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EX-32 - EXHIBIT 32.2 CERTIFICATION - BELLAVISTA CAPITAL INCbellavista10qex322.txt
EX-31 - EXHIBIT 31.2 CERTIFICATION - BELLAVISTA CAPITAL INCbellavista10qex312.txt
EX-32 - EXHIBIT 32.1 CERTIFICATION - BELLAVISTA CAPITAL INCbellavista10qex321.txt
EX-11 - EXHIBIT 11.1 STATEMENT RE COMPUTATION - BELLAVISTA CAPITAL INCbellavista10qex11.txt
EX-31 - EXHIBIT 31.1 CERTIFICATION - BELLAVISTA CAPITAL INCbellavista10qex311.txt



                                  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 June 30, 2009

                                       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.)


        15700 Winchester Blvd.
            Los Gatos, CA                                    95030
    (Address of principal offices)                         (zip code)

                                 (408) 354-8424
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant has (1) 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 a large accelerated filer, an accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Yes [ ] No [X] Yes [ ] No [X] Non-accelerated filer (Do not Check if a smaller reporting company) Smaller reporting company Yes [ ] No [ ] Yes [X] No [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares of the registrant's only class of common equity, its common stock, outstanding as of July 15, 2009: 11,171,433 This Quarterly Report on Form 10-Q 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, investment portfolio, 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," "seek," "target" 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 Part II, Item 1A - Risk Factors. 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.
Table of Contents Part I. Financial Information Item 1. Financial Statements (unaudited) 2 Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and September 30, 2008 (Note 1) 3 Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended June 30, 2009 and 2008 (unaudited 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2009 and 2008 (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 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Item 4T. Controls and Procedures 21 Part II. Other Information Item 1. Legal Proceedings 22 Item 1A. Risk Factors 22 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 23 Item 6. Exhibits 23 Signatures 24
PART 1. 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 June 30, 2009 (unaudited), and September 30, 2008 (2) Condensed Consolidated Statements of Operations for the Three Months and Nine Months ended June 30, 2009 and 2008 (unaudited) (3) Condensed Consolidated Statements of Cash Flows for the Nine Months ended June 30, 2009 and 2008 (unaudited) (4) 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 fiscal year ended September 30, 2008 as filed with the Securities and Exchange Commission in our Annual Report on Form 10-KSB, filed January 23, 2009. 2
BELLAVISTA CAPITAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS As of June 30, 2009 and September 30, 2008 June 30, 2009 September 30, 2008 (unaudited) (Note 1) ----------------- ------------------ ASSETS: Cash and cash equivalents $ 187,267 $ 636,346 Loans receivable secured by real estate 6,069,631 11,251,773 Joint venture investments in real estate developments 8,349,446 9,944,197 Investments in real estate developments 17,817,641 19,026,984 Investment in rental property, net of accumulated depreciation of $148,643 and $130,038 at June 30, 2009 and September 30, 2008, respectively 3,909,824 3,928,429 Fixed assets, net of accumulated depreciation of $16,160 and $12,831 at June 30, 2009 and September 30, 2008, respectively 32,002 24,379 Other assets, net 321,010 670,836 ----------------- ------------------ Total assets $ 36,686,821 $ 45,482,944 ================= ================== LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Notes payable and lines of credit $ 10,192,337 $ 12,453,057 Accounts payable and accrued expenses 487,906 1,062,168 Capital lease 2,852 4,985 ----------------- ------------------ Total Liabilities 10,683,095 13,520,210 Shareholders' equity: Common stock: par value $0.01, 50,000,000 shares authorized; 11,171,433 and 11,590,870 shares issued and outstanding at June 30, 2009 and September 30, 2008, respectively 111,714 115,908 Additional paid-in capital 102,630,358 103,360,168 Accumulated deficit (76,738,346) (71,513,342) ----------------- ------------------ Total shareholders' equity 26,003,726 31,962,734 ----------------- ------------------ Total liabilities and shareholders' equity $ 36,686,821 $ 45,482,944 ================= ================== See accompanying notes to these condensed consolidated financial statements 3
BELLAVISTA CAPITAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the three and nine months ended June 30, 2009 and 2008 (unaudited) Three Months Ended June 30, Nine Months Ended June 30, ----------------------------------------- ------------------------------------------- 2009 2008 2009 2008 ----------------- ---------------------- -------------------- --------------------- REVENUES: Revenues from loans receivable $ 71,977 $ 207,863 $ 348,311 $ 662,881 Equity in earnings from joint venture investments 3,680 1,835,745 3,680 2,801,205 Sales of real estate 4,392,680 524,132 5,278,513 524,132 Rental revenue 99,025 8,173 527,225 8,173 Other revenue -- 6 202,536 14,847 ----------------- ---------------------- ------------------- --------------------- Total revenues 4,567,362 2,575,919 6,360,265 4,011,238 Cost of sales of real estate (4,575,256) (902,746) (5,656,930) (1,008,728) Rental expense (214,873) (21,822) (530,150) (21,822) ----------------- ---------------------- ------------------- --------------------- Total cost of revenue (4,790,129) (924,568) (6,187,080) (1,030,550) ----------------- ---------------------- ------------------- --------------------- Gross profit (loss) (222,767) 1,651,351 173,185 2,980,688 ----------------- ---------------------- ------------------- --------------------- EXPENSES: Operating expenses: Salaries and related expense 543 113,988 2,957 392,385 Facilities expense -- 1,467 -- 52,000 Legal and accounting expense 20,454 60,670 90,185 183,926 Board of directors fees 29,750 46,500 111,250 166,225 Asset management fees 67,351 26,200 273,587 26,200 Officers consulting fees for routine business operations - related party 22,684 25,730 81,747 51,583 D & O liability insurance 27,844 25,375 83,531 76,125 General and administrative expense 4,280 7,424 24,518 44,328 Expenses: MPF proxy solicitation - officers consulting fees - related party 33,600 -- 37,450 -- Other expenses; MPF proxy - accounting, legal, board of directors, postage, printing 42,995 -- 48,254 -- Reserve for uncollectible interest 49,413 25,000 143,328 25,000 Depreciation expense 215 1,557 3,329 7,650 ----------------- ---------------------- ------------------- --------------------- Total operating expenses 299,129 333,911 900,136 1,025,422 REO expense 278,873 60,994 442,123 167,245 Provision for impairment of investments in real estate 514,861 2,680,990 3,458,156 11,036,866 ----------------- ---------------------- ------------------- --------------------- Total expenses 1,092,863 3,075,895 4,800,415 12,229,533 ----------------- ---------------------- ------------------- --------------------- Net loss from operations (1,315,630) (1,424,544) (4,627,230) (9,248,845) OTHER INCOME (EXPENSE) Loss on sale of fixed assets -- -- -- (14,888) Interest income -- 4,527 1,081 15,929 Interest expense (209,818) (207,032) (598,054) (207,032) ----------------- ---------------------- ------------------- --------------------- Total other expense (209,818) (202,505) (596,973) (205,991) ----------------- ---------------------- ------------------- --------------------- Net loss before tax (1,525,448) (1,627,049) (5,224,203) (9,454,836) ----------------- ---------------------- ------------------- --------------------- Income tax expense (800) (1,600) (800) (4,000) ----------------- ---------------------- --------- ---------- -------------------- Net loss allocable to common stock $ (1,526,248) $ (1,628,649) $ (5,225,003) $ (9,458,836) ================= ====================== =================== ===================== See accompanying notes to these condensed consolidated financial statements 4
