SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Nine Months Ended September 30, 2005
---------------------------
BELLAVISTA CAPITAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland 94-3324992
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 Florence Street Suite 200
Palo Alto, CA 94301
(Address of principal offices)
(650) 328-3060
(Registrant's telephone number, including area code)
---------------------------
Securities registered under Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter is $0.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date:
14,991,325 Shares of Common Stock
- --------------------------------------------------------------------------------
1
On November 7, 2005 the Company's Board of Directors voted to change its fiscal
year end from December 31 to September 30 and adopted an amendment to the
Company's Bylaws reflecting this change.
This Transition Report on Form 10-K of BellaVista Capital, Inc. (the "Company")
contains forward-looking statements. All statements other than statements of
historical fact may be forward-looking statements. These include statements
regarding the Company's future financial results, operating results, business
strategies, projected costs and capital expenditures, products, competitive
positions, and plans and objectives of management for future operations.
Forward-looking statements may be identified by the use of words such as "may,"
"will," "should," "expect," "plan," anticipate," "believe," "estimate,"
"predict," "intend" and "continue," or the negative of these terms, and include
the assumptions that underlie such statements. The Company's actual results
could differ materially from those expressed or implied in these forward-looking
statements as a result of various risks and uncertainties, including those set
forth in the sections entitled "Item 1A - Risk Factors" and "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations." All forward-looking statements in this report are based on
information available to the Company as of the date hereof and the Company
assumes no obligation to update any such statements.
The following information should be read in conjunction with the Financial
Statements and notes thereto included in this Form 10-K.
PART I
ITEM 1. BUSINESS
Business Focus and Strategies
Organized in 1999 as a real estate investment trust or "REIT," we make and fund
development and construction loans to developers of residential real estate. We
generally invest in for-sale single-family or multi-family projects, which are
typically structured as construction loans, mezzanine loans, or equity
investments. To date, nearly all of our investments have been made in Northern
California; however, we plan to seek investment opportunities in other areas of
California and neighboring states. We do not engage in any foreign operations or
derive any revenue from foreign operations, and do not intend to do so in the
future. Effective January 1, 2004, we withdrew our REIT status and are now taxed
as a C Corporation.
Most investments are underwritten with maturity dates of up to 24 months, which
dates may be extended when deemed to be in the Company's best interest. Most
investments are secured by recorded deeds of trust on the property being
developed, and title insurance protecting the position of our deeds of trust is
always a precondition to funding a secured loan. We may also make loans to
development entities or take an ownership interest in the development entity. In
such circumstances we typically require a shared appreciation interest or other
equity participation. We also may invest our funds directly in real property, if
in the opinion of our Board of Directors it is in our best interest.
All approved investments are subject to detailed legal documentation that has
been formulated by legal counsel for our specific purposes. In addition, our
Board of Directors has implemented specific guidelines for the making of loans
and investments. In accordance with our loan documents, we generally advance the
monthly interest payments out of available loan proceeds, although our loan
documents provide us with a right not to advance or to cease such payments
should it be determined that conditions require such actions. Loan fees, if
charged, are typically advanced out of the loan proceeds with the initial loan
advance. Generally, our loans require the borrower to make a "balloon payment"
equal to the principal amount, advanced interest and fees upon maturity of the
loan. The loan maturity date is the date of sale of the underlying real estate
or the date stated in the loan documents.
Company Management.
Investment Origination. We employ persons skilled in loan underwriting,
disbursement and monitoring, and the various business and legal issues that may
2
be involved with real estate lending. Our employees, and independent contractors
where appropriate, provide all of the services including but not limited to:
underwriting loans and investments, overseeing all loans and investments, and
servicing loans. Our loans and investments are arranged through Eric Hanke,
Vice-President of Business Development. Mr. Hanke is a licensed California real
estate broker, and performs in such capacity in arranging loans and investments
on our behalf.
Proposed loans and investments are evaluated to determine whether the loan or
investment is of a type typically made by us, whether the developer has the
experience necessary to manage the project, whether the security for the loan
and the loan to value ratio meets our investment standards, and whether the loan
or investment meets investment criteria and objectives set forth by the Board of
Directors. The Board of Directors must approve any loans or investments. We also
require third party appraisals to support valuation of proposed future
investments and for modifying loans.
Collateral valuation. We utilize the experience of our employees, brokers in the
real estate industry, third party appraisals or other information deemed useful
to make assessments of a proposed project's viability and projected value, and
to determine if a proposed investment meets our criteria. In the evaluation
process, emphasis is placed on the ability of the underlying collateral to
protect against losses in the event of default by the borrower. The evaluation
is based on the projected market value of the proposed project, using various
tools, including comparable sales of similar properties and projections of
market appeal and demand at completion. The goal of the underwriting process is
to achieve a comfort level that the projected completion value of the property
will support full repayment of the investment plus the projected rate of return.
Servicing. Investment servicing involves taking all steps necessary to
administer the investment, including monitoring the propriety of funding
requests, monitoring progress of a project and accounting for principal and
income. Where appropriate, we employ an outside agent to monitor construction
progress and draw requests. Loan proceeds are disbursed as construction
progresses, and only after we have received satisfactory documentation. Before
making disbursements of loan proceeds, borrower disbursement requests are
verified by invoices from the developer or its subcontractors, and by periodic
site inspections of progress.
Sales of construction mortgage loans. We plan to hold mortgage loans to
maturity, and have not embarked on selling loans in any secondary market. Nor
are we aware that a secondary market exists for the loans we hold. We may,
however, decide to sell assets from time to time for a number of reasons,
including, without limitation: (1) to dispose of an asset for which credit risk
concerns have arisen; (2) to reduce interest rate risk; (3) or to re-structure
our balance sheet when our management deems it advisable. We will select any
mortgage loans to be sold according to the particular purpose the sale is
intended to serve. Our Board of Directors has not adopted a policy that would
restrict management's authority to determine the timing of sales or the
selection of mortgage loans to be sold.
ITEM 1A. RISK FACTORS
An investment in our stock involves a high degree of risk. Some of the principal
risks include: the real estate lending business may be adversely affected by
periods of economic slowdown, which may be accompanied by declining real estate
values on properties securing repayment of loans; construction mortgage loans
involve greater risks of repayment than loans secured by property that has
already been improved since completion market valuation of a given project can
be highly speculative and subject to unanticipated conditions; there is no
public market for our securities, and liquidity is not assured.
In addition to the foregoing, and other information contained or incorporated
into this Form 10-K, the following is a discussion of risk factors that we
believe are material at this time
General Risks Related to Construction Mortgage Lending
Real estate collateral. Our common stock securities are subject to risks
inherent in real estate lending. Many of the risks of holding mortgage loans are
similar to the risks of investing directly in the real estate securing the
mortgage loans. This may be especially true in the case of a relatively small or
less diverse pool of mortgage loans. If there is a default on the mortgage loan,
the ultimate extent of our loss, if any, may only be determined after a
foreclosure of the mortgage encumbering the property and, if we take title to
the property, upon liquidation of the property. Factors such as the title to the
property or its physical condition, including environmental considerations and
state of construction, may make a third party unwilling to purchase the property
at a foreclosure sale or for a price sufficient to satisfy the obligations with
respect to the related mortgage loan. Foreclosure laws may protract the
foreclosure process. In addition, the condition of a property may deteriorate
during the pendency of foreclosure proceedings. Some borrowers may become
subject to bankruptcy proceedings, in which case the amount and timing of
3
amounts due may be materially adversely affected. Even if the real property
provides adequate security for the mortgage loan, substantial delays could be
encountered in connection with the liquidation of a defaulted mortgage loan and
a corresponding delay in the receipt and reinvestment of principal and interest
payments could occur.
