<PAGE>
As filed with the Securities and Exchange Commission on August 7, 2000
Registration No. 333-32800
--------------------------------------------------------------------------------
Securities and Exchange Commission
Washington, D.C. 20549
------------------------
AMENDMENT NO. 4
Form S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
DM MORTGAGE INVESTORS, LLC
(Exact name of registrant as specified in governing instruments)
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
(Address of Principal executive offices)
------------------------
Michael V. Shustek
Director
VESTIN MORTGAGE, INC.
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
(Name and address of agent for service)
The Commission is requested to send copies of all communications to:
Guy P. Lander, Esq.
Goodman Phillips & Vineberg
430 Park Avenue
New York, New York 10022
Approximate date of commencement of proposed sale to the public. As
soon as practicable following effectiveness of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
<PAGE>
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
----------------------------- ----------------- --------------------- --------------------- -----------------
Title of Amount Being Proposed Maximum Proposed Maximum Amount of
Securities Being Registered Registered (1) Offering Price Aggregate Registration Fee
Per Unit Offering Price
----------------------------- ----------------- --------------------- --------------------- -----------------
<S> <C> <C> <C> <C>
Unit of Limited Liability
Company Interest 100,000,000 $1.00 $100,000,000 $26,400
----------------------------- ----------------- --------------------- --------------------- -----------------
</TABLE>
(1) The number of units being registered includes units offered under
our distribution reinvestment plan.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION
DATED AUGUST 7, 2000
PRELIMINARY PROSPECTUS
DM MORTGAGE INVESTORS, LLC
1,500,000 Units
of Limited Liability Company Interests
DM Mortgage Investors, LLC is a Nevada limited liability company. We
invest in mortgage loans, which are loans where our collateral is real property.
The loans will be selected for us by our manager, Vestin Mortgage, Inc.
(formerly Capsource, Inc.).
We are offering and selling to the public a minimum of 1,500,000 up to
a maximum of 100,000,000 units for $1.00 per unit. This offering includes units
to be issued under our distribution reinvestment plan.
<TABLE>
<CAPTION>
------------------------ ------------------------- ------------------------------- ---------------------------
Selling Commissions/ Expense
Price to Public Reimbursement (2) Proceeds to DM LLC
------------------------ ------------------------- ------------------------------- ---------------------------
<S> <C> <C> <C>
Per Unit $1.00 $0.05 $0.95
------------------------ ------------------------- ------------------------------- ---------------------------
Total Minimum $1,500,000.00(1) $75,000.00 $1,425,000.00(1)
------------------------ ------------------------- ------------------------------- ---------------------------
Total Maximum $100,000,000.00(1) $5,000,000.00 $95,000,000.00(1)
--------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes units purchased under our distribution reinvestment plan.
(2) Assumes that unaffiliated dealers will generate sales of all units. This is
a maximum estimate. We expect that a majority of all units sold will be
sold by Vestin Capital, Inc. without the unaffiliated dealers, which
reduces the selling commissions by up to 70%.
The most significant risks to our investment include:
o Restricted right to sell or transfer your units
o Total reliance on Vestin Mortgage
o Payment of substantial fees to Vestin Mortgage, which is our affiliate
o Tax risks of the offering and membership in DM LLC
o Insufficiency of the minimum proceeds
o Restricted distributions and increased risk due to leveraging
o Conflicts of interest for Vestin Mortgage and Vestin Capital
o Recent organization and lack of significant assets, operating history
and financing source.
You should read the complete discussion of the risk factors beginning
on page 8.
Vestin Capital Inc. (formerly DM Financial Services, Inc.) is the lead
dealer selling our units in this offering. As our "lead dealer," Vestin Capital
will be the primary seller of Units and may also engage other dealers to sell
Units. Vestin Capital and Vestin Mortgage are both owned by the same company,
Vestin Group, Inc. (formerly known as Sunderland Corporation).
You must purchase at least 2,000 units for $2,000. To purchase units,
you must first sign the enclosed subscription agreement and make the
representations and warranties included in that agreement. Initially, your money
will be placed in an escrow account with BankWest of Nevada. The escrow will end
upon the earlier of our sale of a minimum of 1,500,000 units or December 31,
2000. If we fail to sell 1,500,000 units and receive proceeds of $1,500,000 on
or before December 31, 2000, BankWest will promptly return your money without
interest. If we sell the minimum on or before December 31, 2000, we will
continue to sell up to 100,000,000 units. We will terminate the offering on
December 31, 2001.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the units or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The use of forecasts in this offering is prohibited. No one is
permitted to make any oral or written predictions about the cash benefits or tax
consequences you will receive from your investment.
August 7, 2000
<PAGE>
NOTICE TO CALIFORNIA RESIDENTS
All certificates representing units resulting from any offers or sales
of units to California residents will bear the following legend restricting
transfer:
It is unlawful to consummate a sale or transfer of this
security, or any interest therein, or to receive any
consideration therefor, without the prior written consent of
the Commissioner of the Corporation of the State of
California, except as permitted in the Commissioner's Rules.
A copy of the applicable rule of the California Commissioner of Corporations
will be furnished to each California investor by Vestin Mortgage.
NOTICE TO PENNSYLVANIA RESIDENTS
Because the minimum closing amount is less than $10,000,000, you are
cautioned to carefully evaluate our ability to fully accomplish our stated
objectives and to inquire as to the current dollar volume of program
subscriptions.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY...........................................................................................................1
RISK FACTORS......................................................................................................9
Investment Risks...............................................................................................9
You will not have the benefit of reviewing the past performance of DM LLC.................................9
Your units lack liquidity and marketability...............................................................9
You have a limited ability to have your units redeemed....................................................9
If we sell only the minimum number of units, we will be unable to diversify our loan
portfolio adequately or meet investment objectives......................................................9
We must rely on Vestin Mortgage to manage our operations and select our loans for investment.............10
We depend on key personnel of Vestin Mortgage............................................................10
You may face a delay before distributions begin..........................................................10
Any borrowing by us will increase your risk and reduce the amount we have available to
distribute to members..................................................................................10
Risks of the Mortgage Lending Business........................................................................10
Defaults on our mortgage loans will decrease our revenues and your distributions.........................10
We will invest in kinds of loans that have a greater risk of default than first mortgage
loans on commercial properties.........................................................................10
Our loans are not guaranteed by any government agency....................................................11
Our mortgage loans will not be marketable and we expect no secondary market to develop...................11
Our loan portfolio is riskier because it will not be diversified geographically..........................12
We may have difficulty protecting our rights as a secured lender.........................................12
Our underwriting standards and procedure are more lenient than conventional lenders, which
may create additional risks to your return.............................................................12
By becoming the owner of property, we may become liable for unforeseen environmental
obligations............................................................................................12
Our results are subject to fluctuations in interest rates and other economic conditions..................12
We face competition for mortgage loans that may reduce available yields and fees available...............13
Conflicts of Interest Risks...................................................................................13
Vestin Mortgage will face conflicts of interest concerning the allocation of its personnel's
time...................................................................................................14
Vestin Mortgage will face conflicts of interest arising due to our fee structure.........................14
Vestin Mortgage will face conflicts of interest relating to other investments in mortgage
loans..................................................................................................14
We may not have control over joint ventures with affiliates..............................................14
Lack of Control by Members....................................................................................14
Your right to vote is limited and you are bound by majority vote.........................................14
Your interest in DM LLC may be diluted as we sell additional units.......................................15
The value of your units may decrease below one dollar....................................................15
Risks Related to Vestin Capital...............................................................................15
Vestin Capital is newly formed and has no operating history or track record in public
offerings..............................................................................................15
Vestin Capital is an Affiliate of Vestin Mortgage........................................................15
Federal Income Tax Risks......................................................................................15
Your cash flow and distributions will be reduced if we are taxed as a corporation........................15
If we are deemed to not be engaged in a trade or business, the tax benefits of partnership
status will be adversely affected......................................................................16
An IRS audit of our books and records could result in an audit of your tax returns.......................16
Inconsistencies between federal, state and local tax rules may adversely affect your return..............16
Retirement Plan Risks.........................................................................................16
An investment in DM LLC may not qualify as an appropriate investment under all retirement
plans..................................................................................................16
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
USE OF PROCEEDS..................................................................................................17
INVESTOR SUITABILITY STANDARDS...................................................................................19
INVESTMENT OBJECTIVES AND POLICIES...............................................................................22
Acquisition and Investment Policies.........................................................................22
Mortgage Loans to Affiliates................................................................................25
Purchase of Loans from Vestin Mortgage and its Affiliates...................................................25
Commitment of Offering Proceeds.............................................................................25
Types of Loans We Intend to Invest In.......................................................................25
Prepayment Penalties........................................................................................27
Balloon Payment.............................................................................................27
Borrowing...................................................................................................27
Repayment of Mortgages on Sales of Properties...............................................................27
No Trust or Investment Company Activities...................................................................28
Various Other Policies and Procedures.......................................................................28
Competition and General Economic Conditions.................................................................28
Regulation..................................................................................................28
MANAGEMENT.......................................................................................................30
Our Management..............................................................................................30
Vestin Mortgage.............................................................................................30
Removal of Vestin Mortgage as Manager.......................................................................30
Evaluation and Acquisition by Vestin Mortgage...............................................................31
Management of Loan Portfolio................................................................................31
Mortgage Loans..............................................................................................31
Prior Experience............................................................................................32
Directors and Executive Officers of Vestin Mortgage and Vestin..............................................33
Affiliated Companies........................................................................................36
COMPENSATION OF VESTIN MORTGAGE AND VESTIN CAPITAL...............................................................38
CONFLICTS OF INTEREST............................................................................................42
Share ownership.............................................................................................44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................................................46
FIDUCIARY RESPONSIBILITY.........................................................................................47
Exculpation and Defenses....................................................................................47
Indemnification.............................................................................................48
SUMMARY OF OPERATING AGREEMENT, RIGHTS OF MEMBERS AND DESCRIPTION OF UNITS.......................................49
Your Status.................................................................................................49
Limited Liability of Members................................................................................49
Term of DM LLC..............................................................................................49
Meetings....................................................................................................49
Voting and Other Rights of Members..........................................................................49
Capital Accounts............................................................................................50
Capital Contribution of Vestin Mortgage.....................................................................50
Unit Repurchases and Deemed Distributions...................................................................50
Write-Down of Investments...................................................................................51
Members' Return on Investment...............................................................................51
Distribution Reinvestment Plan..............................................................................52
Reinvestment of Proceeds of Capital Transactions............................................................53
Assignment and Transfer of Units............................................................................53
Repurchase of Units, Withdrawal from DM LLC.................................................................53
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Options and Warrants........................................................................................54
Special Power of Attorney...................................................................................54
FEDERAL INCOME TAX CONSEQUENCES..................................................................................55
Classification as a Partnership.............................................................................56
We Will Not Be Classified As A Publicly Traded Partnership..................................................56
General Principles of Partnership Taxation..................................................................59
Determination of Basis in Units.............................................................................59
Allocations of Profits and Losses...........................................................................59
Limitations on the Deduction of Losses......................................................................60
Computation of Gain or Loss on Sale or Redemption of Units..................................................61
Character of Gain or Loss...................................................................................61
Tax Rates on a Partner's Share of Ordinary Income from the Partnership......................................61
Distributions and Deemed Distributions......................................................................61
Depreciation................................................................................................62
Investment Interest.........................................................................................62
Tax Treatment of Tax-Exempt Entities........................................................................62
Partnership Tax Returns, Tax Information and Audits.........................................................64
Vestin Mortgage is Tax Matters Partner......................................................................64
Original Issue Discount Rules...............................................................................64
Market Discount.............................................................................................65
No Section 754 Election - Impact on Subsequent Purchasers...................................................65
Treatment of Compensation of Vestin Mortgage................................................................65
Possible Legislative Tax Changes............................................................................66
State and Local Taxes.......................................................................................66
ERISA Considerations........................................................................................67
Annual Valuation............................................................................................67
Plan Assets Generally.......................................................................................67
HOW WE PROTECT OUR RIGHTS AS A LENDER............................................................................70
Overview of Mortgages.......................................................................................70
Foreclosure.................................................................................................70
Environmental Risks.........................................................................................71
Second Mortgages; Rights of Senior Mortgages................................................................71
Statutory Rights of Redemption..............................................................................72
Anti-Deficiency Legislation.................................................................................72
Bankruptcy Laws.............................................................................................73
Enforceability of Certain Provisions........................................................................74
REPORTS TO MEMBERS...............................................................................................76
PLAN OF DISTRIBUTION.............................................................................................78
LEGAL MATTERS....................................................................................................79
EXPERTS..........................................................................................................79
AVAILABLE INFORMATION............................................................................................79
EXHIBIT 23.3......................................................................................................1
EXHIBIT 23.4......................................................................................................2
</TABLE>
iii
<PAGE>
SUMMARY
Because this is a summary, it does not contain all the information that
may be important to you. Before you invest, you should read this entire
prospectus carefully, including the section entitled "Risk Factors," beginning
at page 8, and the Financial Statements and Notes, beginning at page F-1.
<TABLE>
<CAPTION>
<S> <C>
DM Mortgage DM Mortgage Investors, LLC was organized in December 1999 as a Nevada limited
Investors, LLC liability company. Under our articles and our Second Amended and Restated Operating
Agreement, which we refer to as our operating agreement, our existence ends on December
31, 2019, unless the members vote to extend our duration. In this prospectus we refer to
DM Mortgage Investors, LLC as "DM LLC," "we," "us" or "our." Our offices are at 2901 El
Camino Avenue, Suite 206, Las Vegas, Nevada 89102, and our telephone number is (702)
227-0965.
Our Manager Our manager is Vestin Mortgage, Inc., a Nevada corporation, which was incorporated in
1997 as Capsource, Inc. Its executive offices are at 2901 El Camino Avenue, Suite 206,
Las Vegas, Nevada 89102, and its telephone number is (702) 227-0965. Vestin Mortgage is
a mortgage broker licensed in the State of Nevada since 1997.
Investment Policies We will invest in mortgage loans where our collateral is real property located
primarily in Nevada, Arizona and California. There may be commercial or residential
buildings on the real property, but our collateral may also consist of real property
with buildings under construction and no physical structures at all. The loans will
be selected for us by Vestin Mortgage from among loans obtained by Vestin Mortgage or
mortgage brokers with which we are not affiliated. We believe these loans will be
attractive to borrowers because of the expediency of Vestin Mortgage's loan approval
process, which takes from 10 to 20 days.
We do not intend to invest in or own real property. However, we may own real property if
we foreclose on a defaulted loan.
We expect to obtain a line of credit which we currently intend to use to acquire,
operate and develop for resale the real properties on which we have foreclosed. Our
total indebtedness under the line of credit will not exceed 70% of the fair market value
of the outstanding mortgage loans in our loan portfolio.
You will not receive any distributions on your investment before we invest the proceeds
of this offering in mortgage loans and receive interest payments on those loans. We
estimate that distributions will begin on the later of eight months after you deliver
your subscription amount to us, or three to six months after the funds are released from
escrow.
</TABLE>
1
<PAGE>
Summary Risk Factors The following are some of the significant risks
concerning your investment:
o There is no public trading market for the
units, and we do not expect one to ever
develop. Further, the transfer and
redemption of your units is restricted.
Consequently, you will have a difficult time
trying to obtain cash for your units.
o We rely on Vestin Mortgage, our manager, for
the day-to-day management of our business
and the selection of our mortgages.
o We will pay Vestin Mortgage and Vestin
Capital substantial fees from the proceeds
of this offering and our operations.
o If we do not remain qualified as a
partnership for federal income tax purposes,
we would be subject to the payment of tax on
our income at corporate rates, which would
reduce the amount of funds available for
payment of distributions to you.
o If we sell only 1,500,000 units, our loan
portfolio will not be diversified. Although
we expect that no one loan will exceed 20%
of our loan portfolio, if we sell only the
minimum number of units, we will only be
able to invest in one mortgage loan.
o Any borrowing by us under a line of credit
will increase the risk of your investment
and reduce the amount we have available to
distribute to you.
o Real estate investments are subject to
cyclical economic trends which are out of
our control.
o Vestin Mortgage has not yet identified the
mortgage loans that we will invest in with
the proceeds of this offering. As a result,
you will not have an opportunity to
determine for yourself whether the real
properties that are our collateral justify
using the proceeds of this to make a
particular loan.
o We were formed late last year and have no
significant assets, no operating history and
no current sources of financing.
Before you invest in DM LLC, you should see the
complete discussion of "Risk Factors" beginning
on page 8 of this prospectus.
Estimated Use of We anticipate that we will invest in mortgage
Proceeds of Offering loans at least 86.5% of the proceeds of this
offering and the distributions reinvested under
our reinvestment plan, but in no event will we
invest less than 82% of the proceeds. We will use
the remainder of offering proceeds to pay
organization expenses, commissions, fees and
expenses relating to the costs of this offering
and for obtaining, processing, making and
brokering the mortgage loans in which we invest.
2
<PAGE>
Conflicts of Interest Vestin Mortgage will face various conflicts of
interest resulting from its activities, including
the following:
o We will pay substantial fees to Vestin
Mortgage and Vestin Capital for the sale
of units and for obtaining, processing,
making and brokering, managing and
selling of mortgage loans, as well as
for other services. The terms of these
transactions have not been set by
arms-length negotiations. The fees for
these services are described in greater
detail under "Compensation to Vestin
Mortgage and Vestin Capital" in this
summary and as set forth in greater
detail in the main body of this
prospectus. We will pay Vestin Mortgage
based on the volume and size of the
mortgages selected for us, and our
interests may diverge from those of
Vestin Mortgage and Mr. Shustek, the
indirect owner of a controlling interest
in Vestin Mortgage, in deciding whether
we should invest in a particular loan.
o Vestin Mortgage will be receiving fees
from borrowers that would otherwise
increase our returns. These fees include
the fees listed under "Fees Paid by
Borrower" in the above mentioned
compensation description. Because Vestin
Mortgage receives all of these fees, our
interests will diverge from those of
Vestin Mortgage and Mr. Shustek when
Vestin Mortgage determines whether to
charge higher interest rates and risk
losing fees from the loans.
o Vestin Mortgage must allocate its time
between our activities and its other
activities. These other activities
include its current activities as a
licensed mortgage broker and may in the
future include acting as the manager or
general partner of, or adviser to, funds
with objectives similar to ours.
Vestin Group, Vestin Mortgage and Their Affiliates
--------------------------------------------------
The following chart shows the ownership
structure of the various persons and entities
that are affiliated with Vestin (formerly
Sunderland Corporation) and Vestin Mortgage:
<TABLE>
<CAPTION>
Michael V. Shustek
<S> <C> <C>
Vestin Group, Inc. Del Mar Mortgage, Inc.
Officers and Directors include: (Predecessor to the business
now operated by Vestin
Michael Shustek, Chairman of the Board, CEO, and Mortgage)
controlling shareholder
Stephen Byrne, President 100% owned by Michael Shustek
Lance Bradford, CFO, Secretary
Vestin Capital Vestin Mortgage
(Lead Dealer) (Manager and initial
Member of DM LLC)
100% owned by Vestin 100% owned by Vestin
</TABLE>
Compensation to Vestin Vestin Mortgage and Vestin Capital will receive
Mortgage and Vestin fees and reimbursement of expenses for performing
Capital services in this offering and the investment and
management of our assets. We do not anticipate
that the sales commissions and fees and expenses
of this offering and for Vestin Mortgage's
selecting, obtaining, processing, making,
brokering and extending our mortgage loans,
which we refer to as the front-end fees, will
exceed 13.5% of the capital contributions we
receive or are deemed to receive under our
operating agreement, but under no circumstances
will they exceed 18% of these contributions. The
most significant items of compensation are as
follows:
3
<PAGE>
<TABLE>
<S> <C>
Type of Compensation Form of Compensation
-------------------- --------------------
<CAPTION>
Offering Stage:
---------------
Paid by Us
------------
<S> <C>
Sales Commission 3.5% of gross offering proceeds
(non-affiliates)
Lead Dealer Fee (paid to 1.0% of gross offering proceeds
Vestin Capital)
Expense Reimbursement 0.5% of gross offering proceeds
(paid to Vestin Capital and
other dealers)
<CAPTION>
Organization Stage:
-------------------
<S> <C>
Promotional Interest If 84.5% of capital contributions are
invested in mortgage loans, the
promotional interest will be 1.0%. If
86.5% of capital contributions are
invested in mortgage loans, the
promotional interest increases to an
aggregate of 2.0%. The promotional
interest will thereafter increase by 1.0%
for each additional 1.0% of capital
contributions invested in mortgage
loans. The above promotional interest is
in addition to any ownership interest
that Vestin Mortgage pays for.
Operational Stage:
------------------
<CAPTION>
<S> <C>
Where the fees below are described as competitive fees or based on local market
conditions, that means the fees are determined by price competition within a given
market. To ensure that our fees remain competitive, we will directly contact our
competition, such as major banks in the local market or other relevant commercial
lenders. We expect that the interest rate on the loans in which we invest will be
2-3 points higher than comparable loans made by banks and that the fees paid to
Vestin Mortgage will be 2-3 points higher than similar fees charged by conventional
lenders. We believe that this rate structure is consistent with rates and fees
charged by other non-conventional lenders. References below to local law also
contemplate additional requirements imposed by local or state law, such as usury
laws.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Paid by Borrower
----------------
<S> <C>
Loan Brokerage Fee 2%-6% of each loan, competitive fee based
on local market conditions
Loan Evaluation and Processing Fees 2%-5% of each loan, competitive fee based
on local market conditions
Servicing Fee for Administering Loans Annual fee of 0.25% of outstanding
principal
Loan Extension Fee 2%-5% of outstanding principal, as
permitted by local law and local market
conditions
Paid by Us
----------
<S> <C>
Reimbursement of Our Operating Lesser of cost or third party rate.
Expenses See expanded discussion in "Conflicts of
Interest."
Back-end Promotional Interest The sum of:
o 10% of distributions provided from operations
(other than repayments of mortgage loan
principal) after deducting general expenses and
debt payments, all of which we call cash available
for distribution, plus
o 15% of cash available for distribution and of
distributions from the net proceeds of any
repayment, sale, foreclosure or other disposition
of an underlying mortgage or property, after paying
members from these net proceeds an amount equal to
their capital contributions plus a cumulative 6%
annual return on those contributions. The 15%
allocation under this provision may be
increased by 1.0% for each 1% that Vestin Mortgage
reduces from 10% its allocation of cash available
for distribution under the immediately preceding
provision.
Real Estate Brokerage Fees on Resales Up to 3% of proceeds to Vestin Mortgage
of Foreclosed Property where it substantially contributed to sale;
up to 6% for all persons involved.
</TABLE>
5
<PAGE>
Members' Return on Our mortgage loans will generate monthly payments
Investment of interest or principal to DM LLC, which Vestin
Mortgage intends to distribute to you.
Distributions of interest received will be paid
monthly by cash or distribution reinvestment.
All net income attributable to interest payments
from borrowers will be distributed as follows:
o 10% to Vestin Mortgage as part of its
"back-end" promotional interest, and
o the remaining 90% to the members, which
will include an allocation, which is
expected to be 2.5%, to Vestin Mortgage
corresponding to the relative size of
Vestin Mortgage's capital account.
We will also receive net proceeds in the form of
the repayment of principal or the prepayment of a
mortgage loan, net proceeds of a foreclosure
sale, or deemed proceeds resulting from loan
modifications that result in a disposition for
tax purposes. We may not actually distribute
these proceeds as cash, but under our operating
agreement, for tax purposes only, any such
proceeds are deemed to be distributed to the
members and then recontributed to DM LLC by the
member. Any distributions of net proceeds of loan
repayments will be made to the members pro rata
based upon their capital accounts. However, once
the members actually receive their entire capital
contributions plus 6% per annum of that amount,
distributions of the excess amount will be 15% to
Vestin Mortgage and 85% to the members, including
Vestin Mortgage.
Distribution Reinvestment You may elect to reinvest the distributions of
Plan our net income that you receive from DM LLC when
you return your subscription agreement or at a
later date. If you so elect to participate in
our distribution reinvestment plan, you will be
taxed on your share of our taxable income even
though you will not receive any cash
distributions. Additionally, solely for tax
purposes, you will be deemed to have received
and recontributed to DM LLC any proceeds we
receive from loan repayments, foreclosures or
other capital transactions, or any loan
modifications treated as a disposition for tax
purposes. We believe that this characterization
will not affect the tax liability of our
members. However, if the Internal Revenue
Service unexpectedly were to disagree, you may
have a tax liability with no cash distributions
to pay that liability. We may end the
distribution reinvestment plan at any time. See
"Summary of Operating Agreement, Rights of
Members and Description of units - Distribution
Reinvestment Plan."
ERISA Considerations The section of this prospectus entitled "ERISA
Considerations" describes the effect the
purchase of units will have on individual
retirement accounts, or IRAs, retirement plans
subject to the Employee Retirement Income
Security Act of 1974, also known as ERISA, and
the Internal Revenue Code of 1986, which we call
the Internal Revenue Code. ERISA is a federal
law that regulates the operation of retirement
plans. Any retirement plan trustee or individual
considering purchasing shares for a retirement
plan or an IRA should read this section of the
prospectus very carefully.
Units Your investment will be recorded on our books
only. We will not issue Unit certificates. If you
wish to redeem or transfer your units, you must
send an executed redemption or transfer form to
us. We will provide the required redemption form
to you upon request.
6
<PAGE>
Operating Agreement Your relationship with DM LLC and with Vestin
Mortgage will be governed by the operating
agreement. Some of the significant features of
the operating agreement are as follows:
We will allocate to you our income, gains, losses
and distributions in the same proportion that
your capital account bears to all of the capital
accounts of all of our members. The number of
units you own will be of no significance in this
determination.
In this prospectus, when we refer to a majority,
we mean those members whose capital accounts
together are over 50% of the amount all of the
members' capital accounts. A majority can bind
all of our members on fundamental matters
affecting DM LLC. If such a vote occurs, you will
be bound by the majority vote even if you did not
vote with the majority.
Michael V. Shustek, an officer and a director of
Vestin Mortgage, is the owner of a controlling
interest in Vestin Group, Inc., the company that
owns Vestin Mortgage. Accordingly, Mr. Shustek
may be deemed to have indirect control of the
conduct of our business, subject to the rights
of the majority described above and elsewhere in
this prospectus.
The operating agreement is discussed in more
detail in "Summary of Operating Agreement, Rights
of Members and Description of Units," beginning
on page 47. If any statements in this prospectus
differ from the operating agreement, you should
rely on the operating agreement. The operating
agreement is attached as Exhibit A.
The Offering We are offering for sale a minimum of 1,500,000
units and a maximum of 100,000,000 units of
limited liability company interests at $1.00 per
unit. These units include units issued under our
distribution reinvestment plan. The minimum
initial purchase is 2,000 units for $2,000,
except to the extent that state suitability
standards dictate otherwise.
Tax Considerations In the opinion of our tax counsel, we will be
treated for federal income tax purposes as a
partnership. You should consult your own tax
advisor regarding personal tax consequences that
might be associated with your investment in the
units. See "Federal Income Tax Risks," beginning
at page 14, and "Federal Income Tax
Consequences," beginning at page 54 of this
prospectus.
Suitability To invest in units, you must have either:
o a net worth, exclusive of home, home
furnishings and automobiles, of at least
$45,000 and a minimum annual gross income of at
least $45,000; or
o a minimum net worth of at least $150,000.
As described more fully in "Investor Suitability
Standards," beginning on page 18, a significant
number of states have more stringent requirements
than those set forth above. Additionally, you
will have to make additional representations to
us before we determine that the investment is
suitable for you.
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To Purchase Units To purchase units you must complete and sign the
subscription agreement, which is Exhibit B at
page B-1 of this prospectus, and deliver it to
the securities dealer that has solicited your
investment, together with payment for the number
of units specified in the subscription
agreement. We may accept or reject your
subscription in whole or in part. If we do not
accept your subscription or if we do not sell
1,500,000 units before December 31, 2000, your
purchase payment will be returned to you
promptly without interest.
Our acceptance of your subscription agreement is
effective when we countersign it, for the number
of units we set forth next to our signature. If
we accept your subscription agreement, you will
be an owner of the units and a member of DM LLC
when we sell a minimum of 1,500,000 units and the
escrow is broken. If we do accept your
subscription agreement, we will provide you with
a confirmation of the number of units you have
acquired. Because the units are not certificated,
we will not mail you a unit certificate. We will
furnish all investors in California whose
subscriptions are accepted with a copy of the
operating agreement.
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RISK FACTORS
You should carefully consider the following risks and other information
in the prospectus before purchasing units.
Investment Risks
You will not have the benefit of reviewing the past performance of DM
LLC.
We were organized in December 1999 and still have no significant
assets. We will only commence operations after we sell 1,500,000 units and
receive $1,500,000, and accordingly we have no operating history. We have no
external source of financing and are relying on capital contributions from
Vestin Mortgage (formerly Capsource), which will be our sole member until we
sell the minimum amount of units.
Your units lack liquidity and marketability.
There will be no public trading market for your units, and you cannot
freely sell or transfer your units or use them as collateral for a loan. Our
operating agreement restricts transfer of units so that we may avoid being
classified as a "publicly traded partnership," under Section 7704 of the
Internal Revenue Code. Because classification as a publicly traded partnership
would significantly decrease the value of the units of all our members, Vestin
Mortgage must consent to any assignment of your units. Vestin Mortgage will
withhold its consent to the extent necessary to prohibit transfers that could
cause us to be classified as a publicly traded partnership. Further, the resale
of the units may be restricted by state securities laws. Consequently, you may
not be able to obtain cash for your units in a timely manner and you should
purchase the units for at least one year.
You have a limited ability to have your units redeemed.
You have a limited ability to have your shares redeemed by us. Some of
these limitations include the following:
o You must give a written request to withdraw at least 60 days
before the withdrawal;
o You can only redeem your units after you have held them for one
year;
o Redemption payments only return all or the requested part of your
capital account and are not affected by the value of our
underlying assets, except for any payment made upon final
liquidation;
o Payments are made only to the extent we have available cash from
proceeds of repayments of principal and capital contributions;
o There is no reserve fund for repurchases;
o You may withdraw a maximum of $100,000 during any calendar year;
o The total amount withdrawn by all members during any calendar
year cannot exceed 10% of the amount of capital accounts of all
the members;
o We will only make redemption payments on the last day of any
month.
If we do not sell more than the minimum number of units in this
offering or if principal payments on existing loans decrease, your ability to
have your units redeemed will be adversely affected, particularly if the amount
of requested withdrawals should increase substantially. To help permit
redemptions, we will not refinance or invest in new loans using payments of loan
principal by borrowers or new invested capital of members unless we have
sufficient funds to cover requested withdrawals.
If we sell only the minimum number of units, we will be unable to
diversify our loan portfolio adequately or meet investment objectives.
The minimum proceeds of this offering will be insufficient for
diversification or for achieving our investment objectives. We will be able to
invest in only one mortgage loan with the minimum proceeds of the offering,
based upon an anticipated average loan size of about $1,500,000. We will require
at least $1,500,000 to invest in one or more loans, but we will require about 15
loans to adequately diversify our portfolio to the extent
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desired by Vestin Mortgage. If we fail to adequately diversify our loan
portfolio, our revenues will be too closely tied to the performance of the
borrower under each loan we invest in. If we raise only the minimum proceeds, we
also will not be able to pursue the investment opportunities that we anticipate
will develop.
We must rely on Vestin Mortgage to manage our operations and select our
loans for investment.
Our ability to achieve our investment objectives and to pay
distributions to you depends upon Vestin Mortgage's performance in obtaining,
processing, making and brokering loans for us to invest in and determining the
financing arrangements for borrowers. You will have no opportunity to evaluate
the terms of mortgages, the real property that is our collateral or other
economic or financial data concerning our loans. You must rely entirely on the
judgment of Vestin Mortgage in investing the proceeds of this offering.
We depend on key personnel of Vestin Mortgage.
We do not have any officers or employees. Our success depends upon the
continued contributions of certain key personnel of Vestin Mortgage, including
Michael V. Shustek, Stephen J. Byrne and Lance Bradford, each of whom would be
difficult to replace because of his extensive experience in his field, extensive
market contacts and familiarity with Vestin Mortgage's activities. If any of
these key employees were to cease employment, our operating results could
suffer. Our future success also depends in large part upon Vestin Mortgage's
ability to hire and retain additional highly skilled managerial, operational and
marketing personnel. Vestin Mortgage may require additional operations and
marketing people who are experienced in obtaining, processing, making and
brokering loans and who also have contacts in the market. The size of our loan
portfolio may require Vestin Mortgage to hire and retain additional financial
and accounting personnel to assist Mr. Bradford in managing Vestin Mortgage's
and our revenues. Competition for these people is intense, and we cannot assure
you that Vestin Mortgage will be successful in attracting and retaining skilled
personnel.
You may face a delay before distributions begin.
Neither we nor Vestin Mortgage have identified any specific loans that
we will invest in. Consequently, there may be a substantial period of time
before Vestin Mortgage invests the proceeds of this offering, during which you
will not receive any distributions on your investment. We estimate that
distributions will begin on the later of eight months after you deliver your
subscription amount to us, or three to six months after the funds are released
from escrow.
Any borrowing by us will increase your risk and reduce the amount we
have available to distribute to members.
We anticipate that we will obtain a line of credit that we currently
intend to use to acquire, operate and develop for resale the real properties on
which we have foreclosed. We may borrow up to 70% of the fair market value of
our outstanding mortgage loans at any time to finance these acquisitions. Should
we be unable to repay the indebtedness and make the interest payments on the
loans, the lender will likely declare us in default and require that we repay
all amounts owing under the loan facility. Even if we are repaying the
indebtedness in a timely manner, interest payments owing on the borrowed funds
will reduce our income and the distributions you receive.
Risks of the Mortgage Lending Business
Defaults on our mortgage loans will decrease our revenues and your
distributions.
We are in the business of investing in mortgage loans and, as such, we
risk defaults by borrowers. Any failure of a borrower to repay loans or interest
on loans will reduce our revenues and your distributions, the value of your
units and your interest in DM LLC as a whole.
We will invest in kinds of loans that have a greater risk of default
than first mortgage loans on commercial properties.
o We will likely invest a material amount of our assets in
construction mortgage loans. These are loans made to real estate
developers for up to two years to fund the construction or
renovation of buildings
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on real property. These loans are riskier than loans secured by
income producing properties because during construction the
borrower does not receive income from the property to make
payments on the loan.
o We will likely invest about 10% of our assets in second mortgage
loans and, to a much lesser extent, wraparound, or all-inclusive,
mortgage loans. In a second mortgage loan, our rights as a
lender, including our rights to receive payment on foreclosure,
will be subject to the rights of the first mortgage lender. In a
wraparound mortgage loan, our rights will be similarly subject to
the rights of a first mortgage lender, but the aggregate
indebtedness evidenced by our loan documentation will be the
first mortgage loan plus the new funds we invest. We would
receive all payments from the borrower and forward to the senior
lender its portion of the payments we receive. Because both of
these types of loans are subject to the first mortgage lender's
right to payment on foreclosure, we incur a greater risk when we
invest in each of these types of loans.
o We expect to invest in commercial property loans that have
"balloon payments". A balloon payment is a large principal
balance that is payable after a period of time during which the
borrower has repaid none or only a small portion of the principal
balance. Loans with balloon payments are riskier than loans with
even payments of principal over an extended time period like 15
or 30 years because the borrower's repayment depends on its
ability to refinance the loan or sell the property profitably
when the loan comes due.
o Sometimes we may invest in loans that are significantly larger
than $1,500,000, which we expect to be the average size of our
loans. These larger loans are risky because they reduce our
ability to diversify our loan portfolio.
o We may invest in loans where the collateral is an interest in a
lease. These loans are riskier because the only rights we will
have is to assume the borrower's obligations under the lease and
to use the property for the length of time and in the limited
manner permitted under the lease.
o We may invest in bridge loans. These are loans to enable
commercial borrowers to make improvements to their property so
that they can qualify for institutional refinancing. These loans
are riskier because there is no assurance that the developer will
ever qualify for the refinancing or that the improvements will
yield the anticipated increase in value and income.
o We will also invest in loans to purchase or develop raw,
unimproved land. We determine whether to invest in these loans
based upon the "90-day quick sale value" of the property and the
borrower's actual capital investment in the property. The "90-day
quick sale value" is the highest price for which the land could
actually be sold within the next 90 days, as determined by local
real estate brokers and others. We believe that this 90-day
period approximates the time required for a foreclosure. These
loans are riskier because the property is not capable of
generating any income, as compared to a commercial property, and
because there is no assurance that we will be able to sell the
property within the 90-day period.
Our loans are not guaranteed by any government agency.
Our loans will not be insured or guaranteed by a federally owned or
guaranteed mortgage agency. As a result, our recourse if there is a default may
only be to foreclose upon the mortgaged real property.
Our mortgage loans will not be marketable and we expect no secondary
market to develop.
We do not expect our mortgage loans to be marketable and we do not
expect a secondary market to develop for them. Because of our limited ability to
reduce the risk of default by borrowers by selling or transferring our mortgage
loans, you and we will bear all of the risk of our investments in mortgage loans
until they mature.
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Our loan portfolio is riskier because it will not be diversified
geographically.
Our results will primarily reflect the condition of the real estate
markets in the states of Nevada, California and Arizona, where we will likely
invest in or purchase about 70% of our loans. Consequently, if economic
conditions in any of these three states decline, or if the recent increase in
building and property values in these geographic areas ceases, there will be an
increase in the number of defaults on our loans or fewer loans in which to
invest.
We may have difficulty protecting our rights as a secured lender.
We believe that our loan documents will enable us to enforce our
commercial arrangements with borrowers. However, the rights of borrowers and
other secured lenders may limit our practical realization of those benefits. For
example:
o Judicial foreclosure is subject to the delays of protracted
litigation. Although we expect non-judicial foreclosure to be
quicker, our collateral may deteriorate and decrease in value
during any delay in foreclosing on it.
o The borrower's right of redemption during foreclosure proceedings
can deter the sale of our collateral and can for practical
purposes require us to manage the property.
o Unforeseen environmental hazards may subject us to unexpected
liability and procedural delays in exercising our rights.
o The rights of junior or senior secured parties in the same
property can create procedural hurdles for us when we foreclose
on collateral.
o We may not be able to pursue deficiency judgments after we
foreclose on collateral.
o State and federal bankruptcy laws can prevent us from pursuing
any actions, regardless of the progress in any of these suits or
proceedings.
Our underwriting standards and procedure are more lenient than
conventional lenders, which may create additional risks to your return.
o We will invest in loans to borrowers who will not be required to
meet the credit standards of conventional mortgage lenders, which
is riskier than investing in loans made to borrowers who are
required to meet those credit standards.
o Because we approve a mortgage loan more quickly than other
mortgage lenders, there may be a risk that the inquiry we perform
as part of our credit procedures will not reveal the need for
additional precautions. If so, the interest rate we charge and
the collateral we require may not protect us adequately or
generate adequate returns for the risk undertaken.
By becoming the owner of property, we may become liable for unforeseen
environmental obligations.
We intend to only own real property if we foreclose on a defaulted loan
and purchase the property at the foreclosure sale. Under applicable
environmental laws, however, any owner of real property is fully liable for the
costs involved in cleaning up any contamination by materials hazardous to the
environment. Even though we might be entitled to indemnification from the person
that caused the contamination, there is no assurance that the person would be
able to indemnify us to the full extent of our liability. Furthermore, we would
still have court and administrative expenses for which we may not be entitled to
indemnification.
Our results are subject to fluctuations in interest rates and other
economic conditions.
o Our 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, we expect that more people
will be borrowing
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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 will
result in our investing in fewer loans and thus reduce our
revenues and the distributions you receive.
o One of the results of interest rate fluctuations is that
borrowers seek to extend their low-interest-rate mortgage loans
after market interest rates have increased. All of our loan
documents permit us to raise the interest rate we charge on
extended loans anywhere from between 3/4% to 3% from the
then-current rate on the loan. This creates two risks for us:
- There is no assurance that this permitted rate increase
will be adequate if interest rates have increased beyond
the range contemplated by our loan documents.
- If interest rates rise, borrowers under loans with monthly
or quarterly principal payments may be compelled to extend
their loans to decrease the principal paid with each
payment because the interest component has increased. If
this happens, we are likely to be at a greater risk of the
borrower defaulting on the extended loan, and the increase
in the interest rate on our loan may not be adequate
compensation for the increased risk.
Additionally, any fees paid to extend the loan are paid to Vestin
Mortgage, not to us. Our revenues and distributions will decline
if we are unable to reinvest at higher rates or if an increasing
number of borrowers default in their loans.
o Most of the loans we invest in do not have prepayment penalties.
If, at a time of relatively low interest rates, a borrower should
prepay obligations that have a higher interest rate from an
earlier period, we 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, we will receive neither the
anticipated revenue stream at the higher rate nor any
compensation for its loss.
o Our results will also reflect other economic conditions, such as
a particular industry migrating to or from one of the states into
which we make loans. Although in recent years more businesses
have migrated into and expanded within Nevada, California and
Arizona, there is no assurance that this trend will continue. If
this trend reverses, our ability to invest in loans in these
states will be adversely affected.
We face competition for mortgage loans that may reduce available yields
and fees available.
Our competitors consist primarily of conventional mortgage lenders and
mortgage loan investors that operate in Nevada, California and Arizona,
including Bank of America, Bank One, Wells Fargo, Residential Funding, First
Security Bank, and United Bank of Texas. Our ability to invest in loans also
depends on Vestin Mortgage's ability to compete as a non-conventional mortgage
lender in the Nevada area against companies such as Consolidated Mortgage Corp.
and Global Express Mortgage, which originate the same types of loans as does
Vestin Mortgage. Many of the companies against which we and Vestin Mortgage
compete have substantially greater financial, technical and other resources than
either DM LLC or Vestin Mortgage. Additionally, if our competition decreases
interest rates on their loans or makes funds more easily accessible, yields on
our loans could decrease and the costs associated with making loans could
increase, both of which would reduce our revenues and the distributions you
receive.
Conflicts of Interest Risks
The risk factors below describe material conflicts of interest that may
arise in the course of Vestin Mortgage's management and operation of our
business. The list of potential conflicts of interest reflects our knowledge of
the existing or potential conflicts of interest as of the date of this
prospectus. We cannot assure you that no other conflicts of interest will arise
in the future.
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Vestin Mortgage will face conflicts of interest concerning the
allocation of its personnel's time.
Vestin Mortgage and Mr. Shustek, who indirectly owns a controlling
interest in Vestin Mortgage, anticipate that they will also sponsor other real
estate programs having investment objectives and legal and financial obligations
similar to ours and engage in the business activities described in the
"Conflicts of Interest" section in this prospectus. As a result, Vestin Mortgage
and Mr. Shustek may have conflicts of interest in allocating their time and
resources between our business and those other activities. During times of
intense activity in other programs and ventures, Vestin Mortgage and Mr. Shustek
will likely devote less time and resources to our business than they ordinarily
would.
Vestin Mortgage will face conflicts of interest arising due to our fee
structure.
We will pay substantial fees to Vestin Mortgage and Vestin Capital for
transactions involving the sale of units and the selection, purchase, management
and sale of loan mortgages, all of which have not been set by arms-length
negotiations. These fees are quantified and described in greater detail under
"Compensation to Vestin Mortgage and Vestin Capital" in the summary and in the
compensation table contained elsewhere in this prospectus. We will pay Vestin
Mortgage based on the volume and size of the mortgages selected for us. Our
interests will diverge from those of Vestin Mortgage and Mr. Shustek when Vestin
Mortgage decides whether we should invest in a loan that is not squarely within
our investment guidelines.
Vestin Mortgage will be receiving fees from borrowers that would
otherwise increase our returns. These fees include the fees listed under "Fees
Paid by Borrower" in the above mentioned compensation description and are also
quantified elsewhere in this prospectus. Because Vestin Mortgage receives all of
these fees, our interests will diverge from those of Vestin Mortgage and Mr.
Shustek when Vestin Mortgage decides whether to charge higher interest rates or
to receive higher fees from the borrower.
Vestin Mortgage will face conflicts of interest relating to other
investments in mortgage loans.
We expect to invest in mortgage loans when one or more other companies
managed by Vestin Mortgage are also investing in mortgage loans. There is a risk
that Vestin Mortgage may select for us a mortgage loan investment that provides
lower returns than a mortgage loan investment purchased by another Vestin
Mortgage program or entity.
We may not have control over joint ventures with affiliates.
We will consider investing in or purchasing loans jointly with other
lenders. Although we intend to only participate in loans with publicly
registered entities, we may invest with other entities in the future. In joint
ventures with related parties, there is a risk that neither co-venturer may
control the venture, which could result in an impasse on joint venture
decisions.
Lack of Control by Members
Your right to vote is limited and you are bound by majority vote.
You cannot exercise control over our affairs. That is entirely in the
hands of Vestin Mortgage. Additionally, because Vestin Mortgage is wholly owned
by Vestin, a company which Michael Shustek has a controlling interest, Mr.
Shustek may be deemed to indirectly control Vestin Mortgage's and our
activities. You may vote only in a limited number of specific instances, in
which case a majority, being the owners of our capital accounts aggregating over
50% of all of the members' capital accounts, can take action and bind all of the
members. These situations in which all members are bound include votes to:
o dissolve DM LLC;
o change the nature of our business;
o amend the operating agreement;
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o remove and replace Vestin Mortgage;
o approve a merger with or into another company; or
o approve a sale of all or a majority of our assets.
Although Vestin Mortgage may not change the nature of our business without
majority approval, Vestin Mortgage may change our investment policies consistent
with the fiduciary duties it owes to all of the members. While you will not have
any vote on these investment policies, you retain your vote to remove and
replace Vestin Mortgage.
Your interest in DM LLC may be diluted as we sell additional units.