Basic and diluted net loss per share $ (0.14) $ (0.14) $ (0.47) $ (0.75) ================= ====================== =================== ===================== Basic and diluted weighted average shares outstanding 11,171,433 11,998,789 11,202,161 12,631,476 ================= ====================== =================== ===================== See accompanying notes to these condensed consolidated financial statements 5
BELLAVISTA CAPITAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended June 30, 2009 and 2008 (unaudited) June 30, 2009 June 30, 2008 ------------------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (5,225,003) $ (9,458,836) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 21,934 7,650 Reserve for uncollectible interest 143,328 -- Provision for impairment 3,458,156 11,036,866 Loss on sale of fixed assets -- 14,888 Changes in assets and liabilities: Decrease in other assets 206,497 402,229 (Decrease) increase in accounts payable and accrued expenses (574,262) 172,873 ------------------- ------------------- Net cash provided by (used in) operating activities (1,969,350) 2,175,670 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of fixed assets -- 2,200 Purchases of fixed assets (10,952) -- Proceeds from repayments of investments in real estate 6,137,687 10,305,632 Investments in real estate (1,609,607) (11,491,929) ------------------- ------------------- Net cash provided by (used in) investing activities 4,517,128 (1,184,097) CASH FLOWS FROM FINANCING ACTIVITIES: Stock repurchases (734,004) (4,037,762) Borrowings under notes payable and lines of credit 3,225,225 7,161,504 Repayment of notes payable and lines of credit (5,485,944) (2,830,240) Payments under capital lease (2,134) (3,435) ------------------- ------------------- Net cash provided by (used in) financing activities (2,996,857) 290,067 ------------------- ------------------- Net increase (decrease) in cash and cash equivalents (449,079) 1,281,640 Beginning cash and cash equivalents 636,346 1,759,241 ------------------- ------------------- Ending cash and cash equivalents $ 187,267 $ 3,040,881 =================== =================== Cash paid for interest $ 606,819 $ -- ------------------- ------------------- Cash paid for income taxes $ 800 $ 4,000 =================== =================== See accompanying notes to these condensed consolidated financial statements 6
BELLAVISTA CAPITAL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION AND BUSINESS: Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2009 or for any other future period. The condensed consolidated balance sheet at September 30, 2008 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the BellaVista Capital, Inc. Annual Report on Form 10-KSB for the fiscal year ended September 30, 2008. Organization BellaVista Capital, Inc., a Maryland corporation (the Company, BellaVista, our, we), was formed on March 18, 1999 and commenced operations effective May 1, 1999. We have been engaged in the business of investing in real estate development projects, primarily in California. Our investments are structured as loans secured by real estate, loans made to real estate development entities and joint venture investments in real estate development entities. Our operations are treated as one operating segment. In addition, BellaVista Capital, Inc. is the 100% shareholder of Sands Drive San Jose, Inc., and Frank Norris Condominiums Inc., both of which are California corporations formed for the purpose of developing and selling residential real estate. The Company holds a 100% interest in Cummings Park Associates, LLC, a California Limited Liability Company formed to develop and sell a mixed use residential and retail project in East Palo Alto California. The Company also holds a 100% interest in MSB Brighton LLC, currently operated as a rental property. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Consolidation Policy These condensed consolidated financial statements include the accounts of BellaVista Capital, Inc. and its wholly owned subsidiaries: Sands Drive San Jose, Inc., MSB Brighton LLC, Frank Norris Condominiums, Inc., and Cummings Park Associates, LLC. All intercompany accounts and transactions have been eliminated in consolidation. Investments acquired or created are evaluated based on Financial Accounting Standards Board ("FASB") Interpretation ("FIN") 46R, "Consolidation of Variable Interest Entities," which requires the consolidation of VIEs in which we are considered to be the primary beneficiary. If the investment is determined not to be within the scope of FIN 46R, then the investments are evaluated for consolidation under the American Institute of Certified Public Accountants' Statement of Position 78-9, "Accounting for Investments in Real Estate Ventures," as amended by Emerging Issues Task Force Issue No. 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. 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 7
BELLAVISTA CAPITAL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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. Loans Receivable Secured By Real Estate We have originated loans secured by real estate. These loans are secured by deeds of trust on real property, generally pay interest on a monthly basis and are typically also collateralized by personal guarantees from the principals of our borrowers. We recognize interest income on these loans during the period in which the interest is earned and recognize income on any loan fees charged under the effective interest method. We establish and maintain credit reserves for loans receivable secured by real estate based on estimates of credit losses inherent in these loans as of the balance sheet date. To calculate the credit reserve, we assess inherent losses by determining loss factors (defaults, the timing of defaults, and loss severities upon defaults) that can be specifically applied to each loan. We follow the guidelines of Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues (SAB 102), and Financial Accounting Statement No. 5, Accounting for Contingencies (FAS 5), in setting credit reserves for our residential and commercial loans. We follow the guidelines of Financial Accounting Statement No. 114, Accounting by Creditors for Impairment of a Loan (FAS 114), in determining impairment on commercial real estate loans. Joint Venture Investments in Real Estate Developments Our joint venture investments in real estate developments are comprised of loans, known as Acquire, Develop, and Construct loans ("ADC Loans"), which are secured by real estate and have many characteristics of joint venture investments and investments in real estate joint ventures. ADC Loans We have originated secured loans to acquire, develop and construct residential real estate. 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 ADC Loans contain many of the characteristics of investments in real estate, they are classified for financial reporting purposes as joint venture investments in real estate developments (Note 4). ADC Loans with no equity participation interest are stated at the lower of cost or fair value and accounted for as an investment in real estate. Revenue from interest and points is recognized as cash is received from the sale or refinancing of such properties. ADC Loans that include an equity participation interest are accounted for in the same manner as joint venture investments in real estate developments. ADC Loans include amounts funded under the loan agreements and capitalized interest expense, where applicable. If our ADC Loans qualified as borrowings under US GAAP, interest and points would be recognized in income as earned instead of at the time of sale of the underlying property. Joint Venture Investments in Real Estate We provide equity financing to real estate developers necessary to acquire, develop and construct real estate developments. Such investments are structured as membership interests in the development entity. We account for such investments using the equity method of accounting. Our management conducts a review of our investments 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. An impairment charge 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 8
