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 September 30, 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 common stock outstanding as of November 19, 2004
was 19,483,352.
Table of Contents
Part I. Financial Information
Item 1. Financial Statements (unaudited) 2
Consolidated Balance Sheets as of September 30, 2004 (unaudited)
and December 31, 2003 3
Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 2004 and 2003 (unaudited) 4
Consolidated Statement of Shareholders' Equity for the Nine
Months Ended September 30, 2004 (unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 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 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 22
Signatures 23
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 September 30, 2004 (unaudited), and
December 31, 2003
(2) Consolidated Statements of Operations for the Three Months and Nine
Months ended September 30, 2004 and 2003 (unaudited)
(3) Consolidated Statement of Shareholders' Equity for the Nine Months
ended September 30, 2004 (unaudited)
(4) Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 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
September 30, 2004
(unaudited) December 31, 2003
------------------ -------------------
ASSETS:
Investments in real estate under development $ 17,942,688 $ 34,629,956
Investments in real estate held for sale 47,308,624 44,551,722
Cash and cash equivalents 9,412,715 10,701,188
Fixed assets, net 131,936 --
Other assets, net 224,861 1,504,472
------------------ -------------------
Total assets $ 75,020,824 $ 91,387,338
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Unsecured notes payable $ -- $ 4,692,517
Secured notes payable 3,185,000 3,185,000
Accrued expenses and other 394,662 235,551
Payable to manager -- 121,577
------------------ -------------------
Total liabilities 3,579,662 8,234,645
SHAREHOLDERS' EQUITY:
Preferred stock: par value $0.01, 0
and 40,000,000 shares authorized at
September 30, 2004 and December 31,
2003, respectively: 0 and 22,229,739
shares issued and outstanding at
September 30, 2004, and December 31,
2003, respectively -- 225,142,861
Common stock: par value $0.01, 50,000,000
shares authorized; 19,483,352 and
100 shares issued and outstanding at
September 30, 2004, and December
31, 2003, respectively 217,517,218 1
Accumulated dividends and distributions (90,621,455) (90,621,455)
Accumulated deficit (55,454,601) (51,368,714)
------------------ -------------------
Total shareholders' equity 71,441,162 83,152,693
------------------ -------------------
Total liabilities and shareholders' equity $ 75,020,824 $ 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 Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------------ ------------------ ------------------ ------------------
REVENUES:
Income from completed real estate development $ 300,748 $ 3,984,006 $ 2,527,574 $ 8,218,106
Income from legal settlements 132,000 -- 501,000 --
Interest income 31,933 -- 95,562 --
Other 103,214 28,053 131,001 44,317
------------------ ------------------ ------------------ ------------------
Total revenues 567,895 4,012,059 3,255,137 8,262,423
------------------ ------------------ ------------------ ------------------
EXPENSES:
Salaries expense 227,013 -- 576,596 --
Facilities expense 61,439 -- 251,425 --
Legal and accounting expense 329,898 124,173 1,413,818 394,384
Insurance expense 80,363 82,623 224,672 240,545
General, administrative and other expense 56,016 22,960 171,086 106,299
Depreciation expense 8,547 -- 17,094 --
REO expense 71,421 300,127 276,672 431,841
Internalization transition expenses 10,394 -- 444,066 --
Management fees -- 896,095 639,698 3,120,171
Provision for impairment of investments in real estate 516,134 2,208,575 3,325,897 16,577,672
------------------ ------------------ ------------------ ------------------
Total expenses 1,361,226 3,634,553 7,341,024 20,870,912
------------------ ------------------ ------------------ ------------------
Net (loss) income (793,331) 377,506 (4,085,887) (12,608,489)
Preferred stock dividends and distributions -- (2,623,555) -- (10,489,238)
------------------ ------------------ ------------------ ------------------
Net loss allocable to common $ (793,331) $ (2,246,049) $ (4,085,887) $ (23,097,727)
================== ================== ================== ==================
$ (0.12) $ (22,460) $ (1.92) $ (230,977)
Basic and diluted net loss per common share
Basic and diluted weighted-average shares outstanding 6,353,334 100 2,133,303 100
The accompanying notes are an integral part of these statements
4
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months and nine months ended September 30, 2004
(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
Repurchase of Preferred
Stock (2,746,487) (7,625,644) -- -- -- -- (7,625,644)
Conversion of Preferred
Stock (19,483,252) (217,517,217) 19,483,252 217,517,217 -- -- --
Net loss -- -- -- -- -- (4,085,887) (4,085,887)
-------------- -------------- -------------- ------------- -------------- -------------- --------------
Shareholders' equity at
September 30, 2004 -- $ -- 19,483,352 $217,517,218 $(90,621,455) $ (55,454,601) $ 71,441,162
