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 MARCH 31, 2003
[ ] 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 II, LLC
(Exact Name of Registrant as Specified in Its Charter)
NEVADA 88-0481336
(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 April 30, 2003, the Issuer had 36,384,965 of its Units outstanding.
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance sheets as of March 31, 2003 (unaudited),
and June 30, 2002............................................... 3
Statements of income for the three and nine months
ended March 31, 2003 and 2002 (unaudited)....................... 4
Statement of members' equity for the nine months
ended March 31, 2003 (unaudited)................................ 5
Statements of cash flows for the nine months
ended March 31, 2003 and 2002 (unaudited)....................... 6
Notes to financial statements (unaudited)......................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................. 18
Item 2. Changes in Securities and Use of Proceeds......................... 18
Item 3. Defaults Upon Senior Securities................................... 18
Item 4. Submission of Matters to a Vote of Security Holders............... 18
Item 5. Other Information................................................. 18
Item 6. Exhibits and Reports on form 8-K.................................. 18
SIGNATURES................................................................ 19
2
VESTIN FUND II, LLC
BALANCE SHEETS
ASSETS
(UNAUDITED)
MARCH 31, 2003 JUNE 30, 2002
-------------- -------------
Cash $ 2,041,462 $ 2,198,542
Certificates of deposit 9,825,000 6,425,000
Interest and other receivables 3,630,637 2,189,631
Real estate held for sale 17,398,688 --
Due from related parties 94,510 --
Investments in mortgage loans, net of
allowance for loan losses of $1,250,000
and $500,000, respectively 321,376,074 222,058,326
Assets under secured borrowing 38,005,621 --
Deferred bond offering costs 569,426 255,637
------------ ------------
Total assets $392,941,418 $233,127,136
============ ============
LIABILITIES AND MEMBERS' EQUITY
Liabilities
Accounts payable $ 41,398 $ --
Due to Manager 1,723,301 650,765
Revolving line of credit 2,000,000 --
Secured borrowing 38,005,621 --
------------ ------------
Total liabilities 41,770,320 650,765
------------ ------------
Members' equity - authorized 50,000,000 units
35,077,506 and 23,239,836 units issued and
outstanding at $10 per unit at March 31, 2003
and June 30, 2002, respectively 351,171,098 232,476,371
------------ ------------
Total members' equity 351,171,098 232,476,371
------------ ------------
Total liabilities and members' equity $392,941,418 $233,127,136
============ ============
The accompanying notes are an integral part of these statements.
3
VESTIN FUND II, LLC
STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
REVENUES
Interest income from investment in
mortgage loans $10,196,721 $ 4,667,631 $28,647,804 $ 8,453,875
Other income 105,958 64,712 632,156 64,712
----------- ----------- ----------- -----------
Total revenues 10,302,679 4,732,343 29,279,960 8,518,587
----------- ----------- ----------- -----------
OPERATING EXPENSES
Interest expense 1,015,097 -- 2,372,938 --
Management fees to Manager 209,411 103,263 559,052 190,095
Provision for loan losses 250,000 -- 750,000 --
Other 119,734 336 188,507 443
----------- ----------- ----------- -----------
Total operating expenses 1,594,242 103,599 3,870,497 190,538
----------- ----------- ----------- -----------
NET INCOME $ 8,708,437 $ 4,628,744 $25,409,463 $ 8,328,049
=========== =========== =========== ===========
Net income allocated to members $ 8,708,437 $ 4,628,744 $25,409,463 $ 8,328,049
=========== =========== =========== ===========
Net income allocated to members per
weighted average membership units $ 0.26 $ 0.29 $ 0.86 $ 0.91
=========== =========== =========== ===========
Weighted average membership units 33,277,556 15,749,588 29,533,622 9,166,177
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
4
VESTIN FUND II, LLC
STATEMENTS OF MEMBERS' EQUITY
(UNAUDITED)
UNITS AMOUNT
------------- -------------
Members' equity at July 1, 2002 23,239,836 $ 232,476,371
Issuance of units 11,921,212 119,212,123
Distributions -- (25,091,442)
Reinvestments of distributions 657,195 6,571,950
Members' withdrawals (740,737) (7,407,367)
Net income -- 25,409,463
------------- -------------
Members' equity at March 31, 2003 35,077,506 $ 351,171,098
============= =============
The accompanying notes are an integral part of these statements.
