of loan
origination and may not reflect subsequent changes in value estimates. Such
appraisals are generally dated no greater than 12 months prior to the date of
loan origination. Appraisals are also based on either an "as is basis" or "as-if
completed basis". These appraised values do not reflect immediate sales values,
which may be substantially different.
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses on its investment in mortgage
loans for estimated credit impairment in the Company's investment in mortgage
loans portfolio. The Manager's estimate of losses is based on a number of
factors including the types and dollar amounts of loans in the portfolio,
adverse situations that may affect the borrower's ability to repay, prevailing
economic conditions and the underlying collateral securing the loan. Additions
to the allowance are provided through a charge to earnings and are based on an
assessment of certain factors including, but not limited to, estimated losses on
the loans. Actual losses on loans are recorded as a charge-off or a reduction to
the allowance for loan losses. Subsequent recoveries of amounts previously
charged off are added back to the allowance.
13
SECURED BORROWING
Loans that have been participated to third party investors through an
intercreditor agreement ("Agreement") are accounted for as secured borrowing in
accordance with SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES ("SFAS NO. 140"). Under the
Agreement, investors may participate in certain loans with Vestin Mortgage, Fund
II, and the Company (collectively, "the Lead Lenders"). In the event of borrower
non-performance, the intercreditor agreement gives the Lead Lenders the right to
either (i) continue to remit to the investor the interest due on the
participation amount; (ii) substitute an alternative loan acceptable to the
investor; or (iii) repurchase the participation from the investor for the
outstanding balance of the participation plus accrued interest. Consequently,
the Investor is in a priority lien position against the collateralized loans and
mortgage loan financing under the participation arrangement is accounted for as
a secured borrowing in accordance with SFAS No. 140.
CAPITAL AND LIQUIDITY
Liquidity is a measure of a company's ability to meet potential cash
requirements, including ongoing commitments to fund lending activities and for
general operational purposes. The Company believes that interest earned from
both investment loans and cash held at bank institutions in the next twelve
months will be sufficient to meet the Company's capital requirements. The
Company does not anticipate the need for hiring any employees, acquiring fixed
assets such as office equipment or furniture, or incurring material office
expenses during the next twelve months because the Manager will continue to
manage the Company's affairs. The Company may pay the Manager an annual
management fee of up to 0.25% of the Company's aggregate capital contributions.
Pursuant to the Company's Operating Agreement the maximum amount of management
fees the Manager was entitled to receive during the three months ended December
31, 2002 was approximately $62,655.
During the three months ended December 31, 2002, cash flows provided by
operating activities approximated $2.4 million. Investing activities consisted
of cash used to purchase investments in mortgage loans approximating $1.5
million (net of proceeds from investments in mortgage loans) and the maturity of
certificates of deposit approximating $0.6 million. Financing activities
consisted of members' withdrawals in the amount of $1.5 million and
distributions of $2.3 million (net of reinvestments).
As of December 31, 2002, members holding approximately 29% of our outstanding
units have elected to reinvest their dividends. The level of dividend
reinvestment will depend upon our performance as well as the number of our
members who prefer to reinvest rather than receive current distributions of
their income.
Any significant level of defaults on our outstanding loans could reduce the
funds we have available for investment in new loans. Foreclosure proceedings may
not generate full repayment of our loans and may result in significant delays in
the return of invested funds. This would diminish our capital resources and
would impair our ability to invest in new loans. In addition, any significant
level of withdrawals by our Members would reduce the capital we have available
for investment. Such withdrawals are limited by the terms of our Operating
Agreement to not more than 10% per year and are subject to other conditions. To
date, our capital resources have not been materially impaired by loan defaults
or withdrawals by members and we believe our current capital resources are
sufficient to continue to maintain our investment portfolio.
Non-earning assets, which include loans on non-accrual (discussed in Note C) and
real estate held for sale (discussed in Note E), totaled $33.8 million at
December 31, 2002. It is possible that no earnings will be recognized from these
assets until they are disposed of, and the time it will take to dispose of these
assets cannot be predicted.
Total non-earning assets at December 31, 2002 have increased since September 30,
2002, as a result of factors unique to specific borrowers. Because of the
estimated value of the underlying properties, the Company does not believe that
any losses will be incurred from these assets upon final disposition. However,
it is possible that the Company will not be able to realize the full estimated
values upon disposition, particularly if continuing economic weakness results in
declining real estate values.
At December 31, 2002, the Company had $0.4 million in cash, $2.2 million in
certificates of deposit, and $104.6 million in total assets. On the same date,
the Company had a liability due to the Managing Member of approximately $0.5
million. Accordingly, it appears the Company has sufficient working capital to
meet its operating needs in the near term.