When we receive your initial investment, Vestin Mortgage will establish
for you an individual capital account on our books. Your capital account will
begin with the amount of your first capital contribution for units. We do not
adjust your capital account for unrealized appreciation or depreciation of our
underlying assets, except for write-downs of assets. Consequently, your capital
account may not reflect your portion of the fair market value of our underlying
assets, particularly immediately after another member makes a capital
contribution or distribution reinvestment.
For example, you bought one unit for one dollar and now have one dollar
in your capital account. The assets we bought for one dollar become worth five
dollars, but the gain is unrealized, which means that we have not yet sold the
relevant assets and "locked in" our profit. A new member contributes one dollar,
which is credited to his capital account. You and the new member will each have
a one dollar capital account. However, as a result of the new contribution, the
value of your units would decrease from five dollars to three dollars. In this
way, your portion of the underlying value of the fair market value of our assets
would be diluted by a later sale of units.
The value of your units may decrease below one dollar.
The value of your share of our underlying assets at any time may be
less or more than $1.00 per unit, depending on when the unit was purchased. For
example, if the fair market value of our assets at the time of a capital
contribution or distribution reinvestment is less than the cost of these assets
on our books, then the value of your units immediately after a capital
contribution or distribution reinvestment may be less than one dollar.
Risks Related to Vestin Capital
Vestin Capital is newly formed and has no operating history or track
record in public offerings.
Vestin Capital (formerly DM Financial Services), the lead dealer in
this offering, is a newly formed securities brokerage firm that has not
previously participated in a public offering of securities. As a result, Vestin
Capital has no history of selling publicly offered securities itself or in
recruiting dealers to assist in the sale of publicly offered securities. The
absence of this track record may make it more difficult for it to sell our
units. If Vestin Capital does not sell a sufficient number of our units, we may
not be able to diversify our portfolio to the extent necessary to achieve our
objectives.
Vestin Capital is an Affiliate of Vestin Mortgage.
Vestin Capital is wholly owned by Vestin Group Inc., which also owns
Vestin Mortgage. Consequently, Vestin Capital may have a conflict of interest in
performing its obligations to conduct a "due diligence" investigation of the
statements made in this prospectus and may not conduct the investigation with
the same degree of care as an unaffiliated dealer.
Federal Income Tax Risks
Your cash flow and distributions will be reduced if we are taxed as a
corporation.
If we fail to qualify as a partnership for any taxable year, we would
then be subject to federal income tax on any taxable income in that taxable year
at regular corporate rates. You could not then take tax deductions for your
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share of our deductions or credits. You would be subject to tax on your share of
our income to the extent we distribute it to you out of current or accumulated
earnings and profits, or as taxable gain in excess of the cost of your units. If
we were taxed as a corporation, your cash flow, the distributions you receive
and the value of your units will be significantly reduced. See "Federal Income
Tax Consequences - General Principles of Partnership Taxation," at page 58 and
"-Tax Rates on a Partner's Share of Ordinary Income from the Partnership," at
page 60.
If we are deemed to not be engaged in a trade or business, the tax
benefits of partnership status will be adversely affected.
If the Internal Revenue Service does not consider us to be engaged in a
trade or business, the result would be that your share of our expenses would be
deductible only to the extent that all of your miscellaneous itemized deductions
exceed two percent of your adjusted gross income.
An IRS audit of our books and records could result in an audit of your
tax returns.
If we are audited by the IRS and it makes determinations adverse to us,
including the disallowance of deductions we have taken, the IRS may decide to
audit your income tax returns. Any such audit could result in adjustments to
your tax return for items of income, deductions or credits, and the imposition
of penalties and interest for the adjustments and additional expenses for filing
amended income tax returns.
Inconsistencies between federal, state and local tax rules may
adversely affect your return.
If we are treated as a partnership for federal income tax purposes but
as a corporation for state or local income tax purposes, or if deductions that
are allowed by the IRS are not allowed by state or local regulators, your cash
flow and distributions would be adversely affected.
Retirement Plan Risks
An investment in DM LLC may not qualify as an appropriate investment
under all retirement plans.
There are special considerations that apply to pension or profit
sharing trusts or IRAs investing in units. If you are investing the assets of a
pension, profit sharing, 401(k), Keogh or other qualified retirement plan or the
assets of an IRA in DM LLC, you could incur liability or subject the plan to
taxation if:
o your investment is not consistent with your fiduciary obligations
under ERISA and the Internal Revenue Code;
o your investment is not made in accordance with the documents and
instruments governing your plan or IRA, including your plan's
investment policy;
o your investment does not satisfy the prudence and diversification
requirements of Sections 40(a)(1)(B) and 404(A)(1)(C) of ERISA;
o your investment impairs the liquidity of the plan;
o your investment produces "unrelated business taxable income" for
the plan or IRA;
o you will not be able to value the assets of the plan annually in
accordance with ERISA requirements; and
o your investment constitutes a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Internal Revenue
Code.
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USE OF PROCEEDS
If we sell 1,500,000 units in this offering on or before December 31,
2000, we will continue the offering with the goal of raising $100,000,000, which
includes units sold in our distribution reinvestment plan. Once we have sold
1,500,000 units, we cannot assure you that we will receive any further proceeds
from the offering. If we do not sell significantly more than the 1,500,000
initial units, we will have to restrict our mortgage loans and intended
operations. If we sell the minimum amount, we anticipate that we would only be
able to invest in one mortgage loan. We believe that if we sell fewer than
22,500,000 units, we will not be able to diversify our loan portfolio
adequately. We estimate that we then would only be able to invest in 15 loans,
which would make us more vulnerable to decreased revenues due to any one
nonperforming loan and would result in your distributions being more closely
tied to the performance of a small number of individual loans. Additionally,
depending on the rates of withdrawal by members and principal payments on loans
by borrowers, our lack of available cash could further restrict withdrawals by
members.
If we receive proceeds to invest in fewer than 15 loans, we expect that
we will still conduct our business as described in the "Investment Objectives
and Policies" section of this prospectus, although we may be more likely to
enter into loan participation arrangements with Vestin Mortgage. See "Investment
Objectives and Policies - Acquisition and Investment Policies - Item 8- Joint
Ventures." Vestin Mortgage has confirmed to us in writing that it will
subordinate its interest in any loan to ours where we both participate in the
same loan. We will still require any such loan to meet our investment
guidelines, which we do not intend to alter even if initially we are not able to
diversify adequately.
We will maintain working capital reserves of at least 3%, consisting of
at least 2 1/2% of the aggregate capital accounts of the members other than
Vestin Mortgage, with the remaining 1/2% to be provided by Vestin Mortgage. This
reserve is available to pay expenses in excess of revenues, satisfy obligations
of underlying security properties, expend money to satisfy our unforeseen
obligations and for other permitted uses of our working capital. Working capital
reserves of up to 3% are included in the funds committed to mortgage investments
in determining what proportion of the offering proceeds and reinvested
distributions have been invested in mortgage loans.
The following table contains information about the estimated use of the
gross proceeds of this offering. Many of the figures represent our best estimate
since we cannot now precisely calculate the figures.
<TABLE>
<CAPTION>
Minimum Offering Pct of Maximum Offering Pct of
(1,500,000 units) Offering (100,000,000 units) Offering
----------------- -------- ------------------- --------
<S> <C> <C> <C> <C>
Gross Offering Proceeds............ $ 1,500,000 100.0% $100,000,000 100.0%
Less:
Selling Commissions and
Expenses
Paid to affiliates (1).......... 15,000 1.0% 1,000,000 1.0%
Paid to nonaffiliates (1)....... 52,500 3.5% 3,500,000 3.5%
Expense
Reimbursement.(2)............. 7,500 0.5% 500,000 0.5%
Public Offering Expenses (3)...... 127,500(4) 8.5% 500,000 0.5%
--------- --- ------- ---
Net Amount received in this
Offering(5)....................... 1,297,500 86.5% 94,500,000 94.5%
Less:
Cash Reserves:............... 45,000 3.0% 3,000,000 3.0%
------ --- --------- ---
Cash Available for
Investment in
Mortgage Loans: $ 1,252,500 83.5% $ 91,500,000 91.5%
----------- ------ ------------ ------
</TABLE>
17
<PAGE>
-----------
(1) Amounts shown reflect the worst-case scenario that all of the units will be
sold by our select dealers engaged by our lead broker Vestin Capital.
However, we anticipate that Vestin Capital will sell most of the units. As
a result, in most cases the only amounts payable to dealers other than
expense reimbursement of 0.5% will be 1.0% of proceeds to Vestin Capital.
Vestin Capital will earn this 1.0% commission regardless of whether it
engages any other dealers.
(2) These fees will be allocated among the dealers based upon the amount of
proceeds generated, but in no event will exceed 0.5% of the gross proceeds
of the offering. We expect that most of the expense reimbursement will be
paid to Vestin Capital, which is our affiliate.
(3) Includes filing and review fees, legal, accounting, printing and other
expenses of this offering, which are described further in the registration
statement of which this prospectus forms a part. None of these fees are
paid to affiliates.
(4) If the sales commissions and expenses of this offering exceed 13.5% of the
gross offering proceeds, Vestin has agreed to pay the sales commissions and
expenses in excess of that amount. For example, assuming offering fees and
expenses of $500,000, excluding commissions and expenses paid to all
dealers, if we raise the minimum of $1,500,000 in the offering, Vestin will
pay $372,500 of these fees and expenses. If we raise the maximum of
$100,000,000, Vestin will not be required to pay any of these fees and
expenses.
(5) Borrowers will pay to Vestin Mortgage all acquisition, selection,
processing and brokerage and selling expenses for loans made by Vestin
Mortgage. Consequently, these expenses do not appear in the table.
Vestin Mortgage has not set the amount of sales proceeds to be
allocated to the various types of mortgage loans in which we invest, except to
the extent described in "Investment Objectives and Policies." Vestin Mortgage
reviews each loan to determine if it meets our investment criteria. We plan to
invest the entirety of our cash available for investments in mortgage loans. We
do not expect to use any of the proceeds of this offering to acquire assets
other than in the ordinary course of our business.
Pending investment in the mortgage loans, we may invest the proceeds of
this offering in relatively safe, short-term liquid investments such as U.S.
Treasury bills, notes or bonds, certificates of deposit or commercial paper. We
anticipate that these proceeds, once received, will be held at BankWest of
Nevada or in an account at a financial institution or securities firm that has
assets in excess of $50,000,000.
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<PAGE>
INVESTOR SUITABILITY STANDARDS
As a result of the risks inherent in an investment in units, the units
are suitable only for persons who meet the financial suitability standards
adopted by the states in which they live, as set forth below. Our units are only
suitable for those who desire a relatively long term investment for which they
do not need liquidity for at least one year, in light of the other limitations
on redemption and transfer described in this prospectus.
You must meet one of the investor suitability standards contained in
the second and third columns in the table below and the suitability standard
contained in the fourth column, if applicable, to purchase units and to
participate in our reinvestment plan. Fiduciaries must also meet one of these
conditions. If the investment is a gift to a minor, the custodian or the donor
must meet these conditions. For purposes of the net worth calculations below,
net worth is the amount by which your assets exceed your liabilities, but
excluding your house, home furnishings or automobile(s) among your assets. In
the subscription agreement, you will have to confirm that you meet these minimum
standards.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
State(s) 1. Minimum Net
Worth AND Minimum Minimum Net Worth 2. Additional
Gross Income OR AND Standards
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alabama, Arkansas, $45,000/$45,000 $150,000 N/A
Colorado
Connecticut, Delaware,
Florida, Georgia, Hawaii,
Idaho, Illinois, Indiana,
Iowa, Kansas, Kentucky,
Michigan, Minnesota,
Missouri, Montana, New
Jersey, New Mexico,
New York, Oklahoma,
Oregon, Tennessee,
Texas, Utah, Vermont,
Virginia, Washington,
West Virginia,
Wisconsin
-------------------------------------------------------------------------------------------------------------
Arizona, Alaska, $60,000/$60,000 $225,000 N/A
California,
Massachusetts,
Mississippi, Missouri,
Tennessee
-------------------------------------------------------------------------------------------------------------
Maine $50,000/$50,000 $200,000 N/A
-------------------------------------------------------------------------------------------------------------
New Hampshire $125,000/$50,000 $250,000 N/A
-------------------------------------------------------------------------------------------------------------
South Carolina $65,000/$65,000 $150,000 N/A
-------------------------------------------------------------------------------------------------------------
Nevada $45,000/$45,000 $150,000 Minimum investment is
$5,000
-------------------------------------------------------------------------------------------------------------
Investment is less
than 10% of Net
Ohio, Pennsylvania $45,000/$45,000 $150,000 Worth. We will make
no sales until we
receive proceeds of
at least $5,000,000.
-------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
District of Columbia, These jurisdictions do not have quantified suitability requirements. We
Louisiana, Nebraska, believe that it is reasonable for us to rely upon the suitability standards set
North Dakota, Rhode forth above when selling units to residents of these jurisdictions.
Island
-------------------------------------------------------------------------------------------------------------
Maryland, South Dakota, No minimum requirements. Disclosure state only. We will follow the
Wyoming guidelines for the preponderance of the states above in selling units in these
states.
-------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to the foregoing suitability standards, we cannot accept
subscriptions from anyone if the representations required are either not
provided or are provided but are inconsistent with our determination that the
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<PAGE>
investment is suitable for the subscriber. In addition to the financial
information we require, the representations we require of you state that you:
o have received this prospectus;
o understand that no federal or state agency has made any finding or
determination as to of the fairness for public investment in, nor
made any recommendation or endorsement of, the units; and
o understand that an investment in DM LLC will not, in itself,
create a retirement plan as described in the Internal Revenue Code
and that, to create a retirement plan, you must comply with all
applicable provisions of the Internal Revenue Code.
Each of these representations reflects that we are not indicating any
approval by anyone other than Vestin Mortgage or that an investment will have an
effect other than to make you a member of DM LLC.
You will also represent that you are familiar with some of the risk
factors we describe and that this investment matches your investment objectives.
Specifically, you represent to us that you:
o understand that we intend to be taxed as a partnership and not as
a corporation, and that, among other things, this may result in
your being required to pay taxes even though we may not have
distributed cash to you;
o understand that there will be no public market for the units, that
there are substantial restrictions on repurchase, sale, assignment
or transfer of the units, and that it may not be possible readily
to liquidate an investment in the units; and
o have investment objectives that correspond to those described
elsewhere in this prospectus, i.e., to preserve the capital
invested and to receive monthly distributions of cash.
You will also represent to us that you have the capacity to invest in
DM LLC by confirming that:
o you are legally able to enter into a contractual relationship with
us, and, if you are an individual, have attained the age of
majority in the state in which you live; and
o if you are a trustee, are the trustee for the trust on behalf of
which you are purchasing the units, and have due authority to
purchase units on behalf of the trust.
If you are purchasing as a fiduciary, you will also represent that the
above representations and warranties are accurate for the person(s) for whom you
are purchasing units.
By executing the subscription agreement, you will not be waiving any
rights under the Securities Act or the Securities and Exchange Act of 1934.
The subscription agreement also contains a series of short questions so
that we or our dealers may also assess for ourselves the accuracy of these
representations. For employee benefit plans, the questions are more expansive
because of the application of additional provisions of the Internal Revenue Code
relating to retirement plans.
Due to the nature of our investments, it is likely that all or
substantially all of our income will be taxable to you as ordinary income. See
"Federal Income Tax Consequences" at page 54. The units may, therefore, be
suitable for:
o persons seeking current taxable income;
o Keogh Plan accounts or corporation, pension or profit sharing
plans, which we refer to collectively as qualified plans;
20
<PAGE>
o IRAS or Roth IRAS;
o Simplified Employee Pensions, or SEP's; and
o other entities exempt from federal income taxation such as
endowment partnerships and foundations, and charitable, religious,
scientific or educational organizations (assuming the provisions
of their governing instruments and the nature of their tax
exemptions permit such investment).
Our investment objectives and policies are intended to make the units
suitable investments for employee benefit plans under current law. In this
regard, ERISA provides a comprehensive regulatory scheme for plan assets.
Further, Vestin Mortgage intends to manage DM LLC so that an investment by a
qualified plan will not make our assets plan assets under ERISA. The ERISA
regulations are also applicable to an IRA. "Federal Income Tax Consequences -
ERISA Considerations" at page 65.
Vestin Mortgage is not permitted to allow any qualified plan to
purchase units if Vestin Mortgage has investment discretion over the assets of
the qualified plan, or if Vestin Mortgage regularly gives individualized
investment advice that serves as the primary basis for the investment decisions
made for these assets. This prohibition is designed to prevent a violation of
ERISA. You should obtain the advice of your attorney, tax advisor, or business
consultant for the legal, tax and business aspects of this investment before
subscribing for units.
To assure that this offering complies with applicable state law, each
dealer selling our units is required to:
o inquire diligently of all prospective investors to assure that our
units are a suitable investment in light of the investor's age,
educational level, knowledge of investments, financial means and
other pertinent factors;
o for at least six years, maintain records of the information used
to determine that an investment in units is suitable and
appropriate for each investor; and
o transmit promptly to us all properly completed and executed
subscription agreements.
21
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
We intend to invest in mortgage loans where our collateral is real
property located primarily in Nevada, Arizona and California. The loans we
invest in will be selected for us by Vestin Mortgage (formerly Capsource) from
among loans originated by Vestin Mortgage or unaffiliated mortgage brokers. When
Vestin Mortgage or someone else originates a loan for us, that person obtains
the borrower, processes the loan application, makes or invests in the loan, and
brokers or sells the loan to us. We believe our loans will be attractive to
borrowers because of the expediency of Vestin Mortgage's loan approval process,
which takes about 10 to 20 days. Vestin Mortgage will obtain, negotiate and make
each loan, after which we will acquire the loan.
In addition to those policies contained in this prospectus and the
operating agreement, Vestin Mortgage may establish written policies on loans and
borrowings. Vestin Mortgage will also administer our operations and performance
to assure that the policies are implemented and remain in your best interest.
Our principal investment objectives are to:
o Produce revenues from the interest income on our mortgage loans;
o Provide monthly cash distributions to you from the net income
earned on our mortgage loans;
o Preserve and return your capital contributions; and
o Reinvest payments of principal and proceeds of prepayments, sales
and insurance proceeds, net of expenses.
We cannot assure you that we will achieve these objectives or that your
capital will not decrease. Vestin Mortgage may change the overall investment
strategy, subject to the fiduciary obligations that it owes to all members.
However, Vestin Mortgage may not change the investment objectives above, except
upon majority approval. Vestin Mortgage has no authority to do anything that
would impair our ability to carry on our ordinary business as a mortgage
investor.
Acquisition and Investment Policies
We will seek to invest substantially all of the offering proceeds and
distribution reinvestments in mortgage loans, after paying applicable fees and
expenses. We anticipate that we will invest about 86.5% of the offering proceeds
and distribution reinvestments in mortgage loans, but in no event shall this
amount be below 82%. The anticipated balance of 13.5%, or as much as 18%, of the
offering proceeds and capital contributions we receive or are deemed to receive
under our operating agreement may be used to pay the sales commissions and
expenses of this offering and the brokerage, acquisition, selection, processing
and extension fees and expenses for our loans, which collectively we call the
front-end fees.
Our collateral on all of our mortgage loans will be the real property
that the borrower is purchasing with the funds that we make available. We
sometimes refer to these real properties as the security properties. While we
may invest in other types of loans, we believe that most of the loans in which
we invest will have been made to real estate developers with a lesser proportion
of loans involving land loans and bridge financing. We anticipate that about
20-65% of the loans invested in with the offering proceeds will be secured by
commercial properties, 15-25% by unimproved land, 10-20% by apartments and
income-producing properties and 5% by single family residences. We do not
anticipate that our mortgage investments will be insured or guaranteed by any
government agency.
Vestin Mortgage will continuously evaluate prospective investments,
select the mortgages in which we invest and make all investment decisions on our
behalf in its sole discretion, unless the operating agreement provides
otherwise. You are not entitled to act on any proposed investment. In evaluating
prospective mortgage loan investments, Vestin Mortgage considers such factors as
the following:
o the ratio of the amount of the investment to the value of the
property by which it is secured;
o the potential for capital appreciation of the property securing
the investment;
22
<PAGE>
o expected levels of rental and occupancy rates;
o current and projected revenues from the property;
o potential for rental increases;
o the status and condition of the record title of the property
securing the investment;
o geographic location of the property securing the investment; and
o the financial condition of the borrowers and their principals, if
any, who guarantee the loan.
Vestin Mortgage can obtain our loans from unaffiliated mortgage brokers
and previous borrowers, and by solicitations of new borrowers in those states
where permissible. We may purchase existing loans that were originated by third
party lenders and acquired by Vestin Mortgage for us. Vestin Mortgage is
required to sell the loans to us for the lower of Vestin Mortgage's cost or the
then-current market value.
When selecting mortgage loans for us, Vestin Mortgage will adhere to
the following guidelines, which are intended to control the quality of the
collateral given for our loans: 1. Priority of Mortgages. Our mortgage on the
security property will not be junior to more than one other mortgage. The only
subordinated mortgages we currently intend to invest in at this time are second
mortgages, although in the future we may invest in wraparound, or all-inclusive,
mortgages. We anticipate that our mortgage loans will be diversified as to
priority approximately as follows: first mortgages - 90%; second mortgages -
10%. 2. Loan-to-Value Ratio. We do not anticipate that the amount of our loan
combined with the outstanding debt secured by a senior mortgage on a security
property will exceed the following percentage of the appraised value of the
security property:
<TABLE>
<CAPTION>
Type of Secured Property Loan-to-Value Ratio
------------------------ -------------------
<S> <C>
Residential 75%
Unimproved Land 60%
Commercial 75%
Property under Development/Construction Loan 75% (of anticipated post-development value)
Leasehold Interest 75% (of leasehold interest)
</TABLE>
3. Construction Mortgage Loans. We anticipate that we will invest
20-65% of the offering proceeds in construction loans other than home
improvement loans on residential property, subject to the following guidelines:
o The loan-to-value ratio on construction loans in which we invest
will not exceed 80% of the independently appraised, completed
value of the security property.
o We currently do not intend to invest in or purchase construction
loans secured by properties Vestin Mortgage considers to be
special-use properties, other than loans to casinos.
Vestin Mortgage, in its discretion, may increase any of the above
loan-to-value ratios if a given loan is supported by credit adequate to justify
a higher loan-to-value ratio, including personal guarantees. These loan-to-value
ratios will not apply to financing offered by us to the purchaser of any real
estate acquired through foreclosure, or to refinance an existing loan that is in
default when it matures. In those cases, Vestin Mortgage, in its sole
discretion, shall be free to accept any reasonable financing terms it deems to
be in our best interests. Nevertheless, in no event will the loan-to-value ratio
on any loan exceed 80% of the independently appraised completed value of the
property. The target loan-to-value ratio for our loan portfolio as a whole is
approximately 70%.
23
<PAGE>
We will receive an independent appraisal for each security property.
You may review copies of these appraisals upon reasonable notice to us. We will
retain appraisers who will be licensed or qualified as independent appraisers
and be certified by or hold designations from one or more of the following
organizations: The Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, the National Association of Review Appraisers, the
Appraisal Institute, the Society of Real Estate Appraisers, M.A.I., Class IV
Savings and Loan appraisers or from among appraisers with other qualifications
acceptable to Vestin Mortgage. However, appraisals are only estimates of value
and cannot be relied on as measures of realizable value. An employee or agent of
Vestin Mortgage will review each appraisal report and will conduct a "drive-by"
for each property on which an appraisal is made. A "drive-by" means that the
person drives to the property and assesses the front exterior of the subject
property, the adjacent properties and the neighborhood. A drive-by does not
include entering any structures on the property, although in most cases our
employee or agent will attempt to do so.
4. Terms of Mortgage Loans. Most of our loans will be for one to seven
years. We anticipate that most of our loans will provide for payments of
interest only with a "balloon" payment of principal payable in full at the end
of the term. Some loans will provide for the deferral and compounding of all or
a part of accrued interest for various periods of time.
5. Escrow Conditions. Our loans will be funded by us through an escrow
account held by a title insurance company, subject to the following conditions:
o Borrowers will obtain satisfactory title insurance coverage for
all loans, with the title insurance policy naming us as the
insured and providing title insurance in an amount at least equal
to the principal amount of the loan. Title insurance insures only
the validity and priority of our deed of trust, and does not
insure us against loss by other causes, such as diminution in the
value of the security property.
o Borrowers will obtain satisfactory fire and casualty insurance for
all loans secured by improved real property, naming us as loss
payee in an amount sufficient to cover the replacement cost of
improvements.
o All insurance policies, notes, deeds of trust or mortgages, escrow
agreements, and any other loan document for a particular
transaction will name us as payee and beneficiary. Mortgage loans
will not be written in the name of Vestin Mortgage or any other
nominee.
6. Purchase of Mortgage Investments from Affiliates. We may acquire
mortgage loans from our affiliates, including Vestin Mortgage, for a price not
in excess of the par value of the note or its fair market value, whichever is
lower, plus allowable fees and expenses, but without the allowance of any other
compensation for the loans. Except for the compensation paid to Vestin Mortgage
described elsewhere in this prospectus, any affiliate from which we purchase
mortgage loans will remit to us all income it earns from the mortgage loan while
the loan is in its portfolio.
7. Note Hypothecation. We may also acquire mortgage loans secured by
assignments of secured promissory notes. These mortgage loans must satisfy our
stated investment standards, including our loan-to-value ratios, and also may
not exceed 80% of the principal amount of the assigned note. For example, if the
property securing a note we acquire is commercial property, the total amount of
outstanding debts secured by the property must not exceed 75% of the appraised
value of the property, and the mortgage loan will not exceed 80% of the
principal amount of the assigned note. For mortgage loans secured by promissory
notes, we will rely on the appraised value of the underlying property, as
determined by an independent written appraisal which was conducted within the
then-preceding twelve months. If an appraisal was not conducted within that
period, then we will arrange for a new appraisal to be prepared for the
property. All these appraisals will satisfy the standards described above.
8. Joint Ventures. We may also participate in loans with other lenders,
including affiliates, by providing funds for or purchasing a undivided interest
in a loan meeting our investment guidelines described above. Because we will not
participate in a loan that would not otherwise meet our requirements, and will
only participate in a joint venture with third parties where we hold a
controlling interest in the venture, we believe that the risk of our
participation is minimized. We will not give Vestin Mortgage, Vestin or any of
our affiliates any consideration
24
<PAGE>
similar to rebates or give-backs or enter into reciprocal arrangements with
Vestin Mortgage or its affiliates that might be entered into in lieu of joint
ventures.
9. Diversification. No single mortgage loan will exceed 20% of our
assets when the loan is made. Additionally, no more than 20% of our loan
portfolio will be represented by mortgage loans in favor of any one borrower.
10. Reserve Fund. We will establish contingency working capital
reserves of at least three percent of the gross proceeds of this offering to
cover our unexpected cash needs.
11. Credit Evaluations. Before making a loan, Vestin Mortgage must
first determine that a borrower has sufficient equity in the security property
to meet the loan-to-value ratios described above. Vestin Mortgage may also
consider the income level and creditworthiness of a borrower to determine its
ability to repay the mortgage loan.
12. Sale of Mortgage Investments. Although Vestin Mortgage has no plan
to do so, Vestin Mortgage may sell our mortgage loans or interests in our loans
to either affiliates or non-affiliated parties when Vestin Mortgage believes
that it is advantageous to us to do so. However, as noted elsewhere in this
prospectus, we do not expect that the loans will be marketable or that a
secondary market will ever develop for them.
13. Other Fees Payable to us by Borrowers. We will also receive all
fees paid by borrowers when Vestin Mortgage permits the assumption of loans,
provides escrow services to borrowers, permits the reconveyance of a property
subject to a lien, and collects late fees or prepayment fees. All of these fees
are determined by price competition within a given market, as described under
"Operational Stage" in the compensation table on page 4 of this prospectus.
Mortgage Loans to Affiliates
We will not invest in mortgage loans made to Vestin Mortgage, Vestin or
any of our affiliates. However, we may acquire an investment in a mortgage loan
payable by Vestin Mortgage when Vestin Mortgage has assumed by foreclosure the
obligations of the borrower under that loan.
Purchase of Loans from Vestin Mortgage and its Affiliates
In addition to those loans Vestin Mortgage selects for us, we may
purchase loans that were originated by Vestin Mortgage or other parties and
first held for Vestin Mortgage's own portfolio, as long as the loan is not in
default and otherwise satisfies all of our lending criteria. Additionally, if
the loan did not originate within the 90 days before its purchase by us, Vestin
Mortgage must retain a minimum of a 10% interest in the loan. This requirement
also applies to any loan originated by an affiliate of Vestin Mortgage, such as
Vestin, Mr. Shustek or another principal of Vestin Mortgage.
Commitment of Offering Proceeds
Vestin Mortgage anticipates that we will commit at least 86.5% of the
offering proceeds received by us and of our investment distributions to invest
in or purchase mortgage loans, including three percent of the proceeds that we
will hold as working capital reserves. In no event shall this amount be below
82% of the offering proceeds. If the sales commissions and expenses of this
offering exceed 13.5% of the offering proceeds, Vestin will pay the excess.
Types of Loans We Intend to Invest In
We primarily invest in first and second mortgage loans and construction
mortgage loans on real property, although we will also invest in the types of
loans described below. Ordinarily, we will invest in loans having terms of one
to seven years and we will not invest in mortgage loans with a maturity of more
than 15 years. All loans provide for monthly payments of interest and some also
provide for principal amortization although our loans may provide for payments
of interest only and a payment of principal in full at the end of the loan term.
Vestin Mortgage
25
<PAGE>
does not intend loans for us that permit the principal to grow, or be
capitalized, when accrued interest on the loan is not paid.
First Mortgage Loans
First mortgage loans are secured by first mortgages on real property.
We expect that these loans will have terms of one to seven years.
Second Mortgage Loans
Our collateral for our second mortgage loans is real property that is
already subject to prior mortgage indebtedness. In the future we may also invest
in wraparound loans, which is similar to a second loan except that the loan
balance is the outstanding balance under the existing mortgage loans plus the
amount actually to be advanced by us under the new mortgage loan. Under a
wraparound loan, we would make principal and interest payments on behalf of the
borrower to the holders of the prior mortgage loans.
Construction Loans
Construction loans are loans originally made for both original
development and renovation of property. We expect our construction loans to be
secured by first mortgages on real property for terms of six months to two
years.
We do not anticipate that we will disburse funds on a construction loan
until work in the previous phase of the project has been completed, and an
independent inspector has verified certain aspects of the construction and its
costs. Additionally, we require the submission of signed labor and material lien
releases by the borrower for each completed phase of the project before making
any periodic disbursements of loan proceeds.
Leasehold Interest Loans
Loans on leasehold interests are secured by an assignment of the
borrower's leasehold interest in the particular real property. We anticipate
that the terms of these loans will not exceed 15 years. The leasehold interest
loans are either amortized over a period that is shorter than the lease term or
have a maturity date prior to the date the lease terminates. These loans all
permit Vestin Mortgage to cure any default under the lease.
Variable Rate Loans
Variable rate loans originated by Vestin Mortgage may use as indices
the one and five year Treasury Constant Maturity Index, the Prime Rate Index and
the Monthly Weighted Average Cost of Funds Index for Eleventh District Savings
Institutions (Federal Home Loan Bank Board). Vestin Mortgage may negotiate
spreads over these indices of 2.5% to 5.5%, depending upon market conditions
when the loan is made.
It is possible that the interest rate index used in a variable rate
loan will rise (or fall) more slowly than the interest rate of other loan
investments available to us. Vestin Mortgage attempts to minimize this interest
rate differential by tying variable rate loans to indices that are sensitive to
fluctuations in market rates. Additionally, most variable rate loans originated
by Vestin Mortgage contain provisions under which the interest rate cannot fall
below the initial rate.
Bridge Loans
A bridge loan provides funds for commercial borrowers to make
improvements to the property to increase the net operating income of their
property so that it can qualify for institutional refinancing. Vestin Mortgage
will value the existing property and we will invest in loans for up to 75% of
that value.
Land Loans
We will also invest in loans to purchase or develop of raw, unimproved
land. We determine whether to invest in these loans based upon the "90-day quick
sale value" of the property and the borrower's actual capital investment in the
property. The "90-day quick sale value" is the highest price for which the land
could actually be
26
<PAGE>
sold within the next 90 days, as determined by local real estate brokers and
others. We believe this 90-day period approximates the time required for a
foreclosure. The value of the land is generally the same as its cost to the
borrower. We do not expect to invest in loans for more than 60% of the "90-day
quick sale value," and we anticipate that the borrower will have made actual
capital expenditures of at least 25% of the property's value.
Interest Rate Caps
All our variable rate loans will have interest rate caps. We anticipate
that the interest rate cap will be a ceiling that is 2-4% above the starting
rate with a floor rate equal to the starting rate. For these loans there is the
risk that the market rate may exceed the interest cap rate.
Assumable Loans
Variable rate loans of five to ten year maturities are not assumable
without the prior consent of Vestin Mortgage. We do not expect to invest in or
purchase a significant amount of other assumable loans. To minimize our risk,
any borrower assuming an existing mortgage loan will be subject to the same
underwriting criteria as the original borrower.
Prepayment Penalties
We do not anticipate that many of the loans we invest in will contain
prepayment penalties. If our loans are at a high rate of interest in a market of
falling interest rates, the failure to have a prepayment penalty provision in
the loan allows the borrower to refinance the loan at a lower rate of interest,
thus providing a lower yield to us on the reinvestment of the prepayment
proceeds. However, these loans will usually be written with relatively high
minimum interest rates, which we would expect to minimize the risk of lower
yields.
Balloon Payment
Most of the loans we invest in or purchase will require the borrower to
make a "balloon payment" on the principal amount upon maturity of the loan. To
the extent that a borrower has an obligation to pay mortgage loan principal in a
large lump sum payment, its ability to repay the loan may be dependent upon its
ability to sell the property, obtain suitable refinancing or otherwise raise a
substantial amount of cash. As a result, these loans involve a higher risk of
default than loans where the principal is paid at the same time as the interest
payments.
Borrowing
We may incur indebtedness:
o to finance our investments in mortgage loans,
o to prevent a default under mortgage loans that are senior to
our mortgage loans,
o to discharge senior mortgage loans if this becomes necessary
to protect our investment in mortgage loans, or
o to operate or develop a property that we acquired under a
defaulted loan.
We currently intend to obtain a line of credit only to acquire, operate
or develop for resale the real properties on which we have foreclosed, although
we may use the funds for the other purposes set forth above in the future. At no
time will our indebtedness under our line of credit, once obtained, exceed 70%
of the fair market value of our mortgage loans. This indebtedness may be with
recourse to our assets.
Repayment of Mortgages on Sales of Properties
We may require a borrower to repay a mortgage loan upon the sale of the
mortgaged property rather than allow the buyer to assume the existing loan. We
will require repayment if we determine that repayment appears to be advantageous
to us based upon then-current interest rates, the length of time that the loan
has been held by us, the
27
<PAGE>
creditworthiness of the buyer and our objectives. We will either invest our net
proceeds from any capital transaction in new mortgage loans, hold the net
proceeds as cash or distribute them to the members. These net proceeds will also
include the principal of a loan deemed to be repaid for tax purposes as a result
of the nature of a loan modification or loan extension. Our operating agreement
provides that whether we choose to distribute the proceeds or reinvest them, you
will be deemed to have received a distribution of capital and recontributed the
same amount to DM LLC. Capital transactions include payments of principal,
foreclosures and prepayments of mortgages, to the extent classified as a return
of capital under the Internal Revenue Code, and any other disposition of a
mortgage or property.
No Trust or Investment Company Activities
We have not qualified as a real estate investment trust under the
Internal Revenue Code, and therefore we are not subject to the restrictions on
its activities that are imposed on real estate investment trusts. We intend to
conduct our business so that we are not an "investment company" within the
meaning of the Investment Company Act of 1940. Last, we intend to conduct our
business so that we are not to be deemed a "dealer" in mortgage loans for
federal income tax purposes.
Various Other Policies and Procedures
Without majority approval, we will not:
o issue securities senior to the units or issue any units or
other securities for other than cash;
o invest in the securities of other issuers for the purpose of
exercising control, except when exercising our rights as a
secured lender;
o underwrite securities of other issuers;
o discontinue providing our members with the reports described
in this prospectus; or
o offer securities in exchange for property.
Competition and General Economic Conditions
Banks, thrifts, conduit lenders and other entities both larger and
smaller than us may compete with Vestin Mortgage to make the type of loans in
which we invest. For the past few years, the major institutional lenders have
not been as active in the commercial mortgage market as in prior years.
Recently, however, many major institutional lenders have reentered the
commercial mortgage market due to a stronger economy, stabilized or increased
property values and leasing rates, and the decrease in demand for residential
loans. As a result, we anticipate competition for investments in mortgages
secured by commercial properties, which creates pressure on lenders to lower
interest rates. Consequently, we may not be able to obtain as high interest
rates on mortgage investments as we would otherwise obtain, which would affect
our revenues and the distributions you receive.
Regulation
Our operations are conducted by Vestin Mortgage. Vestin Mortgage's
operations as a mortgage company are subject to extensive regulation by federal,
state and local laws and governmental authorities. Vestin Mortgage conducts its
real estate mortgage business under a "PRIVILEGED" license issued by the Nevada
Division of Financial Institutions. Under applicable Nevada law, the division
has broad discretionary authority over Vestin Mortgage's activities, including
the authority to conduct periodic regulatory audits of all aspects of Vestin
Mortgage's operations.
We and Vestin Mortgage are also subject to the Equal Credit Opportunity
Act of 1974, which prohibits creditors from discriminating against loan
applicants on the basis of race, color, sex, age or marital status, and the Fair
Credit Reporting Act of 1970, which requires lenders to supply applicants with
the name and address of the reporting agency if the applicant is denied credit.
We are also subject to various other federal and state securities laws
regulating the issuance and sale of securities, as well as the Employee
Retirement Income Security Act of 1974.
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<PAGE>
Should we or Vestin Mortgage fail to adhere to these regulations, we
could face potential disciplinary or other civil action that could have a
material adverse effect on our business.
29
<PAGE>
MANAGEMENT
Our Management
Our business is managed by Vestin Mortgage, Inc. (formerly Capsource,
Inc.), as the manager of our limited liability company. The telephone number for
Vestin Mortgage's offices is (702) 227-0965. Vestin Mortgage is a mortgage
broker licensed in the State of Nevada and a wholly owned subsidiary of Vestin
Group, Inc. (formerly Sunderland Corporation). Vestin is a Delaware corporation
with publicly held common stock that trades on the Nasdaq Smallcap Market under
the symbol "VSTN". Until early July, 2000, Vestin traded under the symbol
"DLMA." Vestin had a net worth of approximately $4,700,000 as of December 31,
1999 and is briefly described later in this section.
Vestin Mortgage
Vestin Mortgage manages and controls our affairs and has responsibility
and final authority in almost all matters affecting our business. These duties
include dealings with members, accounting, tax and legal matters, communications
and filings with regulatory agencies and all other needed management and
operational duties. Additionally, because Michael Shustek owns a controlling
interest in Vestin and Vestin wholly owns Vestin Mortgage, Mr. Shustek may be
deemed to control our activities through Vestin Mortgage. As our only manager,
Vestin Mortgage has complete authority and responsibility for managing DM LLC
regarding the following:
o evaluating and choosing the mortgage loans in which we will
invest;
o deciding what agreements we will enter into and whether we
will enter into joint ventures with other companies to invest
in mortgage loans;
o originating, servicing and managing our mortgage loan
investments; and
o managing all our other operations.
Notwithstanding that Vestin Mortgage has the broad authority described
above, neither Vestin Mortgage directly nor Mr. Shustek indirectly may do any of
the following:
o impair our ability to carry on or change the nature of our
business;
o admit a manager without prior majority approval;
o sell all or over 50% of our assets or dissolve DM LLC without
the prior majority approval; and
o anything else not permitted in the operating agreement.
You have no right to participate in the management or control of our
business or affairs other than to exercise the limited voting rights provided
for members in the operating agreement. Vestin Mortgage has primary
responsibility for the initial selection, evaluation and negotiation of our
mortgage loans. Vestin Mortgage will provide all executive, supervisory and
administrative services for our operations, including servicing the mortgage
loans we hold. Our books and records are maintained by Vestin Mortgage, subject
to audit by independent certified public accountants.
Removal of Vestin Mortgage as Manager
Vestin Mortgage will cease to be our manager upon its removal,
withdrawal or dissolution, or if it is found to be bankrupt. A majority,
excluding Vestin Mortgage's interest, can remove Vestin Mortgage as our manager
upon the following conditions:
o if the members have not previously elected an additional
manager, the removal will not become effective for at least
120 days following the consent or authorizing vote by the
majority;
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<PAGE>
o during the 120 days set forth above, a majority can agree in
writing to continue our business and, within six months
following the termination date of the last remaining manager,
elect and admit a new manager who agrees to continue our
existence; and
o the substitution of a new manager shall be effective when the
new manager accepts in writing the duties and responsibilities
of a manager.
If our business continues after Vestin Mortgage is no longer our
manager, then we will pay Vestin Mortgage a sum equal to all amounts then owing
to it. By majority vote, we may terminate Vestin Mortgage's interest in DM LLC
by paying an amount equal to the then-present fair market value of Vestin
Mortgage's interest in DM LLC, which would be Vestin Mortgage's outstanding
Capital Account at such time. All payments to a terminated manager must be fair
and must protect our solvency and liquidity.
If a majority does not designate and admit a new manager within the
time specified, DM LLC will dissolve. Vestin Mortgage's may assign its interest
in DM LLC, but our manager may not be changed except as set forth above.
Evaluation and Acquisition by Vestin Mortgage
Vestin Mortgage considers prospective loans for us. In that regard,
Vestin Mortgage evaluates the credit of prospective borrowers, analyzes the
return to us of potential mortgage loan transactions, reviews property
appraisals, and determines which types of transactions appear to be most
favorable to us.
Management of Loan Portfolio
After we acquire mortgage loans, Vestin Mortgage also manages our
mortgage loan portfolio. Vestin Mortgage is responsible for:
o creating and implementing investment policies in furtherance
of those contained in the operating agreement;
o preparing and reviewing budgets, economic surveys, cash flow
and taxable income or loss projections and working capital
requirements;
o preparing and reviewing of reports for securities filings,
distribution to our members or otherwise;
o communicating with members;
o supervising and reviewing our bookkeeping, accounting and
audits;
o supervising and reviewing the preparation of our state and
federal tax returns; and
o supervising professionals employed by us, including attorneys,
accountants and appraisers.
Mortgage Loans
Vestin Mortgage obtains, processes, makes and invests in, brokers or
sells, and manages and services our mortgage loans. Its mortgage loan services
also include:
o reviewing of loans;
o recommending changes in loans;
o employing and supervising employees who handle the loans;
o preparing and reviewing projected performance;
o reviewing of reserves and working capital; and
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<PAGE>
o collecting and maintaining all loans.
Prior Experience
In April 1999, Vestin, then known as Sunderland, acquired the mortgage
brokerage business of Del Mar Mortgage, Inc. and Del Mar Holdings, Inc. from
Michael Shustek by purchasing their assets and assuming their liabilities in
exchange for shares of common stock. As part of a corporate reorganization,
Vestin transferred the mortgage brokerage business of Del Mar Mortgage and Del
Mar Holdings to Vestin Mortgage. At the time of these transactions, Vestin
conducted business as Sunderland Corporation.
Vestin Mortgage holds a privileged mortgage broker's license in Nevada.
As a licensed mortgage broker, Vestin Mortgage is subject to regular on site
examinations by the Financial Institutions Division of the State of Nevada,
which also reviews its advertising, mandates strict record maintenance, and
reviews its financial reporting, including its financial statements and monthly
activity reports.
Vestin Mortgage obtains borrowers through approved advertisements,
referrals and repeat business, and obtains investors interested in funding the
loan in the same manner. It then matches the two together in compliance with
Nevada law.
Vestin Mortgage obtains a loan and then processes the application. When
processing a loan, Vestin Mortgage will
o order and review a property title search,
o perform a property inspection,
o obtain an appraisal which is reviewed for reasonableness, and
o perform credit underwriting through borrower interviews,
credit reports and review of borrower and principals'
financials.
After processing the loan, Vestin Mortgage reviews the loan through its loan
committee, and then presents the loan to investors. Investors select the loan(s)
they wish to invest in and receive an assignment from Vestin Mortgage in the
form of an individual promissory note and trust deed issued by the borrower. The
investors receive a lender's policy of title insurance reflecting their
beneficial interest in the real property. Nevada law requires mortgage companies
to provide copies of loan documentation and borrower information (credit
underwriting criteria), as well as real estate lending risk disclosures, to the
investors (lenders). Vestin Mortgage also services loans once they have closed.
Vestin Mortgage does not charge any fees to investors. Vestin Mortage's
compensation is in the form of loan origination fees paid by borrowers ranging
from three to five percent of the respective loan amount.
Vestin Mortgage acts as a mortgage broker originating many separate
loans, each of which is separately funded by institutions and individuals. In
contrast, here we will be the party investing in loans with our own funds. Our
assets will be a pool of loans, the distributions from and proceeds of which
will be passed through to you as described in this prospectus. Unlike DM LLC,
Vestin Mortgage does not and will not own the loans. The assets of Vestin
Mortgage are primarily receivables in the form of origination and servicing
fees.
Since 1997, Vestin Mortgage and its predecessors Del Mar Mortgage and
Del Mar Holdings have acted as mortgage brokers for the investment by about
4,500 investors in about 400 mortgage notes totaling about $500 million. Vestin
Mortgage currently services over 125 loans totaling approximately $272 million.
The collateral for these loans are real properties primarily located in Nevada,
California and Arizona. Vestin Mortgage used working capital obtained from
capital contributions to fund some of these loans prior to selling them as part
of its mortgage brokerage business, except for $1,980,000 of indebtedness
incurred to finance these transactions. Vestin Mortgage and Del Mar Mortgage
limit their businesses to mortgage lending, and have not acquired any real
properties except in connection with a loan foreclosure.
