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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2004
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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.)
420 Florence Street Suite 200
Palo Alto, CA 94301
(Address of principal offices)
(650) 328-3060
(Registrant's telephone number, including area code)
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Securities registered under Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
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 [ ] No[X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant is $0.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: 14,991,325 Shares of
Common Stock
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This Annual Report on Form 10-K of BellaVista Capital, Inc. (the "Company")
contains forward-looking statements. All statements other than statements of
historical fact may be forward-looking statements. These include statements
regarding the Company's future financial results, operating results, business
strategies, projected costs and capital expenditures, products, competitive
positions, and plans and objectives of management for future operations.
Forward-looking statements may be identified by the use of words such as "may,"
"will," "should," "expect," "plan," anticipate," "believe," "estimate,"
"predict," "intend" and "continue," or the negative of these terms, and include
the assumptions that underlie such statements. The Company's actual results
could differ materially from those expressed or implied in these forward-looking
statements as a result of various risks and uncertainties, including those set
forth in the section entitled "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations." All forward-looking statements
in this report are based on information available to the Company as of the date
hereof and the Company assumes no obligation to update any such statements.
The following information should be read in conjunction with the Financial
Statements and notes thereto included in this Form 10-K.
PART I
ITEM 1. BUSINESS
Business Focus and Strategies
Organized in 1999 as a real estate investment trust or "REIT," we make and fund
development and construction loans to developers of residential real estate. We
generally invest in for-sale single-family or multi-family subdivision projects,
which are typically structured as construction loans, mezzanine loans, or equity
investments. To date, nearly all of our investments have been made in Northern
California; however, we plan to seek investment opportunities in other areas of
California and neighboring states. We do not engage in any foreign operations or
derive any revenue from foreign operations, and do not intend to do so in the
future. Effective January 1, 2004, we withdrew our REIT status and are now taxed
as a C Corporation.
Most investments are underwritten with maturity dates of up to 24 months, which
dates may be extended when deemed to be in the Company's best interests. Most
investments are secured by recorded deeds of trust on the property being
developed, and title insurance protecting the position of our deeds of trust is
always a pre condition to funding a secured loan. We may also make loans to
development entities or take an ownership interest in the development entity. In
such circumstances wee typically require a shared appreciation interest or other
equity participation. We also may invest our funds directly in real property, if
in the opinion of our Board of Directors it is in our best interest.
All approved investments are subject to detailed legal documentation that has
been formulated by legal counsel for our specific purposes. In addition, our
Board of Directors has implemented specific guidelines for the making of loans
and investments. In accordance with our loan documents, we generally advance the
monthly interest payments out of available loan proceeds, although our loan
documents provide us with a right not to advance or to cease such payments
should it be determined that conditions require such actions. Loan fees, if
charged, are typically advanced out of the loan proceeds with the initial loan
advance. Generally, our loans require the borrower to make a "balloon payment"
equal to the principal amount, advanced interest and fees upon maturity of the
loan. The loan maturity date is the date of sale of the underlying real estate
or the date stated in the loan documents.
Company Management.
Investment Origination. We employ persons skilled in loan underwriting,
disbursement and monitoring, and the various business and legal issues that may
be involved with real estate lending. Our employees, and independent contractors
where appropriate, provide all of the services including but not limited to
underwriting loans and investments, overseeing all loans and investments, and
servicing loans. Our loans and investments are arranged through Eric Hanke,
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Vice-President of Business Development. Mr. Hanke is a licensed California real
estate broker, and performs in such capacity in arranging loans and investments
on our behalf.
Proposed loans and investments are evaluated to determine whether the loan or
investment is of a type typically made by us, whether the developer has the
experience necessary to manage the project, whether the security for the loan
and the loan to value ratio meets our investment standards, and whether the loan
or investment meets investment criteria and objectives set forth by the Board of
Directors. The Board of Directors must approve any loans or investments. We also
require third party appraisals to support valuation of proposed future
investments and for modifying loans.
Collateral valuation. We utilize the experience of our employees, brokers in the
real estate industry, third party appraisals or other information deemed useful
to make assessments of a proposed project's viability and projected value, and
to determine if a proposed investment meets our criteria. In the evaluation
process, emphasis is placed on the ability of the underlying collateral to
protect against losses in the event of default by the borrower. The evaluation
is based on the projected market value of the proposed project, using various
tools, including comparable sales of similar properties and projections of
market appeal and demand at completion. The goal of the underwriting process is
to achieve a comfort level that the projected completion value of the property
will support full repayment of the investment plus the projected rate of return.
Servicing. Investment servicing involves taking all steps necessary to
administer the investment, including monitoring the propriety of funding
requests, monitoring progress of a project and accounting for principal and
income. Where appropriate, we employ an outside agent to monitor construction
progress and draw requests. Loan proceeds are disbursed as construction
progresses, and only after we have received satisfactory documentation. Before
making disbursements of loan proceeds, borrower disbursement requests are
verified by invoices from the developer or its subcontractors, and by periodic
site inspections of progress.
Sales of construction mortgage loans. We plan to hold mortgage loans to
maturity, and have not embarked on selling loans in any secondary market. Nor
are we aware that a secondary market exists for the loans we hold. We may,
however, decide to sell assets from time to time for a number of reasons,
including, without limitation: (1) to dispose of an asset for which credit risk
concerns have arisen; (2) to reduce interest rate risk; (3) or to re-structure
our balance sheet when our management deems it advisable. We will select any
mortgage loans to be sold according to the particular purpose the sale is
intended to serve. Our Board of Directors has not adopted a policy that would
restrict management's authority to determine the timing of sales or the
selection of mortgage loans to be sold.
ITEM 2. PROPERTIES. We own certain real property that we have acquired through
foreclosure or deed in lieu of foreclosure. In addition, we obtained certain
properties upon our acquisition of all of the ownership of 99 Investors, LLC in
2002. Our policy is to maximize the value of these foreclosed properties prior
to liquidation. In some cases this may involve completing construction,
sometimes through a subsidiary, and then marketing the property for sale. The
following is a list of real estate owned by us as of December 31, 2004:
Property 2216 - This is an approximately 8-acre land parcel which has been
approved for development of 72 townhomes and condominiums totaling approximately
123,372 square feet in San Jose, California. The first phase of 38 homes is
currently under construction with completion of the first units scheduled during
June 2005. Based on projected sales absorption of 8 units per month, the project
should be sold out during February 2006.
Property 2368 - This is an 8-unit loft-style condominium project totaling
approximately 6,100 square feet in the South of Market area of San Francisco,
California. The project is currently under construction with units expected to
complete in April 2005.
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
complete and on the market for sale.
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 purchaser of the two lots has an option to purchase the remaining four
lots. The option expires on July 15, 2005 but may be extended until May 4, 2006
with further option payments.
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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. The home is complete and currently on the market for sale.
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. The remaining lot is currently on the market for
sale.
Property 2455 - This project is an approximately 8,850 square foot home in
Atherton, California. The home is complete and on the market for sale.
Property 2465 - This project is an approximately 8,900 square foot unimproved
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 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. We have restarted construction and currently estimate
completion of the project in June 2005.
Property 2492 -This is an approximately 4,500 square foot home in Portola
Valley, California. In January 2005 the property was sold and closed escrow.
Property 2506 - This project is an approximately 6,400 square foot home in
Hillsborough, California. The property is complete and on the market for sale.
Property 2518 - This property will be an approximately 6,400 square foot home in
Tiburon, California. We received title to the property through foreclosure on
September 29, 2004 and, after analysis of the property, have determined that we
will maximize its value by completing the property and selling it as a finished
home. We have restarted construction that was halted prior to our taking title,
and currently expect to complete construction by November 2005.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may and have become subject to litigation in connection
with our business. In addition, as of December 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 of December 31, 2004, and in which it was believed at December
31, 2004 it is reasonably possible that its 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. 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. Trial is currently
scheduled for April 25, 2005. 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.
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2. 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
defects in construction including faulty framing and faulty soil treatment,
resulting in movement and property damage. The Complaint contains claims
totaling approximately $1.9 million 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 right to determine whether or not the claim is covered under the
policy. The Company disputes both the claim of liability and the extent of the
damages claimed and intends to vigorously defend against the claims. In
addition, the Company currently believes that in the event of any recovery by
the plaintiff, the amount of the claim would be covered by insurance.
In addition to the above matters, at December 31, 2004, the Company was involved
in several legal matters in which it sought recovery from borrowers, guarantors,
and others. The actions included the following:
1. A lawsuit was filed by the Company in connection with a loan made on a
subdivision project in Marin County. While the Company had written off the loan
approximately two years before, it 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 $2,350,000 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. To date, the Company has
received payments totaling $1,650,000. Two additional payments of $350,000 each
are due on April 27, 2005 and July 26, 2005. 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 was filed to collect against the personal 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 was 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 defendants timely made, on September 15 and October 8,
2004, the first two payments totaling $100,000. However, defendants thereafter
defaulted in their payments, and on January 21, 2005 a judgment was entered
against the defendants, Robert A. Johnston and Gregory Bock, in the amount of
$5,900,000. The company is taking steps to recover the amount of the judgment.
The amount of the judgment is not reflected in the financial statements, and
will not be until there is collection, as collection is not reasonably assured.
3. A lawsuit was filed 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.
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.
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ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our stockholders during the fourth
quarter of the year ended December 31, 2004. For information concerning a
proposal to be voted on at a special meeting on March 14, 2005, reference is
made to the proxy materials Form 14A filed on February 28, 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
There is currently no public trading market for our stock. We are authorized to
issue up to 50,000,000 shares of Common Stock. During the period from April 30,
1999 through August 31, 2004 we sold 28,007,243 shares of Class A Convertible
Preferred Stock, including sales made through our dividend reinvestment program.
During this period of time we also repurchased 8,523,991 shares of our Preferred
Stock through our redemption programs. All sales of stock were made under
exemption from the registration requirements of the Securities Act of 1933
pursuant to Regulation D, Rule 506. All sales of stock and notes were to
accredited investors, as defined in Regulation D, Rule 501 (a)(4), (5) or (6)
under the 1933 Securities Act. Appropriate legends were placed on each stock
certificate. No underwriters were involved and no underwriting commissions were
paid in any of the transactions. On September 1, 2004 our outstanding shares of
Preferred Stock totaling 19,483,252 shares, converted to Common Stock in
accordance with the terms of the Preferred Stock. At the time of conversion,
there were 100 shares of common stock issued and outstanding. At December 31,
2004, there were 18,304,168 shares of Common Stock, issued and outstanding. We
currently are not offering any new shares of stock for sale. We have also
offered and sold Series A and B promissory notes of varying amounts and
maturities.
ITEM 6. SELECTED FINANCIAL INFORMATION.
The following financial and operating data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our audited financial statements included elsewhere in this Form
10-K. Capitalization
Our capitalization, as of December 31, 2004, was as follows:
Borrowings:
Secured notes payable $ 3,185,000
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3,185,000
Total borrowings
Capital Stock
Common Stock - 18,304,168 shares
issued and outstanding 213,208,861
Accumulated dividends and distributions (90,621,455)
Accumulated deficit (56,142,559)
------------------
Total borrowings and capital stock $ 66,444,847
==================
The selected financial data set forth below has been derived from our audited
financial statements included elsewhere in this and previously filed Forms 10-K
(in 000's except per share amounts).