BELLAVISTA CAPITAL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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 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. Investments in Real Estate Developments Investments in Real Estate Developments represent development projects that the Company has obtained through foreclosure of its mortgage loans or controls by virtue of its operating agreements with development entities, and relate to real properties for which the Company has a controlling ownership interest. For simplicity in this document these properties will be referred to as REOs. We consolidate the assets and liabilities of these Investments in Real Estate Developments in our financial statements. The Company's basis in the projects is the carrying amount of the project at the time of loan foreclosure. Management conducts a review for impairment of these assets on an investment-by-investment basis whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, but not less frequently than 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 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. 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. As of June 30, 2009 the Company's cash was fully insured by the Federal Deposit Insurance Corporation ("FDIC"). Fixed Assets Fixed assets, which include equipment and furniture, are carried at cost less accumulated depreciation. Depreciation and amortization is recorded using the straight-line method over the estimated useful life of the asset Furniture and equipment have useful lives ranging from 3 to 7 years. Buildings have useful life of 30 to 40 years. 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. Recent Accounting Pronouncements In May 2009, the FASB issued Statement No. 165, "Subsequent Events" ("SFAS 165"), which establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. We adopted the provisions of SFAS 165 for the quarter ended June 30, 2009. The adoption of these provisions did not have a material effect on our consolidated financial statements. 9
BELLAVISTA CAPITAL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140 (SFAS 166). SFAS 166 eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity's continuing involvement in and exposure to the risks related to transferred financial assets. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company will adopt SFAS 166 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company. In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS 167 is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. The Company will adopt SFAS 167 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company. In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168). SFAS 168 replaces FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes the FASB Accounting Standards Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP). SFAS 168 is effective for interim and annual periods ending after September 15, 2009. The Company will begin to use the new Codification when referring to GAAP in its annual report on Form 10-K for the fiscal year ending September 30, 2009. This will not have an impact on the consolidated results of the Company. 3. LOANS RECEIVABLE SECURED BY REAL ESTATE: As of June 30, 2009, loans receivable secured by real estate summarized by location consisted of the following: Amount Recognized Carrying Invested Impairments Amount In Default Description ------------------ ------------------ ------------------ ------------------ SF Bay Area $ 4,649,531 $ 165,000 $ 4,484,531 $ 3,237,532 California Central Valley 800,000 -- 800,000 -- Southern California 185,100 -- 185,100 -- Other States 600,000 -- 600,000 -- ------------------ ------------------ ------------------ ------------------ Total $ 6,234,631 $ 165,000 $ 6,069,631 $ 3,237,532 ================== ================== ================== ================== As of September 30, 2008, loans receivable secured by real estate summarized by location consisted of the following: Amount Recognized Carrying Invested Impairments Amount In Default Description ------------------ ------------------ ------------------ ------------------ SF Bay Area $ 9,971,673 $ 165,000 $ 9,806,673 $ 6,858,673 California Central Valley 660,000 -- 660,000 210,000 Southern California 185,100 -- 185,100 -- Other States 600,000 -- 600,000 -- ------------------ ------------------ ------------------ ------------------ Total $ 11,416,773 $ 165,000 $ 11,251,773 $ 7,068,673 ================== ================== ================== ================== Loans Receivable Secured by Real Estate consist of loans to real estate developers which are secured by deeds of trust on real property, pay interest monthly and generally have repayment guarantees from the principals of the borrowing entity. As of June 30, 2009 $3,799,925 of these loans were secured by first trust deeds and $2,434,706 were secured by second trust deeds. Additionally, at June 30, 2009 four loans totaling $3,237,532 were in default under the terms of our loans. As of June 30, 2009, we had recorded an impairment 10
BELLAVISTA CAPITAL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) on one of our loans receivable in the amount of $165,000. Interest receivable net of allowance for uncollectible interest of $210,117 and $189,849 amounted to $124,147 and $119,710 as of June 30, 2009 and September 30, 2008, respectively. 4. JOINT VENTURE INVESTMENTS IN REAL ESTATE DEVELOPMENTS: As of June 30, 2009, joint venture investments in real estate developments summarized by location consisted of the following: Amount Carrying Remaining Funding Invested Impairments Amount Obligation DESCRIPTION ------------------ ------------------ ------------------ ------------------ SF Bay Area $ 10,919,319 $ 2,569,873 $ 8,349,446 $ 211,120 Southern California 7,484,906 7,484,906 -- -- ------------------ ------------------ ------------------ ------------------ Total $ 18,404,225 $ 10,054,779 $ 8,349,446 $ 211,120 ================== ================== ================== ================== As of September 30, 2008, joint venture investments in real estate developments summarized by location consisted of the following: Amount Carrying Remaining Funding Invested Impairments Amount Obligation DESCRIPTION ------------------ ------------------ ------------------ ------------------ SF Bay Area $ 11,081,830 $ 1,964,705 $ 9,117,125 $ 297,461 Southern California 8,886,797 8,059,725 827,072 320,000 ------------------ ------------------ ------------------ ------------------ Total $ 19,968,627 $ 10,024,430 $ 9,944,197 $ 617,461 ================== ================== ================== ================== Joint Venture Investments in real estate developments consist of ADC loans and joint investments with real estate developers. ADC Loans, which are loan arrangements that are typically secured by real property, provide for the payment of interest from an interest reserve established from loan funds and may also provide for the payment of an exit fee as a percentage of sales from each unit in the development or a share of project profits. Joint Venture investments are equity investments in operating entities formed for the purpose of developing real estate. Our investment typically earns a preferred return calculated based on our investment amount at a specific rate during the term of the investment and a share of the project profits. As of June 30, 2009 and September 30, 2008, we have recognized impairments totaling approximately $10 million on three of our joint venture investments and $10 million on two other of our joint venture investments in real estate developments, respectively. In April, 2009, the first lender for one of our joint ventures, that had previously been fully impaired, foreclosed on the property. 