============== ============== ============== ============= ============== =============== ==============
The accompanying notes are an integral part of these statements
5
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Nine Months
Ended Ended
September 30, 2004 September 30, 2003
------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,085,887) $ (12,608,489)
Adjustments to reconcile net loss to net cash provided by
(used in) operations;
Depreciation expense 17,094 --
Provision for impairment of investments in real estate 3,325,897 16,577,672
Increase (decrease) in accrued expenses and other 159,111 (3,983)
(Decrease) in payable to manager (121,577) (356,182)
-------------------- ---------------------
Net cash (used in) provided by operating activities (705,362) 3,609,018
-------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (149,030) --
Decrease (increase) in other assets, net 1,279,611 (9,401)
Cash received from loan payments -- 4,695,000
Proceeds from investments in real estate under development and
property held for sale 24,615,230 46,841,782
Investments in real estate under development and property held for
sale (14,010,761) (19,382,070)
-------------------- ---------------------
Net cash provided by investing activities. 11,735,050 32,145,311
-------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Preferred Stock (7,625,644) (346,502)
Adjustment for dividend reinvestment -- (94,330)
Issuance of unsecured notes payable -- 476,679
Repayment of unsecured notes payable (4,962,517) (8,660,053)
Payments on secured notes payable -- (4,508,000)
Payments on secured line of credit, net -- (14,431,132)
Payment of preferred stock dividends -- (11,800,156)
-------------------- ---------------------
Net cash used in financing activities (12,318,161) (39,363,494)
-------------------- ---------------------
Net decrease in cash and cash equivalents (1,288,473) (3,609,165)
Beginning cash and cash equivalents 10,701,188 4,394,107
-------------------- ---------------------
Ending cash and cash equivalents $ 9,412,715 $ 784,942
==================== =====================
Cash paid for interest, net of amounts capitalized of $49,988 and
$1,163,628, for the nine months ended September 30, 2004 and 2003,
respectively $ -- $ --
==================== =====================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Reinvested Preferred Stock dividends $ -- $ 1,499
==================== =====================
Interest accrued on unsecured notes payable $ 4,264 $ 53,588
==================== =====================
The accompanying notes are an integral part of these statements
6
BELLAVISTACAPITAL, 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). On October 7, 2003 our Board
of Directors voted to withdraw our REIT election effective for the tax year
beginning January 1, 2004. The Company changed its name to BellaVista Capital,
Inc. on April 28, 2004. We are engaged in the business of investing in
residential real estate development. 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. All but one of the properties
securing repayment of our 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 and the collateral securing our 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. Detailed risk factors are set forth in
the Company's Annual Report on Form 10-K filed April 14, 2004.
7
BELLAVISTACAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying unaudited financial statements present the financial position
of the Company as of September 30, 2003 (unaudited), and December 31, 2002, and
the results of operations and cash flows of the Company for the three months and
nine months ended September 30, 2003 and 2002. In the opinion of management, the
accompanying unaudited financial statements contain all adjustments (consisting
of only normal accruals) necessary to present fairly the financial position and
results of operations of the Company as of September 30, 2003 and for the
periods then ended.
Use of Estimates
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
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 includes capitalized interest costs but 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.
8
BELLAVISTACAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
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 temporary
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 may
result in tax savings to the company. The Company has established a full
valuation allowance against these net operating loss carry forwards and future
tax deductions because of the possibility that the carry forwards 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. On September 1, 2004
our Preferred Stock converted to common stock according to the provisions of our
supplemental articles of incorporation. 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 September 30,
2004 and 2003 are the same and are 6,353,334 and 100 shares, respectively.
9
BELLAVISTACAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVESTMENTS IN REAL ESTATE UNDER DEVELOPMENT:
We have made ADC loans with maturity dates generally ranging from 12 to 18
months. As of September 30, 2004 we had five ADC loans outstanding which are
described below.