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<PAGE>
For the three year period ended December 31, 1999, the properties
securing these loans can be subdivided as follows:
<TABLE>
<CAPTION>
Aggregate amount invested
Property Type (as percentage of total purchases by these programs)
------------- ----------------------------------------------------
<S> <C>
Commercial (total) 58%
Land Acquisition 36%
Residential 6%
</TABLE>
Of the loans described in the foregoing table, 90% by dollar amount
were development loans, including construction loans, the balance were land
acquisition loans and loans secured by developed properties.
There have been no major adverse conditions with respect to Vestin
Mortgage's or Del Mar Mortgage's businesses. Of the loans that were made, we are
aware of only five properties that have gone to foreclosure sale over the last
six years. The default rate on the loans brokered by Vestin Mortgage and Del Mar
Mortgage has averaged less than 1% during the last three years.
The description above of Vestin Mortgage and its predecessors is not
intended to provide a description of the loans to be invested in or purchased by
us in the future.
Directors and Executive Officers of Vestin Mortgage and Vestin
The directors and executive officers of Vestin Mortgage are listed
below:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Michael V. Shustek 41 Director, Chief Executive Officer, Chairman
Stephen J. Byrne 43 President and Director
Peggy S. May 31 Senior Vice President
Michael Whiteaker 50 Vice President of Regulatory Affairs
Lance Bradford 33 Treasurer, Secretary and Director
The directors and officers of Vestin are as follows:
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Michael V. Shustek 41 Chairman of the Board, Chief Executive Officer and Director
Stephen J. Byrne 43 President and Director
Lance Bradford 33 Chief Financial Officer, Corporate Secretary and Director
Robert J. Aalberts 49 Director
Robert W. Fine 64 Director
John E. Dawson 42 Director
Robert L. Forbuss 51 Director
</TABLE>
All the directors of Vestin Mortgage and Vestin hold office until the
next annual meeting of shareholders or period of one year. The last annual
meeting of stockholders was June 23, 2000. Vestin, as the only shareholder of
Vestin Mortgage, can change the constitution of Vestin Mortgage's Board of
Directors at its sole discretion. Similarly, Michael Shustek can cause a change
in the Board of Directors of Vestin by virtue of his controlling ownership
interest in Vestin. Vestin, which is a reporting company under the Securities
Exchange Act, has already established an audit committee consisting of three
independent directors and requires that its audit committee be comprised of
independent directors. Vestin Mortgage, which is privately held and has only
three directors, has no audit committee and no requirement of independence at
this time. The By-laws of Vestin Mortgage and Vestin provide for up to 10
directors and permit the Board of Directors to fill any vacancy on the Board of
Directors. Officers of both companies serve at the discretion of the Board of
Directors.
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<PAGE>
The principal occupation and business experience for each of our
officers and directors, for at least the last five years, are as follows:
MICHAEL V. SHUSTEK has been a director of Vestin Mortgage and Chairman
of the Board of Directors, Chief Executive Officer and a director of Vestin
since April 1999. In 1995, Mr. Shustek founded Del Mar Mortgage, and has been
involved in various aspects of the real estate industry in Nevada since 1990. In
1993, he founded Foreclosures of Nevada, Inc., a company specializing in
non-judicial foreclosures. In 1993, Mr. Shustek also started Shustek
Investments, a company that originally specialized in property valuations for
third-party lenders or investors and which continues today as the primary
vehicle for his private investment portfolio. In 1997, Mr. Shustek founded
Nevada First Bank, with the largest initial capital base of any new state
charter in Nevada's history. In 2000, Mr. Shustek co-authored a book, Trust Deed
Investments, on the topic of private mortgage lending. Mr. Shustek is a guest
lecturer at the University of Nevada, Las Vegas, where he also teaches a course
in Real Estate Law and Ethics. Mr. Shustek received a Bachelor of Science degree
in Finance at the University of Nevada, Las Vegas.
On November 9, 1998, the State of Nevada, Department of Business and
Industry, Financial Institutions Division and Del Mar Mortgage Inc., which is
owned by Mr. Shustek, settled allegations of noncompliance brought by the
division. Del Mar Mortgage neither admitted nor denied the division's
allegations. On February 11, 1999, the division issued an order against Del Mar
Mortgage, which alleged violations of the Nevada regulatory statutes and
established a conservator to oversee Del Mar Mortgage's operations. On February
16, 1999, Del Mar Mortgage sued the division, contesting the order. On March 26,
1999, Del Mar Mortgage and the division entered into a stipulated court order
that effectively superceded the November 1998 agreement. The stipulated court
order also vacated the division's order and removed the conservator. Without
admitting any facts, and solely to settle these matters, Del Mar Mortgage agreed
to assure compliance with applicable law in all advertisements, solicitations of
mortgage borrowers and in its making and servicing of mortgage loans. Vestin
Mortgage and Vestin, as successors to the mortgage company business of Del Mar
Mortgage, agreed to adhere to the terms of the stipulation. Del Mar Mortgage
also paid an additional $20,000 to the division under the November 1998
agreement, in addition to the $30,000 Del Mar Mortgage had paid prior to
February.
STEPHEN J. BRYNE has been the President and a director of Vestin
Mortgage since its inception as Capsource, Inc. in 1997 and has been the
President and a director of Vestin since April 1999. Mr. Byrne joined Del Mar
Mortgage in June 1998 as its Senior Lending Officer. In 1997, Mr. Byrne founded
Vestin Mortgage which he owned and operated before joining Del Mar Mortgage.
From 1991 to 1997, Mr. Byrne served as Vice President of Wells Fargo Bank and of
its predecessor First Interstate Bank of Nevada. Mr. Byrne served in various
capacities with First Interstate Bank, including manager of the Diversified
Asset Group based in Las Vegas and the commercial Diversified Asset Group in
Houston, Texas. Mr. Byrne received a Bachelor of Science degree in Business
Administration from Hastings College, Hastings, Nebraska.
LANCE BRADFORD has been a director Treasurer and Secretary of Vestin
Mortgage and the Chief Financial Officer, Corporate Secretary, and a director of
Vestin since April 1999. Since 1992, Mr. Bradford has been a partner in L. L.
Bradford & Company, Las Vegas, Nevada, a Certified Public Accounting firm that
he founded. From 1988 to 1991, Mr. Bradford served as an accountant with Ernst &
Young International. Mr. Bradford received a Bachelor of Science degree in
Accounting from the University of Nevada, Reno.
JOHN E. DAWSON has been a director of Vestin since March 2000. Since
1995, Mr. Dawson has been a partner at the law firm of Marquis & Aurbach. Before
joining Marquis & Aurbach, Mr. Dawson was affiliated with the law firm of
Jeffrey L. Burr & Associates. Mr. Dawson co-authored the Asset Protection
Guidebook for Attorneys and Accountants and has presented seminars on asset
protection. Mr. Dawson received his Bachelor's Degree from Weber State and his
J.D. from Brigham Young University. Mr. Dawson received his Masters of Law
(L.L.M.) in Taxation from the University of San Diego in 1993. Mr. Dawson was
admitted to the Nevada Bar in 1988 and the Utah Bar in 1989.
ROBERT L. FORBUSS has been a director of Vestin since March 2000. Since
February 1999, Mr. Forbuss has been the President of Strategic Alliances, a
business and government affairs consulting organization. From March 1998 through
February 1999, he was the President of Medical Transportation of America. From
February 1997 to March 1998, Mr. Forbes was the Chief Executive Officer of the
Southwest Division of American Medical Response. From March 1994 to February
1997, he was Senior Vice President of Laidlaw Medical Transportation,
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<PAGE>
which had acquired Mercy Medical Services, Inc., a company that Mr. Forbuss
founded, owned and managed for 22 years. The latter four companies are all in
the business of providing emergency ambulance and transportation services. Mr.
Forbuss received his Bachelor of Arts in Public Administration and Political
Science from the University of California at Long Beach.
ROBERT AALBERTS has been a director of Vestin since April 1999. Since
1991, Mr. Aalberts has held the Ernst Lied Professor of Legal Studies
professorship at the University of Nevada, Las Vegas. From 1984 to 1991, Mr.
Aalberts was an Associate Professor of Business Law at Louisiana State
University - Shreveport. From 1982 through 1984, he served as an attorney for
Gulf Oil Company. Mr. Aalberts has co-authored a book relating to the regulatory
environment, law and business of real estate; and he is the author of numerous
legal articles, dealing with various aspects of real estate, business and the
practice of law. Mr. Aalberts received his Juris Doctor degree from Loyola
University, New Orleans, Louisiana and received a Master of Arts from the
University of Missouri. He is a member of the State Bar of Louisiana.
ROBERT W. FINE has been a director of Vestin since April 1999. Since
1998, Mr. Fine has been the President of Equisource Group Ltd., a company
providing investment-banking services to businesses seeking to raise capital or
to become public companies. From 1993 to 1998, Mr. Fine was President of
Transworld Healthcare, a company providing home healthcare products and
services, during which period the company grew from less than $7 million in
revenues to over $80 million. From 1990 to 1993, the year of its sale, Mr. Fine
served as President of the Fortress Company, a manufacturer of healthcare
mobility devices. For the seven years prior to joining Fortress, Mr. Fine was
President of ConAc, a company that specialized in mergers and acquisitions.
During this period, the company provided assistance to other companies in over
100 mergers, principally in the healthcare field. Mr. Fine received a Bachelor
of Arts in Accounting from Bentley College, Waltham, Massachusetts.
The following information about executive compensation has been
provided by Vestin and Vestin Mortgage. Vestin employees receive no extra pay
for serving as directors. Each non-employee director receives $3,750 per
quarter, which includes personal attendance at one quarterly board meeting and
one committee meeting on which the director serves, plus reimbursement of
reasonable travel expenses if the director lives more than 100 miles from
Vestin's principal place of business. For each Board of Directors meeting in
excess of one per quarter, directors receive $750 for each meeting attended in
person and $500 for each meting attended telephonically. For each committee
meeting in excess of one per quarter, directors receive $500 for each meeting
attended in person and $250 for each meeting attended telephonically. Each
Vestin director will receive 15,000 options to acquire Vestin common stock at
the then fair market value on the later of the date the non-employee director is
elected to the Board or the date the option is approved by Vestin's stockholders
and the underlying shares of common stock are registered. Vestin provides
directors' and officers' liability insurance of $5,000,000 and also has agreed
to indemnify each director to the fullest extent of Delaware law.
The following Summary Compensation Table sets forth the compensation
paid or awarded for the fiscal year ended December 31, 1999 to Vestin and Vestin
Mortgage's Chief Executive Officer and the next most highly compensated
executive officers whose compensation for the fiscal year ended December 31,
1999 exceeded $100,000. No other executive officer received compensation in
excess of $100,000 for fiscal year ended December 31, 1999 from either Vestin or
Vestin Mortgage.
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<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation (1) Long Term Compensation
----------------------- ----------------------
All Other
---------
Name and Position Year Salary ($) Bonus($) Other Awards Compensation
----------------- ---- ---------- -------- ----- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael V. Shustek 1999 720,000 0 0 0 0
Chairman and Chief
Executive Officer
Stephen J. Byrne(2) 1999 240,000 171,515 0 0 0
President
Peggy S. May 1999 120,000 0 0 0 0
Senior Vice President
</TABLE>
(1) Vestin began payments to its personnel as of April, 1999.
(2) Vestin entered into employment arrangements with Mr. Byrne who was
initially employed by Del Mar Mortgage, Inc., in October 1998. In April
1999 the Company assumed Mr. Byrne's two-year employment contract as a loan
officer and underwriter at an annual salary of $65,000. Mr. Byrne has an
employment contract with the Company for serving as its President at an
annual salary of $240,000.
The compensation above for each of Messrs. Shustek and Byrne includes
compensation for services rendered to Vestin Mortgage and other Vestin
affiliates as set forth in the most recent 10-K of Vestin, which was filed by
Sunderland Corporation. Of the amounts set forth above, Mr. Shustek received
$360,000 of his total compensation for services rendered to Vestin Mortgage, and
Mr. Byrne received $286,515 of his total compensation for services rendered to
Vestin Mortgage. Ms. May provided services to and received her compensation
directly from Vestin Mortgage.
Effective April 1, 2000, Vestin entered into an Employment Agreement
with Lance Bradford, its Chief Financial Officer, Secretary, director and a
stockholder. Mr. Bradford is also the Secretary, Treasurer and a director of
Vestin Mortgage, but is not being compensated in those capacities. Under the
terms of the Employment Agreement, Mr. Bradford will serve as Vestin's Chief
Financial Officer for three years at an annual salary of $296,000. Paul
Connaghan joined Vestin Mortgage as general counsel in mid 1999. Mr. Connaghan
earns $120,000 per year.
Vestin's Board of Directors adopted a stock option plan on July 28,
1999. Vestin's stockholders approved the plan at Vestin's annual stockholders'
meeting on June 23, 2000.
Affiliated Companies
VESTIN GROUP, INC.
Vestin is a holding company, incorporated in Delaware, which owns and
conducts its business primarily through Vestin Mortgage. Vestin also owns Vestin
Capital, our dealer-manager. The common stock of Vestin trades under the symbol
"VSTN" on the Nasdaq Smallcap Market. Prior to early July, 2000, the symbol was
"DLMA". For a complete description of Vestin, potential investors should review
Vestin's most recent periodic reports on file with the Securities and Exchange
Commission, which can be found in the Commission's EDGAR database on the
Internet at http://www.sec.gov.
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<PAGE>
VESTIN CAPITAL, INC.
Vestin Capital, Inc. (formerly DM Financial Services, Inc.), the lead
dealer, is a securities brokerage firm registered with the Securities and
Exchange Commission and a member of the National Association of Securities
Dealers, Inc., or NASD. Vestin Capital is a Nevada corporation formed in 1998 to
expand and develop business opportunities, including offering real estate loans
and private investments in promissory notes secured by deeds of trust.
Vestin Capital may obtain other securities brokerage firms to sell the
units, sell the units to its customers and provide us with sales, promotional
and marketing assistance for the distribution of the units.
37
<PAGE>
COMPENSATION OF VESTIN MORTGAGE AND VESTIN CAPITAL
Vestin Mortgage (formerly Capsource) and its affiliates will receive
fees and expenses for services relating to this offering and the investment and
management of our assets. We anticipate that the sales commissions and expenses
of this offering and the brokerage, acquisition, selection and origination fees
and expenses for our loans will not exceed 13.5% of the proceeds of this
offering, but under no circumstances will they exceed 18% of the capital
contributions we receive or are deemed to receive under our operating agreement.
The fees that we and our borrowers pay to Vestin Mortgage and its affiliates are
summarized in the table below.
We anticipate that the maximum aggregate amount of the front-end fees
to be paid during the first year is $13,500,000, but in no event will the
front-end fees in the first year exceed $18,000,000.
<TABLE>
<CAPTION>
Type of Compensation Form of Compensation(1)
Offering Stage:
---------------
Paid by Us
<S> <C>
Lead Dealer Fee (paid to Vestin Capital) 1.0% of gross offering proceeds plus up to 0.5% of
gross proceeds as expense reimbursement. Our total
compensation to Vestin Capital can be $1.5 million
(including up to $500,000 in expense reimbursement). We
will pay these fees regardless of whether Vestin
Capital engages any other selected dealers. These fees
will be paid promptly upon the initial closing in this
offering and on a monthly basis thereafter. These fees
are included within the front-end fees.
<CAPTION>
Organization Stage:
-------------------
<S> <C>
Promotional Interest of Vestin Mortgage If 84.5% of capital contributions are invested in mortgage
loans, the promotional interest will 1.0%. If 86.5% of
capital contributions are invested in mortgage loans,
the promotional interest increases to an aggregate of
2.0%. The promotional interest will thereafter increase
by 1.0% for each additional 1.0% of capital
contributions invested in mortgage loans. The above
promotional interest is in addition to any ownership
interest that Vestin Mortgage pays for. The promotional
interest will be allocated to Vestin Mortgage on the
initial closing and will be increased monthly
thereafter.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Operational Stage:
------------------
<S> <C>
Where the fees below are described as competitive fees or
based on local market conditions, that means the fees are
determined by price competition within a given market. To
ensure that our fees remain competitive, we will directly
contact our competition, such as major banks in the local
market or other relevant commercial lenders. We expect that
the interest rate on the loans in which we invest will be
2-3 points higher than comparable loans made by banks and
that the fees paid to Vestin Mortgage will be 2-3 points
higher than similar fees charged by conventional lenders.
We believe that this rate structure is consistent with
rates and fees charged by other non-conventional lenders.
References below to local law also contemplate additional
requirements imposed by local or state law, such as usury
laws.
<CAPTION>
Paid by Borrowers
-----------------
<S> <C>
Loan Brokerage Fees for Loan Selection and Origination 2%-6% of each loan, competitive fee based on local market
conditions. Vestin Mortgage and its affiliates may
receive up to $5,190,000 in loan brokerage fees. These
fees are paid by the borrower no later than when the
loan proceeds are disbursed. These fees are included
within the front-end fees.
Loan Evaluation and Processing Fees 2%-5% of each loan, competitive fee based on local market
conditions. Vestin Mortgage and its affiliates may
receive up to $4,325,000 in loan evaluation and
processing fees. These fees are paid by the borrower no
later than when the loan proceeds are disbursed. These
fees are included within the front-end fees.
Service Fee for Administering Loans Annual fee of 0.25% of the outstanding principal balance
of loans. Vestin Mortgage may receive up to $216,250 in
servicing fees. These fees will be paid by the borrower
either annually or added to the monthly payments.
Loan Extension Fee 2%-5% of outstanding principal, as permitted by local law
and local market conditions. The amount to be received
is not determinable at this time. These fees will paid
when the loan is extended. These fees are included
within front-end fees.
Paid by Us
----------
Reimbursement of Our Operating Expenses Lesser of cost or third party rate. We will pay these
fees monthly. See expanded discussion in "Conflicts of
Interest."
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Back-end Promotional Interest The sum of:
o 10% of distributions provided from operations (other
than repayments of mortgage loan principal) after
deducting general expenses and debt payments, all of
which we call cash available for distribution, plus
o 15% of cash available for distribution and of
distributions from the net proceeds of any repayment,
sale, foreclosure or other disposition of an underlying
mortgage or property, after paying members from these
net proceeds an amount equal to their capital
contributions plus a cumulative 6% annual return on
those contributions. The 15% allocation under this
provision may be increased by 1.0% for each 1% that
Vestin Mortgage reduces from 10% its allocation of cash
available for distribution under the immediately
preceding provision. The size of and distributions
generated by this interest are not determinable at this
time.
Real Estate Brokerage Fees on Resales of Foreclosed Up to 3% of proceeds where Vestin Mortgage substantially
Property to Vestin Mortgage contributed to the sale; up to 6% for all persons involved.
These fees are not yet determinable. We will pay these
fees promptly out of the proceeds of a sale of the
relevant real estate.
</TABLE>
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<PAGE>
(1) Where aggregate fees are provided in the chart on the proceding pages,
they are based upon our receipt of $100,000,000 in gross proceeds in this
offering and the anticipated investment of $86,500,000 in mortgage loans.
Our operating agreement provides that Vestin Mortgage shall take all
reasonable measures to maintain front end fees, including the sales
commissions and expenses of this offering and the brokerage, acquisition,
selection and origination fees and expenses for our loans, below 13.5% of
the gross proceeds of the capital contributions we receive or are deemed to
receive under our operating agreement. Under no circumstances will the
above expenses exceed 18% of these capital contributions.
For the minimum offering, we will pay the amounts owing to Vestin Capital and
any other dealers upon the breaking of escrow. Thereafter, we will pay their
sales commissions and expenses quarterly in arrears.
We will attribute to Vestin Mortgage its promotional interest on a
monthly basis. If Vestin Mortgage has not contributed an amount equal to one
percent of all contributions received by the members, we will withhold the
incremental promotional interest.
We will pay Vestin Mortgage its fees for services during the
operational stage on a monthly basis in arrears.
Vestin Mortgage will make arrangements with the respective borrowers
for Vestin Mortgage's fees owing from those borrowers. Vestin Mortgage
anticipates that borrowers will pay its compensation out of the proceeds of
loans or upon closing the relevant transaction. For loan servicing fees, Vestin
Mortgage will receive these fees monthly in arrears along with the payments it
receives on loans that we have acquired. Vestin Mortgage will make arrangements
with borrowers within one month to receive late fees on loan payments.
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<PAGE>
CONFLICTS OF INTEREST
The relationships among us, Vestin Mortgage and the directors and other
affiliates of Vestin Mortgage will result in various conflicts of interest.
Vestin Mortgage and its directors and other affiliates are engaged in business
activities involving real estate lending, and anticipate engaging in additional
business activities in the future that may be competitive with us. Vestin
Mortgage and its officers and directors will exercise their fiduciary duties to
us and to you in a manner they believe will preserve and protect your rights as
a member. Additionally, our operating agreement contains provisions that limit
our ability to enter into transactions with Vestin Mortgage and its affiliates.
The paragraphs below describe material conflicts of interest that may
arise in the course of Vestin Mortgage's management and operation of our
business. The list of potential conflicts of interest reflects our knowledge of
the existing or potential conflicts of interest as of the date of this
prospectus. We cannot assure you that no other conflicts of interest will arise
in the future.
The organizational structure of Vestin, Vestin Mortgage and their
affiliates is as follows:
<TABLE>
<CAPTION>
Michael Shustek
<S> <C>
Vestin Group, Inc. Del Mar Mortgage, Inc.
(controlling interest owned by Michael. Shustek) (100% owned by Michael Shustek)
Vestin Capital Vestin Mortgage
(100% owned by Vestin) (100% owned by Vestin)
Lead Dealer Manager and initial Member of
DM LLC
</TABLE>
1. Payment of Fees and Expenses. Vestin Mortgage and its affiliates will
receive substantial fees and expenses from the proceeds of the offering and our
ongoing operations, including:
o lead dealer fees and expenses,
o a promotional interest,
o a back-end promotional interest,
o loan brokerage fees,
o loan evaluation and processing fees,
o loan servicing fees,
o loan extension fees,
o reimbursement of operating expenses, and
o real estate brokerage commissions payable upon the resale of
foreclosed properties.
These fees will be payable even if we are not profitable or the
particular transaction causes us to incur a loss.
Our reimbursement of the expenses of Vestin Mortgage is restricted. All
of our expenses must be billed directly to, and paid by, us. We can reimburse
Vestin Mortgage for its actual cost, or we can pay the cost directly,
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<PAGE>
of goods and materials that we use or are used for our benefit and obtained from
entities unaffiliated with Vestin Mortgage and its affiliates. We will pay or
reimburse Vestin Mortgage for the cost of administrative services necessary to
its prudent operation of DM LLC, provided that this reimbursement will be at the
lower of the actual cost to Vestin Mortgage or the amount we would be required
to pay to non-affiliated persons rendering similar services in the same
location. We will not reimburse Vestin Mortgage for services for which it is
otherwise entitled to compensation by way of a separate fee, as described in
this prospectus. Vestin Mortgage will pay and will not be reimbursed by us for
any general or administrative overhead expenses it incurs that are not directly
attributable to services rendered to us or for which payment is not explicitly
authorized under applicable law.
2. Purchase Of Mortgage Notes from Vestin Mortgage. We will acquire our
mortgage loans from or through Vestin Mortgage. Vestin Mortgage is in the
business of obtaining, processing, making, brokering and selling, and managing
and servicing mortgage loans. All our mortgage loans purchased from Vestin
Mortgage will be at prices no higher than the lesser of the cost of the mortgage
loan to Vestin Mortgage or the then current market value of the mortgage loan. A
committee of officers and directors of Vestin Mortgage makes all decisions
concerning the mortgage loans in which we will invest or purchase. This
committee is currently comprised of Michael V. Shustek, Stephen J. Byrne, and
Lance K. Bradford. Because Vestin Mortgage's fees are generated by the volume of
the mortgage loans we purchase, Vestin Mortgage will face a conflict of interest
in determining whether a loan not squarely within our investment guidelines is
appropriate for our loan portfolio.
3. Non-Arm's Length Agreements. Our agreements and arrangements for
compensating Vestin Mortgage are not the result of arm's-length negotiations.
Additionally, none of the three directors of Vestin Mortgage is independent.
4. Competition for the Time and Services of Common Officers. We will
rely on Vestin Mortgage and its directors and officers for the management of our
operations. When performing their duties, the officers, directors and employees
of Vestin Mortgage may, for their own account or that of others, originate
mortgages and acquire investments similar to those made or acquired by DM LLC.
The directors of Vestin Mortgage also may act as trustees, directors or
officers, or engage in other activities for themselves and/or other entities and
may acquire, broker and originate similar mortgage investments for their own
account or that of others. Accordingly, conflicts of interest will arise in
operating more than one entity for allocating time between the entities. The
directors and officers of Vestin Mortgage will devote such time to our affairs
and as they determine in good faith and in compliance with their fiduciary
obligations to us and our members, to be necessary for our benefit.
Vestin Mortgage believes it has sufficient staff to be capable of
discharging its responsibility to us and to all other entities to which they or
their officers or affiliates are responsible. However, during times when we and
the other businesses are handling a high volume of loans, a conflict will arise
as to which company's loan processing to complete first.
Currently, Vestin Mortgage is not the mortgage broker for another
Vestin Mortgage program or entity. Vestin Mortgage does market loans to other
investors as part of its regular mortgage company business, but there are
currently no other mortgage loan investors for which Vestin Mortgage serves in
the same capacity as Vestin Mortgage does for DM LLC. We do not believe that
Vestin Mortgage will take on a significant amount of additional work outside of
the services that Vestin Mortgage performs for DM LLC. Vestin Mortgage currently
intends to focus its efforts on our mortgage loan investments and, to the extent
that our business grows, to reduce the amount of time spent on originating other
mortgage loans. There can be no assurance, however, that Vestin Mortgage will
continue with these business plans and Vestin Mortgage may service other
programs in the future.
5. Competition between us, Vestin Mortgage and Vestin Mortgage's
Affiliates for the Purchase and Sale of Mortgage Loans. Vestin Mortgage
anticipates that it or its other affiliates will engage in businesses which are
or will be competitive with ours or which have the same management as we do. To
the extent that these other entities with similar investment objectives have
funds available for investment when we do and a potentially suitable
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<PAGE>
investment has been offered to us or one of these programs, conflicts of
interest will arise as to which entity should acquire the investment.
If any conflict arises between us and any other affiliated program as
to which company will have the right to invest in a particular mortgage loan or
other investment, Vestin Mortgage will make the determination largely based on a
review the respective loan portfolios. Vestin Mortgage will also base the
decision on factors such as the amount of funds available for investment, yield,
portfolio diversification, type and location of the property on which Vestin
Mortgage will make the mortgage loan, and proposed loan or other transaction
terms. The officers and directors of Vestin Mortgage will be responsible for
monitoring this allocation method to be sure that it is applied fairly.
The officers, directors and employees of Vestin Mortgage may for their
own account or that of others originate, acquire or broker mortgage investments
similar to those made or acquired by us. Vestin Mortgage remains subject to a
fiduciary duty to us and our members described in this prospectus. Subject to
this fiduciary duty, neither Vestin Mortgage nor its affiliates will be
obligated to present to us any particular investment opportunity that comes to
their attention, even if the opportunity is of a character that might be
suitable for us.
6. Because we are a newly formed company with no prior performance
history, we expected difficulty obtaining an unaffiliated brokerage firm to act
as our dealer-manager on terms and conditions that would be as favorable as
those that could be obtained from Vestin Capital. Accordingly, we believe that
the use of Vestin Capital as the lead dealer for our offering of units is in our
best interests and those of our members. We did not negotiate the fees to be
paid to Vestin Capital on an arm's length basis. Vestin Capital and Capcourse
have not entered into any arm's length agreements.
7. Lack of Separate Representation. We are represented by the same
counsel as Vestin Mortgage and its affiliates, and we anticipate that this
multiple representation by our attorneys will continue in the future. If a
dispute arises between us and Vestin Mortgage or any of its affiliates, Vestin
Mortgage or the affiliate will either obtain separate counsel or facilitate our
retaining separate counsel for such matters. However, we do not anticipate
obtaining separate counsel should there be a need in the future to negotiate or
prepare contracts or other agreements between us and Vestin Mortgage for
services including those contemplated by this prospectus, and as a result these
agreements will not reflect arm's length bargaining.
8. Rights of Affiliates. Any director or officer of Vestin Mortgage and
any other affiliate may acquire, own, hold and dispose of units for his
individual account and may exercise all rights of a member, except for voting
rights with respect to the manager, to the same extent and in the same manner as
if he were not an affiliate of ours.
9. We may invest in mortgages acquired by Vestin Mortgage. If Vestin
Mortgage determines that an entire loan is not suitable for our loan portfolio,
we may invest in the loan with Vestin Mortgage. Our portion of the total loan
may be smaller or greater than the portion of the loan made by Vestin Mortgage,
but we expect that the terms of the loans will be substantially similar.
Investing with Vestin Mortgage could result in a conflict of interest between us
and Vestin Mortgage if the borrower defaults on the loan and each of us seeks to
protect our interests in the loan and in the security property. Because we have
no written or oral agreement or understanding with Vestin Mortgage concerning
our relative priority when a borrower defaults, you must rely on Vestin Mortgage
to act in accordance with its fiduciary duty under the operating agreement to
protect your interest.
Share ownership
The following table indicates the share ownership of Vestin. This
information was taken from Vestin's proxy statement on file with the Commission.
Vestin owns all of the 100 issued and outstanding shares of Vestin Mortgage, and
Vestin Mortgage owns all of the 273,734 issued and outstanding units in DM LLC.
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<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK PERCENT OF COMMON
BENEFICIALLY STOCK BENEFICIALLY
NAME OWNED(1) OWNED
---- -------- -----
<S> <C> <C>
Michael V. Shustek, Chairman and Chief 3,298,000 47.2%
Executive Officer
129 Augusta
Henderson, Nevada 89014
Stephen J. Byrne, President, Director
1808 Dalton Avenue 30,200 *
Henderson, Nevada 89014
Lance Bradford, Chief Financial Officer, Corporate 670,000(2) 9.7%
Secretary and Director
3441 Eastern Avenue
Las Vegas, Nevada 89109
Robert J. Aalberts, Director 1,000 *
311 Vallarte Drive
Henderson NV 89014
Robert W. Fine, Director 400,000 6.5%
3 Palazzo Terrace
Henderson, Nevada 89014
John E. Dawson, Esq., Director 8,400 *
228 South Fourth Street
Las Vegas, Nevada 89101
Robert L. Forbuss, Director 0 0%
200 Starlite Drive
Las Vegas, Nevada 89107
All directors and executive officers as a group (8 4,567,600(2) 65.4%
persons)
</TABLE>
--------------------
*Less than 1%
(1) Based upon 6,989,270 shares outstanding.
(2) Includes 640,000 shares received by Mr. Bradford and his spouse from
the Company's acquisition of L.L. Bradford & Company on March 31, 2000.
320,000 of these shares are owned by Mr. Bradford's spouse. Mr.
Bradford disclaims beneficial ownership of these shares.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Twelve Month Plan of Operation
During the next 12 months, if we sell at least 1,500,000 units, we plan
to invest in mortgage loans where our collateral is real property located
primarily in the states of Nevada, California and Arizona. Upon the sale of
these units and the end of our escrow arrangement, Vestin Mortgage will select
mortgage loans for us, and also will assist us by obtaining, processing and
managing these loans for us. We believe that we will have an adequate number of
opportunities to invest in mortgage loans in the above named states when our
escrow ends.
During the next 12 months, Vestin Mortgage will pay the initial costs
we incur, including accounting, legal, and administrative expenses and fees. We
therefore do not anticipate needing additional funds to satisfy our cash
requirements during this period. If we are unable to raise the minimum offering
amount as described elsewhere in this prospectus, Vestin Mortgage will fully
absorb all costs incurred on our behalf. Assuming we sell the minimum number of
units and escrow is broken, Vestin Mortgage will pay for the administrative
expenses we incur. However, Vestin Mortgage will not purchase units to help us
reach the 1,500,000 unit minimum.
We do not anticipate in hiring any employees, acquiring any fixed
assets like office equipment or furniture, or incurring material office expenses
during the next 12 months because we will be utilizing Vestin Mortgage's
personnel and office equipment. We will not pay Vestin Mortgage any overhead or
other compensation for providing us with its personnel and equipment.
DM LLC has not committed itself to make any acquisitions, and has not
entered into any arrangements or other transactions other than for compensation
for selling the Units. We do not intend to incur any indebtedness at the
commencement of our operations, although we do intend to establish a line of
credit for future use.
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<PAGE>
FIDUCIARY RESPONSIBILITY
Vestin Mortgage (formerly Capsource) is a fiduciary for you and DM LLC.
As a fiduciary, Vestin Mortgage must exercise good faith and integrity when
handling our affairs. Vestin Mortgage must not take advantage of us, and must
make full disclosure of any conflicts of interest or benefit to it in its
dealings with us. As set forth in the operating agreement, Vestin Mortgage has
fiduciary responsibility for the safekeeping and use of all of our funds and
assets and Vestin Mortgage will not use, or permit another to use our funds or
assets in any manner except for our exclusive benefit. Vestin Mortgage will not
allow our assets to be commingled with its assets or the assets of any other
person or company. Vestin Mortgage and its affiliates may engage in activities
similar to or identical with our business, but Vestin Mortgage must devote such
of its time to our business as it determines, in good faith, to be reasonably
necessary. Vestin Mortgage also acts for its own account as a mortgage broker.
In connection with this activity, it also brokers, arranges and services
mortgage loans for investors that it obtains in the ordinary course of its
mortgage brokerage business, including by way of seminars, general solicitations
and referrals. When it acts in those capacities, it has a fiduciary duty to each
company as set forth in the respective organizational documents, if any, and
under applicable law, and Vestin Mortgage is bound to treat each fairly and with
equal access to investment opportunities.
Additionally, Vestin Mortgage could change our investment guidelines
when a reasonably prudent person would do likewise, subject to its fiduciary
duties to our members. However, Vestin Mortgage can only change our investment
objectives upon majority approval.
The above described fiduciary duty is both contractual, arising by
virtue of the operating agreement, and imposed by Nevada common law.
Based upon the present state of the law, you have the following legal
rights and remedies concerning Vestin Mortgage and the conduct of our
operations:
o you may bring individual actions on behalf of yourself or
class actions on behalf of yourself and other members to
enforce your rights under the operating agreement and Nevada
limited liability company law, including for breaches by
Vestin Mortgage of its fiduciary duty;
o a majority may remove Vestin Mortgage as our manager, as
described elsewhere in this prospectus;
o you may bring actions on our behalf for claims we might have
as derivative actions, if Vestin Mortgage refuses to bring
suit; and
o you may bring actions under federal or state securities laws,
either individually or as part of a class of members, if
Vestin Mortgage has violated those laws in connection with the
offer and sale, or repurchase of units.
This is a rapidly changing and developing area of law. If you have
questions concerning the duties of Vestin Mortgage in its role as our manager,
you should consult with your own legal counsel.
Exculpation and Defenses
The operating agreement exculpates Vestin Mortgage from liability to
the fullest extent permitted by law. Vestin Mortgage will not be liable to us or
to you for errors in judgment or other acts or omissions not amounting to
misconduct or negligence. This means that Vestin Mortgage will have no liability
to you unless you can show that Vestin Mortgage intentionally caused the damages
or losses, or if Vestin Mortgage did not exercise the same degree of care that a
reasonably careful person would have used in the same circumstances. If Vestin
Mortgage can show that it acted in good faith and in a manner reasonably
believed to be in our best interest, and with such care as a
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<PAGE>
reasonably prudent person in a like situation would use, Vestin Mortgage would
likely have an effective defense to any legal action. You will have a more
limited right of action than you might have absent this limitation in the
operating agreement.
Indemnification
DM LLC will indemnify Vestin Mortgage, its affiliates and agents for
liabilities they incur on our behalf in dealing with third parties if they
believed the relevant conduct was in our best interest, and where there was no
fraud and no breach of a fiduciary duty or the operating agreement. The members
do not have any personal obligation to indemnify any person or entity. If the
indemnification provisions purport to include indemnification for liabilities
arising under the Securities Act of 1933, in the opinion of the Securities and
Exchange Commission, that indemnification is contrary to public policy and
unenforceable.
Notwithstanding the statements regarding indemnification in the
preceding paragraph, we will not indemnify Vestin Mortgage or any of its
affiliates, agents, or attorneys, nor any person acting as securities broker or
dealer for the units from any liability, loss or damage incurred by them arising
due to an alleged violation of federal or state securities laws unless:
o there has been a successful adjudication on the merits of each
count involving alleged securities law violations as to the
particular party;
o the claims have been dismissed with prejudice on the merits by
a court of competent jurisdiction as to the particular party;
or
o a court of competent jurisdiction approves a settlement of the
claims against the particular party and finds that
indemnification of the settlement and related costs should be
made.
Before seeking a court approval for indemnification, Vestin Mortgage is required
to cause the party seeking indemnification to apprise the court of the position
of the Securities and Exchange Commission and the Nevada Administrator
concerning indemnification for securities violations.
We will not purchase any insurance that protects a party from any
liability for which we could not indemnify that party.
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<PAGE>
SUMMARY OF OPERATING AGREEMENT,
RIGHTS OF MEMBERS AND DESCRIPTION OF UNITS
This is a summary of the operating agreement and does not contain all
the information that may be important to you. Furthermore, you will be bound by
the operating agreement by purchasing your units. Consequently, you should read
carefully both this prospectus and the operating agreement, which you can find
as Exhibit A.
Your Status
Our acceptance of your subscription agreement is effective when we
countersign it for the number of units we set forth next to our signature. If we
accept your subscription and payment for units, you will receive units in DM LLC
when we receive proceeds from the sale of at least 1,500,000 units on or before
December 31, 2000. We will promptly send you a confirmation of the number of
units you have acquired. This will be evidence that you are a member of DM LLC.
As a member, you have the rights that are outlined in this prospectus.
Limited Liability of Members
The Nevada statute under which DM LLC has been formed provides that
members are not personally liable for the obligations of their limited liability
company. The operating agreement also provides that every written agreement
entered into by us is not enforceable against our members personally.
Term of DM LLC
DM LLC will cease operating on December 31, 2019. Before then, the
members may vote by a majority to extend its life or to dissolve it sooner.
Additionally, DM LLC may dissolve earlier if Vestin Mortgage ceases serving as
the manager and the members cannot agree on a new manager within six months.
Meetings
Either Vestin Mortgage or members owning capital accounts with at least
10% of the amounts in all capital accounts may call meetings of the members.
Vestin Mortgage has informed us that it has no present intention of calling any
meetings of the members. Any voting by the members is anticipated to be by
written consent.
Voting and Other Rights of Members
We require the vote or consent of a majority to do any of the
following:
o amend the operating agreement, except that Vestin Mortgage may
amend it
- to remedy any ambiguity or formal defect or omission,
- to conform it to applicable laws and regulations, and
- to make any change which, in the judgment of Vestin
Mortgage, is not to the prejudice of the members;
o dissolve DM LLC and wind up our business;
o add or remove a manager;
o cause us to merge with another company; and
o approve or disapprove the sale of all or over 50% of our
assets.
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You may inspect our books and records at our principal office during
our regular business hours. We also maintain a copy of each appraisal for the
security property where we have invested in a mortgage loan at our principal
office for at least six years after the last date that we held the related
mortgage. You may inspect and copy these appraisals during our regular business
hours. We may charge you a fee for copying them.
Capital Accounts
Vestin Mortgage will credit the capital account it establishes for you
when we receive your initial investment after the escrow ends. We will allocate
to your capital account the percentage of our income, gains, losses and
distributions that the amount in your capital account bears to all members'
capital accounts. Your capital account will increase by the amount of additional
capital contributions you make, including distribution reinvestments, and by
your share of income and gains realized by us. Your capital account will
decrease by your share of losses realized by us and any income or capital we
distribute to you. Increases and decreases in your capital account do not depend
on the number of units you own.
Except for when we write down our investments, we do not adjust capital
accounts to reflect unrealized appreciation or depreciation of our underlying
assets. Consequently, the amount in your capital account may not reflect your
portion of the fair market value of our underlying assets. This is a continuous
offering in which allocations will be made based on the proportionate interest
of capital accounts. As a result, depending upon when units are purchased, the
units purchased by our members for one dollar will likely have:
o different rights to distributions and income from our mortgage
loans, and
o different proportionate interests in the fair market value of
our underlying assets.
If the fair market value of our assets is less than the cost of the
assets on our books when you make a capital contribution, then the value of your
units' interest in the fair market value of our underlying assets may be less
than one dollar. Conversely, if the fair market value of our assets is greater
than the cost of the assets on our books when a new member makes a capital
contribution, then your units' interest in the realized gains in the fair market
value of our assets will be shared with the new members making the contribution
or reinvestment. This will result in a dilution in the value of your units'
interest in the fair market value of our underlying assets. These principles
apply equally for when a member makes a distribution reinvestment.
Capital Contribution of Vestin Mortgage
Vestin Mortgage must contribute to our capital an amount equal to at
least 0.5% of the aggregate capital accounts of all our members. In addition,
Vestin Mortgage is entitled to a promotional interest which is likely to range
from 1.0% to 2.0% as described in the compensation tables provided elsewhere in
this prospectus. If the minimum of 1,500,000 units is sold in the offering,
$7,500 of Vestin Mortgage's existing $273,734 contribution as of March 31, 2000,
will be considered Vestin Mortgage's required minimum capital contribution. If
we invest 86.5% of the proceeds in mortgage loans as we anticipate, we will also
credit Vestin Mortgage with a $30,000 promotional interest. If the maximum of
100,000,000 units is sold in the offering, Vestin Mortgage will contribute an
additional $226,266. In that case, we will credit Vestin Mortgage with an
additional $2,000,000 in promotional interest. If a number of units between the
minimum and the maximum number of units is sold, these amounts will be adjusted
accordingly.
Unit Repurchases and Deemed Distributions
The number of units you hold will decrease when we return capital to
you and will increase when you contribute or are deemed to recontribute capital.
If we return capital to you, we will treat it as a redemption of units in an
amount proportionate to the amount in your capital account. We will provide
statements to you reflecting the number of units that we have redeemed and the
number of units that you still own as a result of the redemption. Additionally,
for tax purposes you will be deemed to have received a return of capital and
recontributed to DM LLC
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any proceeds we receive from loan repayments, foreclosures or other capital
transactions, or any loan modifications or extensions treated as a disposition
for tax purposes. While we believe that this characterization will not affect
the tax liability of our members, if the Internal Revenue Service unexpectedly
were to disagree, you may have a tax liability with no cash distributions to pay
that liability.
Write-Down of Investments
As indicated above, we make quarterly downward adjustments to the fair
market value of our assets to reflect then-current market conditions. We refer
to these downward adjustments as write-downs. We will make any necessary
write-downs within 30 days following the end of each calendar quarter. Our
accountants will then confirm that the write-down conforms with generally
accepted accounting principles. If a write-down is required, the write-down
shall be effective on the last day of the calendar quarter and the capital
accounts of all members on that date shall be reduced accordingly.
Members' Return on Investment
Our mortgage loans will generate monthly payments of interest and/or
principal to us. We intend to distribute these payments to you as described
below. These distributions will be paid monthly in arrears in cash or via
reinvestment. We will not accumulate assets other than mortgage notes or similar
instruments and we will not accumulate cash on hand, except for working capital
reserves of at least 3% of capital contributions. We cannot make distributions
to you until we have received the proceeds from the offering, and invested them
in mortgage loans. Thereafter, our first distribution to you will be your share
of our distribution for the month in which your contribution is actually
received by us and invested. We calculate the amount of your distributions on a
pro rata basis, based upon the monthly return, if any, on all of our assets, the
size of your capital account and, if applicable, when during the month we
received your contribution.
All net income attributable to interest payments from borrowers will be
distributed. When we distribute net income attributable to interest payments,
the distributions will be made to the members in the following ratios, assuming
that we have invested 86.5% of the proceeds in mortgage loans:
o 10% to Vestin Mortgage as part of its "back-end" promotional
interest, and
o 90% to the members, of which 2.5%, or 2.25% of the total
monthly distribution, will be paid to Vestin Mortgage as a
result of its contributed capital and carried interest, and
the remaining 97.5%, or 87.75% of the total monthly
distribution, to the other members. The aggregate distribution
to Vestin Mortgage will be 12.25% of the total distribution.
These proportions are subject to change if Vestin Mortgage's
promotional interest fluctuates.
Net proceeds will include the proceeds from the repayment of principal
or the prepayment of a mortgage loan, or the net proceeds of a foreclosure sale.
Vestin Mortgage may consider the factors listed below in determining whether and
how much of the net proceeds to distribute:
o reinvesting in new loans, at any time before seven years after
the registration statement becomes effective,
o improving or maintaining any properties that we acquire
through foreclosure,
o paying permitted operating expenses, or
o distributing to the members.
When we distribute net proceeds of loan repayments, the distributions
will be made to the members in the following ratios, assuming that we have
invested 86.5% of the proceeds in mortgage loans: 2.5% to Vestin Mortgage
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and an aggregate of 97.5% to the other members, until the return of the members'
capital contributions plus 6% per annum of that amount. Thereafter, any amount
in excess of the 6% return will be distributed 15% to Vestin Mortgage and 85% to
the members. In this case, Vestin Mortgage will have a 2.5% interest in the 85%
distribution to the members, which means that Vestin Mortgage will receive an
aggregate of approximately 17.1% of the total distribution in excess of the 6%
return, in addition to the 2.5% it initially received as a member of DM LLC.
These proportions are subject to change if Vestin Mortgage's promotional
interest fluctuates as described in the compensation tables provided elsewhere
in this prospectus: Before making a distribution, Vestin Mortgage will pay our
expenses and other liabilities and confirm that our working capital reserves are
adequate.
