VRTB Vestin Realty Mortgage II Inc (CE)

SPECIAL FACTORS – PROPOSAL NO. 1

REVERSE STOCK SPLIT

This section provides information concerning special factors relating to Proposal No. 1 and the proposed 1-for-1,000 Reverse Stock Split and related transactions including the cashing out of fractional shares following such split and subsequent anticipated SEC deregistration.

THE REVERSE STOCK SPLIT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, AND NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE COMMISSION HAS PASSED UPON THE FAIRNESS OR MERITS OF THE REVERSE STOCK SPLIT OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

Overview

The Board has unanimously adopted resolutions approving and recommending to the stockholders for their approval a reverse stock split of all of the outstanding shares of Common Stock, whereby each 1,000 shares would be combined, converted and changed into one share of Common Stock.  As described in greater detail below, the Reverse Stock Split is proposed to be effected to decrease the number of stockholders of record to a number less than 300 to, among other things, place the Company in a position to voluntarily delist the Common Stock from NASDAQ and voluntarily deregister from the reporting requirements of the Exchange Act.

Following the Reverse Stock Split, the number of issued and outstanding shares of Common Stock would be reduced in accordance with the Reverse Stock Split ratio. Except for adjustments that may result from the treatment of fractional shares, each stockholder will hold the same percentage of the outstanding Common Stock immediately following the Reverse Stock Split as such stockholder held immediately prior to the Reverse Stock Split. As described in greater detail below, as a result of the Reverse Stock Split, stockholders who hold less than 1,000 shares of Common Stock will no longer be stockholders of the Company on a post-split basis.

Board Deliberations

The Board, with input from senior management, regularly reviews and evaluates the Company's business, strategic plans and prospects.  As part of this regular assessment, from time to time, the Board has considered and deliberated the advantages and disadvantages of a potential deregistration transaction.  In connection with such assessment, the Board has considered the costs and expenses of remaining a public company, the limited trading in the Common Stock and the other considerations set forth under the sections "Advantages of the Reverse Stock Split" and "Disadvantages of the Reverse Stock Split," and has also considered other alternatives to the Reverse Stock Split, including those described under the section "Alternatives Considered."

Following such deliberations and after obtaining input from outside legal counsel with respect to the Reverse Stock Split and potential alternatives, at a meeting of the Board held on August 15, 2016, the Board unanimously approve taking all actions, including obtaining stockholder approval, to effectuate the Reverse Stock Split as soon as reasonably practicable.

After review and discussion, the Board determined that the proposed Reverse Stock Split is necessary for execution of the Company's business plan.  In addition, the Board determined that voluntarily delisting and deregistering is in the overall best interests of the Company after carefully considering several factors, including

·	the large costs of preparing and filing periodic reports with the SEC,

·	the increased outside accounting, audit, legal and other costs and expenses associated with being a public company,

·	the burdens placed on Company management to comply with reporting requirements, and

·	the low trading volume in the Common Stock,

all as further disclosed in the sections "Advantages of the Reverse Stock Split,"  "Disadvantages of the  Reverse Stock Split" and "Alternatives Considered."

As further disclosed under "Advantages of the Reverse Stock Split," the Board has concluded that the large costs of preparing and filing periodic reports with the SEC and the increased outside accounting, audit, legal and other costs and expenses associated with being a public company are outweigh by the perceived benefits of remaining a public company, particularly in light of the limited trading in the Common Stock. The Board also believes the Reverse Stock Split would free management and staff time to focus on long-term business objectives as well as internal financial reporting and analytics to support those objectives.  The Board also considered the fact that the Reverse Stock Split will provide an opportunity for Cashed Out Stockholders to sell their holdings without brokerage fees or commissions or other transaction costs at market price.

As further disclosed under "Disadvantages of the Reverse Stock Split," the Board also considered the requirement that stockholders owning less than 1,000 shares of record surrender their shares and accept the Cash-Out Payment as part of the Reverse Stock Split, thereby foregoing any opportunity to participate in any possible future increases in value of the Common Stock. The Board also considered the possible significant decline in value and liquidity of the Common Stock following the Reverse Stock Split. In particular, the Board noted that the Common Stock may suffer further illiquidity following the Reverse Stock Split as a result of the reduced number of shares of Common Stock and the significant increase in the per share price of Common Stock resulting from the Reverse Stock Split.  The decreased liquidity of the Common Stock, coupled with an absence of publicly available information, may further decrease the value of the shares owned by continuing stockholders.

As part of its assessment, the Board also noted that the share price of Vestin Realty Mortgage I, Inc. ("VRTA") common stock did not decrease significantly following its delisting from the NASDAQ.  On December 30, 2015, the last day of trading of VRTA common stock, the closing price of VRTA stock on NASDAQ was $1.75.  On January 11, 2016, the day after delisting, the closing price of VRTA stock on the Pink Sheets was $1.35.   On September 8, 2016, the closing price of VRTA stock on the Pink Sheets was $3.4399.  VRTA has a similar investment strategy with the Company and is managed by the same advisor.  The Board recognized, however, that the historical performance of VRTA stock price cannot be used to predict the future stock performance of the Common Stock following the Reverse Stock Split, particularly given the differences in stock ownership, shares outstanding, share prices, and financial and operating performances of the Company and VRTA.  The Board thus continues to consider the potential decline in value of the Common Stock resulting from the Reverse Stock Split as a potential disadvantage resulting from the Reverse Stock Split.

Neither the Board nor management believes the Reverse Stock Split itself will be a change factor for better performance of the Company, but the Board believes the Reverse Stock Split is a vehicle the Company can use to reduce costs and redirected time resources resulting from regulatory and reporting compliance cessation post Reverse Stock Split; assuming the Company's shareholders of record are reduced below 300 and the Company is able to deregister with the SEC.

As further disclosed under "Alternatives Considered," the Board also considered issuer purchases and maintaining the status quo as alternatives, but concluded ultimately that the proposed Reverse Stock Split was the best method and was in the best interests of the Company and its stockholders.  As further disclosed under "Fairness of the Reverse Stock Split," the Board has further determined that the Reverse Stock Split is substantively and procedurally fair to the unaffiliated stockholders.

Purpose of the Reverse Stock Split

The Common Stock is currently listed on NASDAQ under the symbol "VRTB." Among other requirements, the listing maintenance standards established by NASDAQ require there be a minimum of 300 stockholders. In addition, the Exchange Act requires reporting requirement registration for companies with more than 300 stockholders.  Through the date of filing this proxy statement, there were approximately 1,744 stockholders of the Company. The Company estimates that if the Reverse Stock Split is approved and implemented, the approximate number of record shareholders is anticipated to be approximately 291.

The primary purpose of the Reverse Stock Split is to enable us to reduce the number of our stockholders of record to fewer than 300. This reduction in the number of our stockholders will allow:

·	Substantial cost savings of time and money derived from termination of the registration of our Common Stock under the Exchange Act and suspension of our duties to file periodic reports with the SEC and comply with Sarbanes-Oxley Act and other SEC requirements

·	Elimination of the administrative burden and expense of maintaining many small stockholders' accounts

·	Liquidation by small stockholders of their shares of our Common Stock at a market price, without having to pay brokerage commissions

If approved at the Annual Meeting, the Company will effectuate the Reverse Stock Split by filing an amendment to the Charter in substantially the form attached hereto as Appendix A with the Maryland State Department of Assessments and Taxation of Maryland.  See Appendix A.