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December 31, December 31, December 31, December 31, December 31,
2004 2003 2002 2001 2000
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Total assets............................... $ 69,969 $ 91,387 $ $
$ 155,067 184,597 207,077
Total debt................................. 3,185 7,878 36,401 32,313 45,432
Capital stock.............................. 213,209 225,143 226,080 216,158 199,286
Accumulated distributions.................. (90,621) (90,621) (80,132) (58,826) (34,708)
Accumulated deficit........................ (56,143) $ (51,369) $ (29,520) $ (8,215) $ (8,882)
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
2004 2003 2002 2001 2000
--------------- ----------------------------------------------------------
Operating Results under Generally
Accepted Accounting Principles in the
United States:
Revenues................................ 4,953 $ 11,390 $ 10,018 $ 12,588 $ 15,140
Net Income (loss)....................... (4,774) (21,849) (21,305) 667 3,572
(Loss) Income allocable to a Preferred Share:
Basic and Diluted....................... -- $ (0.98) $ (0.96) $ 0.03 $ 0.19
Preferred stock dividends and distributions
per share............................... -- $ 0.47 $ 0.96 $ 1.12 $ 1.14
Weighted average Preferred Shares....... -- 22,442 22,169 21,451 18,955
Loss allocable to each common share:
Basic and Diluted....................... $ (0.73) $(323,383) $(426,107) $(234,510) $(180,375)
Weighted average common shares.......... 6,477 100 100 100 100
Cash flows from (used by):
Operating activities.................... $ (577) $ 3,904 $ (322) $ (2,156) $ 6,076
Investing activities.................... 14,400 43,731 17,991 26,400 (28,139)
Financing activities.................... (16,627) (41,328) (15,982) (21,538) 21,387
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
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
BellaVista Capital was incorporated in March 1999 as Primecore Mortgage
Trust, Inc. Since incorporation, Primecore has been engaged in the business of
providing loans for the development of primarily high-end residential real
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estate. During 1999 and 2000 Primecore raised the capital to fund these loans
from the sale of shares of Preferred Stock. This capital was invested primarily
in high priced San Francisco Bay Area residential real estate at a time when
prices were increasing at a rapid pace. By the end 2000, Primecore had loan
commitments of $436 million on 117 loans with over $216 million funded.
After 2000, the market for high-end real estate in the San Francisco Bay Area
began to deteriorate. Primecore significantly scaled back new lending and
concentrated on funding the existing loans in its portfolio. During 2001
Primecore funded only 6 new loans and closed out 38. At the same time, Primecore
began to experience borrower defaults and sought to enforce its security rights.
During 2001, Primecore took title to 11 projects through foreclosure, which were
classified as Real Estate Owned (REO). Of the 38 investments closed in 2001, 2
were REO properties.
During 2002 and 2003 Primecore continued the task of completing and closing out
the development properties in our portfolio. During 2002 and 2003 Primecore took
title to an additional 37 properties by way of foreclosure or deed in lieu of
foreclosure. Two new loans were originated during that period and 60 were
closed, 30 of which were REO properties. Primecore also began to recognize
significant impairments in its portfolio. For the two years ended December 31,
2003, Primecore charged $48,737,682 to expense for impairments in its investment
portfolio. At that time the portfolio consisted of 11 loans, 7 of which were
non-performing, and 16 REO properties.
The impairment of our loan portfolio resulted in substantial operating losses.
The Company realized that these net operating losses could be carried forward
and used to shelter future income. In prior years, the company used its REIT
status, and the payment of dividends, to eliminate corporate level taxation.
However, the REIT rules restricted the types of loans the Company could make. In
particular, the Company was prohibited, by the REIT rules, from making loans
with equity participations. With the ability to carry forward prior years' net
operating losses to offset future taxable income, the Company was free to
terminate its REIT status, which it did effective January 1, 2004, and was no
longer restricted in the types of investments it could make. As of December 31,
2004 the Company's available net operating loss carryforward was approximately
$81.3 million. If this net operating loss carryforward is fully utilized to
offset future taxable income, at current Federal and California state tax rates,
it would save the Company approximately $31.3 million in tax payments.
By the end of 2003 it was clear the company needed new direction. On December
31, 2003 our Board of Directors terminated our management agreement with
Primecore Funding Group and internalized operations. On March 19, 2004
Primecore's CEO, Susan Fox, resigned and Michael Rider, then CFO, was appointed
as the new CEO. Eric Hanke was named Vice President of Business Development and
placed in charge of rebuilding the investment portfolio. In April 2004 Primecore
changed its name to BellaVista Capital in order to reflect its new business
focus. Messrs. Rider and Hanke worked closely with the Board of Directors to
develop a new investment strategy. After assessing failures of Primecore's
business model, new management and the Board of Directors formalized a plan for
future business operation. The basic principles of the plan are as follows:
o We will concentrate on $1 million to $6 million investments in
residential real estate development;
o We will target a 15% average return on our portfolio of investments by
blending lower yield, more secure first trust deed investments with
higher yield subordinated debt and equity investments;
o We will focus on investments covering a broad range of price points,
but with a majority of investments in housing priced close to the
median sale prices for the areas in which we lend;
o We will diversify the portfolio into other geographic areas, primarily
in California; and
o We have established a rigorous process for investment underwriting and
approval designed to mitigate our risk.
During 2004 new management focused on completing and liquidating the existing
portfolio of assets, internalizing operations, resolving outstanding legal
issues and developing a pipeline of new investment opportunities. To that end,
of the 11 loans in our portfolio at December 31, 2003 three were repaid and we
took title to 5 through foreclosure. Additionally, the property securing one
loan was under contract at December 31, 2004 and subsequently closed escrow on
January 4, 2005. Of the 16 properties we owned at the beginning of 2004 we added
5 with our foreclosures and sold 9, leaving us 12 properties at December 31,
2004. See Item 2 - Properties for a discussion of the current status of these
properties.
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In addition to the completion and sale of our non-performing investments,
management completed the transition to internal management by significantly
reducing continuing operating expenses. We reduced unnecessary staff and
administrative overhead. We leased smaller office space more suited for our
leaner staff, at approximately 10% of the cost paid by prior management. At
$1.25 million annually, our projected continuing operating expenses are less
than 15% of the $9 million average annual operating expenses paid from 1999
through 2003.
Management also worked hard to resolve the many legal issues that it faced as a
result of prior management's policies. We settled two lawsuits from two groups
of shareholders seeking to gain at the expense of our remaining shareholders. We
also settled legal actions brought by developers and contractors seeking
millions for approximately $725,000. In addition, we successfully defended a
legal action against us for breach of contract. Defending and settling these
legal actions was costly, with approximately $2.8 million paid in legal fees and
settlement costs, but we believe the benefits gained through the certainty of
settlement, will far outweigh the costs over time as we are able to devote our
limited resources to productive purposes. Not all of our legal outcomes were
negative however. During 2004 we settled two legal actions in which we were the
plaintiff that resulted in the agreement by the defendants to pay BellaVista
$6.41 million. During 2004 we collected $1.128 million from these settlements,
net of collection costs. In January 2005, one of parties defaulted on their
settlement payment, but by the terms of the agreement we were able to obtain a
judgment against them in the amount of $5.9 million. We are currently pursuing
collection on that judgment.
During 2004 we also developed our pipeline of new investment opportunities.
Through contacts we developed, we received investment requests totaling over
$540 million for over 110 projects. During 2004 we approved investments totaling
approximately $20 million. As of December 31, 2004 these new, performing
investments comprised approximately 24% of our invested assets. As we continue
to liquidate our non-performing investments we plan to invest the proceeds as
described above. We will seek to generate gross returns on invested assets of
15%. These targeted returns, when combined with our projected operating expenses
totaling approximately 2.5% of assets, are projected to generate returns to
shareholders of approximately 12.5%.
Results of Operations
Revenue
For financial statement purposes we report income from ADC Loans and REO
properties only after we have collected it from the sale or repayment of our
investment. During the year ended December 31, 2004 for financial statement
purposes, we reported income of $3,497,665 from our investments compared with
$11,372,436 and $10,018,189 for the years ended December 31, 2003 and 2002,
respectively. Our income decreased compared to 2003 and 2002 as fewer loans
repaid during the current year than in past years, 12 investments during the
year ended December 31, 2004 compared with 32 each during the years ended
December 31, 2003 and 2002. During 2004, we reported income from twelve
investments which were sold or repaid.
Expenses
In years prior to 2004, 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 internalized management
during the first three months of 2004. The Board believed that this action would
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, 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.
During 2004 we incurred expenses totaling $6.26 million relating to the ongoing
operations of the company, legal expenses related to lawsuits brought by
shareholders and former borrowers, expenses related to the carrying costs of our
REO portfolio, and expenses associated with the transition to new management.
Our operating expenses not related to non-recurring legal costs or costs
associated with completing and selling our non-performing assets were
approximately $1.97 million. During 2004, through staff reductions, entering
9
into a new lease for reduced office space and othrer cost cutting measures, we
were able to cut these expenses to an amount such that our projected recurring
operating expenses are expected to be approximately $1.25 million.
In addition to our recurring operating expenses, we incurred legal expenses
totaling $2.63 million associated with litigation with former shareholders and
former borrowers which . Most of these legal issues have been resolved and we
expect theselegal expenses related to our non-performing assets to decrease
substantially during 2005. We also recorded expenses of $0.52 million related to
warranty, insurance and carrying costs of our real estate owned portfolio. As
these properties continue to complete construction and are sold, these costs
will decrease. Finally, we incurred approximately $1.09 million in management
fees and transition expenses related to the internalization of our management.
We don't expect to have any more of these costs in future periods.
Since December 31, 1999, all interest costs have been capitalized as a cost of
our investments. Interest cost associated with our borrowings was $256,887
during the year ended December 31, 2004 compared with $1,590,531 and $2,578,762
during the years ended 2003 and 2002. The decrease is due to the lower amount of
debt on our balance sheet. During the first six months of 2004 we retired our
unsecured notes payable.
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.
Sources of cash
As of December 31, 2004 our primary source of liquidity was the repayment of our
investments in real estate. We do not currently have an open private placement
for the sale of our stock and do not expect to open a new one for the
foreseeable future. Additionally, we are currently not soliciting or accepting
applications to issue new unsecured notes payable. However, 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 typically receive repayment on our investments when the development has been
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 development properties in which we have invested. During
the year ended December 31, 2004 we received repayments totaling $37.6 million
compared with $65.2 million and $58.1 million during the years ended December
31, 2003 and 2002. The repayments decreased during 2004 compared with 2003 and
2002 due to the smaller amount of investments completed during 2004. The
following table summarizes our liquidity expectations for the 18 investments,
both ADC Loans and REO properties, held at December 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
------------------
Scheduled investment completion:
Completed at Decmeber 31, 2004 $ 25,144,662
During Q1 2005 22,480,092
During Q2 2005 10,280,129
During Q3 2005 5,012,931
During Q4 2005 4,577,381
During Q1 2006 4,921,886
During Q2 2006 3,043,034
During Q3 2006 --
During Q4 2006 2,936,663
------------------
Total $ 78,396,778
==================
10
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 or seek financing at terms that may
not be favorable to us. 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 two years, without taking into account new loans that
may be made in 2005 and 2006:
Obligation Total 2005 2006 Thereafter
----------------------- ------------------ ----------------- ------------------ ------------------
Investment fundings $ 28,648,148 $ 28,648,148 $ -- --
Secured note payable 3,185,000 -- -- $ 3,185,000
Office lease 170,400 84,000 86,400 --
Legal services agreement 373,500 373,500 -- --
------------------ ----------------- ------------------ ------------------
Total $ 32,377,048 $ 29,105,648 $ 86,400 $ 3,185,000
================== ================= ================== ==================
Investment fundings are our largest use of our cash. During the year ended
December 31, 2004 we invested $23.1 million in new and continuing development
projects compared with $26.1 million and $40.1 million during the years ended
December 31, 2003 and 2002. At December 31, 2004 we estimated costs to complete
investments in our portfolio were $28.6 million. $22.2 million of investment
funding requirement is related to our Property 2216. We have a $22 million
construction loan in place to fund most of this requirement. The construction
loan provides for proceeds of $21.2 million to fund these construction costs.