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 2503 11.50% 12/1/05 7,725,000 5,423,292 134,522 1,582,725 3,975,089
Loan 2504 11.50% 12/1/05 8,765,000 6,144,729 160,684 1,373,894 4,931,520
Loan 2517 21.00% 8/4/05 4,135,000 2,159,865 113,833 -- 2,273,698
Loan 2523 8.00% 8/4/05 11,000,000 5,747,951 14,277 -- 5,762,228
Loan 2524 10.00% 11/12/06 1,300,000 1,000,000 153 -- 1,000,153
---------------- ---------------- ---------------- ---------------- ----------------
Total $ 32,925,000 $ 20,475,837 $ 423,470 $ 2,956,619 $ 17,942,688
================ ================ ================ ================ ================
Loan 2503 - This loan is secured by an approximately 8,300 square foot home in
Carmel, California. The $7,075,000 loan matured on June 1, 2004 and was extended
to December 1, 2004. The amount of the loan was also increased by $650,000 to
$7,725,000. The entire amount of increase provided for interest reserve with no
additional funds available to the borrower. As of September 30, 2004 we had
$131,708 remaining to fund on our commitment for the non-interest portion of the
loan. The property has been sold and escrow is currently expected to close in
early December.
Loan 2504 - This loan is secured by an approximately 7,900 square foot home in
Carmel, California. The $7,950,000 loan matured on June 1, 2004 and was extended
to December 1, 2004. The amount of the loan was also increased by $815,000 to
$8,765,000. The entire amount of increase provided for interest reserve with no
additional funds available to the borrower. As of September 30, 2004, we had
$110,271 remaining to fund on the non-interest portion of our commitment. The
property has been sold and escrow is currently expected to close in early
December.
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 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 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. As of September
30, 2004 we had $3,952,049 remaining to fund on the non-interest portion of our
loan commitment.
Loan 2524 - This $1,300,000 loan is secured by a third deed of trust on a 10.3
acre parcel in Colorado Springs, Colorado which will comprise 148 condominium
units. The loan is junior to a deed of trust in the amount of $2,392,000 and a
revolving deed of trust totaling $4,000,000, both in favor of Ohio Savings Bank.
The note was issued on May 12, 2004, bears interest at 10%, which is accrued and
payable at the loan's maturity date, November 12, 2006. The note provides for
additional interest equal to 3% of the gross sales price of each completed
condominium unit. We have no additional funding requirement on the non interest
portion of our commitment.
10
BELLAVISTACAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. INVESTMENT IN REAL ESTATE HELD FOR SALE:
As of September 30, 2004, we or our wholly-owned subsidiaries held title to 14
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:
Estimated
Carrying
Amount Funded Capitalized Recognized Amount of Costs to
Description (net of payments) Interest Costs Impairment Property Complete
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Property 2216 $ 11,645,488 $ 559,082 $ 2,145,617 $ 10,058,952 $ 23,530,441
Property 2368 2,479,219 77,040 -- 2,556,259 487,718
Property 2396 2,497,455 99,696 813,805 1,783,345 358,216
Property 2407 1,091,990 69,015 -- 1,161,005 --
Property 2423 5,583,015 262,555 675,569 5,170,000 --
Property 2442 4,943,372 242,264 275,952 4,909,684 --
Property 2443 -- -- -- -- --
Property 2455 11,385,287 382,842 5,417,299 6,350,830 417,076
Property 2462 7,356,044 292,503 4,536,487 3,112,059 83,941
Property 2465 208,423 13,076 -- 221,499 --
Property 2468 2,441,106 97,569 -- 2,538,675 364,577
Property 2492 3,467,853 104,592 665,388 2,907,057 37,180
Property 2506 4,446,399 45,382 548,236 3,943,545 553,197
Property 2518 3,430,951 213,163 1,048,399 2,595,714 3,420,286
------------------ ------------------ --------------------------------------------------------
Total $ 60,976,599 $ 2,458,778 $ 16,126,753 $ 47,308,624 $ 29,252,632
================== ================== ========================================================
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 September 30, 2004 the project was underway with grading and installation of
site improvements.