5
VESTIN FUND II, LLC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
MARCH 31,
------------------------------
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,409,463 $ 8,328,049
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 750,000 --
Change in operating assets and liabilities:
Due to Manager 230,577 351,791
Due from related parties (94,510) --
Interest and other receivables (1,441,006) (1,658,732)
Deferred bond offering costs (313,789) --
Accounts payable 41,398 --
Other assets -- (73,579)
------------- -------------
Net cash provided by operating activities 24,582,133 6,947,529
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments in mortgage loans (249,971,443) (189,458,921)
Purchase of investments in mortgage loans from:
Vestin Fund I, LLC (14,450,263) (21,289,763)
Manager (6,847,900) --
Vestin Group, Inc. (15,023,151)
Other related party (4,674,950) --
Private investor (1,228,870) --
Proceeds received from sale of mortgage loans to:
Vestin Fund I, LLC 13,575,000 10,000,000
Manager 500,856 4,026,598
Vestin Group, Inc. 19,200,000
Other related party 3,674,950 1,000,000
Proceeds from sale of mortgage loans 54,327,158 --
Proceeds from loan payoffs 84,294,136 28,311,046
Investment in certificates of deposit (3,400,000) (4,225,000)
------------- -------------
Net cash used in investing activities (120,024,477) (171,636,040)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of membership units 119,212,123 171,918,633
Members' withdrawals (7,407,367) (27,050)
Members' distributions, net of reinvestments (18,519,492) (6,053,924)
Advance from Manager -- 80,000
Advance on revolving line of credit 2,000,000 --
------------- -------------
Net cash provided by financing activities 95,285,264 165,917,659
------------- -------------
NET (DECREASE) INCREASE IN CASH (157,080) 1,229,148
CASH, BEGINNING 2,198,542 1,857,602
------------- -------------
CASH, ENDING $ 2,041,462 $ 3,086,750
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Non-cash investing and financing activities:
Reinvestment of members' distributions $ 6,571,950 $ 1,252,051
============= =============
Distributions payable to Manager $ 96,800 $ 46,630
============= =============
Real estate held for sale acquired through
foreclosure $ 17,398,688 $ --
============= =============
Loans funded through secured borrowing $ 38,005,621 $ --
============= =============
Conversion of deferred offering costs to
membership units $ -- $ 242,699
============= =============
Deferred debt offering costs paid by Manager $ -- $ 142,448
============= =============
Due to Manager assumed through foreclosure $ 745,159 $ --
============= =============
Sale of rights to receive proceeds of guarantee $ 1,714,926 $ --
============= =============
The accompanying notes are an integral part of these statements.
6
VESTIN FUND II, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003
(Unaudited)
NOTE A -- ORGANIZATION
Vestin Fund II, 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 7, 2000 (date of formation) and will continue until
December 31, 2020 unless dissolved prior thereto or extended by vote of the
members under the provisions of the Company's Operating Agreement.
On June 13, 2001, the Company's Form S-11/A filed with the Securities and
Exchange Commission became effective for the initial public offering of
50,000,000 units at $10 per unit. The Company commenced operations on June 15,
2001. As of March 31, 2003, the Company had sold 35,077,506 units of the
50,000,000 units offered. Additionally, in connection with the Company's
organization, the Company issued 110,000 units to its Manager for offering costs
paid by them to unrelated third parties on the Company's behalf. The Company
will continue to offer its remaining unsold units to the public for a period of
up to three years following the effective date of its Form S-11/A.
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 is 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.
The Operating Agreement also provides that the members have certain rights,
including the right to terminate the Manager subject to a majority vote of the
members.
Vestin Mortgage, Inc. is also the Manager of Vestin Fund I, LLC ("Fund I") and
inVestin Nevada, Inc., entities 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 June 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 expected losses is based on a number
of factors including the types and dollar amounts of loans in the portfolio,
adverse situations that may effect 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 loan loss allowance. 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 cost 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.
The appraisals may be for the current estimate of the "as-if developed" value of
the property, and which approximates the post-construction value of the
collateralized property assuming that such property is developed. As-if
developed values on raw land loans or acquisition and development loans often
dramatically exceed the immediate sales value and may include anticipated zoning
changes, selection by a purchaser against multiple alternatives, and successful
development by the purchaser; upon which development is dependent on
availability of financing. As most of the appraisals will be prepared on an
as-if developed basis, if a loan goes into default prior to any development of a
project, the market value of the property may be substantially less than the
appraised value. As a result, there may be less security than anticipated at the
time the loan was originally made. If there is less security and a default
occurs, the Company may not recover the full amount of the loan.
