UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-30507
BellaVista Capital, Inc.
(Exact name of registrant as specified in its charter)
Maryland 94-3324992
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
99 El Camino Real
Menlo Park, CA 94025
(Address of principal offices) (zip code)
(650) 328-3060
(Registrant's telephone number, including area code)
Primecore Mortgage Trust, Inc.
99 El Camino Real Menlo Park, CA 94025
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The number of shares of convertible preferred stock outstanding as of March
31, 2004 was 22,229,739. The number of shares of common stock outstanding as of
March 31, 2004 was 100.
28
Table of Contents
Part I. Financial Information
Item 1. Financial Statements (unaudited).................................. 2
Consolidated Balance Sheets as of March 31, 2004 (unaudited) and
December 31, 2003................................................. 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 2004 and 2003 (unaudited)............................... 4
Consolidated Statement of Shareholders' Equity for the Three Months
Ended March 31, 2004 (unaudited).................................. 5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2004 and 2003 (unaudited)............................... 6
Notes to the Consolidated Financial Statements (unaudited)........ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 23
Item 4. Controls and Procedures.......................................... 24
Part II. Other Information
Item 1. Legal Proceedings................................................ 24
Item 2. Changes in Securities and Use of Proceeds........................ 24
Item 3. Defaults Upon Senior Securities.................................. 24
Item 4. Submission of Matters to a Vote of Security Holders.............. 25
Item 5. Other Information................................................ 25
Item 6. Exhibits and Reports on Form 8-K................................. 25
Signatures....................................................... 26
1
Part I. Financial Information
Item 1. Financial Statements
Attached are the following unaudited financial statements of BellaVista
Capital, Inc., formerly known as Primecore Mortgage Trust, Inc. (the "Company"):
(1) Consolidated Balance Sheets as of March 31, 2004 (unaudited), and
December 31, 2003
(2) Consolidated Statements of Operations for the Three Months ended March
31, 2004 and 2003 (unaudited)
(3) Consolidated Statement of Shareholders' Equity for the Three Months
ended March 31, 2004 (unaudited)
(4) Consolidated Statements of Cash Flows for the Three Months ended March
31, 2004 and 2003 (unaudited)
(5) Notes to Consolidated Financial Statements (unaudited)
The financial statements referred to above should be read in
conjunction with the Company's audited financial statements for the year ended
December 31, 2003 as filed with the Securities and Exchange Commission in our
Annual Report on Form 10-K filed April 14, 2004.
2
BELLAVISTA CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2004
(unaudited) December 31, 2003
------------------ -------------------
ASSETS:
Investments in real estate under development $ 34,500,768 $ 34,629,956
Investments in real estate held for sale 40,757,269 44,551,722
Cash and cash equivalents 10,776,480 10,701,188
Fixed assets, net 149,030 --
Other assets, net 1,156,416 1,504,472
------------------ -------------------
Total assets $ 87,339,963 $ 91,387,338
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Unsecured notes payable (including $0 and $280,000 to a director at March
31, 2004 and December 31, 2003, respectively) $ 930,058 $ 4,692,517
Secured notes payable 3,185,000 3,185,000
Accrued expenses and other 1,649,668 235,551
Payable to manager -- 121,577
------------------ -------------------
Total liabilities 5,764,726 8,234,645
SHAREHOLDERS' EQUITY:
Preferred stock: par value $0.01, 40,000,000 shares authorized; 22,229,739
shares issued and outstanding at March 31, 2004, and December 31, 2003,
respectively 225,142,861 225,142,861
Common stock: par value $0.01, 10,000,000 shares authorized; 100 shares
issued and outstanding at March 31, 2004, and December 31, 2003,
respectively 1 1
Accumulated dividends and distributions (90,621,455) (90,621,455)
Accumulated deficit (52,946,170) (51,368,714)
------------------ -------------------
Total shareholders' equity 81,575,237 83,152,693
------------------ -------------------
Total liabilities and shareholders' equity $ 87,339,963 $ 91,387,338
================== ===================
The accompanying notes are an integral part of these statements
3
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Three Months
Ended Ended
March 31,2004 March 31,2003
--------------- ---------------
REVENUES:
Income from completed real estate
development $ 1,372,634 $ 2,797,671
Income from legal settlements 210,000 --
Interest income 35,105 --
Other 17,772 16,157
--------------- ---------------
Total revenues 1,635,511 2,813,828
--------------- ---------------
EXPENSES:
Salaries expense 21,838 --
Facilities expense 88,423 --
Legal and accounting expense 864,928 170,582
Insurance expense 72,154 80,995
REO expense 124,419 59,038
Internalization transition expenses 429,435 --
Management fees 639,698 1,127,933
Provision for impairment of investments
in real estate 927,480 763,059
General, administrative and other 44,592 82,021
--------------- ---------------
Total expenses 3,212,967 2,283,628
--------------- ---------------
Net (loss) income (1,577,456) 530,200
Preferred stock dividends and distributions -- (3,930,392)
--------------- ---------------
Net loss allocable to common (1,577,456) (3,400,192)
=============== ===============
Basic and diluted net loss per common share $ (15,775) $ (34,002)
=============== ===============
Basic and diluted weighted-average shares
outstanding 100 100
=============== ===============
The accompanying notes are an integral part of these statements
4
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 2003
(unaudited)
Preferred Stock Common Stock
--------------------------------- -----------------
Accumulated
Dividends
and Accumulated
Shares Amount Shares Amount Distributions Deficit Total
--------------- ----------------- -------- -------- ----------------- ---------------- -----------------
Shareholders' equity at
December 31, 2003. 22,229,739 $225,142,861 100 $ 1 $ (90,621,455) $ (51,368,714) $ 83,152,693
Net loss -- -- -- -- -- (1,577,456) (1,577,456)
--------------- ----------------- -------- -------- ----------------- ---------------- -----------------
Shareholders' equity at
March 31, 2004. 22,229,739 $225,142,861 100 $ 1 $ (90,621,455) $ (52,946,170) $ 81,575,237
=============== ================= ======== ======== ================= ================ =================
The accompanying notes are an integral part of these statements
5
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Three Months
Ended Ended
March 31, 2003 March 31, 2003
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,577,456) $ 530,200
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operations;
Provision for impairment of investments in real estate 927,480 763,059
Increase in accrued expenses and other 1,414,117 523,841
Decrease in payable to manager (121,577) (268,501)
Decrease in other assets, net 348,056 36,610
-------------------- --------------------
Net cash provided by (used in) operating activities 990,620 1,585,209
-------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (149,030) --
Proceeds from investments in real estate under development and
property held for sale 8,164,027 15,151,522
Investments in real estate under development and property held for (5,163,602) (7,678,637)
-------------------- ---------------------
Net cash provided by investing activities. 2,851,395 7,472,885
-------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Adjustment for dividend reinvestment -- (94,330)
Issuance of unsecured notes payable -- 250,000
Repayment of unsecured notes payable (3,766,723) (2,770,370)
Payments on secured line of credit, net -- (6,835,573)
Payment of preferred stock dividends -- (3,931,045)
-------------------- ---------------------
Net cash used in financing activities (3,766,723) (13,381,318)
-------------------- ---------------------
Net increase (decrease) in cash and cash equivalents 75,292 (4,323,224)
Beginning cash and cash equivalents 10,701,188 4,394,107
-------------------- ---------------------
Ending cash and cash equivalents $ 10,776,480 $ 70,883
==================== =====================
Cash paid for interest, net of amounts capitalized of $84,817 and
$553,757, for the three months ended March 31, 2004 and 2003,
respectively $ -- $ --
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Interest accrued on unsecured notes payable $ 4,264 $ 24,818
==================== =====================
The accompanying notes are an integral part of these statements
6
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BUSINESS:
Organization
The Company, formerly known as Primecore Mortgage Trust, Inc., a Maryland
corporation, was formed on March 18, 1999 and commenced operations effective May
1, 1999 as a real estate investment trust (REIT). The Company changed its name
to BellaVista Capital, Inc. on April 28, 2004. On October 7, 2003 our Board of
Directors voted to withdraw our REIT election effective for the tax year
beginning January 1, 2004. We are engaged in the business of investing in
residential real estate developments. We are organized in a single operating
segment for purposes of making operating decisions and assessing performance.