Following the Reverse Stock Split, the Company expects to file a Form 25, Notification of Removal from Listing and/or registration under Section 12(b) of the Exchange Act with the SEC and NASDAQ. The Form 25 will become effective 10 days after it is filed. Upon its effectiveness, the Company anticipates that its Common Stock will be quoted on the Pink Sheets, a centralized electronic quotation service for over-the-counter securities. The Company expects the Common Stock will continue to trade on the Pink Sheets, so long as market makers continue to make a market in the Common Stock. However, the Company can give no assurance that trading in its stock will continue on the Pink Sheets or on any other securities exchange or quotation medium.

Upon the effective date of the NASDAQ delisting, the Company intends to file a Form 15 to deregister its Common Stock with the SEC and become a non-reporting company under the Exchange Act. As of the date of the filing of the Form 15, the obligation of the Company to file reports under the Exchange Act, including Forms 10-K, 10-Q and 8-K, will be immediately suspended. The Company expects the deregistration of its Common Stock to become effective 90 days after filing the Form 15. The Company intends to continue to make certain information available to stockholders as required by applicable law.  In addition, although no longer required after deregistration, the Company intends to release financial results and issue press releases for the benefit of its shareholders.  There can be no assurance, however, that the Company will continue to provide such information in the future.

Principal Effects of the Reverse Stock Split

After the Effective Date, each stockholder will own a reduced number of shares of the Common Stock. However, the Company expects that the market price of the Common Stock immediately after the Reverse Stock Split will increase substantially above the market price of the Common Stock immediately prior to the Reverse Stock Split. The proposed Reverse Stock Split will be effected simultaneously for all of the Common Stock, and the ratio for the Reverse Stock Split will be the same for all of the Common Stock. The Reverse Stock Split will affect all stockholders uniformly and will not affect any stockholder's percentage ownership interest in the Company (except to the extent that the Reverse Stock Split would result in any of the stockholders owning a fractional share as described below). Proportionate voting rights and other rights and preferences of the holders of Common Stock will not be affected by the proposed Reverse Stock Split (except to the extent that the Reverse Stock Split would result in any stockholders owning a fractional share as described below). For example, a holder of 2% of the voting power of the outstanding shares of Common Stock immediately prior to the Reverse Stock Split would continue to hold approximately 2% of the voting power of the outstanding shares of Common Stock immediately after the Reverse Stock Split. The number of stockholders of record also will not be affected by the proposed Reverse Stock Split (except to the extent that the Reverse Stock Split would result in any stockholders owning only a fractional share as described below).

The Common Stock is currently registered under Section 12(b) of the Exchange Act, and the Company is subject to the periodic reporting and other requirements of the Exchange Act. The proposed Reverse Stock Split will affect the registration of the Common Stock under the Exchange Act. If the proposed Reverse Stock Split is implemented, the Company will voluntarily delist the Common Stock from NASDAQ and voluntarily deregister from the reporting requirements of the Exchange Act.

The respective rights, preferences or limitations of the Company's Common Stock will remain the same after the proposed Reverse Stock Split as before the split. For example, the rights of shareholders as voting, dividends, liquidation or other rights of the Company's Common Stock will remain the same and will not change as a result of the proposed Reverse Stock Split.  In addition, the Company has decided not to adjust the par value of its Common Stock in connection with the Reverse Stock Split.

The Company estimates that if the Reverse Stock Split is approved and implemented, the total number of shares of outstanding Common Stock in pre-split terms would be approximately 2,089,000 (a reduction of approximately 457,771 pre-split shares or 18.0% of the pre-split total shares outstanding), and the approximate number of record shareholders is anticipated to be approximately 291.

This would represent an anticipated reduction of approximately 1,453 pre-split record shareholders out of the approximately 1,744 shareholders of record as of the Record Date.  Based on the minimum Cash-Out Payment of $2.70 per share, the total anticipated cost of cashing out such estimated 457,771 shares pre-split would be approximately $1,240,000.  If the 10-day average market price ending on the last trading day prior to the Effective Date is greater than $2.70, then the actual cost will be based on such Closing Trading Price.  The Company plans to pay such anticipated cash-out cost from the Company's available cash resources.  The Company does not anticipate any material impact on the Company's financial statements if the Reverse Stock Split is approved and implemented.

Effects of the Reverse Stock Split on our Affiliates .

The transaction would not differentiate among stockholders on the basis of affiliate status. The sole determining factor in whether a stockholder will become a Cashed Out Stockholder or a Continuing Stockholder as a result of the Reverse Stock Split is the number of shares held by such stockholder immediately before the effective time of the Reverse Stock Split as no fractional shares will be issued. The beneficial ownership percentage of shares of our Common Stock held by our executive officers and directors and the beneficial ownership percentage of the stockholders who will continue to hold our Common Stock after the Reverse Stock Split, may, however,  increase or decrease as a result of such purchases, sales and other transfer of shares of our Common Stock by our stockholders prior to the effective time of the Reverse Stock Split, and depending on the number of shares that are actually Cashed-Out in the Reverse Stock Split.

As of September 30, 2016, approximately 513,276 shares of our Common Stock, or approximately 21.5% of the issued and outstanding shares of Common Stock on such date, were held, directly or indirectly, by Mr. Shustek, our chief executive officer and chairperson of the board. Upon the effectiveness of t he Reverse Stock Split , the aggregate number of shares of our Common Stock owned directly or indirectly by Mr. Shustek may increase to approximately 25.5% as a result of the reduction of the number of shares of our Common Stock outstanding.  No other director or officer of the Company owns any share of our Common Stock as of the date hereof.  The table below reflects the pre-Reverse Stock Split and an estimate of the post-Reverse Stock Split ownership of our current executive officers and directors:

_____________________

A s a result of the Reverse Stock Split, Mr. Shustek's interest in the Company's net book value and net earnings (losses) will increase to the extent of the increase in his percentage ownership in the Company as a result of a reduction in the number of shares of Common Stock after the Reverse Stock Split.  The Company's net book value, calculated as total assets minus total liabilities, was approximately $17,491,000 and $6,862,000 at December 31, 2015 and September 30, 2016, respectively, and the Company had net losses of approximately $18,006,000 and $3,846,000 for the year ended December 31, 2015 and nine months ended September 30, 2016.

·	Assuming Mr. Shustek owned 21.5% of the outstanding shares throughout 2015 and 2016:

o	Mr. Shustek's interest in the Company's net book value as of December 31, 2015 and September 30, 2016, would have been approximately $3,760,565 and $1,475,330, respectively, or 21.5% of the total net book value as of December 31, 2015 and September 30, 2016; and

o	Mr. Shustek's interest in the Company's net losses as of December 31, 2015 and September 30, 2016, would have been approximately $3,871,290 and $826,890, respectively, or 21.5% of the total net losses as of December 31, 2015 and September 30, 2016.

