UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-30507
BellaVista Capital, Inc.
(Exact name of registrant as specified in its charter)
Maryland 94-3324992
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
420 Florence Street, Suite 200
Palo Alto, CA 94301
(Address of principal offices) (zip code)
(650) 328-3060
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The number of shares of common stock outstanding as of March 31, 2005 was
14,991,325.
Table of Contents
Part I. Financial Information
Item 1. Financial Statements (unaudited).................................. 2
Condensed Consolidated Balance Sheets as of March 31, 2005
(unaudited) and December 31, 2004 (unaudited)..................... 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2005 and 2004 (unaudited).................. 4
Condensed Consolidated Statement of Shareholders' Equity for the
Three Months Ended March 31, 2005 (unaudited)..................... 5
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2005 and 2004 (unaudited).................. 6
Notes to the Condensed Consolidated Financial Statements
(unaudited)....................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 22
Item 4. Controls and Procedures...........................................23
Part II. Other Information
Item 1. Legal Proceedings................................................ 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 23
Item 3. Defaults Upon Senior Securities.................................. 23
Item 4. Submission of Matters to a Vote of Security Holders.............. 23
Item 5. Other Information................................................ 24
Item 6. Exhibits ........................................................ 24
Signatures....................................................... 24
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Attached are the following unaudited financial statements of BellaVista
Capital, Inc., formerly known as Primecore Mortgage Trust, Inc. (the "Company"):
(1) Condensed Consolidated Balance Sheets as of March 31, 2005 (unaudited),
and December 31, 2004 (unaudited)
(2) Condensed Consolidated Statements of Operations for the Three Months
ended March 31, 2005 and 2004 (unaudited)
(3) Condensed Consolidated Statement of Shareholders' Equity for the Three
Months ended March 31, 2005 (unaudited)
(4) Condensed Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2005 and 2004 (unaudited)
(5) Notes to Condensed Consolidated Financial Statements (unaudited)
The financial statements referred to above should be read in
conjunction with the Company's audited financial statements for the year ended
December 31, 2004 as filed with the Securities and Exchange Commission in our
Annual Report on Form 10-K filed May 9, 2005.
2
BELLAVISTA CAPITAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, 2005 December 31, 2004
------------------ -------------------
ASSETS:
Investments in real estate under development $ 16,225,603 $ 18,455,557
Investments in real estate held for sale 42,985,497 42,776,676
Cash and cash equivalents 641,833 7,897,242
Fixed assets, net 80,714 87,914
Other assets 290,023 752,043
------------------ -------------------
Total assets $ 60,223,670 $ 69,969,432
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Secured notes payable 5,301,968 3,185,000
Accrued expenses and other 1,053,936 339,585
------------------ -------------------
Total liabilities 6,355,904 3,524,585
SHAREHOLDERS' EQUITY:
Common stock: par value $0.01, 50,000,000
shares authorized; 14,991,325 and
18,304,168 shares issued and outstanding
at March 31, 2005, and December 31, 2004,
respectively 201,216,369 213,208,861
Accumulated dividends and distributions (90,621,455) (90,621,455)
Accumulated deficit (56,727,148) (56,142,559)
------------------ -------------------
Total shareholders' equity 53,867,766 66,444,847
------------------ -------------------
Total liabilities and shareholders' equity $ 60,223,670 $ 69,969,432
================== ===================
The accompanying notes are an integral part of these statements
3
BELLAVISTA CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Three Months
Ended Ended
March March
31,2005 31,2004
--------------- ---------------
REVENUES:
Income from real estate development $ 454,560 $ 1,372,634
Interest income 48,521 35,105
Other 203 17,772
--------------- ---------------
Total revenues 503,284 1,425,511
EXPENSES:
Salaries expense 184,647 21,838
Facilities expense 23,788 88,423
Administrative expense 225,001 280,484
Real Estate Owned expense 245,680 825,609
Depreciation 7,200 --
Internalization transition expenses -- 429,435
Management fees -- 639,698
Provision for impairment of
investments in real estate 911,557 927,480
--------------- ---------------
Total expenses 1,597,873 3,212,967
--------------- ---------------
Operating loss (1,094,589) (1,787,456)
OTHER INCOME (EXPENSE):
Income from legal settlements 510,000 210,000
--------------- ---------------
Total other income (expense) 510,000 210,000
--------------- ---------------
Net loss before income taxes (584,589) (1,577,456)
Provision for income taxes -- --
--------------- ---------------
Net loss $ (584,589) $ (1,577,456)
=============== ===============