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 I, and the Company (collectively, "the Lead Lenders"). In
the event of borrower non-performance, the 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.
Assets under secured borrowing have been segregated in the accompanying balance
sheets and include loans outstanding of $33.1 million and real estate acquired
through foreclosure of $2.4 million as of March 31, 2003.
NOTE C -- INVESTMENTS IN MORTGAGE LOANS
Investments in mortgage loans are as follows:
March 31, 2003
NUMBER AVERAGE
LOAN OF INTEREST PORTFOLIO LOAN
TYPE LOANS BALANCE RATE PERCENTAGE TO VALUE*
---- ----- ------- ---- ---------- ---------
Acquisition and development .... 3 $ 25,218,897 14.43% 7.82% 51.73%
Bridge ......................... 4 13,395,964 13.38% 4.15% 62.86%
Commercial ..................... 32 142,588,420 12.14% 44.20% 62.27%
Construction ................... 18 118,230,136 13.44% 36.65% 57.41%
Land ........................... 9 19,887,157 13.72% 6.16% 47.76%
Residential .................... 6 3,305,500 14.00% 1.02% 58.81%
--- ------------ ------ ------ ------
72 $322,626,074 13.01% 100.00% 58.94%
=== ============ ====== ====== ======
8
June 30, 2002
NUMBER AVERAGE
LOAN OF INTEREST PORTFOLIO LOAN
TYPE LOANS BALANCE RATE PERCENTAGE TO VALUE*
---- ----- ------- ---- ---------- ---------
Acquisition and development .... 7 $ 50,177,032 13.86% 22.54% 59.23%
Bridge ......................... 3 7,764,367 14.00% 3.49% 67.43%
Commercial ..................... 18 78,759,650 12.59% 35.39% 60.78%
Construction ................... 19 59,008,277 14.27% 26.51% 58.36%
Land ........................... 12 22,180,376 12.71% 9.97% 44.31%
Residential .................... 7 4,668,624 13.08% 2.10% 64.14%
--- ------------ ------ ------ ------
66 $222,558,326 13.42% 100.00% 59.04%
=== ============ ====== ====== ======
* 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. The appraisals may be for the current estimate of the
"as-if developed" value of the property, and which approximates the
post-construction value of the collateralized property assuming that such
property is developed. As-if developed values on raw land loans or
acquisition and development loans often dramatically exceed the immediate
sales value and may include anticipated zoning changes, selection by a
purchaser against multiple alternatives, and successful development by the
purchaser; upon which development is dependent on availability of
financing. As most of the appraisals will be prepared on an as-if developed
basis, if a loan goes into default prior to any development of a project,
the market value of the property may be substantially less than the
appraised value. As a result, there may be less security than anticipated
at the time the loan was originally made. If there is less security and a
default occurs, the Company may not recover the full amount of the loan.
MARCH 31, 2003 PORTFOLIO JUNE 30, 2002 PORTFOLIO
LOAN TYPE BALANCE PERCENTAGE BALANCE PERCENTAGE
--------- ------- ---------- ------- ----------
First mortgages ......... $321,663,116 99.70% $222,513,820 99.98%
Second mortgages** ...... 962,958 0.30% 44,506 0.02%
------------ ------ ------------ ------
$322,626,074 100.00% $222,558,326 100.00%
============ ====== ============ ======
** 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
March 31, 2003:
2003........................................ $ 308,647,905
2004........................................ 10,328,045
2005........................................ 3,650,124
-------------
$ 322,626,074
=============
The following is a schedule by geographic location of investments in mortgage
loans as of:
MARCH 31, 2003 PORTFOLIO JUNE 30, 2002 PORTFOLIO
BALANCE PERCENTAGE BALANCE PERCENTAGE
------------ ------ ------------ ----------
Arizona ........... $ 48,430,498 15.01% $ 37,528,258 16.86%
California ........ 53,166,165 16.48% 43,242,770 19.43%
Colorado .......... 4,137,548 1.28% -- --
Florida ........... 3,943,520 1.22% -- --
Hawaii ............ 11,558,145 3.58% 15,681,746 7.05%
Idaho ............. -- -- 2,855,202 1.28%
Missouri .......... 5,930,650 1.84% 5,430,000 2.44%
New Mexico ........ -- -- 42,495 0.02%
Nevada ............ 93,247,531 28.90% 64,641,428 29.04%
Oregon ............ 4,343,330 1.35% -- --
Ohio .............. 7,599,469 2.36% -- --
Texas ............. 90,269,218 27.98% 53,136,427 23.88%
------------ ------ ------------ ------
$322,626,074 100.00% $222,558,326 100.00%
============ ====== ============ ======
9
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 9% to 17%. Revenue
by product will fluctuate based upon relative balances during the period.