5. INVESTMENTS IN REAL ESTATE DEVELOPMENTS: Investments in Real Estate Developments (REOs) include real estate development projects we own, either directly or through a subsidiary company we own or control. The following table summarizes our Investments in Real Estate Developments by location as of June 30, 2009: Amount Invested Recognized Carrying Costs to (net of payments) Impairment Amount Complete Description ------------------ ------------------ ------------------ ------------------ SF Bay Area $ 21,188,247 $ 4,068,347 $ 17,119,900 $ 425,140 Central Valley 897,741 200,000 697,741 -- ------------------ ------------------ ------------------ ------------------ Total $ 22,085,988 $ 4,268,347 $ 17,817,641 $ 425,140 ================== ================== ================== ================== The following table summarizes our Investments in Real Estate Developments by location as of September 30, 2008: Amount Invested Recognized Carrying Costs to (net of payments) Impairment Amount Complete Description ------------------ ------------------ ------------------ ------------------ SF Bay Area $ 21,584,416 $ 3,004,897 $ 18,579,519 $ 331,305 Central Valley 647,465 200,000 447,465 -- ------------------ ------------------ ------------------ ------------------ Total $ 22,231,881 $ 3,204,897 $ 19,026,984 $ 331,305 ================== ================== ================== ================== 11
BELLAVISTA CAPITAL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 6. INVESTMENT IN RENTAL PROPERTY: The rental property is summarized as follows at June 30, 2009 and September 30, 2008: June 30, 2009 September 30, 2008 ------------------ ------------------ Land $ 1,076,589 $ 1,076,589 Building 2,969,348 2,969,348 Furniture and equipment 12,530 12,530 ------------------ ------------------ Total rental property 4,058,467 4,058,467 Accumulated depreciation (148,643) (130,038) ------------------ ------------------ Rental property, net $ 3,909,824 $ 3,928,429 ================== ================== Depreciation expense on rental property was $18,605 and zero for the nine months ended June 30, 2009 and 2008, respectively. 7. FIXED ASSETS: Fixed assets at June 30, 2009 and September 30, 2008 consisted of the following: June 30, 2009 September 30, 2008 ------------------ ------------------ Computer equipment $ 18,756 $ 18,756 Furniture 29,405 18,454 ------------------ ------------------ Total office equipment 48,161 37,210 Accumulated depreciation (16,159) (12,831) ------------------ ------------------ Fixed assets, net $ 32,002 $ 24,379 ================== ================== Depreciation expense on fixed assets was $3,328 and $7,650 for the nine months ended June 30, 2009 and 2008, respectively. 8. NOTES PAYABLE AND LINES OF CREDIT: Notes payable and lines of credit as of June 30, 2009 and September 30, 2008 consisted of the following: June 30, 2009 September 30, 2008 ------------------ ------------------ Secured loan $ 2,600,000 $ 2,600,000 Secured loan 2,677,193 7,331,328 Secured loan 2,515,144 2,521,729 Secured line of credit 900,000 -- Secured line of credit 1,500,000 -- ------------------ ------------------ Total $ 10,192,337 $ 12,453,057 ================== ================== The secured loan of $2,600,000 represents the outstanding balance as of June 30, 2009 and September 30, 2008 secured by a deed of trust on one of our investments. It bears interest at the Wells Fargo Prime Rate plus 2.0% (5.25% and 5.50% at June 30, 2009 and September 30, 2008, respectively). The line matured on June 5, 2008, and was extended to April 18, 2009. The loan is due on demand but the bank is allowing the Company to make interest only payments until final extension terms are negotiated. The Company is currently negotiating an extension. The secured loan amount totaling $2,677,193 and $7,331,328 as of June 30, 2009 and September 30, 2008, respectively remains outstanding on a $14.9 million construction loan originated for the purpose of financing the construction of a residential and retail mixed use project in East Palo Alto, California. The loan 12
BELLAVISTA CAPITAL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) is owed by Cummings Park Associates, LLC and is secured by the real property. The loan bears interest at Prime plus 1%, (4.25% at June 30, 2009) and matured on March 15, 2009. Interest-only payments are due monthly on the outstanding balance of the note. Principal payments will be made from the proceeds when units are sold. The Company is currently negotiating an extension. The secured loan amounts of $2,515,144 and $2,521,729 represent the outstanding balance as of June 30, 2009 and September 30, 2008, respectively on an assumed loan for the Frank Norris Condominium Inc. property that is now fully owned by the Company and secured by that property. The loan bears interest at The Wall Street Journal Prime plus 1% with a floor of 6.5% (6.5% at June 30, 2009) and matures April 15, 2012. The $1.5 million secured line of credit has an outstanding balance of $900,000 as of June 30, 2009 and is secured by the 2555 Pulgas property. The line bears interest at 11.5%. Interest-only payments are due monthly on the outstanding balance of the note. The line matures on February 1, 2012. This outstanding balance of $900,000 is due to certain related parties. The other $1.5 million secured line of credit has an outstanding balance of $1,500,000 as of June 30, 2009 and is secured by the MSB Brighton rental property. The line bears interest at 11.5%. Interest-only payments are due monthly on the outstanding balance. The line matures on November 1, 2009. This outstanding balance of $1,500,000 is due to certain related parties. 9. SHAREHOLDERS' EQUITY: There is currently no public trading market for our stock. We are authorized to issue up to 50,000,000 shares of Common Stock. As of June 30, 2009 we have repurchased 1,564,097 shares in connection with legal settlements and 6,747,822 shares under tender offers at various prices. At June 30, 2009 we had 11,171,433 shares of Common Stock outstanding. Since June 2005, a group of entities associated with Mackenzie Patterson Fuller, Inc. (collectively "MPF") have acquired an aggregate of 1,390,046 shares as of June 30, 2009, through a series of unsolicited tender offers. The Company has not declared or paid any dividends on its capital stock during the period from January 1, 2005 through the date of this report. During the nine months ended June 30, 2009, the Company repurchased 419,437 shares of stock. 10. COMMITMENTS AND CONTINGENCIES: Litigation As of June 30, 2009, the Company was involved in the following litigation in which claims for damages would be material if the plaintiff prevailed and there is at least a reasonable possibility that a loss may have occurred: Richard Aster v BellaVista Capital, Inc. et al. This action was initiated in California Civil Court on August 10, 2007. The plaintiff is Richard Aster, the party that purchased the completed home from BellaVista. The defendants are BellaVista, Ainsworth Construction, Masma (the original developer) and various subcontractors who did work for each of these two construction companies. This lawsuit alleges construction defects in the installation of windows, decking and roofing related to a single family home that was purchased by the plaintiff from the Company after the Company acquired the property through foreclosure. In this lawsuit the plaintiff is requesting compensation for all of their costs related to correcting the construction defects and pursuing this action. In addition, a lawsuit has been filed by the original developer (Masma) against the Company for indemnification and defense. The Company believes it has strong and viable defenses and plans to vigorously defend these actions. The Company has hired both legal and engineering experts who specialize in construction defects matters. In addition, the Company has tendered to the respective insurance companies for insurance coverage and defense costs owed to it under the construction contracts of both the original contractor and the contractor that the Company hired to complete the construction after the Company took ownership of the property by foreclosure. 13