As of December 31, 2002, the Company had liabilities totaling $6.6 million as
secured borrowings related to an intercreditor agreement. Pursuant to the
intercreditor agreement, the Investor may participate in certain loans with
Vestin Mortgage, Fund I, and the Company (collectively, "the Lead Lenders"). In
the event of borrower non-performance, the intercreditor agreement gives the
Lead Lenders the right to either (i) continue to remit to the investor the
interest due on the participation amount; (ii) substitute an alternative loan
acceptable to the investor; or (iii) repurchase the participation from the
investor for the outstanding balance of the participation plus accrued interest.
Consequently, mortgage loan financing under the participation arrangement is
accounted for as a secured borrowing in accordance with SFAS No. 140, ACCOUNTING
FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES ("FAS 140").
The Company maintains working capital reserves of approximately 3% of aggregate
members' capital accounts in cash and cash equivalents, and certificates of
deposit. This reserve is available to pay expenses in excess of revenues,
satisfy obligations of underlying security properties, expend money to satisfy
unforeseen obligations and for other permitted uses of the working capital.
14
Working capital reserves of up to 3% are included in the funds committed to loan
investments in determining what proportion of the offering proceeds and
reinvested distributions have been invested in mortgage loans.
FACTORS AFFECTING THE COMPANY'S OPERATING RESULTS
The Company's business is subject to numerous factors affecting its operating
results. In addition to the factors discussed above, the Company's operating
results may be affected by:
RISKS OF INVESTING IN MORTGAGE LOANS
* The Company's underwriting standards and procedures are more lenient
than conventional lenders in that the Company will invest in loans to
borrowers who will not be required to meet the credit standards of
conventional mortgage lenders.
* The Company approves mortgage loans more quickly then other mortgage
lenders. Due to the nature of loan approvals, there is a risk that the
credit inquiry the Company's Manager performs will not reveal all
material facts pertaining to the borrower and the security.
* Appraisals may be performed on an "as-if completed" basis. Therefore
there is a risk that the borrower will not complete development of the
project which may affect the expected value of the property and the
loan to value ratio.
* The Company's results of operations will vary with changes in interest
rates and with the performance of the relevant real estate markets.
* If the economy is healthy, the Company expects that more people will
be borrowing money to acquire, develop or renovate real property.
However, if the economy grows too fast, interest rates may increase
too much and the cost of borrowing may become too expensive. This
could result in a slowdown in real estate lending which may mean the
Company will have fewer loans to acquire, thus reducing the Company's
revenues and the distributions to members.
* If, at a time of relatively low interest rates, a borrower should
prepay obligations that have a higher interest rate from an earlier
period, investors will likely not be able to reinvest the funds in
mortgage loans earning that higher rate of interest. In the absence of
a prepayment fee, the investors will receive neither the anticipated
revenue stream at the higher rate nor any compensation for their loss.
This in turn could harm the Company's reputation and make it more
difficult for the Company to attract investors willing to acquire
interest in mortgage loans.
RISK OF DEFAULTS
The Company's performance will be directly impacted by any defaults on the loans
in its portfolio. As noted above, the Company may experience a higher rate of
defaults than conventional mortgage lenders. The Company seeks to mitigate the
risk by estimating the value of the underlying collateral and insisting on low
loan to value ratios. However, no assurance can be given that these efforts will
fully protect the Company against losses on defaulted loans. Moreover, during
the period of time when a defaulted loan is the subject of foreclosure
proceedings, it is likely that the Company will earn less (if any) income from
such loans, thereby reducing the Company's earnings.
COMPETITION FOR BORROWERS
The Company considers its competitors for borrowers to be the providers of
non-conventional mortgage loans, that is, lenders who offer short-term,
equity-based loans on an expedited basis for higher fees and rates than those
charged by conventional lenders and mortgage loans investors, such as commercial
banks, thrifts, conduit lenders, insurance companies, mortgage brokers, pension
funds and other financial institutions that offer conventional mortgage loans.
Many of the companies against which the Company competes have substantially
greater financial, technical and other resources than the Company does.
Competition in the Company's market niche depends upon a number of factors
including price and interest rates of the loan, speed of loan processing, cost
of capital, reliability, quality of service and support services.
15
EFFECT OF FLUCTUATIONS IN THE ECONOMY
The Company's sole business, making loans secured by real estate, is
particularly vulnerable to changes in macroeconomic conditions. Any significant
decline in economic activity, particularly in the geographical markets in which
the Company concentrates its loans, could result in a decline in the demand for
real estate development loans. In order to stay fully invested during a period
of declining demand for real estate loans, the Company may be required to make
loans on terms less favorable to the Company or to make loans involving greater
risk to the Company. Declines in economic activity are often accompanied by a
decline in prevailing interest rates. Although the Company's lending rates are
not directly tied to the Federal Reserve Board's discount rate, a sustained and
widespread decline in interest rates will impact the interest the Company is
able to earn on its loans. Since the Company's loans generally do not have
prepayment penalties, declining interest rates may also cause the Company's
borrowers to prepay their loans and the Company may not be able to reinvest the
amounts prepaid in loans generating a comparable yield. Moreover, any
significant decline in economic activity could adversely impact the ability of
the Company's borrowers to complete their projects and obtain take out
financing. This in turn could increase the level of defaults the Company may
experience.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, primarily from changes in interest rates.