Real estate market conditions. The real estate investment business may be
adversely affected by periods of economic slowdown or recession, which may be
accompanied by declining real estate values. Any material decline in real estate
values reduces the ability of borrowers to use real estate equity to support
borrowings and increases the loan-to-value ratios of mortgage loans previously
made, thereby weakening collateral coverage and increasing the possibility of a
loss in the event of default. In addition, delinquencies, foreclosures and
losses generally increase during economic slowdowns and recessions. In addition,
equity investments in real estate joint ventures provide no lending relationship
and rely directly upon the performance of the real estate development for return
of the investment.
Loans on properties not yet constructed. A mortgage loan made to finance a
property that is not yet constructed will generally involve greater risks than a
mortgage loan on property that has been completed. In the case of a property
already completed, market value at the time the loan is made is more readily
ascertainable from current market valuations. In the case of a property under
development, there can be no assurance that the improvements can be accomplished
with available funds or in a timely manner. Sale or refinancing of the completed
project generally provides the funds for repayment of a construction mortgage
loan. While analyses are made to predict the completed market value of the
development project, such analyses are subject to unanticipated changes over
which we may have no control. Since market value cannot be determined until a
property is actually sold in the marketplace, the market valuation of a proposed
construction project can be especially speculative.
Economic conditions. The performance of a real estate investment portfolio will
depend on, among other things, the level of net interest income generated by
mortgage loans, the market value of the mortgage loans and joint venture
investments, the supply of and demand for these investments. Prepayment rates,
interest rates, borrowing costs and credit losses depend upon the nature and
terms of the mortgage loans, the geographic location of the properties under
development, conditions in financial markets, the fiscal and monetary policies
of the United States government and the Board of Governors of the Federal
Reserve System, international economic and financial conditions, competition and
other factors, none of which can be predicted.
Environmental liabilities. In the event that hazardous substances are found to
have contaminated properties, the value of the real property may be diminished.
As a joint venture owner, we might potentially become subject to environmental
liabilities even if we were not responsible for the contamination. While we
intend to exercise due diligence to discover potential environmental
liabilities, hazardous substances or wastes, contaminants or pollutants may be
discovered on properties during our ownership or after a sale of the property to
a third party. If hazardous substances are discovered on a property, we may be
required to remove those substances or sources and clean up the property. We may
also be liable to tenants and other users of neighboring properties. In
addition, we may find it difficult or impossible to sell the property before or
following any clean up.
Legislation and regulation. The real estate investment business is subject to
extensive regulation, supervision and licensing by federal, state and local
governmental authorities and to various laws and judicial and administrative
decisions imposing requirements and restrictions. Laws and regulations may be
subject to legislative, administrative and judicial interpretation, especially
laws and regulations that have been infrequently interpreted or only recently
enacted. Infrequent interpretations of laws and regulations or an insignificant
number of interpretations of recently enacted regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Ambiguity under regulations to which we are subject may lead to regulatory
investigations or enforcement actions and private causes of action. Failure to
comply with regulatory requirements can lead to loss of approved status,
lawsuits and administrative enforcement actions. There can be no assurance that
we will maintain compliance with these requirements in the future without
additional expenses, or that more restrictive local, state or federal laws,
rules and regulations will not be adopted or that existing laws and regulations
will not be interpreted in a more restrictive manner, which would make
compliance more difficult for us.
4
Specific Risks of Investment in Our Securities
Restrictions on transferability and lack of liquidity of shares. Shares of our
common stock have been privately placed solely with accredited investors who
have acquired them for investment purposes only and not with a view toward
transfer, resale, exchange or distribution. There currently is no public market
for our shares of stock. Accordingly, the transferability of such shares of
stock is limited. Additionally, the shares may not be readily accepted as
collateral for a loan. Holders of our common stock do not have a vested right to
redeem their shares, and therefore may not be able to liquidate their investment
in the event of an emergency or otherwise.
Investment losses. As noted above, an investment in property that is not yet
constructed generally involves greater risks than investments in property that
has been completed since there can be no assurance that the improvements can be
accomplished with available funds or in a timely manner. Furthermore, while
analyses are made to predict the completed market value of the development
project, such analyses are subject to unanticipated changes over which we may
have no control, including recessions and economic downturns.
Balloon loans. The loans in our portfolio will typically require the borrower to
make a "balloon payment" on the principal amount upon maturity of the loan. To
the extent that a borrower has an obligation to pay a mortgage loan in a large
lump sum payment, their ability to satisfy this obligation may be dependent upon
their ability to obtain suitable refinancing or otherwise raise a substantial
amount of cash. An increase in market interest rates over the mortgage rates
available at the time the loan was originated may have an adverse effect on the
borrower's ability to obtain refinancing or to pay required monthly payments. As
a result, these loans may involve a higher risk of default than fully amortizing
loans.
Lack of geographic diversification. Currently, most of the developments in which
we invest are located in the San Francisco Bay Region of Northern California.
Properties located in the same geographic region may be subject to a greater
risk of loss if economic or political conditions or real property values in the
region deteriorated substantially. Also, since developments will not be required
to purchase earthquake insurance, the developments are subject to greater risk
of loss than properties located in more stable geologic areas.
Funding of loan commitments. We expect that proceeds generated from completed
real estate developments will be sufficient to fund all loan commitments. If,
however, we were unable to obtain loan repayments we might then be unable to
fund all of our existing commitments. Borrowers might then be unable to complete
their projects if they could not obtain financing from other sources, and we
conceivably could incur damages. Also, if we became unable to meet our
contractual obligations, our reputation would likely suffer, and we might be
unable to attract new borrowers, resulting in the loss of future business. This
might have a materially adverse effect upon our financial condition, cash flows
and results of operations.
Litigation. We are subject to risks of litigation filed against us. These legal
proceedings and claims, whether with or without merit, are time-consuming and
expensive to defend and divert management's attention and resources.
Discretion of Board of Directors. Management has established our operating
policies and strategies. These policies and strategies may be modified or waived
by the Board of Directors, without shareholder approval. The ultimate effect of
any such changes may adversely affect our operations.
Competition. As with any business, we face competition, primarily from
commercial banks, savings and loans, other independent mortgage lenders, and
real estate investment funds. Also, if we expand into particular geographic
markets in order to increase geographic diversity and take advantage of
opportunities in such markets, we may face competition from lenders with
established positions in these locations. Competition can take place on various
levels, including convenience in obtaining a mortgage loan, service, marketing,
origination channels and pricing. Although we do not know of any particular
competitor that dominates our market, many of our competitors in the financial
services business are substantially larger and have more capital and other
resources. There can be no assurance that we will be able to compete
successfully in this market environment. Any failure in this regard could have a
material adverse effect on our results of operations and financial condition.