Distribution Reinvestment Plan
You can elect to participate in the distribution reinvestment plan by
so indicating in your completed subscription agreement, or you can later elect
to become a participant. We will treat you as a distribution reinvestment plan
participant on the date we actually receive your initial investment, if you
indicate in your subscription agreement that you want to participate in the
plan. You may also make an election or revoke a previous election at any time by
sending us written notice. Units purchased under the plan will be credited to
your capital account as of the first day of the month following the month in
which the reinvested distribution was made. If you notify us prior to 10 days
before the end of any given month, you will be removed from the reinvestment
plan during that month and any distribution you receive that month will be paid
in cash. If you notify us within ten days of the end of the month, you will need
to wait a month to receive cash instead of units.
Your continued participation in the plan depends on whether you meet
our investor suitability standards. While you are a participant, for each $1.00
in distributions you reinvest, you will acquire one unit. Vestin Mortgage may
terminate or reinstate, as applicable, the distribution reinvestment plan at any
time. Vestin Mortgage shall not earn any fees when you reinvest net proceeds.
If you choose to reinvest your distributions in units, we will send you
a report within 30 days after each time you receive units describing the
distributions you received, the number of units you purchased, the purchase
price per Unit, and the total number of units accumulated. We will also send you
a current prospectus and tax information for income earned on units under the
reinvestment plan for the calendar year when you receive annual tax information
from us. You must pay applicable income taxes upon all distributions, whether
the distribution is paid in cash or reinvested.
No reinvestment participant shall have the right to draw checks or
drafts against his distribution reinvestment account.
Units you acquire through the distribution reinvestment plan carry the
same rights as the units you acquired through your original investment. However,
as previously noted, the value of the new units issued for one dollar will not
necessarily be the same as those previously acquired for one dollar.
We may amend or end the distribution reinvestment plan for any reason
at any time by mailing a notice to you at your last address or record at least
30 days before the effective date of our action. Vestin Mortgage specifically
reserves the right to suspend or end the distribution reinvestment plan if:
o Vestin Mortgage determines that the distribution reinvestment
plan impairs our capital or operations;
o Vestin Mortgage determines that an emergency makes continuing
the plan unreasonable;
o any governmental or regulatory agency with jurisdiction over
us requires us to do so;
o in the opinion of our counsel, the distribution reinvestment
plan is no longer permitted by federal or state law;
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o if transactions involving units within the previous twelve
(12) months would result in our being considered terminated
under Section 708 of the Internal Revenue Code; or
o Vestin Mortgage determines that allowing any further
reinvestments would crease a material risk that we would be
treated as a "publicly traded partnership" within the meaning
of Section 7704 of the Internal Revenue Code.
Reinvestment of Proceeds of Capital Transactions
We will either invest our net proceeds from any capital transaction in
new mortgage loans, hold the net proceeds as cash or distribute them to the
members. Capital transactions include payments of principal, foreclosures and
prepayments of mortgages, to the extent classified as a return of capital under
the Internal Revenue Code, and any other disposition of a mortgage or property.
Net proceeds of capital transactions will also include the principal of a loan
deemed to be repaid for tax purposes as a result of a loan modification or loan
extension. Our operating agreement provides that if we reinvest the proceeds,
you will be deemed to have received a distribution of capital and recontributed
the same amount to DM LLC for tax purposes. Units purchased by virtue of a
deemed recontribution of distributed capital will be credited to your capital
account as of the day when the distribution was deemed to be made. Units you
acquire through the deemed recontribution of capital carry the same rights as
the units you acquired through your original investment. However, as previously
noted, the value of the new units issued for one dollar will not necessarily be
the same as those previously acquired for one dollar.
Assignment and Transfer of Units
Your rights to sell or transfer units are limited. There is no public
market in which you may sell your units. We do not expect a public market to
emerge anytime in the future. You may not sell parts of units unless required by
law and you may not transfer any units if, as a result, you would own fewer than
2,000 units. You may transfer your units using a form approved by Vestin
Mortgage and must obey all relevant laws when you are permitted to transfer
units. Any person who buys units from you must meet the investor suitability
requirements in his home state. Vestin Mortgage must approve any new members and
all transfers of membership must comply with the operating agreement. Vestin
Mortgage's consent to transfers will be withheld to the extent needed to
prohibit transfers that would cause us to be classified as a publicly traded
partnership under the Internal Revenue Code.
Repurchase of Units, Withdrawal from DM LLC
You may withdraw, or partially withdraw, from DM LLC and obtain the
return of all or part of your capital account within 61 to 91 days after you
deliver written notice of withdrawal to Vestin Mortgage, subject to the
following additional conditions:
o You should not expect to be able to withdraw from DM LLC until
one year after you purchased units.
o We can only make cash payments in return of an outstanding
capital account from net proceeds and capital contributions.
o You will be limited to a maximum of $100,000 in withdrawals
per calendar year.
o We are not required to sell any portion of our assets to fund
a withdrawal.
o Vestin Mortgage will not reinvest net proceeds for a period of
up to 90 days after receiving a withdrawal notice from you if
we do not have sufficient funds available to distribute to you
all of your capital account in cash.
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o The amount to be distributed to you depends solely on your
capital account on the date of the distribution, even if this
is not the same as your proportionate share of the then fair
market value of our assets.
o We will not permit more than 10% of the outstanding capital
accounts of members to be withdrawn during any calendar year,
except upon the dissolution of DM LLC.
o If your capital account is reduced below $2,000 due to any
withdrawal payment, we may distribute all remaining amounts in
your capital account to you in cancellation of your units, and
you will then cease to be a member.
o All payments to meet requests for withdrawal are on a
"first-come, first-served" basis. If the sums needed to fund
withdrawals in any particular month exceed the amount of cash
available for withdrawals, funds will be distributed first to
the member whose request we received first, until his
withdrawal request is paid in full.
Options and Warrants
The operating agreement does not provide for the purchase of options or
warrants to any party. In the event that Vestin Mortgage, as manager, elects to
issue options or warrants, they will be offered on the same terms to all
persons, including members other than Vestin, its subsidiaries and affiliates,
Additionally:
o The options or warrants will have an exercise price that is
not less than the fair market value of the units on the date
the options or warrants are issued;
o The options or warrants will not be issued for consideration
less than the fair market value of the option or warrant on
the date of issue; and
o Units underlying the options or warrants, in aggregate, shall
not exceed 10% of the then issued and outstanding units.
Special Power of Attorney
Under the terms of the operating agreement and the subscription
agreement, you appoint Vestin Mortgage your attorney-in-fact for certain
documents, including the signing of the operating agreement. You cannot revoke
this special power of attorney, which will survive your death and stays with
your units even if they are assigned.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated federal income tax
aspects of an investment in units. Because this is a summary, it does not
contain all the information that may be important to you. This summary is based
on the Internal Revenue Code as in existence on the date of this prospectus,
existing laws, judicial decisions and administrative regulations, rulings and
practice, any of which are subject to change, and these changes could be
retroactive.
We and our members may be subject to state and local taxes in states
and localities in which the IRS or state authorities deem us to be doing
business, and except where we reference specific states, this discussion does
not cover state or local tax consequences you may incur in connection with your
investment.
Some of the deductions we intend to claim or positions we intend to
take for tax purposes may be challenged by the IRS. The IRS has increased its
audit efforts with respect to limited partnerships and limited liability
companies, and an audit of our information return may result in, among other
things, an increase in our gross income, the disallowance of certain deductions
or credits we have claimed or in an audit of your income tax returns.
Any audit adjustments made by the IRS could adversely affect you even
if none of these adjustments are ultimately sustained, since you and the other
members will, directly or indirectly, bear the expense of contesting the
adjustments.
We advise you to consult your own tax advisors, with specific reference
to your own tax situation and potential changes in applicable laws and
regulations.
Vestin Mortgage will prepare our information returns, which will not be
reviewed by our independent accountants or tax counsel. Vestin Mortgage will
handle all of our other tax matters, often with the advice of independent
accountants and/or tax counsel.
Tax counsel has delivered an opinion letter to us which is attached as
an exhibit to the registration statement of which this prospectus forms a part.
This letter contains the following opinions with respect to tax matters
affecting us:
o we will be classified as a partnership rather than as an
association taxable as a corporation for federal income tax
purposes;
o we will not be classified as a publicly traded partnership for
federal income tax purposes; and
o the discussion set forth below is an accurate summary of the
material federal income tax aspects of your investment in
units.
The following discusses the material tax issues associated with an
investment in units. All of the conclusions as to the tax treatment of a
particular tax item set forth in the following discussion reflect the opinion of
tax counsel unless otherwise expressly indicated.
The discussion considers existing laws, applicable current and proposed
Treasury Regulations; current published administrative positions of the IRS
contained in revenue rulings, revenue procedures and other IRS pronouncements,
and published judicial decisions. We do not know whether a court would sustain
any position we take for tax purposes, if contested, or whether there might be
legislative or administrative changes or court decisions that would modify this
discussion. Any of these changes may or may not be retroactive with respect to
transactions prior to the date of the changes.
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Moreover, it is possible that the changes, even if not applied
retroactively, could reduce the tax benefits anticipated to be associated with
an investment in units.
We urge you to consult and rely upon your own tax advisor with respect
to the federal and state consequences arising from an investment in units. The
cost of the consultation could, depending on the amount charged to you, decrease
any return anticipated on the investment. Nothing in this prospectus is or
should be construed as legal or tax advice to any specific investor as
individual circumstances may vary. This federal income tax consequences section
of this prospectus only provides the current state of tax laws. You should be
aware that the IRS may not agree with all tax positions taken by us and that
legislative, administrative or court decisions may reduce or eliminate your
anticipated tax benefits.
Classification as a Partnership
Under Treasury Regulations issued in December 1996, a domestic limited
liability company with more than one member will be classified as a partnership
for federal income tax purposes unless it makes an election to be classified as
an association taxable as a corporation. We are a domestic limited liability
company, and if we complete a minimum offering of 1,500,000 units, we will have
more than one member. Vestin Mortgage will not cause us to make an election to
be classified as an association taxable as a corporation. Based on the
foregoing, it is the opinion of tax counsel that we will be classified as a
partnership for federal income tax purposes.
Assuming that we will be classified as a partnership for federal income
tax purposes, in the discussion that follows, as the context requires:
o the use of the term partnership will be construed to refer
also to a limited liability company classified as a
partnership for federal income tax purposes;
o the use of the term partner will be construed to refer also to
a member of a limited liability company; and
o the use of the terms partnership interest or interest in the
partnership or similar terms will be construed to refer also
to the interest of a member in a limited liability company.
We Will Not Be Classified As A Publicly Traded Partnership
Section 7704 of the Internal Revenue Code treats publicly traded
partnerships as corporations for federal income tax purposes. Section 7704(b) of
the Internal Revenue Code defines the term publicly traded partnership as any
partnership, including a limited liability company otherwise classified as a
partnership for federal income tax purposes, where the equity interests are:
o readily traded on an established securities market; or
o readily tradable on a secondary market or the substantial
equivalent of a secondary market. In the discussion that
follows, the references to a secondary marked also include the
substantial equivalents to a secondary market.
In 1995, the IRS issued final Treasury Regulations under Section 7704
of the Internal Revenue Code. These regulations provide that an established
securities market includes:
o a national securities exchange registered under the Securities
Exchange Act of 1934;
o a national securities exchange exempt from registration
because of the limited volume of transactions;
o a foreign securities exchange;
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o a regional or local exchange; and
o an interdealer quotation system that regularly disseminates
firm buy or sell quotations by identified brokers or dealers
by electronic means or otherwise.
In determining when partnership interests will be treated as readily
tradable on a secondary market, there are a number of safe harbors that allow
certain transactions to be disregarded including a safe harbor that is available
if the sum of the percentage interests in partnership capital or profits that
are sold or otherwise disposed of during the taxable year does not exceed two
percent (2%) of the total interests in partnership capital or profits.
The IRS will disregard certain transfers for purposes of determining
whether this safe harbor is met:
o transfers at death,
o transfers in which the basis is determined under Section 732
of the Internal Revenue Code,
o interests issued by the partnership for cash, property or
services, and
o interests in the partnership which are redeemed pursuant to
the safe harbor discussed in the next paragraph.
The IRS also will disregard transfers of an interest in a partnership
pursuant to a redemption or repurchase agreement where the partnership maintains
a plan of redemption or repurchase in which the partners may tender their
partnership interests for purchase by the partnership, another partner or
persons related to another partner. These transfers will be disregarded in
determining that our units are readily tradable on a secondary market if:
o the redemption agreement requires that the redemption cannot
occur until at least 60 calendar days after the partner
notifies the partnership in writing of the partner's intention
to exercise the redemption rights;
o the redemption agreement requires that the redemption price
cannot be established until at least 60 days after receipt of
the notification by the partnership or the price is
established not more than 4 times during the partnership's
taxable year; and
o the sum of the percentage interests in partnership capital and
profits represented by partnership interests that are
transferred, other than in transfers otherwise disregarded, as
described above, during the taxable year of the partnership,
does not exceed 10% of the total interests in partnership
capital or profits.
Our operating agreement provides that, subject to the limitations
described elsewhere in this prospectus, you may withdraw or partially withdraw
as a member and obtain the return of your outstanding capital account. These
provisions constitute a redemption or repurchase agreement within the meaning of
these regulations.
The limitations on your right to withdraw your capital account set
forth in our operating agreement include:
o a requirement that the withdrawal will not be made until at
least 61 days after written notice of withdrawal is delivered
to Vestin Mortgage;
o the amount distributed to you will be a sum equal to your
capital account as of the date of the distribution; and
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o in no event will Vestin Mortgage permit the withdrawal during
any calendar year of more than 10% of the outstanding units.
In the opinion of tax counsel, the foregoing limitations satisfy the
requirements applicable to the safe harbor for transfers made pursuant to a
redemption or repurchase agreement.
Our operating agreement provides that you may not transfer your units
if Vestin Mortgage determines that the transfer would result in our being
classified as a publicly traded partnership within the meaning of Section
7704(b) of the Internal Revenue Code. To prevent this classification, our
operating agreement provides that:
o Vestin Mortgage will not permit trading of units on an
established securities market within the meaning of Section
7704(b) of the Internal Revenue Code;
o Vestin Mortgage will prohibit any transfer of units which
would cause the sum of percentage interests in our capital or
profits represented by partnership interests that are
transferred during any taxable year to exceed the limitation
under the safe harbor which applies if the sum of the
percentage interests in the partnership capital or profits
that are sold or otherwise disposed of during the taxable year
does not exceed two percent of the total interests in
partnership capital or profits; and
o Vestin Mortgage will not permit any withdrawal of units except
in compliance with the provisions of our operating agreement.
Based upon the provisions of our operating agreement and the
representations of Vestin Mortgage, tax counsel's opinion is that:
o units will not be traded on an established securities market
within the meaning of Section 7704 of the Internal Revenue
Code;
o our operation with regard to the withdrawal by members will
qualify for the safe harbor that applies to interests which
are transferred pursuant to a redemption or repurchase
agreement;
o our operation with regard to the transfer of units by members
will qualify for the above-referenced safe harbor that applies
based upon the percentage interests in the partnership capital
or profits that are sold or otherwise disposed of during the
taxable year;
o units will not be considered as readily tradable on a
secondary market; and
o we will not be classified as a publicly traded partnership for
purposes of Section 7704 of the Internal Revenue Code.
A partnership which is classified as a publicly traded partnership
under Section 7704 of the Internal Revenue Code will not be treated as a
corporation for federal income tax purposes if 90% or more of its gross income
is qualifying income. Qualifying income under Section 7704(c) includes for these
purposes, among other passive-type items, interest, dividends, real property
rents, and gains from the sale of real property, but excludes interest derived
in the conduct of a financial business.
If a publicly traded partnership is not taxed as a corporation because
it meets the qualifying income test, the passive loss rules discussed below are
applied separately to the partnership, and a tax-exempt partner's share of the
partnership's gross income is treated as income from an unrelated trade or
business under the unrelated trade or business taxable income rules discussed
below.
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It is not clear whether we would satisfy the qualifying income test of
Section 7704(c) of the Internal Revenue Code, and tax counsel is unable to give
an opinion on this issue. This would be relevant only if it were determined that
we should be classified as a publicly traded partnership. Vestin Mortgage
expects that more than 90% of our income will be qualifying income. However, it
is not clear whether we will be engaged in the conduct of a financial business,
and tax counsel is unable to give an opinion on this issue. If we were
classified as a publicly traded partnership and considered to be engaged in a
financial business, we would be treated as a corporation for federal income tax
purposes.
General Principles of Partnership Taxation
A partnership is not subject to any federal income taxes. We will file
information returns reporting our operations on the accrual basis for each
calendar year.
Determination of Basis in Units
You will not be taxed on distributions you receive from us unless the
distributions exceed your adjusted basis in your units. Your adjusted basis in
your units is the amount you originally paid for the units increased by:
o your proportionate share of partnership indebtedness with
respect to which no member is personally liable;
o your proportionate share of our taxable income, and
o any additional capital contributions made by you,
and decreased by:
o your proportionate share of our losses,
o the amount of cash, and fair value of noncash, distributions
to you, and
o any decreases in your share of any of partnership nonrecourse
liabilities.
Any increase in nonrecourse liabilities is treated as a cash
contribution and a decrease in nonrecourse liabilities is treated as a cash
distribution, even though you do not actually contribute or receive cash.
Distributions in excess of your basis generally will be treated as gain from the
sale or exchange of your units.
Allocations of Profits and Losses
We will allocate to the members profits and losses and cash
distributions in the manner described in our operating agreement. Any allocation
of profits and losses will be recognized as long as it has substantial economic
effect under the Treasury Regulations promulgated under Section 704(b) of the
Internal Revenue Code by satisfying one of these tests:
o it has substantial economic effect;
o it is in accordance with the partners' interest in the
partnership, determined by taking into account all facts and
circumstances; or
o it is deemed to be in accordance with the partners' interest
in the partnership.
We have decided to establish the validity of the allocations of profits
and losses under our operating agreement by demonstrating that these allocations
will be in accordance with the partners' interest in the partnership.
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The allocations of profits, losses and cash distributions contained in our
operating agreement will be substantially proportionate to the capital accounts
of the members. For this reason, in the opinion of tax counsel, the IRS should
treat the allocations as being substantially in accordance with the partners'
interests in the partnership within the meaning of this alternative method for
establishing the validity of allocations.
Limitations on the Deduction of Losses
We do not expect that we will incur net losses in any taxable year.
However, if we were to incur losses in any year, your ability to deduct your
distributive share of the losses would be subject to the potential application
of the limitations discussed below.
The Basis Limitation
Section 704(d) of the Internal Revenue Code provides that a partner's
share of partnership losses is deductible only to the extent of his adjusted
basis in his partnership interest at the end of the year in which the losses
occur. Losses disallowed under Section 704(d) of the Internal Revenue Code may
be carried forward indefinitely until adequate basis is available to permit
their deduction. Due to this limitation, you will be precluded from deducting
losses in excess of your adjusted basis in your units.
The At Risk Limitation
Section 465 of the Internal Revenue Code provides that a partner's
share of partnership losses is deductible only to the extent the partner is at
risk. The primary effect of this provision is to limit the availability of tax
losses of a partnership as offsets against other taxable income of a partner to
the partner's adjusted basis in his partnership interest, excluding any portion
of adjusted basis attributable to partnership nonrecourse indebtedness. In
addition, the at risk amount does not include contributions by a partner to the
extent the partner used the proceeds of a nonrecourse borrowing to make the
contributions.
The Passive Loss Rules
Section 469 of the Internal Revenue Code limits the deductibility of
losses from passive activities for individuals, estates, trusts and certain
closely-held corporations. A passive activity includes an activity which
involves the conduct of a trade or business in which the taxpayer does not
materially participate. Losses from passive activities are only allowed to
offset income from passive activities and will not be allowed to offset
portfolio income, trade or business income or other nonpassive income, including
wages or salaries. Suspended losses and credits attributable to passive
activities are carried forward and treated as deductions and credits from
passive activities in the next year. Suspended losses from a passive activity
are allowed in full when the taxpayer disposes of his entire interest in the
passive activity in a taxable transaction.
The Treasury Regulations under Section 469 of the Internal Revenue Code
provide that in certain situations, net income, but not net loss from a passive
activity is treated as nonpassive. One of the items covered by these regulations
is net income from an equity-financed lending activity. An equity-financed
lending activity is defined as an activity that involves a trade or business of
lending money, if the average outstanding balance of liabilities incurred in the
activity for the taxable year does not exceed 80% of the average outstanding
balance of the interest-bearing assets held in the activity for the year.
Vestin Mortgage expects that at no time will the average outstanding
balance of our liabilities exceed 80% of the average outstanding balance of our
mortgage loans. If we are deemed to be engaged in the trade or business of
lending money, our income will generally be recharacterized as nonpassive
income, even though our net losses or your loss on the sale of a unit will be
treated as passive activity losses.
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If we are not considered engaged in a trade or business of lending
money, then income and loss will be considered portfolio income and loss, and
you will not be permitted to offset passive losses from other activities against
your share of our income.
Section 67(a) of the Internal Revenue Code provides that most
miscellaneous itemized deductions are deductible by an individual taxpayer only
to the extent that they exceed 2% of the taxpayer's adjusted gross income and
are subject to additional limitations for certain high-income taxpayers.
Deductions from a trade or business are not subject to these limitations. Your
allocable share of our expenses will be considered miscellaneous itemized
deductions subject to this 2% limitation only if we are not considered to be in
the trade or business of lending money.
Computation of Gain or Loss on Sale or Redemption of Units
If you sell your units, including a sale of your units to us in a
redemption transaction, you will recognize gain or loss on the sale measured by
the difference between the amount realized and your adjusted basis in the units.
Character of Gain or Loss
Gain on the sale of units which have been held over 12 months should be
taxable as long-term capital gain, except for that portion of the gain allocable
to substantially appreciated inventory items and unrealized receivables, as
those terms are defined in Section 751 of the Internal Revenue Code, which would
be treated as ordinary income. We may have unrealized receivables arising from
the ordinary income component of market discount bonds. In addition, if we hold
property as a result of foreclosure, which is unsold at the time you sell your
units, or hold an investment in a mortgage loan that is classified as an equity
interest, the amount of ordinary income that would result if we were to sell the
property is expected to be an unrealized receivable.
For noncorporate taxpayers, long-term capital gain for assets held
longer than 12 months is subject to a maximum rate of 20%, or 10% for
individuals in the 15% tax bracket. The amount of ordinary income against which
a noncorporate taxpayer may deduct a capital loss is the lower of $3,000 or
$1,500 in the case of a married taxpayer filing a separate return, or the excess
of these losses of the taxpayer over the taxpayer's capital gain.
Tax Rates on a Partner's Share of Ordinary Income from the Partnership
Your tax liability with respect to an investment in units will depend
upon your individual tax bracket. Currently, there are five tax brackets for
individuals. For calendar year 2000,
o the first bracket is at 15% on taxable income not over $43,850
in the case of married taxpayers filing joint returns,
o the second at 28% on taxable income from $43,850-$105,950,
o the third at 31% on taxable income from $105,950-$161,450,
o the fourth at 36% on taxable income from $161,450-$288,350,
and
o the fifth at 39.6% on taxable income over $288,350.
Distributions and Deemed Distributions
Distributions to you from us may take the form of either actual cash
distributions or so-called "deemed distributions." A deemed distribution is
treated as a cash distribution and can result from your decision to participate
in our distribution reinvestment plan. If you elect to participate in our
distribution reinvestment plan,
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under the terms of our operating agreement, you will be deemed to have received
a distribution of your share of net income and to have recontributed the same
amount to DM LLC.
Our operating agreement also provides that a deemed distribution and an
equivalent recontribution will result if we reinvest our net proceeds from any
capital transactions in new mortgage loans. Capital transactions are defined in
the operating agreement to include payments of principal, foreclosures and
prepayments of mortgages, or any other disposition of a mortgage or property.
For this purpose, a disposition of a mortgage is deemed to occur if "significant
modifications" to the mortgage are made within the meaning of Section 1001 of
the Internal Revenue Code and the regulations thereunder.
Distributions to you, including deemed distributions, will not generate
taxable income to you unless and to the extent the amount of any such
distribution exceeds your basis in your units. We do no anticipate that you will
recognize any taxable income as a result of any deemed distributions resulting
from your election to participate in our distribution reinvestment plan or from
our decision to reinvest net proceeds from any capital transactions (including
significant modifications of any existing mortgage).
Depreciation
From time to time we may acquire equity or leasehold interests in real
property by foreclosure. The cost of the improvements on any of these owned real
property may be recovered through depreciation deductions over a period of 39
years.
Investment Interest
Section 163(d) of the Internal Revenue Code, applicable to noncorporate
taxpayers and S corporation shareholders, limits the deductibility of interest
incurred on loans used to acquire or carry property held for investment.
Property held for investment includes all investments held for the production of
taxable income or gain, but does not include trade or business property or
interest incurred to construct trade or business property. Investment interest
is deductible by noncorporate taxpayers and S corporation shareholders only to
the extent it does not exceed net investment income for the taxable year.
Net investment income is the excess of investment income over the sum
of investment expenses. Interest expense we incur and interest expense you incur
to acquire your units will not be treated as investment interest to the extent
attributable to a passive activity conducted by us. However, that portion of
interest expense allocable to portfolio investments is subject to the investment
interest limitations.
Interest attributable to debt you incur in order to purchase or carry
units may constitute investment interest subject to these deductibility
limitations. You should consider the effect of investment interest limitations
on using debt financing for your purchase of units.
Tax Treatment of Tax-Exempt Entities
Sections 511 through 514 of the Internal Revenue Code impose a tax on
the unrelated business taxable income of organizations otherwise exempt from tax
under Section 501(a) of the Internal Revenue Code. The entities subject to the
unrelated business income tax include:
o qualified plans, and
o IRAs.
Other charitable and tax-exempt organizations are also generally
subject to the unrelated business income tax. Interest income is not subject to
this tax unless it constitutes debt-financed income.
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Unrelated business taxable income includes gross income, which may be
subject to deductions and modifications, derived from any trade or business
regularly carried on by a partnership. Among the items excluded from unrelated
business taxable income are:
o interest and dividend income;
o rents from real property, other than debt-financed property or
property from which participating rentals are derived; and
o gains on the sale, exchange or other disposition of assets
held for investment.
The receipt of unrelated business taxable income by an entity subject
to the unrelated business income tax has no effect on the entity's tax-exempt
status or on the exemption from tax of its other income; however, the continual
receipt of unrelated business taxable income may cause some of these entities to
lose their exemptions. For certain types of entities subject to this tax, the
receipt of any unrelated business income taxable may cause all income of the
tax-exempt entity to be subject to tax. For example, for charitable remainder
trusts, the receipt of any taxable income from an unrelated trade or business
during a taxable year will result in the taxation of all of the trust's income
from all sources for that year. If you are a tax-exempt entity, we urge you to
consult your own tax advisors concerning the possible adverse tax consequences
resulting from an investment in units.
Vestin Mortgage intends to invest our assets so as to assure that
tax-exempt members will not derive unrelated business taxable income or
unrelated debt-financed income with respect to their units. Unrelated
debt-financed income might be derived in the event that Vestin Mortgage deems it
advisable to incur indebtedness under a line of credit in connection with
foreclosures on property where mortgagors have defaulted on their loans.
If we acquire property subject to acquisition indebtedness, the income
attributable to the portion of the property which is debt financed may be
treated as unrelated business taxable income to the entity holding units.
Sales of foreclosure property might also produce unrelated business
taxable income if we are characterized as a dealer with respect to that
property. Mortgage loans which we invest in or purchase which permit us to
participate in the appreciation value of the properties may be recharacterized
by the IRS as an equity interest and the recharacterization could result in
unrelated debt-financed income. The IRS might not agree that our other income is
not subject to tax under the unrelated business income and unrelated
debt-financed income tax provisions.
If an IRA or a qualified plan is a member and its partnership income
constitutes unrelated business taxable income, this income is subject to tax
only to the extent that its unrelated business taxable income from all sources
exceeds $1,000 for the taxable year.
In considering an investment in units of a portion of the assets of a
qualified plan or IRA, a fiduciary should consider:
o whether the investment is in accordance with the documents and
instruments governing the plan or IRA;
o whether the investment satisfies the diversification
requirements of Section 404(a)(1)(c) of ERISA;
o whether the investment is prudent considering, among other
matters, that there probably will not be a market created in
which the investment can be sold or otherwise disposed of; and
o whether the investment would cause the IRS to impose an excise
tax under Section 4975 of the Internal Revenue Code.
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We do not expect an investment in units by an IRA to be subject to the
above diversification and prudence requirements of ERISA unless the IRA also is
treated under Section 3(2) of ERISA as part of an employee pension benefit plan
which is established or maintained by an employer, employee organization, or
both.
Partnership Tax Returns, Tax Information and Audits
Vestin Mortgage will prepare our information income tax returns. In
connection with the preparation of our income tax returns, Vestin Mortgage will
prepare and distribute to the Members not later than seventy-five (75) days
after the close of each fiscal year all information necessary in the preparation
of the Members' federal income tax returns, including our Schedule K (Form
1065), Partner's Share of Income, Credits, Deductions, and each Member's
respective Schedule K-1. Such information will not be supplied to assignees who
are not substitute Members.
You are required to report your distributive share of the items set
forth on your Schedule K-1 on your individual tax return consistent with our
treatment of the items on our returns. You may report an item inconsistently if
you file a statement with the IRS identifying the inconsistency. Otherwise, the
IRS may summarily assess additional tax necessary to make your treatment of the
item consistent with our treatment of the item without a notice of deficiency or
an opportunity to protest the additional tax in the Tax Court being afforded to
you. Penalties for intentional disregard of the consistency requirements may
also be assessed.
Our tax returns may be audited by the IRS. Tax audits and adjustments
are made at our level in once unified proceeding, the results of which are
binding on all members. You may, however, protest the additional tax paying the
full amount thereof and suing for a refund in either the U.S. Claims Court or a
U.S. District Court.
Vestin Mortgage is Tax Matters Partner
A limited liability company which is classified as partnership for tax
purposes must designate a tax matters partner to represent it in dealing with
the IRS. Vestin Mortgage will serve as the tax matters partner to act on our
behalf and on behalf of the members with respect to partnership items, to deal
with the IRS and to initiate any appropriate administrative or judicial actions
to contest any proposed adjustments at the partnership level.
If you own less than a 1% of the units, you will not receive notice
from the IRS of these administrative proceedings unless you form a group with
other members, having an aggregate interest of 5% or more, and request the
notice. However, all members have the right to participate in the administrative
proceedings will be our responsibility and may adversely affect the
profitability, if any, of our operations.
Adjustments, if any, resulting from any audit may require you to file
an amended tax return, and may result in an audit of your own tax return. Any
audit of your tax return could result in adjustments of items unrelated to our
operations as well as income and losses from our operations.
Original Issue Discount Rules
The original issue discount rules under the Internal Revenue Code
pertain to mortgage loans and obligations issued by us. The effect will be that
we will realize as interest income the amount that economically accrues under a
mortgage loan during the course of the year, using compound interest concepts,
even where a lesser amount is actually paid or accrued under its terms.
Identical concepts will be used for determining our interest deduction on our
obligations, if any.
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Market Discount
We may purchase mortgage investments for an amount substantially less
than the remaining principal balance of the mortgage investments. Each monthly
payment which we receive from a mortgagor will consist of interest at the stated
rate for the investment in a mortgage loan and a principal payment. If we
purchase an investment in a mortgage loan at a discount, for federal income tax
purposes the principal portion of each monthly payment will constitute the
return of a portion of our investment in the investment in a mortgage loan and
the payment of a portion of the market discount for the investment in a mortgage
loan.
We will recognize the amount of each monthly payment attributable to
market discount as ordinary income, but the amount of each monthly payment
representing the return of our investment will not constitute taxable income to
us. The Internal Revenue Code also treats accrued market discount as ordinary
income on the sale of an investment in a mortgage loan.
No Section 754 Election - Impact on Subsequent Purchasers
Section 754 of the Internal Revenue Code permits a partnership to elect
to adjust the basis of its property in the case of a transfer of an interest in
the partnership. The effect of this election would be that, with respect to the
transferee only, the basis of our property would either be increased or
decreased by the difference between the transferee's basis for his units and his
proportionate share of our basis for all proportionate share of our basis for
all property we own.
Vestin Mortgage has decided that due to the accounting difficulties
which would be involved, it will not cause us to make an election pursuant to
Section 754 of the Internal Revenue Code. Accordingly, our basis in our assets
will not be adjusted to reflect the transferee's purchase price of his units.
This treatment might not be attractive to prospective purchasers of
units, and you might have difficulty for that reason in selling your units or
you might be forced to sell at a discounted price.
Treatment of Compensation of Vestin Mortgage
We will pay Vestin Mortgage and its affiliates certain fees and
expenses for services relating to the offering and the investment and operation
of our business, including a lead dealer fee to be paid at the initial closing
and on a monthly basis thereafter and real estate brokerage fees of up to 3% of
proceeds from the resale of foreclosed property. The lead dealer fee will be an
amount equal to 1% of the gross offering proceeds plus up to 0.5% of gross
proceeds as expense reimbursement. In addition, Vestin Mortgage may receive an
"up-front" promotional interest in our profits and losses of 1% or more and a
"back-end" promotional interest equal to the sum of 10% of cash available for
distributions from operations and 15% of cash available from the net proceeds of
capital transactions after payment of a 6% cumulative return on capital
contributions to our members.
In computing our taxable income for each year, we intend:
o to deduct the amount of all such lead dealer fees paid during
such year,
o to reduce our gain from the resale of any foreclosed property
sold during such year by the amount of all real estate
brokerage fees paid to Vestin Mortgage and its affiliates,
o to allocate income and losses to Vestin Mortgage consistent
with its up-front promotional interest in our profits and
losses, and
o to deduct as fees the amount of all payments made to Vesting
Mortgage pursuant to its back-end promotional interest during
such year.
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Our ability to obtain the foregoing tax treatment relative to these
fees and promotional interests depends in large measure on the value of the
services rendered in exchange therefor, which is a question of fact that may
depend on events to occur in the future. Due to this uncertainty, tax counsel
was unable to give an opinion as to the proper tax treatment of these fees and
promotional interests, and the IRS may attempt to recharacterize one or more
aspects of our treatment of these items by, for example, disallowing the
deduction paid with respect to the lead delaer fees paid. If successful, such
recharacterization could cause the tax benefits generated by these payments
and/or allocations of profits and losses to Vestin Mortgage to be deferred or
lost.
Vestin Mortgage will also be entitled to fees payable by borrowers in
connection with our investing in or purchasing a mortgage loan. These fees
include loan brokerage fees for loan selection and origination, loan evaluation
and processing fees and loan extension fees. The exact amount of the foregoing
fees will be negotiated with prospective borrowers on a case-by-case basis. In
addition, Vestin Mortgage will act as a servicing agent with respect to our
investments, for which it will be paid by the relevant borrower an annual fee of
up to one-quarter of one percent (0.25%) of the unpaid balance of the respective
mortgage loan serviced.
Since any of the commissions or fees described in the preceding
paragraph will be payable by the borrowers, their payment should not have any
effect on the calculation of our taxable income. The IRS could take the position
that these commissions or fees, or any of them, are constructively paid by us,
in which case our interest income would be increased by the amount of the
commissions, and we could deduct the commissions only to the extent the
commissions or fees are reasonable compensation for the services rendered and
otherwise considered deductible expenditures. This could result in an increase
in the Company's taxable income for any year in which such a recharacterization
occurs and an allocation of this increase in taxable income among the members.
Since this is ultimately an issue of fact which may depend on future
events, tax counsel was unable to give an opinion regarding the issue.
Vestin Mortgage will be entitled to reimbursement from us for expenses
advanced by Vestin Mortgage for our benefit and for salaries and related
expenses for nonmanagemenent and nonsupervisory services performed for our
benefit. Our reimbursement of these expenses will be treated in the same manner
as if we had incurred these expenses directly.
We will receive fees from borrowers when Vestin Mortgage
o permits the reconveyance of property upon full payment of a loan,
o permits the assumption of a loan,
o acts as escrow agent for our mortgage investments, or
o receives a delinquent payment under a mortgage loan or, in some
cases, a prepayment of a mortgage loan.
We expect that our fees will be comparable to those generally prevailing in the
geographic area where the mortgaged property is located. These fees will be
included as income when we calculate our taxable income.
Possible Legislative Tax Changes
In recent years there have been a number of proposals made in Congress
by legislators, government agencies and by the executive branch of the federal
government for changes in the federal income tax laws. In addition, the IRS has
proposed changes in regulations and procedures, and numerous private interest
groups have lobbied for regulatory and legislative changes in federal income
taxation. It is impossible to predict the likelihood of adoption of any
proposal, the likely effect of any proposals upon the income tax treatment
presently associated with investment in mortgage loans or units, or the
effective date, which could be retroactive, of any legislation which may derive
from any past or future proposal.
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We strongly urge you to consider ongoing developments in this uncertain
area and to consult your own tax advisors in assessing the risks of investment
in units.
State and Local Taxes
We currently contemplate investing in or purchasing loans in Nevada,
California and Arizona. Nevada does not have an income tax law, and, we believe
that no taxes will be imposed by the State of Nevada or any of its localities on
our assets or income or on any member's share of any income derived from our
activities in Nevada.
California and Arizona may impose a tax on our assets or income, or on
each member based on his share of any income derived from our activities in
those states. In addition, we may decide to invest in or purchase loans secured
by properties in other states and localities which also may impose these taxes.
If you are entity that is exempt from federal income taxation, it is
likely that you are also exempt from state and local taxation.
The state in which you reside may impose taxes on your share of any
income derived from your interest in us. You should consult with your own tax
advisors concerning the applicability and impact of any state and local tax laws
in your state of residence.
ERISA Considerations
ERISA requires that the assets of qualified plans be held in trust and
that the trustee, or a duly authorized investment manager, within the meaning of
Section 3(38) of ERISA shall have exclusive authority and sole discretion to
manage and control the assets of the plan. ERISA also imposes certain duties on
persons who are fiduciaries of employee benefit plans subject to its provisions
and prohibits certain transactions between ERISA and an employee benefit plan
and the parties in interest with respect to qualified plans, including
fiduciaries.
Under the Internal Revenue Code, similar prohibitions apply to all
qualified plans and IRAs. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a qualified
plan or IRA is considered to be a fiduciary of the plan or IRA, subject to
certain exceptions not here relevant.
ERISA and the Internal Revenue Code also prohibit parties in interest,
including fiduciaries of an IRA or qualified plan, from engaging in various acts
of self-dealing. To prevent a possible violation of these self-dealing rules,
Vestin Mortgage may not permit the purchase of units with assets of any IRA or
qualified plan if Vestin Mortgage:
o has investment discretion with respect to the assets of the
plan or IRA, or
o regularly gives individualized investment advice which serves
ad the primary basis for the investment decisions made with
respect to the assets of the plan or IRA.
Annual Valuation
Fiduciaries of any qualified plan subject to ERISA are required to
determine annually the fair market value of the assets of the plan as of the
close of the plan's fiscal year. Although Vestin Mortgage will provide annually
upon the written request of a member an estimate of the value of the units based
upon, among other things, outstanding mortgage investments, fair market
valuation based on trading will not be possible because there will be no market
for the units.
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Plan Assets Generally
If our assets are deemed to be plan assets under ERISA:
o our investment will be subject to the prudence standards and
other provisions of ERISA applicable to investments by
qualified plans and their fiduciaries would extend to
investments made by us,
o certain transactions that we might seek to enter into might
constitute prohibited transactions under ERISA and the
Internal Revenue code because Vestin Mortgage would be deemed
to be a fiduciary of the plans, and
o our audited financial information would have to be reported
annually to the Department of Labor.
In 1986, the Department of Labor promulgated final regulations defining
the term plan assets. Under these regulations, when a plan makes an equity
investment in another entity, the underlying assets of that entity will be
considered plan assets unless one or more of the following exemptions applies:
o equity participation by benefit plan investors is not
significant,
o the entity is a real estate operating company, or
o the equity interest is a publicly-offered security.
Exemption for Insignificant Participation by Qualified Plans. This
exemption is available if less than 25% of each class of equity interests in the
corporation or partnership is held in the aggregate by qualified plans or IRAs.
For purposes of this 25% rule, the interests of any person who had
discretionary authority or control with respect to the assets of the entity, or
who provides investment advice for a fee with respect to the assets of the
entity, or any affiliate of a person who has that authority or control, shall be
disregarded.
Thus, while Vestin Mortgage and its affiliates are not prohibited from
purchasing units, any purchases of units by any of them will be disregarded in
determining whether this exemption is satisfied. We cannot assure you that we
will always qualify for this exemption.
Exemption For a Real Estate Operating Company. For purposes of this
exemption, an entity is a real estate operating company if at least 50% of its
assets valued at cost, other than short-term investments pending long-term
commitment, are invested in real estate which is managed or developed and with
respect to which the entity has the right substantially to participate directly
in the management or development of real estate.
The preamble to these regulations states the Department of Labor's view
that an entity would not be engaged in the management or development of real
estate if it merely services mortgages on real estate. Thus, it is unlikely that
we would qualify for an exemption from plan assets treatment as a real estate
operating company.
Exemption for Publicly Offered Securities. For purposes of this
exemption, a publicly offered security is a security that is:
o freely transferable,
o part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another, and
o either part of a class of securities registered under Section
12(b) or 12(g) of the Exchange Act of 1934, or sold to the
plan as part of an offering of securities to the public
pursuant to an effective registration
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statement under the Securities Act and the class of securities
of which the security is a part is registered under the
Securities Exchange Act of 1934 within 120 days, or such later
time as may be allowed by the Securities and Exchange
Commission, after the end of the fiscal year of the issuer
during which the offering of such securities to the public
occurred.
For purposes of this definition, whether a security is freely
transferable is a factual question to be determined on the basis of all relevant
facts. If a security is part of an offering in which the minimum is $10,000 or
less, however, certain customary restrictions on the transferability of
partnership interests necessary to permit partnerships to comply with applicable
federal and state laws, to prevent a termination or of the entity for federal or
state tax purposes and to meet certain enumerated administrative needs not,
alone or in combination, affect a finding that such securities are freely
transferable.
The units will be sold as part of an offering of securities to the
public pursuant to registration under the Securities Act, and Vestin Mortgage
has represented that it will cause us to register the units under the Exchange
Act within 120 days, or such later time as may be allowed by the Securities and
Exchange Commission, after the end of our fiscal year during which the offering
of units to the public occurred. The units will not be subject to any
restrictions on transfer other than those enumerated in the operating agreement,
these regulations and referenced in the preceding paragraph. Based on the
foregoing, the units should be publicly offered securities within the meaning of
these regulations. As a result, our underlying assets should be not considered
to be plan assets under these regulations.
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HOW WE PROTECT OUR RIGHTS AS A LENDER
The following discussion is a summary of legal aspects of mortgage
loans. Because this is a summary, it does not contain all the information that
may be important to you. Many of the legal aspects of mortgage loans are
governed by applicable state laws, which may vary substantially. The following
material does not reflect the laws of any particular state, unless specifically
indicated.
Overview of Mortgages
We invest in mortgage loans. In connection with these loans, we receive
mortgages or other similar instruments such as deeds of trust, granting us
rights in the security properties. Our authority under a mortgage is governed by
applicable law and the express provisions of the mortgage.
Priority of liens on mortgaged property created by mortgages depends on
their terms and on the order of filing with a state, county or municipal office,
although this priority may be altered by the mortgagee's knowledge of unrecorded
liens against the security property. However, filing or recording does not
establish priority over governmental claims for real estate taxes and
assessments. In addition, the Internal Revenue Code provides priority for
certain tax liens over the lien of the mortgage.
Foreclosure
Non-judicial Foreclosure
If a mortgage loan secured by a deed of trust is in default, we will
protect our rights by foreclosing by a non-judicial sale. Deeds of trust differ
from mortgages in form, but are in most other ways similar to mortgages. Deeds
of trust will contain specific provisions enabling non-judicial foreclosure in
addition to those provided for in applicable statutes upon any material default
by the borrower. Applicable state law controls the extent that we have to give
notice to interested parties and the amount of foreclosure expenses and costs,
including attorney's fees, which may be covered by a lender, and charged to the
borrower.
Judicial Foreclosure
Foreclosure under mortgage instruments other than deeds of trust is
more commonly accomplished by judicial action initiated by the service of legal
pleadings. When the mortgagee's right to foreclose is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. A judicial
foreclosure is subject to most of the delays and expenses of other litigation,
sometimes requiring up to several years to complete. For this reason, we do not
anticipate using judicial foreclosure to protect our rights due to the
incremental time and expense involved in these procedures.
When foreclosing under a mortgage instrument, the sale by the
designated official is often a public sale. The willingness of third parties to
purchase the property will depend to some extent on the status of the borrower's
title, existing redemption rights and the physical condition of the property. It
is common for the lender to purchase the security property at a public sale
where no third party is willing to purchase the property, for an amount equal to
the outstanding principal amount of the indebtedness and all accrued and unpaid
interest and foreclosure expenses. In this case, the debt owed to the mortgagee
will be extinguished. Thereafter, the mortgagee would assume the burdens of
ownership, including paying operating expenses and real estate taxes and making
repairs. The lender is then obligated as an owner until it can arrange a sale of
the property to a third party. If we foreclose on the security property, we
expect to obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal our
investment in the property. A lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings.
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Lenders also need to comply with procedure-related environmental rules
and regulations. An increasing number of states require that any environmental
hazards are eliminated before a property may be resold. A lender may be
responsible under federal or state law for the cost of cleaning up a mortgaged
property that is environmentally contaminated. As a result, a lender could
realize an overall loss on a mortgage loan even if the related mortgaged
property is sold at foreclosure or resold after it is acquired through
foreclosure for an amount equal to the full outstanding principal amount of the
mortgage loan, plus accrued interest.