·	Assuming the Reverse Stock Split is consummated and Mr. Shustek's percentage ownership in the Company increases to 25.5% from 21.5% as noted above:

o

Mr. Shustek's interest in the Company's net book value as of December 31, 2015 and September 30, 2016, on a pro forma basis, after giving effect to the Reverse Stock Split as of such dates, would have been approximately $4,460,2055 and $1,749,810, respectively, or 25.5% of the total net book value as of December 31, 2015 and September 30, 2016; and

o

Mr. Shustek's interest in the Company's net losses as of December 31, 2015 and September 30, 2016, on a pro forma basis, after giving effect to the Reverse Stock Split as of such dates, would have been approximately $4,591,530 and $980,730, respectively, or 25.5% of the total net losses as of December 31, 2015 and September 30, 2016.

Additionally, directors, executive officers and 10% stockholders and their affiliates will be relieved of certain SEC reporting requirements and "short-swing profit" trading provisions under Section 16 of the Exchange Act, and public disclosure of information regarding their compensation and stock ownership will no longer be required. The Company after deregistration would also no longer be prohibited, pursuant to Section 402 of the Sarbanes-Oxley Act, from making personal loans to directors or executive officers.

We do not have any agreement, arrangement or understanding, whether written or unwritten, with any of our affiliates pursuant to which we are obligated to pay to any affiliate compensation, whether present, deferred or contingent, that is based on, or otherwise relates to, the Reverse Stock Split.  All of our officers and directors will continue in such capacity after the Reverse Stock Split.

To the extent known by the Company, each executive officer or director of the Company that is entitled to vote at the Annual Meeting intends to vote for the Reverse Stock Split. No executive officer or director of the Company will be entitled to the Cash-Out Payment, except for payment for any fractional shares that may result from the Reverse Stock Split.

Treatment of Fractional Shares

No scrip or fractional shares would be issued if, as a result of the Reverse Stock Split, a registered stockholder would otherwise become entitled to a fractional share. Instead, the Company would pay to the registered stockholder, in cash, the value of any fractional share interest arising from the Reverse Stock Split, for a minimum Cash-Out Payment of $2.70 per share.  The minimum Cash-Out Payment is equal to the average per-share closing price of the Common Stock on NASDAQ for the ten consecutive trading days ending on the last trading day prior to September 15, 2016.  September 15, 2016 is the date of the first public disclosure of the Reverse Stock Split proposal in the form of the initial filing of this proxy statement with the SEC.

Notwithstanding the foregoing, if the Closing Trading Price is greater than $2.70, then the Cash-Out Payment will be equal to the fraction to which the stockholder would otherwise be entitled multiplied by the Closing Trading Price.  The Closing Trading Price is the average per-share closing price of the Common Stock on NASDAQ for the ten consecutive trading days ending on the last trading day prior to the Effective Date.

No transaction costs would be assessed to stockholders for the cash payment. Stockholders would not be entitled to receive interest for the period between the Effective Date and the date payment is made for their fractional shares. The ownership of a fractional interest will not give the holder thereof any voting, dividend or other rights except to receive payment as described herein. This cash payment merely represents a mechanical rounding off of the fractions in the exchange.

As a result of the Reverse Stock Split, stockholders who hold less than 1,000 shares of Common Stock will no longer be stockholders of the Company on a post-split basis. In other words, any holder of 999 or fewer shares of Common Stock prior to the effectiveness of the Reverse Stock Split would only be entitled to receive cash for the fractional share of Common Stock such stockholder would hold on a post-split basis. The actual number of stockholders that will be eliminated will depend on the actual number of stockholders holding less than 1,000 shares of Common Stock on the Effective Date. Reducing the number of post-split stockholders is the purpose of the Reverse Stock Split.

If you do not hold sufficient shares of pre-split Common Stock to receive at least one post-split share of Common Stock and you want to hold Common Stock after the Reverse Stock Split, you may do so by taking either of the following actions far enough in advance so that it is completed before the Reverse Stock Split is effected:

•	purchase a sufficient number of shares of Common Stock so that you would hold at least 1,000 shares of Common Stock in your account prior to the implementation of the Reverse Stock Split that would entitle you to receive at least one share of Common Stock on a post-split basis; or

•

if applicable, consolidate your accounts so that you hold at least 1,000 shares of Common Stock in one account prior to the Reverse Stock Split that would entitle you to at least one share of Common Stock on a post-split basis. Common stock held in registered form (that is, shares held by you in your own name on the Company's share register maintained by its transfer agent) and Common Stock held in "street name" (that is, shares held by you through a bank, broker or other nominee) for the same investor would be considered held in separate accounts and would not be aggregated when implementing the Reverse Stock Split. In addition, shares of Common Stock held in registered form but in separate accounts by the same investor would not be aggregated when implementing the Reverse Stock Split.

Stockholders should be aware that, under the escheat laws of the various jurisdictions where stockholders reside, where the Company is domiciled and where the funds for fractional shares would be deposited, sums due to stockholders in payment for fractional shares that are not timely claimed after the effective time may be required to be paid to the designated agent for each such jurisdiction. Thereafter, stockholders otherwise entitled to receive such funds may have to seek to obtain them directly from the state to which they were paid.

Advantages of the Reverse Stock Split

Cost Savings

The costs of being a public reporting company are significant and have increased over the years, including as a result of compliance with the internal control assessment and audit requirements of Section 404 and other requirements imparted by Sarbanes-Oxley Act and the Dodd-Frank Act, and are expected to continue to increase in the near future.

Legislation such as Sarbanes-Oxley Act and the Dodd-Frank Act will continue to have the effect of increasing the compliance burdens and potential liabilities of being a public reporting company. It will increase audit fees and other costs of compliance, such as outside securities legal counsel fees, as well as outside director fees and large insurance premiums to cover potential liability faced by our officers and directors. We also incur substantial indirect costs as a result of, among other things, our management's time expended to prepare and review our public filings.

The Board believes that by deregistering our shares of Common Stock and suspending our periodic reporting obligations we will realize annual cost savings of approximately $160,000. These estimated annual cost savings reflect, among other things: (i) a reduction in audit, legal and other fees required for publicly held companies, (ii) the elimination of various internal costs associated with filing periodic reports with the SEC, and (iii) the reduction or elimination of various clerical and other expenses associated with being a public company. The cost savings figures set forth above are only estimates. The actual savings we realize from the transaction may be higher or lower than such estimates, but the savings will continue annually. Estimates of the annual savings to be realized are based upon (i) the actual costs to us of the services and disbursements in each of the categories listed above that are reflected in our financial records and (ii) the allocation to each category of management's estimates of the portion of the expenses and disbursements in such category believed to be solely or primarily attributable to our public reporting company status. In some instances, management's cost saving expectations were based on information provided or upon verifiable assumptions.  The Board has reviewed an analysis prepared by management on the cost saving expectations if the Company were to cease being a reporting company. The analysis was also reviewed by independent accountants, but the independent accountants did not render any opinion or other written report in connection with its review of the cost savings analysis.