Property 2423 - This property is an approximately 4,200 square foot home in
Belvedere, California. We received title to the property through foreclosure on
September 29, 2004. As of September 30, 2004 the home was complete but needs to
be cleaned before the property can be properly marketed.
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 December 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
November 2004.
Property 2407 - This property originally consisted of 6 subdivided and improved
lots in San Rafael, California. Two of the lots closed escrow on September 24,
2004. The purchasor of the two lots has an option to purchase the remaining four
lots. The option expires on November 28, 2004 but may be extended in six month
increments until May 4, 2006 with further option payments.
Property 2442 - This property is an approximately 10,000 square foot home in
Atherton, California. As of September 30, 2004 the property was under contract
for sale with escrow scheduled to close in late October. Subsequent to September
30, 2004 the property closed escrow under the terms of the contract.
11
BELLAVISTACAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Property 2443 - This project originally consisted 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. On August 27, 2004 two of the three lots
closed escrow. As of September 30, 2004 the remaining lot was under contact with
escrow scheduled to close in November 2004.
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 November 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 2462 - This project is an approximately 7,000 square foot home in
Saratoga, California. The project has completed construction and was under
contract to sell as of September 30, 2004. Subsequent to September 30, 2004 the
property closed escrow according to the terms of the contract.
Property 2468 - This property is an approximately 4,000 square foot home in
Tiburon, California. We received title to the property through foreclosure on
September 29, 2004. As of September 30, 2004 construction was not complete and
we were in the process of engaging a contractor to complete construction.
Property 2492 - This is an approximately 4,500 square foot home in Portola
Valley, California. The property is complete and was listed for sale in April
2004.
Property 2506 - This project is an approximately 6,400 square foot home in
Hillsborough, California. The property is currently under construction and we
expect the home to be complete and ready for sale in November 2004.
Property 2518 - This property is an approximately 6,400 square foot home in
Tiburon, California. We received title to the property through foreclosure on
September 29, 2004. The property is in an uncompleted state of construciton. We
are currently evaluating our options with this property.
5. SHAREHOLDERS' EQUITY:
We have authorized 50,000,000 shares of capital stock with a $0.01 par value;
Prior to September 1, 2004 40,000,000 shares were designated Class A Convertible
Preferred (Preferred Stock), and 10,000,000 shares were designated as common. On
September 1, 2004 our Preferred Stock converted to common stock in accordance
with the terms of the articles authorizing the Preferred Stock. As a result of
the conversion all 50,000,000 authorized shares are now common shares of which
19,483,352 were outstanding at September 30, 2004.
We sold our Preferred 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 September
30, 2004 we did not have an active private placement.
6. 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 nine months ended September 30, 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.
12
BELLAVISTACAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 internal 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 a transition
period that ended on March 19, 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 nine months ended September 30, 2004. We have
also agreed to compensate Ms. Fox for her assistance in recovery of legal
actions we have brought against some of our former borrowers. 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 an 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 and nine months ended September 30, 2004, the portfolio
management fees earned by our Manager were $0 and $639,698 compared with
$896,095 and $3,120,171 for the three months and nine months ended September 30,
2003.
Real Estate Sales Commissions
We paid real estate sales commissions of $0 and $331,550 during the three months
and nine months ended September 30, 2004 to Primecore Properties, Inc., compared
with $489,900 and $725,500 during the three months and six months ended June 30,
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.
7. COMMITMENTS AND CONTINGENCIES:
Leases
We are obligated to make payments under certain office and equipment leases.
During the three months and nine months ended September 30, 2004 we recognized
$66,587 and $148,176 expense for such leases compared to none during the three
months and nine months ended September 30, 2003. As of September 30, 2004 our
future minimum annual lease payments under operating leases was as follows:
13
BELLAVISTACAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Year
Amount
2004 (Remaining three months) 66,587
2005 26,348
2006 22,534
2007 14,039
-----------------
Total 129,508
=================
Litigation
From time to time, we may and have become subject to litigation in connection
with our business. In addition, as of September 30, 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 September 30, 2004, and in which it was believed at
September 30, 2004 that potential liability could be material 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., JAMS Arbitration No. 1100041879. Approximately 35 shareholders,
holding approximately 1,260,000 shares of Preferred Stock,
approximately 5% of the Preferred shares of the Company, filed a
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. An
arbitration hearing is currently scheduled for December 1, 2004. The
Company believes the claims are without merit and believes that it has
strong and viable defenses. As any such matter involves uncertainty and
the risk of an adverse outcome regardless of the merits of the case,
the Company will continue to consider such alternative courses of
action as it deems necessary to protect the interests of the Company
and all its shareholders.