In foreclosure proceedings, courts frequently apply equitable
principles, which are designed to relieve the borrower from the legal effects of
his immaterial defaults under the loan documents or the exercise of remedies
that would otherwise be unjust in light of the default. These equitable
principles and remedies may impede our efforts to foreclose.
Environmental Risks
Our security property may be subject to potential environmental risks.
Of particular concern may be those security properties which are, or have been,
the site of manufacturing, industrial or disposal activity. These environmental
risks may give rise to a diminution in value of the security property or
liability for clean-up costs or other remedial actions. This liability could
exceed the value of the real property or the principal balance of the related
mortgage loan. For this reason, we may choose not to foreclose on contaminated
property rather than risk incurring liability for remedial actions.
Under the laws of certain states, an owner's failure to perform
remedial actions required under environmental laws may give rise to a lien on
mortgaged property to ensure the reimbursement of remedial costs. In some states
this lien has priority over the lien of an existing mortgage against the real
property. Because the costs of remedial action could be substantial, the value
of a mortgaged property as collateral for a mortgage loan could be adversely
affected by the existence of an environmental condition giving rise to a lien.
The state of law is currently unclear as to whether and under what
circumstances clean-up costs, or the obligation to take remedial actions, can be
imposed on a secured lender. If a lender does become liable for clean up costs,
it may bring an action for contribution against the current owners or operators,
the owners or operators at the time of on-site disposal activity or any other
party who contributed to the environmental hazard, but these persons or entities
may be bankrupt or otherwise judgment-proof. Furthermore, an action against the
borrower may adversely affected by the limitations on recourse in the loan
documents.
For the foregoing reasons, we anticipate that Vestin Mortgage will
protect us and you by requiring a Phase I Environmental Site Assessment of the
security properties prior to selecting a loan for us to invest in.
Second Mortgages; Rights of Senior Mortgages
We do not presently intend to acquire mortgages that are subordinate to
more than one other mortgage. Our rights as mortgagee or beneficiary under a
second mortgages will be subordinate to those of the mortgagee under the senior
mortgage, including the prior rights of the senior mortgagee to receive rents,
hazard insurance and condemnation proceeds and to cause the security property to
be sold upon default of the mortgagor. This can extinguish a second mortgage
unless we assert our subordinate interest in foreclosure litigation or satisfy
the defaulted senior loan. In many states a junior mortgagee may satisfy a
defaulted senior loan in full, or may cure the default, and bring the senior
loan current, in either even adding the amounts expended to the balance due on
the junior loan. Absent a provision in the senior mortgage, or unless required
by state law, a senior mortgagee need not give notice of default to a junior
mortgagee.
The form of mortgage used by many institutional lenders confers on the
mortgagee the right both to receive insurance proceeds and condemnation awards.
Thus, in the event improvements on the property are damaged or destroyed by fire
or other casualty, or in the event the property is taken by condemnation, the
first mortgagee will
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have the prior right to collect any insurance proceeds payable and any
condemnation award of damages in and to apply the same to the indebtedness
secured by the senior mortgage. Proceeds in excess of the amount of senior
indebtedness will, in most cases, be applied to the indebtedness secured by a
junior mortgage. The right to insurance proceeds and condemnation awards may be
limited, as in cases where the mortgagor is allowed to use the insurance
proceeds and condemnation award to repair the damage unless the security of the
mortgagee has been impaired.
The form of mortgage used by many institutional lenders also contains a
"future advance" clause, which provides that additional amounts advanced to or
on behalf of the mortgagor by the mortgagee are to be secured by the mortgage.
While this type of clause is valid under the laws of most states, the priority
of any advance made under the clause may depend on whether the advance was an
"obligatory" or "optional" advance. If the mortgagee is obligated to advance the
additional amounts, the advance may be entitled to receive the same priority as
amounts initially made under the mortgage, notwithstanding that there may be
intervening junior mortgages and other liens and notwithstanding that the
mortgagee or beneficiary had actual knowledge of them. Where the mortgagee is
not obligated to advance the additional amounts and has actual knowledge of the
intervening junior mortgages and other liens, the advance may be subordinate to
these intervening junior mortgages and other liens. Priority of advances under a
"future advance" clause may also rest on state law giving priority to advances
made under the loan agreement up to a "credit limit" amount stated in the
recorded mortgage.
We can also protect ourselves by including provisions obligating the
mortgagor to do the following:
o pay before delinquency all taxes and assessments on the
property and, when due, all encumbrances, charges and liens on
the property which appear prior to the mortgage,
o to provide and maintain fire insurance on the property,
o to maintain and repair the property,
o and not to commit or permit any waste on the property, and
o to appear in and defend any action or proceeding purporting to
affect the property or the rights of the mortgagee under the
mortgage.
Upon a failure of the mortgagor to perform any of these obligations, we
would have the right under the mortgage to perform the obligation, with the
mortgagor agreeing to reimburse us for any sums we expend on behalf of the
mortgagor. All sums we expend become part of the indebtedness secured by the
mortgage.
Statutory Rights of Redemption
After a foreclosure sale pursuant to a mortgage, the borrower and
foreclosed junior lienors may have a statutory period in which to redeem the
property from the foreclosure sale. Redemption may be limited to where the
mortgagee receives payment of all or the entire principal balance of the loan,
accrued interest and expenses of foreclosure. The statutory right of redemption
diminishes the ability of the lender to sell the foreclosed property. The right
of redemption may defeat the title of any purchaser at a foreclosure sale or any
purchaser from the lender subsequent to a foreclosure sale. One remedy we may
have is to avoid a post-sale redemption by waiving our right to a deficiency
judgment. Consequently, as noted above, the practical effect of the redemption
right is often to force the lender to retain the property and pay the expenses
of ownership until the redemption period has run.
Anti-Deficiency Legislation
We may acquire interests in mortgage loans which limit our recourse to
foreclosure upon the security property, with no recourse against the borrower's
other assets. Even if recourse is available pursuant to the terms of
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the mortgage loan against the borrower's assets in addition to the mortgaged
property, we may confront statutory prohibitions which impose prohibitions
against or limitations on this recourse. For example, the right of the mortgagee
to obtain a deficiency judgment against the borrower may be precluded following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the security and the amount due to the lender. Other
statutes require the mortgagee to exhaust the security afforded under a mortgage
by foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. We may elect, or be deemed to have elected, between
exercising our remedies with respect to the security or the deficiency balance.
The practical effect of this election requirement is that lenders will usually
proceed first against the security rather than bringing personal action against
the borrower. Other statutory provisions limit any deficiency judgment against
the former borrower following a judicial sale to the excess of the outstanding
debt over the fair market value of the property at the time of the public sale.
In Nevada, we can pursue a deficiency judgment against the borrower or
a guarantor if the value of the property securing the loan is insufficient to
pay back the debt owed to us. In jurisdictions like California, however, if we
desire to seek a judgment in court against the borrower for the deficiency
balance, we may be required to seek judicial foreclosure and/or have other
security from the borrower. We would expect this to be a more prolonged
procedure, and is subject to most of the delays and expenses that affect other
lawsuits.
Bankruptcy Laws
We may subject to delays from statutory provisions that afford relief
to debtors from our ability to obtain payment of the loan, to realize upon
collateral and/or to enforce a deficiency judgment. Under the United States
Bankruptcy Code of 1978, which we refer to as the Bankruptcy Code, and analogous
state laws, foreclosure actions and deficiency judgment proceedings are
automatically suspended upon the filing of the bankruptcy petition, and often no
interest or principal payments are made during the course of the bankruptcy
proceeding. The delay and consequences in obtaining our remedy can be
significant. Also under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of the holder of a second mortgage may prevent the
senior lender from taking action to foreclose out the junior lien.
Under the Bankruptcy Code, the amount and terms of a mortgage on
property of the debtor may be modified under equitable principles or otherwise.
Under the terms of an approved bankruptcy plan, the court may reduce the
outstanding amount of the loan secured by the real property to the then current
value of the property in tandem with a corresponding partial reduction of the
amount of the lender's security interest. This leaves the lender having the
status of a general unsecured creditor for the differences between the property
value and the outstanding balance of the loan. Other modifications may include
the reduction in the amount of each monthly payment, which may result from a
reduction in the rate of interest and/or the alteration of the repayment
schedule, and/or change in the final maturity date. A court may approve a plan,
based on the particular facts of the reorganization case that effected the
curing of a mortgage loan default by paying arrearage over time. Also, under the
Bankruptcy Code, a bankruptcy court may permit a debtor to de-accelerate a
mortgage loan and to reinstate the loan even though the lender accelerated the
mortgage loan and final judgment of foreclosure had been entered in state court
prior to the filing of the debtor's petition. This may be done even if the full
amount due under the original loan is never repaid. Other types of significant
modifications to the terms of the mortgage or deed of trust may be acceptable to
the bankruptcy court, often depending on the particular facts and circumstances
of the specific case.
In a bankruptcy or similar proceeding action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related mortgage loan to the lender. Payments on long-term debt may be
protected from recovery as preferences if they are payments in the ordinary
course of business made on debts incurred in the ordinary course of business.
Whether any particular payment would be protected depends upon the facts
specific to a particular transaction.
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Enforceability of Certain Provisions
Due-On-Sale Provisions
Federal law pre-empts state constitutional, statutory and case law that
prohibits the enforcement of due-on-sale clauses and permits lenders to enforce
these claims in accordance with their terms. As a result, due-on-sale clauses
are enforceable except in those states whose legislatures exercised their
limited authority to regulate the enforceability of these clauses. Due-on-sale
clauses will not be enforceable in bankruptcy proceedings.
Acceleration on Default
We may invest in mortgage loans which contain a "debt-acceleration"
clause, which permits us to accelerate the full debt upon a monetary or
nonmonetary default of the borrower. The courts of most states will enforce
clauses providing for acceleration in the event of a material payment default
after we give appropriate notices. The equity courts of any state, however, may
refuse to foreclose a mortgage when an acceleration of the indebtedness would be
inequitable or unjust. Furthermore, a borrower may avoid foreclosure and
reinstate an accelerated loan by paying only the defaulted amounts and the costs
and attorney's fees incurred by the lender in collecting these defaulted
payments.
State courts also are known to apply various legal and equitable
principles to avoid enforcement of the forfeiture provisions of instalment
contracts. For example, a lender's practice of accepting late payments from the
borrower may be deemed a waiver of the forfeiture clause. State courts also may
impose equitable grace periods for payment of arrearage or otherwise permit
reinstatement of the contract following a default. If a borrower under an
instalment contract has significant equity in the property, a court may apply
equitable principles to reform or reinstate the contract or to permit the
borrower to share the proceeds upon a foreclosure sale of the property if the
sale price exceeds the debt.
Prepayment Provisions
In the absence of state statutory provisions prohibiting prepayment
fees, we expect that the courts will enforce claims requiring prepayment fees.
However, in some states prepayment fees may be unenforceable for residential
loans or after a mortgage loan has been outstanding for a number of years.
Applicable law may limit the amount of any prepayment fee to a specified
percentage of the original principal amount of the mortgage loan, to a specified
percentage of the outstanding principal balance of a mortgage loan, or to a
fixed number of month's interest on the prepaid amount. We may have to contend
with laws that render prepayment provisions on default or other involuntary
acceleration of a mortgage loan unenforceable against the mortgagor or trustor.
Some state statutory provisions may also treat prepayment fees as usurious if
they exceed statutory limits. We anticipate that our loans will not have
prepayment provisions.
Secondary Financing: Due-on-Encumbrance Provisions
Some mortgage loans may have no restrictions on secondary financing,
thereby permitting the borrower to use the mortgaged property as security for
one or more additional loans. We are more likely to invest in mortgage loans
that permit us, as first lender, to accelerate the maturity of a loan if the
borrower grants a second mortgage or in mortgage loans that require our consent
to any junior or substitute financing.
Where a borrower encumbers the mortgaged property with one or more
junior liens, the first lender is subjected to the following additional risks:
o the borrower may have difficulty servicing and repaying
multiple loans;
o acts of the senior lender which prejudice the junior lender or
impair the junior lender's security may create a superior
equity in favor of the junior lender;
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o if the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the
senior lender and can interfere with, delay and even prevent
the taking of action by the senior lender.
o the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
We expect that our loans will prohibit junior mortgages and intend to
monitor our loans closely so that we will know when a junior lien holder
acquires an interest in the security property.
Applicability of Usury Laws
State and federal usury laws limit the interest that lenders are
entitled to receive on a mortgage loan. In determining whether a given
transaction is usurious, courts may include charges in the form of points and
fees as interest, but may exclude payments in the form of reimbursement of
foreclosure expenses or other charges found to be distinct from interest. If,
however, the amount charged for the use of the money loaned is found to exceed a
statutorily established maximum rate, the form employed and the degree of
overcharge are both immaterial. Statutes differ in their provision as to the
consequences of a usurious loan. One group of statutes requires the lender to
forfeit the interest above the applicable limit or imposes a specified penalty.
Under this statutory scheme, the borrower may have the recorded mortgage or deed
of trust cancelled upon paying its debt with lawful interest, or the lender may
foreclose, but only for the debt plus lawful interest. Under a second, more
severe type of statute, a violation of the usury law results in the invalidation
of the transaction, thereby permitting the borrower to have the recorded
mortgage or deed of trust cancelled without any payment and prohibiting the
lender from foreclosing.
Nevada law does not apply limitations on interest that may be charged
on the type of loans that we intend to invest in or purchase. In California, we
will only invest in loans that were made through real estate brokers licensed by
the California Department of Real Estate. Mortgage loans made or arranged by a
licensed real estate broker are exempt from the California usury law provisions
that restrict the maximum rate of interest on California loans. All underlying
mortgage loans on California property that are invested in or purchased by us
will be arranged for us by such a licensed California real estate broker.
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REPORTS TO MEMBERS
Pursuant to applicable state guidelines and the undertakings we have
made to the Securities and Exchange Commission in our filings, we will be
required to deliver certain reports to our members and make various filings with
the Commission, particularly in the early stages of our operations. These
reports and filings are described in this section.
Within 75 days after the close of our fiscal year, Vestin Mortgage will
prepare and distribute to you all the information about us you need to prepare
your federal income tax return. The materials delivered to you annually will
include:
o audited financial statements: balance sheet, statements of
income or loss, Members' equity, and cash flow;
o a statement as to any transactions between us and Vestin
Mortgage or its affiliates, and of the fees, commissions,
compensation and other benefits paid by us or accrued to
Vestin Mortgage or its affiliates for the fiscal year
completed, showing the amount paid or accrued to each
recipient and the respective services performed; and
o a report identifying distributions from:
- cash flow from operations during that year,
- cash flow from operations of prior years that had
been held as reserves,
- proceeds from capital transactions, lease payments on
net leases with builders and sellers, and
- reserves from the gross proceeds of the offering
originally obtained from our members.
Copies of the financial statements and reports referred to above, other
than those delivered for purposes of your income tax return, shall be
distributed to you within 120 days after the close of each taxable year. We will
reimburse Vestin Mortgage for the costs of any verification performed by our
accountants in the preparation of their reports, but only to the extent that the
reimbursement when added to the costs for administrative services rendered by
Vestin Mortgage does not exceed the competitive rate for such services.
We will also provide you with the information required by Form 10-Q
within 45 days of the end of each fiscal quarter.
Once the Securities and Exchange Commission declares effective the
registration statement of which this prospectus is a part, we will become
subject to the reporting requirements of the Securities Exchange Act. This means
that we will be required to file periodic reports, including quarterly reports
within 45 days after the end of each fiscal quarter and annual reports within 90
days of the end of each fiscal year. These reports contain financial information
and an analysis of our business for that quarter or year, including comparisons
with prior performance, as well as additional disclosure in the annual reports.
Our manager and the holders of over 5% of our units will also be required to
file reports reflecting their levels of unit ownership. Furthermore, for so long
as the proceeds of this offering are not fully committed or returned to
investors, Vestin Mortgage shall prepare a special report containing a statement
of the amount of the mortgage loans in which we have invested, the material
terms of these loans, the identity of the borrower and the real property
securing the mortgage loans and the appraised values of that real property. This
report may be included in the quarterly report described below. We will send you
copies of the report within sixty (60) days after the end of each quarter.
Vestin Mortgage will not prepare a special report during quarters when there are
no mortgage loans or origination, placement or evaluation fees.
If we decide to register our units under Section 12(g) of the
Securities Exchange Act of 1934, Vestin Mortgage shall prepare, at our expense:
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o a quarterly report for each of the first three quarters in
each fiscal year containing unaudited financial statements,
consisting of a balance sheet, a statement of income or loss
and statement of cash flow, and
o a statement of other pertinent information regarding DM LLC
and its activities during the period covered by the report.
We will distribute copies of these statements and information to you
within sixty (60) days after the close of the respective quarter.
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PLAN OF DISTRIBUTION
Vestin Capital, Inc. (formerly DM Financial Services, Inc.), our lead
dealer, is using this prospectus to offer units to the public on our behalf.
Vestin Capital, which is an NASD member, is an affiliate of Vestin Mortgage and
wholly owned subsidiary of Vestin Group, Inc., the Delaware corporation that
owns Vestin Mortgage. We will pay Vestin Capital 1.0% of the gross proceeds of
the sale of units as a fee for selling the units and for managing these selected
dealers. Vestin Capital may engage non-affiliated securities brokerage firms
that are members of the NASD to act as selected dealers to sell units to the
public; however, we will pay this 1.0% fee to Vestin Capital even if it does not
engage other selected dealers. We will pay the selected dealers sales
commissions of up to 3.5% of the gross proceeds of their respective sales of
units. We will reimburse Vestin Capital and these select dealers for their
accountable expenses up to a maximum of 0.5% of the gross proceeds of this
offering. In no event will the maximum compensation to be paid to NASD members
in connection with this offering exceed 10% of the gross proceeds plus 0.5% for
bona fide due diligence expenses.
We will be reviewing subscription applications as they are received. We
will indicate our acceptance of your subscription agreement by countersigning it
and indicating the number of units we will issue. We will place all proceeds
from the sale of units in a segregated escrow account until at least 1,500,000
units have been sold. The escrow account will be with BankWest of Nevada, whose
address if 2700 West Sahara Avenue, Las Vegas, Nevada 89102-1700. We have
entered into escrow agreement with BankWest, which you can find as an exhibit to
our registration statement.
If we sell 1,500,000 units on or before December 31, 2000, the escrow
account will be closed and the proceeds, after deduction of Bank West's escrow
agent fees, together with amounts earned as interest on those proceeds, will be
delivered to us. If we have not sold 1,500,000 units on or before December 31,
2000, Bank West will promptly return to all investors the amounts they have paid
to buy units, without interest. We will then stop selling units and the
subscription agreements will be cancelled, regardless or whether or not
previously accepted.
If we sell 1,500,000 units on or before December 31, 2000, we will
continue to sell units to the public through Vestin Capital and selected
dealers. We will seek to sell a total of 100,000,000 units for $100,000,000,
which includes units to be issued under our distribution reinvestment plan. We
may sell units through December 31, 2001, or we may decide to end the offering.
In certain states where the offering will be made, we may not be allowed to
extend the offering beyond one year unless we have the permission of the
appropriate state agency.
If you want to purchase units, you should complete the subscription
agreement, which you can find at Exhibit B to this prospectus and which will be
provided by the person or the securities dealer that offered you the units. You
should return the subscription agreement and full payment for the units being
purchased to that dealer, who will tell you whether to make your payment to
"Bank West of Nevada, as Escrow Agent" or, to "DM Mortgage Investors, LLC". You
may obtain additional copies of the subscription agreement from Vestin Capital,
whose address is 2901 El Camino Avenue, Suite 207, Las Vegas, Nevada 89102,
telephone number (702) 247-1332.
By submitting the signed Subscription Agreement with payment for the
purchase of units, you:
o agree to be bound by the operating agreement;
o grant a special and limited power of attorney to Vestin
Mortgage; and
o represent and warrant that you meet the relevant suitability
standards and are eligible to purchase units.
Neither Vestin Capital nor any other securities brokerage firm will
permit sales to discretionary accounts without prior specific written approval
of the owner of the account.
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LEGAL MATTERS
The legality of our issuance of the units offered under the Securities
Act will be reviewed for us by Goodman Phillips & Vineberg. For matters of
Nevada law, Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP, Vestin
Mortgage's attorneys, have reviewed the legality of our issuance of units. Our
tax counsel is Wendel, Rosen, Black & Dean, LLP, Oakland, California.
EXPERTS
Grant Thornton have audited our financial statements as of December 31,
1999, and for the period from December 14, 1999 (the date we began business)
through December 31, 1999. These financial statements are included in this
prospectus and in the registration statement of which this prospectus forms a
part. We include Grant Thornton's report here and elsewhere in this registration
statement. We rely on Grant Thornton as experts in auditing and on the Grant
Thornton report for the financial statements we include here.
Grant Thornton LLP has also audited the financial statements of Vestin
Group, Inc. as of December 31, 1999 and for the year then ended included in this
prospectus or in the Registration Statement. We include Grant Thornton's report
here and elsewhere in this Registration Statement. We rely on Grant Thornton as
experts in auditing and on the report of Grant Thornton for the financial
statements included here.
AVAILABLE INFORMATION
This prospectus does not contain all the information in the
Registration Statement on Form S-11 (No. 333-32800) and accompanying exhibits
which we have filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933. Additionally, we will become
subject to the reporting requirements of the Securities and Exchange Act of 1934
and, consequently, will file annual and quarterly reports and other information
with the Commission. Copies of the Registration Statement on Form S-11 and other
reports and information filed by us can be inspected and copied at the public
reference facilities (phone number (800) SEC-0330) maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of that material can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
maintains a World Wide Web site that contains reports, proxy and information
statements and other information for registrants that file electronically with
the Commission. The address of this site is http://www.sec.gov.
As required by the Commission in connection with real estate related
offerings on Form S-11, we have also undertaken to provide you directly with the
financial statements required by Form 10-K for the first full year of operations
of the Company and to file with the Commission "sticker supplements" to this
prospectus during the distribution period. We will also consolidate all of these
supplements into a post-effective amendment filed at least once every three
months, with the information contained in such amendment provided simultaneously
to our members.
You will also be able to review our filing on Form 8-K that we will
file after the end of the distribution period. This report will contain
additional financial statements and information required under the Securities
Exchange Act for purchases made after the end of the distribution period
involving the use of 10 percent or more, on a cumulative basis, of the net
proceeds of the offering. We will also provide the information contained in this
report to the members at least once each quarter after the distribution period
of the offering has ended.
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INDEX TO FINANCIAL STATEMENTS
DM MORTGAGE INVESTORS, LLC
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
BALANCE SHEETS AT DECEMBER 31, 1999 AND MARCH 31, 2000 F-2
STATEMENTS OF MEMBERS' EQUITY FOR THE PERIOD FROM
DECEMBER 14, 1999 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1999 AND MARCH 31, 2000 F-3
NOTES TO THE FINANCIAL STATEMENTS F-4
VESTIN GROUP, INC.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-9
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1999
AND MARCH 31, 20000 F-10
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR
ENDED DECEMBER 31, 1999 AND THE THREE MONTHS ENDED
MARCH 31, 2000 F-11
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR
THE YEAR ENDED DECEMBER 31, 1999 F-12
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 1999 AND THE THREE MONTHS ENDED MARCH 31, 2000 F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-15
<PAGE>
Report of Independent Certified Public Accountants
Member
DM Mortgage Investors, LLC
We have audited the accompanying balance sheet of DM Mortgage Investors, LLC (A
Development Stage Company), as of December 31, 1999, and the related statement
of members' equity for the period from December 14, 1999 (date of inception)
through December 31, 1999. These financial statements are the responsibility of
the Company's management and Board of Directors. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DM Mortgage Investors, LLC, as
of December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.
/S/ GRANT THORNTON LLP
Reno, Nevada
January 10, 2000
F-1
<PAGE>
DM Mortgage Investors, LLC
(A Development Stage Company)
BALANCE SHEETS
ASSETS
December 31, March 31,
1999 2000
------------ ------------
(Unaudited)
Deferred offering costs $ 115,100 $ 273,734
------------ ------------
Total assets $ 115,100 $ 273,734
============ ============
LIABILITIES AND MEMBERS' EQUITY
Liabilities $ - $ -
Members' equity - actual 115,100 and 273,734
units at $1 per unit at December
31, 1999 and March 31, 2000, respectively. 115,100 273,734
------------ ------------
Total liabilities and members' equity $ 115,100 $ 273,734
============ ============
The accompanying notes are an integral part of these statements
F-2
<PAGE>
DM Mortgage Investors, LLC
(A Development Stage Company)
STATEMENTS OF MEMBERS' EQUITY
Inception, December 14, 1999 $ -
Issuance of units 115,100
----------
Members' equity at December 31, 1999 115,100
Issuance of units 158,634
----------
Members' equity at March 31, 2000 (unaudited) $ 273,734
==========
The accompanying notes are an integral part of these statements
F-3
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DM MORTGAGE INVESTORS, LLC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 (DATA RELATING TO MARCH 31, 2000 IS UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. ORGANIZATION
DM Mortgage Investors, LLC, a Nevada Limited Liability Company, (the
Company) is a development stage company primarily engaged in business as a
mortgage lender to make and purchase first, second, wraparound,
participating and construction mortgage investments secured by deeds of
trust and mortgages on real estate. The Company was organized on December
14, 1999 (date of formation) and will continue until December 31, 2019
unless dissolved prior or extended thereto under the provisions of the
operating agreement.
The Manager of the Company is Vestin Mortgage, Inc. (formerly Capsource,
Inc., dba Del Mar Mortgage), a Nevada corporation engaged in the business
of mortgage services, specifically the origination of mortgages,
principally in the greater Las Vegas area. Vestin Mortgae, Inc. is a
wholly-owned subsidiary of Vestin Group, Inc. (formerly Sunderland
Corporation), a Delaware Corporation, whose common stock is publicly held
and is traded on the NASDAQ under the symbol "VSTN."
For the period from December 14, 1999 (date of inception) through March
31, 2000, the only transactions were non-cash deferred offering costs
which were paid by the Manager on behalf of the Company.
2. INTERIM FINANCIAL STATEMENTS
The financial statements for the three months ended March 31, 2000 are
unaudited; however, in the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary for a fair
presentation of the Company's financial position and results of operations
for such period have been included. The results for the three months ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
3. MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
4. INCOME TAXES
Income tax effects resulting from the Company's operations pass through to
the members individually and, accordingly, no provision for income taxes
is included in the financial statements.
F-4
<PAGE>
DM MORTGAGE INVESTORS, LLC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 (DATA RELATING TO MARCH 31, 2000 IS UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. REVENUE RECOGNITION
Interest is recognized as revenue when earned according to the terms of
the loan.
6. DEBT SECURITIES
The Company will classify its debt securities as held-to-maturity, as the
Company has the ability and the intent to hold the securities until
maturity. These securities will be recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. A decline in
the market value of any held-to-maturity security below cost that is
deemed to be other than temporary will result in a reduction in carrying
amount to fair value. The impairment would be charged to earnings and a
new cost basis for the security would be established. Premiums and
discounts will be amortized or accreted over the life of the related
security as an adjustment to yield using the effective interest method.
7. LOANS SECURED BY TRUST DEEDS
Loans secured by trust deeds will be originated by Vestin Mortgage, Inc.
and will be recorded at cost. Interest income on loans will be accrued by
the simple interest method. The Company will not recognize interest income
on loans once they are determined to be impaired until the interest is
collected in cash. 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 and a
specific reserve has been recorded. Cash receipts will be allocated to
interest income, except when such payments are specifically designated as
principal reduction or when management does not believe the Company's
investment in the loan is fully recoverable.
NOTE B - MEMBERS' EQUITY
1. MEMBERSHIP UNITS
The Manager shall contribute to the capital of the Company an amount in
cash equal to 0.5% of the aggregate of the capital accounts of the other
members. The members shall contribute to the capital of the Company an
amount equal to $1.00 for each unit subscribed for by each member, with a
minimum subscription of 2,000 units per member. The total Capital
contributions of the members will not exceed $100,000,000. The period of
public offering will be for a period of two years following the effective
date of the prospectus during which time the Company must receive paid
subscriptions for at least 1,500,000 units by December 31, 2000. In the
event the minimum number of units are not sold by December 31, 2000, the
subscription amounts will be returned in full to the subscribers.
F-5
<PAGE>
DM MORTGAGE INVESTORS, LLC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 (DATA RELATING TO MARCH 31, 2000 IS UNAUDITED)
NOTE B - MEMBERS' EQUITY - Continued
1. MEMBERSHIP UNITS - Continued
Notwithstanding, (i) Net Losses, if any, allocable to the period prior to
the admission of any additional members pursuant to the Operating Agreement
(see Note B2) hereof shall be allocated 99.5% to the Manager and 0.5% to
the Initial Member, and net income during the same period, if any, shall be
allocated to the Manager, and (ii) Profits or Losses allocable to the
period commencing with the admission of any additional such members and all
subsequent periods shall be allocated pursuant to the operating agreement.
2. ALLOCATIONS AND DISTRIBUTIONS
In accordance with the operating agreement, the Company's profits, gains
and losses are to be credited to and charged against each member in
proportion to their respective capital accounts as of the close of business
on the last day of each calendar month.
Distributions of interest received on mortgage loans are paid monthly in
cash or as reinvested distributions. Ten percent (10%) of net income
attributable to interest payments from borrowers is distributed to Vestin
Mortgage as part of its "back-end" promotional interest, and the remaining
90% is distributed to the members including an allocation to Vestin
Mortgage corresponding to Vestin Mortgage's capital account.
Distributions of net proceeds in the form of repayment of principal on a
mortgage loan will be made to the members pro rata based on their capital
accounts. However, once the members actually receive their entire capital
contributions plus 6% per annum of that amount, distributions of the excess
amount will be 15% to Vestin Mortgage (see Note B3) and 85% to the members,
including Vestin Mortgage.
3. PROMOTIONAL INTEREST OF MANAGER
Vestin Mortgage will contribute capital to the Company in the amount of
0.5% of the members' aggregate capital accounts. If 84.5% of capital
contributions are invested in mortgage loans, Vestin Mortgage will receive
a 1.0% promotional interest. If 86.5% of capital contributions are invested
in mortgage loans, the promotional interest increases to an aggregate of
2.0%. The promotional interest will thereafter increase by 1.0% for each
additional 1.0% of capital contributions invested in mortgage loans. The
promotional interest of Vestin Mortgage will be recorded as an expense of
the Company and credited as a contribution to Vestin Mortgage's capital
account as additional compensation. Vestin Mortgage may only receive
distributions on its interest, including the portion for which it paid
consideration, in accordance with the operation agreement as disclosed in
Note B2.
F-6
<PAGE>
DM MORTGAGE INVESTORS, LLC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 (DATA RELATING TO MARCH 31, 2000 IS UNAUDITED)
NOTE B - MEMBERS' EQUITY - Continued
3. PROMOTIONAL INTEREST OF MANAGER- Continued
Vestin Mortgage will also receive a "back-end" promotional interest equal
to the sum of (i) 10% of distributions provided from operations (other than
repayments of mortgage loan principal) after deducting general expenses and
debt payments, all of which is considered cash available for distribution,
plus (ii) 15% of distributions from the net proceeds of any repayment,
sale, foreclosure or other disposition of an underlying mortgage or
property, after paying members from these net proceeds an amount equal to
their capital contributions plus a cumulative 6% annual return on those
contributions. The 15% allocation under this provision may be increased by
1.0% for each 1.0% that Vestin Mortgage reduces from 10% its allocation of
cash available for distribution under the immediately preceding provision.
NOTE C - TRANSACTIONS WITH THE MANAGER AND ITS AFFILIATES
1. FEES PAID BY THE COMPANY
a. Broker-dealer affiliates of the Manager are to receive as
compensation for services in the offering up to 1.5% of gross
proceeds of this offering, of which a maximum of 0.5% of gross
proceeds is for reimbursement of expenses.
b. Vestin Mortgage, Inc. or its affiliates will be reimbursed for
the costs of goods and materials used for or by the Company
and obtained from entities unaffiliated with the Manager or
its affiliates. The Company shall also pay or reimburse the
Manager or its affiliates for the cost of administrative
services necessary to the prudent operation of the Company.
c. Vestin Mortgage, Inc. will receive fees for reselling
properties foreclosed upon. These fees are to be not greater
than 3.00% of the proceeds where substantial service has been
performed by the Manager.
2. FEES PAID BY BORROWERS
a. Vestin Mortgage, Inc. will receive fees of 2.00% to 5.00% of
each loan as compensation for loan evaluation and processing
fees. These fees shall be reasonable and shall be payable only
for services actually rendered.
b. Vestin Mortgage, Inc. will originate all loans the Company
invests in. Vestin Mortgage, Inc. has the ability to act as
broker for which it will receive a commission of approximately
2.00% to 6.00% of the principal amount of each mortgage
investment made during the year.
F-7
<PAGE>
DM MORTGAGE INVESTORS, LLC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 (DATA RELATING TO MARCH 31, 2000 IS UNAUDITED)
NOTE C - TRANSACTIONS WITH THE MANAGER AND ITS AFFILIATES - Continued
2. FEES PAID BY BORROWERS- Continued
c. All of the Company's loans are to be serviced by Vestin
Mortgage, Inc., in consideration for which Vestin Mortgage,
Inc. will receive up to 0.25% of the total unpaid principal
balance of each mortgage investment serviced.
d. Vestin Mortgage, Inc. will receive loan extension fees of
2.00% to 5.00% of the outstanding principal as permitted by
local law and local market conditions.
Vestin Mortgage, Inc. has the right to purchase from the Company the
interest receivable or principal on delinquent loans held by the Company.
The Company shall not sell a foreclosed property to the Manager or to
another program in which the Manager or its affiliates has an interest.
F-8
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Vestin Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Vestin Group,
Inc. and Subsidiaries (formerly Sunderland Corporation and Subsidiaries) as of
December 31, 1999, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vestin Group, Inc. and
Subsidiaries as of December 31, 1999, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
/S/ GRANT THORNTON LLP
Reno, Nevada
May 18, 2000
F-9
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(Restated) Unaudited)
<S> <C> <C>
Cash $ 1,109,454 666,831
Accounts receivable, net 1,157,047 1,505,838
Due from affiliate - 168,952
Notes receivable 323,000 292,097
Investments in marketable securities 114,949 207,856
Investment in real estate held for sale 1,293,194 1,306,901
Investments in mortgage loans on real estate 5,516,244 4,798,552
Other investments - 42,530
Deferred tax asset 27,542 27,542
Other assets 134,089 213,638
Property and equipment, net 107,988 140,883
------------ -----------
Total assets $ 9,783,507 $9,371,620
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 250,765 95,636
Accrued expenses 205,477 92,633
Lines of credit 1,985,564 1,076,241
Income taxes payable 736,875 898,921
Due to related party 269,641 54,675
Note payable 1,290,000 1,284,339
Obligations under capital leases 24,127 -
------------ -----------
Total liabilities 4,762,449 3,502,445
------------ -----------
Commitments and contingencies - -
------------ -----------
Stockholders' equity
Preferred stock, $.0001 par value; 20 million
shares authorized; no shares issued - -
Common stock, $.0001 par value; 100 million
shares authorized; 6,989,270 shares issued
and outstanding 699 699
Additional paid-in capital 1,739,427 1,739,427
Retained earnings 3,280,932 4,129,049
------------ -----------
Total stockholders' equity 5,021,058 5,869,175
------------ -----------
Total liabilities and stockholders' equity $ 9,783,507 $9,371,620
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-10
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
------------- ------------
(Restated) (Unaudited)
<S> <C> <C>
Revenues
Loan origination and related fees $11,237,208 $ 2,558,454
Revenue from accounting services 1,313,885 539,116
Interest income 612,391 233,418
Other income 58,825 13,781
------------- ------------
Total revenues 13,222,309 3,344,769
------------- ------------
Expenses
Sales and marketing expenses 1,749,948 570,766
General and administrative expenses 7,077,536 1,476,663
Interest expenses 148,272 27,143
------------- ------------
Total expenses 8,975,756 2,074,572
------------- ------------
Income before provision for income taxes 4,246,553 1,270,197
Provision for income taxes 959,333 362,046
------------- ------------
NET INCOME $ 3,287,220 $ 908,151
============= ============
Pro forma information (unaudited) (Note A):
Historical income before income taxes $ 4,246,553 $ 1,270,197
Pro forma income taxes 1,443,828 431,867
------------- ------------
Pro forma net income $ 2,802,725 $ 838,330
============= ============
Pro forma net income per share $ 0.40 $ 0.12
============= ============
Weighted average shares outstanding 6,982,914 6,989,270
============= ============
</TABLE>
The accompanying notes are an integral part of these statements
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-11
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Receivable
--------------- ------------------- Paid-in From Retained
Shares Amount Shares Amount Capital Stockholder Earnings Total
------ ------- ------ ------ ---------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999,
restated - $ - 5,719,270 $ 572 $3,135,064 (535,646) $ 344,347 $ 2,944,337
Cancellation of $0.0001
common stock in connection
with recapitalization - - (100,000) (10) - - - (10)
Issuance of $0.0001
common stock in connection
with recapitalization - - 1,350,000 135 291 - - 426
Distribution of assets,
net of liabilities,
to Del Mar Mortgage, Inc. - - - - (1,152,046) - - (1,152,046)
Distribution of assets,
net of liabilities,
to Del Mar Holdings, Inc. - - - - (643,260) - - (643,260)
Acquisition of Capsource - - 20,000 2 12,358 - - 12,360
Contribution by stockholder
through relief of note payable - - - - 350,000 - - 350,000
Payments received on receivable
from stockholder - - - - - 535,646 - 535,646
Distribution to stockholders of
L.L. Bradford and Company - - - - - - (350,635) (350,635)
Cash contributions 37,020 - - 37,020
Net income - - - - - - 3,287,220 3,287,220
------ ----- ------------- ------ ----------- --------- ----------- ------------
Balance at December 31,
1999, restated - $ - 6,989,270 $ 699 $1,739,427 $ - $3,280,932 $ 5,021,058
====== ===== ============= ====== =========== ========= =========== ============
</TABLE>
The accompanying notes are an integral part of these statements
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-12
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
-------------- -------------
(Restated) (Unaudited)
<S> <C> <C>
Cash flow from operating activities:
Net income $ 3,287,220 $ 908,151
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 51,470 8,706
Loss on disposal of assets 466 -
Changes in operating assets and liabilities:
Accounts receivable (537,469) (348,791)
Deferred tax asset (27,542) -
Other assets (16,078) (79,549)
Due from related party (292,033) (168,952)
Accounts payable and accrued expenses 746,900 (267,973)
Due to related party 332,270 (214,966)
Income taxes payable 736,875 162,046
------------- ------------
Net cash provided by (used in) operating activities 4,282,079 (1,328)
------------- ------------
Cash flows from investing activities:
Purchase of property and equipment (52,241) (14,838)
Purchase of investment in note receivable (323,000) -
Proceeds from notes receivable - 30,903
Purchase of investment in marketable securities (114,949) -
Proceeds from sale of investments, net - 568,548
Purchase of real estate held for sale (3,194) -
Purchase of investments in mortgage loans (3,055,520) -
------------- ------------
Net cash provided by (used in) investing activities (3,548,904) 584,613
------------- ------------
Cash flows from financing activities:
Advances (payments) on line of credit, net 1,978,588 (960,213)
Payments on short-term note (100,000) -
Distribution to stockholders (2,482,940) (60,034)
Payments received from note receivable from stockholder 535,646 -
Deferred offering costs (115,100) -
Proceeds from stockholders 62,020 -
Capital lease payments (4,742) (5,661)
------------- ------------
Net cash used in financing activities (126,528) (1,025,908)
------------- ------------
NET INCREASE (DECREASE) IN CASH 606,647 (442,623)
Cash at beginning of year 502,807 1,109,454
------------- ------------
Cash at end of year $ 1,109,454 $ 666,831
============= ============
</TABLE>
F-13
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
----------------- -----------------
(Restated) (Unaudited)
<S> <C> <C>
Supplemental cash flow information:
Cash paid for Federal income taxes $ 250,000 $ 200,000
================= =================
Cash paid for interest $ 134,566 $ 27,143
================= =================
Noncash investing and financing activities:
Investment in real estate held for sale $ 1,290,000 $ -
================= =================
Contribution by stockholder through relief of note payable $ 350,000 $ -
================= =================
Distribution of liabilities, net of assets assumed to
stockholders of Del Mar Mortgage, Inc. and Del Mar
Holdings, Inc. $ 336,999 $ -
================= =================
Purchase of property and equipment on line of credit $ 6,976 $ 26,763
================= =================
Purchase of property and equipment on capital lease $ 9,435 $ -
================= =================
</TABLE>
The accompanying notes are an integral part of these statements
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-14
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company changed its name from Sunderland Corporation to Vestin Group,
Inc. Vestin Group, Inc. ("Vestin Group" or the "Company") was incorporated
in the State of Delaware on June 2, 1998. The Company conducts its
operations primarily through Vestin Mortgage, Inc. (formerly Capsource,
Inc.), its wholly owned subsidiary. Vestin Mortgage, Inc. ("Vestin
Mortgage") operates as a mortgage company licensed in the state of Nevada.
Vestin Mortgage is engaged in the origination, arrangement and secondary
purchase and sale of loans secured by real property. The Company's primary
operations consist of arranging for investor funding of mortgage loans for
the construction of commercial and residential projects in southern
Nevada. The Company also services such loans.
On April 27, 1999, Vestin Group, a non-operating public company with
nominal net assets, acquired certain assets and assumed certain
liabilities representing the operations of Del Mar Mortgage, Inc. and Del
Mar Holdings, Inc. (the "Del Mar Entities") in exchange for 4,891,270
shares of Vestin Group common stock (post 5-for-3 stock split). The
combination of the Del Mar Entities has been accounted for in a manner
similar to a pooling of interest, as the companies were under common
control. Vestin Group concurrently acquired 100% of the outstanding common
stock of Vestin Mortgage in exchange for 20,000 shares of Vestin Group
common stock.
Under generally accepted accounting principles, the acquisition of the Del
Mar Entities is considered to be a capital transaction in substance,
rather than a business combination. That is, the acquisition is equivalent
to the issuance of stock by the Del Mar Entities for the net monetary
assets of Vestin Group, accompanied by a recapitalization, and is
accounted for as a change in capital structure. Accordingly, the
accounting for the acquisition is identical to that resulting from a
reverse acquisition, except that no goodwill is recorded. Under reverse
takeover accounting, the post reverse-acquisition comparative historical
financial statements of the "legal acquirer" (Vestin Group), are those of
the "legal acquiree" (Del Mar Entities) (i.e. the accounting acquirer).
Accordingly, the consolidated financial statements of Vestin Group as of
December 31, 1999, and for the year then ended, are the combined
historical financial statements of Del Mar Mortgage, Inc. and Del Mar
Holdings, Inc. The assets not acquired, net of the liabilities not
assumed, have been accounted for as distributions to Del Mar Mortgage,
Inc. and Del Mar Holdings, Inc.'s stockholders.
The business combination with Vestin Mortgage has been accounted for as a
purchase business combination. The cost of Vestin Mortgage is based upon
the fair value of the 20,000 common shares issued to the Vestin Mortgage
shareholder, which was $12,360. The acquisition resulted in the
recognition of $1,390 of goodwill, which was expensed for the year ended
December 31, 1999.
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-15
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- Continued
Organization - Continued
On March 31, 2000, the Company consummated a merger with L.L. Bradford &
Company (LLB) (see Note T). LLB operates as a certified public accounting
and consulting practice in the State of Nevada offering services in the
area of attestation, tax planning and preparation, general accounting
services, business valuation, mergers and acquisition, management
advisory, financial consulting, initial public and private offering
consulting, and internet start-up consulting.
As disclosed in Note R, the Company acquired all of the outstanding common
stock of Vestin Capital, Inc. (formerly DM Financial Services, Inc.) and
DM Mortgage Advisors, Inc. These acquisitions have been accounted for as a
pooling of interests, and accordingly, the accompanying consolidated
financial statements of the Company have been restated to include the
accounts and operations for all periods presented.
The Company operates in one business segment. As a result of the mergers
discussed above, the Company will determine the applicability of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information,
which requires reporting business segments and information, including how
the segments are determined, products and services provided, and changes
in the measurement of segment accounts from period to period.
Interim Financial Statements
The financial statements for the three months ended March 31, 2000 are
unaudited; however, in the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary for a fair
presentation of the Company's financial position and results of operations
for such period have been included. The results for the three months ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and it's wholly-owned subsidiaries. All significant inter-company
transactions and balances have been eliminated in consolidation.
Concentrations
Substantially all of the Company's operations are derived from Southern
Nevada. Consequently, the Company's results of operations and financial
condition are affected by general trends in the Southern Nevada economy
and its commercial and residential real estate market.
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-16
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- Continued
Concentrations - Continued
The Company's mortgage loans will require the borrower to make a balloon
payment of the principal at maturity. To the extent that a borrower has an
obligation to pay a mortgage loan in a lump sum payment, its ability to
satisfy this obligation may be dependent upon its ability to refinance or
raise a substantial amount of cash. An increase in interest rates over the
mortgage rate applicable at origination of the loan may have an adverse
effect on the borrower's ability to refinance.
Financial instruments, which potentially subject the Company to credit
risk, consist primarily of cash in bank. The Company maintains its cash in
bank deposit accounts, which at times may exceed Federally insured limits.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Revenue Recognition
The Company recognizes revenue primarily from loan origination fees, loan
servicing fees, extension fees and accounting services. Loan origination
fees are recorded as revenue at the close of escrow and reduced by direct
loan origination costs. Loan servicing fees are recorded as revenue when
such services are rendered. Servicing fees represent the interest spread
between what is paid to the investor and what the borrower pays for the
use of the money. This can vary from loan to loan. Extension fees are
recorded as revenue at the extension grant date. Accounting services are
recognized when services are rendered.