Limited Liquidity of Common Stock

The Board further believes that the perceived benefits of remaining a public company is outweighed by the costs, particularly in light of the limited public trading value, liquidity and analyst coverage of the Common Stock.  The Common Stock is traded on NASDAQ under the symbol "VRTB".  As of September 30, 2016, the Company has outstanding 2,384,179 shares of Common Stock.  Over the last nine-month period ending September 30, 2016, the average NASDAQ daily trading volume of the Common Stock was approximately 3,393 shares, or less than 0.15% of the total outstanding shares as of September 30, 2016.  The Company also is not aware of any analyst coverage of the Common Stock.

Additional Potential Management Resources Arising From Reduced Disclosure Obligations

Another main benefit is that the proposed Reverse Stock Split would free management and staff time to focus on long-term business objectives as well as internal financial reporting and analytics to support those objectives.  Additional benefits and advantages would also include greater confidentiality of strategic and competitively sensitive information. Our management will also be able to focus on long-term growth without undue emphasis on short-term financial results that is often expected of SEC reporting companies.

Opportunity for Cashed Out Stockholders to Sell Their Holdings at Current Market Trading Price Without Brokerage Fees or Commissions

The Reverse Stock Split provides an opportunity for Cashed Out Stockholders to sell their holdings without brokerage fees or commissions or other transaction costs at a minimum amount equal to $2.70.

The Board believes the minimum Cash-Out Payment of $2.70 is fair to the stockholders as it is equal to the 10-day average trading price of our common stock ending on the last trading day prior to our initial public announcement of the Reverse Stock Split. The Board also considered the fact that the minimum Cash-Out Payment of $2.70 exceeds $2.53, which is the average price paid per share for our stock repurchases during the nine months ended September 30, 2016, and falls within the quarterly highest sales prices of our common stock through the end of 2016, as shown in the tables below.

Notwithstanding the foregoing, if the average per-share closing price of the Common Stock for the ten consecutive trading days ending on the last trading day prior to the Effective Date is greater than $2.70, then the Cash-Out Payment will be calculated based on the Closing Trading Price instead of $2.70. The Board is unable to predict whether the Closing Trading Price will be in excess of $2.70 per share, but if there is an increase in the stock price, the Board believes any the increase is reflective of the stock market's support of the Reverse Stock Split.  The Board believes stockholders whose shares are being cashed out in the Reverse Stock Split should benefit from any such price increase.  For a further discussion on the Board's determination regarding the fairness of the Cash-Out Payment, please see the section entitled "Fairness of the Reverse Stock Split" below.

In addition, stockholders with less than 1,000 pre-split shares could buy additional shares, at a relatively low cost per share, to get to 1,000 by the Record Date and thereby avoid cash-out if they prefer. Similarly, shareholders with slightly more than 1,000 pre-split shares could sell some shares to get under the 1,000 share level if they prefer.

Disadvantages of the Reverse Stock Split

Holders of less than 1,000 shares of record will be required to give up their shares and accept cash consideration.

The Reverse Stock Split of 1-for-1,000 will force stockholders who own less than 1,000 shares of record to be cashed out for the Cash-Out Payment. Other than acquiring more shares of stock before the Effective Date, stockholders may only vote against the proposed Reverse Stock Split, but if the Reverse Stock Split proposal is approved and implemented, stockholders who own less than 1,000 shares of record will be required to sell for the Cash-Out Payment.

Substantial or Complete Reduction of Public Sale Opportunities for our Stockholders

Following the transaction, we anticipate that the market for shares of our Common Stock will be even less active and may be eliminated altogether. Our stockholders may no longer have the option of selling their Common Stock in a public market. While shares may be quoted in the Pink Sheets, any such market for our Common Stock may be highly illiquid after the suspension of our periodic reporting obligations.

Loss of Certain Publicly Available Information

Upon terminating the registration of our Common Stock under the Exchange Act, our duty to file periodic reports with the SEC will be suspended. The information regarding our operations and financial results that is currently available to the general public and our investors will not be available after we have terminated our registration. Upon the suspension of our duty to file reports with the SEC, investors seeking information about us may have to contact us directly to request such information. We cannot assure you that we will provide the requested information to an investor. While the Board acknowledges the circumstances in which such termination of publicly available information may be disadvantageous to some of our stockholders, the Board believes that the overall benefit to the Company of no longer being a public reporting company substantially outweighs the disadvantages.

If the Company is no longer subject to certain liability provisions of the Exchange Act, including those associated with officer certifications required by Sarbanes-Oxley, stockholders will find that the information provided to them is more limited and that their recourse for alleged false or misleading statements is also more limited.  If the shares are traded on the Pink Sheets, the Company will submit quarterly unaudited financial statements of the Company with the Pink Sheets in accordance with the Pink Sheets requirements, although such information is generally not publicly available.

Possible Significant Decline in the Value and Liquidity of the Common Stock

The market price of our Common Stock is based on our performance and other factors, some of which are unrelated to the number of shares outstanding. If the Reverse Stock Split is effected and the market price of our Common Stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of a Reverse Stock Split. In many cases, both the total market capitalization of a company and the market price of a share of such company's Common Stock following a Reverse Stock Split are lower than they were before the Reverse Stock Split.

Furthermore, the liquidity of our Common Stock could be adversely affected by the reduced number of shares that would be outstanding after the Reverse Stock Split, as well as the increase in the stock price triggered by the Reverse Stock Split.

The Company estimates that if the Reverse Stock Split is approved and implemented, the total number of shares of outstanding Common Stock in pre-split terms would be approximately 2,087,000 (a reduction of approximately 457,771 pre-split shares or 18.0% of the pre-split total shares outstanding) and the approximate number of record shareholders is anticipated to be approximately 291. This would represent an anticipated reduction of approximately 1,453 pre-split record shareholders out of the approximately 1,744 shareholders of record as of the Record Date.

 

Based on the closing price of a share of Common Stock on the minimum Cash-Out Payment of $2.70 per share, a 1-for-1,000 Reverse Stock Split is expected to result in split-adjusted per share Common Stock price of $2,700.  This high per share stock price could further limit the market for the Common Stock after the Reverse Stock Split.

The decreased liquidity of the Common Stock, coupled with an absence of publicly available information, may further decrease the value of the shares owned by continuing stockholders.

Inability to Participate in any Future Increases in Value of our Common Stock

Cashed Out Stockholders will have no further financial interest in the Company, and therefore will not have the opportunity to participate in any potential appreciation in the value of our shares, including without limitation, an increase in profitability of the Company. The Board believes that the Reverse Stock Split is nonetheless fair to our unaffiliated stockholders, because those stockholders are being cashed out at a fair price for their shares.

Alternatives Considered

The Board considered alternative transactions to reduce the number of shareholders but concluded ultimately that the proposed Reverse Stock Split was the best method and was in the best interests of the Company and its stockholders.

The Board considered issuer purchases, e.g., by tender offer, but concluded that the Company did not have sufficient resources to effectuate such purchases at the level that would reduce record shareholders to below 300. The Board also considered the possibility that an existing shareholder might undertake a possible tender offer but concluded that no shareholder had expressed interest in undertaking such a transaction.