Basic and diluted net loss per share $ (0.03) $ (15,775)
=============== ===============
Basic and diluted weighted average 17,199,887 100
shares outstanding =============== ===============
The accompanying notes are an integral part of these statements
4
BELLAVISTA CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 2005
(unaudited)
Common Stock
---------------------------------
Accumulated Accumulated
Shares Amount Dividends Deficit Total
--------------- ----------------- ----------------- ------------------ ---------------
Shareholders' equity at
January 1, 2005 18,304,168 $213,208,861 $ (90,621,455) $ (56,142,559) $ 66,444,847
Repurchase of stock (3,312,843) (11,992,492) -- -- (11,992,492)
Net income -- -- -- (584,589) (584,589)
--------------- ----------------- ----------------- ------------------ ---------------
Shareholders' equity at
March 31, 2005. 14,991,325 $201,216,369 $ (90,621,455) $ (56,727,148) $ 53,867,766
=============== ================= ================= ================== ===============
The accompanying notes are an integral part of these statements
5
BELLAVISTA CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Three Months
Ended Ended
March March 31,2004
31,2005
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (584,589) $ (1,577,456)
Adjustments to reconcile net loss to net cash provided by operations:
Provision for impairment of investments in real estate 911,557 927,480
Depreciation 7,200 --
Increase in accounts payable and other liabilities 714,351 1,292,540
Decrease in other assets, net 462,020 348,056
-------------------- --------------------
Net cash provided by operating activities 1,510,539 990,620
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for purchase of fixed assets -- (149,030)
Proceeds from investments in real estate under development and
property held for sale 7,003,776 8,164,027
Investments in real estate under development and property held for
sale (5,894,200) (5,163,602)
-------------------- --------------------
Net cash provided by investing activities. 1,109,576 2,851,395
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of stock (11,992,492) --
Payments of unsecured notes payable -- (3,766,723)
Borrowings under secured notes payable 2,116,968 --
-------------------- --------------------
Net cash used in financing activities (9,875,524) (3,766,723)
-------------------- --------------------
Net (decrease) increase in cash and cash equivalents (7,255,409) 75,292
Beginning cash and cash equivalents 7,897,242 10,701,188
-------------------- --------------------
Ending cash and cash equivalents $ 641,833 $ 10,776,480
==================== ====================
Cash paid for interest, net of amounts capitalized of $44,121 and
$84,817, for the three months ended March 31, 2005 and 2004,
respectively $ -- $ --
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Reinvested interest on unsecured notes payable $ -- $ 4,264
==================== ====================
The accompanying notes are an integral part of these statements
6
BELLAVISTACAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BUSINESS:
These statements are not a complete financial statement presentation. They
should be read in conjunction with our December 31, 2004 Financial Statement
presentation filed on Form 10-K. The accompanying unaudited interim financial
statements reflect all adjustments that are, in the opinion of management,
necessary for a fair statement of results for the interim periods presented. The
results of operations for the fiscal quarter ended March 31, 2005 are not
necessarily indicative of the results to be expected for any future period or
the full fiscal year.
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 our 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, 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, our CEO and Ms. Fox, our former CEO, both provided
voluntary testimony in connection with the inquiry. In January 2005 the
Commission requested additional documentation which the Company provided on
April 27, 2005.
7
BELLAVISTACAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
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, is charged to operations.
8
BELLAVISTACAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Investments in Real Estate Held for Sale
We may take title to property through foreclosure or by deed in lieu of
foreclosure when a borrower defaults on our ADC 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.
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 uses 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.
As of December 31, 2004 we had generated federal and state net operating losses
of approximately $81.3 million and $62.5 million, respectively from the
disposition of impaired assets in our portfolio. The ability to use these net
operating loss carry forwards to offset future taxable income may result in tax
savings to the company. The Company has established a full valuation allowance
against its net deferred income tax asset, which is composed primarily of the
carry forwards, because of the possibility that the carry forwards may expire
unused and that future tax deductions may not be realized through future
operations.