Loan Origination Fees
Loan origination fees related to investments in mortgage loans on real
estate are amortized principally by the effective interest method over the
term of the related obligation.
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-17
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- Continued
Investments in Marketable Securities
Investments in equity securities consist of common stock. The securities
are stated at market value as determined by the most recently traded price
of each security at the balance sheet date. All marketable securities are
defined as available-for-sale securities under the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Management determines the appropriate classification of its investments in
marketable securities at the time of purchase and reevaluates such
determination at each balance sheet date. Securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading securities and unrealized holding gains and losses
are included in earnings. Debt securities for which the Company does not
have the intent or ability to hold to maturity and equity securities are
classified as available-for-sale. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses, net of tax,
reported in other comprehensive income. The net unrealized gains and
losses were immaterial for the year ended December 31, 1999. The cost of
investments sold is determined on the specific identification or the
first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
principally on the straight-line method over the estimated useful lives of
the assets of 5 and 7 years. The cost of repairs and maintenance is
charged to expense as incurred.
Comprehensive Income
The Company has no material components of other comprehensive income, and
accordingly, comprehensive income is the same as net income for the
period.
Advertising Costs
Advertising costs are expensed as incurred and amounted to $365,836 for
the year ended December 31, 1999.
Income Taxes
The liability method is used to account for income taxes. Under this
method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
scheduled to be in effect when the differences are expected to reverse.
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-18
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- Continued
Pro Forma Financial Information (Unaudited)
Prior to the recapitalization of the Company (April 27, 1999) and the
acquisition of L.L. Bradford & Company, the earnings of Del Mar Mortgage,
Inc. and L.L. Bradford & Company, which are included in the Consolidated
Statement of Income, were taxed to the shareholders of Del Mar Mortgage,
Inc. and L.L. Bradford & Company The pro forma information reflects a
provision for income taxes as if the Company had been a C corporation for
the entire year ended December 31, 1999 using an assumed effective tax
rate of 34%. Pro forma net income per share has been computed by dividing
pro forma net income by the weighted average shares outstanding, assuming
that the shares exchanged for the purchase of L.L. Bradford & Company were
outstanding for the entire year.
Impairment of Long-Lived Assets to be Disposed
The Company continually monitors events and changes in circumstances that
could indicate carrying amounts of long-lived assets may not be
recoverable. When such events or changes in circumstances are present, the
Company assesses the recoverability of long-lived assets by determining
whether the carrying value of such assets will be recovered through
undiscounted expected future cash flows. If the total of the future cash
flows is less than the carrying amount of those assets, the Company
recognizes an impairment loss based on the excess of the carrying amount
over the fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or the fair value less costs to sell.
Earnings Per Share
Primary and fully-diluted earnings per share is based on the
weighted-average number of outstanding common shares during the applicable
period.
NOTE B - ACCOUNTS RECEIVABLE
The Company services loans which have been arranged for the investor
parties through a servicing agreement. The servicing agreement stipulates
that all extension fees charged on behalf of the investors shall be
retained by the Company as part of the loan servicing fees. Accounts
receivable represent extension and loan origination fees earned but not
yet received along with receivables for accounting services net of
$117,420 allowance for doubtful accounts at December 31, 1999 and March
31, 2000.
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-19
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE C - INVESTMENT IN REAL ESTATE HELD FOR SALE
The Company has an investment in real estate held for sale totaling
$1,293,194 at December 31, 1999. The investment in real estate held for
sale is recorded at the lower of carrying amount or fair value less cost
to sell.
NOTE D - INVESTMENTS IN MORTGAGE LOANS ON REAL ESTATE
The Company invests in mortgage loans. The mortgage loans are secured by
first trust deeds on real estate. These loans have maturities of one year
or less with interest rates ranging from 12% to 14% payable monthly, with
principal due at maturity. Management believes the underlying value of the
assets securing the mortgage loans was sufficient at December 31, 1999 to
realize their carrying value. Accordingly, no allowance for loan losses
has been established.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
-------------------- -------------------
<S> <C> <C>
Furniture and equipment $116,267 $274,292
Computers and equipment held
under capital leases 26,446 26,446
-------------------- -------------------
142,713 300,738
Less: Accumulated depreciation (34,725) (159,855)
-------------------- -------------------
Total property and equipment $107,988 $140,883
==================== ===================
</TABLE>
NOTE F - NOTE PAYABLE
In 1999, the Company foreclosed on real estate which was subject to an
existing lien (the "note"). The term of the note is for one year and
includes interest at 12.75% per annum. The note is secured by certain real
estate. The note was originally due on October 8, 1999 and was extended to
April 8, 2000. The note requires monthly interest payments with the
balance of unpaid principal and interest due on demand.
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-20
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE G - LINES OF CREDIT
The Company maintains a $3,000,000 floating line of credit with a
financial institution. The outstanding balance as of December 31, 1999
totaled $1,980,000. The line of credit, which is guaranteed by the
Company's majority shareholder, is payable in monthly installments of
interest only at the bank's prime lending rate plus 1.5% (10% at December
31, 1999) and expires on December 15, 2000. The line of credit is secured
by 1,450,000 shares of the Company's common stock held by the majority
stockholder (23.5% of the outstanding stock at December 31, 1999) and the
deeds of trust on the property being advanced against. The line of credit
agreement limits payments of dividends on the Company's stock and
transfers between related parties without prior written consent from
financial institution. The line of credit contains certain covenants,
which the Company has complied with as of December 31, 1999.
The Company also maintains an equipment line of credit with Wells Fargo
Bank. $50,000 is available on this line of credit for the acquisition of
equipment through February 26, 2000. Principal and interest is payable on
each advance over a payment schedule of not less than 36 months or more
than 96 months, as agreed by the Company and the bank. At the time of each
advance, the Company can either elect a fixed or a variable interest rate.
The fixed interest rate is 2.875% above the treasury rate in effect as of
the close of the business on the Thursday of the week preceding
disbursement of the advance, rounded to the nearest .05%. The variable
interest rate is at .5% above the prime rate. The outstanding balance as
of December 31, 1999 totaled $5,564 and is at the fixed interest rate
(10.65% at December 31, 1999). The line of credit is secured by the
Company's equipment purchased or acquired in whole or in part with the
advance.
The following are the maturities under the lines of credit as of December
31, 1999:
2000 $1,981,994
2001 2,464
2002 1,106
-------------
$1,985,564
=============
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-21
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE H - CREDIT AGREEMENT
The Company has entered into a credit agreement with a financial
institution that maintains non-interest bearing trust funds held on behalf
of the investors and the Company (Note J). The credit agreement allows the
Company to borrow funds up to the amount held in the trust accounts at a
rate of 1% and invest those funds in commercial paper (securities). The
Company has provided the financial institution with a security interest in
the securities and, at all times, the securities remain in the financial
institution's custody and control. The balance drawn down upon the credit
agreement was $-0- at December 31, 1999 and March 31, 2000.
NOTE I - CAPITAL LEASES
The Company is the lessee of computers and equipment under capital leases
expiring in various years through 2004. The assets and liabilities under
capital leases are recorded at the lower of the present value of the
minimum lease payments or the fair value of the assets. The assets are
depreciated over the lower of their related lease terms or their estimated
productive lives. Depreciation of capital leases is included in
depreciation expense for 1999. Accumulated depreciation on capital leases
was $6,596 at December 31, 1999.
Minimum future lease payments under capital leases as of December 31, 1999
for each of the next five years and in the aggregate are:
Year ending December 31,
2000 $ 8,458
2001 8,458
2002 8,458
2003 4,629
2004 423
----------
30,426
Less: Amounts representing interest (6,299)
----------
$24,127
==========
Interest rates on capital leases vary from 6.7% to 15.5%.
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-22
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE J - TRUST ACCOUNTS
The Company manages on behalf of Del Mar Mortgage, Inc., a company wholly
owned by the Company's majority stockholder, certain trust assets
including cash and receivables on behalf of the investors. The cash is
held at a financial institution and the Company records and reconciles the
receivables from borrowers. At December 31, 1999, the cash held in trust
was $667,345 and the trust receivables were $1,215,466. The related trust
liability was $1,882,811 at December 31, 1999. The trust assets and
liabilities are not recorded on the balance sheet of the Company at
December 31, 1999.
NOTE K - LOANS SERVICED FOR OTHERS
The Company services loans for others, which are not shown on the balance
sheet. The face amount of these loans at December 31, 1999 approximated
$227,000,000. Loans serviced for others include construction loans that
are originated by the Company.
NOTE L - RELATED PARTY TRANSACTIONS
On April 27, 1999, the Company entered into a non-renewable transition
agreement (the "Agreement") with Del Mar Mortgage, Inc., a company wholly
owned by the Company's majority stockholder. The Agreement requires the
Company to pay Del Mar Mortgage, Inc. 25% of loan origination fees earned
from April 27, 1999 through October 26, 1999 and 12.5% of such fees from
October 27, 1999 through April 26, 2000. The Agreement also requires the
Company to remit to Del Mar Mortgage, Inc. all future loan servicing and
extension fees recognized on loans originated by the Company prior to
April 27, 1999. The Agreement terminates on April 26, 2000. The Company
incurred $2,597,641 in fees related to the Agreement for the year ended
December 31, 1999, which have been recorded as general and administrative
expenses in the consolidated financial statements.
The Company has recorded accounts receivable from Del Mar Mortgage, Inc.
of $443,390 as of December 31, 1999. The Company also has a balance due to
Del Mar Mortgage, Inc. of $244,641. These balances bear no interest and
are due on demand.
As of December 31, 1999, the Company had $25,000 due to stockholders,
bearing no interest and due on demand.
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-23
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE M - INCOME TAXES
The components of income tax expense (benefit) are as follows:
Current $986,875
Deferred (27,542)
-------------
$959,333
=============
Deferred taxes result from temporary differences in the recognition of
certain revenue and expense items for income tax and financial reporting
purposes. The significant components of the Company's deferred taxes as of
December 31, 1999 are as follows:
Deferred tax assets:
Accrued compensation $27,542
Less: Valuation allowance -
-----------
Net deferred taxes $27,542
===========
The reconciliation of the statutory federal rate to the Company's
effective income tax rate is as follows:
Statutory tax provision $1,332,880
Earnings taxed to shareholder (381,867)
Non-deductible expenses 8,320
---------------
$ 959,333
===============
NOTE N - EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) Savings Plan which covers substantially all
full-time employees. Participants may make tax-deferred contributions of
up to 15% of annual compensation (subject to other limitations specified
by the Internal Revenue Code). The Company matches employee contributions
dollar for dollar up to 5% of compensation. The Company contributed $
37,537 to the plan for the year ended December 31, 1999.
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-24
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE O - EMPLOYMENT AGREEMENTS
The Company has employment agreements and arrangements with certain
officers and key employees. The agreements generally continue for a period
of three years or until terminated by the executive or the Company with
cause. The agreements and arrangements provide the employees with a base
salary and benefits. The agreements contain covenants against competition
with the Company, which extend for a period of time after termination.
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, notes receivable,
mortgage loans, accounts payable and notes payable approximate fair value
because of the short-term maturity of these instruments.
NOTE Q - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company operates from leased office facilities under a noncancellable
operating lease. The lease requires the Company to pay certain escalation
clauses for real estate taxes, operating expense, usage and common area
charges. The Company also leases equipment under a noncancellable
operating lease. Rent expense for leased office facilities and equipment
charged to operations for the year ended December 31, 1999 was $254,278.
Future minimum rental payments required under the operating leases as of
December 31, 1999, are as follows:
2000 $180,418
2001 190,193
2002 193,728
2003 197,128
2004 66,363
------------
$827,830
============
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-25
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE R - ACQUISITIONS
On December 23, 1999, the Company consummated an agreement to acquire all
the outstanding capital stock of Vestin Capital, Inc., a newly formed Las
Vegas, Nevada based securities broker-dealer for 10,300 shares of the
Company's common stock and DM Mortgage Advisors, Inc., a Phoenix, Arizona
based mortgage funding company for 17,700 shares of the Company's common
stock. The acquisition of Vestin Capital, Inc. and DM Mortgage Advisors,
Inc. is accounted for as a pooling of interest, and accordingly, the
accompanying consolidated financial statements have been restated to
include the accounts and operations for all periods presented.
NOTE S - LITIGATION
The Company is a defendant in various lawsuits incurred in the normal
course of business. In the opinion of management, after consulting with
legal counsel, the liabilities, if any, resulting from these matters will
not have a material effect on the consolidated financial statements of the
Company.
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-26
<PAGE>
Vestin Group, Inc. and Subsidiaries
(formerly Sunderland Corporation and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE T - POOLING OF INTEREST TRANSACTION
On March 31, 2000, the Company consummated a merger with L.L. Bradford &
Company (LLB), accounted for as a pooling of interest, and accordingly,
the accompanying consolidated financial statements have been restated to
include the accounts and operations of LLB for all periods presented.
Under the terms of the merger, the Company issued 800,000 shares of its
common stock for all of LLB's outstanding common stock.
The consolidated balance sheet at December 31, 1999 reflects the combining
of the Company prior to consummation of the merger and LLB as of this
date. Combined and separate results of operations for the year ended
December 31, 1999 of the Company and LLB for the restated period is as
follows:
<TABLE>
<CAPTION>
Vestin
Group, Inc.
and
Subsidiaries LLB Eliminations Combined
---------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Year ended December 31,
1999 revenues $11,868,918 $1,503,391 $(150,000) $13,222,309
Income before provision
for income taxes December 31,
1999 3,869,956 376,597 - 4,246,553
Net income December 31,
1999 2,910,623 376,597 - 3,287,220
Three months ended March 31,
2000 revenues 2,805,568 576,701 (37,500) 3,344,769
Income before provision for
income taxes March 31, 2000 1,064,842 205,355 - 1,270,197
Net income March 31, 2000 702,796 205,355 - 908,151
</TABLE>
During the year ended December 31, 1999, the Company and LLB entered into
certain transactions for services performed by LLB in the normal course of
business. These intercompany transactions have been eliminated in the
accompanying financial statements.
The acquisition of Vestin Capital, Inc. and DM Mortgage Advisors, Inc.
treated as a pooling of interest is not separately stated in the above
schedule as the effect to revenues and income is immaterial (see Note R).
The investors in DM Mortgage Investors, LLC are not acquiring an interest
in Vestin Group, Inc. and Subsidiaries.
F-27
<PAGE>
Exhibit A
DM MORTGAGE INVESTORS, LLC
SECOND AMENDED AND RESTATED
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
DM MORTGAGE INVESTORS, LLC
TABLE OF CONTENTS
ARTICLE 1
ORGANIZATION OF THE LIMITED LIABILITY COMPANY 1
1.1 Formation 1
1.2 Name 1
1.3 Place of Business 1
1.4 Purpose 1
1.5 Articles of Organization 1
1.6 Term of Existence 2
1.7 Power of Attorney 2
1.8 Nature of Power of Attorney 2
ARTICLE 2
DEFINITIONS 2
2.1 Acquisition and Investment Evaluation Expenses 3
2.2 Acquisition and Investment Evaluation Fees 3
2.3 Administrator 3
2.4 Affiliate 3
2.5 Agreement 3
2.6 Capital Account 3
2.7 Capital Contribution 4
2.8 Capital Transaction 4
2.9 Code 4
2.10 Company 4
2.11 [Reserved] 4
2.12 Deed of Trust 4
2.13 [Reserved] 4
2.14 Fiscal Year 4
2.15 Front-End Fees 4
2.16 Gross Asset Value 4
2.17 Independent Expert 5
2.18 Interest 5
2.19 Investment in Mortgage Loans 5
2.20 [Reserved] 5
2.21 Majority 5
2.22 [Reserved] 5
2.23 Manager 5
2.24 Member 5
2.25 Mortgage Investment(s) 5
2.26 Mortgage Loans 6
2.27 NASAA Guidelines 6
2.28 Net Income Available for Distribution 6
2.29 Net Proceeds 6
2.30 Net Worth 6
2.31 Nevada Statutes 6
2.32 Offering 6
2.33 Organization and Offering Expenses 6
2.34 Person 6
2.35 Profits and Losses 6
<PAGE>
2.36 Program 7
2.37 Promotional Interest 7
2.38 [Reserved] 7
2.39 Prospectus 7
2.40 Real Property 7
2.41 Regulations 7
2.42 Distribution Reinvestments 7
2.43 Roll-Up 7
2.44 Roll-Up Entity 7
2.45 Sales Commissions 8
2.46 Sponsor 8
2.47 Subscription Agreement 8
2.48 Units 8
2.49 Writedown 8
2.50 Writedown Amount 8
ARTICLE 3
THE MANAGER 8
3.1 Control in Manager 8
3.2 Limitations on Manager's Authority 10
3.3 Right to Purchase Receivables and Loans 11
3.4 Extent of Manager's Obligation and Fiduciary Duty 11
3.5 Liability and Indemnification of Manager 11
3.6 Assignment by the Manager 13
3.7 Promotional Interest of Manager 13
3.8 Removal of Manager 13
3.9 Right to Rely on Manager 13
3.10 Transfer of the Control of the Manager 14
ARTICLE 4
INVESTMENT AND OPERATING POLICIES 14
4.1 Commitment of Capital Contributions 14
4.2 Limitation on Single Property Loans 14
ARTICLE 5
CAPITAL CONTRIBUTIONS; LOANS TO COMPANY 14
5.1 Capital Contribution by Manager 14
5.2 Contributions of Other Members 14
5.3 Interest 14
5.4 Loans 14
ARTICLE 6
VOTING AND OTHER RIGHTS OF MEMBERS 15
6.1 No Participation in Management 15
6.2 Rights and Powers of Members 15
6.3 Meetings 16
6.4 Limited Liability of Members 16
6.5 Access to Books and Records 16
6.6 Representation of Company 17
ARTICLE 7
PROFITS AND LOSSES; CASH DISTRIBUTIONS 17
7.1 Allocation of Profits and Losses 17
7.2 Net Income Available For Distribution 17
7.3 Net Proceeds 17
ii
<PAGE>
7.4 Cash Distributions Upon Dissolution 17
7.5 Special Allocation Rules. 17
7.6 Code Section 704 (c) Allocations 19
7.7 Intent of Allocations 19
7.8 Quarterly Valuation of Assets 19
ARTICLE 8
REINVESTED DISTRIBUTIONS PLAN 20
8.1 Members' Reinvested Distributions 20
8.2 Purchase of Additional Units 20
8.3 Statement of Account 20
8.4 Continued Suitability Requirements 20
ARTICLE 9
BOOKS AND RECORDS, REPORTS AND RETURNS 20
9.1 Books and Records 20
9.2 Annual Statements 21
9.3 Special Quarterly Reports 22
9.4 Filings 22
9.5 Suitability Requirements 23
9.6 Fiscal Matters 23
ARTICLE 10
TRANSFER OF COMPANY INTERESTS 23
10.1 Interest of Manager 23
10.2 Transfer of Member's Interest 24
10.3 Further Restrictions on Transfers 24
ARTICLE 11
DEATH, LEGAL INCOMPETENCY, OR WITHDRAWAL
OF A MEMBER; WITHDRAWAL OF MANAGER 25
11.1 Effect of Death or Legal Incompetency of a
Member on the Company 25
11.2 Rights of Personal Representative 25
11.3 Withdrawal of Members Other than Managers 25
11.4 Withdrawal by Manager 27
11.5 Payment to Terminated Manager 27
ARTICLE 12
DISSOLUTION OF THE COMPANY 27
12.1 Events Causing Dissolution 27
12.2 Winding Up 27
12.3 Order of Distribution of Assets 28
12.4 No Recourse to Manager 28
12.5 Compliance With Timing Requirements of Regulations 28
ARTICLE 13
ROLL-UPS AND INVESTMENTS IN OTHER PROGRAMS 28
13.1 Roll-Up Transactions: Appraisal 28
13.2 Members' Rights in a Roll-Up 29
13.3 Limitations on Roll-Ups 29
ARTICLE 14
COMPENSATION TO THE MANAGER AND ITS AFFILIATES 30
iii
<PAGE>
ARTICLE 15
MISCELLANEOUS 30
15.1 Covenant to Sign Documents 30
15.2 Notices 30
15.3 Right to Engage in Competing Business 30
15.4 Amendment 31
15.5 Entire Agreement 31
15.6 Waiver 31
15.7 Severability 31
15.8 Application of Nevada law 31
15.9 Captions 32
15.10 Number and Gender 32
15.11 Counterparts 32
15.12 Waiver of Action for Partition 32
15.13 Defined Terms 32
15.14 Binding on Assignees 32
iv
<PAGE>
SECOND AMENDED AND RESTATED
OPERATING AGREEMENT
OF
DM MORTGAGE INVESTORS, LLC
A Nevada Limited Liability Company
THIS SECOND AMENDED AND RESTATED OPERATING AGREEMENT (this "Agreement")
was made and entered into as of the 1st day of August, 2000, by and between
Vestin Mortgage, Inc., a Nevada corporation (in its capacity as a member of the
Company, the "Initial Member" and collectively with all Persons who may become
members of the Company from time to time in accordance herewith, the "Members"),
and DM Mortgage Investors, LLC, a Nevada limited liability company (the
"Company").
WITNESSETH
WHEREAS, the Initial Member and the Company are the parties to the
Company's Operating Agreement dated as of December 15, 1999 (as amended and
restated as of May 31, 2000, the "Original Agreement"); and
WHEREAS, the Initial Member, being the sole member of the Company and
the sole Manager of the Company (in this latter capacity, the "Manager"),
desires to amend and restate the Original Agreement;
NOW, WHEREFORE, in consideration for the mutual agreements, covenants
and premises set forth herein, the Original Agreement is hereby amended and
restated in its entirety as follows:
ARTICLE 1
ORGANIZATION OF THE LIMITED LIABILITY COMPANY
1.1 Formation. The Initial Member caused the formation of the Company
on December 14, 1999 under the provisions of Title 7, Chapter 86, of the Nevada
Statutes.
1.2 Name. The name of the Company is DM MORTGAGE INVESTORS, LLC.
1.3 Place of Business. The principal place of business of the Company
is and will be located at 2901 El Camino Avenue, Suite 206, Las Vegas, Nevada
89102, until the manager changes it after giving the Members notice. In
addition, the Company may maintain such other offices and places of business in
the United States as the Manager may deem advisable. The Manager will file all
necessary or desirable documents to permit the Company to conduct its business
lawfully in any state or territory of the United States.
1.4 Purpose. The primary purpose of this Company is to generate cash
flow and to distribute to the Members the Profits of the Company from its
operations. The Company will invest in and purchase first, second, wraparound,
participating and construction Mortgage Investments, and do all things
reasonably related thereto, including developing, managing and either holding
for investment or disposing of real property acquired through foreclosure,
either directly or through general partnerships or other joint ventures, all as
further provided for in this Agreement.
1.5 Articles of Organization. The Company's Articles of Organization,
as amended, and Certificate of Acceptance of Appointment of Resident Agent have
been duly executed, acknowledged and filed with the Office of the Secretary of
State of the State of Nevada under the
<PAGE>
provisions of the Nevada Statues. The Initial Member hereby approves, ratifies
and confirms all of these actions. The Manager is authorized to execute and
cause to be filed additional Certificates of Amendment of the Articles of
Organization whenever required by the Nevada Statutes or this Agreement.
1.6 Term of Existence. The Company's existence began on December 14,
1999 and will continue until December 31, 2019, unless earlier terminated under
the provisions of this Agreement or by operation of law. A Majority may extend
the Company's term, provided that the Company remains in compliance with the
NASAA Guidelines.
1.7 Power of Attorney. Each of the Members irrevocably constitutes and
appoints the Manager as his true and lawful attorney-in-fact, with full power
and authority for him, and in his name, place and stead, to execute,
acknowledge, publish and file:
1.7.1 This Agreement, the Articles of Organization, as
amended to date, as well as any and all additional
amendments thereto required under the laws of the
State of Nevada or of any other state, or which the
Manager deems advisable to prepare, execute and file;
1.7.2 Any certificates, instruments and documents,
including, without limitation, Fictitious Business
Name Statements, as may be required to be filed by
the Company by any governmental agency or by the laws
of any state or other jurisdiction in which the
Company is doing or intends to do business, or which
the Manager deems advisable to file; and
1.7.3 Any documents which may be required to effect the
continuation of the Company, the admission of an
additional or substituted Member, or the dissolution
and termination of the Company, provided that the
continuation, admission, substitution or dissolution
or termination, as applicable, is in accordance with
the terms of this Agreement.
1.8 Nature of Power of Attorney. The grant of authority in Section 1.7:
1.8.1 Is a Special Power of Attorney coupled with an
interest, is irrevocable, survives the death of the
Member and shall not be affected by the subsequent
incapacity of the Member;
1.8.2 May be exercised by the Manager for each member by a
facsimile signature of or on behalf of the Manager or
by listing all of the members and by executing any
instrument with a single signature of or on behalf of
the Manager, acting as attorney-in-fact for all of
them; and
1.8.3 Shall survive the delivery of an assignment by a
Member of the whole or any portion of his Interest;
except that where the assignee thereof has been
approved by the Manager for admission to the Company
as a substituted Member, the Special Power of
Attorney shall survive the delivery of the assignment
for the sole purpose of enabling the person to
execute, acknowledge, and file any instrument
necessary to effect the substitution.
ARTICLE 2
DEFINITIONS
Unless stated otherwise, the terms set forth in this Article 2 shall,
for all purposes of this Agreement, have the following meanings:
2
<PAGE>
2.1 Acquisition and Investment Evaluation Expenses means expenses
including but not limited to legal fees and expenses, travel and communication
expenses, costs of appraisals, accounting fees and expenses, title insurance
funded by the Company, and miscellaneous expenses related to the evaluation,
selection and acquisition of Mortgage Investments, whether or not acquired.
2.2 Acquisition and Investment Evaluation Fees means the total of all
fees and commissions paid by any Person when purchasing or investing in Mortgage
Investments. Included in the computation of these fees or commissions shall be
any selection fee, mortgage placement fee, nonrecurring management fee, and any
evaluation fee, loan fee, or points paid by borrowers to the Manager, or any fee
of a similar nature, however designated.
2.3 Administrator means the agency or official administering the
securities law of a state in which Units are registered or qualified for offer
and sale.
2.4 Affiliate means, for any person, (a) any person directly or
indirectly controlling, controlled by or under common control with the Person,
(b) any other Person owning or controlling ten percent (10%) or more of the
outstanding voting securities of the Person, (c) any officer, director or Member
of the Person, or (d) if the other Person is an officer, director or Manager,
any company for which the Person acts in any similar capacity.
2.5 Agreement means this Second Amended and Restated Operating
Agreement, as further amended from time to time.
2.6 Capital Account means, for any Member, the Capital Account
maintained for the Member in accordance with the following provisions:
2.6.1 The Manager shall credit to each Member's Capital
Account the Member's Capital Contribution, the
Member's distributive share of Profits, any items in
the nature of income or gain (from unexpected
adjustments, allocations or distributions) that are
specially allocated to a Member, and the amount of
any Company liabilities that are assumed by the
Member or that are secured by any Company property
distributed to the Member.
2.6.2 The Manager shall debit from each Member's Capital
Account the amount of cash and the fair market value
of any Company property distributed to the Member
under any provision of this Agreement, the Member's
distributive share of Losses, and any items in the
nature of expenses or losses that are specially
allocated to a Member and the amount of any
liabilities of the Member that are assumed by the
Company or that are secured by any property
contributed by the Member to the Company.
If the Gross Asset Value of a Company asset is adjusted as a result of
a Writedown, the Manager shall concurrently adjust the Capital Accounts of all
Members in order to reflect the aggregate net adjustment that would have
occurred if the Company had recognized Losses equal to the Writedown Amount and
the Losses were allocated under Article 7.
If any interest in the Company is transferred in accordance with
Section 10.2 of this Agreement, the transferee shall succeed to the Capital
Account of the transferor to the extent it relates to the transferred interest.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in
a manner consistent with the Regulation. If the
3
<PAGE>
Manager determines that it is prudent to modify the manner in which the Capital
Accounts, or any debits or credits thereto, are computed in order to comply with
the then existing Treasury Regulation, the Manager may make the modification,
provided that it is not likely to have a material effect on the amounts
distributable to any Member under Articles 7 and 12 of this Agreement upon the
dissolution of the Company. The Manager shall adjust the amounts debited or
credited to Capital Accounts for (a) any property contributed to the Company or
distributed to the Manager, and (b) any liabilities that are secured by the
contributed or distributed property or that are assumed by the Company or the
Manager, if the Manager determines the adjustments are necessary or appropriate
under Treasury Regulation Section 1.704-1(b)(2)(iv). The Manager shall make any
appropriate modification if unanticipated events might otherwise cause this
Agreement not to comply with Treasury Regulation Section 1.704-1(b) as provided
for in Sections 7.7 and 15.4.
2.7 Capital Contribution means the total investment and contribution to
the capital of the Company by a Member in cash or by way of automatic
reinvestment of Company distributions of capital an/or net income and, in the
case of the Manager (in its capacity as a Member), its Promotional Interest.
"Initial Capital Contribution" means the amount paid in cash by each Member with
his original subscription for and acquisition of Units of the Company under the
Prospectus.
2.8 Capital Transaction means (i) the repayment of principal or
prepayment of a Mortgage Investment, including deemed repayments of Mortgage
Investments resulting from dispositions thereof, to the extent classified as a
return of capital under the Code, (ii) the foreclosure, sale, exchange,
condemnation, eminent domain taking or other disposition under the Code of a
Mortgage Investment or Real Property subject to a Mortgage Investment, or (iii)
the payment of insurance or a guarantee for a Mortgage Investment.
2.9 Code means the Internal Revenue Code of 1986, as amended from time
to time, and corresponding provisions of subsequent revenue laws.
2.10 Company means DM Mortgage Investors, LLC, the Nevada limited
liability company to which this Agreement pertains.
2.11 [Reserved]
2.12 Deed(s) of Trust means the lien(s) created on the Real Property of
borrowers securing their respective obligations to the Company to repay Mortgage
Investments, whether in the form of a deed of trust, mortgage or otherwise.
2.13 [Reserved]
2.14 Fiscal Year means, subject to the provisions of Section 706 of the
Code and Section 9.6.1, (i) the period commencing on the date of formation of
the Company and ending on December 31, 1999 (ii) any subsequent 12 month period
on January 1 and ending on December 31 and (iii) the period commencing January 1
and ending on the date on which all Company assets are distributed to the
Members under Article 12.
2.15 Front-End Fees means fees and expenses paid by any Person to
organize the Company and acquire assets for the Company, including Organization
and Offering Expenses, Acquisition and Investment Evaluation Expenses,
Acquisition and Investment Evaluation Fees, interest on deferred fees and
expenses, fees or points paid by borrowers to the Manager to extend their loans,
and any fees otherwise deemed to be "Front-End Fees" under the NASAA Guidelines.
2.16 Gross Asset Value means, for any Company asset, the following:
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2.16.1 The initial Gross Asset Value of any Company asset at
the time that it is contributed by a Member to the
capital of the Company shall be an amount equal to
the fair market value of the Company asset (without
regard to the provisions of Code Section 7701(g)), as
determined by the contributing Member and the
Manager;
2.16.2 The Gross Asset Values of all Company assets shall be
adjusted, as determined by the distributed Member and
the Manager, to equal their respective fair market
values upon the distribution to a Member by the
Company of more than a de minimis amount of Company
assets (other than money), unless all Members
simultaneously receive distributions of undivided
interests in the distributed Company assets in
proportion to their respective Capital Accounts;
2.16.3 The Gross Asset Values of all Company assets shall be
adjusted to equal their respective fair market values
(as determined by the Manager, in its reasonable
discretion) upon the termination of the Company for
Federal income tax purposes under Code Section
708(b)(1)(B); and
2.16.4 The Gross Asset Value of a Company asset shall be
adjusted in the case of a Writedown of the Company
asset in accordance with Sections 2.49, 2.50 and 7.8.
2.17 Independent Expert means a Person with no material current or
prior business or personal relationship with the Manager, who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Company, and who is qualified to perform the
services.
2.18 Interest means the Capital Accounts of Members, which are divided
into "Units."
2.19 Investment in Mortgage Loans means the amount of Capital
Contributions used to make or invest in Mortgage Investments or the amount
actually paid or allocated to the purchase of Mortgage Investments, working
capital reserves allocable thereto (except that working capital reserves in
excess of 3.0% shall not be included), and other cash payments such as interest
and taxes but excluding Front-End Fees.
2.20 [Reserved]
2.21 Majority means any group of Members who together hold a majority
of the total outstanding Interests of the Company as of a particular date (or if
no date is specified, the first day of the then current calendar month).
2.22 [Reserved]
2.23 Manager means Vestin Mortgage, Inc., a Nevada corporation, in that
capacity, or any Person replacing Vestin Mortgage under this Agreement. For
greater certainty, Vestin Mortgage, in its capacity as the Initial Member, is a
distinct entity from the Manager for purposes of this Agreement unless the
context should indicate to the contrary.
2.24 Member means the owners of Units in the Company, unless the
instruments through which the Units were transferred to the owner did not also
convey the transferor's status as a Member.
2.25 Mortgage Investment(s) means the Mortgage Loan(s) or an interest
in the Mortgage Loans that are held by the Company.
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2.26 Mortgage Loans means investments of the Company that are notes,
debentures, bonds and other evidences of indebtedness or obligations that are
negotiable or non-negotiable and secured or collateralized by Deeds of Trust on
Real Property.
2.27 NASAA Guidelines means the Mortgage Program Guidelines of the
North American Securities Administrators Association, Inc. adopted on September
10, 1996, as amended from time to time unless indicated to the contrary by the
context.
2.28 Net Income Available for Distribution means an amount equal to the
excess of accrued income from operations and investment, or the sale or
refinancing or other disposition of, Company assets during any calendar month
over the accrued operating expenses of the Company during the month; provided
that:
2.28.1 the operating expenses shall not include any general
overhead expenses of the Manager not specifically
related to, billed to or reimbursable by the Company
as specified in Exhibit 14 to this Agreement; and
2.28.2 Net Income Available for Distribution shall not
exceed the amount of cash on hand.
2.29 Net Proceeds means the net cash proceeds (or deemed net proceeds)
from any Capital Transaction.
2.30 Net Worth means the excess of total assets over total liabilities
as determined by generally accepted accounting principles consistently applied,
except that if any of the assets have been depreciated, then the amount of the
depreciation relative to any particular asset may be added to the depreciated
cost of the asset to compute total assets, provided that the amount of
depreciation may be added only to the extent that the amount resulting after
adding the depreciation does not exceed the fair market value of the asset.
2.31 Nevada Statutes means Nevada Revised Statutes, as amended from
time to time, unless indicated to the contrary by the context.
2.32 Offering means the offer and sale of Units of the Company made
under the Prospectus.
2.33 Organization and Offering Expenses means those expenses incurred
when preparing the Company for registration with the Securities and Exchange
Commission and states and subsequently offering and distributing Units to the
public, including without limitation Sales Commissions and all advertising
expenses.
2.34 Person means any natural person, partnership, corporation,
unincorporated association or other legal entity.
2.35 Profits and Losses mean, for each Fiscal Year or any other period,
an amount equal to the Company's taxable income or loss for the Fiscal Year or
other given period, determined in accordance with Code Section 703(a) (for this
purpose, all items of income, gain, loss, or deduction required to be stated
separately under Code Section 703(a)(1) shall be included in taxable income or
loss), with the following adjustments (without duplication):
2.35.1 Any income of the Company that is exempt from federal
income tax and not otherwise taken into account in
computing Profits or Losses under this Section 2.35
shall be added to the taxable income or loss;
2.35.2 Any expenditures of the Company described in Section
705(a)(2)(B) of the Code or treated as Section
705(a)(2)(B) of the Code expenditures
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under Treasury Regulation Section
1.704-1(b)(2)(iv)(i), and not otherwise taken into
account in computing Profits or Losses under this
Section 2.35, shall be subtracted from the taxable
income or loss.
If any Company asset has a Gross Asset Value which differs from its
adjusted cost basis, gain or loss resulting from the disposition of the Company
asset shall be computed using the Gross Asset Value (rather than adjusted cost
basis) of the Company asset.
Notwithstanding any other provision of this Section, any items in the
nature of income, gain, expenses or losses, which are specially allocated under
Section 7.5.1, 7.5.2 and 7.6, shall not be taken into account in computing
Profits or Losses.
2.36 Program means a limited or general partnership, limited liability
company, limited liability partnership, trust, joint venture, unincorporated
association or similar organization other than a corporation formed and operated
for the primary purpose of investing in mortgage loans.
2.37 Promotional Interest is calculated as follows: If an aggregate of
84.5% of Capital Contributions are invested in Mortgage Loans, the Promotional
Interest will 1.0%. If 86.5% of Capital Contributions are invested in Mortgage
Loans, the Promotional Interest increases to an aggregate of 2.0%. The
Promotional Interest will thereafter increase by 1.0% for each additional 1.0%
of Capital Contributions invested in Mortgage Loans. The Promotional Interest is
in addition to any ownership interest that the Manager pays for.
2.38 [Reserved]
2.39 Prospectus means the prospectus that forms a part of the
Registration Statement on Form S-11 under the Securities Act of 1933
(Registration No. 333-32800), originally filed by the Company with the
Securities and Exchange Commission on February 17, 2000, as amended, and any
supplement or amended Prospectus or new prospectus that forms a part of a
supplement to the Registration Statement filed by the Company, unless the
context should indicate to the contrary.
2.40 Real Property means and includes (a) land and any buildings,
structures, and improvements, and (b) all fixtures, whether in the form of
equipment or other personal property, that is located on or used as part of
land. Real Property does not include Deeds of Trust, mortgage loans or interests
therein.
2.41 Regulations means, except where the context indicates otherwise,
the permanent, temporary, proposed, or proposed and temporary regulations of the
U.S. Department of the Treasury under the Code, as the regulations may be
lawfully changed from time to time.
2.42 Reinvested Distributions means Units purchased under the Company's
Reinvested Distribution Plan that is described in Article 8 of this Agreement.
2.43 Roll-Up means a transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of the Company and
the issuance of securities of a Roll-Up Entity. "Roll-Up" does not include a
transaction involving (i) securities of the Company, if any, listed on a
national securities exchange or quoted on the Nasdaq National Market for 12
months or (ii) conversion to corporate, trust, limited liability company, or
association form of only the Company if, as a consequence of the transaction,
there will be no significant adverse change in any of the following: (a)
Members' voting rights; (b) the term of existence of the Company; (c) Manager
compensation; (d) the Company's investment objectives.
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2.44 Roll-Up Entity means a company, real estate investment trust,
corporation, limited liability company, limited or general partnership or other
entity that would be created or would survive after the successful completion of
a proposed Roll-Up.
2.45 Sales Commissions means the compensation that may be paid to
broker-dealers for the sale of Units under the Prospectus.
2.46 Sponsor means any Person (a) directly or indirectly instrumental
in organizing, wholly or in part, a Program, or a Person who will manage or
participate in the management of a Program, and any Affiliate of any the Person,
but does not include a Person whose only relation with a Program is that of an
independent property manager or other provider of services (such as attorneys,
accountants or underwriters), whose only compensation is received in that
capacity, or (b) is a "Sponsor" as otherwise defined in the NASAA Guidelines.
Sunderland Corporation, the Manager's parent company, is the initial Sponsor of
the Company.
2.47 Subscription Agreement means the document that is an exhibit to
and part of the Prospectus that every Person who buys Units of the Company must
execute and deliver with full payment for the Units and which, among other
provisions, contains the written consent of each Member to the adoption of this
Agreement.
2.48 Units mean the units of equity in the Company evidencing the
Company's Interests that are (a) issued to Members upon their admission to the
Company under the Subscription Agreement and the Prospectus or (b) transferred
to those who become substituted Members under Section 10.2 hereof. The Manager
may purchase Units on the same basis as other Members. Units purchased at
different times do not necessarily represent the same underlying amount of
Interests.
2.49 Writedown means a determination by the Manager for a particular
Mortgage Investment or other Company investment (which determination has been
verified by the Company's accountants as being in conformity with generally
accepted accounting principles) that the fair market value of the investment at
the time the determination is made is less than the amount actually paid or
allocated to the purchase of the investment, which determination shall be made
by the Company and its accountants within thirty (30) days of the end of each
calendar quarter and any Writedown shall be effective on the last day of the
relevant calendar quarter during the term of this Agreement.
2.50 Writedown Amount means, for any Mortgage Investment or other
Company investment, the amount by which, at the time that a Writedown is
determined for the Investment, the amount actually paid or allocated to the
purchase of the investment exceeds its fair market value.
ARTICLE 3
THE MANAGER
3.1 Control in Manager. Subject to the provisions of Section 3.2 and
except as otherwise expressly stated elsewhere in this Agreement, the Manager
has exclusive control over the business of the Company (with all acts and
decisions being in its sole discretion except as specifically set forth in this
Agreement), 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. As Manager of the Company and its business, the
Manager has all duties generally associated with that position, including
dealing with Members, being responsible for all accounting, tax and legal
matters, performing internal reviews of the Company's investments and loans,
determining how and when to invest the Company's capital, and determining the
course of action to take for Company loans that are in default. The Manager also
has all of these powers
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for ancillary matters. Without limiting the generality of the foregoing, the
powers include the right (except as specifically set forth in this Agreement,
including under Section 3.2):
3.1.1 To evaluate potential Company investments and to
expend the capital of the Company in furtherance of
the Company's business;
3.1.2 To acquire, hold, lease, sell, trade, exchange, or
otherwise dispose of all or any portion of Company
property or any interest therein at a price and upon
the terms and conditions as the Manager may deem
proper;
3.1.3 To cause the Company to become a joint venturer,
general or limited partner or member of an entity
formed to own, develop, operate and dispose of
properties owned or co-owned by the Company acquired
through foreclosure of a Mortgage Loan;
3.1.4 To manage, operate and develop Company property, or
to employ and supervise a property manager who may,
or may not, be an Affiliate of the Manager;
3.1.5 To borrow money from banks and other lending
institutions for any Company purpose, and as security
therefor, to encumber Company property;
3.1.6 To repay in whole or in part, refinance, increase,
modify, or extend, any obligation, affecting Company
property;
3.1.7 To employ from time to time, at the expense of the
Company, persons, including the Manager or its
Affiliates, required for the operation of the
Company's business, including employees, agents,
independent contractors, brokers, accountants,
attorneys, and others; to enter into agreements and
contracts with persons on terms and for compensation
that the Manager determines to be reasonable; and to
give receipts, releases, and discharges for all of
the foregoing and any matters incident thereto as the
Manager may deem advisable or appropriate; provided,
however, that any agreement or contract between the
Company and the Manager or between the Company and an
Affiliate of the Manager shall contain a provision
that the agreement or contract may be terminated by
the Company without penalty on sixty (60) days'
written notice and without advance notice if the
Manager or Affiliate who is a party to the contract
or agreement resigns or is removed under the terms of
this Agreement;
3.1.8 To maintain, at the expense of the Company, adequate
records and accounts of all operations and
expenditures and furnish the Members with annual
statements of account as of the end of each calendar
year, together with all necessary tax-reporting
information;
3.1.9 To purchase, at the expense of the Company, liability
and other insurance to protect the property of the
Company and its business;
3.1.10 To refinance, recast, modify, consolidate, extend or
permit the assumption of any Mortgage Loan or other
investment owned by the Company;
3.1.11 To pay all expenses incurred in the operation of the
Company;
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3.1.12 To file tax returns on behalf of the Company and to
make any and all elections available under the Code;
3.1.13 To modify, delete, add to or correct from time to
time any provision of this Agreement as permitted
under Section 15.4 hereof.
3.2 Limitations on Manager's Authority. The Manager has no authority
to:
3.2.1 Do any act in contravention of this Agreement;
3.2.2 Do any act which would make it impossible to carry on
the ordinary business of the Company;
3.2.3 Confess a judgment against the Company;
3.2.4 Possess Company property or assign the rights of the
Company in property for other than a Company purpose;
3.2.5 Admit a person as a Manager without the prior
affirmative vote or consent of a Majority, or any
higher vote as may be required by applicable law;
3.2.6 Voluntarily withdraw as Manager without the prior
affirmative vote or consent of a Majority unless its
withdrawal would neither affect the tax status of the
Company nor materially adversely affect the Members
(subject to any delay in effectiveness of the
withdrawal as set forth elsewhere herein);
3.2.7 Sell all or substantially all of the assets of the
Company in one or a series of related transactions
that is not in the ordinary course of business,
without the prior affirmative vote or consent of a
Majority;
3.2.8 Amend this Agreement without the prior affirmative
vote or consent of a Majority, except as permitted by
Section 15.4 of this Agreement;
3.2.9 Dissolve or terminate the Company without the prior
affirmative vote or consent of a Majority;
3.2.10 Cause the merger or other reorganization of the
Company without the prior affirmative vote or consent
of a Majority;
3.2.11 Grant to the Manager or any of its Affiliates an
exclusive right to sell any Company assets;
3.2.12 Receive or permit the Manager or any Affiliate of the
Manager to receive any insurance brokerage fee or
write any insurance policy covering the Company or
any Company property;
3.2.13 Receive from the Company a rebate or participate in
any reciprocal business arrangement which would
enable the Manager or any of its Affiliates to do so;
3.2.14 Commingle the Company's assets with those of any
other Person;
3.2.15 Use or permit another Person to use the Company's
assets in any manner, except for the exclusive
benefit of the Company;
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3.2.16 Pay or award, directly or indirectly, any commissions
or other compensation to any Person engaged by a
potential investor for investment advice as an
inducement to the advisor to advise the purchase of
Units; provided, however, that this clause shall not
prohibit the payment of Sales Commissions;
3.2.17 Make loans to the Manager or an Affiliate of the
Manager; or
3.2.18 Pay, directly or indirectly, a commission or fee to
the Manager in connection with the reinvestment or
distribution of Net Proceeds.