At March 31, 2003, two of the Company's loans totaling $12.6 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.
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, as of March 31, 2003, the Company's
Manager had granted extensions on 13 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 as of March 31, 2003 was approximately
$41.4 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 $1,250,000 included in the accompanying
balance sheet as of March 31, 2003 is adequate to address estimated credit
impairment in the Company's investment in mortgage loans portfolio 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
For the three and nine months ended March 31, 2003, the Company recorded
management fees to the Company's Manager of approximately $209,411 and $559,052,
respectively, compared to $103,263 and $190,095 for the same periods in 2002.
Additionally, for the three and nine months ended March 31, 2003, the Company
recorded pro rata distributions owed to the Company's Manager of $31,057 and
$96,717 based upon the total of 110,000 units owned by the Company's Manager.
During the nine months ended March 31, 2003, the Company purchased $14,450,263
in investments in mortgage loans from Fund I, $6,847,900 from the Manager,
$15,023,151 from Vestin Group, Inc. and $4,674,950 from other related parties.
For the same period, the Company also sold $13,575,000 in investments in
mortgage loans to Vestin Fund I, LLC, $500,856 to the Manager, $19,200,000 to
Vestin Group and $3,674,950 to other related parties.
NOTE E -- REAL ESTATE HELD FOR SALE
At March 31, 2003, the Company had seven properties with a total carrying value
of $17.4 million, which were acquired through foreclosure and recorded as
investments in real estate held for sale. The Company may share ownership of
such properties with Fund I, the Manager, or other unrelated parties. The
summary below includes the Company's percentage ownership in each property.
These investments in real estate held for sale are accounted for at the lower of
cost or fair value, less selling costs, being based on appraisals and knowledge
of local market conditions. It is not the Company's intent to invest in or own
real estate as a long-term investment. The Company seeks to sell properties
acquired through foreclosure as quickly as circumstances permit. The following
is a summary of real estate held for sale as of March 31, 2003:
10
Description % of ownership Carrying Value
----------- -------------- --------------
A custom residential property located in Santa Fe, New Mexico 4% $ 85,727
40 acres of land containing 381 RV lots in Las Vegas, Nevada 31% 5,707,032
An approximate 200-unit apartment complex located in Las Vegas,Nevada 98% 4,302,805
11.42 acres of vacant land zoned commercial in Henderson, Nevada 100% 2,203,279
An uncompleted golf course in Mesquite, Nevada 36% 1,680,516
65 acres of raw land in Mesquite, Nevada 41% 1,272,470
Raw land in Mesquite, Nevada 42% $ 2,146,859
-----------
Total $17,398,688
===========
Based on management's estimate of fair value of these assets, no impairment
charge was required as of March 31, 2003.
Through foreclosure, the Company assumed an approximate 98% ownership of a
200-unit apartment complex as described above. The other 2% is owned by Fund I.
The operations of the facility were also assumed which is being managed by an
outside management company. The Company's share of income from operations for
the three months ended March 31, 2003 totaled $3,415 which is included in other
income on the accompanying statements of income.
NOTE F -- SECURED BORROWING
As of March 31, 2003, the Company had approximately $38.0 million in secured
borrowings pursuant to an intercreditor agreement with the related amounts
included in assets under secured borrowings. For the three and nine month
periods ended March 31, 2003, the Company recorded interest expense of $0.6 and
$2.0 million, respectively, related to the secured borrowings.
NOTE G -- REVOLVING LINE OF CREDIT
The Company has a revolving line of credit with a financial institution, which
provides for borrowing up to $2.0 million. As of March 31, 2003, the balance
outstanding was $2.0 million. The line of credit is secured by the Company's
certificates of deposit with First Hawaiian Bank, is payable in monthly
installments of interest only at 1.50% over the weighted average interest rate
paid on the First Hawaiian Bank certificates of deposit (1.6% at March 31,
2003), and matures on September 28, 2003. The interest rate will be reset upon
the occurrence of either a new drawing on the revolving line of credit or at the
maturity of the certificate of deposit. The Company was in compliance with the
covenants of the line of credit agreement as of March 31, 2003.