Borrowing. We may employ a financing strategy to increase the size of our
mortgage loan portfolio by borrowing a portion of the market value of our
mortgage loans. The costs of those borrowings vary depending upon the lender,
the nature and liquidity of the underlying collateral, the movement of interest
5
rates, the availability of financing in the market and other factors. If the
returns on the mortgage loans purchased with borrowed funds fail to cover the
cost of the borrowings, we will experience net interest losses and may
experience net losses. In addition, we may not be able to achieve the degree of
leverage we believe to be optimal, which may cause us to be less profitable than
we might be otherwise. We may finance some of the mortgage loans that we hold
through interim financing facilities such as bank credit lines. We may be
dependent upon a few lenders to provide the primary credit facilities for our
mortgage loans. Any failure to renew or obtain adequate funding under these
financings, or any substantial reduction in the size of or pricing in the market
for our mortgage loans, could have a material adverse effect on our operations.
We have not made any agreements under which a lender would be required to enter
into new borrowing agreements during a specified period of time; however, we may
make such agreements if deemed favorable.
Future offerings. We may increase our capital resources by making additional
offerings of equity and debt securities, including classes of preferred stock,
common stock, commercial paper, medium-term notes, mortgage-backed obligations
and senior or subordinated debt. All debt securities will be and some classes of
preferred stock could potentially be senior to our common stock.
Deficiency upon liquidation of our mortgages. The market value of our mortgage
assets may fluctuate significantly. If we need to sell assets to repay our
outstanding notes or other borrowings or commitments, our mortgage assets may
prove to be illiquid. Even if sold at a discount, the proceeds of sale might be
less than the outstanding principal amount of, and interest payable on, our
notes.
Investment by tax-exempt entities. A fiduciary of a pension, profit-sharing,
stock bonus plan or individual retirement account, including a plan for
self-employed individuals and their employees or any other employee benefit plan
subject to the prohibited transaction provisions of the Internal Revenue Code or
the fiduciary responsibility provisions or "prudent man" rule of the Employee
Retirement Income Security Act of 1974, known as "ERISA", should consider:
(a) whether the ownership of our securities is in accordance with the
documents and instruments governing the employee benefit plan,
(b) whether the ownership of our securities is consistent with the
fiduciary's responsibilities and satisfies the applicable requirements of
ERISA, in particular, the diversification, prudence and liquidity
requirements of section 404 of ERISA,
(c) the prohibitions under ERISA on improper delegation of control
over, or responsibility for "plan assets" and ERISA's imposition of
co-fiduciary liability on a fiduciary who participates in, or permits, by
action or inaction, the occurrence of, or fails to remedy, a known breach
of duty by another fiduciary with respect to plan assets, and
(d) the need to value the assets of the employee benefit plan
annually.
A plan fiduciary should understand the illiquid nature of an investment in our
securities and that no secondary market exists for them, and should review both
anticipated and unanticipated liquidity needs for the plan and conclude that an
investment in our securities is consistent with the plan's foreseeable future
liquidity needs.
Investment Company Act exemption. We conduct our business so as not to become
regulated as an investment company under the Investment Company Act. The
Investment Company Act exempts entities that are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate." If we should fail to qualify for an exemption from
registration as an investment company, our ability to use leverage would be
substantially reduced and we may be unable to conduct our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES.
We own certain real property that we have acquired through foreclosure or deed
in lieu of foreclosure. Our policy is to maximize the value of these foreclosed
properties prior to liquidation. In some cases this may involve completing
6
construction, sometimes through a subsidiary, and then marketing the property
for sale. The properties we own are described in Note 5 to the Consolidated
Financial Statements contained as Item 8 of the Form 10-K and begin on page
FS-1.
ITEM 3. LEGAL PROCEEDINGS.
Legal proceedings are described in Note 10 to the financial statements included
in the Form 10-K as Item 8.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
On October 3, 2005 the Company held its annual meeting of shareholders and voted
to elect all five nominated directors: William Offenberg; Robert Puette;
Patricia Wolf; Jeffrey Black; and Michael Rider. The elected directors
constitute the full Board of Directors for BellaVista Capital and there were no
other directors whose term of office as a director continued after the meeting.
The election results were as follows:
For Against Abstain
--------------- -------------- ---------------
William Offenberg 8,568,122 205,241 181,378
Robert Puette 7,998,795 661,069 294,877
Patricia Wolf 8,576,922 193,735 184,084
Jeffrey Black 8,614,060 206,823 133,858
Michael Rider 8,121,417 587,697 245,627
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
There is currently no public trading market for our stock. We are authorized to
issue up to 50,000,000 shares of Common Stock. During the period from April 30,
1999 through August 31, 2004 we sold 28,007,243 shares of Class A Convertible
Preferred Stock, including sales made through our dividend reinvestment program.
During this period of time we also repurchased 8,523,991 shares of our Preferred
Stock through our redemption programs. We have also offered and sold Series A
and B promissory notes of varying amounts and maturities. All sales of stock
were made under exemption from the registration requirements of the Securities
Act of 1933 pursuant to Regulation D, Rule 506. All sales of stock and notes
were to accredited investors, as defined in Regulation D, Rule 501 (a)(4), (5)
or (6) under the 1933 Securities Act. Appropriate legends were placed on each
stock certificate. No underwriters were involved and no underwriting commissions
were paid in any of the transactions. On September 1, 2004 our outstanding
shares of Preferred Stock totaling 19,483,252 shares, converted to Common Stock
in accordance with the terms of the Preferred Stock. At the time of conversion,
there were 100 shares of common stock issued and outstanding. On December 27,
2004 we repurchased 1,179,184 shares in connection with a legal settlement. On
March 1, 2005 we repurchased an additional 3,312,843 shares of Common Stock
under an issuer tender offer.
At September 30, 2005, there were 14,991,325 shares of Common Stock, issued and
outstanding held by a total of 962 holders of record.
The Company has not declared or paid any dividends on its capital stock during
the period from January 1, 2004 through the date of this report.
7
ITEM 6. SELECTED FINANCIAL INFORMATION.
The following financial and operating data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our audited financial statements included elsewhere in this Form
10-K.
Capitalization
Our capitalization, as of September 30, 2005, was as follows:
Borrowings:
Construction loan payable $ 5,934,447
Secured notes payable 2,100,000
-------------------
8,034,447
Total borrowings
Capital Stock
Common Stock - 14,991,325 shares
issued and outstanding 201,216,369
Accumulated dividends and distributions (90,621,455)
Accumulated deficit (52,704,875)
-------------------
Total borrowings and capital stock $ 65,924,486
===================
The selected financial data set forth below has been derived from our audited
financial statements included elsewhere in this and previously filed Forms 10-K
(in 000's except per share amounts).