BELLAVISTA CAPITAL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Polk Street Associates, LLC v BellaVista Capital, Inc. et al. This action was initiated in the United States Bankruptcy Court on May 1, 2009. The plaintiff is 1314 Polk Street Associates, LLC ("1314 Polk"). The defendants are BellaVista and its wholly owned subsidiary, Frank Norris Condominiums, Inc. The lawsuit was filed by the bankruptcy trustee on behalf of 1314 Polk claiming damages arising from 1314 Polk's transfer of 14 unsold condo units to BellaVista in July 2008 under a settlement agreement with the original developer and the trustee's assessment of the value that the Company received as a result of being granted ownership of the unsold units. The Company has hired expert bankruptcy counsel to defend BellaVista. The Company expects a mediation session to be held within the next 3 to 6 months to attempt to resolve these issues. The Company believes that the bankruptcy trustee's assessment of value is flawed and plans to vigorously defend against this action. 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 our direct investments in real estate development. 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. 11. SUBSEQUENT EVENTS: On March 17, 2009 MacKenzie Patterson Fuller (MPF) sent a letter to the Board demanding that the Board resign in favor of MPF designees and turn over complete control of the administration and asset management of the Company to MPF for which MPF would be compensated with an asset management fee and a 15% stock option. After careful consideration and discussions with MPF, the Board concluded that the MPF demand was not in the best interest of the shareholders, and therefore, declined. MPF then began a campaign to communicate with the Company's shareholders and subsequently has initiated a hostile takeover by means of a series of proxy solicitations. The Board vigorously opposed these solicitations and issued its own proxy solicitation on this matter on July 22, 2009. In order to resolve the pending takeover proposal, the Board voted to call a Special Meeting of the shareholders of BellaVista on September 25, 2009 in order to vote on the MPF proxy proposals. This Special Meeting was held with 70.9% of the outstanding shares represented. All of the proposals made by MPF to effect the takeover were defeated by the vote of a significant majority of the outstanding shares. Specifically, 95.2% of the quorum and 67.5% of the outstanding shares voted against all three of the MPF takeover proposals. The Company has decided to segregate the costs of the proxy fight on its consolidated statements of operations for the three and nine months ended June 30, 2009. Wilbur v Cummings Park Associates, LLC et al. In June 2009, the Company was made aware of a dispute and a complaint filed relative to a real estate commission on the sale of the Cummings Park retail space previously mentioned. The Company had hired an expert real estate counsel to defend BellaVista in the adversary proceeding. In August 2009, this matter was settled with no additional expenses incurred by the Company. Morten Jenson; Maria Wolf v Andrew B. Brog; Oakland Cathedral Building, LLC; BellaVista Capital, Inc. This action was initiated in the Superior Court of California, County of Alameda, on July 1, 2009. The plaintiffs are Morten Jenson and Maria Wolf, the buyers under contract to purchase the sixth floor commercial condominium in the Oakland Cathedral Building, a project in which BellaVista is the first lender. The defendants are Andrew B. Brog, Oakland Cathedral Building, LLC, and BellaVista Capital, Inc. The plaintiffs are seeking the cancellation of the purchse contract and damages related to non-performance. Bella Vista Capital, as the lender, was named as an additional defendant. Andrew Brog, the developer and our borrower, is defending BVC in this case. 14
BELLAVISTA CAPITAL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) MacArthur Residential Condominium Auction In August 2009 MAC Homes, LLC, the owner of this property in Oakland, held an auction of the 16 residential condominiums. The Company is the lender on this project and expects to receive proceeds from these sales as they are closed over the next 120 days. Eden CDM v MAC Homes, LLC This action was initiated in the Superior Court of the State of California for the County of Alameda on July 20, 2009. The plaintiff is Eden CDM, the general contractor hired to build the MacArthur project. The defendant is MAC Homes, LLC, the developer and BellaVista's JV partner. The plaintiff is seeking the retention amounts not paid at completion and legal fees. The contract with general contractor had penalty provisions for delayed completion, which the Company strongly believes are owed by the general contractor and are greater than the retention amounts sought. The Company has retained expert construction litigation counsel on behalf of MAC Homes. The Company expects a mediation session to be held within the next 3 to 6 months to attempt to resolve these issues. The Company feels it has a very strong position as a result of Eden's lengthy delay in delivery of the completed project. A mediation session was held at ADR Services on October 7, 2009 which did not lead to a resolution of this dispute Secured lines of credit During the three month period ending September 30, 2009, the total balances owed on the lines of credit, which are secured by trust deeds to the Brighton and Pulgas properties, were reduced from $2,400,000 to $2,225,000 from the net proceeds received from the sale of various units. 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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" included in Part II, Item 1A. 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 and through December 2000, Primecore engaged in the business of providing loans for the development of primarily high-end single family 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 of 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 began to experience borrower defaults and through 2003 took title to 48 properties by way of foreclosure or deed in lieu of foreclosure. Primecore also recognized significant impairments in its portfolio. 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 from making loans with equity participation. 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. In April 2004 Primecore changed its name to BellaVista Capital in order to reflect its new business focus. 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 a number of our non-performing investments, management completed the transition to internal management and reduced continuing operating expenses. In October 2007, the Board began a restructuring program that has ultimately resulted in significant operating cost savings and increased efficiencies, including: closing the Palo Alto office, terminating all direct employees, outsourcing the administration and asset management functions and enlisting a Board member to function as CEO on an as needed basis as a consultant. The current real estate market is best characterized by significant erosion in real estate values and a significant decrease in the rate of inventory absorption; thus the Company has currently discontinued originating any new investments secured by deeds of trust or subordinated debt or investments in equity partnerships. 16