The Board also considered doing nothing, or maintaining the status quo. The Board concluded, however, that this alternative would not allow the Company to achieve the significant potential benefits of completing the Reverse Stock Split and deregistering the Company's common shares so the Company would no longer be an SEC-reporting company.  The Board concluded that maintaining the status quo would result in the Company continuing to be burden by the costs and expenses of remaining a public company without enjoying the benefits traditionally associated with public reporting company status.

The Board unanimously agreed that the significant costs of operating as a reporting company warranted deregistering the Common Stock under the Exchange Act and that the most viable method to achieve that deregistration was a reverse stock split. The Board also agreed that the historically limited trading activity of the Company's Common Stock supported the conclusion that it was in the Company's best interest to effectuate a Reverse Stock Split and deregistration.

Fairness of the Reverse Stock Split

The Board has fully reviewed and considered the terms, purpose, alternatives and effects of the Reverse Stock Split, and has unanimously determined (without the vote of Mr. Shustek, the only affiliated director on the Board) that the transaction is in our best interests and is substantively and procedurally fair to the unaffiliated stockholders.

Mr. Shustek, as President, Chief Executive Officer and a Director of the Company, and as an individual, adopted the conclusions of the Board and believes that the transaction is substantively and procedurally fair to unaffiliated security holders. Mr. Shustek also considered the purposes, alternatives and fairness of the Reverse Stock Split in determining how to vote his shares. Mr. Shustek intends to vote his shares in favor of the Reverse Stock Split.

The Reverse Stock Split does not require the approval of a majority of our unaffiliated stockholders. Despite the foregoing, the Board believes that the Reverse Stock split is substantively and procedurally fair to each differently-impacted group of stockholders – those unaffiliated stockholders who will be cashed-out and those affiliated and unaffiliated stockholders who will be Continuing Stockholders. The Board bases its opinion on:

·	the requirement that the proposal receive a majority vote of the shares represented, in person or by proxy, at the Annual Meeting,

·

the calculation of the Cash-Out Payment, pursuant to which stockholders are provided with the benefit of receiving the greater of (i) $2.70, which is the 10-day average market price ending on the last trading day prior to the first public disclosure of the Reverse Stock Split proposal, or (ii) the 10-day average market price ending on the last trading day prior the Effective Date, and

·	the possibility, although not the assurance, that the unaffiliated stockholders may be able to change their status from Cashed Out Stockholder to Continuing Stockholder (or vice versa) as they see fit.

In addition, Continuing Stockholders have the advantage of continuing as stockholders in a company that will not be subject to the costs associated with being a public company. These savings should decrease our ongoing expenses.

The Board believes the minimum Cash-Out Payment of $2.70 is fair to our stockholders as it is equal to the 10-day average trading price of our Common Stock ending on the last trading day prior to our initial public announcement of the Reverse Stock Split. The Board also considered the fact that the minimum Cash-Out Payment of $2.70:

·	exceeds $2.53, which is the average price paid per share for our stock repurchases during the nine months ended September 30, 2016,

·	exceeds $1.97, which the closing price of our Common Stock on August 15, 2015, the last full trading day prior to the Board approving the Reverse Stock Split, and

·	is within the range of the highest sales price for our common stock on NASDAQ during the first, second, third and fourth quarters of 2016, or $2.32, $2.97, $3.75 and $3.00, respectively.

The Board also notes that the Cash-Out Payment will be calculated based on the Closing Trading Price, which is the average closing price during the 10 trading days prior to the Effective Date, rather than the minimum Cash-Out Payment of $2.70 if the Closing Trading Price is in excess of $2.70 per share. The Board is unable to predict whether the Closing Trading Price prior to the Effective Time will be in excess of $2.70 per share, particularly in light of the limited trading in the Common Stock and the potential volatility in the stock price as a result of such limited trading. However, if there is an increase in the stock price, the Board believes such increase is likely reflective of the stock market's support of the Reverse Stock Split. The Board believes stockholders whose shares are being cashed out in the Reverse Stock Split therefore should benefit from any such price increase.

The Board considered the net book value per share of our common stock in relation to the minimum Cash-Out Payment of $2.70.  The net book value per share of our common stock was equal to approximately $3.97 and $2.88, as of June 30, 2016 and September 30, 2016, respectively.  Net book value is defined generally as total assets minus total liabilities.  While the Board considered the relationship of market value to net book value in its deliberations, the Board does not view net book value alone to be a material indicator of the fair value of our common stock but rather indicative of historical costs. The Board notes that net book value does not take into account our future prospects, market conditions, trends in the industry in which we conduct our business or the business risks inherent in competing with other companies in the same industry.  The Board further notes that net book value does not state all assets and liabilities at market value, nor does it take into account the other considerations that might be part of a transaction between a willing buyer and a willing seller.

The Board did not seek to establish, and did not consider, a going concern valuation because the Board determined that   the costs associated with engaging an independent financial advisor to assist the Board in analyzin g and providing an accurate estimate of our going concern value exceeded the anticipated benefits of such analysis.  In addition, the Board believes that the market value determined by the public trading market reflected any value attributable to the Company as a going concern.

The Board further views the liquidation value of the Company to be an inappropriate measure for the purpose of evaluating the fairness of the Cash-Out Payment because the Board considers the Company to be a viable going concern business. There is no present intention of liquidating the Company. Further, the Reverse Stock Split will only result in the termination of an equity interest by those stockholders who has holdings are reduced to fractional shares as a result of the Reverse Stock Split.  A liquidation process would also involve additional legal fees, costs of sale and other expenses that would reduce any amounts that stockholders might receive upon liquidation. In addition, the Board believes that the value of the Company's assets that might be realized in liquidation may be substantially less than its going concern value. Given the other factors considered by the Board as described in this Proxy Statement, the Board did not pursue a liquidation value approach.

The Board considered the stock repurchases discussed in the section " Purchases of Equity Securities by the Issuer and Affiliated Purchasers."  The Board believes the minimum Cash-Out Price of $2.70 is fair in consideration of the fact that the minimum Cash-Out Price represents a premium to the average price paid of $2.53 per share for our most recent stock repurchases during the nine months ended September 30, 2016.  The Board, however, did not consider such prices to be a significant material factor in its fairness   evaluation because these purchase prices generally reflected the market value of our Common Stock or the prevailing trading prices of our common stock in the open market, as of the time of repurchase, and therefore do not reflect the occurrence of any events that may impact the value of our Common Stock after the time of repurchase.

The Board did not have the benefit of any firm offers made within the past two years regarding the merger or consolidation of the Company with or into any other company, the sale or other transfer of all or a substantial portion of the assets of the Company or a purchase of the Company's Common Stock that would enable the purchaser to exercise control of the Company to consider as part of its deliberations.

In evaluating the fairness of the Reverse Stock Split with respect to the unaffiliated stockholders in particular, the Board also noted that the transaction would not differentiate among stockholders on the basis of affiliate status. The sole determining factor in whether a stockholder will become a Cashed Out Stockholder or a Continuing Stockholder as a result of the Reverse Stock Split is the number of shares held by such stockholder immediately before the Effective Date as no fractional shares will be issued.