Prior to December 31, 2003, we were managed by Primecore Funding Group, Inc., at
the time an affiliated California corporation located in Menlo Park, California.
Consolidated Entities
The Company is the sole member of the following limited liability companies
whose operations are consolidated with these financial statements:
99 Investors, LLC - This entity owns real property in Atherton,
California which is being developed into a single family home.
Sands Drive San Jose, LLC - This entity owns real property in San Jose,
California which is being developed into 72 condominiums .
Risk Factors
General Economic Conditions in Lending Areas. Properties securing repayment of
the mortgage loans are located in the San Francisco Bay Area, with the majority
in the counties of Santa Clara and San Mateo. Since the properties secured by
the mortgage loans are located in a limited geographical region, these mortgage
loans may be subject to a greater risk of delinquency or default if the
industries concentrated there suffer adverse economic or business developments.
Realization of Assets. The Company's liquidity and ability to meet its
obligations as they become due are subject to, among other things, its ability
to obtain timely repayments of its ADC loans and sales of its investments in
real estate held for sale. In the event that repayments are not sufficient to
timely meet our commitments, we may be forced to reduce prices on properties we
control in order to expedite their repayment. In such cases, the amount of
proceeds received could be substantially less than what we would have expected
if we allowed a proper marketing period for the property. This would have a
negative impact on the estimated net realizable value of our assets and would
force the Company to adopt an alternative strategy that may include actions such
as seeking additional capital with unfavorable terms. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Other. In addition, we are subject to other significant business and financial
risks, including but not limited to liquidity, the prevailing market for
residential real estate, interest rates, timely completion of projects, lack of
borrower diversification, and potential environmental matters relating to
properties on which we have made loans.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
7
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Valuations of investments in real estate include management's
best estimates of the amounts expected to be realized on the sale of its
investments. The estimates are based on an analysis of the properties, including
certain inherent assumptions and estimates that are involved in preparing such
valuations. The amounts the Company will ultimately realize could differ
materially in the near term from these estimates.
Investments in Real Estate under Development
We have originated loans to Acquire, Develop and Construct (ADC) residential
real estate ("ADC loans"). Our loans contain many of the following
characteristics which are identified with ADC loans:
1. The lender has agreed to provide all or substantially all necessary funds
to acquire, develop or construct the property. The borrower has title to
but little or no cash equity in the project;
2. The lender funds substantially all the interest and fees during the term of
the loan by adding them to the loan balance;
3. Typically, the lender's only security is the project itself. The lender has
no recourse to other assets of the borrower,
and the borrower does not guarantee the debt;
4. In order for the lender to recover its investment in the project, the
property must be sold to independent third parties or the borrower must
obtain refinancing from another source.
Because our loans contain many of the characteristics of ADC Loans they are
classified for financial reporting purposes as investments in real estate under
development (Note 3). Revenue from interest and points is recognized as cash is
received from the sale or refinancing of such properties. Investments in real
estate under development include amounts funded under the loan agreements and
capitalized interest expense. If our ADC loans qualified as loans under US GAAP,
interest and points would be recognized in income as earned instead of at the
time of sale of the underlying property.
Such investments are stated at the lower of cost or fair value. Management
conducts a review for impairment on an investment-by-investment basis whenever
events or changes in circumstances indicate that the carrying amount of an
investment may not be recoverable. Impairment is recognized when estimated
expected future cash flows (undiscounted and without interest charges),
typically from the sale of a completed property, are less than the carrying
amount of the investment, which does not include accrued interest and points.
The estimation of expected future net cash flows is inherently uncertain and
relies to a considerable extent on assumptions regarding current and future
economic and market conditions. If, in future periods, there are changes in the
estimates or assumptions incorporated into the impairment review analysis, the
changes could result in an adjustment to the carrying amount of the investments.
To the extent an impairment has occurred, the excess of the carrying amount of
the investment over its estimated fair value, less estimated selling costs, will
be charged to operations.
Investments in Real Estate Held for Sale
We may take title to property through foreclosure or by deed in lieu of
foreclosure when a borrower defaults on our ADC loan. Such properties are termed
real estate owned (REO) and are accounted for in a manner similar to our
investments in real estate under development. Interest income for tax purposes
is not accrued on investments in real estate held for sale.
Consolidation Policy
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
8
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Cash and Cash Equivalents
Cash and cash equivalents include cash held in financial institutions and other
highly liquid short-term investments with original maturities of three months or
less.
Income from Completed Real Estate Development
We recognize income from our ADC loans and REO properties as costs are
recovered, generally upon the sale or refinancing of the underlying completed
real estate to or by a third party. No interest income or points are recognized
until the financed property is sold or refinanced. We compute income as the
difference between cash received from the sale or refinancing of the property
and the carrying value of the investments at the date of repayment.
Income Taxes
Our taxable income differs from income measured in accordance with generally
accepted accounting principles in the United States of America due to timing
differences in the recognition of income from our ADC loans. For tax purposes,
interest and points are accrued as income according to the terms of our loan
contracts, but not recognized under generally accepted accounting principles in
the United States of America until the contract has been paid through sale or
refinancing of the secured property.
As of December 31, 2003 we had generated a net operating loss of approximately
$45 million from the disposition of impaired assets in our portfolio. The
ability to use this net operating loss to offset future taxable income would
result in tax savings to the company. The Company has established a full
valuation allowance against these net operating loss carryforwards and future
tax deductions because of the possibility that the carryforwards may expire
unused and that future tax deductions may not be realized through future
operations.
Net Loss Per Share of Common Stock
Per share amounts for our common stock are computed using the weighted average
common shares outstanding during the period. Net loss used in the calculation is
increased by declared dividends to preferred shareholders and net income is
decreased by declared dividends to preferred shareholders. There are currently
no stock options or other dilutive common stock equivalents, and as a result,
the basic and diluted weighted average common shares outstanding for the
quarters ended March 31, 2004 and 2003 are the same and are 100 shares.
3. INVESTMENTS IN REAL ESTATE UNDER DEVELOPMENT:
We have made ADC loans with maturity dates generally ranging from 12 to 18
months. As of March 31, 2004 we had nine ADC loans outstanding which are
described below.