As a result of the current difficult market conditions, the Company has taken control of the underlying project associated with certain nonperforming loans and equity partnership investments. Control was obtained by settlement with the borrower or by assuming the role of managing partner. These properties are now categorized as Investments in real estate developments (REOs). For each of these properties, the Company has made a determination on how to maximize value based on the local market conditions, potential for future appreciation, and the properties' operating and debt structure. In a number of cases, these REO's are being operated as either a rental or a hybrid of units used for rental and units available for sale. In a particular case of a mixed use, retail and residential project, it was deemed appropriate (1) to auction the residential units due to its existing debt structure and (2) to lease and hold the commercial space, a portion of which closed escrow in May 2009. In terms of our path forward, as was discussed at the most recent annual shareholders meeting, the Company has evaluated the climate and analyzed the existing portfolio and is not planning on originating any new investments in the foreseeable future. The Company is in the process of managing the existing REO and other properties under its control to maximize their value, with the goal of selling these properties over the next several years (market permitting) with the resulting proceeds first being used to retire existing debt and then being used to provide liquidity to existing shareholders through a share repurchase program. It should clearly be noted that the timing for share repurchases is highly dependent on when properties are sold, at what price and when all of the existing debt is repaid. RESULTS OF OPERATIONS Three and Nine Months Ended June 30, 2009 vs. Three and Nine Months Ended June 30, 2008 -------------------------------------------------------------------------------- Revenues We reported revenues from Loans Receivable Secured by Real Estate totaling $71,977 and $348,311 during the three months and nine months ended June 30, 2009, respectively compared with $207,863 and $662,881 during the three months and nine months ended June 30, 2008, respectively. The decrease in revenues was due to a decrease in the average amount invested in these loans during the comparable periods and a decline in our average return due to nonperforming loans in the portfolio. We reported $3,680 revenues from our Joint Venture Investments in Real Estate Developments during the three months and nine months ended June 30, 2009 compared with $1,835,745 and $2,801,205 during the three months and nine months ended June 30, 2008. These revenues are derived from repayment of loans and equity participations. During this current fiscal year, the Company assumed control of several of these properties and discontinued accruing interest payments due to nonperformance. The Company will then recognize revenues from certain of these properties upon their sale. During the three months and nine months ended June 30, 2009 we reported revenues totaling $4,392,680 and $5,278,513 from our Investments in Real Estate Developments compared with $524,132 revenues during the three months and nine months ended June 30, 2008. This increase is due to sales of units that were under development in the prior comparative period. During the three months and nine months ended June 30, 2009, we reported revenues totaling $99,025 and $527,225 from our investment in rental property compared with $8,173 revenues during the three months and nine months ended June 30, 2008. This was due to the conversion of MSB Brighton, one of the Company's Investments in Real Estate Development to a rental property in the latter half of 2008. During the three months and nine months ended June 30, 2009, rental expenses excluding depreciation were $208,489 and $511,545, respectively compared with $21,822 during the three months and nine months ended June 30, 2008. The increase is due to converting the investment in MSB Brighton to a rental property from a property held for sale. For the three months and nine months ended June 30, 2008, MSB Brighton was reported as a joint venture investment. Expenses As a result of the continuing downturn in the real estate market and significant uncertainties associated with future investments, we have discontinued originating any new equity or subordinated debt investments and ceased originating new trust deed investments. In order to streamline the operations of 17
the company and reduce operating expenses to compensate for the eroding market conditions and declining property values, in 2007 the Board of Directors determined that the best course of action to preserve shareholder's value was to begin implementation of a restructuring program. The Board has continued to make significant progress under this program which has ultimately resulted in significant operating cost savings and increased efficiencies, including: closing the Palo Alto office, terminating all direct employees, outsourcing the administration and asset management functions and enlisting a Board member to function as CFO on an as needed basis and another board member to assume the CEO responsibilities on an as-needed consulting basis. We group our expenses in three categories: BellaVista operating expenses, REO expenses, and impairments. BellaVista operating expenses are associated with the ongoing operations of the Company. REO expenses include all of the carrying costs for REO properties such as property taxes, insurance, maintenance, marketing, legal, debt service and general and administrative expenses. During the three months and nine months ended June 30, 2009 BellaVista operating expenses were approximately $299,129 and $900,136, compared with $308,911 and $1,000,422 for the three months and nine months ended June 30, 2008. The increase in the three months and nine months ended June 30, 2009 includes $76,595 and $85,704 of shareholder proxy expenses. Without the shareholder proxy expenses, there was a decrease that was mainly due to decreased salaries, facilities, legal and accounting, and administration expenses. Operating expenses of the Company included: (1) One-time, non-recurring startup asset management fees of $75,725 for the nine months ended June 30, 2009 that included systems and financial records migration and conversions, new office space, and setup at Cupertino Capital including phones and IT systems, and all of the preparatory work done between July 2008 and September 2008; (2) Reserve for uncollectible interest and depreciation of fixed assets totaling $49,628 and $146,655 for the three months and nine months ended June 30, 2009, respectively. (3) Expenses incurred related to the MPF takeover attempt, the resulting shareholder proxy solicitations made by both MPF and the Company, and the Special Shareholder Meeting totaling $76,595 and $85,704 for the three months and nine months ended June 30, 2009, respectively. Excluding the reserve for uncollectible interest, depreciation expense, the expenses related to the MPF takeover attempt, and the non-recurring asset management startup fees, BellaVista operating expenses would have been $172,906 and $592,050 for the three and nine months ended June 30, 2009, respectively. During the three months and nine months ended June 30, 2009, REO expenses were $278,873 and $442,123 compared with $60,994 and $167,245 during the three months and nine months ended June 30, 2008, respectively. This increase is due to the increased number of REO properties in 2009. We recorded impairment charges totaling $514,861 and $3,458,156 during the three months and nine months ended June 30, 2009, respectively compared with $2,680,990 and $11,036,866 during the three months and nine months ended June 30, 2008, respectively. The impairments reported during the three months and nine months ended June 30, 2009 were related to certain investments whose values had declined due to the continuing decreases in real estate prices and longer than normal projected marketing periods. The recorded impairments during the three months and nine months ended June 30, 2008 related to certain investments that declined in value due to then current prevailing real estate market conditions coupled with lower than projected sales rates. We have impaired these investments based on our estimate of the decrease in value and the increase in carrying and operating costs associated with either holding or renting these properties for periods longer than originally projected due to the continued weakness and highly uncertain conditions in the real estate and credit markets. 