Furthermore, although stockholders with less than 1,000 shares of our common stock will be cashed out mandatorily if the Reverse Stock Split is approved, the Board considered that this potentially coercive impact of the transaction is minimized by the ability of stockholders with less than 1,000 pre-split shares to buy additional shares, at a relatively low cost per share, to get to 1,000 by the Record Date and thereby avoid cash-out if they prefer.

The Board considered but ultimately concluded that the Board did not need to form a separate committee or otherwise appoint a separate independent representative to evaluate the procedural and substantive fairness of the Reverse Stock Split. The Board noted that it is currently composed of four members, three of whom are independent directors. One of the independent directors is a practicing lawyer; all of the independent directors have expertise in real estate.  The Board concluded that it, as a whole, is in a position to evaluate the fairness of the Reverse Stock Split without the need to appoint a separate committee of independent directors.  The Board approved the Reverse Stock Split unanimously, without the vote of Mr. Shustek, the only affiliated director.

The proposed Reverse Stock Split does not require the separate approval of shareholders unaffiliated with the Company. The Board concluded that the interests of unaffiliated shareholders were sufficiently represented at the Board level as the Board is comprised of four directors, three of whom are independent and disinterested directors. The Board also concluded that there is no direct conflict between Mr. Shustek and the unaffiliated stockholders with respect to the Reverse Stock Split that would warrant requiring the approval of the Reverse Stock Split by a majority of the unaffiliated stockholders.

In reaching this conclusion, the Board noted that Mr. Shustek is not treated any differently from any other stockholder who owns at least 1,000 shares.  Moreover, the Board noted that, while stockholders owning less than 1,000 shares may be cashed out, such shareholders could, for a relatively small sum acquire additional shares if they are interested in remaining as shareholders of the Company.  For example, a shareholder owning 700 shares could increase his or her ownership to 1000 shares for the relatively modest sum of approximately $750 based on current market prices.    The Board also noted that the Reverse Stock Split would not have a material impact on Mr. Shustek's percentage ownership in the Company, which is anticipated to increase to 21.5% from 25.5% as a result of the reduction in the number of shares of Common Stock outstanding following the Reverse Stock Split. The Board concluded, based upon the foregoing, and upon advice of its counsel, that separate approval of stockholders unaffiliated with the Company is not required.

The Board also considered the advantages and disadvantages of the Reverse Stock Split discussed in the sections "Advantages of the Reverse Stock Split,"  "Disadvantages of the Reverse Stock Split" and "Alternatives Considered" in reaching its conclusion as to the substantive and procedural fairness of the Reverse Stock Split to our unaffiliated stockholders. The Board did not assign specific weight to each advantage and disadvantage in a formulaic fashion. However, the Board noted in their analysis that the Company historically had limited trading activity and coupled with the relatively large costs associated with remaining a public company supported the conclusion that the Company needed to effectuate a Reverse Stock Split.

We have not made any special provision in connection with the Reverse Stock Split to grant stockholders access to our corporate files or to obtain counsel or appraisal services at our expense. The Board determined that these steps were not necessary to ensure the fairness of the Reverse Stock Split. In particular, the Board determined that such steps would be costly, time consuming and would not provide any meaningful additional benefits. Additionally, the Board believes that this Proxy Statement, together with our other filings with the SEC, provide adequate information for our stockholders to make an informed decision with respect to the Reverse Stock Split.

The Board did not request or rely on a fairness opinion on behalf of unaffiliated shareholders or potential Cashed-Out Shareholders. The potential costs of such an opinion were considered to be quite substantial compared to any potential value of such an opinion.  In addition, the Board took into account the following additional factors in not requesting or relying on a fairness opinion.  The Board approved a cash-out price that is based on the market value of the Common Stock, as reported on NASDAQ. Furthermore, in calculating the Cash-Out Payment, the Board noted that stockholders are provided with the benefit of receiving the greater of the 10-day average market price ending on the last trading day prior to (i) the first public disclosure of the Reverse Stock Split proposal or (ii) the Effective Date. In addition, shareholders who are potential Cashed-Out Shareholders would have the opportunity to buy more shares before the split so as to avoid being Cashed-Out Shareholders immediately before the effective date of such split. Similarly, shareholders who hold somewhat more than 1,000 shares before the proposed split and would like to become Cashed-Out Shareholders could do so simply by selling enough of their shares so that they would have less than 1,000 shares immediately before such split.

Exchange of Stock Certificates

As soon as practicable after the Effective Date, stockholders will be notified that the Reverse Stock Split has been effected. The Company's transfer agent will act as "exchange agent" for purposes of implementing the exchange of stock certificates. If any of your shares are held in certificated form (that is, you do not hold all of your shares electronically in book-entry form), you will receive a letter of transmittal from the Company's exchange agent as soon as practicable after the Effective Date, which will contain instructions on how to obtain post-split shares. You must complete, execute and submit to the exchange agent the letter of transmittal in accordance with its instructions and surrender your stock certificate(s) formerly representing shares of stock prior to the Reverse Stock Split (or an affidavit of lost stock certificate containing an indemnification of the Company for claims related to such lost stock certificate). Upon receipt of your properly completed and executed letter of transmittal and your stock certificate(s), you will be issued the appropriate number of shares of Common Stock either as stock certificates (including legends, if appropriate) or electronically in book-entry form, as determined by the Company. This means that, instead of receiving a new stock certificate, you may receive a direct registration statement that indicates the number of post-split shares you own in book-entry form. At any time after receipt of your direct registration statement, you may request a stock certificate representing your post-split ownership interest. If you are entitled to payment in lieu of any fractional share interest, payment will be made as described above under the heading "Treatment of Fractional Shares." No direct registration statements, new stock certificates or payments in lieu of fractional shares will be issued to a stockholder until such stockholder has properly completed and executed a letter of transmittal and surrendered such stockholder's outstanding certificate(s) to the exchange agent. If you hold any or all of your shares electronically in book-entry form, please see the section below under the heading "Effect on Registered Book-Entry Holders."

STOCKHOLDERS SHOULD NOT DESTROY ANY PRE-SPLIT STOCK CERTIFICATE AND SHOULD NOT SUBMIT ANY CERTIFICATES UNTIL THEY ARE REQUESTED TO DO SO.

Effect on Beneficial Owners

Stockholders holding Common Stock through a bank, broker or other nominee should note that such banks, brokers or other nominees may have different procedures for processing the Reverse Stock Split than those that would be put in place by the Company for registered stockholders that hold such shares directly, and their procedures may result, for example, in differences in the precise cash amounts being paid by such nominees in lieu of a fractional share. If you hold your shares with such a bank, broker or other nominee and if you have questions in this regard, you are encouraged to contact your bank, broker or nominee.

Effect on Registered Book-Entry Holders

The Company's registered stockholders may hold some or all of their shares electronically in book-entry form under the direct registration system for securities. These stockholders will not have stock certificates evidencing their ownership of the Common Stock. They are, however, provided with a statement reflecting the number of shares registered in their accounts.

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If you hold shares in a book-entry form, you do not need to take any action to receive your post-split shares or your cash payment in lieu of any fractional share interest, if applicable. If you are entitled to post-split shares, a transaction statement will automatically be sent to your address of record indicating the number of shares you hold.