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. The claims alleged a failure to fund draw requests. The
Court thereafter granted summary judgment in favor of the Company on
all claims except a claim under Bankruptcy Code Sec. 544 and 548. On
November 2, 2004, the Company entered into a settlement agreement,
subject to Bankruptcy Court approval, under which the Company will pay
$75,000 in settlement of all claims.
3. BellaVista Capital v. Agustin Rosas-Maxemin, et. al., San Mateo
Superior Court No. 439577. On May 26, 2004, the Company brought suit
against the principals of a former borrower and their affiliated
entities relating to the misappropriation and diversion of loan funds
for improper purposes. The misappropriation and diversion was first
discovered in the course of a bankruptcy proceeding, in which one of
the defendants admitted that he had fraudulently prepared invoices
in the name of third party contractors, and forged endorsements on
checks written by the Company to the third party contractors. The
Company seeks to recover all of the misappropriated funds, and has
alleged damages presently believed to exceed $1,000,000. The Company
has not reflected any potential recovery in its financial statements.
In response to the Complaint, one of the defendants filed a
Cross-Complaint alleging that misrepresentations were made to him in
connection with loans made by the Company. The Cross-Complaint seeks
unspecified damages. The Company believes the Cross-Complaint is
without merit, intends to vigorously defend against the claims, and
believes that it has strong and viable defenses.
14
BELLAVISTACAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Wagner v. 99 Investors, LLC, et. al., San Mateo Superior No. CIV
436762. This lawsuit was served on or about March 30, 2004 by the
purchaser of a home against 99 Investors, LLC, a subsidiary of the
Company. The home was sold to plaintiffs by 99 Investors in or around
March 2000. The Complaint alleges that there are defects in
construction including faulty framing and faulty soil treatment,
resulting in movement and property damage. The Complaint contains
claims against 99 Investors, the seller, Pacific Peninsula Group, Inc,
the builder, and Harlan Tait Associates, the soils engineer. The
Company tendered the matter to its insurance carrier at the time for
defense and indemnity, and the insurer accepted defense subject to a
reservation of rights. At the present time, the Company believes the
Complaint is without merit as against 99 Investors, intends to
vigorously defend against the claims, and believes that it has strong
and viable defenses. In addition, the Company currently believes that
in the event of any recovery by the plaintiff, the amount of the claim
should be covered by insurance.
In addition to the above matters, at September 30, 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 four payments of $100,000 were received on March 2, 2004, April
2, 2004, June 1, 2004, and August 30, 2004, and a payment of $650,000
was received on October 29, 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 borrower stipulated to judgment in the amount of $750,000,
which judgment has been entered. 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 on two loans. The matter
was set for trial on September 13, 2004. However, prior to trial, the
defendants entered into a stipulation for settlement. Under the terms
of the settlement, the Company is entitled to a judgment of $6 million
if the defendants do not make periodic payments totaling $4 million in
accordance with a fixed schedule. The settlement will not be reflected
in the financial statements until payments are received, as collection
is not reasonably assured. To date, the defendants timely made, on
September 15 and October 8, 2004, two payments totaling $100,000.
4. A lawsuit to collect against the principals of a former borrower
relating to the misappropriation and diversion of loan funds for
improper purposes. The Company seeks to recover all of the
misappropriated funds, and has alleged damages presently believed to
exceed $1,000,000. The Company has not reflected any potential recovery
in its financial statements. In addition, in the same lawsuit, the
Company seeks to recover approximately $900,000 as usurious interest
paid by the Company to another lender on the project in order to
protect the Company's security interest.
15
BELLAVISTACAPITAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Construction Contracts
In connection with our development of investments in real estate held for sale,
we, or our subsidiaries, have entered into contracts with construction companies
totaling $24,120,885 to complete these projects. 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 as well as certain
other monetary guarantees of payment. The total amount of the surety bonds
issued with respect to which we have issued indemnity agreement is $310,139. 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.