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, costs of operating and holding investments in real estate development for future sales, and operating expenses. Sources of Cash As of June 30, 2009 our primary sources of liquidity were proceeds from the sale of our completed investments in REO properties, investments in trust deeds that paid interest monthly, our lines of credit and cash on hand. We typically receive repayment on our investments when the development project has been completed and sold or refinanced to third parties. Accordingly, our repayments are a function of our developers' ability to complete and sell the 18
development properties in which we have invested. During the nine months ended June 30, 2009 we received repayments, totaling $6.2 million compared with $10.3 million during the nine months ended June 30, 2008. Due to the continued weakness and uncertainty in the real estate and credit markets in 2009, we believe that there is a high degree of uncertainty in estimating the timing of the sales or the amount of proceeds we might receive from the future sale of our properties. It is possible that our repayments may not be sufficient to meet our commitments including REO and operating expenses and we may be forced to sell assets or seek financing at terms that may be unfavorable. This would have a negative impact on the estimated net realizable value of our assets. At June 30, 2009, we had cash and cash equivalents of approximately $187,267. The total balance owed on the two lines of credit (previously described in the Company's 10Q for the period ending March 31, 2009), which are secured by the Brighton and Pulgas properties, amounted to $2,400,000 as of June 2009. Of this total, Mr. Offenberg and Mr. Black, two related parties, had made net advances, after repayments, to the Company of $1,415,000 and $830,000, respectively as of June 30, 2009. Total interest paid and payable on amounts advanced by Mr. Offenberg and Mr. Black as of June 30, 2009 were $107,762 and $37,371, respectively. Given that these two lines carry a higher interest rate compared to the Company's rates on other various borrowings, the Company made principal repayments of $480,000 and $120,000 as of June 30, 2009 to Mr. Offenberg and Mr. Black, respectively from the proceeds of sales of various condominium units so as to reduce the average interest paid on all of its borrowings. As noted in the Subsequent Events Footnote 11, during the three month period ending September 30, 2009, the total balances owed on the Brighton and Pulgas lines of credit were reduced from $2,400,000 to $2,225,000 from the net proceeds received from the net proceeds from the sale of various units. The Company expects to continue to borrow against its real estate assets or sell its real estate projects in order to fund REO expenses, operating expenses, and retire the Company's indebtedness. The Company believes that it has adequate resources to secure necessary financing and assure its liquidity for the foreseeable future. Uses of Cash The following table sets forth the projected timing and amount of our obligations through September 30, 2010, without taking into account new investments that may be made during future periods: Three months Year ended ended Obligation Total September 30, 2009 September 30, 2010 ----------------------- ---------------- ------------------ ------------------ Investment fundings $ 636,260 $ 317,405 $ 318,855 ---------------- ------------------ ------------------ Total $ 636,260 $ 317,405 $ 318,855 ================ ================== ================== Investment fundings are the largest use of our cash. During the nine months ended June 30, 2009 we invested approximately $1.6 million in new and continuing development projects compared with approximately $11.5 million during the nine months ended June 30, 2008. We used cash of approximately $734,000 and $4.0 million to repurchase BellaVista common stock during the nine months ended June 30, 2009 and June 30, 2008, respectively. At June 30, 2009, we estimated the costs to complete our investments in real estate developments plus the remaining funding obligation on our joint venture investments in real estate developments to be approximately $636,260. The exact timing of these 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. Stock Repurchases In the past, given that certain Company liquidity requirements were satisfied, we have provided 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 19
the repurchase price. The Board of Directors has used the net realizable value of the Company's assets as well as an assessment of the risk profile for each investment to guide in the determination of the repurchase price for planned repurchases as well as Company repurchases in response to unsolicited tender offers. STOCKHOLDER LIQUIDITY AND REALIZABLE VALUE OF INVESTMENTS The realizable value of our assets 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 and the length of time required to complete the project. Many factors outside of the Company's control can cause changes in these estimates and produce significantly different results. Furthermore, as noted above, there is no organized public market for the Company's shares, so the Company's calculation of the estimated realizable value of its assets per outstanding share should not be viewed as an estimate of any market value per share, and there can be no assurance as to the amount or timing of any investment returns on the shares. During the period from June 2005 to June 2009, the Company has not used its funds to pay dividends or distributions or, except in certain extraordinary circumstances, to redeem shares. Such extraordinary circumstances have included Company tender offers in response to unsolicited third party tender offers which the Board deemed inadequately priced and opportunistic. The Board will determine the timing and terms of any future share redemptions based on available liquidity, net realizable value, and assessment of the risk profile for each investment. The information presented below reconciles the differences between the carrying value of our investments based on US GAAP and the estimated realizable value of our investments. June 30, 2009 September 30, 2008 ------------------- ------------------- Loans receivable secured by real estate $ 6,069,631 $ 11,251,773 Joint Venture investments in real estate developments 8,349,446 9,944,197 Investments in real estate developments 17,817,641 19,026,984 Investment in rental property 3,909,824 3,928,429 ------------------- ------------------- Total investments in real estate per US GAAP 36,146,542 44,151,383 Collectible interest and preferred return not reportable per US GAAP 2,226,042 4,023,463 ------------------- ------------------- Estimated