Net Loss Per Share of Common Stock
Per share amounts for our common stock are computed using the weighted average
common shares outstanding during the period. Net loss used in the calculation is
increased by declared dividends 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
three months ended March 31, 2005 and March 31, 2004, are the same and are
17,199,887 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 income
(loss) per common share as if the Preferred Stock had always been common stock:
9
BELLAVISTACAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Proforma
--------------------------------------
Three months Three months
Ended Ended
March 31, 2005 March 31, 2004
Basic and diluted net income
(loss) per common share............... $ (0.03) $ (0.07)
================== ===================
Basic and diluted weighted-average
common shares outstanding............ 17,199,887 22,229,839
================== ===================
3. INVESTMENTS IN REAL ESTATE UNDER DEVELOPMENT:
As of March 31, 2005 we had five investments in real estate development which
are described below:
Remaining
Amount Capitalized Carrying Funding
Description Investment Type Invested Costs Amount Obligation
- ------------------- ------------------- ------------------ ----------------- ------------------ ------------------
Loan 2517 Loan $ 2,159,866 $ 114,665 $ 2,274,530 $ --
Loan 2523 Loan 8,619,395 17,107 8,636,503 1,080,605
Loan 2524 Loan 1,000,000 519 1,000,519 --
Loan 2525 Equity 1,476,540 532 1,477,072 1,561,044
Loan 2526 Loan 2,835,940 1,038 2,836,979 --
------------------ ----------------- ------------------ ------------------
Total $ 16,091,741 $ 133,861 $ 16,225,603 $ 2,641,649
================== ================= ================== ==================
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 investment is structured as an $11,000,000 loan 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 upon the earlier of August 4, 2005, the
loan's maturity date, or the sale of the developed real property. The project is
nearing completion and models opened in April 2005. There are a number of units
presold and closings are expected to occur as units are completed, currently
expected to begin during June, 2005.
Loan 2524 - This investment is structured as a $1,200,000 loan secured by a
third deed of trust on a 10.3 acre parcel in Colorado Springs, Colorado which
will comprise 148 condominium units, scheduled to be constructed in phases. The
first phase of 27 units is nearing completion. The loan is junior to a deed of
trust in the amount of $2,392,000 and a revolving construction 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.
Loan 2525 - This $3,250,000 investment is structured as an equity investment in
a 1.1 acre development 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. On April 26, 2005 the developer received planning
commission approval. Approval for the zoning change is expected by June 2005.
The investment agreement with our developer provides for the payment of a
preferred return on our invested capital and a portion of the development's
10
BELLAVISTACAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
profits. 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 investment is structured as a $3,353,000 loan 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. INVESTMENTS IN REAL ESTATE HELD FOR SALE:
As of March 31, 2005, we or our wholly-owned subsidiaries, 99 Investors, Inc.
and Sands Drive San Jose, Inc., held title to 11 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 the membership interest in
99 Investors, LLC was transferred to us. The properties are described below:
Carrying
Amount Invested Capitalized Recognized Amount of Costs to
Description (net of payments) Interest Costs Impairment Property Complete
- --------------------- ------------------- ---------------- ----------------- ---------------- -----------------
Under construction
Property 2216 $ 17,047,555 $ 564,195 $ 2,145,617 $ 15,466,132 $ 20,447,400
Property 2368 3,012,403 78,099 -- 3,090,502 109,041
Property 2468 2,596,673 98,529 -- 2,695,201 364,622
Property 2518 3,505,253 214,130 1,048,399 2,670,985 1,911,210
Total under
construction 26,161,884 954,953 3,194,016 23,922,820 22,832,273
Held for sale
Property 2396 2,900,061 99,696 813,805 2,185,952 28,980
Property 2407 1,091,989 69,015 -- 1,161,005 --
Property 2423 5,647,343 262,555 1,232,233 4,677,665 22,335
Property 2443 -- -- -- -- --
Property 2455 11,854,286 382,842 5,417,299 6,819,829 --
Property 2465 208,423 13,076 -- 221,499 --
Property 2506 4,939,573 46,946 989,793 3,996,727 92,274
------------------- ---------------- ----------------- ---------------- -----------------
Total held for
sale 26,641,6751 874,130 8,453,130 19,062,677 143,589
------------------- ---------------- ----------------- ---------------- -----------------
Total $ 52,803,559 $ 1,829,083 $ 11,647,146 $ 42,985,497 $ 22,975,862
=================== ================ ================= ================ =================
Property 2216 - This is an approximately 8-acre parcel approved for development
of 72 townhomes and condominiums totaling approximately 123,372 square feet in
San Jose, California. We have contracted with an outside party to provide
development and construction management services for this property. As of March
31, 2005 the first phase of 38 homes was underway with the first units scheduled
to complete in July 2005.
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
11
BELLAVISTACAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
of March 31, 2005 the project was under construction with completion expected in
May 2005. During April 2005 the units were marketed for sale and all units were
under contract pending close of escrow.
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. In March 2005 the property was removed from the market while we planned
certain improvements to better market the property. We expect to list the
property for sale again by July 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. 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 March 31, 2005 the
remaining lot was under contract pending close of escrow.