3.3 Right to Purchase Receivables and Loans. As long as the
requirements of Article 4 are met and the Company adheres to the investment
policy described in the Prospectus, the Manager, in its sole discretion, may at
any time, but is not obligated to:
3.3.1 Purchase from the Company the interest receivable or
principal on delinquent Mortgage Loans held by the
Company;
3.3.2 Purchase from a senior lien holder the interest
receivable or principal on mortgage loans senior to
Mortgage Loans held by the Company; and/or
3.3.3 Use its own monies to cover any other costs
associated with Mortgage Loans held by the Company
such as property taxes, insurance and legal expenses.
3.4 Extent of Manager's Obligation and Fiduciary Duty. The Manager
shall devote the portion of its time to the business of the Company as it
determines, in good faith, to be reasonably necessary to conduct the Company's
business. The Manager shall not be bound to devote all of its business time to
the affairs of the Company, and the Manager and its Affiliates may engage for
their own account and for the account of others in any other business ventures
and employments, including ventures and employments having a business similar or
identical or competitive with the business of the Company. The Manager has
fiduciary responsibility for the safekeeping and use of all funds and assets of
the Company, whether or not in the Manager's possession or control, and the
Manager will not employ, or permit another to employ the Company's funds or
assets in any manner except for the exclusive benefit of the Company. The
Manager will not allow the assets of the Company to be commingled with the
assets of the Manager or any other Person. The Company shall not permit a Member
to contract away the fiduciary duty owed to any Member by the Manager under
common law. The Manager, for so long as it owns any Units as a Member, hereby
waives its right to vote its Units and to have them considered as outstanding in
any vote for removal of the Manager or for amendment of this Agreement (except
as provided in Sections 3.1.13 and 15.4) or otherwise.
3.5 Liability and Indemnification of Manager. Neither the Manager nor
any of its Affiliates, agents or attorneys (hereinafter, an "Indemnified Party")
shall be liable, responsible or accountable in damages or otherwise to any other
Member, the Company, its receiver or trustee (the Company and its receiver or
trustee, if any, are hereinafter referred to as "Indemnitors") for, and the
Indemnitors agree to indemnify, pay, protect and hold harmless each Indemnified
Party (on the demand of the Indemnified Party) from and against any and all
liabilities, obligations, losses, damages, actions, judgments, suits,
proceedings, reasonable costs, reasonable expenses and disbursements (including,
without limitation, all reasonable costs and expenses of defense, appeal and
settlement of any and all threatened, pending, or completed suits, actions or
proceedings instituted against the Indemnified Party or the Company and all
reasonable costs of investigation related thereto) (collectively referred to as
"Liabilities" for the remainder of this Section) which may be imposed on,
incurred by, or asserted against the Indemnified Party or the Company, where the
Liabilities relate to or arise out of any action or inaction on the part of the
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Company or on the part of the Indemnified Party for services to or on behalf of
the Company (and for an Indemnified Party which is an Affiliate of the Manager
for an act which the Manager would be entitled to indemnification if the act
were performed by it). These rights are conditioned upon the Indemnified Party
having reasonably believed that its actions were in or not opposed to the best
interest of the Company, and, for any criminal action or proceeding, the
Indemnified Party's having had no reasonable cause to believe its conduct was
unlawful.
Notwithstanding the foregoing, any right to indemnification hereunder
shall be subject to the following:
1. The Company shall not indemnify the Manager for any liability
or loss suffered by the Manager, nor shall the Manager be held
harmless for any loss or liability suffered by the Company,
unless all of the following conditions are met:
a. The Manager has determined, in good faith, that the
course of conduct which caused the loss or liability
was in the best interest of the Company;
b. The Manager was acting on behalf of or performing
services for the Company;
c. such liability or loss was not the result of the
negligence or misconduct by the Manager; and
d. such indemnification or agreement to hold harmless is
recoverable only out of the assets of the Company and
not from the Participants.
2. Notwithstanding anything to the contrary contained in
subection 1 above, the Manager (which shall include Affiliates
only if such Affiliates are performing services on behalf of
the Company) and any Person acting as a broker-dealer shall
not be indemnified for any losses, liabilities or expenses
arising from an alleged violation of federal or state
securities laws unless the following conditions are met:
a. there has been a successful adjudication on the
merits of each count involving alleged securities law
violation as to the particular indemnitee; or
b. such claims have been dismissed with prejudice on the
merits by a court of competent jurisdiction as to the
particular indemnitee; or
c. a court of competent jurisdiction has approved a
settlement of the claims against a particular
indemnitee and has determined that indemnification of
the settlement and related costs should be made; and
d. in the case of subparagraph c of this paragraph, the
court of law considering the request for
indemnification has been advised of the position of
the Securities and Exchange Commission and the
position of any state securities regulatory authority
in which securities of the Company were offered or
sold as to indemnification for violations of
securities laws; provided that the court need only be
advised of and consider the positions of the
securities authority of those states:
(1) which are specifically set forth in the
Company agreement; and
(2) in which plaintiffs claim they were offered
or sold Company interests.
3. The Company may not incur the cost of that portion of
liability insurance which insures the Manager for any
liability as to which the Manager is prohibited from being
indemnified under this subsection.
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4. The provision of advancement from Company funds to the Manager
or its Affiliates for legal expenses and other costs incurred
as a result of any legal action is permissible if the
following conditions are satisfied:
a. The legal action relates to acts or omissions with
respect to the performance of duties or services on
behalf of the Company;
b. The legal action is initiated by a third party who is
not a Member, or the legal action is initiated by a
Member and a court of competent jurisdiction
specifically approves such advancement; and
c. The Manager or its Affiliates undertake to repay the
advanced funds to the Company in cases in which such
Person is not entitled to indemnification under
paragraph 1 of this section 3.5.
3.6 Assignment by the Manager. The Manager's Interest in the Company
may be assigned at the discretion of the Manager, subject to Section 10.1.
3.7 Promotional Interest of Manager. The Manager shall be allocated the
Promotional Interest as defined in Section 2.37.
3.8 Removal of Manager. The Manager may be removed upon the following
conditions:
3.8.1 The Members may remove the Manager by written consent
or vote of a Majority (excluding any Interest of the
Manager being removed). This removal of the Manager,
if there is no other Manager, shall not become
effective for at least 120 days following the consent
or vote of the Majority.
3.8.2 During the 120 day period described in Section 3.8.1,
the Majority (excluding any Interest of the removed
Manager) shall have the right to agree in writing to
continue the business of the Company and, within six
months following the termination date of the last
remaining Manager, elect and admit a new Manager(s)
who agree(s) to continue the existence of the
Company.
3.8.3 Substitution of a new Manager, if any, shall be
effective upon written acceptance of the duties and
responsibilities of a Manager by the new Manager.
Upon effective substitution of a new Manager, this
Agreement shall remain in full force and effect,
except for the change in the Manager, and business of
the Company shall be continued by the new Manager.
The new Manager shall thereupon execute, acknowledge
and file a certificate of amendment to the Articles
of Organization of the Company in the manner required
by Section 26.221 of the Nevada Law.
3.8.4 Failure of a Majority to designate and admit a new
Manager within the time specified herein shall
dissolve the Company, in accordance with the
provisions of Article 12 of this Agreement.
3.9 Right to Rely on Manager. Any person dealing with the Company may
rely (without duty of further inquiry) upon a certificate signed by the Manager
as to:
3.9.1 The identity of the Manager or any Member;
3.9.2 The existence or nonexistence of any fact or facts
which constitute a condition precedent to acts by the
Manager or which are in any further manner germane to
the affairs of the Company;
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3.9.3 The persons who are authorized to execute and deliver
any instrument or document of the Company; and
3.9.4 Any act or failure to act by the Company or any other
matter whatsoever involving the Company or any
Member.
3.10 Transfer of the Control of the Manager. A sale or transfer of a
controlling interest in the Manager will not terminate the Company or be
considered the withdrawal or resignation of the Manager.
ARTICLE 4
INVESTMENT AND OPERATING POLICIES
4.1 Commitment of Capital Contributions. The Manager shall take all
reasonable steps to commit at least eighty-six and one-half percent (86.5%) of
Capital Contributions to investments in Mortgage Loans (including up to 3.0% of
the amount established as reserves), provided that under no circumstances may
such commitment decrease below the applicable percentage in the NASAA
Guidelines. The Company may invest in or purchase Mortgage Loans of such
duration and on such real property and with such additional security as the
Manager in its sole discretion shall determine, subject to Section 4.2. These
Mortgage Loans may be senior to other mortgage loans on the real property, or
junior to other mortgage loans on the real property, all in the sole discretion
of the Manager.
4.2 Investment Policy. In making investments, the Manager shall follow
the investment policy described in the Prospectus.
ARTICLE 5
CAPITAL CONTRIBUTIONS; LOANS TO COMPANY
5.1 Capital Contribution by Manager. The Manager (in its capacity as
the Initial Member) shall contribute to the capital of the Company an amount in
cash equal to one-half (1/2) of one percent (1%) of the aggregate of the Capital
Contribution of the other Members. The Manager shall also be deemed to have
contributed to the capital of the Company an amount equal to the Promotional
Interest.
5.2 Contributions of Other Members. Members other than the Manager
shall acquire Units in accordance with the terms of the Subscription Agreement
or any future subscription materials approved by the Manager. The names,
addresses, date of admissions and Capital Contributions of the Members are and
shall be set forth in Schedule A to this Agreement, as amended from time to
time, and incorporated herein by reference. The Manager shall update Schedule A
to reflect the then-current ownership of Units (and Interests) without any
further need to obtain the consent of any Member, and Schedule A, as revised
from time to time by the Manager, shall be presumed correct absent manifest
error.
5.3 Interest. No interest shall be paid on, or in respect of, any
contribution to Company Capital by any Member, nor shall any Member have the
right to demand or receive cash or other property in return for the Member's
Capital Contribution.
5.4 Loans. Any Member or Affiliate of a Member may, with the written
consent of the Manager, lend or advance money to the Company. If the Manager or,
with the written consent of the Manager, any Member shall make any loans to the
Company or advance money on its behalf, the amount of any loan or advance shall
not be treated as a contribution to the capital of the Company, but shall be a
debt due from the Company. The amount of any loan or advance by a
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lending Member or an Affiliate of a Member shall be repayable out of the
Company's cash and shall bear interest at a rate of not in excess of the lesser
of (i) the prime rate established, from time to time, by any major bank selected
by the Manager for loans to the bank's most creditworthy commercial borrowers,
plus five percent (5%) per annum, or (ii) the maximum rate permitted by
applicable law. None of the Members or their Affiliates shall be obligated to
make any loan or advance to the Company. This section shall be subject to the
Company's Investment Policy as it relates to transactions with the Manager or
its Affiliates.
ARTICLE 6
VOTING AND OTHER RIGHTS OF MEMBERS
6.1 No Participation in Management. Except as expressly provided in
this Agreement, no Member shall take part in the conduct or control of the
Company's business or have any right or authority to act for or bind the
Company.
6.2 Rights and Powers of Members. In addition to the rights of the
Members to remove and replace the Manager and as otherwise provided for in
Section 3.2, the Members shall have the right to vote upon and take any of the
following actions upon the approval of a Majority, without the concurrence of
the Manager, and an affirmative vote of a Majority shall be required to allow or
direct the Manager to:
6.2.1 Dissolve and windup the Company before the expiration
of the term of the Company;
6.2.2 Amend this Agreement, subject to the rights to the
Manager granted in Section 15.4 of this Agreement and
subject also to the prior consent of the Manager if
either the distributions due to the Manager or the
duties of the Manager are affected;
6.2.3 Merge the Company or sell all or substantially all of
the assets of the Company, otherwise than in the
ordinary course of its business.
6.2.4 Change the nature of the Company's business; and
6.2.5 Elect to continue the business of the Company other
than in the circumstances described in Section 3.8 of
this Agreement.
6.3 Meetings.
6.3.1 The Members may hold meetings of Members within or
outside the State of Nevada at any place selected by
the Person or Persons calling the meeting. If no
other place is stated, meetings shall be held at the
Company's principal place of business as established
in accordance with Section 1.3 of this Agreement. The
Members may approve by written consent of a Majority
any matter upon which the Members are entitled to
vote at a duly convened meeting of the Members, which
consents will have the same effect as a vote held at
a duly convened meeting of the Members.
6.3.2 The Manager, or Members representing more than ten
percent (10%) of the outstanding Interests for any
matters on which the Members may vote, may call a
meeting of the Company. If Members representing the
requisite Interests present to the Manager a
statement requesting a Company meeting, or the
Manager calls the meeting, the Manager shall fix a
date for a meeting and shall (within ten (10) days
after receipt of a
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statement, if applicable) give personal or mailed
notice or notice by any other means of written
communication, addressed to each Member at the
respective address of the Member appearing on the
books of the Company or given to the Company for the
purpose of notice, not less than fifteen (15) or more
than sixty (60) days before the date of the meeting,
to all Members of the date, place and time of the
meeting and the purpose for which it has been called.
Unless otherwise specified, all meetings of the
Company shall be held at 2:00 p.m. local time at the
principal office of the Company.
6.3.3 Members may vote in person or by proxy. A Majority,
whether present in person or by proxy, shall
constitute a quorum at any meeting of Members. Any
question relating to the Company which may be
considered and acted upon by the Members may be
considered and acted upon by vote at a Company
meeting, and any vote required to be in writing shall
be deemed given if approved by a vote by written
ballot.
6.4 Limited Liability of Members. Units are non-assessable. No Member
shall be personally liable for any of the expenses, liabilities, or obligations
of the Company or for any Losses beyond the amount of the Member's Capital
Contribution to the Company and the Member's share of any undistributed net
income and gains of the Company.
6.5 Access to Books and Records. The Members and their designated
representatives shall have access to all books and records of the Company during
the Company's normal business hours. An alphabetical list of the names and
addresses of all Members together with the number of Units held by each of them
will be maintained as a part of the books and records of the Company. The
Company shall make the list available on request to any Member or his
representative for a stated purpose including, without limitation, matters
relating to Members' voting rights, tender offers, and the exercise of Members'
rights under federal proxy law. A copy of the Members list shall be mailed to
any Member requesting it within ten business days of the request, although the
Company may change a reasonable amount for the copy. The Member list shall be
updated at least quarterly to reflect changes in the information contained
therein.
If the Manager neglects or refuses to exhibit, produce or mail a copy
of the Member list as requested, the Manager shall be liable to any Member
requesting the list for the costs, including attorney fees, incurred by that
Member for compelling the production of the list, and for actual damages
suffered by the Member by reason of the refusal or neglect. However, the Company
need not exhibit, produce or mail a copy of the Member list if the actual
purpose and reason for the request therefor is to secure the list or other
information for the purpose of selling the list or copies thereof, or of using
it for a commercial purpose other than the in the interest of the Person as a
Member in the Company. The Manager may require the Person requesting the list to
represent that the list is not requested for any commercial purpose. The
remedies provided hereunder to Members requesting copies of the list are in
addition to, and shall not in any way limit, other remedies available to Members
under federal or Nevada law.
6.6 Representation of Company. Each of the Members hereby acknowledges
and agrees that the attorneys representing the Company and the Manager and its
Affiliates do not represent and shall not be deemed under the applicable codes
of professional responsibility to have represented or be representing any or all
of the Members in any respect at any time. Each of the Members further
acknowledges and agrees that the attorneys shall have no obligation to furnish
the Members with any information or documents obtained, received or created in
connection with the representation of the Company, the Manager and its
Affiliates.
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ARTICLE 7
PROFITS AND LOSSES; CASH DISTRIBUTIONS
7.1 Allocation of Profits and Losses. The Manager shall credit all
Company Profits to and charge all Company Losses against the Members in
proportion to their respective Interests. The Manager shall allocate to the
Members all Profits and Losses realized by the Company during any month as of
the close of business on the last day of each calendar month, in accordance with
their respective Interests and in proportion to the number of days during the
month that they owned the Interests (i.e., a weighted average Capital Account),
without regard to Profits and Losses realized for time periods within the month.
This allocation shall be subject to the Manager's Promotional Interest and the
prior distributions of Cash Available for Distribution and net proceeds of
Capital Transactions to the Manager provided for Article 14.
7.2 Net Income Available For Distribution. The Company shall distribute
Net Income Available For Distribution to Members according to the allocations
provided for in Section 7.1, in cash to those Members who have on file with the
Company their written election to receive cash distributions, as a pro rata
share of the total Net Income Available For Distribution. The Company shall make
these distributions monthly in proportion to the weighted average Capital
Account of each Member during the preceding calendar month.
7.3 Net Proceeds. Net Proceeds may also be distributed to Members in
cash or retained by the Company for other uses as set forth herein. Net Proceeds
will be deemed to be distributed to the Members to upon receipt by the Company
thereof, regardless of whether any actual cash distributions of the Net Proceeds
occur. Immediately thereafter, there shall be a deemed recontribution by each
Member to the extent of the deemed distribution of Net Proceeds. The Company may
use Net Proceeds to make new loans, improve or maintain properties acquired by
the Company through foreclosure or to pay operating expenses. Distributions of
Net Proceeds shall be in accordance with the allocations provided for in Section
7.1 above.
7.4 Cash Distributions Upon Dissolution. Upon dissolution and winding
up of the Company, the Company shall thereafter distribute Net Income Available
for Distribution and Net Proceeds available for distribution, if any, to the
Members in accordance with the provisions of Section 12.3 of this Agreement.
7.5 Special Allocation Rules.
7.5.1 For purposes of this Agreement, a loss or allocation
(or item thereof) is attributable to non-recourse
debt which is secured by Company property to the
extent of the excess of the outstanding principal
balance of the debt (excluding any portion of the
principal balance which would not be treated as an
amount realized under Section 1001 of the Code and
Treasury Regulation Section 1.1001-2 if the debt were
foreclosed upon) over the adjusted basis of the
property. This excess is called "Minimum Gain"
(whether taxable as capital gain or as ordinary
income) as more explicitly set forth in Treasury
Regulation Sections 1.704-2(b)(2) and 1.704-2(d).
Notwithstanding any other provision of Article 7, the
allocation of loss or deduction (or item thereof)
attributable to non-recourse debt which is secured by
Company property will be allowed only to the extent
that the allocation does not cause the sum of the
deficit Capital Account balances of the Members
receiving the allocations to exceed the Minimum Gain
determined at the end of the Company's taxable year
to which the allocations relate. The balance of the
losses shall be allocated to the Manager. Any Member
with a deficit Capital Account balance resulting in
whole or in part from allocations of loss or
deduction (or item thereof) attributable to
non-recourse debt which is secured by Company
property shall, to the extent possible, be allocated
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income or gain (or item thereof) in an amount not
less than the Minimum Gain at a time no later than
the time at which the Minimum Gain is reduced below
the sum of the deficit Capital Account balances. This
section is intended and shall be interpreted to
comply with the requirements of Treasury Regulation
Section 1.704-2(f).
7.5.2 If any Member receives any adjustments, allocations
or distributions, not covered by Subsection 7.5.1, so
as to result in a deficit Capital Account, items of
Company income and gain shall be specially allocated
to the Members in an amount and manner sufficient to
eliminate the deficit balances in his Capital Account
created by the adjustments, allocations or
distributions as quickly as possible. This Section
shall constitute a qualified income offset under
Treasury Regulation Section 1.704-1(b)(2)(ii).
7.5.3 Organization and Offering Expenses for any Fiscal
Year or other period shall be specially allocated to
the Members in proportion to their Interests,
provided that if additional Members are admitted to
the Company on different dates, all Organization and
Offering Expenses shall be divided among the Persons
who own Interests from time to time so that, to the
extent possible, the amount of Organization and
Offering Expenses allocated to the Interests is in
the same proportion as the Members' Interests bears
to the aggregate capital of the Company. If the
Manager shall determine that the result is not likely
to be achieved through future allocations of
Organization and Offering Expenses, the Manager may
allocate a portion of Net Income or Losses so as to
achieve the same effect on the Capital Accounts of
the Members, notwithstanding any other provision of
this Agreement.
7.5.4 The Manager's Promotional Interest resulting from a
Capital Contribution by a non-Manager Member shall be
treated as an expense of the Company at the time of
the Capital Contribution, and this expense shall be
specially allocated to the Member whose Capital
Contribution gave rise to the Promotional Interest.
7.5.5 For purposes of determining the Profits, Losses, Net
Income Available for Distribution or any other items
allocable to any period, these other items shall be
determined on a daily, monthly, or other basis, as
determined by the Manager using any permissible
method under Section 706 of the Code and the Treasury
Regulations thereunder.
7.5.6 Notwithstanding Sections 7.1 and 7.2 hereof, (i) Net
Losses, if any, allocable to the period before the
admission of any additional Members under Section 5.2
hereof shall be allocated ninety-nine and one-half
percent (99.5%) to the Manager and one-half percent
(0.5%) to the Initial Member, subject to adjustment
to reflect changes in the Promotional Interest, and
Net Income during that same period, if any, shall be
allocated to the Manager, and (ii) Profits or Losses
allocable to the period commencing with the admission
of any additional Members and all subsequent periods
shall be allocated under Section 7.1.
7.5.7 Except as otherwise provided in this Agreement, all
items of Company income, gain, loss, deduction, and
any other allocations not otherwise provided for
shall be divided among the Members in the same
proportions as they share Net Income or Net Losses,
as the case may be, for the year.
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7.6 Code Section 704(c) Allocations.
7.6.1 Income, gains, losses and deductions, as determined
for Federal income tax purposes, for any Company
asset which has a Gross Asset Value that differs from
its adjusted basis for Federal income tax purposes
shall, solely for Federal income tax purposes, be
allocated among the Members so as to take account of
any variation between the adjusted basis of the
Company asset to the Company for Federal income tax
purposes and its initial Gross Asset Value in
accordance with Code Section 704(c) and the Treasury
Regulations thereunder. In furtherance of the
foregoing, it is understood and agreed that any
income, gain, loss, or deduction attributable to Code
Section 704(c) property shall be allocated to the
Members in accordance with the traditional method of
making Code Section 704(c) allocations, in accordance
with Treasury Regulation ss.1.704-3(b).
7.6.2 If the Gross Asset Value of any Company asset is
adjusted under and under Section 2.16, subsequent
allocations of income, gain, losses and deductions,
as determined for Federal income tax purposes, for
the Company asset shall, solely for Federal income
tax purposes, take account of any variation between
the adjusted basis of the Company asset for Federal
income tax purposes and its Gross Asset Value in the
same manner as under Code Section 704(c) and the
Treasury Regulations thereunder.
7.6.3 Allocations under this Section 7.6 are solely for
purposes of Federal, state and local income taxes and
shall not affect, or in any way be taken into account
in computing, any Member's Capital Account.
7.6.4 Except as otherwise set forth in this Agreement, any
elections or other decisions relating to allocations
under this Section 7.6 shall be made by the Manager,
with the review and concurrence of the Company's
accountants, in a manner that reasonably reflects the
purpose and intention of this Agreement.
7.7 Intent of Allocations. It is the intent of the Company that this
Agreement comply with the safe harbor test set out in Treasury Regulation
Sections 1.704-1(b)(2)(ii)(d) and 1.704-2 and the requirements of those
Sections, including the qualified income offset and minimum gain charge-back,
which are hereby incorporated by reference. If, for whatever reasons, the
Company is advised by counsel or its accountants that the allocation provisions
of this Agreement are unlikely to be respected for federal income tax purposes,
the Manager is granted the authority to amend the allocation provisions of this
Agreement, to the minimum extent deemed necessary by counsel or its accountants
to effect the plan of Allocations and Distributions provided in this Agreement.
The Manager shall have the discretion to adopt and revise rules, conventions and
procedures as it believes appropriate for the admission of Members to reflect
Members' interests in the Company at the close of the years.
7.8 Quarterly Valuation of Assets. For each of the Company's Mortgage
Investments and other investments, the Manager shall review the investments at
the end of each calendar quarter and determine if a Writedown is required with
respect thereto. The Manager shall cause the Company's accountants, within
thirty (30) days of the end of each calendar quarter, to verify that the
Manager's determination was made in compliance with generally accepted
accounting principles. Any Writedown of an asset resulting from the valuation
shall be effective on the last day of the respective calendar quarter during the
term of this Agreement.
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ARTICLE 8
REINVESTED DISTRIBUTIONS PLAN
8.1 Members' Reinvested Distributions. A Member may elect to
participate in the Company's Distribution Reinvestment Plan (the "Plan") at the
time of his purchase of Units, by electing to do so in the Subscription
Agreement executed by the Member. The Member's participation in the Plan
commences after (a) the escrow has terminated in the Offering and (b) the
Company has accepted the Member's Subscription Agreement. Subsequently, a Member
may revoke any previous election or make a new election to participate in the
Plan by sending written notice to the Company. The notice shall be effective for
the month in which the notice is received, if received at least ten (10) days
before the end of the calendar month. Otherwise the notice is effective the
following month.
8.2 Purchase of Additional Units. Under the Plan, participating Members
use distributions to purchase additional Units at one dollar ($1.00) per Unit.
The Manager will credit Units purchased under the Plan to the Member's Capital
Account as of the first day of the month following the month in which the
Reinvested Distribution is made. If a Member revokes a previous election to
participate in the Plan, subsequent to the month in which the Company receives
the revocation notice, the Company shall make distributions in cash to the
Member instead reinvesting the distributions in additional in Units.
8.3 Statement of Account. Within 30 days after the Reinvested
Distributions have been credited to Members participating in the Plan, the
Manager will mail to participating Members a statement of account describing the
Reinvested Distributions received, the number of incremental Units purchased,
the purchase price per Unit (if other than one dollar ($1.00) per Unit), and the
total number of Units held by the Member. Before the Members' reinvestment of
distributions in the Company, the Manager will also mail an updated Prospectus
or other updated disclosure document to each Member that fully describes the
Plan, including the minimum investment amount, the type or source of proceeds
which may be reinvested and the tax consequences of the reinvestment to the
Members.
8.4 Continued Suitability Requirements. Each Member who is a
participant in the Plan must continue to meet the investor suitability standards
described in the Subscription Agreement and Prospectus (subject to minimum
requirements of applicable securities laws) to continue to participate in
reinvestments. It is the responsibility of each Member to notify the Manager
promptly if he no longer meets the suitability standards set forth in the
Prospectus for a purchase of Units in the Offering. The Members acknowledge that
the Company is relying on this notice in issuing the Units, and each Member
shall indemnify the Company if he fails to so notify the Company and the Company
suffers any damages, losses or expenses, or any action or proceeding is brought
against the Company due to the issuance of Units to the Member.
8.5 Changes or Termination of the Plan. The terms and conditions of the
Plan may be amended, supplemented, suspended or terminated for any reason by the
Manager at any time by mailing notice thereof at least thirty (30) days before
the effective date of the action to each participating Member at his last
address of record.
ARTICLE 9
BOOKS AND RECORDS, REPORTS AND RETURNS
9.1 Books and Records. The Manager shall cause the Company to keep the
following:
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9.1.1 Complete books and records of account in which shall
be entered fully and accurately all transactions and
other matters relating to the Company;
9.1.2 A current list setting forth the full name and last
known business or residence address of the Manager
and each Member which shall be listed in alphabetical
order and stating his respective Capital Contribution
to the Company and share in Profits and Losses;
9.1.3 A copy of the filed Articles of Organization, and all
amendments thereto;
9.1.4 Copies of the Company's federal, state and local
income tax returns and reports, if any, for the six
(6) most recent years;
9.1.5 Copies of this Agreement, including all amendments
thereto; and
9.1.6 The financial statements of the Company for the three
(3) most recent years.
All books and records shall be maintained at the Company's principal
place of business and shall be available for inspection and copying by, and at
the sole expense of, any Member, or any Member's duly authorized
representatives, during the Company's normal business hours.
9.2 Annual Statements.
9.2.1 The Manager shall cause to be prepared at least
annually, at the Company's expense, audited financial
statements prepared in accordance with generally
accepted accounting principles and accompanied by a
report thereon containing an opinion of an
independent certified public accountant. The
financial statements will include
(a) an audited balance sheet, statements of
income or loss, Members' equity, and a
statement of cash flow;
(b) a statement as to any transactions with the
Manager or its Affiliates, and of fees,
commissions, compensation and other benefits
paid or accrued to the Manager or its
Affiliates from the Company for the fiscal
year completed, showing the amount paid or
accrued to each recipient and the respective
services performed; and
(c) a report identifying distributions from (i)
cash flow from operations during that year,
(ii) cash flow from operations of prior
years that had been held as reserves, (iii)
proceeds from capital transactions, (iv)
lease payments on net leases with builders
and sellers, and (v) reserves from the gross
proceeds of the offering originally obtained
from the Members. The Company shall
reimburse the Manager or its Affiliates at
the lower of their cost or the amount that
the Company would be required to pay to
independent Persons for comparable
administrative services in the same
geographic location. Copies of the
aforementioned financial statements and
reports shall be distributed to each Member
within 120 days after the close of each
taxable year of the Company.
9.2.2 The Company's accounts will itemize the costs of any
verification performed by them and may be reimbursed
to the Manager by the
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Company only to the extent that the reimbursement
when added to the costs for administrative services
rendered does not exceed the competitive rate for the
services as determined in the above paragraph.
9.2.3 Notwithstanding the 120-day period specified in
Section 9.2.1 above, the Manager shall cause to be
prepared and distributed to the Members not later
than 75 days after the close of each fiscal year of
the Company all Company information necessary in the
preparation of the Members' federal income tax
returns.
9.3 Special and Quarterly Reports.
9.3.1 For each quarter in which the Company bought or
invested in a Mortgage Loan or it or a borrower
incurred origination or evaluation fees, and for so
long as the proceeds of the Offering are not fully
committed and/or returned to investors, at the
Company's expense, the Manager shall cause to be
prepared a special report (which may be included in
the quarterly report described below) which shall
contain a statement listing:
(a) the amount of the Mortgage Loans purchased
or invested in;
(b) the material terms of the loans;
(c) the identity of the borrower; and
(d) the real property securing the Mortgage Loan
and the appraised value of that real
property.
Copies of the statements shall be distributed to each
Member within sixty (60) days after the end of the
quarterly period.
9.3.2 The Manager will supply to each Member the
information required by Form 10-Q (if Form 10-Q is
required to be filed with the Securities and Exchange
Commission) within 45 days of the end of each
quarterly period.
9.3.3 If the Company is registered under Section 12(g) of
the Securities Exchange Act of 1934, as amended, the
Manager shall cause to be prepared, at Company
expense, a quarterly report for each of the first
three quarters in each fiscal year containing
unaudited financial statements (consisting of a
balance sheet, a statement of income or loss and a
statement of cash flow) and a statement of other
pertinent information regarding the Company and its
activities during the period covered by the report.
Copies of the statements and other pertinent
information shall be distributed to each Member
within 60 days after the close of each quarter. This
report may be combined with the delivery of
information described in the immediately preceding
Section 9.3.2, subject to the 45-day period described
therein.
9.4 Filings. The Manager, at Company expense, shall cause the income
tax returns for the Company to be prepared and timely filed with the appropriate
authorities. The Manager, at Company expense, shall also cause to be prepared
and timely filed with and/or delivered to appropriate federal and state
regulatory and administrative bodies and/or the Members applicable, all reports
required to be filed with or delivered to those entities or Members under
applicable law, including those described in the Company's undertakings in any
securities filing. The reports shall be prepared using the accounting or
reporting basis required by the relevant
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regulatory bodies. The Company will provide a copy of the reports to each Member
who requests one, without expense to the Member. The Manager, at Company
expense, shall file, with the Administrators for the states in which this
Company is registered, as required by these states, a copy of each report
referred to this Article 9.
9.5 Suitability Requirements. The Manager, at Company expense, shall
maintain for a period of at least six years a record of the documentation
indicating that a Member complies with the suitability standards set forth in
the Prospectus.
9.6 Fiscal Matters.
9.6.1 Fiscal Year. The Company has previously adopted the
Fiscal Year for tax and accounting purposes. Subject
to the provisions of Section 706 of the Code and
approval by the Internal Revenue Service and the
applicable state taxing authorities, in the Manager's
sole discretion and without the approval of a
Majority, from time to time the Manager may change
the Company's fiscal year to a period to be
determined by the Manager.
9.6.2 Method of Accounting. The Company shall continue to
use the accrual method of accounting for both income
tax purposes and financial reporting purposes.
9.6.3 Adjustment of Tax Basis. Upon the transfer of an
interest in the Company, the Company may, at the sole
discretion of the Manager, elect under Code Section
754, to adjust the basis of the Company property as
allowed by Sections 734(b) and 743(b) thereof.
9.6.4 Tax Matters Partner. The Manager shall act as the
"Tax Matters Partner" ("TMP") and shall have all the
powers and duties assigned to the TMP under Sections
6221 through 6234 of the Code and the Treasury
Regulations thereunder. The Members agree to perform
all acts necessary under Section 6231 of the Code and
Treasury Regulations thereunder to designate the
Manager as the TMP.
ARTICLE 10
TRANSFER OF COMPANY INTERESTS
10.1 Interest of Manager. A successor or additional Manager may be
admitted to the Company as follows:
10.1.1 With the consent of all Managers (should there be any
manager other than the Manager) and a Majority, a
manager may at any time designate one or more Persons
to be a successor to it or to be an additional
manager, in each case with the participation in the
Manager's Interest as they may agree upon, so long as
the Company and the Members shall not be adversely
affected thereby.
10.1.2 Upon any sale or transfer of a manager's Interest, if
there is an additional or successor manager of the
Company, the successor manager shall succeed to all
the powers, rights, duties and obligations of the
assigning Manager hereunder, and the assigning
Manager shall thereupon be irrevocably released and
discharged from any further liabilities or
obligations of or to the Company or the Members
accruing after the date of the transfer. The sale,
assignment or transfer of all or any portion of
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the outstanding stock of the Manager, or of any
interest therein, or an assignment of the Manager's
Interests for security purposes only, shall not be
deemed to be a sale or transfer of the Manager's
Interests subject to the provisions of this Section
10.1.
10.2 Transfer of Member's Interest. To the extent any of the following
restrictions is not necessary to the Company, in the discretion of the Manager
reasonably exercised, the Manager may eliminate or modify any restriction.
Subject to the immediately preceding sentence, no assignee of the whole or any
portion of a Member's Interest in the Company shall have the right to become a
substituted Member in place of his assignor, unless the following conditions are
first met:
10.2.1 No Member may transfer a fractional Unit, and no
Member may transfer Units where, as a result of the
transfer, the Member would thereafter, own fewer than
two thousand (2,000) Units, except where the transfer
occurs by operation of law;
10.2.2 The assignor shall designate its intention in a
written instrument of assignment, which shall be in a
form and substance reasonably satisfactory to the
Manager;
10.2.3 The transferring Member shall first obtain written
consent of the Manager to the substitution. The
Manager shall not unreasonably withhold its consent,
but the Manager will withhold its consent to the
extent necessary to prohibit transfers that could
cause us to be classified as a publicly traded
partnership. The Manager will also withhold consent
if it determines that the sale or transfer will
otherwise jeopardize the continued ability of the
Company to qualify as a "partnership" for federal
income tax purposes or that the sale or transfer may
violate any applicable securities laws (including any
investment suitability standards);
10.2.4 The assignor and assignee named therein shall execute
and acknowledge any other instruments as the Manager
may deem necessary or desirable to effect the
substitution, including, but not limited to, a power
of attorney;
10.2.5 The assignee shall accept, adopt and approve in
writing all of the terms and provisions of this
Agreement as the same may have been amended;
10.2.6 The assignee shall pay or, at the election of the
Manager, obligate himself to pay all reasonable
expenses connected with the substitution, including
but not limited to reasonable attorneys' fees
associated therewith; and
10.2.7 The Company has received, if required by the Manager,
a legal opinion satisfactory to the Manager that the
transfer will not violate the registration provisions
of the Securities Act of 1933, as amended, or any
applicable state securities laws, which opinion shall
be furnished at the Member's expense.
Assignments complying with the above shall be recognized by the Company not
later than the last day of the calendar month in which the written notice of
assignment is received by the Company.
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<PAGE>
10.3 Further Restrictions on Transfers. Notwithstanding any provision
to the contrary contained in this Agreement, the following restrictions shall
also apply to any and all proposed sales, assignments and transfer of Interests,
and any proposed sale, assignment or transfer in violation of same shall be void
and of no effect:
10.3.1 No Member shall make any transfer or assignment of
all or any part of his Interest if said transfer or
assignment would, when considered with all other
transfers during the same applicable twelve month
period, cause a termination of the Company for
federal or Nevada state income tax (if any) purposes;
10.3.2 Notice to California residents:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
10.3.3 Appropriate legends (including the legend above)
under applicable securities laws shall be affixed to
certificates evidencing the Units and issued or
transferred to purchasers in other states.
10.3.4 No Member shall make any transfer or assignment of
all or any of his Interest if the Manager determines
that the transfer or assignment would result in the
Company being classified as a "publicly traded
partnership" with the meaning of Section 7704(b) of
the Code or Regulations. To prevent that:
(a) The Manager will not permit trading of Units
on an established securities market within
the meaning of Section 7704(b);
(b) The Manager will prohibit any transfer of
Units which would cause the sum of
percentage interest in Company capital or
profits represented by Interests that are
sold or otherwise disposed of during any
taxable year of the Company to exceed two
percent (2%) of the total Interests in
Company capital or profits; and
(c) The Manager will not permit any withdrawal
of Units except in compliance with the
provisions of this Agreement.
ARTICLE 11
DEATH, LEGAL INCOMPETENCY, OR WITHDRAWAL OF A MEMBER;
WITHDRAWAL OF THE MANAGER
11.1 Effect of Death or Legal Incompetency of a Member on the Company.
The death or legal incompetency of a Member shall not cause a dissolution of the
Company or entitle the Member or his estate to a return of his Capital Account.
11.2 Rights of Personal Representative. On the death or legal
incompetency of a Member, his personal representative shall have all the rights
of that Member for the purpose of settling his estate or managing his property,
including the rights of assignment and withdrawal.
11.3 Withdrawal of Members Other than Managers. To withdraw, or
partially withdraw from the Company, a Member must give written notice thereof
to the Manager and may thereafter
25
<PAGE>
obtain the return, in cash, of his Capital Account, or the portion thereof as to
which he requests withdrawal, within sixty-one (61) to ninety-one (91) days
after written notice of withdrawal is delivered to the Manager, subject to the
following limitations:
11.3.1 Except with regard to the right of the personal
representative of a deceased Member under Section
11.2 above, no notice of withdrawal shall be honored
and no withdrawal made of or for any Units until the
expiration of at least one year from the date of
purchase of those Units in the Offering, other than
purchases by way of automatic reinvestment of Company
distributions described in Article 8 of this
Agreement;
11.3.2 To assure that the payments to a Member or his
representative do not impair the capital or the
operation of the Company, any cash payments in return
of an outstanding Capital Account shall be made by
the Company only from Net Proceeds and Capital
Contributions;
11.3.3 A maximum of one hundred thousand dollars ($100,000)
may be withdrawn by any Member during any calendar
year;
11.3.4 The Member shall have the right to receive
distributions of cash from their Capital Accounts
only to the extent that funds described in Subsection
11.3.2 are available; the Manager shall not be
required to establish a reserve fund for the purpose
of funding the payments; the Manager shall not be
required to use any other sources of Company funds
other than those set forth in Section 11.3.2; the
Manager shall not be required to sell or otherwise
liquidate any portion of the Company's Mortgage
Investments or any other asset in order to make a
cash distribution of any Capital Account under this
Section 11.3;
11.3.5 Subject to Section 7.3, during the ninety (90) days
following receipt of written notice of withdrawal
from a Member, the Manager shall not refinance any
loans of the Company or reinvest any Net Proceeds or
Capital Contributions in new loans or other
non-liquid investment unless and until the Company
has sufficient funds available in cash to distribute
to the withdrawing Member the amount that he is
withdrawing from his Capital Account;
11.3.6 Subject to the restrictions on withdrawal contained
in this Agreement, the amount to be distributed to
any withdrawing Member shall be an amount equal to
the amount of the Member's Capital Account as of the
date of the distribution, as to which the Member has
given a notice of withdrawal under this Section 11.3,
notwithstanding that the amount may be greater or
lesser than the Member's proportionate share of the
current fair market value of the Company's net
assets;
11.3.7 In no event shall the Manager permit the withdrawal
during any calendar year of total amounts from the
Capital Accounts of members that exceeds ten percent
(10%) of the aggregate Interests, except upon the
vote of the Members to dissolve the Company under
this Agreement;
11.3.8 Requests by Members for withdrawal will be honored in
the order in which they are received by the Manager.
If any request may not be honored, due to any
limitations imposed by this Section 11.3 (except the
one year holding limitation set forth in Subsection
11.3.1), the Manager will so notify the requesting
Member in writing, whose request, if not
26
<PAGE>
withdrawn by the Member, will be honored if and when
the limitation no longer is imposed; and
11.3.9 If a Member's Capital Account would have a balance of
less than two thousand dollars ($2,000) following a
requested withdrawal, the Manager, at its discretion,
may distribute to the Member the entire balance in
the account.
11.4 Withdrawal by Manager. The Manager may withdraw from the Company
upon not less than 120 days written notice of the same to all Members, but only
with the affirmative vote or consent of a Majority, as noted in Section 3.2. The
withdrawing Manager shall not be liable for any debts, obligations or other
responsibilities of the Company or this Agreement arising after the effective
date of the withdrawal.
11.5 Payment to Terminated Manager. If the business of the Company is
continued as provided elsewhere in this Agreement upon the withdrawal, removal,
dissolution, or bankruptcy of the Manager, then the Company shall pay to the
Manager a sum equal to all amounts then accrued and owing to the Manager. The
Company may terminate the Manager's interest in the Company by paying an amount
equal to the then-present fair market value of the Manager's interest in the
Company, which the Company and Manager acknowledge is the outstanding Capital
Account as of the date of the removal, withdrawal, dissolution or bankruptcy. If
the business of the Company is not so continued, then the Manager shall receive
from the Company the sums it would have received in the course of dissolving the
Company and winding up its affairs, as provided in Section 12.2 below.
The method of payment to any terminated Manager must be fair
and must protect the solvency and liquidity of the program. Where the
termination is voluntary, the method of payment will be deemed presumptively
fair where it provides for a non-interest bearing unsecured promissory note with
principal payable, if at all, from distributions which the terminated Manager
otherwise would have received under this Agreement had the Manager not
terminated. Where the termination is involuntary, the method of payment will be
deemed presumptively fair where it provides for an interest bearing promissory
note coming due in no less than five years with equal installments each year.
ARTICLE 12
DISSOLUTION OF THE COMPANY
12.1 Events Causing Dissolution. The Company shall dissolve upon
occurrence of the earlier of the following events:
12.1.1 The expiration of the term of the Company as stated
in Section 1.6 of this Agreement;
12.1.2 Upon the written consent of the Manager and any other
Person who is then a manager, and the affirmative
vote or consent of a Majority;
12.1.3 The withdrawal, removal, dissolution or bankruptcy of
the Manager, unless, if there is no remaining
manager, a Majority agree in writing to continue the
business of the Company and, within six months after
the last remaining manager has ceased to be a
manager, admit one or more managers who agree to such
election and join the Company as managers.
12.2 Winding Up. Upon the occurrence of an event of dissolution, the
Company shall immediately be dissolved, but shall continue until its affairs
have been wound up according to the
27
<PAGE>
provisions of the Nevada Statutes. Upon dissolution of the Company, unless the
business of the Company is continued as provided above, the Manager will wind up
the Company's affairs as follows:
12.2.1 No new Mortgage Investments shall be invested in or
purchased;
12.2.2 The Manager(s) shall liquidate the assets of the
Company as promptly as is consistent with recovering
the fair market value thereof, either by sale to
third parties or by servicing the Company's
outstanding Mortgage Investments in accordance with
their terms;
12.2.3 All sums of cash held by the Company as of the date
of dissolution, together with all sums of cash
received by the Company during the winding up process
from any source whatsoever, shall be distributed in
accordance with Section 12.3 below.
12.3 Order of Distribution of Assets. If the Company is dissolves under
Section 12.1 above, the assets of the Company shall be distributed in accordance
with Nevada Statutes Section 86.521.
12.4 No Recourse to Manager. Upon dissolution and winding up under the
Nevada Statutes, each Member shall look solely to the assets of the Company for
the return of his Capital Account, and if the Company assets remaining after the
payment or discharge of the debts and liabilities of the Company are
insufficient to return the amounts of the Capital Account of Members, Members
shall have no recourse against the Manager or any other Member. The winding-up
of the affairs of the Company and the distribution of its assets shall be
conducted exclusively by the Manager. The Manager is hereby authorized to do any
and all acts and things authorized by law for these purposes. If the Manager
becomes insolvent or bankrupt, dissolves, withdraws or is removed by the
Members, the winding-up of the affairs of the Company and the distribution of
its assets shall be conducted by the person or entity selected by a vote of a
Majority, which person or entity is hereby authorized to do any and all acts and
things authorized by law for such purposes.
12.5 Compliance With Timing Requirements of Regulations. If the Company
is "liquidated" within the meaning of Treasury Regulation Section
1.704-1(b)(2)(ii)(g):
12.5.1 Distributions shall be made under this Article 12 (if
such liquidation constitutes a dissolution of the
Company) or Article 7 hereof (if it does not) to the
Manager and Members who have positive Capital
Accounts in compliance with Treasury Regulation
Section 1.704-1(b)(2)(ii)(b)(2); and
12.5.2 if the Manager's Capital Account has a deficit
balance (after giving effect to all contributions,
distributions, and allocations for all taxable years,
including the year during which such liquidation
occurs), the Manager shall contribute to the capital
of the Company the amount necessary to restore such
deficit balance to zero in compliance with Treasury
Regulation Section 1.704-1(b)(2)(ii)(b)(3).