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 December
31, 2004 as we continue to make and fund new loan commitments in 2005 and
beyond.
During the year ended December 31, 2004 we repaid unsecured notes totaling $4.7
million compared with $10.1 million and $7.5 million during the years ended
December 31, 2003 and 2002. The payments made during 2004 retired all of our
unsecured notes payable.
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. The property
completed construction during 2004 and is currently listed for sale.
Stock Repurchases
We provide liquidity to our stockholders through the repurchase of outstanding
shares. During the year ended December 31, 2004 we repurchased 3,925,671 shares
of our stock for $11.9 million. Because our stock does not trade in any
secondary market, no market value exists for our stock and another method must
be used to determine the repurchase price. On October 29, 2004 our Board of
Directors revised our policy for repurchases of stock. The repurchase policy
generally provides that from time to time the company will allocate a certain
amount of its capital for the purpose of repurchasing shares of stock and that
the repurchase offer will follow United States Securities and Exchange
Commission guidelines for issuer tender offers of stock. According to the
policy, the Board of Directors determines the offer price prior to the issuance
of the tender offer. In determining its offer price, the Board considers the net
realizable value of the company's assets.
11
Realizable Value of Investments
The realizable value of our investments represents our current estimate of the
amount of proceeds we expect to receive once our investments are 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. Currently, 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.
The information presented below reconciles the differences between US GAAP and
the estimated realizable value of our investments.
December 31, 2004 December 31, 2003
--------------------------------------
Investments in real estate
under construction $ 18,455,557 $ 34,629,956
Investments in real estate
held for sale 42,776,676 44,551,722
--------------------------------------
Total investments in real
estate per US GAAP 61,232,233 79,181,678
Add: GAAP impairments 12,983,702 26,436,565
Accrued interest and points 20,249,047 38,360,634
Less: Capitalized interest (2,186,797) (4,633,962)
--------------------------------------
Balance owed on real estate
investments 92,278,185 139,344,915
Amount estimated uncollectible (21,790,293) (54,162,649)
--------------------------------------
Realizable value of investments
in real estate $ 70,487,892 $ 85,182,266
======================================
Net Realizable Value of Assets per Share
The net realizable value of assets per share is a tool the company uses to
assist the Board in determining an offer price for the repurchase of shares. In
addition to the net realizable value of assets per share, the Board may consider
such other information as projected revenues and operating expenses, and legal
contingencies.
The following calculation determines the net realizable value of our stock at
December 31, 2004 and 2003 for purposes of our redemption policy only:
December 31, 2004 December 31, 2003
--------------------------------------
Cash $ 7,897,242 $ 10,701,188
Other assets 752,042 1,504,470
Realizable value of investments
in real estate 70,487,892 85,182,266
--------------------------------------
Total realizable assets 79,137,176 97,387,924
Total liabilities (3,524,585) (8,234,645)
--------------------------------------
Net realizable assets 75,612,591 89,153,279
Shares outstanding 18,304,168 22,229,739
--------------------------------------
Net realizable assets per share $ 4.13 $ 4.01
======================================
On January 28, 2005, in accordance with its new policy, the Company offered to
purchase up to 3,314,917 shares of its stock for a price of $3.62 per share. The
Offer terminated on March 1, 2005, and a total of 6,714,420 Shares were tendered
and not withdrawn as of such date. In accordance with the terms of the offer the
Company purchased a total of 3,314,929 Shares at $3.62 per Share for a total
payment of $12,000,042.98. As the number of Shares tendered exceeded the maximum
12
number of Shares the Company offered to purchase, each tendering shareholder
received payment for a prorated number of Shares purchased. The proration factor
was 49.37%. After completion of the Offer, a total of 14,989,239 shares remain
issued and outstanding.
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 that there is an impairment , the excess of the
carrying amount of the investment over its estimated fair value, less estimated
selling costs, will be charged to income. In accordance with this policy, we
recorded a provision for impairment of investments in real estate under
development totaling $3,412,560, during the year ended December 31, 2004
compared with $27,499,639 and $21,238,043 during the years ended December 31,
2003 and 2002. We believe that all of our investments are carried at the lower
of cost or fair value, however conditions may change and cause our ADC loans and
REO properties 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 treat these loans as if they were real estate joint
ventures, and thus 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 and 4 to
the financial statements) and include amounts funded under the loan agreements
and capitalized interest expense. In addition to ADC Loans, we have made direct
equity investments in real estate joint ventures. These joint venture
investments are accounted for in the same manner as our ADC Loans and are
classified as investments in real estate under development. 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 7A. QUALITATIVE AND QUANTITATIVE 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 ADC 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.
13
In addition to the foregoing, and other information contained or incorporated
into this Form 10-K, the following is a discussion of risk factors that we
believe are material at this time
General Risks Related to Construction Mortgage Lending
Real estate collateral. Our common stock securities are subject to risks
inherent in real estate lending. Many of the risks of holding mortgage
loans are similar to the risks of investing directly in the real estate securing
the mortgage loans. This may be especially true in the case of a relatively
small or less diverse pool of mortgage loans. If there is a default on the
mortgage loan, the ultimate extent of our loss, if any, may only be determined
after a foreclosure of the mortgage encumbering the property and, if we take
title to the property, upon liquidation of the property. Factors such as the
title to the property or its physical condition, including environmental
considerations and state of construction, may make a third party unwilling to
purchase the property at a foreclosure sale or for a price sufficient to satisfy
the obligations with respect to the related mortgage loan. Foreclosure laws may
protract the foreclosure process. In addition, the condition of a property may
deteriorate during the pendency of foreclosure proceedings. Some borrowers may
become subject to bankruptcy proceedings, in which case the amount and timing of
amounts due may be materially adversely affected. Even if the real property
provides adequate security for the mortgage loan, substantial delays could be
encountered in connection with the liquidation of a defaulted mortgage loan and
a corresponding delay in the receipt and reinvestment of principal and interest
payments could occur.
Real estate market conditions. The real estate lending business may be adversely
affected by periods of economic slowdown or recession, which may be accompanied
by declining real estate values. Any material decline in real estate values
reduces the ability of borrowers to use real estate equity to support borrowings
and increases the loan-to-value ratios of mortgage loans previously made,
thereby weakening collateral coverage and increasing the possibility of a loss
in the event of default. In addition, delinquencies, foreclosures and losses
generally increase during economic slowdowns and recessions.
Loans on properties not yet constructed. A mortgage loan made to finance a
property that is not yet constructed will generally involve greater risks than a
mortgage loan on property that has been constructed. In the case of a property
already constructed, market value at the time the loan is made is more readily
ascertainable from current market valuations. In the case of a property not
already constructed, there can be no assurance that the improvements to be
constructed can be accomplished with available funds or in a timely manner. Sale
or refinancing of the completed project generally provides the funds for
repayment of a construction mortgage loan. While analyses are made to predict
the completed market value of the development project, such analyses are subject
to unanticipated changes over which we may have no control. Since market value
cannot be determined until a property is actually sold in the marketplace, the
market valuation of a proposed construction project can be especially
speculative.
Economic conditions. The performance of a mortgage loan portfolio will depend
on, among other things, the level of net interest income generated by the
mortgage loans, the market value of the mortgage loans and the supply of and
demand for construction mortgage loans. Prepayment rates, interest rates,
borrowing costs and credit losses depend upon the nature and terms of the
mortgage loans, the geographic location of the properties securing the mortgage
loans, conditions in financial markets, the fiscal and monetary policies of the
United States government and the Board of Governors of the Federal Reserve
System, international economic and financial conditions, competition and other
factors, none of which can be predicted.
Environmental liabilities. In the event that hazardous substances are found to
have contaminated properties secured by mortgage loans, the value of the real
property may be diminished. If forced to foreclose on a defaulted mortgage loan
on a contaminated property, we might potentially become subject to environmental
liabilities even if we were not responsible for the contamination. While we
intend to exercise due diligence to discover potential environmental liabilities
before the acquisition of any property through foreclosure, hazardous substances
or wastes, contaminants or pollutants may be discovered on properties during our
ownership or after a sale of the property to a third party. If hazardous
substances are discovered on a property, we may be required to remove those
substances or sources and clean up the property. We may also be liable to
14
tenants and other users of neighboring properties. In addition, we may find it
difficult or impossible to sell the property before or following any clean up.
Legislation and regulation. The mortgage loan business is subject to extensive
regulation, supervision and licensing by federal, state and local governmental
authorities and to various laws and judicial and administrative decisions
imposing requirements and restrictions. Laws and regulations may be subject to
legislative, administrative and judicial interpretation, especially laws and
regulations that have been infrequently interpreted or only recently enacted.
Infrequent interpretations of laws and regulations or an insignificant number of
interpretations of recently enacted regulations can result in ambiguity with
respect to permitted conduct under these laws and regulations. Ambiguity under
regulations to which our manager or we are subject may lead to regulatory
investigations or enforcement actions and private causes of action. Failure to
comply with regulatory requirements can lead to loss of approved status,
lawsuits and administrative enforcement actions. There can be no assurance that
we will maintain compliance with these requirements in the future without
additional expenses, or that more restrictive local, state or federal laws,
rules and regulations will not be adopted or that existing laws and regulations
will not be interpreted in a more restrictive manner, which would make
compliance more difficult for us.
Specific Risks of Investment in Our Securities
Restrictions on transferability and lack of liquidity of shares. Shares of our
common stock have been privately placed solely with accredited investors who
have acquired them for investment purposes only and not with a view toward
transfer, resale, exchange or distribution. There currently is no public market
for our shares of stock. Accordingly, the transferability of such shares of
stock is limited. Additionally, the shares may not be readily accepted as
collateral for a loan. Holders of our common stock do not have a vested right to
redeem their shares, and therefore may not be able to liquidate their investment
in the event of an emergency or otherwise. Our Board of Directors currently has
a stock 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,
subject to the exercise of their prudent business judgment. Also, a change in
the redemption policy, which would be effected solely for the benefit of the
Company, could affect a shareholder's ability to liquidate their investments.
Loan losses. As noted above, in investment in property that is not yet
constructed generally involves greater risks than investments in property that
has been constructed since there can be no assurance that the improvements to be
constructed can be accomplished with available funds or in a timely manner.
Furthermore, while analyses are made to predict the completed market value of
the development project, such analyses are subject to unanticipated changes over
which we may have no control, including recessions and economic downturns. Since
2002 we sustained significant losses in our portfolio of investments made prior
to 2002, as discussed above, and also acquired title to a number of properties
through foreclosure.