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If you are entitled to a payment in lieu of any fractional share interest, a check will be mailed to you at your registered address as soon as practicable after the Company's transfer agent completes the aggregation and sale described above in "Treatment of Fractional Shares." By signing and cashing this check, you will warrant that you owned the shares for which you receive a cash payment.

Accounting Consequences

The par value per share of the Common Stock would remain unchanged at $0.0001 per share after the Reverse Stock Split. As a result, on the Effective Date, the par value per share on the Company's balance sheet attributable to the Common Stock will be reduced proportionally from its present amount, and the additional paid in capital account shall be credited with the amount by which the par value per share is reduced. The per share Common Stock net income or loss and net book value will be increased because there will be fewer shares of Common Stock outstanding. The Company does not anticipate that any other accounting consequences would arise as a result of the Reverse Stock Split.

No Appraisal Rights

Stockholders are not entitled to appraisal rights under Maryland law with respect to the proposed amendment to the Charter to effect the Reverse Stock Split. The Board did not consider the presence or lack of appraisal rights to be a material factor in its consideration and approval of the Reverse Stock Split.

Cost/Source of Funds and Expenses

The Company will bear the entire cost of solicitation, including the preparation, assembly, printing, and mailing of the Notice, the Proxy Statement, the proxy card and any additional solicitation materials furnished to the stockholders.  The Company will use the services of Broadridge in connection with this proxy solicitation. The estimated fees paid by the Company to Broadridge will be approximately $10,000.

Copies of solicitation materials will be furnished to brokers, banks, or other nominees holding shares in their names that are beneficially owned by others so that they may forward this solicitation material to such beneficial owners.  In addition, the Company may reimburse such persons for their costs in forwarding the solicitation materials to such beneficial owners.  The original solicitation of proxies by internet may be supplemented by a solicitation by telephone, mail or other means by directors, officers or employees of the Company or of Vestin Mortgage.  No additional compensation will be paid to these individuals or to Vestin Mortgage for any such services.  Except as described above, the Company does not presently intend to solicit proxies other than by Internet and through the use of direct solicitation by mail and/or telephone.

Based on estimates of the record ownership of shares of the Common Stock, the number of shares outstanding and other information as of September 30, 2016 and assuming that approximately 457,771 shares are cashed out, we estimate that the total funds required to consummate the  Reverse Stock Split will be at least $1,420,000, of which approximately $1,240,000 will be used to pay the consideration to stockholders entitled to receive cash for their shares of our Common Stock (based on the minimum Cash-Out Payment) and $180,000 will be used to pay the costs of the Reverse Stock Split, as follows:

The Company plans to pay out all the costs of the Reverse Stock Split from the Company's available cash resources.

There have been no public offerings of the Company's Common Stock in the past three year.  To the Company's knowledge, no affiliate of the Company has engaged in a transaction in the Common Stock in the past 60 days.

Dividend Policy

During June 2008, the Board decided to suspend the payment of dividends.  No dividends were declared during the years ended December 31, 2015 or December 31, 2014.   The Company has no present intention to declare or pay dividends in the foreseeable future. Future dividends, if any, will be determined by the Board.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On March 21, 2007, the Board authorized the repurchase of up to $10 million worth in the Common Stock. On November 17, 2014, the Board authorized the repurchase of an additional $500,000 in the Common Stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.  We are not obligated to purchase any shares.  Subject to applicable securities laws, including SEC rule 10b-18, repurchases may be made at such times and in such amounts, as our management deems appropriate.  The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program.  The repurchases will be funded from our available cash.

We record our treasury stock using the cost method.  Under the Maryland General Corporation Law, shares of its own stock acquired by a corporation constitute authorized but unissued shares.

The following is a summary of our stock acquisitions during the years ended December 31, 2014 and December 31, 2015 and the nine months ended September 30, 2016:

Material U.S. Federal Income Tax Consequences of the Reverse Stock Split

The following is a discussion of certain material U.S. federal income tax consequences of the Reverse Stock Split. This discussion is included for general information purposes only and does not purport to address all aspects of U.S. federal income tax law that may be relevant to stockholders in light of their particular circumstances. Further, this discussion does not address any state, local or non-U.S. tax consequences of the Reverse Stock Split. This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), and current Treasury Regulations, administrative rulings and court decisions, all of which are subject to change, possibly on a retroactive basis, and any such change could affect the continuing validity of this discussion.

All stockholders are urged to consult with their own tax advisors with respect to the tax consequences of the Reverse Stock Split. This discussion does not address the tax consequences to stockholders who are subject to special tax rules, such as banks, insurance companies, regulated investment companies, personal holding companies, partnerships (or entities treated as partnerships for U.S. federal income tax purposes), stockholders who are not U.S. holders (as defined herein), stockholders who hold their shares as "qualified small business stock" or "Section 1244" stock, broker-dealers and tax-exempt entities. This summary also assumes that the pre-split shares were, and the post-split shares will be, held as a "capital asset," as defined in Section 1221 of the Code.

As used herein, the term "U.S. holder" means a holder that is, for U.S. federal income tax purposes:

•    an individual who is a citizen or resident of the United States;

•    a corporation or other entity taxed as a corporation created or organized in or under the laws of the United States or any political subdivision thereof;

•    an estate the income of which is subject to U.S. federal income tax regardless of its source; or

•    a trust (A) if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more "U.S. persons" (as defined in the Code) have the authority to control all substantial decisions of the trust or (B) that has a valid election in effect to be treated as a U.S. person.

Tax Consequences to U.S. Holders Not Receiving Cash in the Reverse Stock Split

The Reverse Stock Split is expected to be treated as a form of reorganization defined in Section 368(a)(1)(E) of the Code as a recapitalization. A U.S. holder that does not receive any cash in the Reverse Stock Split generally should not recognize any gain or loss with respect to the Reverse Stock Split for U.S. federal income tax purposes, and generally should have the same adjusted tax basis and holding period in such holder's post-split shares of Common Stock as such holder had immediately prior to the Reverse Stock Split .

Tax Consequences to U.S. Holders Receiving Only Cash in the Reverse Stock Split

In general, the receipt of cash by a U.S. holder instead of a fractional share will be a taxable transaction to such holder for U.S. federal income tax purposes. Under the stock redemption rules of Section 302 of the Code (referred to

herein as the "Section 302 tests"), a U.S. holder's exchange of pre-split shares of common stock for cash in the Reverse Stock Split generally should be treated as a "sale or exchange" of such shares if the exchange (1) results in a "complete termination" of such holder's interest in the Company, (2) is "substantially disproportionate" with respect to such holder or (3) is "not essentially equivalent to a dividend" with respect to the such holder. Each of the Section 302 tests is described in more detail below. In determining whether any of the Section 302 tests is satisfied, a U.S. holder must take into account both common stock actually owned by such holder and any common stock considered as owned by such holder by reason of certain constructive ownership rules in the Code. Under these rules, a U.S. holder generally will be considered to own common stock which such holder has the right to acquire pursuant to the exercise of an option or warrant or by conversion or exchange of a security. A U.S. holder generally will also be considered to own common stock that is owned (and, in some cases, constructively owned) by some members of such holder's family and by some entities (such as corporations, partnerships, trusts and estates) in which such holder, a member of such holder's family or a related entity has an interest.