9
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Final Face Amount Funded Carrying
Interest Maturity Amount (net of Capitalized Recognized Amount of
Description Rate Date of Mortgages payments) Interest Costs Impairment Mortgages
- ------------------------ ------------- ----------------- ---------------- ----------------- ----------------- ----------------
Loan 2423 16.50% 12/1/03 $ 7,300,000 $ 5,430,208 $ 262,555 $ 159,436 $ 5,533,327
Loan 2442 16.00% 8/1/03 7,000,000 4,802,550 242,264 275,952 4,768,861
Loan 2468 16.50% 12/31/03 3,775,000 2,333,527 96,808 -- 2,430,334
Loan 2503 11.50% 6/1/04 7,075,000 5,181,607 133,349 1,582,725 3,732,230
Loan 2504 11.50% 6/1/04 7,950,000 5,866,963 159,232 1,373,894 4,652,301
Loan 2506 13.00% 12/1/03 3,500,000 4,122,998 44,250 548,236 3,619,012
Loan 2517 21.00% 8/4/05 4,135,000 2,159,866 113,136 -- 2,273,001
Loan 2518 11.50% 11/1/03 9,400,000 3,430,904 212,108 201,344 3,441,668
Loan 2523 8.00% 8/4/05 11,000,000 4,037,038 12,996 -- 4,050,034
----------------- ---------------- ----------------- ----------------- ----------------
Total $ 61,135,000 $ 37,365,661 $ 1,276,698 $ 4,141,587 $ 34,500,768
================= ================ ================= ================= ================
Loan 2423 - This $7,300,000 loan bears interest at 16.50%, was due on December
1, 2003 and is secured by an approximately 4,200 square foot home in Belvedere,
California. The home is complete and on the market for sale and we have no
further obligation to fund additional amounts toward the loan. We are currently
in negotiations with the borrower to attempt to resolve the default under the
loan; if negotiations are unsuccessful in the near term, we will commence
foreclosure proceedings.
Loan 2442 - This $7,000,000 loan bears interest at 16.00%, was due on August 1,
2003 and is secured by an approximately 10,000 square foot home in Atherton,
California. On December 16, 2003 we recorded a notice of default for this loan
and subsequent to March 31, 2004 took title to this property through
foreclosure. Although the property has completed construction, we have estimated
an additional $119,139 in costs for landsaping and repairs will be necessary to
properly market the property for sale.
Loan 2468 - This $3,775,000 loan bears interest at 16.50%, was due on December
31, 2003 and is secured by an approximately 4,000 square foot home in Tiburon,
California. As the loan is currently past due we are reviewing our alternatives
with respect to this property. We are currently in negotiations with the
borrower to attempt to resolve the default under the loan; if negotiations are
unsuccessful in the near term, we will commence foreclosure proceedings. Because
the loan is in default, the current accrual rate of interest on the loan is
21.5% which is 500 basis points above its note rate. As long as the default is
not cured, we have no obligation to fund the remaining obligation of $479,287
remaining on the non interest portion of our commitment. Construction is ongoing
and we currently expect the home to be complete and ready for sale in July 2004.
Loan 2503 - This loan is secured by an approximately 8,300 square foot home in
Carmel, California. The $7,075,000 loan matures on June 1, 2004 and as of March
31, 2004 we had an additional $373,393 commitment remaining to fund for the non
interest portion of the loan. Because the estimated completed value of the
property is not sufficient to fully repay the loan, we are not currently
accruing interest on the loan. Construction is ongoing and we currently expect
the home to be complete and ready for sale in May 2004.
Loan 2504 - This loan is secured by an approximately 7,900 square foot home in
Carmel, California. The $7,950,000 loan matures on June 1, 2004 and as of March
31, 2004, we had an additional $385,037 commitment remaining to fund for the non
interest portion of the loan. Because the estimated completed value of the
property is not sufficient to fully repay the loan, we are not currently
accruing interest on the loan. Construction is ongoing and we currently expect
the home to be complete and ready for sale in April 2004.
Loan 2506 - This $3,500,000 loan is secured by an approximately 6,400 square
foot home in Hillsborough, California. On December 16, 2003 we recorded a notice
of default for this loan and subsequent to March 31, 2004 took title to this
property through foreclosure. As long as the default is not cured, we have no
obligation to fund the $883,098 remaining on the non interest portion of our
loan commitment, however, we have elected to continue funding the loan in order
to keep the construction in progress. We expect the home to be complete and
ready for sale in September 2004.
10
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Loan 2517 - This $4,135,000 loan is secured by a second deed of trust on 17
condominiums totaling approximately 31,500 square feet in San Mateo, California.
Our deed of trust is subordinate to our $11.0 million construction deed of
trust, Loan 2523. This note was issued on May 24, 2002, the proceeds of which
were used to acquire the property and provide funds for obtaining development
approvals, and was modified on August 3, 2003 as part of the agreement to
provide an additional $11.3 million for funds needed to construct the
condominiums. The note bears interest at 21%, which is accrued and payable
August 4, 2005, the loan's maturity date. We have fully funded the non interest
portion of our commitment.
Loan 2518 - This $9,400,000 loan is secured by a deed of trust on an
approximately 6,400 square foot home in Tiburon, California. This note was
issued on July 29, 2002, the proceeds of which were used to acquire the property
and provide funds for construction, bears interest at 11.5% and matured on
November 1, 2003. Because the estimated completed value of the property is not
sufficient to fully repay the loan, we are not currently accruing interest on
the loan. The loan is in default and we are currently reviewing our options with
regard to this loan. We estimate approximately $3,420,332 will be needed to
complete this property. Construction on the property was halted after framing
and there is no construction activity currently associated with the property; we
are currently in negotiations with the borrower to attempt to resolve the
default under the loan. If negotiations are unsuccessful in the near term, we
will commence foreclosure proceedings.
Loan 2523 - This $11,000,000 loan is secured by a first deed of trust on 17
condominiums totaling approximately 31,500 square feet in San Mateo, California.
The note was issued on August 4, 2003, the proceeds of which will be used for
construction of the condominiums. The note bears interest at 8.00%, which is
accrued and payable August 4, 2005, the loan's maturity date. On February 27,
2004 we modified this loan by reducing the interest rate from 16.00% and
decreasing the loan amount to $11,000,000 from $11,300,000 which reflects a
decrease in our interest reserve due to the reduction in our interest rate. As
of December 31, 2003 we had $5,662,962 remaining to fund on the non interest
portion of our loan committment.
4. INVESTMENT IN REAL ESTATE HELD FOR SALE:
As of March 31, 2004, we or our wholly-owned subsidiaries held title to 13
properties which we received through foreclosure, by deed in lieu of
foreclosure, or as a result of an agreement dated October 17, 2002, pursuant to
which all membership interests in 99 Investors, LLC were transferred to us. The
properties are described below:
Carrying Estimated
Amount Funded Capitalized Recognized Amount of Costs to
Description (net of payments) Interest Costs Impairment Property Complete
- --------------------- ------------------ ------------------ ------------------- ------------------ -----------------
Property 2216 $ 8,902,383 $ 556,568 $ 2,145,617 $ 7,313,333 $ 24,500,000
Property 2345 4,168,413 189,228 -- 4,357,641 121,533
Property 2368 1,912,416 76,401 -- 1,988,816 1,134,230
Property 2396 2,233,478 99,209 813,805 1,518,882 619,526
Property 2407 2,226,598 69,015 -- 2,295,613 --
Property 2443 685,683 34,890 -- 720,573 1,504,579
Property 2446 1,191,422 81,133 675,655 596,900 --
Property 2455 10,634,952 381,054 5,417,299 5,598,707 1,167,411
Property 2462 7,114,649 291,275 3,501,260 3,904,665 325,335
Property 2465 208,423 13,076 -- 221,499 --
Property 2473 6,601,754 415,304 1,417,876 5,599,182 --
Property 2492 3,371,752 104,592 665,388 2,810,956 126,611
Property 2498 6,906,890 346,720 3,423,110 3,830,502 --
------------------ ------------------ ------------------- ----------------- ------------------
Total $ 56,158,813 $ 2,658,465 $ 18,060,010 $ 40,757,269 $ 29,499,225
================== ================== =================== ================= ==================
11
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Property 2216 - This is an approximately 8 acre parcel which has been approved
for development of 72 townhomes and condominiums totaling approximately 123,372
square feet in San Jose, California. We have contracted with an outside party to
provide development and construction management services for this property. As
of March 31, 2004 we were waiting to secure our grading permit in order to begin
work on the project. We currently anticipate breaking ground in May 2004.