NOTE H -- LITIGATION INVOLVING THE MANAGER
The Manager, Vestin Group, Inc., and Del Mar Mortgage, Inc., a company wholly
owned by Mike Shustek, the largest shareholder and CEO of the Vestin Group, Inc.
(collectively, the "defendants"), are defendants in a civil action (the
"Action"). On April 10, 2003, the United States District Court for the District
of Nevada (the "Court") entered a judgment in the Action for $5.0 million, plus
interest accruing from March 26, 2003, jointly and severally against the
defendants. Subsequent to April 10, 2003, the Court stayed the execution of the
judgment pending the hearing and ruling on post-trial motions and accordingly,
the Court did not require the defendants to post a bond for the judgment. Del
Mar Mortgage, Inc. has indemnified Vestin Group, Inc. and the Manager for any
losses and expenses in connection with the Action. Mr. Shustek has guaranteed
the indemnification. If the stay of execution is lifted, Mr. Shustek has agreed
to provide a bond in the amount of the judgment. In management's opinion after
consultation with legal counsel, the judgment against Vestin Group, Inc. and the
Manager will be vacated and will have no effect on the operating results and
financial condition of the Company. The defendants are appealing the rating by
the District Court.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
Vestin Fund II, LLC (the "Company") was organized in December 2000 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 June 15, 2001, 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 I, LLC and
inVestin Nevada, Inc. which are similar funds to Vestin Fund II, LLC.
The following is a financial review and analysis of the Company's financial
condition and results of operations for the three and nine months ended March
31, 2003. Prior to June 15, 2001, the Company was a development stage company
with no operational activities. 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 June 30,
2002.
11
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q the words or phrases "will
likely result," "are expected to," "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 June 13, 2001, the Company's Registration Statement as filed with the
Securities and Exchange Commission became effective for the initial public
offering of up to 50,000,000 units at $10 per unit. The Company commenced
operations on June 15, 2001. The Company commenced raising funds through the
sale of its units in June 2001; this offering will continue until the earlier of
such time that the Company has raised $500 million or June 2004. As of March 31,
2003, the Company had sold approximately 34.8 million units of the total 50
million units offered. Members may also 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 March 31, 2003, an
additional 905,196 units have been purchased under this plan. Additionally, in
connection with the Company's organization, the Company issued 110,000 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 MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Total revenues .............................. $10,302,679 $ 4,732,343 $29,279,960 $ 8,518,587
Total expenses .............................. 1,594,242 103,599 3,870,497 190,538
----------- ----------- ----------- -----------
Net income .................................. $ 8,708,437 $ 4,628,744 $25,409,463 $ 8,328,049
=========== =========== =========== ===========
Earnings per unit:
Net income allocated to members per
weighted average membership units ......... $ 0.26 $ 0.29 $ 0.86 $ 0.91
=========== =========== =========== ===========
Annualized net interest yield to members .... 10.5% 11.8% 11.5% 12.1%
=========== =========== =========== ===========
Weighted average membership units ........... 33,277,556 15,749,588 29,533,622 9,166,177
=========== =========== =========== ===========
(a) The annualized rate of return to members is calculated based upon the net
income allocated to members per weighted average units as of March 31, 2003
and 2002 divided by the number of months during the period and multiplied
by twelve (12) months, then divided by ten (the $10 cost per unit).
THREE AND NINE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE AND NINE MONTHS
ENDED MARCH 31, 2002
Total Revenues. For the three and nine months ended March 31, 2003, revenues
totaled $10.3 million and $29.3 million, respectively, compared to $4.7 million
and $8.5 million for the same periods in 2002, increases of $5.6 million and
$20.8 million or 119% and 245%. The increase in revenue was primarily due to an
increase in our average daily investments in mortgage loans of approximately
112% and 222%, respectively. The increase in our investment in mortgage loans is
due, almost entirely, to the continuing sale of our units, which has increased
our capital from $232.5 million at June 30, 2002 to $351.2 million at March 31,
2003. Overall, our average interest yields on our investments in mortgage loans
during 2003 have not changed significantly compared to 2002. We currently expect
that our revenues will continue to increase as we raise additional funds through
the sale of our units. Such increase may be offset, to some extent, by an
increase in non-earning assets, which totaled approximately $30.0 million at
March 31, 2003 as compared to $42,000 at June 30, 2002.