September 30, September 30, December 31, December 31, December 31, December 31,
2005 2004 2004 2003 2002 2001
-------------------------------------------------------------------------------------------
Total assets.......................... $ 67,822 $ 75,021 $ 69,969 $ 91,387 $ 155,067 $ 184,597
Total debt............................ 8,034 3,185 3,185 7,878 36,401 32,313
Capital stock......................... 201,216 217,517 213,209 225,143 226,080 216,158
Accumulated distributions............. (90,621) (90,621) (90,621) (90,621) (80,132) (58,826)
Accumulated deficit................... $ (52,705) $ (55,455) $ (56,143) $ (51,369) $ (29,520) $ (8,215)
Nine months Nine months Year Ended Year Ended Year Ended Year Ended
September 30, September 30, December 31, December 31, December 31, December 31,
2005 2004 2004 2003 2002 2001
-------------------------------------------------------------------------------------------
Revenues........................... $ 5,911 $ 3,255 $ 3,825 $ 11,390 $ 10,018 $ 12,588
Net Income (loss).................. 3,438 (4,086) (4,774) (21,849) (21,305) 667
(Loss) Income allocable to a Preferred
Share:
Basic and Diluted.................. $ -- -- $ -- $ (0.98) $ (0.96) $ 0.03
Preferred stock dividends and
distibutions per share............. $ -- -- $ -- $ 0.47 $ 0.96 $ 1.12
Weighted average Preferred Shares.. -- -- -- 22,442 22,169 21,451
Income (loss) allocable to each common
share:
Basic and Diluted.................. $ 0.22 (1.92) $ (0.73) $(323,383) $ (426,107) $(234,510)
Weighted average common shares..... $15,719,422 2,133,303 $6,476,866 100 100 100
Cash flows from (used by):
Operating activities............... $ 5,233 (705) $ (577) $ 3,904 $ (322) $ (2,156)
Investing activities............... 8,449 11,735 14,400 43,731 17,991 26,400
Financing activities............... (7,143) (12,318) (16,627) (41,328) (15,982) (21,538)
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Statements contained in this Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," ("MD&A") and elsewhere in this
Form 10-K, which are not historical facts, may be forward-looking statements.
Such statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Investors are cautioned not
to attribute undue certainty to these forward-looking statements, which speak
only as of the date of this Form 10-K. We undertake no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Form 10-K or to reflect the occurrence of
unanticipated events, other than as required by law.
Change in Year End
On November 7, 2005 the Company's Board of Directors voted to change its fiscal
year end from December 31 to September 30 and adopted changes to the Company's
Bylaws reflecting this change. In view of this change, the MD&A compares the
consolidated financial statements as of and for the nine months ended September
30, 2005 (the transition period) with the consolidated financial statements as
of and for the nine months ended September 30, 2004. References to 2005 refer to
the transition period unless otherwise specified. Note that although
consolidated financial statements are not presented as of and for the nine
months ended September 30, 2004, we have included summary information in the
MD&A for these periods for comparability purposes. We are also including a
discussion and analysis of our financial statements for fiscal years ended
Dec. 31, 2004, and 2003.
Throughout the MD&A, data for all periods except as of and for the nine months
ended September 30, 2004, are derived from our audited consolidated financial
statements, which appear in this report. All data as of and for the nine months
ended September 30, 2004, are derived from our unaudited consolidated financial
statements, which are not presented herein. Summary financial information for
this period can be found in Note 13 - Change in Fiscal Year End.
OVERVIEW
BellaVista Capital was incorporated in March 1999 as Primecore Mortgage Trust,
Inc. Since incorporation, Primecore engaged in the business of providing loans
for the development of primarily high-end residential real estate. During 1999
and 2000 Primecore raised the capital to fund these loans from the sale of
shares of Preferred Stock. This capital was invested primarily in high priced
San Francisco Bay Area residential real estate at a time when prices were
increasing at a rapid pace. By the end 2000, Primecore had loan commitments of
$436 million on 117 loans with over $216 million funded.
After 2000, the market for high-end real estate in the San Francisco Bay Area
began to deteriorate. Primecore significantly scaled back new lending and
concentrated on funding the existing loans in its portfolio. During 2001
Primecore funded only 6 new loans and closed out 38. At the same time, Primecore
began to experience borrower defaults and sought to enforce its security rights.
During 2001, Primecore took title to 11 projects through foreclosure, which were
classified as Real Estate Owned (REO). Of the 38 investments closed in 2001, 2
were REO properties.
During 2002 and 2003 Primecore continued the task of completing and closing out
the development properties in its portfolio. During 2002 and 2003 Primecore took
title to an additional 37 properties by way of foreclosure or deed in lieu of
foreclosure. Two new loans were originated during that period and 60 were
closed, 30 of which were REO properties. Primecore also began to recognize
significant impairments in its portfolio. For the two years ended December 31,
2003, Primecore charged $48,737,682 to expense for impairments in its investment
portfolio. At that time the portfolio consisted of 11 loans, 7 of which were
non-performing, and 16 REO properties.
The impairment of the investment portfolio resulted in substantial operating
losses. The Company realized that these net operating losses could be carried
forward and used to reduce future taxable income. In prior years, the company
used its REIT status, and the payment of dividends, to eliminate corporate level
taxation. However, the REIT rules restricted the types of loans the Company
could make. In particular, the Company was prohibited, by the REIT rules, from
making loans with equity participations. With the ability to carry forward prior
years' net operating losses to offset future taxable income, the Company was
free to terminate its REIT status, which it did effective January 1, 2004, and
was no longer restricted in the types of investments it could make. As of
September 30, 2005 the Company's available Federal net operating loss
9
carryforwards were approximately $93.3 million. If these net operating loss
carryforwards are fully utilized to offset future taxable income, at current
Federal and California state tax rates, it would save the Company approximately
$36.1 million in tax payments.
By the end of 2003 it was clear the company needed new direction. On December
31, 2003 our Board of Directors terminated our management agreement with
Primecore Funding Group and internalized operations. On March 19, 2004
Primecore's CEO, Susan Fox, resigned and Michael Rider, then CFO, was appointed
as the new CEO. Eric Hanke was named Vice President of Business Development and
placed in charge of rebuilding the investment portfolio. In April 2004 Primecore
changed its name to BellaVista Capital in order to reflect its new business
focus. Messrs. Rider and Hanke worked closely with the Board of Directors to
develop a new investment strategy. After assessing failures of Primecore's
business model, new management and the Board of Directors formalized a plan for
future business operation. The basic principles of the plan are as follows:
o We will concentrate on $1 million to $6 million investments in
residential real estate development;
o We will target a 15% average return on our portfolio of investments by
blending lower yield, more secure first trust deed investments with
higher yield subordinated debt and equity investments;
o We will focus on investments covering a broad range of price points,
but with a majority of investments in housing priced close to the
median sale prices for the areas in which we lend;
o We will diversify the portfolio into other geographic areas, primarily
in California; and
o We have established a rigorous process for investment underwriting and
approval designed to mitigate our risk.
During 2004 new management focused on completing and liquidating the existing
portfolio of assets, internalizing operations, resolving outstanding legal
issues and developing a pipeline of new investment opportunities. In addition to
the completion and sale of our non-performing investments, management completed
the transition to internal management by significantly reducing continuing
operating expenses. We reduced unnecessary staff and administrative overhead. We
leased smaller office space more suited for our smaller staff, at approximately
10% of the cost paid by prior management. At $1.25 million annually, our
projected recurring operating expenses are less than 15% of the $9 million
average annual operating expenses paid from 1999 through 2003.
During 2004, management also worked hard to resolve the many legal issues that
it faced as a result of prior management's policies. We settled two lawsuits
from two groups of shareholders seeking to gain at the expense of our remaining
shareholders. We also settled legal actions brought by developers and
contractors seeking millions for approximately $725,000. In addition, we
successfully defended a legal action against us for breach of contract.
Defending and settling these legal actions was costly, with approximately $2.8
million paid in legal fees and settlement costs during 2004, but we believe the
benefits gained through the certainty of settlement, will far outweigh the costs
over time as we are able to devote our limited resources to productive purposes.