Property 2345 - This is an approximately 7,000 square foot home in the Pacific
Heights neighborhood of San Francisco, California. It is currently under
construction and is expected to be complete and on the market in May 2004.
Property 2368 - This is an 8 unit condominium project totaling approximately
6,100 square feet in the South of Market area of San Francisco, California. The
units are loft style condominiums which are popular in that area of the city.
The project is currently under construction and is expected to be complete and
on the market in September 2004.
Property 2396 - This is a 2 unit condominium project totaling approximately
4,450 square feet on Russian Hill in San Francisco, California. The project is
currently under construction and is expected to be complete and on the market in
June 2004.
Property 2407 - This property consists of 6 subdivided and improved lots in San
Rafael, California. The lots are approved, subject to design review, for 6
single family homes. We currently intend to sell the lots either singly or in
bulk. The property was under contract to sell, however the buyer failed to
perform. As of March 31, 2004 we were negotiating another sale with interested
parties.
Property 2443 - This project consists of 3 lots for the construction of single
family homes averaging approximately 4,000 square feet each. Two of the homes
had started foundation work before construction was halted while we pursued our
foreclosure action. No work had commenced on the third home prior to beginning
our foreclosure action. We currently intend to sell the properties in their
existing condition.
Property 2446 - This project is designed to be an approximately 5,500 square
foot home in unincorporated Santa Clara County adjacent to the city limits of
Los Gatos. The project design has been approved and we are currently working
with our architect to produce construction drawings. Subsequent to March 31,
2004 we entered into a contract to sell the property in its existing condition.
The contract is ratified pending close of escrow.
Property 2455 - This project is an approximately 8,850 square foot home in
Atherton, California. The project is under construction and we currently
estimate it will be complete and ready for sale in August 2004.
Property 2462 - This project is an approximately 7,000 square foot home in
Saratoga, California. The project is under construction and we currently
estimate it will be complete and ready for sale in May 2004.
Property 2465 - This project is an approximately 8,900 square foot lot in
Oakland, California. Construction had not started prior to our foreclosure
action. We currently plan to sell the property in its existing condition and
have listed it for sale.
Property 2473 - This project is an approximately 13,000 square foot home in
Pebble Beach, California. The property is approved for development but no
construction has taken place on the property. In March 2004 we entered into a
contract to sell this property. As of March 31, 2004 the contract is ratified
pending close of escrow.
Property 2492 - This is an approximately 4,500 square foot home in Portola
Valley, California. The property is complete an was listed for sale in April
2004.
12
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Property 2498 - This project is an approximately 11,000 square foot house in
Atherton, California. The home had started construction before work was halted
while we pursued our foreclosure action. We currently intend to sell the
property in its existing condition and at December 31, 2003 the property was
under contract for sale pending close of escrow. Subsequent to December 31, 2003
we extended the close of escrow for this property in order to correct damage
which occurred as a result of water intrusion. Subsequent to March 31, 2004, the
repairs were completed and the sale closed escrow.
5. NOTES PAYABLE:
We had unsecured borrowings of $919,000 at March 31, 2004 compared with
$4,648,765 at December 31, 2003 on notes issued to accredited investors through
private placements. These notes have varying maturities of up to two years from
the date of issuance and bear interest at fixed rates between 10.00 and 12.0
percent with interest payable monthly in arrears. As of March 31, 2004, we
estimate that the carrying amounts of our notes payable approximate their fair
value based on current borrowing rates available to us.
Additionally, at March 31, 2004, we had $11,058 due on a note payable to a
financial institution to finance the cost of our insurance policies compared
with $43,752 at December 31, 2003. The note bears interest at 8.770% and
requires monthly payments of $11,138.
All of our notes payable at March 31, 2004 will mature by December 31, 2004.
6. SHAREHOLDERS' EQUITY:
We have authorized 50,000,000 shares of capital stock with a $0.01 par value;
40,000,000 shares are designated Class A Convertible Preferred (Preferred
Stock), and 10,000,000 shares are designated as common.
At March 31, 2004 and December 31, 2003, there were 100 shares of common stock
outstanding.
The 22,229,739 shares of Preferred Stock outstanding as of March 31, 2004 and
December 31, 2003, rank senior to our common stock as to dividends and
liquidation rights. The shares are convertible into, and have voting rights
equal to, the same number of shares of our common stock. We will not pay any
dividends to the holders of the common stock so long as any Preferred Stock is
outstanding.
Holders of our Preferred Stock do not have a right to redeem their shares. Our
Board of Directors has adopted a stock redemption policy for Preferred
shareholders who wish to sell their shares to us. The policy may be modified or
terminated at the Board's discretion at any time. Under this policy we will
repurchase shares, at fair market value, as determined by our Board of
Directors, utilizing 25% of "free cash flow" for such purposes. "Free cash flow"
means the total of all proceeds from repayments of loans and all net proceeds
from the sale of real-estate-owned properties in the Company's portfolio during
a Repurchase Period, and then subtracting from such total amounts due during the
same period for (i) existing loan commitments, (ii) debt payments to third
parties, (iii) dividend or other distributions to shareholders, and (iv)
operating expenses. The periods between October 1 and March 31 of the following
year, and April 1 and September 30 are each a "Repurchase Period" for the
purposes of calculating "free cash flow". Redemption of shares is always subject
to availability of funds for redemption purposes. All redemption requests will
be determined and acted upon in accordance with the best interests of the
Company. We will not sell or otherwise liquidate any portion of our mortgage
loan portfolio or other assets to fund a redemption request. There were no stock
repurchases during the three months ended March 31, 2004.
We sold our stock through private placements and have closed five private
placements since our inception, issuing 26,161,438 shares at $10.00 per share.
We used the proceeds from issuance of our Preferred Stock primarily to fund
additional ADC loans and also for working capital purposes. As of March 31, 2004
we did not have an active private placement.
13
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
7. TRANSACTIONS WITH AFFILIATES:
Prior to March 19, 2004, we had the following affiliates all of which were owned
by Susan Fox, who, prior to such date was the President, CEO and a Director of
the Company: Primecore Funding Group, Inc; 99 El Camino Partners, LLC; Primecore
Properties, Inc. During the three months ended March 31, 2004, Primecore Funding
Group, Inc. received management fees from us, and Primecore Properties, Inc.
received real estate commissions in connection with the sale of certain REO
properties in situations where it acted as the listing broker. 99 El Camino
Partners, LLC owns the building, that we began leasing on January 1, 2004.
On December 19, 2003 our Board of Directors voted not to renew the management
agreement with Primecore Funding Group effective December 31, 2003 and
transitioned to internalized management during the first three months of 2004.
On December 23, 2003 we entered into an agreement, effective January 1, 2004
with Primecore Funding Group to provide management services during the
transition period concluding on March 31, 2004.