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
After concentrating our efforts on internalizing management during the first
three months of 2004, we turned our attention to developing our new business
during the six months ended September 30, 2004. During this period we searched
property listings, attended industry conferences and contacted real estate
brokers and industry professionals in an effort to make new contacts. With these
new contacts we generated a list of dozens of development projects seeking
financing. From the date of our last filing to the date of this filing we had
approved two new investments totaling approximately $6.2 million with fundings
scheduled before the end of 2004. In addition as of the date of this filing we
were negotiating terms or analyzing investment opportunities totaling another
$27 million.
We have been making progress toward the completion and sale of our
non-performing investments. We currently have 18 investments, 15 of which are
16
not earning income and are therefore non-performing. These non-performing
investments, which were all originated in 2001 or earlier, currently represent
approximately 72% of our net realizable assets.
Since our last filing we have sold five properties, one of which has closed
escrow, at prices of $0.45 million; $3.52 million; $4.5 million; $5.6 million;
and $5.65 million. In each case the sale price was at or slightly above the
price we used to estimate our June 30, 2004 net asset value. We currently have
five properties under sales contracts with escrows scheduled to close by early
December. An additional four properties are on the market for sale and eight are
in the construction stage with all but two expected to complete construction
before the end of the year.
The performing portion of our invested assets, representing approximately 15% of
our portfolio, and which include our investments in Colorado Springs and San
Mateo, is currently accruing income, which we believe will be collectible, at
13% of the invested assets. As we continue to originate new investments, this
performing portion of our invested assets will increase as a percentage of our
total capital.
Results of Operations
Revenue
During the three months and nine months ended September 30, 2004 we reported
income from real estate developments of $300,748 and $2,527,574 from our
investments compared with $3,984,006 and $8,218,106 for the three months and
nine months ended September 30, 2003, respectively. Our revenues decreased as a
result of the decrease in the amount of loan repayments during the comparable
periods and the impairment of the investments that were closed.
Realizable Value of Investments
For financial statement purposes, we do not report the interest and points we
charge to borrowers as income 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 estimate we
will 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.
September 30, 2004 December 31, 2003
------------------- ------------------
Investments in real estate under development $ 17,942,688 $ 34,629,956
Investments in real estate held for sale 47,308,624 44,551,722
------------------- ------------------
Total investments in real estate per US GAAP 65,251,312 79,181,678
Add: GAAP impairments 19,083,372 26,436,565
Accrued interest and points 25,306,639 38,360,634
Less: Capitalized interest (2,882,248) (4,633,962)
------------------- ------------------
Balance owed on real estate investments 106,759,075 139,344,915
Amount estimated uncollectible (32,553,113) (54,162,649)
------------------- ------------------
Realizable value of investments in real estate $ 74,205,962 $ 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 and sell 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 that 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.
17
Net Realizable Value of Assets per Share
We have attempted to provide liquidity to our shareholders through the
repurchase of outstanding shares. Because our stock does not trade in any
secondary market, another method must be used to determine the value in order to
set the repurchase price. Under its current repurchase policy, the Board has
concluded 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
net realizable value of our stock at September 30, 2004 and December 31, 2003
for purposes of our redemption policy only:
September 30, 2004 December 31, 2003
------------------- ------------------
Cash $ 9,412,715 $ 10,701,188
Other assets 356,795 1,504,470
Realizable value of investments in real estate 74,205,962 85,182,266
------------------- ------------------
Total realizable assets 83,975,472 97,387,924
Total liabilities (3,579,662) (8,234,645)
------------------- ------------------
Net realizable assets 80,395,810 89,153,279
Shares outstanding 19,483,352 22,229,739
------------------- ------------------
Net realizable assets per share $ 4.13 $ 4.01
=================== ==================
The net realizable value of assets per share calculated above is not intended to
reflect the amount a shareholder would receive upon liquidation of the company.
The calculation of net realizable assets per share does not take into account
operating expenses, which would be incurred during the period of time necessary
to complete and liquidate all of the company's assets, nor does it include the
carrying costs of real estate owned. In addition, liquidation of the company
would require establishment of reserves for contingent liabilities, such as
litigation, which could be substantial.
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.