Not all of our legal outcomes were negative however. During 2004 we settled two
legal actions in which we were the plaintiff that resulted in the agreement by
the defendants to pay BellaVista $6.41 million. During 2004 we collected $1.128
million from these settlements, net of collection costs. In January 2005, one of
the parties defaulted on their settlement payment, but by the terms of the
agreement we were able to obtain a judgment against them in the amount of $5.9
million. We are currently pursuing collection on that judgment.
During 2004 and the nine months ended September 30, 2005 we developed our
pipeline of new investment opportunities. Through contacts we developed, we
received investment requests totaling over $604 million for over 130 projects.
Since 2004 we approved new investments totaling approximately $33.8 million. As
of September 30, 2005 these new, performing investments comprised approximately
34% of our invested assets compared with approximately 24% at December 31, 2004.
The percentage of performing investments will increase as we continue to fund
our new commitments, sell off our nonperforming investments and make new
investments. We seek to generate gross returns on invested assets of 15%. With
these targeted returns, we seek to generate returns to shareholders of
approximately 12.5%, net of our operating expenses.
10
RESULTS OF OPERATIONS
Revenue
For financial statement purposes we report income from our investments in real
estate only after we have collected it from the sale or repayment of the
associated investment. During the nine months ended September 30, 2005 we
reported income from our investments in real estate development of $5.7 million
compared with $2.5 million during the nine months ended September 30, 2004. The
increase was due to the repayment of two performing loans during 2004.
Our revenues from investments in real estate were $3.5 million and $11.4 million
during the years ended December 31, 2004 and 2003, respectively. Income
decreased during 2004 compared to 2003 due to a combination of a lower amount of
total repayments and a higher percentage of impaired investments selling in 2004
compared with 2003.
Performing Investments
As of January 1, 2005 we had five performing investments in which we had
invested $14.2 million. During the nine months ended September 30, 2005 we
invested an additional $16.0 million into these performing investments and
received repayments totaling $11.2 million, exclusive of $3.4 million income
reported, thereby increasing our total investment to approximately $19.0 million
at September 30, 2005. If our contracts had been loans according to generally
accepted accounting principles, we would have reported income of approximately
$1.7 million for these performing investments. This represents an annual return
of 14% on our average invested capital for our performing investments during the
nine months ended September 30, 2005 and a return of approximately 3.4% on the
average net realizable value of our assets. See the discussion about the net
realizable value of our investments in the Liquidity and Capital Resources
section of this Item 2.
The Company believes that the rules governing the reporting of income from our
investments make it difficult for readers to understand our economic
performance. Specifically, our investments typically take two years or longer to
complete and repay. During this time, we generally charge interest or a
preferred return on our investments to our developers, which we cannot report
for GAAP purposes until the investment has completed and repaid. During the
period that we are charging, but not reporting this income, we are incurring
expenses necessary to originate and service our investments and these expenses
are reported during the period they are incurred.
The following table, using Non-GAAP measures, presents the results of operations
that would be reported if our investments were treated as loans. For these
purposes, proforma revenues from investment in real estate development include
interest and preferred returns we charge developers during the reporting period
and the prorated amount of loan fees charged for the reporting period over the
contracted term of our investment. Proforma net income (loss) per share is
calculated using the weighted average number of shares outstanding for both
common and preferred shares.
Nine months Year Year
Ended Nine Months Ended Ended
September 30, September 30, December 31, December 31,
2005 2004 2004 2003
--------------- --------------- --------------- ---------------
Net income (loss) per GAAP, as reported $ 3,437,684 $ (4,085,887) $ (4,773,845) $ (21,849,066)
Revenues from real estate development per GAAP (5,720,791) (2,527,574) (3,497,655) (11,372,436)
Proforma revenues from real estate development 1,906,522 (1,307,545) 1,406,344 4,950,383
--------------- --------------- --------------- ---------------
Proforma net income (loss) - Non GAAP $ (466,585) (5,305,916) $ (6,865,156) $ (28,271,119)
=============== =============== =============== ===============
Proforma net income (loss) per share - Non GAAP $ (0.02) $ (.025) $ (0.33) $ (1.26)
=============== =============== =============== ===============
11
Expenses
During the nine months ended September 30, 2005 we incurred expenses totaling
$2.1 million relating to the ongoing operations of the company, legal expenses
and carrying costs related to our REO portfolio compared with $4.0 million
during the nine months ended September 30, 2004. Our recurring operating
expenses were approximately $1.3 million during this period compared with $2.5
million during the nine months ended September 2004. During the year ended
December 31, 2004, these expenses totaled $2.0 million compared with $4.4
million during the year ended December 31, 2003. We accomplished these
reductions in recurring operating expenses, both during the nine months ended
September 30, 2005 and the year ended 2004 compared with the year ended 2003,
through staff reductions, reduced rent from new, smaller office space and other
cost cutting measures.
During the nine months ended September 30, 2005 we recorded impairment charges
totaling $1.6 million compared with $3.3 million during the nine months ended
September 30, 2004, reflecting changes downward totaling $1.9 million in our
estimates of the net realizable values for our direct investments in real estate
developments. During the same period we reflected changes upward in our
estimates of fair values for two of our direct investments in real estate
developments totaling $1.4 million. These upward revisions in estimates do not
affect any previously impaired investments in real estate as management
accounted for the impairment previously taken as a change in cost basis for
those two properties. Consequently, any previous impairment recorded prior to
January 1, 2005 will not reverse until those properties are sold. However, these
adjustments have been reflected in our non-GAAP measure - net realizable value
of investments below. The changes in estimates, both upward and downward, were
based upon revised market information available at the time we prepared this
Form 10-K.
In addition to our recurring operating expenses, we incurred legal expenses and
REO carrying costs related to our non-performing investments of $0.8 million for
the nine months ending September 30, 2005 compared with $1.5 million during the
nine months ended September 30, 2004. The decrease in costs was due the payment
of a $650,000 legal settlement during 2004. During the year ended December 31,
2004 and 2003 we reported legal expenses and REO carrying costs related to our
non-performing investments of $3.2 million and $1.3 million, respectively.
During 2004 we incurred costs of approximately $1.8 million in settlement of
lawsuits, which were one time events and comprise the difference in costs. These
expenses depend, to a large degree, upon our ability to complete and sell these
non-performing investments according to our estimates. T
Since December 31, 1999, all interest costs have been capitalized as a cost of
our investments. Interest cost associated with our borrowings was $345,426
during the nine months ended September 30, 2005 compared with $177,074 during
the nine months ended September 30, 2004. The increase is due to additional debt
we have added from our construction loan and the secured loan from Mid-Peninsula
Bank. During the years ended December 31, 2004 and 2003, our interest costs were
$256,886 and $1,590,531, respectively. Our interest costs decreased
substantially during the year ended December 31, 2004 compared with 2003 as we
used proceeds from the repayment of our investments to repay our secured and
unsecured debt. See Note 7 to the Consolidated Financial Statements included as
Item 8 of this Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity means the need for, access to and uses of cash. Our principal source
of liquidity is the repayment of our real estate investments. Our principal
demands for liquidity are funds that are required to satisfy obligations under
existing loan commitments, operating expenses, interest expense associated with
our indebtedness and debt repayments.
Sources of Cash
As of September 30, 2005 our primary source of liquidity was the collection of
our investments in real estate and our $22 million construction loan from China
Trust Bank. We do not currently have an open private placement for the sale of
our stock and do not expect to sell stock for the foreseeable future.