Property 2455 - This project is an approximately 8,850 square foot home in
Atherton, California. The property completed construction in December 2004 and
is listed for sale at $7.65 million.
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.
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. In February 2005 we engaged a contractor to finish
construction of the home, which is expected to complete in June 2005.
Property 2506 - This project is an approximately 6,400 square foot home in
Hillsborough, California. In March 2005 the home completed construction and is
marketed for sale at $5.125 million.
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. In February 2005, we engaged a contractor and development
manager to complete construction. Construction is expected to complete in early
2006.
5. PROPERTY, PLANT AND EQUIPMENT:
We had the following property, plant and equipment:
March 31, 2005 December 31, 2004
--------------------------------------
Computer Equipment $ 69,354 $ 69,354
Furniture 39,730 39,730
--------------------------------------
Total furniture and equipment 109,084 109,084
Accumulated depreciation (28,370) (21,170)
--------------------------------------
Furniture and Equipment, net $ 80,714 $ 87,914
======================================
12
BELLAVISTACAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. SECURED NOTES PAYABLE:
As of March 31, 2005 and December 31, 2004 we had borrowings of $3,185,000
secured by our Property 2455. The note bears interest at Prime plus 0.5% (6.25%
and 5.75% at March 31, 2005 and December 31, 2004, respectively), 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 was to finance the construction of our Villa Cortona
project, Property 2216. The loan bears interest at Prime plus 1.00% (6.75% and
6.25% at March 31, 2005 and December 31, 2004, respectively) and is due in June
2006. As of March 31, 2005 the balance due on the note was $2,116,968 compared
to $0 at December 31, 2004.
7. SHAREHOLDERS' EQUITY:
We have authorized 50,000,000 shares of capital stock with a $0.01 par value. At
March 31, 2005 and December 31, 2004, there were 14,991,325 and 18,304,168
shares of common stock outstanding, respectively.
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 March 31, 2005 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 United States 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 agreed to purchase a
total of 3,314,929 shares at $3.62 per share for a total payment of $12,000,043.
As the number of shares tendered exceeded the maximum 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%. Subsequent
to the closing of the offer, the Company agreed to accommodate the request of a
shareholder who requested to withdraw 2,086 shares, and reducing proceeds by
$7,508, from shares which the Company agreed to purchase under the terms of the
offer. After completion of the Offer, and the subsequent withdrawal of 2,086
from the shares the Company agreed to purchase, a total of 14,991,325 shares
remain issued and outstanding
8. TRANSACTIONS WITH AFFILIATES:
Prior to March 19, 2004, we had the following affiliates all of which were owned
by Susan Fox, who, prior to such date was the President, CEO and a Director of
the Company: Primecore Funding Group, Inc; 99 El Camino Partners, LLC; Primecore
Properties, Inc. During the three months ended March 31, 2004, Primecore Funding
Group, Inc. received management fees from us, and Primecore Properties, Inc.
received real estate commissions in connection with the sale of certain REO
properties 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.
13
BELLAVISTACAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 the three months ended
March 31, 2005 she received $30,000 in payments from BellaVista in accordance
with this provision of our agreement compared with $0 during the three months
ended March 31, 2004. Additionally, during 2004, 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
during the term of the lease.
Since 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 8, 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. 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. Since that date the Company has been
managed using internal resources.
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 three months ended March 31, 2005, the portfolio management fees earned
by our Primecore Funding Group were $0 compared with $639,698 during the three
months ended March 31, 2004.
Real Estate Sales Commissions
During the three months ended March 31, 2005 we paid no real estate sales
commissions to Primecore Properties, Inc., compared with $102,550 during the
three months ended March 31, 2004. 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.
14
BELLAVISTACAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Operating Leases
The following is a schedule by years of future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of March 31, 2005:
Nine months ended December 31, 2005: $ 86,677
Year ended December 31, 2006 114,154
Year ended December 31, 2007 17,955
------------------
Net minium lease payments $ 218,786
==================
9. 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 March 31, 2005, 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 March 31, 2005, and in which the Company believed at
March 31, 2005 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. 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. Upon request made by
the defendant, the trial, originally scheduled for April 25, 2005 has
been continued to July 25, 2005.
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 that there are 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 March 31, 2005, 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
15
BELLAVISTACAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 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 $2,000,000, including
a $350,000 payment made in April 2005. A final payment of $350,000 is
due 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 with an unpaid
balance totaling $19,715,496 at March 31, 2005. 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 $525,000. 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.