On March 19, 2004, Susan Fox resigned as President, Chief Executive Officer and
Director of Primecore Mortgage Trust, Inc. Ms. Fox was retained as a consultant
to the Company for a period of 12 months in order to assist with any issues that
occur in connection with the transition of management. For her services she will
be paid $30,000 per month. We have recognized all 12 monthly payments due under
the contract as expense during the three months ended March 31, 2004. We have
also agreed to compensate Ms. Fox for her assistance in recovery of legal
actions we have brought on some of our former developers. Our agreement with her
provides that she will receive 5% of any sums we collect from such legal
proceedings. Additionally, we purchased certain furniture, computer equipment
and software from her company, Primecore Funding Group, for $200,000. Finally,
we have entered into a agreement to lease the premises at 99 El Camino Real, a
property owned by 99 El Camino Partners, LLC, a limited liability company in
which Susan Fox is the sole member, through December 31, 2004 at a monthly rate
of $25,000 through June 30, 2004 and then decreasing to $20,000 per month
through December 31, 2004. The agreement also provides that we will pay for real
estate taxes, insurance and maintenance associated with the building.
As of March 19, 2004, none of these entities are affiliates of the Company and,
as of the date of this filing, except as discussed in this Note 7, we have no
business relationships with these entities.
Management Fees
For the three months ended March 31, 2004, the portfolio management fees earned
by our Manager were $639,698 compared with $1,127,933 for the three months ended
March 31, 2003.
Real Estate Sales Commissions
We paid real estate sales commissions of $102,550 during the three months ended
March 31, 2004 to Primecore Properties, Inc., compared with $194,600 during the
three months ended March 31, 2003. The commissions were paid for services
provided by Primecore Properties under listing agreements to sell property
acquired by us through foreclosure or deed in lieu of foreclosure.
14
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
8. COMMITMENTS AND CONTINGENCIES:
Leases
We are obligated to make payments under certain office and equipment leases.
During the three months ended March 31, 2004 we recognized $75,000 expense for
such leases compared to none during the three months ended March 31, 2003. As of
March 31, 2004 our future minimum annual lease payments under non-cancelable
operating leases was as follows:
Year Amount
- ---- ------
2004 (Remaining nine months) 214,761
2005 26,348
2006 22,534
2007 14,039
--------------------
Total 277,682
====================
Litigation
From time to time, we may and have become subject to litigation in connection
with our business. In addition, as of March 31, 2004, we were involved in
several litigation matters that are considered to be out of the ordinary course
of business. The following is a list of non-routine litigation (i.e. suits other
than mechanic's lien lawsuits or similar lawsuits in which the Company becomes
involved from time to time due to its status as a lender) in which the Company
was involved as party, as of March 31, 2004, and in which it is currently
believed that potential liability could each exceed $1 million if the Company is
unsuccessful in its defense, which the Company does not currently believe will
be the case:
1. Baigent, et. al. v. Susan Fox, Primecore Mortgage Trust, Inc., et. al.,
San Mateo Superior Court Action No. 435648. Approximately 35
shareholders, holding approximately 1,260,000 shares of Preferred Stock,
approximately 5% of the Preferred shares of the Company, filed this
lawsuit on November 14, 2003. The lawsuit generally alleges that the
Company, its former Manager, and two former officers failed to disclose
the true risks of the investments made by the plaintiff-shareholders.
The Complaint does not specify the amount of damages being sought. The
Company filed a petition to compel mediation and binding arbitration,
which was granted on January 21, 2004. An initial mediation session was
held on March 31, 2004, which was unsuccessful. Plaintiffs have given
notice of their intent to arbitrate the claims. The Company believes the
lawsuit is without merit, intends to vigorously defend against the
claims, and believes that it has strong and viable defenses.
2. Showplace Square Lofts Company, LLC v. Primecore, et. al., U.S.
Bankruptcy Court (N.D. Cal) No. 02-3157 DM. On June 25, 2002, a borrower
filed a complaint against the Company in connection with its bankruptcy.
Prior to the time that the bankruptcy case and complaint were filed, the
borrower had defaulted under its loan and the Company was proceeding to
enforce its rights through foreclosure. The complaint purported to
assert claims for avoidance of fraudulent transfer, breach of contract,
intentional fraud, negligent misrepresentation, negligence declaratory
relief, breach of fiduciary duty, and unfair business practices. The
Court has granted summary judgment in favor of the Company on all claims
except the claim for transfer in violation of Bankruptcy Code sec. 544.
The Company believes that the lawsuit is wholly without merit. Among
other things, the borrower admitted, in a written agreement signed prior
to the filing of the case, that it had no claims against the Company,
and also provided written releases of any possible claims. The Company
intends to vigorously defend against the claims, and believes that it
has strong and viable defenses.
15
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
3. Bay Area Luxury Homes/Santa Clara 3, LLC v. Primecore, et. al., Bay Area
Luxury Homes/Alameda VI, LLC v. Primecore, et. al., Bay Area Luxury
Homes/Stern VII, LLC v. Primecore, et. al., U.S. Bankruptcy Court
(N.D. Cal.). Three limited liability companies that are under the
control of two individuals, both of whom are being sued by Primecore for
over $5 million under written guarantees that they signed, filed this
series of cases. On or around March 31, 2004, two of the debtor
companies converted their bankruptcies to liquidation bankruptcies
under Chapter 7 of the Bankruptcy Code. It is possible that the cases
might be dismissed by the Chapter 7 trustee since he or she will not
have the vested interest that the borrowers had in trying to pursue the
claims, which the Company believes are without merit. Among other
things, the borrowers all admitted, in written agreements signed prior
to the filing of the cases, that they had no claims against the Company,
and also signed written releases of any possible claims. If the cases
are pursued, the Company intends to vigorously defend against the claims
asserted and believes that it has strong and viable defenses.
4. Amoroso, et. al. v. Primecore Mortgage Trust, et. al, San Mateo Superior
Court. The Complaint, filed by 20 shareholders holding a total of
627,322 shares of Preferred Stock, approximately 3% of the shares of
Preferred Stock of the Company, is nearly identical to the Baigent
lawsuit discussed above. The Company believes the lawsuit is without
merit, intends to vigorously defend against the claims, and believes
that it has strong and viable defenses. Plaintiffs and the Company have
agreed to mediate, and, if necessary, arbitrate the disputes between
plaintiffs and the Company.
In addition to the above matters, at March 31, 2004, the Company was involved in
several lawsuits in which it sought recovery from borrowers, guarantors, and
others. The actions included the following:
1. A lawsuit filed in connection with a loan made on a subdivision project
in Marin County. While the Company had written off the loan
approximately two years ago, it was felt that legal avenues existed to
seek recovery on the loan. The Company filed suit and entered into a
settlement with the key defendants in February 2004. Under the
settlement, the Company is entitled to receive $2,300,000 in payments of
varying amounts to be made over a 17-month term, beginning in March
2004. In the event that the payments are not made when due, the Company
has a right to obtain a stipulated judgment. If and when payments are
received, the payments will be reflected in income. The settlement will
not be reflected in the financial statements until payments are
received, as collection is not reasonably assured. The first payment of
$100,000 was received on March 2, 2004, and the second payment of
$100,000 was received on April 2, 2004. In addition, the Company
obtained a settlement from a co-defendant in the amount of $110,000,
which amount has been paid.
2. A lawsuit to judicially foreclose upon and obtain a deficiency judgment
from a borrower in connection with a loan made on a property in Palo
Alto. The Company obtained the property from the borrower as part of a
settlement, and, subsequent to December 31, 2003, sold the property. In
addition, the borrower has agreed to stipulate to judgment in the amount
of $750,000. The prospect of collection of the judgment is not
reasonably assured, therefore,if and when payments are received, the
payments will be reflected in income. No potential recovery is currently
reflected in the financial statements.
3. A lawsuit to collect against two guarantors of indebtedness. The Company
is seeking approximately $7.5 million in damages. The matter is
currently set for trial on September 13, 2004.