Additionally, we are currently not soliciting or accepting applications to issue
new unsecured notes payable. However, we do have the ability to borrow money
from various financial institutions using our real estate investments as
collateral if we determine that we need additional liquidity.
12
We typically receive repayment on our investments when the development has been
completed and sold to third parties. Accordingly, our repayments are a function
of our developers' ability, or our ability in the case of REO properties, to
complete and sell the development properties in which we have invested. During
the nine months ended September 30, 2005 we received repayments, including
income, totaling $37.0 million compared with $37.6 million and $65.2 during the
years ended December 31, 2004 and 2003. The following table summarizes our
liquidity expectations for the 15 investments we held at September 30, 2005. The
expected proceeds in the table are higher than our net realizable value
estimates because they include our estimated costs to complete.
Expected Proceeds
------------------------
Scheduled investment completion:
Complete 9,855,000
Three months ended 12/31/05 202,433
Three months ended 3/31/06 19,866,696
Three months ended 6/30/06 27,723,448
Three months ended 9/30/06 6,647,887
Three months ended 12/31/06 3,452,004
Three months ended 3/31/07 9,428,835
Three months ended 6/30/07 6,393,963
Three months ended 9/30/07 600,000
Three months ended 12/31/07 600,000
Three months ended 3/31/08 --
Three months ended 6/30/08 1,000,000
Three months ended 9/30/08 550,000
------------------------
Total $ 86,320,266
========================
It is possible that our repayments may not be sufficient to timely meet our
commitments and we may be forced to reduce prices on the properties that we
control in order to expedite their repayment or seek financing at terms that may
not be favorable to us. In such cases, the amount of proceeds received could be
substantially less than what we would have expected if we allowed a proper
marketing period for the property. This would have a negative impact on the
estimated net realizable value of our assets.
Uses of Cash
The following table sets forth the projected timing and amount of our
obligations through 2008, without taking into account new investments that may
be made during future periods:
Obligation Year Ended Year Ended
Total 9/30/06 9/30/07
- ------------------------ ----------------- ----------------- -----------------
Investment fundings $ 28,046,928 $ 28,046,928 $ --
Office lease 107,400 85,800 21,600
Secured notes payable 8,034,447 8,034,447 --
----------------- ----------------- -----------------
$ 36,188,775 $ 36,167,175 $ 21,600
================= ================= =================
Investment fundings are the largest use of our cash. During the nine months
ended September 30, 2005 we invested $26.1 million in new and continuing
development projects compared with $14.0 million during the nine months ended
September 30, 2004. Our investments totaled $23.1 million and $26.1 million
during the years ended December 31, 2004 and 2003.
13
At September 30, 2005 we estimated the costs to complete our direct investments
in real estate developments plus the remaining funding obligation on our joint
venture investments in real estate developments was $28.0 million, $13.5 million
of which is related to our Property 2216. We have a $22 million construction
loan in place with proceeds of $21.2 million to fund these construction costs.
These amounts will be funded as construction progresses on our investments. As
of September 30, 2005 we had drawn $5.9 million against this commitment to fund
construction costs. The exact timing of the investment fundings is dependent on
several factors including weather, governmental regulation and developer related
issues, so the timing of investment fundings in the above table is an estimate
based on information available to us at this time. Additionally, we expect the
amount of actual investment fundings to be higher than our obligation existing
at September 30, 2005 as we continue to make and fund new investments in future
periods.
Our secured notes payable include the construction loan discussed above and a
$2.1 million loan from a bank. The notes payable are secured by two of our
direct investments in real estate development and we expect they will be repaid
from the sale proceeds of the secured properties.
Stock Repurchases
In the past, 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 the repurchase price. The Board of Directors has used the
net realizable value of the Company's assets to guide determinations of
repurchase price.
Realizable Value of Investments
The realizable value of our investments represents our current estimate of the
amount of proceeds we expect to receive once our investments are completed and
ready for sale. The estimate relies on a number of assumptions including the
expected value of the investment once completed, less applicable selling costs,
the remaining costs and the length of time required to complete the project.
Many factors outside our control can cause changes in these estimates and
produce different results. Currently, many of our properties are custom style
homes which appeal to a limited high-end market with few comparable transactions
which makes it difficult to project with certainty the market value of these
properties.
The information presented below reconciles the differences between US GAAP and
the estimated realizable value of our investments.
14
September 30, 2005 December 31, 2004
------------------- -------------------
Loans receivable secured by real estate $ 6,575,000 $ --
Joint Venture investments in real estate developments 12,483,029 18,455,557
Direct investments in real estate developments 34,041,268 42,776,676
------------------- -------------------
Total investments in real estate per US GAAP 53,099,297 61,232,233
Add: GAAP impairments 4,817,726 12,983,702
Accrued interest and points 11,963,772 20,249,047
Less: Capitalized interest (1,347,238) (2,186,797)
------------------- -------------------
Balance owed on real estate investments 68,533,557 92,278,185
Amount estimated uncollectible (10,260,218) (21,790,293)
------------------- -------------------
Estimated realizable value of investments in real estate $ 58,273,339 $ 70,487,892
=================== ===================
Net Realizable Value of Assets per Share
The following calculation determines the estimated net realizable value of our
stock at September 30, 2005 and December 31, 2004:
September 30, 2005 December 31, 2004
------------------- -------------------
Cash $ 14,436,243 $ 7,897,242
Other assets 214,435 752,042
Estimated realizable value of investments in real estate 58,273,339 70,487,892
------------------- -------------------
Total realizable assets 72,924,017 79,137,176
Total liabilities (9,931,709) (3,524,585)
------------------- -------------------
Estimated net realizable assets 62,992,308 75,612,591
Shares outstanding 14,991,325 18,304,168
------------------- -------------------
Estimated net realizable assets per share $ 4.20 $ 4.13
=================== ===================
Our estimated realizable value of investments in real estate decreased by
approximately $12.2 million due to net repayments of investments we received
during the nine months ended September 30, 2005. Additionally, our liabilities
increased by approximately $6.3 million as we financed the costs of improvements
on our San Jose project from the proceeds of our construction loan. The decrease
in our net realizable assets of $12 million reflects the cash used to repurchase
our stock, as described below.
On January 28, 2005, the Company offered to purchase up to 3,314,917 shares of
its stock for a price of $3.62 per share. The Offer terminated on March 1, 2005,
and a total of 6,714,420 shares were tendered and not withdrawn as of such date.
In accordance with the terms of the offer the Company agreed to purchase a total
of 3,314,929 shares at $3.62 per share for a total payment of $12,000,043. As
the number of shares tendered exceeded the maximum number of shares the Company
offered to purchase, each tendering shareholder received payment for a prorated
number of shares purchased. The proration factor was 49.37%. Subsequent to the
closing of the offer, the Company agreed to accommodate the request of a
shareholder who requested to withdraw 2,086 shares, and reducing proceeds by
$7,508, from shares which the Company agreed to purchase under the terms of the
offer. After completion of the Offer, and the subsequent withdrawal of 2,086
from the shares the Company agreed to purchase, a total of 14,991,325 shares
remain issued and outstanding.
In October 2005 the Board of Directors announced the Company's long-term
strategy to increase shareholder value and transform BellaVista into an
attractive investment for both new and existing shareholders. The strategy
involves a two-phased approach:
15
o In the medium term, the Company needs to demonstrate a track record of
consistent share price increases, and
o In the longer term, the Company should establish a regular program to
provide liquidity through a combination of distributions and share
redemption.