Balloon loans. The loans in our portfolio will typically require the borrower to
make a "balloon payment" on the principal amount upon maturity of the loan. To
the extent that a borrower has an obligation to pay a mortgage loan in a large
lump sum payment, their ability to satisfy this obligation may be dependent upon
their ability to obtain suitable refinancing or otherwise raise a substantial
cash amount. An increase in market interest rates over the mortgage rates
available at the time the loan was originated may have an adverse effect on the
borrower's ability to obtain refinancing or to pay required monthly payments. As
a result, these loans may involve a higher risk of default than fully amortizing
loans.
Lack of geographic diversification. Most of the properties securing repayment of
the mortgage loans are currently located in the San Francisco Bay Region of
Northern California. Since the properties secured by the mortgage loans are
located in the same geographic region, these mortgage loans may be subject to a
greater risk of delinquency, default and potential loss if economic or political
conditions or real property values in the region deteriorated substantially.
Also, since borrowers will not be required to purchase earthquake insurance, and
properties are in the San Francisco Bay Area, known for its earthquake activity,
mortgage loans are subject to greater risk of loss than properties located in
more stable geologic areas.
Funding of loan commitments. We expect that proceeds generated from completed
real estate developments will be sufficient to fund all loan commitments. If,
however, we were unable to obtain loan repayments we might then be unable to
fund all of our existing commitments. Borrowers might then be unable to complete
15
their projects if they could not obtain financing from other sources, and we
conceivably could incur damages. Also, if we became unable to meet our
contractual obligations, our reputation would likely suffer, and we might be
unable to attract new borrowers, resulting in the loss of future business. This
might have a materially adverse effect upon our financial condition, cash flows
and results of operations.
Litigation. We are subject to risks of litigation filed against us. These legal
proceedings and claims, whether with or without merit, are time-consuming and
expensive to defend and divert management's attention and resources.
Discretion of Board of Directors. Management has established our operating
policies and strategies. These policies and strategies may be modified or waived
by the Board of Directors, without shareholder approval. The ultimate effect of
any such changes may adversely affect our operations.
Competition. As with any business, we may face competition, primarily from
commercial banks, savings and loans, other independent mortgage lenders, and
real estate investment funds. Also, if we expand into particular geographic
markets in order to increase geographic diversity and take advantage of
opportunities in such markets, we may face competition from lenders with
established positions in these locations. Competition can take place on various
levels, including convenience in obtaining a mortgage loan, service, marketing,
origination channels and pricing. Although we do not know of any particular
competitor that dominates our market, many of our competitors in the financial
services business are substantially larger and have more capital and other
resources. There can be no assurance that we will be able to compete
successfully in this market environment. Any failure in this regard could have a
material adverse effect on our results of operations and financial condition.
Borrowing. We may employ a financing strategy to increase the size of our
mortgage loan portfolio by borrowing a portion of the market value of our
mortgage loans. The costs of those borrowings vary depending upon the lender,
the nature and liquidity of the underlying collateral, the movement of interest
rates, the availability of financing in the market and other factors. If the
returns on the mortgage loans purchased with borrowed funds fail to cover the
cost of the borrowings, we will experience net interest losses and may
experience net losses. In addition, we may not be able to achieve the degree of
leverage we believe to be optimal, which may cause us to be less profitable than
we might be otherwise. We may finance some of the mortgage loans that we hold
through interim financing facilities such as bank credit lines. We may be
dependent upon a few lenders to provide the primary credit facilities for our
mortgage loans. Any failure to renew or obtain adequate funding under these
financings, or any substantial reduction in the size of or pricing in the market
for our mortgage loans, could have a material adverse effect on our operations.
We have not made any agreements under which a lender would be required to enter
into new borrowing agreements during a specified period of time; however, we may
make such agreements if deemed favorable.
Future offerings. We may increase our capital resources by making additional
offerings of equity and debt securities, including classes of preferred stock,
common stock, commercial paper, medium-term notes, mortgage-backed obligations
and senior or subordinated debt. All debt securities will be and some classes of
preferred stock could potentially be senior to our common stock.
Deficiency upon liquidation of our mortgages. The market value of our mortgage
assets may fluctuate significantly. If we need to sell assets to repay our
outstanding notes or other borrowings or commitments, our mortgage assets may
prove to be illiquid. Even if sold at a discount, the proceeds of sale might be
less than the outstanding principal amount of, and interest payable on, our
notes.
Investment by tax-exempt entities. A fiduciary of a pension, profit-sharing,
stock bonus plan or individual retirement account, including a plan for
self-employed individuals and their employees or any other employee benefit plan
subject to the prohibited transaction provisions of the Internal Revenue Code or
the fiduciary responsibility provisions or "prudent man" rule of the Employee
Retirement Income Security Act of 1974, known as "ERISA", should consider:
(a) whether the ownership of our securities is in accordance with the
documents and instruments governing the employee benefit plan,
(b) whether the ownership of our securities is consistent with the
fiduciary's responsibilities and satisfies the applicable requirements of
ERISA, in particular, the diversification, prudence and liquidity
requirements of section 404 of ERISA,
16
(c) the prohibitions under ERISA on improper delegation of control
over, or responsibility for "plan assets" and ERISA's imposition of
co-fiduciary liability on a fiduciary who participates in, or permits, by
action or inaction, the occurrence of, or fails to remedy, a known breach
of duty by another fiduciary with respect to plan assets, and
(d) the need to value the assets of the employee benefit plan
annually.
A plan fiduciary should understand the illiquid nature of an investment in our
securities and that no secondary market will exist for them, and should review
both anticipated and unanticipated liquidity needs for the plan and conclude
that an investment in our securities is consistent with the plan's foreseeable
future liquidity needs.
Investment Company Act exemption. We conduct our business so as not to become
regulated as an investment company under the Investment Company Act. The
Investment Company Act exempts entities that are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate." If we should fail to qualify for an exemption from
registration as an investment company, our ability to use leverage would be
substantially reduced and we may be unable to conduct our business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Required financial statements and supplementary data are included in this Form
10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision of Michael Rider, the Company's Chief Executive Officer
and Chief Financial Officer, we carried out an evaluation of the effectiveness
of the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) as of
December 31, 2004. 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-K. 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.
A significant deficiency is a control deficiency, or combination of control
deficiencies, that adversely affects the company's ability to initiate,
authorize, record, process, or report external financial data reliably in
accordance with generally accepted accounting principles such that there is more
than a remote likelihood that a misstatement of the company's annual or interim
financial statements that is more than inconsequential will not be prevented or
detected.
Our auditors identified the following two significant deficiencies in connection
with their audit of the 2004 and 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.
The Company believes that the issues raised above as (ii) during the 2003 audit
were resolved during 2004 by a combination of the reduction in company assets
and the redistribution of certain duties performed by the CEO and CFO to other
members of the management team. The company is currently evaluating its
personnel needs as part of its capital resource budgeting for 2005 and believes
that staffing levels are adequate to support its current business requirements.
17
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Our Board of Directors consists of five director positions,, two of which were
vacant after the resignation of Susan Fox on March 19, 2004. Our directors,
executive officers and senior officers and their positions, as of the date of
this filing, are:
Name Position
Michael Rider Chief Executive Officer, Chief Financial Officer
and Director
Robert Puette Chairman
James Barrington Director
Eric Hanke Vice President, Business Development
The business background and experience of our directors and executive
officers is as follows:
Michael Rider, age 42, is a co-founder, director, Chief Executive Officer
and Chief Financial Officer of the Company. Mr. Rider's term of office as a
director expires in 2006. Mr. Rider was controller, then Chief Financial Officer
for The Plymouth Group and its successor, TPG Development Corporation, a San
Francisco Bay Area real estate development company from 1991 until 1998. From
1986 to 1990 Mr. Rider was senior accountant with Kenneth Leventhal & Company, a
national public accounting firm specializing in real estate accounting and
advisory services. Mr. Rider is a certified public accountant and a member of
the Urban Land Institute. Mr. Rider received a B.A. degree in Economics/Business
from the University of California Los Angeles.
Robert L. Puette, 63, has been a member of the Board since March 1, 2002.
Prior to such time, Mr. Puette served as an advisory director to the Company.
Between 2001 and 2004, Mr. Puette was a partner at the WK Technology venture
capital firm. Between 1997 and 2000, Mr. Puette was the President, Chief
Executive Officer, and member of the Board of Directors of Centigram
Communications Corporation (NASDAQ), a communications technology firm. Prior to
his position at Centigram, from 1995 to 1997, Mr. Puette served as President,
CEO and Chairman of the Board of Directors at NetFRAME Systems (NASDAQ), a
high-availability computer server company, and from 1990 to 1993, Mr. Puette
served as President of Apple USA, Apple Corporation (NASDAQ). Prior to 1990, Mr.
Puette served as a Group General Manager of Hewlett-Packard Corporation (NYSE).
Mr. Puette is also on the Board of Cupertino Electric Corporation (Private) and
iPolicy Networks Corporation (Private), and is a former director of Cisco
Systems (NASDAQ). Mr. Puette holds a BSEE degree from Northwestern University
and a MSOR degree from Stanford University.
James Barrington, 63, has been a director since March 2002. From 1965 to
1999, Mr. Barrington was with Arthur Andersen LLP, serving primarily as an audit
and business advisory partner. In his capacity as a partner of Arthur Andersen
LLP, Mr. Barrington did not personally provide any services to the Company. Mr.
Barrington received a B.S. in accounting from San Jose State University and a
M.B.A. from the University of California at Berkeley.
Eric Hanke, 36, is the Vice President of Business Development. His
activities include overseeing the origination of new investment opportunities
and capital raising activities, marketing and investor relations. Prior to
joining Primecore, Mr. Hanke was an investment-banking associate with Arthur
Andersen's Real Estate Capital Markets Group based in San Francisco and
Washington D.C. He is a member of the Urban Land Institute and is a licensed
real estate broker. Mr. Hanke earned his B.A. in economics from the University
of California at Irvine and a MBA, with an emphasis in real estate and finance,
from the Marshall School of Business at the University of Southern California.
Compensation of Directors
None of the directors of the Company who also serve as executive officers or
employees receives any separate compensation for service on our Board of
Directors or on any Board committee. Messrs. Puette and Barrington, who are not
employed by us, receive annual compensation totaling $35,000 and $25,000,
18
respectively for their participation in our standard board meetings. They are
also compensated $1,000 for every special board meeting they attend. Our charter
obligates us to indemnify our directors and officers and to pay or reimburse
expenses for such individuals in advance of the final disposition of a
proceeding to the maximum extent permitted from time to time by Maryland law.
The Maryland General Corporation Law, the "Maryland GCL", permits a corporation
to indemnify its present and former directors and officers, among others,
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those or other capacities, unless it
is established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (1) was committed in
bad faith, or (2) was a result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services, or (c) in the case of any criminal proceeding, the
director or officer had reasonable cause to believe that the act or omission was
unlawful.
Terms of Directors and Officers
Our Board of Directors consists of the number of persons as shall be fixed by
the Board of Directors from time to time by resolution to be divided into three
classes, designated Class I, Class II and Class III, with each class to be as
nearly equal in number of directors as possible. Currently there are five
director positions. This position is currently vacant. Mr. Puette is a Class II
director. There is currently one vacancy in the Class II director. The terms of
Class II directors expire in 2005. Mr. Rider and Mr. Barrington are Class III
directors, and their terms expire in 2006. At each annual meeting, the
successors to the class of directors whose term expires at that time are to be
elected to hold office for a term of three years, and until their successors are
elected and qualified, so that the term of one class of directors expires at
each annual meeting.