16
BELLAVISTACAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
We have also provided indemnity agreements to insurance companies in connection
with the issuance of other surety bonds. The total amount of the surety bonds
issued with respect to which we have issued indemnity agreement is $412,902.
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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Our material financial transactions have been purchasing and holding a portfolio
of construction mortgage loans, and the construction and sale of real estate
acquired through foreclosure or deed in lieu of foreclosure. Statements
contained in this Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in this Form 10-Q, which
are not historical facts, may be forward-looking statements. Forward-looking
statements include statements which are predictive in nature, which depend upon
or refer to future events or conditions, which include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," or similar
expressions. In addition, any statements concerning future financial performance
(including future revenues, earnings or growth rates), ongoing business
strategies or prospects, and possible future actions, which may be provided by
management, are also forward-looking statements. These statements are not
guaranties of future performance. Forward-looking statements are based on
current expectations and projections about future events and are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. These risks include those described under the heading
"Risk Factors" in footnote 1 to Item 1 above. Investors are cautioned not to
attribute undue certainty to these forward-looking statements, which speak only
as of the date of this Form 10-Q. 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-Q 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
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 the investment portfolio resulted in substantial operating
losses. The Company realized that these net operating losses could be carried
forward and used to reduce future taxable 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 March
31, 2005 the Company's available net operating loss carryforwards were
approximately $81.3 million. If these net operating loss carryforwards are fully
utilized to offset future taxable income, at current Federal and California
state tax rates, it would save the Company approximately $29.1 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:
18
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. 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 recurring 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 during 2004, but we believe the benefits gained through the
certainty of settlement, will far outweigh to 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 the 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 January 1, 2005 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 our investments in real
estate only after we have collected it from the sale or repayment of the
associated investment. During the three months ended March 31, 2005 we reported
income from our investments in real estate development of $454,560 compared
with $1,372,634 during the three months ended March 31, 2004. The reduction in
income between the two periods is due to a combination of the lower amount of
repayments during the three months ended March 31, 2005, $7.5 million, compared
with $9.5 million collected during the three months ended March 31, 2004; and
one of the investments which repaid during the three months ended March 31, 2004
was a performing investments where we collected our entire investment plus a
total of approximately $700,000, which was interest charged to the loan for over
two years.
Performing Investments
As of January 1, 2005 we had five performing investments in which we had
invested $14.2 million. During the three months ended March 31, 2005 we invested
an additional $1.8 million into these performing investments, increasing our
19
total investment to approximately $16.0 million at March 31, 2005. If our
contracts had been loans according to generally accepted accounting principles,
we would have reported income of approximately $578,000 for these performing
investments. This represents a 15% annual return on our average invested capital
for our performing investments during the three months ended March 31, 2005 and
approximately 4% on the net realizable value of our investment portfolio as a
whole. See the discussion about the net realizable value of our investments in
the Liquidity and Capital Resources section of this Item 2.
The Company believes that the rules governing the reporting of income from our
investments make it difficult to understand our economic performance.
Specifically, our investments can take up to two years to complete and repay.
During this time, we generally charge interest or a preferred return on our
investments to our developers, which we cannot report for GAAP purposes until
the investment has completed and repaid. During the period that we are charging,
but not reporting this income, we are incurring expenses necessary to originate
and service our investments and these expenses are reported as charged during
the period they are incurred.
The following table, using Non-GAAP measures, presents the results of operations
that would be reported if our investments were treated as loans. For these
purposes, proforma revenues from real estate development include interest and
preferred returns we charge developers during the reporting period and the
prorated amount of commitment fees charged for the reporting period over the
contracted term of our investment. Proforma net loss per share is calculated as
the weighted average number of shares outstanding for both common and preferred
shares.