Total Expenses. For the three and nine months ended March 31, 2003, expenses
totaled $1.6 million and $3.9 million respectively, compared to $0.1 million and
$0.2 million for the same periods in 2002, increases of $1.5 million and $3.7
million, respectively. The increase in total expenses is primarily related to an
increase in managements fees approximating $0.1 million and $0.4 million,
respectively, provisions for loan losses totaling $0.3 million and $0.8 million,
12
respectively, interest expense related to secured borrowings approximating $0.6
million and $2.0 million, respectively, and interest expense related to a line
of credit approximating $0.4 million and $0.4 million, respectively. We are
continually evaluating the quality of our investments in mortgage loan portfolio
and based upon future evaluations, may require additional charges to our
allowance for loan losses. Management fees will be an annual recurring expense
based upon an amount up to 0.25% of aggregate outstanding capital.
Net Income. Overall, net income for the three and nine months ended March 31,
2003 totaled $8.7 million and $25.4 million, respectively, as compared to $4.6
million and $8.3 million, respectively, for the same periods in 2002.
Annualized Rate of Return to Members. For the three and nine months ended March
31, 2003, annualized rate of return to members totaled 10.5% and 11.5%,
respectively, as compared to 11.8% and 12.1%, respectively for the same periods
ended March 31 in 2002. The decrease in annualized rate of return to members was
primarily the result of the increase in non-earning assets to $30.0 million as
of March 31, 2002 compared to $42,000 as of June 30, 2002.
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. During the three and nine months ended March 31, 2003, we had
substantially more funds to invest as compared to the prior year's period. Such
funds were derived from the continuing sale of our Units. We expect to continue
to raise funds through the sale of our Units and accordingly the size of our
investment portfolio should continue to increase. Other than a $2.0 million line
of credit, we do not currently have in place any other source of funding
although we are considering possible arrangements such as securitizations and
other structured finance programs to increase the funds we will have available
for investment in mortgage loans. No assurance can be given that we will be able
to raise any additional funds through securitization or other structured finance
arrangements.
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. However, 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 result in a continuing increase in non-earning assets. During the
three and nine month periods ended March 31, 2003, we recorded a provision for
loan losses of $250,000 and $750,000, respectively. Our total reserve for loan
losses as of March 31, 2003 is $1,250,000. The increase in non-earning assets
has contributed to the decline in our annualized rate of return to members from
12.1% for the nine months ended March 31, 2002 to 11.5% for the nine months
ended March 31, 2003.
INVESTMENTS IN MORTGAGE LOANS SECURED BY REAL ESTATE PORTFOLIO
As of March 31, 2003, the Company invested in mortgage loans secured by real
estate totaling $322,626,074, including 72 loans with an aggregate principal
value of $321,663,116 secured by first deeds of trust. Ten of these loans are
also secured by second deeds of trust totaling $962,958. 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 March 31, 2003, the weighted average contractual interest yield on the
Company's investment in mortgage loans is 13.01%. These mortgage loans mature
over the next 24 months.
Losses may occur from 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:
o prevailing economic conditions;
o historical experience;
o the nature and volume of the loan portfolio;
o the borrowers' financial condition and adverse situations that may affect
the borrowers' ability to pay;
13
o evaluation of industry trends;
o review and evaluation of loans identified as having loss potential; and
o estimated net realizable value of any underlying collateral.
Based upon this evaluation the Company's Manager believes that the allowance for
loan losses totaling $1,250,000 included in the accompanying balance sheet as of
March 31, 2003 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 more than 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 cost 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
developed 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.
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
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
14
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 Company recorded management
fees to the Manager during the three and nine months ended March 31, 2003 of
approximately $0.2 million and $0.6 million, respectively.
During the nine months ended March 31, 2003, cash flows provided by operating
activities approximated $24.6 million. Investing activities consisted of
investments in mortgage loans of $116.6 million (net of loan sales and payoffs
on investments in mortgage loans), and investment in certificates of deposit of
$3.4 million. Financing activities consisted of capital raised through the sale
of units in the amount of $119.2 million, advances on a line of credit totaling
$2.0 million, members' withdrawals in the amount of $7.4 million and
distributions of $18.5 million (net of reinvestments).