For any vacancy on the Board of Directors, including a vacancy created by an
increase in the number of directors, the vacancy may be filled by election of
the Board of Directors or the shareholders, with the director so elected to
serve until the next annual meeting of shareholders, if elected by the Board of
Directors, or for the remainder of the term of the director being replaced, if
elected by the shareholders; any newly-created directorships or decreases in
directorships are to be assigned by the Board of Directors so as to make all
classes as nearly equal in number as possible. Directors may be removed only for
cause and then only by vote of a majority of the combined voting power of
shareholders entitled to vote in the election for directors. Subject to the
voting rights of the holders of the preferred stock, the charter may be amended
by the vote of a majority of the combined voting power of shareholders, provided
that amendments to the article dealing with directors may only be amended if it
is advised by at least two-thirds of the Board of Directors and approved by vote
of at least two-thirds of the combined voting power of shareholders. The effect
of these as well as other provisions of our charter and bylaws may discourage
takeover attempts and make more difficult attempts by shareholders to change
management.
Executive officers are appointed by the Board of Directors, serve at the Board's
pleasure and may be removed from office at any time without cause. There are no
family relationships among any of our directors or executive officers.
Audit Committee
The Company has no separate audit committee. The Board of Directors acts as the
audit committee for all purposes relating to communications with the auditors
and responsibility for oversight of the audit. The Board of Directors has an
independent member, James Barrington, with financial expertise gained as a
partner with a national public accounting firm.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of copies of the Forms 3, 4 and 5 and amendments
thereto furnished to the Company with respect to 2004, or written
representations that no such reports were required to be filed with the
Securities and Exchange Commission, the Company believes that during 2004 all
directors and officers of the Company and beneficial owners of more than 10% of
any class of equity securities of the Company registered pursuant to Section 12
of the Exchange Act filed their required Forms 3, 4, or 5, as required by
Section 16(a) of the Securities Exchange Act of 1934, as amended, on a timely
basis.
19
Code of Ethics
The Company has adopted a Code of Ethics applicable to the Chief Executive
Officer, the Chief Financial Officer, and the Principal Accounting Officer. The
Company's Code of Ethics is set forth as Exhibit 14.1 to this report.
ITEM 11. EXECUTIVE COMPENSATION.
Prior to 2004 Primecore Funding Group, Inc. provided management services to
BellaVista Capital pursuant to a written management agreement. Under the
arrangement Primecore Funding Group provided the necessary personnel, at their
expense, to perform the duties required to originate and service our portfolio
of investments. Accordingly, BellaVista Capital had no employees or compensated
personnel. On December 19, 2003 our Board of Directors determined that the
company would internalize operations and therefore, voted to terminate our
agreement with Primecore Funding Group effective December 31, 2003. On December
23. 2003 we entered into an agreement with Primecore Funding Group for
management services for the period January 1, 2004 to March 31, 2004 to help
ease the transition to internal management. Beginning April 1, 2004 BellaVista
Capital had completed internalized operations and employed personnel to perform
the duties previously provided by Primecore Funding Group. The following table
presents executive compensation information for 2004:
Total
Name and Principal Position Fiscal Year Salary Bonus Compensation
Michael Rider $
Chief Executive Officer,
Director 2004 $ 296,895 50,114 $ 347,009
Eric Hanke
Vice President, Secretary 2004 151,422 24,945 176,368
Joseph Colonna
Investment Servicing 2004 113,722 -- 113,722
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table presents information regarding the beneficial ownership of
our capital stock as of December 31, 2004 of: (1) each person known by us to own
beneficially five percent or more of our outstanding capital stock; (2) each of
our directors and executive officers; and (3) all of our directors and executive
officers as a group. Unless otherwise indicated in the footnotes to the table,
the beneficial owners named have, to our knowledge, sole voting and investment
power with respect to the shares beneficially owned, subject to community
property laws where applicable.
Number Percent
Title of Class Beneficial Owner of Shares of Class
Common Stock Michael Rider 12,164
*
Eric Hanke 2,170 *
Robert Puette 405,241 2.21
------------ -----------
Total 419,575 2.29
============ ===========
* Less than one percent of our outstanding capital stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During the year ended December 31, 2004 the Company engaged in the following
transactions with Ms. Susan Fox, who until March 19, 2004 was our President and
Chief Executive Officer:
20
Primecore Funding Group, Inc. Transactions
Primecore Funding Group, Inc. ("PFG") served as manager of all of the Company's
business from inception through March 31, 2004. During this period, the Company
had no employees and PFG covered all operating expenses with the exception of
certain legal, accounting and insurance expenses and expenses incurred to hold
property taken in foreclosure from its borrowers. PFG was paid management fees
pursuant to a Management Agreement entered into at inception and amended October
17, 2002 and terminated December 31, 2003. During the year ended December 31,
2004 we incurred management fee expenses to PFG of $639,638 compared with
$3,808,260 and $9,630,701 during the years ended December 31, 2003 and 2002,
respectively.
On December 19, 2003 our Board of Directors voted not to renew the management
agreement with Primecore Funding Group, effective December 31, 2003. The Company
decided to internalize management of the Company, and proceeded to do so. The
Board believes that this action will result in greater transparency to the
shareholders, more accountability of the employees and management to the Board
of Directors and the ability to better manage company costs. On December 23,
2003 we entered into an agreement, effective January 1, 2004 with Primecore
Funding Group to provide management services during a three-month transition
period ending March 31, 2004. As of the date of this filing, the transition has
been accomplished, and the Company is now internally managed. Accordingly, all
expenses in the future will be borne by the Company, and there will be no
further payment of any management fees to an outside manager.
Our management contract with PFG provided for the payment of a termination fee
equal to 4% of our outstanding loan commitments at the date of termination. The
agreement also provided that any termination fee due under the contract would be
offset by any amounts PFG owed the Company under our Affiliate Loan Agreement
which was entered into concurrently with the Amended and Restated Management
Agreement. Under the terms of the Affiliate Loan Agreement, PFG was indebted to
the Company for approximately $15.6 million prior to offsetting the termination
fee. The amount of the termination fee was approximately $6.2 million which
payment was offset by the obligation to the Company, leaving an obligation of
approximately $9.4 million from PFG. Due to doubts about the ultimate
collectibility of this obligation from PFG, the Company has never reflected it
as an asset in its financial statements. Management does not currently believe
that PFG has assets sufficient to warrant any collection activity for this
obligation, and will therefore not reflect the receivable as an asset in
its financial statements.
On March 19, 2004, Susan Fox resigned as President, Chief Executive Officer and
Director of BellaVista Capital, Inc. Ms. Fox will be 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 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 actually 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 entered into an agreement to lease
the building 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, 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 expenses associated with the
building.
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Company accrues expenses associated with principal accountant fees and
services in the year being audited or serviced. The following table presents the
expenses accrued by the Company for such fees and services in 2004 and 2003.
21
Principal Accountant Fees and Services
- --------------------------------------------------------------------
2004 2003
Audit fees $ 254,094 $ 270,937
Audit-related fees -- --
Tax fees 16,744 36,423
All other fees -- --
----------------------------------
Total $ 270,838 $ 307,360
==================================
Tax fees are comprised of fees related to the preparation and filing of the
Company's federal and applicable state tax returns.
The Company does not have an independent audit committee, and the full board of
directors therefore serves as the audit committee for all purposes relating to
communication with the Company's auditors and responsibility for the Company
audit. All engagements for audit services, audit related services and tax
services are approved in advance by the full board of directors of the Company.
The Company's Board of Directors has considered whether the provision of the
services described above for the fiscal years ended December 31, 2004 and 2003,
is compatible with maintaining the auditor's independence.
All audit and non-audit services that may be provided by our principal
accountant to the Company shall require pre-approval by the Board. Further, our
auditor shall not provide those services to the Company specifically prohibited
by the Securities and Exchange Commission, including bookkeeping or other
services related to the accounting records or financial statements of the audit
client; financial information systems design and implementation; appraisal or
valuation services, fairness opinion, or contribution-in-kind reports; actuarial
services; internal audit outsourcing services; management functions; human
resources; broker-dealer, investment adviser, or investment banking services;
legal services and expert services unrelated to the audit; and any other service
that the Public Company Oversight Board determines, by regulation, is
impermissible.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
a. Financial Statements. The following financial information is included as a
separate section of this Annual Report on Form 10-K:
1. Report of Independent Registered Public Accounting Firm
2. Consolidated Balance Sheets As of December 31, 2004 and 2003
3. Consolidated Statements of Operations for the years ended December 31,
2004, 2003, and 2002
4. Consolidated Statement of Shareholders' Equity for the years ended
December 31, 2004, 2003, and 2002
5. Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003, and 2002
6. Notes to Consolidated Financial Statements December 31, 2004, 2003, and
2002
b. Exhibits
Exhibits submitted with this Form 10-K, as filed with the Securities and
Exchange Commission, or those incorporated by reference to other filings
are:
Exhibit No. Description of Exhibit
3(i) Articles of Incorporation of the Company is
incorporated by reference to Exhibit 3(i) to the
Company's Form 10-12 G/A, previously filed on April
28, 2000
22
3(ii) Bylaws, Amended March 30, 2000 is incorporated by
reference to Exhibit 3(ii) to the Company's Form
10-12 G/A, previously filed on April 28, 2000
3(iii) Articles Supplementary of the Company is incorporated
by reference to Exhibit 99.1 to the Company's Form
10-12 G/A, previously filed on April 28, 2000
3(iv) Specimen Stock Certificate, is incorporated by
reference to Exhibit 99.2 to the Company's Form 10-12
G/A, previously filed on April 28, 2000
4.1 Registration Rights Agreement is incorporated by
reference to Exhibit 4.1 to the Company's Form
10-12 G/A, previously filed on April 28, 2000
4.2 Founder's Registration Rights Agreement is
incorporated by reference to Exhibit to the Company's
Form 10-12 G/A, previously filed on April 28, 2000
4.3 Management Agreement dated March 30, 1999 is
incorporated by reference to Exhibit 10 to the
Company's Form 10-12 G/A, previously filed on April
28, 2000
10.1 Compensation Agreement between BellaVista Capital,
Inc. and Michael Rider
10.2 Compensation Agreement between BellaVista Capital,
Inc. and Eric Hanke
10.3 Legal Services Retention Agreement between BellaVista
Capital, Inc. and Ben Hamburg
14.1 Code of Ethics is incorporated by reference to
Exhibit 14.1 to the Company's Form 10-K previously
filed on April 14, 2004
31.1 Certification of Chief Executive Officer and Chief
Financial Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Reports on Form 8-K
None filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
Chief Executive Officer, Chief
/s/ Michael Rider Financial Officer and Director May 6, 2005
- --------------------------
Michael Rider
/s/ Robert Puette Chairman May 6, 2005
- --------------------------
Robert Puette
/s/ James Barrington Director May 6, 2005
- --------------------------
James Barrington
23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No
Report of independent registered public accounting
firm - Grant Thornton LLP FS-1
Consolidated Balance sheets as of December 31, 2004 and 2003 FS-2
Consolidated Statements of operations for the years ended
December 31, 2004, 2003, and 2002 FS-3
Consolidated Statements of shareholders' equity for the years
ended December 31, 2004, 2003, and 2002 FS-4
Consolidated Statements of cash flows for the years ended
December 31, 2004, 2003, and 2002 FS-5
Notes to consolidated financial statements FS-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FRIM
To the Shareholders and Board of Directors of
BellaVista Capital, Inc.