Three months Three months
Ended Ended
March 31, 2005 March 31, 2004
----------------- -----------------
Net loss per GAAP, as reported $ (584,589) (1,577,456)
Revenues from real estate development
per GAAP (454,560) (1,372,634)
Proforma revenues from real estate
development 577,841 425,062
----------------- -----------------
Proforma net loss - Non GAAP (461,308) (2,525,028)
================= =================
Proforma net loss per share - Non GAAP $ (0.03) $ (0.11)
================= =================
Expenses
During the three months ended March 31, 2005 we incurred expenses totaling
$686,325 relating to the ongoing operations of the company, legal expenses and
carrying costs related to our REO portfolio. Our recurring operating expenses
were approximately $433,436 compared with $1,030,433 during the three months
ended March 31, 2004. We accomplished this reduction in recurring operating
expenses through staff reductions, reduced rent from new, smaller office space
and other cost cutting measures. Our projected operating expenses for the year
ended 2005 are approximately $1.25 million. Based on our first quarter budgets,
we are on target to achieve our projected operating expense budgets. During the
months ended March 31, 2005 we also recorded impairment charges totaling
$911,557 reflecting changes downward in our estimates of the net realizable
values totaling $1.1 for three of our REO properties. During the same period we
reflected changes upward in our estimates of fair values for two of our REO
properties totaling $1.4 million. These upward revisions in estimates do not
affect any previously impaired investments in real estate as management
accounted for the impairment previously taken as a change in cost basis for
those two properties. Consequently, any previous impairment recorded prior to
January 1, 2005 will not reverse until those properties are sold. However, these
adjustments have been reflected in our non-GAAP measure - net realizable value
of investments below. The changes in estimates, both upward and downward, were
based upon revised market information available at the time we prepared this
Form 10-Q.
In addition to our recurring operating expenses, we incurred legal expenses and
REO carrying costs related to our non-performing investments of $245,680 for the
three months ending March 31, 2005 compared with $825,609 during the three
months ended March 31, 2004. The decrease in these costs between these
comparative periods was expected as we continue to complete and sell our
non-performing investments and we resolve our outstanding legal issues
associated with those past investments. For the year ended 2005 we have budgeted
approximately $650,000 for these non-recurring expenses. These estimated
expenses depend, to a large degree, upon our ability to complete and sell these
non-performing investments according to our estimates. In the event we cannot
sell these properties within the timeframes we contemplate, we will incur
additional expenses associated with holding these assets. We had previously
20
estimated that during the three months ended March 31, 2005, we would sell four
properties however, only two properties were sold during that period.
Since December 31, 1999, all interest costs have been capitalized as a cost of
our investments. Interest cost associated with our borrowings was $55,769 during
the three months ended March 31, 2005 compared with $90,386 during the three
months ended March 31, 2004. The decrease is due to the lower amount of debt on
our balance sheet.
During the three months ended March 31, 2005 we reported income of $510,000
from a payment received, net of collection expenses, in accrodance with a
settlement agreement with one of our former borrowers. Under the terms of our
settlement agreement with this developer, we are due to receive two more
payments totaling $630,000, net of collection expenses by July 26, 2005.
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 eCash
As of March 31, 2005 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 three months ended March 31, 2005 we received repayments, including income,
totaling $7.5 million compared with $9.5 million during the three months ended
March 31, 2004. The following table summarizes our liquidity expectations for
the 16 investments, both performing investments and REO properties, net of
secured debt repayments, held at March 31, 2005. 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 March 31, 2005 $ 25,134,764
During Q2 2005 27,288,025
During Q3 2005 5,996,713
During Q4 2005 5,472,237
During Q1 2006 4,927,480
During Q2 2006 3,186,781
During Q3 2006 --
During Q4 2006 3,072,472
------------------------
Total $ 75,078,473
========================
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.
21
Uses of Cash
The following table sets forth the projected timing and amount of our
obligations through December 31, 2006, without taking into account new
investments that may be made during 2005 and 2006:
Nine months Year Ended
Obligation Total ended 12/31/05 12/31/06 Thereafter
- ---------------------------------------------------------- ------------------ ------------------ -------------------
Investment fundings $ 22,842,580 $ 22,842,580 $ -- $ --
Legal services agreement 268,500 268,500 -- --
Office lease 149,400 63,000 86,400 --
Secured note payable 5,301,968 -- 2,116,968 3,185,000
------------------- ------------------ ------------------ -------------------
Total $28,562,448 $ 23,174,080 $ 2,203,368 $ 3,185,000
====================================== ================== ===================
Investment fundings are the largest use of our cash. During the three months
ended March 31, 2005 we invested $5.9 million in new and continuing development
projects compared with $5.2 million during the three months ended March 31,
2005. At March 31, 2005 we estimated the costs to complete the REO properties in
our portfolio plus the remaining funding obligation on our performing
investments was $22.8 million $19.2 million of which is related to our Property
2216. We have a $22 million construction loan in place with proceeds of $21.2
million to fund these construction costs. These amounts will be funded as
construction progresses on our investments. As of March 31, 2005 we had drawn
$2.1 million against this commitment to fund construction costs. The exact
timing of the investment fundings is dependent on several factors including
weather, governmental regulation and developer related issues, so the timing of
investment fundings in the above table is an estimate based on information
available to us at this time. Additionally, we expect the amount of actual
investment fundings to be higher than our obligation existing at March 31, 2005
as we continue to make and fund new loan commitments in 2005 and beyond.