As the offering of our units is continuing, we currently rely upon the sale of
units, loan repayments and dividend reinvestments to provide the cash necessary
to carry on our business. Our ability to attract investors to purchase our units
depends upon a number of factors, some of which are beyond our control. The key
factors in this regard include general economic conditions, the conditions of
the commercial real estate markets, the availability and attractiveness of
alternative investment opportunities, our operating performance and the track
record and reputation of our Manager. We believe our ability to attract
investors has been enhanced by the high historical yields generated by our
mortgage investments. These yields may continue to be viewed as attractive to
the extent that equity markets are viewed as risky or volatile and to the extent
that most fixed income investments provide a lower yield. Notwithstanding our
high historical yields, our ability to raise additional funds may be impaired by
our limited operating history and by the fact that the mortgage loans in which
we invest are not federally insured, as are certain bank deposits, and are
generally illiquid as compared to government or corporate bonds. Thus, our
ability to generate high yields is critical to offsetting these disadvantages.
Our ability to raise additional funds would likely suffer if the performance of
our loan portfolio declines or if alternative investment vehicles offering
comparable yields and greater safety and/or liquidity become available. In
addition, our ability to raise additional funds may suffer if the rate of return
on Vestin Fund I declines or if other funds managed by our Manager perform
poorly.
As of March 31, 2003, members holding approximately 42% 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. Resulting 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, which totalled
approximately $7.4 million for the nine months ended March 31, 2003, are limited
by the terms of our Operating Agreement to not more than 10% per year and are
subject to other conditions.
Non-earning assets, which include loans on non-accrual (discussed in Note C) and
real estate held for sale (discussed in Note E), totaled $30.0 million at March
31, 2003. 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 March 31, 2003 have increased since June 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.
15
At March 31, 2003, the Company had $2.0 million in cash, $9.8 million in
certificates of deposit, and $392.9 million in total assets. On the same date,
the Company had a liability due to the Managing Member of approximately $1.7
million as well as a balance on its revolving line of credit of $2.0 million.
Accordingly, it appears the Company has sufficient working capital to meet its
operating needs in the near term.
As of March 31, 2003, the Company had liabilities totaling $38.0 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.
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.
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
o 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.
o 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.
o Appraisals may be performed on an "as-if developed" 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.
o The Company's results of operations will vary with changes in interest
rates and with the performance of the relevant real estate markets.
o 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.
o 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
16
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.
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.
The Company does not have any debt.
Most of the Company's assets consist of mortgage loans, including those which
are financed under the intercreditor agreement. At March 31, 2003, the Company's
aggregate investment in mortgage loans was $358,189,945 with a weighted average
contractual yield of 12.96%. Loans totaling $35,563,871 financed under the
intercreditor agreement are classified as assets under secured borrowing. Such
financing is at a weighted average contractual interest rate of 12.0%. These
mortgage loans mature over the next 24 months. All of the outstanding mortgage
loans at March 31, 2003 are fixed rate loans. All of the mortgage loans are held
for investment purposes. None of the mortgage loans have prepayment penalties.
As of March 31, 2003, the Company had cash and invesments in certificates of
deposit and other short-term deposit accounts totaling $11.9 million. The
Company anticipates that approximately 3% of its assets will be held in such
accounts as a cash reserve; 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.
17
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 third quarter 2003.
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.
18
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 II, 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: May 15, 2003
19
CERTIFICATIONS
I, Steven J. Byrne, as the Chief Executive Officer of Vestin Mortgage, Inc., the
sole Manager of Vestin Fund II, LLC, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vestin Fund II, 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: May 15, 2003
/s/ Steven J Byrne
- ---------------------------
Steven J Byrne
Chief Executive Officer*
Vestin Mortgage, Inc., sole
Manager of Vestin Fund II, LLC
* Steven J. Byrne functions as the equivalent of the Chief Executive Officer
of the registrant
20
I, Lance K. Bradford, as the Chief Accounting Officer of Vestin Mortgage, Inc.,
the sole Manager of Vestin Fund II, LLC, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vestin Fund II, 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: May 15, 2003
/s/ Lance K Bradford
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Lance K Bradford
Chief Financial Officer*
Vestin Mortgage, Inc., sole
Manager of Vestin Fund II, LLC
* Lance K. Bradford functions as the equivalent of the Chief Financial
Officer of the Manager
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