realizable value of investments in real estate $ 38,372,584 $ 48,174,846 =================== =================== Net Realizable Value of Assets per Share The following calculation determines the estimated net realizable value per share of stock at June 30, 2009 and September 30, 2008: June 30, 2009 September 30, 2008 ------------------- ------------------- Cash $ 187,267 $ 636,346 Other assets 286,830 682,411 Estimated realizable value of investments in real estate 38,372,584 48,174,846 ------------------- ------------------- Total realizable assets 38,846,681 49,493,603 Accounts and notes payable (10,683,095) (13,520,210) ------------------- ------------------- Estimated net realizable assets 28,163,586 35,973,393 Shares outstanding 11,171,433 11,590,870 ------------------- ------------------- Estimated net realizable assets per share $ 2.52 $ 3.10 =================== =================== Our estimated net realizable value of assets per share (NRV) was $2.52 as of June 30, 2009, representing a decrease of $0.58 during the nine months ending June 30, 2009. The decrease of $0.58 in the nine month period from September 30, 2008 was (1) primarily attributable to decreases in the estimated realizable value of several of our investments as a result of the continuing significant declines in real estate values combined with substantially lower inventory absorption rates, and (2) secondarily attributable to the REO carrying and operational costs. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operation covers our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 20
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 Acquire, Develop, and Construct loans (ADC loans) are classified for financial reporting purposes as joint venture investments in real estate developments. We have taken ownership on some ADC loans that are classified as investments in real estate developments. Such investments are stated at the lower of cost or fair value. Management conducts a review for impairment on an investment-by-investment basis whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges), typically from the sale of a completed property, are less than the carrying amount of the investment, 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 impairment, 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 fair value; however, conditions may change and cause our ADC loans and investments in real estate to decline in value in future periods. 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 from these ADC loans is recognized as cash is received from the sale or refinancing of such properties. ADC loans are classified as joint venture investments in real estate developments and include amounts funded under the loan agreements. 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. 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 joint venture investments in real estate developments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 4T. CONTROLS AND PROCEDURES. Evaluation of Effectiveness of Disclosure Controls and Procedures The Company's management, with the participation of the Company's Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q. The Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not fully effective as of June 30, 2009 due to the significant deficiency disclosed in item 8A of the Company's most recent Annual Report on form 10-KSB for the twelve months ended September 30, 2008. 21
Internal Control Over Financial Reporting There have been no changes in the Company's internal controls over financial reporting during the last quarterly period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Limitations on the Effectiveness of Controls A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving its objectives. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Refer to the discussion under the heading "Litigation" in Note 10 of the Notes to the Condensed Consolidated Financial Statements (unaudited), included in Part I, Item 1 above, for a description of certain Legal Proceedings in which the Company is involved. ITEM 1A. RISK FACTORS. General Economic Conditions in Lending Areas. Approximately 80.2% of our investments are currently located in the San Francisco Bay Area, 15.2% are in Southern California, 3.4% are in California's Central Valley, and 1.2% are located in other states of the United States of America. The potential success of real estate investments in general is subject to fluctuations in local market conditions, including fluctuations in the supply of and demand for similar properties, and the success of our investments will depend, to some extent, on the economic and real estate market conditions prevailing in the markets where our investments are located. 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 or other dispositions of its investments. Many of the investments rely on the completion and sale of the developed real estate in order to realize repayment or other disposition proceeds. In the event that proceeds from repayments or other investment dispositions are not sufficient to timely meet our commitments and debt and credit facilities are not extended on terms favorable to us, we may be forced to sell some of our investments prematurely. 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 investment. 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. 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, fluctuations in prevailing interest rates, timely completion of projects by developers, uninsured risks such as earthquake and other casualty damage that may be uninsurable or insurable only at economically unfeasible costs, and potential environmental liabilities relating to properties on which we have made investments or received through foreclosure. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (a) Not Applicable. (b) Not Applicable. 22
(c) Repurchases of Equity Securities. Between October 1, 2008 and June 30, 2009, we repurchased 419,437 shares of our common stock. See Note 9 of the Notes to the Condensed Consolidated Financial Statements (unaudited) included in Part I, Item 1 above, for a discussion of this repurchase of shares. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS. (a) Exhibits Exhibits submitted with this Form 10-Q, 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 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 Shareholder Rights Agreement dated July 19, 2004 is incorporated by reference to Exhibit 4.4 in the Form 8-K previously filed July 20, 2004 10.1 Compensation Agreement dated May 12, 2007 between BellaVista Capital, Inc. and Michael Rider is incorporated by reference to Exhibit 10.1 to the Company's March 31, 2007 Form 10-QSB, previously filed on May 21, 2007 10.2 Compensation Agreement dated May 12, 2007 between BellaVista Capital, Inc. and Eric Hanke is incorporated by reference to Exhibit 10.2 to the Company's March 31, 2007 Form 10-QSB, previously filed on May 21, 2007 10.3 Compensation Agreement dated September 25, 2007 between BellaVista Capital, Inc. and William Offenberg, is incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-KSB for the year ended September 30, 2007, filed on December 31, 2007 10.4 Management Agreement between BellaVista and RMRF Enterprises, Inc., dba Cupertino Capital is incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-KSB for the year ended September 30, 2008, filed on January 3, 2009 11.1 Statement regarding computation of per share earnings 14.1 Code of Ethics is incorporated by reference to Exhibit 14.1 to the Company's 2003 Form 10-K, previously filed on April 14, 2004 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 23
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification 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: December 30, 2009 /s/ WILLIAM OFFENBERG --------------------- William Offenberg, Chief Executive Officer 2