Our secured notes payable will be repaid upon the sale of the properties
securing the notes. One of the properties is complete and on the market for
sale. The other property is a multi-unit project under construction with sales
scheduled to commence in June 2005. We currently expect that both of these notes
payable will be retired prior to the maturity dates of the loans.
Stock Repurchases
We provide liquidity to our stockholders through the repurchase of outstanding
shares. 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.
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.
22
The information presented below reconciles the differences between US GAAP and
the estimated realizable value of our investments.
March 31, 2005 December 31, 2004
------------------- ------------------
Investments in real estate
under development $ 16,225,603 $ 18,455,557
Investments in real estate held
for sale 42,985,497 42,776,676
------------------- ------------------
Total investments in real estate
per US GAAP 59,211,100 61,232,233
Add: GAAP impairments 11,647,146 12,983,702
Accrued interest and points 18,913,465 20,249,047
Less: Capitalized interest (1,962,944) (2,186,797)
------------------- ------------------
Balance owed on real estate
investments 87,808,767 92,278,185
Amount estimated uncollectible (18,705,134) (21,790,293)
------------------- ------------------
Estimated realizable value of
investments in real estate $ 69,103,633 $ 70,487,892
=================== ==================
Net Realizable Value of Assets per Share
The net realizable value of assets per share is a non-GAAP measure that serves
as 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 estimated net realizable value of our
stock at March 31, 2005 and December 31, 2004 for purposes of our redemption
policy only:
March 31, 2005 December 31, 2004
------------------- ------------------
Cash $ 641,833 $ 7,897,242
Other assets 370,737 752,042
Estimated realizable value of
investments in real estate 69,103,633 70,487,892
------------------- ------------------
Total realizable assets 70,116,203 79,137,176
Total liabilities (6,355,904) (3,524,585)
------------------- ------------------
Estimated net realizable assets 63,760,299 75,612,591
Shares outstanding 14,991,325 18,304,168
------------------- ------------------
Estimated net realizable assets
per share $ 4.25 $ 4.13
=================== ==================
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 agreed to purchase a total of 3,314,929 shares at $3.62 per share for a
total payment of $12,000,043. As the number of shares tendered exceeded the
maximum 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%. Subsequent to the closing of the offer, the Company
agreed to accommodate the request of a shareholder who requested to withdraw
2,086 shares, and reducing proceeds by $7,508, from shares which the Company
agreed to purchase under the terms of the offer. After completion of the Offer,
and the subsequent withdrawal of 2,086 from the shares the Company agreed to
purchase, a total of 14,991,325 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
23
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, including those related to the valuation of our assets
and liabilities. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. Management believes the following
critical accounting policies, among others, affect the more significant
judgments and estimates used in the preparation of its consolidated financial
statements.
Valuation and Realizability of Investments. All of our ADC loans are classified
for financial reporting purposes as investments in real estate under development
(see Note 3 to the financial statements). We have foreclosed on some ADC loans
that are classified as investments in real estate held for sale (Note 4). Such
investments include capitalized interest and are stated at the lower of cost or
fair value. Management conducts a review for impairment on an
investment-by-investment basis whenever events or changes in circumstances
indicate that the carrying amount of an investment may not be recoverable.
Impairment is recognized when estimated expected future cash flows (undiscounted
and without interest charges), typically from the sale of a completed property,
are less than the carrying amount of the investment, plus estimated costs to
complete. The estimation of expected future net cash flows is inherently
uncertain and relies to a considerable extent on assumptions regarding current
and future economics and market conditions. If, in future periods, there are
changes in the estimates or assumptions incorporated into the impairment review
analysis, the changes could result in an adjustment to the carrying amount of
the investments. To the extent an impairment has occurred, the excess of the
carrying amount of the investment over its estimated fair value, less estimated
selling costs, will be charged to income. We believe that all of our investments
are carried at the lower of cost or realizable values, however conditions may
change and cause our ADC loans to decline in value in a future period.