In order to establish a track record of consistent share price increases, the
Company determined that it would be necessary to reinvest all capital and
earnings over the next three years and, as a result, Company funds will not be
used to pay dividends or distributions or redeem shares during this period. The
Company believes that successfully achieving these goals will attract new
investors and create access to other capital sources. This will allow the
Company to create a liquidity program that provides regular distributions and
share redemptions. This liquidity will enhance the value for all shareholders.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations covers our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, including those related to the valuation of our assets
and liabilities. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. Management believes the following
critical accounting policies, among others, affect the more significant
judgments and estimates used in the preparation of its consolidated financial
statements.
Valuation and Realizability of Investments. All of our ADC loans are classified
for financial reporting purposes as joint venture investments in real estate
developments (see Note 4 to the financial statements). We have foreclosed on
some ADC loans that are classified as direct investments in real estate
developments (Note 5). Such investments include capitalized interest and are
stated at the lower of cost or fair value. Management conducts a review for
impairment on an investment-by-investment basis whenever events or changes in
circumstances indicate that the carrying amount of an investment may not be
recoverable. Impairment is recognized when estimated expected future cash flows
(undiscounted and without interest charges), typically from the sale of a
completed property, are less than the carrying amount of the investment, plus
estimated costs to complete. The estimation of expected future net cash flows is
inherently uncertain and relies to a considerable extent on assumptions
regarding current and future economics and market conditions. If, in future
periods, there are changes in the estimates or assumptions incorporated into the
impairment review analysis, the changes could result in an adjustment to the
carrying amount of the investments. To the extent that there is impairment, the
excess of the carrying amount of the investment over its estimated fair value,
less estimated selling costs, will be charged to income. In accordance with this
policy, we recorded a provision for impairment of investments in real estate
under development totaling $1,589,863, during the nine months ended September
30, 2005 compared with $3,412,560 and $27,499,639 during the years ended
December 31, 2004 and 2003. We believe that all of our investments are carried
at the lower of cost or fair value, however conditions may change and cause our
ADC loans and REO properties to decline in value in a future period.
Loan Accounting. We have applied the guidance of AICPA Practice Bulletin 1,
Purpose and Scope of AcSEC Practice Bulletins and Procedures for Their Issuance,
Exhibit I in accounting for our investment loans as real estate acquisition,
development, or construction (ADC) arrangements. In accordance with the ADC
accounting rules, we treat these loans as if they were real estate joint
ventures, and thus we do not accrue income for interest and points on our ADC
loans until the sale or refinancing of a property. Revenue from interest and
points 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 direct investments in real estate
developments (see Notes 4 and 5 to the financial statements) and include amounts
funded under the loan agreements and capitalized interest expense. In addition
to ADC loans, we have made direct equity investments in real estate joint
ventures. These joint venture investments are accounted for in the same manner
as our ADC loans and are classified as joint venture investments in real estate
16
developments. If our ADC loans qualified as loans under GAAP, interest and
points would be recognized as income in periods prior to the sale of the
underlying property.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Required financial statements and supplementary data are included in this Form
10-K commencing on page FS-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 1, 2005, the Company received the resignation of Grant Thornton,
LLP ("Grant Thornton") as its principal independent accountants.
Grant Thornton's report on the Company's financial statements for the year ended
December 31, 2004 did not contain an adverse opinion or disclaimer of opinion,
nor was it qualified or modified as to uncertainty, audit scope or accounting
principles. During the Company's fiscal year ended December 31, 2004, and the
subsequent interim periods through September 1, 2005, the date of Grant
Thornton's resignation, there were no disagreements with Grant Thornton on any
matters of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which, if not resolved to the satisfaction of Grant
Thornton would have caused it to make reference to the subject matter of the
disagreement in connection with its report on the financial statements for that
period, nor have there been any "reportable events" as defined under Item
304(a)(1)(v) of Regulation S-K during such period.
On November 15, 2005 the Company engaged Pohl, McNabola, Berg + Company as its
principal accountants.
ITEM 9A. CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining adequate internal
control over financial reporting and for the assessment of the effectiveness of
internal control over financial reporting. As defined by the SEC, internal
control over financial reporting is a process designed by, or under the
supervision of, the Company's principal executive and principal financial
officers and effected by the Company's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statement for external
purposes in accordance with generally accepted accounting principles.
The Company's internal control over financial reporting is supported by written
policies and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company's assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statement in accordance with generally accepted accounting principles and that
receipts and expenditures of the company are being made only in accordance with
authorizations of the Company's management and directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.
Under the supervision of Michael Rider, the Company's Chief Executive Officer
and Chief Financial Officer, we carried out an evaluation of the effectiveness
of the Company's disclosure controls and procedures (as defined in Rules 13a -
15(e) and 15d - 15(e) under the Securities Exchange Act of 1934) as of September
30, 2005. Based on that evaluation, Mr. Rider has concluded that those controls
and procedures were effective in making known to them, on a timely basis, the
material information needed for the preparation of this Report on Form 10-K.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those internal controls since the date
of their evaluation.
17
A significant deficiency is a control deficiency, or combination of control
deficiencies, that adversely affects the company's ability to initiate,
authorize, record, process, or report external financial data reliably in
accordance with generally accepted accounting principles such that there is more
than a remote likelihood that a misstatement of the company's annual or interim
financial statements that is more than inconsequential will not be prevented or
detected.
Our auditors identified the following two significant deficiencies in connection
with their audit of the 2004 and 2003 Financial Statements: (i) there was a lack
of evidence indicating that journal entries were reviewed and approved by
appropriate finance department personnel as part of the periodic closing
process; and (ii) there were not sufficient personnel in the accounting and
finance department which, the auditors noted, was due in part to the assumption
of additional duties by our CFO after the resignation of our CEO. Our auditors
determined that these significant deficiencies, in the aggregate, do not
constitute material weaknesses in the system of internal controls.
The Company believes that the issues raised above as (ii) during the 2003 audit
were resolved during 2004 by a combination of the reduction in company assets
and the redistribution of certain duties performed by the CEO and CFO to other
members of the management team. The company is currently evaluating its
personnel needs as part of its capital resource budgeting for 2006 and believes
that staffing levels are adequate to support its current business requirements.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our Board of Directors consists of five director positions. Our directors,
executive officers and senior officers and their positions, as of the date of
this filing, are:
Name Position
Michael Rider Chief Executive Officer, Chief Financial
Officer and Director
William Offenberg Chairman
Robert Puette Director
Jeffrey Black Director
Patricia Wolf Director
Eric Hanke Vice President, Business Development
The business background and experience of our directors and executive
officers is as follows:
Michael Rider, age 43, is a co-founder, director, Chief Executive Officer
and Chief Financial Officer of the Company. Mr. Rider's term of office as a
director expires in 2008. Mr. Rider was controller, then Chief Financial Officer
for The Plymouth Group and its successor, TPG Development Corporation, a San
Francisco Bay Area real estate development company from 1991 until 1998. From
1986 to 1990 Mr. Rider was senior accountant with Kenneth Leventhal & Company, a
national public accounting firm specializing in real estate accounting and
advisory services. Mr. Rider is a certified public accountant and a member of
the Urban Land Institute. Mr. Rider received a B.A. degree in Economics/Business
from the University of California Los Angeles.