During the three months ended September 30, 2004, the expense items that had
historically comprised our management fee expenses (salaries, facilities and
general, administrative and other) were $344,468 compared with management fees
of $896,095 during the three months ended September 30, 2003. These expenses
during the nine months ended September 30, 2004, including the management fees
paid during the first three months ended March 31, 2004 were $1,638,805 compared
to $3,120,171 in management fee expenses during the nine months ended September
30, 2003. The decease in the comparable expense items is due to the downsizing
of our staff, reduction in our rent and certain other cost savings achieved
through internalization.
Legal and accounting expenses totaled $329,898 and $1,413,818 during the three
months and nine months ended September 30, 2004 compared with $124,173 and
$394,384 during the three months and nine months ended September 30, 2003. Our
legal expenses increased during the three months ended September 30, 2004 as
compared to the three months ended September 30, 2003 as a result of our
engagement of retained counsel, increased litigation activity in connection with
our defense of the lawsuit by certain shareholders and legal counsel in
connection with a proposal for liquidation by certain shareholders. Legal and
accounting expenses increased during the nine months ended September 30, 2004 as
compared to the nine months ended September 30, 2003 due to the factors
mentioned above and, in addition, because they include a $640,000 expense for
settlement of a dispute over the amounts due under construction contracts to
build two of our REO properties.
We recorded a provision for impairment of $516,134 and $3,325,897 during the
three months and nine months ended September 30, 2004 compared with $2,208,575
and $16,577,672 during the three months and nine months ended September 30,
2003. The impairments recorded during the three and nine months ended September
30, 2004 resulted from the following factors: the decision to sell one of our
18
REO properties as land rather than to complete contruction and list the property
for sale; unanticipated costs needed to complete two REO properties; and revised
values applied to particular properties which were deemed impaired due to micro
market conditions.
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
new and existing loan commitments and operating expenses.
During the nine months ended September 30, 2004 we collected proceeds of
approximately $27.1 million from our investments, including income of
approximately $2.5 million. With those proceeds we invested $1 million in new
investments; $13.0 million toward completing our existing investments, used
approximately $4.7 million to pay down our debt and another $7.6 million to
repurchase our stock at an average price of $2.78 per share. As of September 30,
2004 we had completely retired our unsecured debt and held cash reserves of $9.4
million.
Sources of cash
As of September 30, 2004 our primary source of liquidity was the repayment of
our investments in real estate. We 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 securing
repayment 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 18 investments
held at September 30, 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
$ 20,579,680
Investments offered for sale 8,836,000
Investments under construction scheduled
to be complete and on the market:
Q4 2004 17,907,000
Q1 2005 14,058,221
Q2 2005 20,029,208
Q3 2005 16,066,652
Q4 2005 216,430
Q1 2006 216,430
Q2 2006 202,001
Unknown 9,541,000
-------------------
Total $ 107,652,623
===================
Investments with unknown completion dates have recently been repossessed and we
are in the process of acertaining their current permit status. It is possible,
though unlikely, 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 we receive 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 in 2004, 2005 and 2006, without taking into account new investments
that may be originated:
19
Obligation Total 2004 2005 2006
----------------------------- ----------------- ---------------- ---------------- ---------------
Investment fundings $ $ 9,661,997 $ 23,771,783 --
33,433,780
Secured note payable 3,185,000 -- 3,185,000 --
Lease obligations 115,469 66,587 26,348 22,534
----------------- ---------------- ---------------- ---------------
Total $ 36,734,249 $ 9,728,584 $ 26,983,221 22,534
================= ================ ================ ===============
Investment fundings are our largest use of our cash. At September 30, 2004 we
estimated costs to complete investments in our portfolio were approximately
$33.4 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
September 30, 2004 as we continue to make and fund new loan commitments in 2004
and beyond.
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 2005.
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.
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
20
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.
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.. Detailed risk factors are set
forth in the Company's Annual Report on Form 10-K filed April 14, 2004.
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, 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 deficiencies, in the aggregate, do not
constitute material weaknesses in the system of internal controls.
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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. Unregistered Sales of Equity SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS 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
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 Financial Officer pursuant to 18 U.S.C Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
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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: November 22, 2004 /s/ MICHAEL RIDER
-------------------------
Michael Rider, President and
Chief Financial Officer
23