We have audited the accompanying consolidated balance sheets of BellaVista
Capital, Inc., as of December 31, 2004 and 2003 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for expressing an opinion on the
effectiveness of the Company's internal control over financial reporting. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BellaVista
Capital, Inc. as of December 31, 2004 and 2003, and the results of its
consolidated operations and its consolidated cash flows for each of the three
years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
Grant Thornton LLP
San Francisco, California
April 27, 2005
FS-1
BELLAVISTA CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
---------------------------------------
2004 2003
------------------ --------------------
ASSETS:
Investments in real estate under development .......................... $ 18,455,557 $ 34,629,956
Investments in real estate held for sale............................... 42,776,676 44,551,722
Fixed assets, net of $21,170 accumulated depreciation.................. 87,914 --
Cash and cash equivalents.............................................. 7,897,242 10,701,188
Other assets, net...................................................... 752,043 1,504,472
------------------ --------------------
Total assets................................................... $ 69,969,432 $ 91,387,338
================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable.......................................................... $ -- $ 4,692,517
Secured notes payable.................................................. 3,185,000 3,185,000
Accounts payable and accrued expenses.................................. 339,585 357,128
------------------ -------------------
Total liabilities.............................................. 3,524,585 8,234,645
Commitments and contingencies (see note 10)
Convertible Preferred stock: par value $0.01, 0 and 40,000,000 shares
authorized at December 31, 2004 and 2003 respectively; 0 and
22,229,739 shares issued and outstanding at December 31, 2004 and
2003, respectively................................................. -- 225,142,861
Common stock: par value $0.01, 50,000,000 and 10,000,000 shares
authorized at December 31, 2004 and 2003, respectively; 18,304,168
and 100 shares issued and outstanding at December 31, 2004 and
2003, respectively.................................................. 213,208,861 1
Accumulated dividends and distributions................................ (90,621,455) (90,621,455)
Accumulated deficit.................................................... (56,142,559) (51,368,714)
------------------ --------------------
Total shareholders' equity..................................... 66,444,847 83,152,693
------------------ --------------------
Total liabilities and shareholders' equity..................... $ 69,969,432 $ 91,387,338
================== ====================
The accompanying notes are an integral part of these statements.
FS-2
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
------------------ ------------------- ------------------
REVENUES:
Income from real estate developments.............................. $ 3,497,655 $11,372,436 $ 10,018,189
Interest income................................................... 153,395 -- --
Other............................................................. 174,442 17,119 730
------------------ ------------------- ------------------
Total revenues........................................... 3,825,492 11,389,555 10,018,919
EXPENSES:
Salaries expense.................................................. 875,748 -- --
Facilities expense................................................ 326,735 -- --
Legal and accounting expense...................................... 3,054,494 819,090 229,295
Insurance expense................................................. 296,762 327,067 104,306
REO expense....................................................... 349,944 621,866 1,200
Administrative expense............................................ 271,094 162,699 120,099
Depreciation...................................................... 25,641 -- --
Transition expenses............................................... 450,832 -- --
Management fees paid to Manager................................... 639,698 3,808,260 9,630,701
Provision for impairment of real estate investments............... 3,412,560 27,499,639 21,238,043
------------------ ------------------- ------------------
Total expenses........................................... 9,703,508 33,238,621 31,323,644
------------------ ------------------- ------------------
Net loss from operations................................. (5,878,016) (21,849,066) (21,304,725)
OTHER INCOME (EXPENSE)
Income from legal settlements, net of collection costs......... 1,128,000 -- --
Loss on sale of fixed assets................................... (23,829) -- --
Total other income (expense)................................. 1,104,171 -- --
------------------ ------------------- ------------------
Net loss before Preferred Stock dividends and distributions.. (4,773,845) (21,849,066) (21,304,725)
Preferred Stock dividends and distributions.................. -- (10,489,238) (21,306,006)
------------------ ------------------- ------------------
Net loss allocable to common stock........................... $ (4,773,845) (32,338,304) $ (42,610,731)
================== =================== ==================
Basic and diluted net loss per common share....................... $ (0.73) $ (323,383) $ (426,107)
================== =================== ==================
Basic and diluted weighted-average common shares outstanding...... 6,476,866 100 100
================== =================== ==================
The accompanying notes are an integral part of these statements.
FS-3
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
Preferred Stock Common Stock
---------------------------- ---------------------------
Accumulated
Dividends and Accumulated
Shares Amount Shares Amount Distributions Deficit Total
----------------------------------------------------------------------- ----------------------------
Shareholders' equity at
January 1, 2002.............. 21,633,864 $216,157,968 100 $ 1 $(58,826,211) $(8,214,923) $149,116,835
Issuance of preferred stock..... 1,255,043 12,550,430 -- -- -- -- 12,550,430
Issuance of preferred stock
under dividend reinvestment
plan......................... 356,559 3,565,590 -- -- -- -- 3,565,590
Redemptions of preferred stock.. (748,662) (7,414,590) -- -- -- -- (7,414,590)
Additional paid in capital...... -- 1,220,484 -- -- -- -- 1,220,484
Dividends and distributions
paid to preferred
shareholders................. -- -- -- -- (21,306,006) -- (21,306,006)
Net loss....................... -- -- -- -- -- (21,304,725) (21,304,725)
-------------- ------------- ------------- ------------- -------------- ------------- --------------
Shareholders' equity at
December 31, 2002 ........... 22,496,804 $226,079,882 100 $ 1 $ (80,132,217) $(29,519,648) $116,428,018
Issuance of preferred stock
under dividend reinvestment
plan......................... 235 1,499 -- -- -- -- 1,499
Adjustment for dividend
reinvestment................. (9,433) (94,330) -- -- -- -- (94,330)
Redemptions of preferred stock.. (257,867) (844,190) -- -- -- -- (844,190)
Dividends and distributions
paid to preferred
shareholders................. -- -- -- -- (10,489,238) -- (10,489,238)
Net loss....................... -- -- -- -- -- (21,849,066) (21,849,066)
-------------- ------------- ------------- ------------- -------------- ------------- --------------
Shareholders' equity at
December 31, 2003 ........... 22,229,739 $225,142,861 100 $ 1 $ (90,621,455) $(51,368,714) $83,152,693
Redemptions of Stock............ (2,746,487) (7,625,644) (1,179,184) (4,308,357) -- -- (11,934,001)
Conversion of Preferred Stock... (19,483,252) (217,517,217) 19,483,252 217,517,217 -- -- --
Net loss........................ -- -- -- -- -- (4,773,845) (4,773,845)
-------------- ------------- ------------- ------------- -------------- ------------- --------------
Shareholders' equity at
December 31, 2004 ........... -- -- 18,304,168 $213,208,861 $ (90,621,455) $(56,142,559) $66,444,847
============== ============= ============= ============= ============== ============= ==============
The accompanying notes are an integral part of these statements.
FS-4
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
------------------- ------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $ (4,773,845) $ (21,849,066) $ (21,304,725)
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation..................................................... 25,641 -- --
Loss on sale of furniture........................................ 23,829 -- --
Provision for impairment......................................... 3,412,560 27,499,639 21,238,043
Increase (decrease) in accrued expenses and other................ 104,034 (20,508) (975,963)
(Decrease) increase in payable to Manager........................ (121,577) (547,903) 638,287
Decrease (increase) in other assets, net......................... 752,429 (1,178,227) 82,661
------------------- ------------------ -------------------
Net cash provided by (used in) operating activities......... (576,929) 3,903,935 (321,697)
------------------- ------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayments of investments in real estate............... 37,642,307 65,182,905 58,141,019
Investments in real estate........................................... (23,105,422) (26,146,923) (40,149,741)
Payment from loans receivable........................................ -- 4,695,000 --
Purchase of fixed assets.............................................. (137,384) -- --
------------------- ------------------ -------------------
Net cash provided by investing activities................... 14,399,501 43,730,982 17,991,278
------------------- ------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of preferred stock, net of offering costs......... -- -- 12,550,430
Redemptions of capital stock.......................................... (11,934,001) (844,190) (7,414,590)
Adjustment for dividend reinvested.................................... -- (94,330) --
Issuance of notes payable............................................. -- 476,679 4,098,562
Capital contributions from Manager.................................... -- -- 1,220,484
Repayment of unsecured notes payable.................................. (4,692,517) (10,126,707) (7,535,769)
Repayment of secured notes payable.................................... -- (4,508,000) --
Net repayments of secured line of credit.............................. -- (14,431,132) (568,868)
Payment of preferred stock dividends.................................. -- (11,800,156) (18,331,927)
------------------- ------------------ -------------------
Net cash provided by (used in) financing activities......... 16,626,518 (41,327,836) (15,981,678)
------------------- ------------------ -------------------
Net (decrease) increase in cash and cash equivalents........ (2,803,946) 6,307,081 1,687,903
Beginning cash and cash equivalents......................... 10,701,188 4,394,107 2,706,204
------------------- ------------------ -------------------
Ending cash and cash equivalents............................ $ 7,897,242 $ 10,701,188 $ 4,394,107
=================== ================== ===================
Cash paid for interest, net of amounts capitalized of $256,886,
$1,743,658 and $2,199,961, for the years ending December 31,
2004, 2003 and 2002 respectively...................................... $ -- $ -- $ --
=================== ================== ===================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Reinvested Preferred Stock dividends..................................... $ -- $ 1,499 $ 3,565,590
=================== ================== ===================
Reinvested interest on Notes Payable..................................... $ 4,264 $ 65,616 $ 401,610
=================== ================== ===================
The accompanying notes are an integral part of these statements.
FS-5
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
1. ORGANIZATION AND BUSINESS:
Organization
BellaVista Capital, Inc., a Maryland corporation (the Company, our, we), was
formed on March 18, 1999 and commenced operations effective May 1, 1999. We are
engaged in the business of investing in for-sale residential real estate
development projects, primarily in California. Our investments are structured as
loans secured by real estate, loans made to real estate development entities, or
as investments in real estate development entities. We are organized in a single
operating segment for purposes of making operating decisions and assessing
performance. BellaVista Capital, Inc. is also the 100% shareholder of 99
Investors, Inc and Sands Drive San Jose, Inc., both California corporations
formed for the purpose of developing and selling residential real estate.
Risk Factors
General Economic Conditions in Lending Areas. Although our business plan seeks
to diversify its investments throughout California and other states in the
United States of America, currently, nearly all of our investments are located
in the San Francisco Bay Area, with a concentration in the counties of Santa
Clara and San Mateo. Since the investments are located in a limited geographical
region, they 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 investments. Many of the investments rely on
the completion and sale of the developed real estate in order to obtain
repayment. In the event that repayments are not sufficient to timely meet our
commitments and credit facilities are not extended on terms favorable to us, we
will 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 or further downsizing of the Company. 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 investments or received through foreclosure.
In April 14, 2004 the Company provided certain documents requested by the
Securities and Exchange Commission in connection with a letter of inquiry.