Loan Accounting. We have applied the guidance of AICPA Practice Bulletin 1,
Purpose and Scope of AcSEC Practice Bulletins and Procedures for Their Issuance,
Exhibit I in accounting for our investment loans as real estate acquisition,
development, or construction (ADC) arrangements. In accordance with the ADC
accounting rules, we do not accrue income for interest and points on our ADC
loans until the sale or refinancing of a property. Revenue from interest and
points is recognized as cash is received from the sale or refinancing of such
properties. ADC loans are classified as investments in real estate under
development and investments in real estate held for sale (see Notes 3, 4 and 5
to the financial statements) and include amounts funded under the loan
agreements and capitalized interest expense. If our ADC loans qualified as loans
under GAAP, interest and points would be recognized as income in periods prior
to the sale of the underlying property.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
An investment in our stock involves a high degree of risk. Among other things,
some of the principal risks are: the real estate lending business may be
adversely affected by periods of economic slowdown, which may be accompanied by
declining real estate values on properties securing repayment of loans;
construction mortgage loans involve greater risks of repayment than loans
secured by property that has already been improved since completion market
valuation of a given project can be highly speculative and subject to
unanticipated conditions; there is no public market for our securities, and
liquidity is not assured; under our business model, loan commitments will
generally exceed immediately available cash resources, and failure to obtain
repayment of loans in our portfolio, or a failure to maintain sufficient equity
would affect our ability to fund commitments; since we have no employees, if our
manager refused or became unable to continue to serve us, and a proper
replacement were not found, this would materially impact our business.
We make loans at fixed rates of interest. To the extent that prevailing market
interest rates change during the holding period, the value of our loans may be
either adversely or positively affected. When a loan matures, generally within a
12 to 18 month period, it is subject to a new interest rate, determined by us,
based upon current conditions. Since we intend to hold all loans until they are
repaid, we do not believe that changes in market interest rates have a material
impact on the value of the Company.
24
ITEM 4. 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 Exchange Act of 1934) as of March 31,
2005. Based on that evaluation, Mr. Rider has concluded that those controls and
procedures were effective in making known to them, on a timely basis, the
material information needed for the preparation of this Report on Form 10-Q.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those internal controls since the date
of their evaluation, except as disclosed below.
Reportable conditions involve matters relating to significant deficiencies in
the design or operation of internal controls that, in an auditor's judgment,
could adversely affect a company's ability to record, process, summarize, and
report financial data consistent with the assertions of management in the
financial statements.
Our auditors identified the following two 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. The Company
and our auditors determined that these significant deficiencies, in the
aggregate, do not constitute material weaknesses in the system of internal
controls.
The Company has corrected the issue raised as item (i) above by implementing a
procedure where our CEO reviews and initials each journal entry. The Company
also believes that the issue raised above as (ii) during the has been resolved
during 2004 by a combination of the reduction in company assets and the
redistribution of certain duties performed by Mr. Rider as 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Refer to Financial Statements Note 9 for a discussion of Legal Proceedings
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(a) Not Applicable.
(b) Not Applicable.
(c) Sales of Equity Securities.
Between January 1, 2005 and March 31, 2005, we did not sell any shares of
our common stock.
(d) Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
25
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS.
(a) Exhibits
Exhibits included with this Form 10-Q following the signature page, or those
incorporated by reference to other filings are:
3i.1 Articles of Incorporation of the Company are hereby incorporated herein
by reference from Exhibit 3(i) to the Company's Registration Statement on
Form 10-12G, filed on April 28, 2000
3i.2 Articles Supplementary of the Company are hereby incorporated herein by
reference from Exhibit 99.1 to the Company's Registration Statement on
Form 10-12G, filed on April 28, 2000
3ii.1 Bylaws, Amended March 21, 2000 are hereby incorporated herein by
reference from Exhibit 3(ii) to the Company's Registration Statement on
Form 10-12G, filed on April 28, 2000
3ii.2 Bylaws, Amended March 1, 2001 are hereby incorporated herein by reference
from Exhibit 3ii.2 to the Company's Annual Report on Form 10-K, filed on
March 30, 2001
4.1 Specimen Stock Certificate is hereby incorporated herein by reference
from Exhibit 99.2 to the Company's Registration Statement on Form 10-12G,
filed on April 28, 2000
4.2 Registration Rights Agreement is hereby incorporated herein by reference
from Exhibit 4.1 to the Company's Registration Statement on Form 10-12G,
filed on April 28, 2000
4.3 Founder's Registration Rights Agreement is hereby incorporated herein by
reference from Exhibit 4.2 to the Company's Registration Statement on
Form 10-12G, filed on April 28, 2000
11.1 Statement regarding computation of per share earnings
31.1 Certification of Chief Executive Officer and Chief Financial Officer
32.1 Certification of Chief Financial Officer pursuant to 18 U.S.C Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 23, 2005 /s/ MICHAEL RIDER
-----------------
Michael Rider, President and Chief
Financial Officer
26