ARTICLE 13
ROLL-UPS
13.1 Roll-Up Transactions: Appraisal. If the Company proposes to enter
into a Roll-Up transaction, an appraisal of all Company assets shall be obtained
from a competent, Independent Expert. If the appraisal will be included in a
Prospectus to offer the securities of a
28
<PAGE>
Roll-Up entity to the Members, the appraisal shall be filed with the Securities
and Exchange Commission and the states as an exhibit to the Registration
Statement for that offering. The Independent Expert will appraise the assets of
the Company on a consistent basis, and conduct the appraisal based on an
evaluation of the Company's assets as of a date immediately before the
announcement of the proposed Roll-Up. The performing the appraisal, the
Independent Expert shall assume an orderly liquidation of the Company's assets
over a 12-month period. The terms of the engagement of the Independent Expert
shall clearly state that the engagement is for the benefit of the Company and
its Members. The Company shall include a summary of the Independent Expert's
appraisal, indicating all material assumptions underlying the appraisal, in a
report to the Members regarding the proposed Roll-Up.
13.2 Members' Rights in a Roll-Up. If a Roll-Up is effected as to the
Company, the Roll-Up Entity making the offer to the Company shall offer to each
Member who votes against the Roll-Up the choice of
13.2.1 accepting the securities of the Roll-Up Entity that
were offered in the proposed Roll-Up, or
13.2.2 either (a) remaining as a Member of the Company and
preserving its interests therein unchanged; or (b)
receiving cash in an amount equal to the Member's
pro-rata share of the appraised Net Asset Value of
the Company.
13.3 Limitations on Roll-Ups. The Company's ability to participate in a
Roll-Up is also subject to the following:
13.3.1 The Company shall not participate in any proposed
Roll-Up which would result in Members having voting
rights in the Roll-Up Entity which are less than
those provided in Section 6.2 of this Agreement.
13.3.2 If the Roll-Up Entity is a corporation, the voting
rights of the Members shall correspond to the voting
rights provided in this Agreement to the extent
reasonably possible.
13.3.3 The Company will not participate in any proposed
Roll-Up which includes provisions which would operate
to materially impede or frustrate the accumulation of
shares, units or other equity interests, however
denominated, by any purchaser of the securities of
the Roll-Up Entity (except to the minimum necessary
to preserve the tax status of the Roll-Up Entity).
13.3.4 The Company will not participate in any proposed
Roll-Up which would limit the ability of a Member to
exercise the voting rights of the securities of the
Roll-Up Entity on the basis of the value of the
Interest held by the Member.
13.3.5 The Company will not participate in any proposed
Roll-Up in which the Members' rights as securities
holders to access to the records of the Roll-Up
Entity will be less than those provided for in this
Agreement or in which any of the costs of the Roll-Up
transaction would be borne by the Company if the
Roll-Up is not approved by necessary vote of the
Members.
29
<PAGE>
ARTICLE 14
COMPENSATION TO THE MANAGER AND ITS AFFILIATES
14.1 The Company shall pay the Manager the compensation and permit the
Manager to charge and collect the fees and other amounts from borrowers as set
forth in the Prospectus, as amended through the date that the registration
statement of which the Prospectus forms a part is declared effective by the
Securities and Exchange Commission. In addition to the foregoing, under no
circumstances may the Manager receive any compensation not permitted under the
NASAA Guidelines. Without limiting the foregoing, all expenses of the Company
shall be billed directly to and paid by the Company. The Company shall reimburse
the manager or its Affiliates for the actual cost to the Manager or its
Affiliates (or pay directly), the cost of goods and materials used for or by the
Company and obtained from entities unaffiliated with the Manager or its
Affiliates. The Company shall also pay or reimburse the Manager or its
Affiliates for the cost of administrative services necessary to the prudent
operation of the Company, provided that such reimbursement will be at the lower
of (A) the actual cost to the Manager or its Affiliates of providing such
services, or (B) the amount the Company would be required to pay to non-
affiliated persons rendering similar services in the same geographical location.
No reimbursement shall be permitted for services for which the Manager or its
Affiliates are entitled to compensation by way of a separate fee. The Manager or
its Affiliates will pay and will not be reimbursed by the Company for any
general or administrative overhead expenses incurred by the Manager or its
Affiliates which are not directly attributable to services for the Company the
payment or reimbursement for which is authorized under the NASAA Guidelines.
14.2 The Manager shall also be entitled to receive a back-end
promotional interest in the Company equal to the sum of: (a) 10% of cash funds
provided from operations (other than repayments of mortgage loan principal)
after deducting cash funds used to pay general expenses and debt payments (the
"Cash Available for Distribution"), plus (b) 15% of Cash Available for
Distribution and of cash be distributed from the net proceeds of any Capital
Transaction, after payment to members from these net proceeds equal to their
capital contributions plus a cumulative 6% annual return on those contributions.
The 15% allocation under clause (b) may be increased by 1.0% for each 1% that
the Manager reduces from 10% its allocation of cash available for distribution
under clause (a). The 15% distribution under clause (b) shall not apply to
distributions of Net Proceeds deemed to be received but not actually received by
the Members.
ARTICLE 15
MISCELLANEOUS
15.1 Covenant to Sign Documents. Each Member covenants, for himself and
his successors and assigns, to execute, with acknowledgment or verification, if
required, any and all certificates, documents and other writings which may be
necessary or expedient to form the Company and to achieve its purposes,
including, without limitation, any amendments to the Articles of Organization
and any filings, records or publications necessary or appropriate under the laws
of any jurisdiction in which the Company shall conduct its business.
15.2 Notices. Except as otherwise expressly provided for in this
Agreement, all notices which any Member may desire or may be required to give
any other Members shall be in writing and shall be deemed duly given when
delivered personally or when deposited in the United States mail, first-class
postage pre-paid. Notices to Members shall be addressed to the Members at the
last address shown on the Company records. Notices to the Manager or to the
Company shall be delivered to the Company's principal place of business, as set
forth in Section 1.3 above or as hereafter changed as provided herein.
15.3 Right to Engage in Competing Business. Nothing contained in this
Agreement shall preclude any Member from purchasing or lending money upon the
security of any other property or rights therein, or in any manner investing in,
participating in, developing or managing
30
<PAGE>
any other venture of any kind, without notice to the other Members, without
participation by the other Members, and without liability to them or any of
them. Each Member waives any right he may have against the Manager for using for
its own benefit information received as a consequence of the Manager's
management of the affairs of the Company. This Section 15.3 shall be subject in
its entirety to the fiduciary duty of the Manager set forth in Section 3.4.
15.4 Amendment. This Agreement is subject to amendment by the
affirmative vote of a Majority in accordance with Section 6.2; provided,
however, that no amendment shall be permitted if the effect of such amendment
would be to increase the duties or liabilities of any Member or materially
adversely affect any Member's interest in Profits, Losses, Company assets,
distributions, management rights or voting rights, except as agreed by that
Member. In addition, and notwithstanding anything to the contrary contained in
this Agreement, the Manager shall have the right to amend this Agreement,
without the vote or consent of any of the Members, if, in the reasonable
judgment of the Manager, such amendment does not adversely affect the rights of
the Members, including an amendment:
15.4.1 to grant to Members (and not solely the Manager in
its capacity as a Member) additional rights,
remedies, powers or authority that may lawfully be
granted to or conferred upon them;
15.4.2 to cure any ambiguity, to correct or supplement any
provision which may be inconsistent with any other
provision, or to make any other provisions for
matters or questions arising under this Agreement
which will not be inconsistent with the provisions of
this Agreement;
15.4.3 to conform this Agreement to applicable laws and
regulations, including without limitation, federal
and state securities and tax laws and regulations,
and the NASAA Guidelines;
15.4.4 in the form of a revision to or updating of Schedule
A in accordance with Section 5.2 hereof; and
15.4.5 to elect for the Company to be governed by any
successor Nevada statute governing limited liability
companies.
The Manager shall notify the Members within a reasonable time of the adoption of
any amendment.
15.5 Entire Agreement. This Agreement constitutes the entire Agreement
between the parties and supersedes any and all prior agreements and
representations, either oral or in writing, between the parties hereto regarding
the subject matter contained herein.
15.6 Waiver. No waiver by any party hereto of any breach of, or default
under, any provision of this Agreement by any party shall be construed or deemed
a waiver of any breach of or default under any other provision of this
Agreement, and shall not preclude any party from exercising or asserting any
rights under this Agreement for any future breach or default of the same
provision of this Agreement.
15.7 Severability. If any term, provision, covenant or condition of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the provisions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated.
15.8 Application of Nevada law. This Agreement and the application or
interpretation thereof shall be governed, construed, and enforced exclusively by
its terms and by the law of the State of Nevada.
31
<PAGE>
15.9 Captions. Section titles or captions contained in this Agreement
are inserted only as a matter of convenience and for reference and in no way
define, limit, extend or describe the scope of this Agreement.
15.10 Number and Gender. Whenever the singular form is used in this
Agreement it includes the plural when required by the context, and the masculine
gender shall include the feminine and neuter genders.
15.11 Counterparts. This Agreement may be executed in counterparts, any
or all of which may be signed by Manager on behalf of the Members as their
attorney-in-fact.
15.12 Waiver of Action for Partition. Each of the parties hereto
irrevocably waives during the term of the Company any right that it may have to
maintain any action for partition for any property of the Company.
15.13 Defined Terms. All terms used in this Agreement which are defined
in the Prospectus shall have the meanings assigned to them in said Prospectus,
unless this Agreement shall provide for a specific definition in Article 2.
15.14 Binding on Assignees. Each and all of the covenants, terms,
provisions and agreements herein contained shall be binding upon and inure to
the benefit of the successors and assigns of the respective parties hereto,
subject to the provisions of Section 10.2, which control the assignment or other
transfer of Company Interests.
32
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
the day and year first above written.
VESTIN MORTGAGE, INC., a Nevada corporation, as the sole initial Member
By: _____________________________
Name:
Title:
DM MORTGAGE INVESTORS, LLC, a Nevada Limited Liability Company
By: Vestin Mortgage, Inc., a Nevada corporation, as Manager
By: _____________________________
Name:
Title:
33
<PAGE>
SCHEDULE A
LIST OF MEMBERS/ UNIT OWNERSHIP
(As of March 31, 2000)
Member No. Units Capital
Contribution
Vestin Mortgage, Inc. 273,734 $273,734
2901 El Camino Avenue
Suite 206
Las Vegas, Nevada 89102
34
<PAGE>
EXHIBIT B
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, AN INVESTOR IS NOT WAIVING ANY RIGHTS
UNDER THE FEDERAL SECURITIES LAWS.
SUBSCRIPTION INSTRUCTIONS
A. Completion of Subscription Agreement
(1) Subscription and related undertakings, representations and
warranties: Please read carefully pages B-1 to B-4.
o Initial the representation contained in Section 6(c)
on page B-2.
o Indicate in section 13 on page B-4 whether you want
to reinvest distributions by purchasing additional
Units.
o Indicate in section 14 on page B-4 how you will own
the Units.
(2) Questionnaire(s):
o Individual Subscribers. Complete page B-5.
o Entities other than Employee Benefit Plans. Complete
page B-6.
o Employee Benefit Plans. Complete pages B-7 and B-8.
(3) Registration Information. Complete all information on page B-9
(4) Signature Page. Complete and sign page B-10.
(5) Existing Members Only (for use after initial acquisition of
Units). After acquiring Units, you only have to complete the
one page form entitled "Additional Subscription Request" at
page B-11.
B. Payment. All subscriptions should be for at least $2,000, corresponding
to a minimum of 2,000 Units.
<TABLE>
<CAPTION>
If you are purchasing Units during If you are purchasing Units following
the course of the Minimum Offering the period of the Minimum Offering
---------------------------------- ----------------------------------
<S> <C> <C>
Payment by Bank Check or Certified Make payable to order of "BankWest Make payable to the order of "DM
Check: of Nevada, as Escrow Agent" Mortgage Investors, LLC"
Payment by Wire Transfer: BankWest of Nevada, as Escrow Agent DM Mortgage Investors, LLC
for DM Mortgage Investors, LLC Account No. 153790228677
Account No. 320003485 Bank Routing No. 121201694
Bank Routing No. 122401778
</TABLE>
<PAGE>
C. Questions. If you have any questions in completing this Subscription
Agreement, please call DM Financial Services, Inc. at (702) 247-1332.
D. Return of Documents. The Subscription Agreement should be returned to
the following address:
DM Financial Services, Inc.
2901 El Camino Avenue, Suite 207
Las Vegas, NV 89102
<PAGE>
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, AN INVESTOR IS NOT WAIVING ANY RIGHTS
UNDER THE FEDERAL SECURITIES LAWS.
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
DM Mortgage Investors, LLC
1. SUBSCRIPTION. The undersigned investor ("Investor") hereby applies
to become a member in DM Mortgage Investors, LLC, a Nevada limited liability
Company (the "Company"). The Investor subscribes $_______________________ for
the purchase of _____________ units of limited liability interest in the Company
(the "Units"), the price being $1.00 per Unit (with a 2,000 Unit minimum
purchase). The undersigned agrees to purchase the number of Units stated above
in accordance with the terms and conditions of the Operating Agreement (the
"Operating Agreement"), a copy of which is contained in the Prospectus of the
Company as Exhibit A. The Units which the Investor offers to purchase shall not
be deemed issued to, or owned by, the Investor until: (a) the Investor has fully
paid by certified or bank check or by wire transfer for such Units, and (b) the
Manager has in its sole discretion accepted all or any portion of Investor's
offer of purchase.
2. PAYMENT OF SUBSCRIPTION. The amount of the Investor's subscription
set forth above either (a) has already been delivered by wire transfer, to the
account set forth below, or (b) is enclosed in the form of a certified or bank
check.
The Investor hereby authorizes and directs DM Financial Services,
Inc. to deliver this Subscription Agreement to the Manager. The undersigned
hereby directs BankWest of Nevada, as Escrow Agent (the "Bank") to pay to the
Company the funds delivered by the Investor for the Units, to the extent the
Investor's subscription has been accepted, subject to the Bank's receiving the
Minimum Proceeds described in Section 3 below. The Investor acknowledges that
the Manager can accept or reject all or any part of this subscription in its
sole discretion, and that this offering may be terminated at any time by the
Manager. If the Investor's subscription is rejected in part, the funds delivered
herewith, to the extent the application is so rejected, will be returned to
Investor as soon as practicable without interest or deduction, except to the
extent of any interest actually earned.
3. As described in the Prospectus under "Plan of Distribution,"
payments for Units will be held by the Bank in a segregated account (the "Escrow
Account") until the Bank has received payment for subscriptions accepted by the
Company for not fewer than 1,500,000 Units (the "Minimum Offering"),
corresponding to not less than an aggregate of $1,500,000 in subscription
payments (the "Minimum Proceeds").
4. If the Minimum Proceeds have not been received by the Bank on or
before the end of the Bank's business day on December 31, 2000, the Bank will
return your payments, in full, together with your pro rata share of any net
earnings received by the Bank on the subscription amount held by it as escrow
agent, to you at the address shown on the Subscription Agreement Signature Page.
5. If the Minimum Proceeds have been received by the Bank on or before
December 31, 2000, the offering by the Company will continue, without use of the
Bank or any escrow agent, to seek to distribute a total of 100,000,000 Units for
$100,000,000. The Escrow Account will be closed upon the Bank's distribution of
funds either (a) to the Company after the Bank receives the Minimum Proceeds, or
(b) to the Investors, in accordance with Section 4. Proceeds from sales of Units
in the offering following the close of the Escrow Account will be paid directly
to the Company for its use as described in the "Prospectus" under "Use of
Proceeds."
B-1
<PAGE>
6. REPRESENTATIONS BY THE INVESTOR. The Units as an investment involve
a high degree of risk. Please read the "Risk Factors" beginning on page 8 of the
prospectus to which this agreement form an exhibit. In connection with the
Investor's investment described in Section 1 of this Agreement, the Investor
represents and warrants to the Company and any relevant broker-dealers that the
Investor:
(a) has received the Prospectus of the Company dated March ___,
2000;
(b) understands that no federal or state agency has made any finding
or determination as to the fairness for public investment in, nor any
recommendation nor endorsement of, the Units;
(c) ILLIQUID INVESTMENT: understands that there will be no public
market for the Units, that there are substantial restrictions on repurchase,
sale, assignment or transfer of the Units, and that it may not be possible
readily to liquidate this investment;
PLEASE CONFIRM THE REPRESENTATION SET FORTH IN
SECTION 6(c) BY PLACING YOUR INITIALS HERE: __________
(d) meets the following criteria:
(i) if financial suitability standards (i.e., based on net worth
or income levels) are provided in Appendix A to this
Subscription Agreement for the state in which the Investor is
domiciled, the undersigned meets those financial suitability
standards;
(ii) IF NO FINANCIAL SUITABILITY STANDARDS ARE INCLUDED IN APPENDIX
A FOR THE STATE IN WHICH THE INVESTOR IS DOMICILED, ONE OF THE
FOLLOWING IS TRUE:
(A) the undersigned has a minimum net worth (exclusive of
home, furnishings, and automobiles) of $45,000, and
an annual gross income of at least $45,000;
(B) the undersigned has a minimum net worth (exclusive of
home, furnishings, and automobiles) of $150,000; or
(C) the undersigned is purchasing in a fiduciary capacity
for a person meeting the requirements of either (i)
or (ii) above; or
(e) is under no disability with respect to entering into a contractual
relationship with the Company, and, if the Investor is an individual, has
attained the age of majority (as established in the state in which domiciled);
(f) if a trustee, is the trustee for the trust on behalf of which it is
purchasing the Units, and has due authority to purchase Units on behalf of the
trust;
(g) fully indemnifies and holds harmless the Company, the Manager, and
its affiliates from any and all claims, actions, causes of action, damages, and
expenses (including legal fees and expenses) whatsoever which may result from a
breach of any of the representations by Investor contained herein;
(h) has investment objectives that correspond to those stated in the
Prospectus, i.e., to preserve the capital of the Company and to provide monthly
distributions of cash to the members;
(i) understands that the Company intends to be taxed as an association
(partnership) and not as a corporation, and that, among other things, this may
result in taxes being payable by the Investor even though the Company may not
have distributed cash to the Investor.
(j) understands that an investment in the Company will not, in itself,
create a retirement plan (as defined in the Internal Revenue Code of 1986, as
amended) for any investor and that, in order to create a retirement plan, an
investor must comply with all applicable provisions of the Code.
B-2
<PAGE>
7. PURCHASE BY FIDUCIARY. If the Investor is purchasing the Units
subscribed for hereby in a fiduciary capacity, the above representations and
warranties are to be deemed to have been made on behalf of the person(s) for
whom the Investor is so purchasing except that such person(s) need not be over
18 years of age.
8. ADOPTION OF OPERATING AGREEMENT. The Investor hereby adopts,
accepts, and agrees to be bound by all terms and provisions of the Operating
Agreement (Exhibit A to the Prospectus) and to perform all obligations therein
imposed upon a member with respect to Units to be purchased. By signing and
completing the signature page of this Subscription Agreement, the undersigned
agrees to become a Member in the Company upon acceptance of this Subscription
Agreement by the Manager on behalf of the Company, and to pay the subscription
price in full.
9. LIMITATION ON ASSIGNMENT. The Investor acknowledges that the Units
may be assigned only as provided in the Operating Agreement and further
acknowledges the restrictions on the Company's repurchase or the Investor's
resale, transfer, or assignment of the Units set forth in the Operating
Agreement and as described in the Prospectus.
10. SPECIAL POWER OF ATTORNEY. The Investor hereby makes, constitutes,
and appoints the Manager of the Company to be such person's true and lawful
attorney-in-fact with full power and authority for him, and in his name, place
and stead, to execute, acknowledge, publish and file, as necessary or
appropriate:
(a) the Operating Agreement and the Articles of Organization, as
amended to date, as well as any and all additional amendments thereto required
under the laws of the State of Nevada or of any other state or which the Manager
deems advisable to prepare, execute and file;
(b) any other certificate, instrument or document, including
Fictitious Business Name Statements, which may be required to be filed by the
Company by any governmental agency or by the laws of any state or other
jurisdiction in which the Company is doing or intends to do business, or which
the Manager deems advisable to file; and
(c) any documents which may be required to effect the continuation of
the Company, the admission of an additional or substituted member, or the
dissolution and termination of the Company, provided such continuation,
admission, or dissolution and termination are in accordance with the terms of
the Operating Agreement.
The foregoing grant of authority:
(i) is a Special Power of Attorney coupled with an interest, is
irrevocable, survives the death of the Investor and shall not be affected by the
subsequent incapacity of the Investor;
(ii) may be exercised by the Manager for each member by a
facsimile signature of or on behalf of the Manager or by listing all of the
members and by executing any instrument with a single signature of or on behalf
of the Manager, acting as attorney-in-fact for all of them; and
(iii) shall survive the delivery of an assignment by a member of
the whole or any portion of his interest; except that where the assignee thereof
has been approved by the Manager for admission to the Company as a substituted
member, the Special Power of Attorney shall survive the delivery of such
assignment for the sole purpose of enabling such person to execute, acknowledge,
and file any instrument necessary to effect such substitution.
11. NOTIFICATION OF MANAGER. The Investor agrees to notify the Manager
immediately if any of the foregoing statements made herein shall become untrue.
12. OPERATING AGREEMENT GOVERNS. In the event of any conflict between
the provisions of the Operating Agreement and any instrument or document
executed, acknowledged, filed or recorded by the Manager pursuant to this
special power of attorney, the Operating Agreement will govern.
13. REINVESTMENT OF DISTRIBUTIONS. The Company maintains a Distribution
Reinvestment Plan ("Plan") under which distributions of income of the Company
may be reinvested for the purchase of additional Units, rather than being
received in cash. See Prospectus, under "Summary of Operating Agreement, Rights
of Members
B-3
<PAGE>
and Description of Units - Reinvestments." So long as Investor meets the
suitability standards established by the Company and by the securities law
administrator of the state in which Investor is domiciled, and subject to
possible suspension or termination of the Plan by the Manager, as set forth in
the Operating Agreement, the Investor will continue to participate in the Plan.
The Investor may change his election at any time by written notice to the
Company. Please choose one or the other of the two options by a check mark in
the appropriate blank. If you check neither blank, you will be considered to
have elected to receive your distributions in cash (Option B).
A. ______________ Investor elects to participate in the Company
Distribution Reinvestment Plan and receive additional Units rather than
cash as distributions of Net Income from the Company.
B. ______________ Investor elects not to participate in the Company's
Distribution Reinvestment Plan and to receive distributions of Net
Income in cash.
14. OWNERSHIP OF UNITS. The Investor's Units will be owned and should
be shown on the Company's records as follows:
Check one: ___Individual Ownership
___Joint Tenants with Right of Survivorship (all parties
must sign)
___Tenants in Common (all parties must sign)
___Community Property (one signature required)
___Custodian
___Trustee
___Corporation
___Partnership
___Nonprofit Organization
* * *
If you have any questions in completing this
Subscription Agreement, please call
DM Financial Services, Inc. at
(702) 247-1332
B-4
<PAGE>
INDIVIDUAL INVESTORS MUST COMPLETE THIS PAGE
--------------------------------------------
Name: ____________________________________________
Date of Birth ___________________________________________
Occupation ____________________________________________
Marital Status (check one) Single___ Married___
Citizenship U.S.___ Other_______________________
Investment Objective:
Preservation of capital and monthly income distributions ___ (check)
Other (please explain) __________________________________________________
________________________________________________________________________________
Investor's Financial Status and Suitability:
-------------------------------------------
Investor's Net Worth, exclusive of home, furnishings, and automobiles
(check appropriate range):
______ under $30,000 ______ $30,001 - $45,000 ______ $45,001 - 150,000
______ $150,001 - $250,000 ______ over $250,000
Investor's Annual Income (check appropriate range)
______ under $30,000 ______ $30,001 - $45,000 ______ $45,001 - 75,000
______ $75,001 - $150,000 ______ over $150,000
Describe your investments in the last five years and discuss who made the
relevant investment decisions (you, your financial adviser, broker, accountant
or attorney): __________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Please provide any other information that would help the Manager determine
whether the Investor has sufficient knowledge and experience in financial and
business matters to evaluate the merits and risks of an investment in the
Units._________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Are you subject to any regulatory or other constraints that may preclude or
limit your participation in any potential Company investment?
____ YES ____ NO
If yes, please describe: _______________________________________________________
B-5
<PAGE>
LEGAL ENTITIES (NON-BENEFIT PLANS)
----------------------------------
TO COMPLETE THIS PAGE
---------------------
Name of Investor: ____________________________________________
Type of Legal Entity:
____ corporation (if so, provide jurisdiction of
incorporation) ______________________________________
____ partnership or limited liability company (provide jurisdiction
of organization) __________________________________
____ trust (provide state in which formed and date of trust
indenture) ______________________________________________
____ other (describe) ___________________________________________________
Principal place of business ___________________________________________________
Investment Objective:
Preservation of capital and monthly income distributions ___ (check)
Other (please explain) _________________________________________________
________________________________________________________________________________
Total assets (as indicated on the most recent balance sheet) of the Investor:
$____________________________
Describe the Investor's investments in the last five years and discuss who made
the relevant investment decisions (director, officer, financial adviser, broker,
accountant or attorney): ________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Please provide any other information that would help the Manager determine
whether the Investor has sufficient knowledge and experience in financial and
business matters to evaluate the merits and risks of an investment in the
Units.__________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Is the Investor subject to any regulatory or other constraints that may preclude
or limit the Investor's participation in any potential Company investment?
____ YES ____ NO
If yes, please describe: _______________________________________________________
B-6
<PAGE>
EMPLOYEE BENEFIT PLANS
----------------------
TO COMPLETE PAGES B-7 AND B-8
-----------------------------
Name of Investor (the "Plan"): ____________________________________________
Investment Objective:
Preservation of capital and monthly income distributions ___ (check)
Other (please explain) __________________________________________________
________________________________________________________________________________
Total assets (as indicated on the most recent balance sheet) of the Investor:
$____________________________
Does this investment exceed 10% of the Plan's assets?
____ YES ____ NO
Is the Plan an "employee benefit plan" within the meaning of Title I of ERISA
(an "ERISA Plan") with a fiduciary as defined in Section 3(21) of ERISA which is
a bank, insurance company or registered investment adviser (other than an
affiliate of the Manager), which fiduciary will decide whether to purchase
Units?
____ YES ____ NO
If yes, provide details __________________________________________________
________________________________________________________________________________
Is the Plan an employee benefit plan other than an ERISA plan?
____ YES ____ NO
If yes, provide details as to the nature of the Plan (IRA, Keogh, etc.)
and the person making investment decisions on behalf of the Plan
______________________________________________________________________________
Does the Plan permit participants to direct the investment of the contributions
made to the Plan on their behalf?
____ YES ____ NO
Additional Plan Representations and Warranties:
----------------------------------------------
The undersigned authorized signatory of the Plan hereby represents and warrants
on behalf of the Plan that the answers to the following questions are true:
Does the Manager or any of its employees or affiliates manage any part of
the Plan's investment portfolio on a discretionary basis?
____ YES ____ NO
Does the Manager or any of its employees or affiliates regularly give
investment advice to the Plan?
____ YES ____ NO
Does the Manager or any of its employees or affiliates have an agreement
or understanding, written or unwritten, with the investment director of
the Plan under which the latter receives information, recommendations and
advice concerning investments which are used as a primary basis for the
Plan's investment decisions?
____ YES ____ NO
B-7
<PAGE>
Does the Manager or any of its employees or affiliates have an agreement
or understanding, written or unwritten, with the investment director of
the Plan under which the latter receives individualized investment advice
concerning the Plan's assets?
____ YES ____ NO
IF THE ANSWER TO ANY OF THESE IS "YES," INDICATE WHETHER ALL OF THE
REPRESENTATIONS AND WARRANTIES BELOW ARE TRUE BY INITIALING BELOW.
The investment director of the Plan has studied the Prospectus and
has made an independent decision to purchase Units solely on the
basis thereof and without reliance on any other information or
statements as to the appropriateness of this investment for the Plan.
All the obligations and requirements of ERISA, including prudence and
diversification, with respect to the investment of "plan assets" in
the Company have been considered by the investment director of the
Plan.
The investment director and, if different, authorized signatory of
the Plan understand that neither the Manager nor any of its
affiliates: (a) has exercised any investment discretion or control
with respect to the Plan's purchase of any Units, (b) have authority,
responsibility to give, or have given individualized investment
advice with respect to the Plan's purchase of any Units, or (c) are
employers maintaining or contributing to such Plan.
An investment in the Company conforms in all respects to the
governing documents of the Plan.
The person executing this Subscription Agreement on behalf of the
Plan is a "fiduciary" of such Plan and trust and/or custodial account
(within the meaning of Section 3(21)(A) of ERISA); the execution and
delivery of this Subscription Agreement with respect to the Plan and
trust and/or custodial account have been duly authorized; and
investment in the Company conforms in all respect to laws applicable
to the Plan and to the Plan documents; and in making this investment,
the Plan, its fiduciaries and its investment director are aware of,
and have taken into consideration, among other things, risk return
factors and the anticipated effect of an investment in the Company on
the diversification, liquidity and cash flow needs of the Plan and
the projected effect of the investment in meeting the Plan's funding
objectives and have concluded that this investment is a prudent one.
The Plan's governing documents do not prohibit the Company from
investing in specific securities or issues, including, but not
limited to, securities which would be deemed to be "employer
securities" with respect to the Plan as defined in Section 407 of
ERISA.
The Plan's proxy voting guidelines do not apply to securities held by
the Company.
The Plan, its investment director and, if different, the person
executing this Subscription Agreement fully understand the tax
considerations and risks of this investment.
ARE THE FOREGOING RESPRESENTATIONS AND WARRANTIES TRUE?
____ YES ____ NO
* * *
Please provide any other information that would help the Manager determine
whether the Investor has sufficient knowledge and experience in financial and
business matters to evaluate the merits and risks of an investment in the
Units.__________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
B-8
<PAGE>
REGISTRATION INFORMATION FOR THE INTERESTS
------------------------------------------
___________________________________________________$____________________________
(Subscriber Name(s)) (Subscription Amount)
________________________________________________________________________________
(Street Address) (State/Zip Code)
________________________________________________________________________________
(Telephone and Facsimile Numbers) (e-mail - Optional)
The full address to which any communications, distribution checks, and
redemption checks, if applicable, should be sent (if different from registered
address furnished in response to the preceding requirement) is:
________________________________________________________________________________
(Name (s))
________________________________________________________________________________
(Street Address) (City) (State/Country)
________________________________________________________________________________
(Telephone and Facsimile Numbers) (e-mail - Optional)
If the proceeds of distributions or redemptions, if any, are to be wired rather
than sent by check, the account to which such proceeds should be wired is:
________________________________________________________________________________
(Name of Financial Institution)
________________________________________________________________________________
(Routing ABA Number - if a Bank)
________________________________________________________________________________
(Address of Financial Institution)
________________________________________________________________________________
(Financial Institution Account Name and Number)
<TABLE>
<CAPTION>
<S> <C>
_____________________________________________
Social Security No./EIN (Entity) U.S. Citizen or Resident YES _____ NO _____
_____________________________________________
Plan Number (if applicable) Existing Partner YES _____ NO _____
</TABLE>
B-9
<PAGE>
SIGNATURE PAGE
--------------
BEFORE SIGNING THIS PAGE, HAVE YOU: (a) initialed the representation contained
in Section 6(c) on page B-2, (b) indicated in section 13 on page B-4 whether you
want to reinvest distributions by purchasing additional Units, and (c) indicated
in section 14 on page B-4 how you will own the Units? If not, please do so.
<TABLE>
<CAPTION>
INDIVIDUAL(S):
<S> <C>
Date: _____________________
________________________________________________________________________________
(Signature of Subscriber)
________________________________________________________________________________
(Print Name of Subscriber)
Date: _____________________
________________________________________________________________________________
(Signature of Co-Subscriber)
________________________________________________________________________________
(Print name of Co-Subscriber)
ENTITIES (other than Plans):
________________________________________________________________________________
(Print Name of Subscriber)
By: ____________________________________________________________________________ Date: _____________________
(Signature of Authorized Signatory)
________________________________________________________________________________
(Print Name and Title of Signatory)
By: ____________________________________________________________________________ Date: _____________________
(Signature of Required Authorized Co-Signatory)
________________________________________________________________________________
(Print Name and Title of Co-Signatory)
PLAN ENTITIES:
Date: _____________________
________________________________________________________________________________
(Signature of Individual Plan Participant) (Print Name)
Date: _____________________
________________________________________________________________________________
(Signature of Custodian or Trustee) (Print Name)
Date: _____________________
________________________________________________________________________________
(Signature of Other Authorized Signatory) (Print Name)
____________________________________________________________________________________________________________________
FOR USE BY THE COMPANY ONLY
____________________________________________________________________________________________________________________
Subscription has been: _____ Accepted ______ Accepted in Part ____ Rejected ____ Other
Subscription Amount: $________________________ Dated: _______________________________________________
Signed: Capsource, Inc., Manager
By: ________________________________________________
Name:
Title:
</TABLE>
B-10
<PAGE>
ADDITIONAL SUBSCRIPTION REQUEST
(To Be Completed By Existing Investors Instead of Subscription Agreement)
Name of Investment Fund: _______________________________________________________
Name of Subscriber(s): _________________________________________________________
Additional Subscription Amount: $_______________________________________________
The undersigned hereby subscribes for the additional amount set forth
above upon the terms and conditions described in the Confidential Private
Offering Memorandum. The undersigned restates all of the covenants,
representations and warranties made in the undersigned's original Subscription
Agreement as if they were made on the date hereof and certifies that all of the
financial information set forth in the undersigned's original Subscription
Agreement remains accurate and complete on the date hereof.
<TABLE>
<CAPTION>
INDIVIDUAL SIGNATURES:
<S> <C>
_______________________________________________________________________ Dated:_____________________________
(Signature of Subscriber)
_______________________________________________________________________ Dated:_____________________________
(Signature of Co-Subscriber)
ENTITY AND PLAN SIGNATURES
By:___________________________________________________________________ Dated:_____________________________
(Signature of Authorized Signatory)
________________________________________________________________________________
(Print Name and Title of Signatory)
By:___________________________________________________________________ Dated:_____________________________
(Signature of Required Authorized Co-Signatory)
________________________________________________________________________________
(Print Name and Title of Co-Signatory)
___________________________________________________________________________________________________________________
FOR USE BY THE COMPANY ONLY
Subscription has been: _____ Accepted ______ Accepted in Part ____ Rejected ____ Other
Additional Subscription Amount Accepted: $________________________________________________________
Dated: ______________________________________________________________________________________________________________
Signed: Capsource, Inc., Manager
By:_________________________________________________
Name:
Title:
</TABLE>
B-11
<PAGE>
APPENDIX A
STATE REGULATIONS
("Blue Sky" Law)
Various states have established suitability standards for individual investors
and subsequent transferees different from and/or in addition to those set by the
Company. These requirements are set forth below:
<TABLE>
<CAPTION>
-------------- ----------------------------------------------------- -------------------------------------------------
State Suitability Standards Requirements
-------------- ----------------------------------------------------- -------------------------------------------------
<S> <C> <C>
NV Same as in body of agreement Minimum investment is $5,000.
-------------- ----------------------------------------------------- -------------------------------------------------
OH, PA Same as in body of agreement, except that in We will make no sales in these states until we
addition, the amount an Investor pays for units may receive proceeds of at least $5,000,000.
not exceed 10% of the Investor's net worth (without PENNSYLVANIA RESIDENTS: BECAUSE THE MINIMUM
including the Investor's home, home furnishings and CLOSING AMOUNT IS LESS THAN $10,000,000,
automobiles) INVESTORS ARE CAUTIONED TO CAREFULLY
EVALUATE THE COMPANY'S ABILITY TO FULLY
ACCOMPLISH ITS STATED OBJECTIVES AND TO
INQUIRE AS TO THE CURRENT DOLLAR VOLUME OF
PROGRAM SUBSCRIPTIONS.
-------------- ----------------------------------------------------- -------------------------------------------------
AZ, AK, CA, Investors must have either (i) a minimum net worth The following may appear on certificates issued
MA, MS, MO, (without including an Investor's home, home to California residents:
TN furnishings, and automobiles) of $60,000, and an IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER
annual gross income of at least $60,000; or (ii) OF THIS SECURITY, OR ANY INTEREST THEREIN, OR
minimum net worth (exclusive of home, furnishings, TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT
and automobiles) of $225,000 or (iii) are THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER
purchasing in a fiduciary capacity for a person OF CORPORATIONS OF THE STATE OF CALIFORNIA,
meeting the requirements of either (i) or (ii) EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
above. There are restrictions on the transfer of the
Units in California, which are set forth in
the statute included in Appendix B on the
following two pages.
-------------- ----------------------------------------------------- -------------------------------------------------
ME Investors must have either (i) a minimum net worth
(without including an Investor's home, home
furnishings, and automobiles) of $50,000, and an
annual gross income of at least $50,000; or (ii)
minimum net worth (exclusive of home, furnishings,
and automobiles) of $200,000 or (iii) are
purchasing in a fiduciary capacity for a person
meeting the requirements of either (i) or (ii)
above.
-------------- ----------------------------------------------------- -------------------------------------------------
SC Investors must have either (i) a minimum net worth
(without including an Investor's home, home
furnishings, and automobiles) of $65,000, and an
annual gross income of at least $65,000; or (ii)
minimum net worth (exclusive of home, furnishings,
and automobiles) of $150,000 or (iii) are
purchasing in a fiduciary capacity for a person
meeting the requirements of either (i) or (ii)
above.
-------------- ----------------------------------------------------- -------------------------------------------------
NH Investors must have either (i) a minimum net worth
(without including an Investor's home, home
furnishings, and automobiles) of $125,000, and an
annual gross income of at least $50,000; or (ii)
minimum net worth (exclusive of home, furnishings,
and automobiles) of $250,000 or (iii) are
purchasing in a fiduciary capacity for a person
meeting the requirements of either (i) or (ii)
above.
-------------- ----------------------------------------------------- -------------------------------------------------
DC, LA, NE, These jurisdictions do not have quantified
ND, RI suitability requirements. Accordingly, in addition
to assuring compliance with the guidelines set forth
in the body of this agreement, dealers are instructed
to review, and investors should provide any other
relevant information that they believe is necessary
to making an assessment of suitability.
-------------- ----------------------------------------------------- -------------------------------------------------
</TABLE>
B-12
<PAGE>
APPENDIX B
RESTRICTIONS ON TRANSFER SET FORTH
IN RULE 260.141.11 OF
THE CALIFORNIA CODE OF REGULATIONS TITLE 10, CHAPTER 3 (the "Code")
(a) The issuer of any security upon which a restriction on transfer has
been imposed pursuant to Section 260.102.6, 260.141.10 or 260.534 shall
cause a copy of this section to be delivered to each issuee or
transferee of such security.
(b) It is unlawful for the holder of any such security to consummate a sale
or transfer of such security, or any interest therein, without the
prior written consent of the Commissioner (until this condition is
removed pursuant to Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of these rules;
(4) to the transferors ancestors, descendants or spouse or any
custodian or trustee for the account of the transferor or the
transferors ancestors, descendants or spouse; or to a
transferee by a trustee or custodian for the account of the
transferee or the transferees ancestors, descendants or
spouse;
(5) to the holders of securities of the same class of the same
issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign
state, territory or country who is neither domiciled in this
state to the knowledge of the broker-dealer, nor actually
present in this state if the sale of such securities is not in
violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting
syndicate or group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the
security for which the Commissioner's written consent is
obtained or under this rule is not required;
(10) by way of a sale qualified under Sections 25111, 25112, or
25113, or 25121 of the Code, of the securities to be
transferred, provided that no order under Section 25140 or
Subdivision (a) of Section 25143 is in effect with respect to
such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation
to such corporation;
(12) by way of an exchange qualified under Section 25111, 25112, or
25113 of the Code, provided that no order under Section 25140
or Subdivision (a) of Section 25148 is in effect with respect
to such qualification;
(13) between residents of foreign states, territories or countries
who are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law
or to the administrator of the unclaimed property law of
another state; or
B-13
<PAGE>
(15) by the State Controller pursuant to the Unclaimed Property Law
or to the administrator of the unclaimed property law of
another state, if, in either such case, such person (i)
discloses to potential purchasers at the sale that transfer of
the securities is restricted under this rule, (ii) delivers to
each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does
not involve a change in the beneficial ownership of the
securities, provided that any such transfer is on the
condition that any certificate evidencing the security issued
to such transferee shall contain the legend required by this
section.
(c) The certificate representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any
transfer thereof, shall bear on their face a legend, prominently
stamped or printed thereon in capital letters of not less than 10-point
size, reading as follows:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT
THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE
STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONERS RULES.
B-14
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
The expenses incurred and estimated to be incurred in connection with this
offering are as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee $ 26,400
National Association of Securities Dealers, Inc. Filing Fee 10,500
Blue Sky Fees 30,000
Accounting Fees and Expenses 80,000
Legal Fees and Expenses 200,000
Printing Fees and Expenses 75,000
Mailing 25,000
Miscellaneous 53,100
Total $ 500,000
</TABLE>
Item 32. Sales to Special Parties
Not applicable.
Item 33. Recent Sales of Unregistered Securities
Not applicable.
Item 34. Indemnification of Directors and Officers
Indemnification of the Partners and any officer, director, employee,
agent, subsidiary or assign thereof, is provided for in Section 3.5 of the
operating agreement, which is included as Exhibit A to the Prospectus.
Item 35. Treatment of Proceeds from Stock Being Registered
Not applicable
Item 36. Financial Statements and Exhibits
<TABLE>
<S> <C>
(a) Financial Statements: See "Index to Financial Statements" and the financial
statements appearing thereafter in Part I of this registration statement.
(b) Exhibits:
1.1 Dealer Manager Agreement
1.2 Selected Dealer Agreement
3 Articles of Organization, as amended
4.1 Operating agreement of Registrant (included as Exhibit A to the Prospectus)
4.2 Subscription Agreement and Power of Attorney (included as Exhibit B to the
Prospectus)
5.1 Opinion of Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP
with respect to legality of the securities
8 Opinion of Wendel, Rosen, Black & Dean, LLP with respect to federal income tax matters
10.1 Bank West Escrow Agreement
23.1 Consent of Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP (contained in Exhibit
5.1)
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23.2 Consent of Wendel, Rosen, Black & Dean, LLP (contained in Exhibit 8)
23.3 Consent of Grant Thornton LLP (DM Mortgage Investors, LLC)
23.4 Consent of Grant Thornton LLP (Vestin Group, Inc.)
24 Power of Attorney
27 Financial Data Schedule
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Item 37. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
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(i) to include therein any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii) to reflect in any such prospectus any facts or events arising after the effective date of
the Registration Statement (or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing, any increase of
decrease in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus filed of
the estimated maximum offering range may be reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective registration statement.
(iii) to include any material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such information.
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(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
find offering thereof.
(3) That all post-effective amendments will comply with the applicable
forms, rules and regulations of the Securities and Exchange Commission in effect
at the time such post-effective amendments are filed.
(4) To remove from regulation by means of post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(5) To send to each limited partner at least on an annual basis a
detailed statement of any transactions with the Manager or its affiliates, and
of fees, commissions, compensation and other benefits paid, or accrued to the
Manager or its affiliates for the fiscal year completed, showing the amount paid
or accrued to each recipient and the services performed.
(6) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
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asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(7) To provide to the Members the financial statements required by Form
10-K for the first full year of operations of the Company.
(8) To file a sticker supplement pursuant to Rule 424(c) under the Act
during the distribution period describing each property not identified in the
prospectus at such time as there arises a reasonable probability that such
property will be acquired and to consolidate all such stickers into a
post-effective amendment filed at least once every three months, with the
information contained in such amendment provided simultaneously to the existing
members. Each sticker supplement should disclose all compensation and fees
received by the Manager and its affiliates in connection with any such
acquisition. The post-effective amendment shall include audited financial
statements meeting the requirements of Rule 3-14 of Regulation S-X only for
properties acquired during the distribution period.
(9) To file, after the end of the distribution period, a current report
on Form 8-K containing the financial statements and any additional information
required by Rule 3-14 of Regulation S-X, to reflect each commitment (i.e., the
signing of a binding purchase agreement) made after the end of the distribution
period involving the use of 10 percent or more (on a cumulative basis) of the
net proceeds of the offering and to provide the information contained in such
report to the members at least once each quarter after the distribution period
of the offering has ended.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on this Amendment No. 2 on Form S-11 and has
duly caused this Amendment No. 2 to its registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of Las
Vegas, Nevada, on August 7, 2000.
DM MORTGAGE INVESTORS, LLC
By: Vestin Mortgage, Inc., its sole manager
By: /s/ Stephen Byrne
------------------------------------
Stephen Byrne
Director and President
(Principal Officer of Manager)
By: /s/ Lance Bradford
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Lance Bradford
Director, Secretary and Treasurer
(Chief Accounting Officer of the Manager)
By: /s/ Michael Shustek
------------------------------------
Michael Shustek
Director of the Manager
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DM MORTGAGE INVESTORS, LLC
A Nevada Limited Liability Company
INDEX TO EXHIBITS
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1.1 Form of Dealer Manager Agreement*
1.2 Form of Selected Dealer Agreement*
3 Articles of Organization, as amended*
4.1 Second Amended and Restated Operating Agreement (included as Exhibit A to the Prospectus)
4.2 Subscription Agreement and Power of Attorney (included as Exhibit B to the Prospectus)
5.1 Opinion of Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP, with respect to the legality of the
securities*
8 Opinion of Wendel, Rosen, Black & Dean, LLP with respect to federal income tax matters
10.1 Bank West Escrow Agreement*
23.1 Consent of Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP (contained in Exhibit 5.1)*
23.2 Consent of Wendel, Rosen, Black & Dean, LLP (contained in Exhibit 8)*
23.3 Consent of Grant Thornton LLP (DM Mortgage Investors, LLC)
23.4 Consent of Grant Thornton LLP (Vestin Group, Inc.)
24 Power of Attorney*
27 Financial Data Schedule*
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*= Previously filed.