During June 2004 Mr. Rider and Ms. Fox both provided voluntary testimony in
connection with the inquiry. In January 2005 the Commission requested additional
documentation which the Company has agreed to provide.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation Policy
The consolidated financial statements include the accounts of BellaVista
Capital, Inc. and its wholly owned subsidiaries, 99 Investors, Inc. and Sands
Drive San Jose, Inc. All intercompany accounts and transactions have been
eliminated in consolidation.
FS-6
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
DECEMBER 31, 2004, 2003 AND 2002
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"). These 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, where applicable. 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, or at least quarterly. 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 loans. Such properties are
termed real estate owned (REO) and are accounted for in a manner similar to our
investments in real estate under development.
FS-7
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
DECEMBER 31, 2004, 2003 AND 2002
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 Real Estate Developments
We recognize income from our ADC loans and REO properties as costs are
recovered, generally upon the sale or refinancing of the underlying 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 and REO properties.
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.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). This Statement prescribes the
use of the asset and liability method whereby deferred tax assets and liability
account balances are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using enacted
tax rates and laws that will be in effect when the differences are expected to
reverse. The Company provides a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.
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 owed 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
years ended December 31, 2004, 2003 and 2002, are the same and are 6,476,866,
100 and 100 shares, respectively.
On September 1, 2004 all of our outstanding shares of Preferred Stock converted
to common stock. The following table sets forth the basic and diluted net loss
per common share as if the Preferred Stock had always been common stock for the
year ended December 31 (unaudited):
2004 2003 2002
---- ---- ----
Basic and diluted net
loss per common share..................$ (0.23) $ (0.97) $ (0.96)
Basic and diluted weighted-average common ------------ ------------ ------------
shares outstanding..................... 20,694,926 22,422,278 22,168,639
============ ============ ============
3. INVESTMENTS IN REAL ESTATE UNDER DEVELOPMENT:
We have made ADC loans with maturity dates generally ranging from 12 to 18
months. As of December 31, 2004 we had six ADC loans outstanding which are
described below.
FS-8
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
DECEMBER 31, 2004, 2003 AND 2002
Final Face Amount Funded Carrying
Interest Maturity Amount (net of Capitalized Recognized Amount of
Description Rate Date of Mortgages payments) Costs Impairment Mortgages
- ------------------------ ------------- ----------------- ---------------- ----------------- ----------------- ----------------
Loan 2503 11.50% 12/1/04 $ 7,725,000 $ 5,530,622 $ 134,522 $ 1,582,725 $ 4,082,419
Loan 2517 21.00% 8/4/05 4,135,000 2,159,866 113,834 -- 2,273,699
Loan 2523 8.00% 8/4/05 11,000,000 6,818,041 14,277 -- 6,832,318
Loan 2524 10.00% 11/12/06 1,200,000 1,000,000 153 -- 1,000,153
Loan 2525 11.00% 11/15/05 1,725,000 1,431,028 -- -- 1,431,028
Loan 2526 12.00% 3/15/06 3,353,000 2,835,940 -- -- 2,835,940
----------------- ---------------- ----------------- ----------------- ----------------
Total $ 29,138,000 $ 19,775,496 $ 262,785 $ 1,582,725 $ 18,455,557
================= ================ ================= ================= ================
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 December 31, 2004 the property
was sold pending close of escrow and we had funded our entire commitment for the
non-interest portion of the loan. On January 4, 2005 escrow closed and we
received net proceeds from the sale which payment totaling approximately $4.2
million.
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. The project is
nearing completion and models are expected to be open in early April 2005. There
are currently a number of units presold and closings are expected to occur
beginning in May, 2005. As of December 31, 2004 we had $2,881,959 remaining to
fund on the non-interest portion of our loan commitment.
Loan 2524 - This $1,200,000 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.
FS-9
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
DECEMBER 31, 2004, 2003 AND 2002
Loan 2525 - This $1,725,000 loan is secured by a first deed of trust on
approximately 1.1 acre parcel in East Palo Alto, California. The property is
currently zoned residential and the developer has applied for a change in zoning
to residential/retail mixed use. Approval for the zoning change is expected by
June 2005. The note was issued November 15, 2004, bears interest at 11%, which
is accrued and payable at the loan's maturity date, November 15, 2005. We have
an obligation to fund up to an additional $1,500,000 when building permits are
approved and construction is ready to commence.
Loan 2526 - This $3,353,000 loan is secured by a second deed of trust on a 6,551
square foot parcel in San Francisco, California which will comprise 32
condominium units. Construction started in January 2005 and is expected to
complete in January 2006. The loan is junior to a deed of trust in the amount of
$9.3 million in favor of East West Bank. The note was issued on December 7,
2005, bears interest at 12%, which is accrued and payable at the loan's maturity
date, March 15, 2006. The note provides for additional interest equal to 2.75%
of the gross sales price of each completed unit. We have no additional funding
requirement on the non-interest portion of our commitment.
4. INVESTMENT IN REAL ESTATE HELD FOR SALE:
As of December 31, 2004, we or our wholly-owned subsidiaries, 99 Investors, Inc.
and Sands Drive San Jose, Inc, held title to 12 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 interest in 99 Investors
was transferred to us. The properties are described below:
Carrying
Description Amount Funded Capitalized Recognized Amount of Costs to
(net of payments) Interest Costs Impairment Property Complete
- --------------------- ------------------- ---------------- ----------------- ---------------- -----------------
Property 2216 14,064,158 559,082 2,145,617 12,477,622 22,155,867
Property 2368 2,617,842 77,040 -- 2,694,882 503,602
Property 2396 2,878,833 99,696 813,805 2,164,723 --
Property 2407 1,091,989 69,015 -- 1,161,005 --
Property 2423 5,609,379 262,555 762,233 5,109,701 60,299
Property 2443 -- -- -- -- --
Property 2455 11,798,756 382,842 5,417,299 6,764,299 55,531
Property 2465 208,423 13,076 -- 221,499 --
Property 2468 2,452,050 97,569 -- 2,549,619 509,244
Property 2492 3,467,853 104,592 665,388 2,907,057 14,300
Property 2506 4,613,838 45,382 548,236 4,110,984 418,008
Property 2518 3,450,521 213,163 1,048,399 2,615,285 1,965,943
------------------- ---------------- ----------------- ---------------- -----------------
Total 52,253,642 1,924,012 11,400,977 42,776,676 25,682,794
=================== ================ ================= ================ =================
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 December 31, 2004 the first phase of 38 homes had broken ground. The first
units are scheduled to be complete in June 2005.
FS-10
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
DECEMBER 31, 2004, 2003 AND 2002
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. As
of December 31, 2004 the project was under construction with completion expected
in April 2005.
Property 2396 - This is a 2-unit condominium project totaling approximately
4,450 square feet on Russian Hill in San Francisco, California. The project
completed construction in December 2004 and was listed for sale in early January
2005.
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 purchaser of the two lots has an option to purchase the remaining four
lots. The option expires on July 15, 2005 but may be extended in six month
increments until May 4, 2006 with further option payments.
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. Construction was complete as of December 31, 2004 but the
home required cleaning and repair prior to marketing. It was listed for sale in
March 2005.
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. The sale of the two lots fully repaid our investment and our
carrying amount was zero at year end. When we sell the remaining lot in the
development, our proceeds will be reported as income. As of December 31, 2004
the remaining lot was on the market for sale. In March 2005, the property was
sold pending close of escrow..
Property 2455 - This project is an approximately 8,850 square foot home in
Atherton, California. As of December 31, 2004 the project had completed
construction and the property was listed for sale in January 2005.
Property 2465 - This project is an approximately 8,900 square foot unimproved
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 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 December 31, 2004 the property was in an uncompleted
state. In February 2005 we hired a contractor to finish construction of the
home, which is expected to complete in June 2005.
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. In January 2005 the property sold and closed escrow.
Property 2506 - This project is an approximately 6,400 square foot home in
Hillsborough, California. As of December 31, 2004 the property was under
construction. It completed construction and was marketed for sale in March 2005.
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. As
of Decmeber 31, 2004 we were evaluating our options with this property.
Subsequent to year-end, we engaged a contractor and development manager to
complete construction. Construction is expected to complete in January 2006.
FS-11
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
DECEMBER 31, 2004, 2003 AND 2002
5. PROPERTY, PLANT AND EQUIPMENT:
We had the following property, plant and equipment:
December 31, 2004 December 31, 2003
------------------- ------------------
Computer Equipment 69,354 --
Furniture 39,730 --
------------------- ------------------
Total furniture and equipment 109,084 --
Accumulated depreciation (21,170) --
------------------- ------------------
Furniture and Equipment, net 87,914 --
=================== ==================
6. SECURED NOTES PAYABLE:
As of December 31, 2004 and 2003 we had borrowings of $3,185,000 secured by our
Property 2455. The note bears interest at Prime plus 0.5% (5.75% at December 31,
2004), interest only payments are due monthly and the note is due May 1, 2030.
Additionally Sands Drive San Jose, Inc., our wholly owned subsidiary, was the
obligor, and the Company was the guarantor, under a $22 million construction
loan whose purpose is to finance the construction of our Villa Corntona
project, Property 2216. The loan bears interest at Prime plus 1.00% and is due
in June 2006. As of December 31, 2004, there was no balance owed on the loan.
7. SHAREHOLDERS' EQUITY:
We have authorized 50,000,000 shares of capital stock with a $0.01 par value. At
December 31, 2004 and 2003, there were 18,304,168 and 100 shares of common stock
outstanding, respectively.
As of December 31, 2004 and 2003 we had 0 and 40,000,000 shares of Class A
Convertible Preferred Stock authorized, with 0 and 22,229,739 issued and
outstanding. On September 1, 2004 the outstanding shares of Preferred Stock
converted to common stock in accordance with the terms of the Preferred Stock.
At the time of conversion there were 19,483,252 shares of Preferred Stock
outstanding and 100 shares of common stock outstanding.
We have sold our Preferred Stock through 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. We have not sold shares since September 2002 and,
as of December 31, 2004 we did not have an active private placement.
There is no public market for our stock. In order to provide liquidity for our
shareholders, our Board of Directors has adopted a stock redemption policy for
shareholders who wish to sell their shares to us. The policy generally provides
that the company will periodically make funds available for redemption at a
price determined by the Board of Directors. The repurchase of shares follows
guidelines set forth by the Securities and Exchange Commission for issuer tender
offers. The policy may be modified or terminated at the Board's discretion at
any time.
On January 28, 2005 the Company offered to purchase up to 3,314,917 shares of
common stock at a price of $3.62 per share. The Offer terminated on March 1,
2005, and a total of 6,714,420 Shares were tendered and not withdrawn as of such
date. In accordance with the terms of the offer the Company purchased a total of
3,314,929 Shares at $3.62 per Share for a total payment of $12,000,042.98. As
the number of Shares tendered exceeded the maximum number of Shares the Company
FS-12
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
DECEMBER 31, 2004, 2003 AND 2002
offered to purchase, each tendering shareholder received payment for a prorated
number of Shares purchased. The proration factor was 49.37%. After completion of
the Offer, a total of 14,989,239 Shares remain issued and outstanding.
8. INCOME TAXES
On October 7, 2003 our Board of Directors voted to withdraw our REIT election
effective with the tax year beginning January 1, 2004. The withdrawal of this
election results in the loss of our ability to deduct the payment of dividends
from our taxable income. However,as the result of losses from prior years'
operations, the Company had generated a net operating loss.