16
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Construction Contracts
In connection with our development of investments in real estate held for sale,
we have entered into contracts with construction companies totaling $260,117 to
complete these projects where necessary. We will make payments on these
contracts as construction progresses in much the same manner we do for our
investments in real estate under development.
Guarantees
We have issued indemnity agreements to insurance companies in connection with
the sale of certain of our REO properties. The indemnity agreements were
provided in order to induce the insurance companies to issue surety bonds
covering mechanics liens recorded against properties we owned. The total amount
of the surety bonds issued with respect to which we have issued indemnity
agreement is $1,274,674. We believe that we have remedies against the mechanics
lien claims and that we will not become liable for their payment as such, no
amounts have been accrued in the financial statements in connection to these
liens.
General Uninsured Losses
We require that our borrowers carry comprehensive liability, fire, flood,
extended coverage, and rental loss insurance with policy specifications, limits,
and deductibles customarily carried for similar properties. We also carry
insurance to cover losses in case a borrower's policy lapses. Additionally, we
carry insurance on investments in real estate held for sale. There are, however,
certain types of extraordinary losses that may be either uninsurable or not
economically insurable. Further, all of our investments are located in areas
that are subject to earthquake activity, and we generally do not require our
borrowers to maintain earthquake insurance. Should an investment sustain damage
as a result of an earthquake, we may incur losses due to insurance deductibles,
co-payments on insured losses, or uninsured losses. Should an uninsured loss
occur, we could lose our investment in, and anticipated profits and cash flows
from an investment.
9. SUBSEQUENT EVENTS
Subsequent to March 31, 2004, we agreed to pay $640,000 to settle a dispute with
a contractor on two projects that were constructed for our subsidiary, 99
Investors, lLC. We have recognized $640,000 in legal expense during the three
months ended March 31, 2004 for this liability.
On April 28, 2004 the Company changed its name to Bellavista Capital, Inc. from
Primecore Mortgage Trust, Inc.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General Our material financial transactions have been purchasing and holding a
portfolio of construction mortgage loans, and the construction and sale of real
estate acquired through foreclosure or deed in lieu of foreclosure. Statements
contained in this Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in this Form 10-K, which are
not historical facts, may be forward-looking statements. Such statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Investors are cautioned not to attribute undue
certainty to these forward-looking statements, which speak only as of the date
of this Form 10-K. We undertake no obligation to publicly release any revisions
to these forward-looking statements to reflect events or circumstances after the
date of this Form 10-K or to reflect the occurrence of unanticipated events,
other than as required by law.
Overview
During the three months ended March 31, 2004 we focused our efforts on the
transition to internal management. Our Chief Executive Officer, Susan Fox,
resigned on March 19, 2004 and Michael Rider, our Chief Financial Officer was
named President and Chief Executive Officer. We hired the employees necessary to
manage our operations and secured office space through the end of 2004 and
purchased necessary furniture and computer equipment. Additionally, we secured a
new name, BellaVista Capital, which will help to identify our business as a
provider of real estate capital as distinguished from a mortgage REIT.
We also continued the process of completing and liquidating our current non
performing portfolio of assets. During the three months ended 2004 we closed
five investments totaling proceeds of approximately $9.5 million. During this
period we also sold our REO property in Pebble Beach. The property is expected
to close escrow in May 2004. We continued to make progress toward completing
construction of our ADC Loans and REO properties, funding approximately $5.2
million in construction costs, and had two properties complete construction in
April.
Additionally, we began work on our 72 unit project in San Jose which is being
developed in our wholly owned subsidiary, Sands Drive San Jose, LLC. We selected
an experienced development team to guide the project through construction and
sell out. We are expecting to break ground in May 2004 and have the first units
available for sale by the end of the year.
Finally, we began our efforts to seek new investment opportunities. These new
opportunities have been obtained primarily through existing relationships.
During the first three months of 2004 we reviewed a number of new opportunities
and provided letters of interest on a few. We are in the process of negotiating
those deals, and managed to agree to terms and receive Board of Director
approval in April to proceed with one new investment of approximately $1
million. We expect to implement our marketing plan during the second quarter as
we have now secured our new name and have begun to develop our marketing
materials. With the implementation of our marketing plan we expect to generate
substantially greater deal flow.
Results of Operations
Revenue
During the three months ended March 31, 2004 we reported income from real estate
developments of $1,372,634 from closing five of our investments compared with
$2,797,670 for the three months ended March 31, 2003, respectively. Our income
decreased during the three months ended March 31, 2004 compared to the three
months ended March 31, 2003 as a result of the decrease in the amount of loan
repayments during the comparable periods. Income from real estate developments
is a function of the amount of collections we receive from our investments and
our repayments during the three months ended March 31, 2004 were 54% of the
amount received during the three months ended March 31, 2003.
18
Realizable Value of Investments
For financial statement purposes, we do not report as income the amount of
interest and points we charge to borrowers until we collect it. To the extent we
believe we will collect it, the amount of interest and points we charge
borrowers is added to the balance due on our loans for purposes of this
calculation. As the values of the collateral supporting payment of our loans
have declined, the ability to collect our accrued interest and points has, in
many cases, become doubtful. Management includes the amount of collectible
interest and points we are entitled to receive when it sets prices for redeeming
our stock. The information presented below summarizes that analysis and
reconciles the differences between US GAAP and the estimated realizable value of
our investments.
March 31, December 31,
2004 2003
--------------- ----------------
Investments in real estate under development $ 34,500,768 $ 34,629,956
Investments in real estate held for sale 40,757,269 44,551,722
--------------- ----------------
Total investments in real estate per US GAAP 75,258,037 79,181,678
Add: GAAP impairments 22,201,596 26,436,565
Accrued interest and points 32,714,934 38,360,634
Less: Capitalized interest (3,935,160) (4,633,962)
--------------- ----------------
Balance owed on real estate investments 126,239,407 139,344,915
Amount estimated uncollectible (43,559,663) (54,162,649)
--------------- ----------------
Realizable value of investments in real estate $ 82,679,744 $ 85,182,266
=============== ================
The realizable value of our investments represents our current estimate of the
amount of proceeds we expect to receive once our investment is completed and
ready for sale. The estimate relies on a number of assumptions including the
expected value of the investment once completed, less applicable selling costs,
the remaining costs required to complete the project and the length of time
required to complete the project. Many factors outside our control can cause
changes in these estimates and produce different results. Additionally, many of
our properties are custom style homes which appeal to a limited high-end market
with few comparable transactions which makes it difficult to project with
certainty the market value of these properties.
Stock Redemption Price
We provide liquidity to our Preferred Stock holders through the repurchase of
outstanding shares. Because our Preferred Stock does not trade in any secondary
market, another method must be used to determine the fair market value in order
to set the repurchase price. The Board has determined that the value of the
stock should be determined with reference to the Net Realizable Value of our
assets. Therefore, in accordance with the resolutions of the Board of Directors,
the following calculation determines the fair market value of our stock at March
31, 2004 and December 31, 2003 for purposes of our redemption policy:
March 31, December 31,
2004 2003
--------------- ----------------
Cash $ 10,776,480 $ 10,701,188
Other assets 1,305,446 1,504,470
Realizable value of investments in real estate 82,679,744 85,182,266
--------------- ----------------
Total realizable assets 94,761,670 97,387,924
Total liabilities (5,764,726) (8,234,645)
--------------- ----------------
Net realizable assets 88,996,944 89,153,279
Preferred shares outstanding 22,229,739 22,229,739
--------------- ----------------
Net realizable assets per share $ 4.00 $ 4.01
=============== ================
Expenses
In the past, all of our day-to-day operations were performed by Primecore
Funding Group, Inc, operating under a written management agreement. Before
January 1, 2004, we did not have any employees, and substantially all of our
operating costs were paid through our management fee. On December 19, 2003 our
Board of Directors voted not to renew our management agreement with Primecore
Funding Group effective December 31, 2003 and we transitioned to internalized
management during the first three months of 2004. The Board believes that this
action will result in greater transparency to the shareholders, increased
accountability of the employees to the Board of Directors and the ability to
better manage company costs. On December 23, 2003 we entered into an agreement,
19
effective January 1, 2004 with Primecore Funding Group to provide management
services during the transition period. This agreement served to provide for a
smooth transition from outside management to our internal management and is
believed to be fair compensation for the services provided.