The Company does not have any assets or liabilities denominated in foreign
currencies nor does it own any options, futures or other derivative instruments.
Most of the Company's assets consist of investments in mortgage loans. At
December 31, 2002, the Company's aggregate investment in mortgage loans was
$85,070,609 with a weighted average contractual yield of 13.57%. These mortgage
loans mature over the next 18 months. All of the outstanding mortgage loans at
December 31, 2002 are fixed rate loans. All of the mortgage loans are held for
investment purposes. None of the mortgage loans have prepayment penalties.
For the three months ended December 31, 2002, the Company had investments in
certificates of deposit and other short-term deposit accounts totaling $2.2
million. The Company anticipates that approximately 3% of its assets will be
held in such accounts as a cash reserves. Additional deposits in such accounts
will be made as funds are received by the Company from new investors and
repayment of loans pending the deployment of such funds in new mortgage loans.
The Company believes that these financial assets do not give rise to significant
interest rate risk due to their short-term nature.
ITEM 4. CONTROLS AND PROCEDURES.
The Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of a date within 90 days prior to the
filing of this quarterly report on Form 10-Q (the "Evaluation Date"). Such
evaluation was conducted under the supervision and with the participation of the
Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of
Vestin Mortgage, Inc., the Company's Manager, who function as the equivalent of
the CEO and CFO of the Company. Based upon such evaluation, the Company's CEO
and CFO have concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures were effective. There have been no significant changes
in the Company's internal controls or other factors that could significantly
affect these controls subsequent to the date of their most recent evaluation.
16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the first quarter ended December 31, 2002.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Articles of Organization*
10.1 Operating Agreement**
99.1 Certification Pursuant to U.S.C. 18 Section 1350
- ----------
* Previously filed as an exhibit to the Registration Statement on Form S-11
(File No. 333-32800) on March 17, 2000.
** Previously filed as an exhibit to the Amendment No. 4 to the Registration
Statement on Form S-11/A (File No. 333-32800) on August 7, 2000.
(b) Reports on Form 8-K
None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VESTIN FUND I, LLC
By: Vestin Mortgage, Inc., its sole manager
BY: /s/ LANCE K. BRADFORD
----------------------------------------
LANCE K. BRADFORD
DIRECTOR, SECRETARY AND TREASURER
(CHIEF ACCOUNTING OFFICER OF THE MANAGER
AND DULY AUTHORIZED OFFICER)
Dated: February 13, 2003
18
CERTIFICATIONS
I, Steven J. Byrne, as the Chief Executive Officer of Vestin Mortgage, Inc., the
sole Manager of Vestin Fund I, LLC, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vestin Fund I, LLC
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003
/s/ Steven J Byrne
- ----------------------------------
Steven J Byrne
Chief Executive Officer*
Vestin Mortgage, Inc., sole
Manager of Vestin Fund I, LLC
* Steven J. Byrne functions as the equivalent of the Chief Executive Officer
of the registrant
I, Lance K. Bradford, as the Chief Financial Officer of Vestin Mortgage, Inc.,
the sole Manager of Vestin Fund I, LLC, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vestin Fund I, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003
/s/ Lance K Bradford
- ----------------------------------
Lance K Bradford
Chief Financial Officer*
Vestin Mortgage, Inc., sole
Manager of Vestin Fund I, LLC
* Lance K. Bradford functions as the equivalent of the Chief Financial
Officer of the registrant
19
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
Stephen J. Byrne, as Chief Executive Officer of Vestin Mortgage, Inc., the sole
Manager of Vestin Fund I, LLC (the "Registrant"), and Lance K. Bradford, as
Chief Financial Officer of Vestin Mortgage, Inc., hereby certify, pursuant to 18
U.S.C.ss.1350, that
(1) the Registrant's Report on Form 10-Q for the period ended December 31,
2002, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), fully complies with the applicable requirements
of Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
Dated: February 13, 2003 /s/ Stephen J. Byrne
----------------------------------------
Stephen J. Byrne*
Chief Executive Officer
of Vestin Mortgage, Inc., Manager of the
Registrant
Dated: February 13, 2003 /s/ Lance K. Bradford
----------------------------------------
Lance K. Bradford*
Chief Financial Officer
of Vestin Mortgage, Inc., Manager of the
Registrant
* Stephen J. Byrne and Lance K. Bradford function, respectively, as the
equivalent of the Chief Executive Officer and Chief Financial Officer of
the Registrant for purposes of 18 U.S.C. Section 1350.