At December 31, 2004, we had U.S. federal net operating loss carryforwards of
approximately $81.3 million. The net operating loss carryforwards expire in
various amounts between the years 2016 and 2019. If there is a change in
ownership, utilization of the U.S. net operating losses may be subject to
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986, as amended and similar state provisions. The
annual limitation may result in the expiration of net operating losses before
utilization.
Pretax Loss
Loss before income taxes consisted of the following:
Federal California
Operating Loss Operating Loss
Year ended December 31, Carryforward Carryforward
- -------------------------------------- -------------------- -------------------
2004 34,211,863 34,211,863
2003 38,176,549 22,905,929
2002 8,915,070 5,349,042
-------------------- -------------------
Total 81,303,482 62,466,834
==================== ===================
Due to doubt about the the Company's ability to utilize the benefits of net
operating loss carryforwards, there was no provision for income taxes for the
year ended December 31, 2004. Prior to January 1, 2004 we were subject to tax
rules related to Real Estate Investment Trusts, and accordingly, were not
subject to corporate level taxes during 2003 or 2002 as long as certain
conditions were met. The Company believes that it complied with such conditions.
Deferred Taxes
The significant components of the Company's deferred tax assets are as follows
(in thousands):
12/31/04
------------------
27,944,541
Net operating loss carryforwards
Valuation allowance (27,944,541)
------------------
Net deferred tax assets --
==================
As of December 31, 2004, the Company and its subsidiaries had provided valuation
allowances of approximately $27.9 million in respect of deferred tax assets
resulting from tax loss carryforwards because of the possibility that the
carryforwards may expire unused and that future tax deductions may not be
realized through future operations.
FS-13
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
DECEMBER 31, 2004, 2003 AND 2002
9. 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 year ended December 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 on which it acted as the listing broker. 99 El Camino Partners, LLC
owns the building where we maintain our offices which we began leasing in 2004.
On December 23, 2003 we entered into an agreement, effective January 1, 2004
with Primecore Funding Group to provide management services during a period
concluding on March 31, 2004.
On March 19, 2004, Susan Fox resigned as President, Chief Executive Officer and
Director of BellaVista Capital, 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 was paid
$30,000 per month beginning April 2004. We 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. During 2004 she received
$63,000 in payments from BellaVista in accordance with this provision of our
agreement. Additionally, we purchased certain furniture, computer equipment and
software from her company, Primecore Funding Group, for $200,000. Finally, we
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 BellaVista 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
On December 19, 2003 our Board of Directors voted not to renew the management
agreement with Primecore Funding Group, effective December 31, 2003. The Company
decided to internalize management of the Company, and proceeded to do so. The
Board believes that this action will result in greater transparency to the
shareholders, more accountability of the employees and management to the Board
of Directors and the ability to better manage company costs. On December 23,
2003 we entered into an agreement, effective January 1, 2004 with Primecore
Funding Group to provide management services during a three-month transition
period ended March 31, 2004. As of the date of this filing, the transition has
been accomplished, and the Company is now internally managed.
Our management contract with PFG provided for the payment of a termination fee
equal to 4% of our outstanding loan commitments at the date of termination. The
agreement also provided that any termination fee due under the contract would be
offset by any amounts PFG owed the Company under our Affiliate Loan Agreement
which was entered into concurrently with the Amended and Restated Management
Agreement. Under the terms of the Affiliate Loan Agreement, PFG was indebted to
the Company for approximately $15.6 million prior to offsetting the termination
fee. The amount of the termination fee was approximately $6.2 million which
payment was offset by the obligation to the Company, leaving an obligation of
approximately $9.4 million from PFG. Due to doubts about the ultimate
collectibility of this obligation from PFG, the Company has never reflected it
as an asset in its financial statements. Management does not currently believe
that PFG has assets sufficient to warrant any collection activity for this
obligation, and will therefore continue to reserve the entire asset balance from
its financial statements.
For the year ended December 31, 2004, the portfolio management fees earned by
Primecore Funding Group were $639,698 compared with $3,808,260 and $9,630,701
for the years ended December 31, 2003 and 2002.
FS-14
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
DECEMBER 31, 2004, 2003 AND 2002
Real Estate Sales Commissions
We paid real estate sales commissions of $250,050 during the year ended December
31, 2004 to Primecore Properties, Inc., compared with $835,500 and $446,350
during the years ended December 31, 2003 and 2002. 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. We
did not enter into any new listing agreements with Primecore Properties after we
terminated our contract with Susan Fox's management company.
10. COMMITMENTS AND CONTINGENCIES:
Litigation
From time to time, we may and have become subject to litigation in connection
with our business. In addition, as of December 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 litigation in which the Company was
involved as party, as of December 31, 2004, and in which the Company believed at
December 31, 2004 it is possible that its potential liability could be material
if the Company were unsuccessful in its defense, which the Company does not
currently believe will be the case:
1. 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. Trial is currently
scheduled for April 25, 2005. 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.
2. 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
defects in construction including faulty framing and faulty soil treatment,
resulting in movement and property damage. The Complaint contains claims
totaling approximately $1.9 million 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. The Company disputes both the claim of liability and the
extent of the damages claimed and intends to vigorously defend against the
claims. In addition, the Company currently believes that in the event of any
recovery by the plaintiff, the amount of the claim would be covered by
insurance.
In addition to the above matters, at December 31, 2004, the Company was involved
in several legal matters in which it sought recovery from borrowers, guarantors,
and others. Collections of legal settlements from such parties are reflected as
income from legal settlements, net of collection costs, in the statements of
operations. The actions included the following:
1. A lawsuit was filed by the Company in connection with a loan made on a
subdivision project in Marin County. While the Company had written off the loan
FS-15
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
DECEMBER 31, 2004, 2003 AND 2002
approximately two years before, it 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 $2,350,000 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. To date, the Company has
received payments totaling $1,650,000, including a $600,000 payment made in
January 2005. Two additional payments of $350,000 each are due on April 27,
2005 and July 26, 2005. 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 was filed to collect against the personal 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 was 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 defendants timely made, on September 15 and October 8,
2004, the first two payments totaling $100,000. However, defendants thereafter
defaulted in their payments, and on January 21, 2005 a judgment was entered
against the defendants, Robert A. Johnston and Gregory Bock, in the amount of
$5,900,000. The company is taking steps to recover the amount of the judgment.
The amount of the judgment is not reflected in the financial statements, and
will not be until there is collection, as collection is not reasonably assured.
3. A lawsuit was filed 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.
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.
Construction Contracts
In connection with our development of investments in real estate held for sale,
we have entered into contracts with construction companies totaling $21,497,483
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 $75,698. 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.
We have also provided indemnity agreements to insurance companies in connection
with the issuance of surety bonds guaranteeing the completion of certain public
FS-16
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
DECEMBER 31, 2004, 2003 AND 2002
utility improvements in our developments. The total amount of the surety bonds
issued with respect to which we have issued indemnity agreement is $234,450. The
bonds will be released and our guarantee obligation terminated upon completion
and acceptance of the improvements.
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. 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.
FS-17
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
DECEMBER 31, 2004, 2003 AND 2002
11. QUARTERLY STATEMENTS OF OPERATIONS (UNAUDITED):
The following tables contain selected unaudited quarterly financial data for
fiscal years 2004 (1) and 2003:
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2004 June 30, 2004 September 30, 2004 December 31, 2004
------------------ ------------------- ------------------ ------------------
REVENUES:
Income from completed real estate
development..................... $ 1,372,634 $ 854,192 $ 300,748 $ 970,081
Interest income.................... 35,105 28,524 31,933 57,833
Other.............................. 17,772 10,015 103,214 43,441
------------------ ------------------- ------------------ ------------------
Total revenues................. 1,425,511 892,731 435,895 1,071,355
EXPENSES:
Salaries........................... 21,838 327,745 227,013 299,152
Facilities expenses................ 88,423 101,563 61,440 75,309
Legal and accounting expense....... 864,928 218,992 329,898 1,640,676
General administrative and other... 44,592 70,478 56,016 100,008
Depreciation expense............... -- 8,547 8,547 8,547
Insurance expense.................. 72,154 72,155 80,363 72,090
REO expense........................ 124,419 80,832 71,421 73,272
Internalization transition expense. 429,435 4,237 10,394 6,766
Management fees paid to Manager.... 639,698 -- -- --
Provision for impairment of
investments in real estate ..... 927,480 1,882,283 516,134 86,663
------------------ ------------------- ------------------ ------------------
Total expenses.................. 3,212,967 2,766,832 1,361,226 2,362,483
------------------ ------------------- ------------------ ------------------
Net loss from operations (1,787,456) (1,874,101) (925,331) (1,291,128)
OTHER INCOME (EXPENSE):
Income from legal settlements, net
of collection costs............. 210,000 159,000 132,000 627,000
Loss on sale of fixed assets -- -- -- (23,829)
------------------ ------------------- ------------------ ------------------
Total other income (expense) 210,000 159,000 132,000 603,171
------------------ ------------------- ------------------ ------------------
Net loss $ (1,577,456) $ (1,715,101) $ (793,331) $ (687,957)
================== =================== ================== ==================
Basic and diluted net loss per
common share.................... $ (15,775) $ (17,151) $ (0.12) $ (0.03)
================== =================== ================== ==================
Basic and diluted weighted-average
common shares outstanding....... 100 100 6,353,334 19,413,396
================== =================== ================== ==================
(1) The above 2004 Financial data differs in classification from the presentation reflected in the filed
Quarterly financial data for the fiscal year presented. During the fourth quarter, in order to better reflect
its results from operations, the Company reclassified Income from legal settlements and Loss on sale of fixed
assets from revenues to Other Income (Expense).
FS-18
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
DECEMBER 31, 2004, 2003 AND 2002
10. QUARTERLY STATEMENTS OF OPERATIONS (UNAUDITED):
(Continued)
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2003 June 30, 2003 September 30, 2003 December 31, 2003
------------------ ------------------- ------------------ ------------------
REVENUES:
Income from completed real estate
development..................... $ 2,797,671 $ 1,436,429 $ 3,984,006 $ 3,154,330
Other.............................. 16,157 107 95 760
------------------ ------------------- ------------------ ------------------
Total revenues.................. 2,813,828 1,436,536 3,984,101 3,155,090
EXPENSES:
Management fees paid to Manager.... 1,127,933 1,096,143 868,137 716,047
Provision for impairment of
investments in real estate
development..................... 763,059 13,606,038 2,208,575 10,921,967
General, administrative and other.. 392,636 250,550 529,883 757,653
------------------ ------------------- ------------------ ------------------
Total expenses.................. 2,283,628 14,952,731 3,606,595 12,395,667
------------------ ------------------- ------------------ ------------------
Net income (loss)............... 530,200 (13,516,195) 377,506 (9,240,577)
Preferred stock dividends and
distributions................. (3,930,392) (3,935,292) (2,623,554) --
------------------ ------------------- ------------------ ------------------
Net loss allocable to common.... $ (3,400,192) $ (17,451,487) $ (2,246,048) $ (9,240,577)
================== =================== ================== ==================
Basic and diluted net loss per
common share.................... $ (34,002) $ (174,515) $ (22,460) $ (92,406)
================== =================== ================== ==================
Basic and diluted weighted-average
common shares................... 100 100 100 100
================== =================== ================== ==================
FS-19