During the three months ended March 31, 2004, our management fee expense was
$639,698 compared with $1,127,933 during the three months ended March 31, 2003.
The decrease in our management fee expense reflects the revised contract terms
and the transitional aspect of the services that were provided. During this
period we completed our transition from outside management to internal
management and we will therefore have no further management fee expense in
future periods.
We recorded facilities expenses of $88,423 in connection with the costs of
leasing and maintaining our office building. In prior years these costs were
paid by our manager. Our lease provides for monthly payments of $25,000 through
June 30, 2004 and then decreasing to $20,000 per month through December 31,
2004, when the lease expires. We are also responsible for payment of real estate
taxes, insurance and maintenance during the term of our lease. Upon expiration
of the lease we plan to relocate our offices.
Legal and accounting expenses totaled $874,928 during the three months ended
March 31, 2004 compared with $170,582 during the three months ended March 31,
2003. Included in legal expenses is a $640,000 accrual for settlement of a
dispute over the amounts due under contruction contracts to build two of our REO
properties. The remaining increase of approximately $54,000 over the same period
last year is due to an increased amount of legal activities related to
properties with which we are involved. We expect to incur legal expenses at
about the same rate as during the three months ended March 31, 2004 over the
next 18 months as we continue work to resolve our disputes arising out of our
current portfolio of non performing investments.
We incurred $124,419 of expenses related to the acquisition, carrying and
disposal of our REO properties during the three months ended March 31, 2004
compared with $59,038 during three months ended March 31, 2003. The expenses
have increased over the prior period primarily as a result of the increased
carrying costs associated with completed REO properties and the costs to fix
water damage to a property that is under contract to sell. We expect these REO
expenses to decrease as we continue to complete and sell our REO properties.
We recorded a provision for impairment of $927,480 during the three months ended
March 31, 2004 compared with $763,059 during the three months ended March 31,
2003. The impairments resulted from two factors: the decision to sell one of our
REO properties as land rather than to complete contruction and list the property
for sale; and unanticipated costs needed to complete two REO properties.
Liquidity and Capital Resources
Liquidity means the need for, access to and uses of cash. Our principal source
of liquidity is the repayment of our real estate investments. Our principal
demands for liquidity are funds that are required to satisfy obligations under
existing loan commitments, operating expenses, interest expense associated with
our indebtedness and debt repayments.
During the three months ended March 31, 2004 we collected proceeds of
approximately $9.5 million from our investments, including income of
approximately $1.4 million. With those proceeds we invested approximately $5.2
million toward completing our existing investments and used approximately $3.8
million to pay down our debt. As of March 31, 2004 we have almost completely
retired our unsecured debt and expect that our current portfolio of investments
will generate approximately $20 million in cash for new investments during the
remaining nine months of 2004. These investible funds will be in excess of the
cash we estimate that we will need to continue to complete our existing
portfolio of assets.
20
Sources of cash
As of March 31, 2004 our primary source of liquidity was the repayment of our
investments in real estate. We do have the ability to borrow money from various
financial institutions using our REO properties as collateral if we determine
that we need additional liquidity. We do not currently expect that we will have
such a need during the next 12 months.
In order to receive repayment on our investments, the property typically must be
completed and sold to third parties. Accordingly, our repayments are a function
of our developers' ability, or our ability in the case of REO properties, to
complete and sell the properties developed. The following table summarizes our
liquidity expectations for the 22 investments held at March 31, 2004. The
expected proceeds in the table are higher than our net realizable value
estimates because they include our estimated costs to complete.
Expected Proceeds
-------------------
Investments under contract pending
close of escrow $ 10,884,621
Investments offered for sale 18,142,000
Investments under construction scheduled
to be complete and on the market:
Q2 2004 21,291,000
Q3 2004 18,941,000
Q1 2005 20,350,683
Q4 2005 31,813,333
-------------------
Total $ 121,422,637
===================
It is possible that our repayments may not be sufficient to timely meet our
commitments and we may be forced to reduce prices on the properties that we
control in order to expedite their repayment. In such cases, the amount of
proceeds received could be substantially less than what we would have expected
if we allowed a proper marketing period for the property. This would have a
negative impact on the estimated net realizable value of our assets.
Uses of Cash
The following table sets forth the projected timing and amount of our
obligations over the next three years, without taking into account new loans
that may be made in 2004, 2005 and 2006:
Obligation Total 2004 2005 2006
------------------- ------------------ ------------------- --------------------
Investment fundings $ 40,952,473 $ 24,570,015 $ 11,784,242 $ 4,598,216
Short term notes payable 930,058 930,058 -- --
Secured note payable 3,185,000 3,185,000 -- --
------------------- ------------------ ------------------- --------------------
Total $ 45,067,531 $ 28,685,073 $ 11,784,242 $ 4,598,216
=================== ================== =================== ====================
Investment fundings are our largest use of our cash. At March 31, 2004 we
estimated costs to complete investments in our portfolio were approximately
$41.0 million. These amounts will be funded as construction progresses on our
investments. The exact timing of the investment fundings is dependent on several
factors including weather, governmental regulation and developer related issues,
so the timing of investment fundings in the above table is an estimate based on
information available to us at this time. Additionally, we expect the amount of
actual investment fundings to be higher than our obligation existing at March
31, 2004 as we continue to make and fund new loan commitments in 2004 and
beyond.
We have approximately $930,000 in unsecured notes payable at March 31, 2004. In
order to save interest costs, we intend to retire these notes as quickly as
possible.
Our secured note payable is secured by an REO property and is due in 2030,
however it will be repaid upon sale of the property it secures. We currently
expect that property to complete construction and sell during 2004.
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We have a redemption policy for shareholders who wish to sell their shares to
us. The policy may be modified or terminated at the Board's discretion at any
time. Currently, we will repurchase shares, at fair market value, as determined
by our Board of Directors, utilizing 25% of "free cash flow" for such purposes.
"Free cash flow" means the total of all proceeds from repayments of loans and
all net proceeds from the sale of real-estate-owned properties in the Company's
portfolio during a Repurchase Period, and then subtracting from such total
amounts due during the same period for (i) existing loan commitments, (ii) debt
payments to third parties, (iii) dividend or other distributions to
shareholders, and (iv) operating expenses. The periods between October 1 and
March 31 of the following year, and April 1 and September 30 are each a
"Repurchase Period" for the purposes of calculating "free cash flow". Redemption
of shares is always subject to availability of funds and all redemption requests
are acted upon in accordance with the best interests of the Company. We will not
sell or otherwise liquidate any portion of our mortgage loan portfolio or other
assets to fund a redemption request. The following results were achieved during
the Repurchase Period from October 1, 2003 to March 31, 2004:
Six months
Ended
March 31, 2004
-----------------
Cash flow from operations $ 1,294,940
Cash flow from investing activities 14,427,665
Repayments of unsecured notes payable (5,233,377)
Dividends and distributions --
-----------------
Total "Free Cash Flow" 10,489,228
Repurchase percentage 25%
-----------------
Funds presently anticipated to be
available for stock repurchase $ 2,622,307
=================
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations covers our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the 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. On an on-going basis, management evaluates its
estimates and judgments, including those related to the valuation of our assets
and liabilities. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. Management believes the following
critical accounting policies, among others, affect the more significant
judgments and estimates used in the preparation of its consolidated financial
statements.
