Attached files
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.
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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