If any of the Section 302 tests is satisfied with respect to a U.S. holder, and an exchange of common stock for cash is therefore treated as a sale or exchange for U.S. federal income tax purposes, such holder generally should recognize gain or loss equal to the difference between the amount of cash received by such holder and such holder's adjusted basis in the common stock exchanged in the Reverse Stock Split. Gain or loss must be calculated separately with respect to each share of common stock exchanged in the Reverse Stock Split.

Any gain or loss recognized will constitute capital gain or loss and will constitute long-term capital gain or loss if the holder's holding period is greater than one year as of the Effective Date.

Conversely, if none of the Section 302 tests is satisfied with respect to a U.S. holder, such holder generally should be treated as having received a distribution from the Company an amount equal to the cash received by such holder in the Reverse Stock Split. The amount of a distribution received by a U.S. holder will be treated as a dividend to the extent of such holder's share of the Company's current and accumulated earnings and profits. To the extent that the amount of a distribution received by a U.S. holder with respect to the Reverse Stock Split exceeds such holder's share of current and accumulated earnings and profits, the excess generally should be treated as a tax-free return of capital to the extent of such holder's adjusted tax basis in the common stock exchanged in the Reverse Stock Split and any remainder generally should be treated as capital gain from the sale or exchange of the common stock. Dividends received by individuals will generally be taxed at the lower applicable long-term capital gains rates, provided certain holding period and other requirements are satisfied.

Section 302 Tests

A U.S. holder's exchange of common stock for cash in the Reverse Stock Split must satisfy one of the following tests to be treated as a sale or exchange for U.S. federal income tax purposes:

Complete Termination . A U.S. holder's exchange of common stock for cash in the Reverse Stock Split generally will result in a "complete termination" of such holder's interest in us if, in connection with the Reverse Stock Split, either (i) all of the common stock actually and constructively owned by such holder is exchanged for cash, or (ii) all of the shares of common stock actually owned by such holder is exchanged for cash, and, with respect to constructively owned shares of common stock, such holder is eligible to waive (and effectively waives) constructive ownership of all such common stock under procedures described in Section 302(c) of the Code.

Substantially Disproportionate Redemption . A U.S. holder's exchange of common stock for cash in the Reverse Stock Split generally will be "substantially disproportionate" with respect to such holder if, among other things, immediately after the exchange (i.e., treating all common stock exchanged for cash in the Reverse Stock Split as no longer outstanding), (i) such holder's percentage ownership of voting stock is less than 80% of such holder's percentage ownership of voting stock immediately before the exchange (i.e., treating all common stock exchanged for cash in the Reverse Stock Split as outstanding), and (ii) such holder owns less than 50% of the total combined voting power of all classes of stock entitled to vote. For purposes of these percentage ownership tests, a holder will be considered as owning common stock owned directly as well as indirectly through application of the constructive ownership rules described above.

Not Essentially Equivalent to a Dividend . In order for a U.S. holder's exchange of common stock for cash in the Reverse Stock Split to qualify as "not essentially equivalent to a dividend", such holder must experience a "meaningful reduction" in its proportionate interest in us as a result of the exchange, taking into account the constructive ownership rules described above. Whether a U.S. holder's exchange of common stock pursuant to the Reverse Stock Split will result in a "meaningful reduction" of such holder's proportionate interest will depend on such holder's particular facts and circumstances. The IRS has indicated in a published ruling that even a small reduction in the proportionate interest of a small minority stockholder (for example, a holder of less than 1%) in a publicly held corporation who exercises no control over corporate affairs may constitute a "meaningful reduction."

Tax Consequences to U.S. Holders Receiving Both Stock and Cash in the Reverse Stock Split

The Reverse Stock Split is expected to be treated as a form of reorganization defined in Section 368(a)(1)(E) of the Code as a recapitalization. Under Section 354 of the Code, generally no gain or loss will be recognized if stock in a corporation that is a party to a reorganization is exchanged solely for stock. Under Code Section 356, if Section 354 would apply but for the fact that the property received consists not only of stock but other property such as money, then gain must be recognized in an amount not in excess of the non-stock consideration received. A loss may not be recognized. The gain or loss is generally measured share by share, and depends upon the holder's basis in each share. If the distribution of "boot" has the effect of a distribution of a dividend, then the gain is treated as a dividend. To determine whether the gain is to be treated as a dividend, the stockholder hypothetically first assumes he received stock equal to the amount of "boot" received. Then the stockholder is hypothetically deemed to cause that stock to be redeemed.

The hypothetical redemption is tested under the three Section 302 tests described above. For those holders whose percentage interest in the Company is enhanced or not materially diminished, the gain will be treated as a dividend. For those holders whose interest is substantially diminished under the Section 302 tests, the gain is treated as arising out of a sale of stock. The basis in the stock received is the same as the adjusted tax basis the holder had immediately prior to the Reverse Stock Split decreased by the amount of money received and increased by the amount treated as either gain or a dividend. Where in a reorganization one share is received in exchange for more than one share, the basis in the shares surrendered must be allocated to the basis in the shares received. The holding period is to be the same as the holding period the holder had immediately prior to the Reverse Stock Split.

It is also possible based on certain administrative guidance that U.S. holders who receive both stock and cash in the Reverse Stock Split may be treated as if they received all stock in the tax-free reorganization and then redeemed the fractional shares in a separate redemption transaction.  However, we believe that the tax treatment outlined in the immediately preceding paragraph is more likely to apply to the Company's Reverse Stock Split.

Based on Treasury Regulation Section 1.301-1(l), it is possible, even though the Reverse Stock Split is viewed as a reorganization, for the cash received to be viewed as a dividend independent of the reorganization followed by or preceded by the exchange of stock for stock in a tax-free reorganization. Each stockholder is urged to consult its own tax advisor as to the application of these rules to such stockholder under its particular circumstances.

Information Reporting and Backup Withholding

A U.S. holder may be subject to information reporting with respect to any cash received in exchange for a fractional share interest in a new share in the Reverse Stock Split. U.S. holders who are subject to information reporting and who do not provide a correct taxpayer identification number and other required information (e.g., by submitting a properly completed IRS Form W-9 or an applicable IRS Form W-8) may also be subject to backup withholding at a rate of 28%. Any amount withheld under such rules is not an additional tax and may be refunded or credited against the U.S. holder's U.S. federal income tax liability, provided that the required information is properly furnished in a timely manner to the Internal Revenue Service.

Vote Required

The affirmative vote from holders of a majority of the outstanding shares of Common Stock as of the Record Date is required for the approval of the Reverse Stock Split under Proposal No. 1.  Unless marked to the contrary, proxies received will be voted FOR approval of a 1-for-1,000 Reverse Stock Split. In each case where a majority of votes entitled to be cast is required to approve a proposal (including under Proposal No. 1), abstentions and broker non-votes will have the same effect as votes against the proposal,

Recommendation of the Board

The Board unanimously recommends that the stockholders vote FOR the Reverse Stock Split under Proposal No. 1.