Valuation and Realizability of Investments. All of our ADC loans are classified
for financial reporting purposes as investments in real estate under development
(see Note 3 to the financial statements). We have foreclosed on some ADC loans
that are classified as investments in real estate held for sale (Note 4). Such
investments include capitalized interest and are stated at the lower of
cost or fair value. Management conducts a review for impairment on an
investment-by-investment basis whenever events or changes in circumstances
indicate that the carrying amount of an investment may not be recoverable.
Impairment is recognized when estimated expected future cash flows (undiscounted
and without interest charges), typically from the sale of a completed property,
are less than the carrying amount of the investment, plus estimated costs to
complete. The estimation of expected future net cash flows is inherently
uncertain and relies to a considerable extent on assumptions regarding current
and future economics and market conditions. If, in future periods, there are
changes in the estimates or assumptions incorporated into the impairment review
analysis, the changes could result in an adjustment to the carrying amount of
the investments. To the extent an impairment has occurred, the excess of the
carrying amount of the investment over its estimated fair value, less estimated
selling costs, will be charged to income. We believe that all of our investments
are carried at realizable values, however conditions may change and cause our
ADC loans to decline in value in a future period.
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Loan Accounting. We have applied the guidance of AICPA Practice Bulletin 1,
Purpose and Scope of AcSEC Practice Bulletins and Procedures for Their Issuance,
Exhibit I in accounting for our investment loans as real estate acquisition,
development, or construction (ADC) arrangements. In accordance with the ADC
accounting rules, we do not accrue income for interest and points on our ADC
loans until the sale or refinancing of a property. Revenue from interest and
points is recognized as cash is received from the sale or refinancing of such
properties. ADC loans are classified as investments in real estate under
development and investments in real estate held for sale (see Notes 3, 4 and 5
to the financial statements) and include amounts funded under the loan
agreements and capitalized interest expense. If our ADC loans qualified as loans
under GAAP, interest and points would be recognized as income in periods prior
to the sale of the underlying property.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
An investment in our stock involves a high degree of risk. Among other things,
some of the principal risks are: the real estate lending business may be
adversely affected by periods of economic slowdown, which may be accompanied by
declining real estate values on properties securing repayment of loans;
construction mortgage loans involve greater risks of repayment than loans
secured by property that has already been improved since completion market
valuation of a given project can be highly speculative and subject to
unanticipated conditions; there is no public market for our securities, and
liquidity is not assured; under our business model, loan commitments will
generally exceed immediately available cash resources, and failure to obtain
repayment of loans in our portfolio, or a failure to maintain sufficient equity
would affect our ability to fund commitments; since we have no employees, if our
manager refused or became unable to continue to serve us, and a proper
replacement were not found, this would materially impact our business.
We make loans at fixed rates of interest. To the extent that prevailing market
interest rates change during the holding period, the value of our loans may be
either adversely or positively affected. When a loan matures, generally within a
12 to 18 month period, it is subject to a new interest rate, determined by us,
based upon current conditions. Since we intend to hold all loans until they are
repaid, we do not believe that changes in market interest rates have a material
impact on the value of the Company.
ITEM 4. CONTROLS AND PROCEDURES.
Within the past 90 days we carried out an evaluation, under the supervision of
Michael Rider, the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, Mr. Rider has concluded that those
controls and procedures were effective in making known to them, on a timely
basis, the material information needed for the preparation of this report on
Form 10-Q. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect those internal controls
since the date of their evaluation.
Reportable conditions involve matters relating to significant deficiencies in
the design or operation of internal controls that, in an auditor's judgment,
could adversely affect a company's ability to record, process, summarize, and
report financial data consistent with the assertions of management in the
financial statements.
Our auditors identified the following two reportable conditions in connection
with their audit of our 2003 Financial Statements: (i) there was a lack of
evidence indicating that journal entries were reviewed and approved by
appropriate finance department personnel as part of the periodic closing
process; and (ii) there were not sufficient personnel in the accounting and
finance department which, the auditors noted, was due in part to the assumption
of additional duties by our CFO after the resignation of our CEO. Our auditors
determined that these significant deficiences, in the aggregate, do not
constitute material weaknesses in the system of internal controls.
The Company is currently seeking a controller for its accounting department who
will be responsible for overseeing accounting functions and reporting to our
Chief Financial Officer which will address these reported conditions.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Refer to Financial Statements Note 8 for a discussion of Legal Proceedings
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not Applicable.
(b) Not Applicable.
(c) Sales of Equity Securities.
Between January 1, 2004 and March 31, 2004, we did not sell any shares of
our Class A Convertible Preferred stock.
(d) Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibits included with this Form 10-Q following the signature page, or those
incorporated by reference to other filings are:
3i.1 Articles of Incorporation of the Company are hereby incorporated herein
by reference from Exhibit 3(i) to the Company's Registration Statement on
Form 10-12G, filed on April 28, 2000
3i.2 Articles Supplementary of the Company are hereby incorporated herein by
reference from Exhibit 99.1 to the Company's Registration Statement on
Form 10-12G, filed on April 28, 2000
3ii.1 Bylaws, Amended March 21, 2000 are hereby incorporated herein by
reference from Exhibit 3(ii) to the Company's Registration Statement on
Form 10-12G, filed on April 28, 2000
3ii.2 Bylaws, Amended March 1, 2001 are hereby incorporated herein by reference
from Exhibit 3ii.2 to the Company's Annual Report on Form 10-K, filed on
March 30, 2001
4.1 Specimen Stock Certificate is hereby incorporated herein by reference
from Exhibit 99.2 to the Company's Registration Statement on Form 10-12G,
filed on April 28, 2000
4.2 Registration Rights Agreement is hereby incorporated herein by reference
from Exhibit 4.1 to the Company's Registration Statement on Form 10-12G,
filed on April 28, 2000
4.3 Founder's Registration Rights Agreement is hereby incorporated herein by
reference from Exhibit 4.2 to the Company's Registration Statement on
Form 10-12G, filed on April 28, 2000
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10.1 Agreement Regarding Affiliate Loans dated November 17, 2002 is hereby
incorporated herein by reference from Exhibit 10.2 on Form 8-K filed on
December 20, 2002
10.2 Amended and Restated Management Agreement dated November 17, 2002 is
hereby incorporated herein by reference from Exhibit 10.1 on Form 8-K,
filed on December 20, 2002
10.3 Letter agreement with Primecore Funding Group, Inc. and Susan Fox is
hereby incorporated herein by reference from the Company's Annual Report
on Form 10-K filed on April 14, 2004
11.1 Statement regarding computation of per share earnings
31.1 Certification of Chief Executive Officer and Chief Financial Officer
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On January 27, 2004 the Company filed a Report on Form 8-K disclosing the
non-renewal of the Management Agreement with Primecore Funding Group, Inc.
On March 22, 2004 the Company filed a Report on Form 8-K disclosing the
resignation of Susan Fox.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 2004 /s/ MICHAEL RIDER
-----------------
Michael Rider, President
and Chief Financial Officer
25