William Offenberg, age 52, has been a member of the Board since July
2005. Prior to joining the Board, Mr. Offenberg acted as a consultant to the
Board since July 2004. Currently Mr. Offenberg serves on the Boards of UAV
Entertainment, a distributor of video and audio content and UTTC, a contract
electronics manufacturer. From 1998 to 2005, Mr. Offenberg was an Operating
Partner at Morgenthaler Partners, a $2 billion private equity firm, where he
specialized in recapitalizations and leveraged buyouts. In his capacity as
18
Operating Partner, Mr. Offenberg has served as CEO of UAV Entertainment,
President of Sheldahl Materials and Flex Interconnect Divisions and a member of
the Board of Directors of Apsco, a contract electronics manufacturer. Between
1993 and 1997, Mr. Offenberg was President and Chief Executive Officer of Gatan
International, a developer of scientific instrumentation. Prior to joining
Gatan, Mr. Offenberg was President of Spectra-Physics Analytical from 1986 to
1993. Between 1977 and 1986, Mr. Offenberg held various management positions at
Perkin-Elmer's Instrument Group. Mr. Offenberg began his career as a chemist at
Atlantic Richfield. Mr. Offenberg has degree in Chemistry from Bowdoin College
and did graduate work in analytical chemistry at Indiana University.
Robert Puette, age 63, is the President of Puette Capital Management,
Inc., an investment and consulting company that he founded in 2005. He has been
a member of the BellaVista Board since March 1, 2002. Prior to such time, Mr.
Puette served as an advisory director to the Company. Between 2001 and 2004, Mr.
Puette was a partner at the WK Technology venture capital firm. Between 1997 and
2000, Mr. Puette was the President, Chief Executive Officer, and member of the
Board of Directors of Centigram Communications Corporation (NASDAQ), a
communications technology firm. Prior to his position at Centigram, from 1995 to
1997, Mr. Puette served as President, CEO and Chairman of the Board of Directors
at NetFRAME Systems (NASDAQ), a high-availability computer server company, and
from 1990 to 1993, Mr. Puette served as President of Apple USA, Apple
Corporation (NASDAQ). Prior to 1990, Mr. Puette served as a Group General
Manager of Hewlett-Packard Corporation (NYSE). Mr. Puette is also on the Boards
of Cupertino Electric Corporation (Private), iPolicy Networks Corporation
(Private), Bentek Corporation (Private), Fat Spaniel Corporation (Private) and
Aether Wire Corporation (Private). He is also a former director of Cisco Systems
(NASDAQ). Mr. Puette holds a BSEE degree from Northwestern University and a MSOR
degree from Stanford University.
Jeffrey Black, age 50, is a Senior Vice President in the Silicon Valley
office of Grubb & Ellis, a national real estate company, where he has worked
since 1977. In his 28 years as a real estate broker, he has concluded real
estate transactions in excess of $1 billion. Notable clients that Mr. Black has
represented include eBay, Altera, Amdahl, AT&T, Exxon Corporation, Marriott, TRW
Corporation, VLSI Technology, Steelcase, Advanced Micro Devices and Ernst &
Young. He has been named one of the Top 10 Brokers Nationwide (Grubb & Ellis
2003); No. 4 Broker in Silicon Valley (San Jose Business Journal 2003); the Hall
of Fame Award (Association of Silicon Valley Brokers 1997). Mr. Black has a
Bachelor's of Science and Commerce degree in Finance from the University of
Santa Clara.
Patricia Wolf, age 59, is currently Vice Chair of the Board of Trustees
for Ottawa University where she focuses on strategic planning issues. From 1986
until 2002 she was employed by Management Technology America, the computer
software company she founded in 1986. In 1999, Ms. Wolf sold Management
Technology America to a company listed on the NYSE. During the period from 1999
to 2002 she continued her employment with Management Technology America. Ms.
Wolf holds a Bachelor's degree in Business Administration and a Master's degree
in Management, both from Ottawa University.
Eric Hanke, 36, is the Vice President of Business Development. His
activities include overseeing the origination of new investment opportunities
and capital raising activities, marketing and investor relations. Prior to
joining Primecore, Mr. Hanke was an investment-banking associate with Arthur
Andersen's Real Estate Capital Markets Group based in San Francisco and
Washington D.C. He is a member of the Urban Land Institute and is a licensed
real estate broker. Mr. Hanke earned his B.A. in economics from the University
of California at Irvine and an MBA, with an emphasis in real estate and finance,
from the Marshall School of Business at the University of Southern California.
Compensation of Directors
None of the directors of the Company who also serve as executive officers or
employees receives any separate compensation for service on our Board of
Directors or on any Board committee. As Chairman of the Board, Mr. Offenberg
receives annual compensation totaling $30,000 while Messrs. Puette, Black and
Ms. Wolf receive $25,000 each for their participation in our standard board
meetings. All directors independent of management are also compensated $1,000
for every special board meeting they attend. Our charter obligates us to
indemnify our directors and officers and to pay or reimburse expenses for such
individuals in advance of the final disposition of a proceeding to the maximum
extent permitted from time to time by Maryland law. The Maryland General
Corporation Law, the "Maryland GCL", permits a corporation to indemnify its
present and former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason of
19
their service in those or other capacities, unless it is established that (a)
the act or omission of the director or officer was material to the matter giving
rise to the proceeding and (1) was committed in bad faith, or (2) was a result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services, or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful.
Terms of Directors and Officers
Our Board of Directors consists of the number of persons as shall be fixed by
the Board of Directors from time to time by resolution to be divided into three
classes, designated Class I, Class II and Class III, with each class to be as
nearly equal in number of directors as possible. Currently there are five
director positions. Mr. Puette is a Class I director and his term expires in
2006. Mr. Black and Ms. Wolf are Class II directors and their terms expire in
2007. Mr. Rider and Mr. Offenberg are Class III directors, and their terms
expire in 2008. At each annual meeting, the successors to the class of directors
whose term expires at that time are to be elected to hold office for a term of
three years, and until their successors are elected and qualified, so that the
term of one class of directors expires at each annual meeting.
For any vacancy on the Board of Directors, including a vacancy created by an
increase in the number of directors, the vacancy may be filled by election of
the Board of Directors or the shareholders, with the director so elected to
serve until the next annual meeting of shareholders, if elected by the Board of
Directors, or for the remainder of the term of the director being replaced, if
elected by the shareholders; any newly-created directorships or decreases in
directorships are to be assigned by the Board of Directors so as to make all
classes as nearly equal in number as possible. Directors may be removed only for
cause and then only by vote of a majority of the combined voting power of
shareholders entitled to vote in the election for directors. Subject to the
voting rights of the holders of the stock, the charter may be amended by the
vote of a majority of the combined voting power of shareholders, provided that
amendments to the article dealing with directors may only be amended if it is
advised by at least two-thirds of the Board of Directors and approved by vote of
at least two-thirds of the combined voting power of shareholders. The effect of
these as well as other provisions of our charter and bylaws may discourage
takeover attempts and make more difficult attempts by shareholders to change
management.
Executive officers are appointed by the Board of Directors, serve at the Board's
pleasure and may be removed from office at any time without cause. There are no
family relationships among any of our directors or executive officers.
Audit Committee
The Company has no separate audit committee. The Board of Directors acts as the
audit committee for all purposes relating to communications with the auditors
and responsibility for oversight of the audit. The Board of Directors has an
independent member, Robert Puette, with financial expertise gained as an
executive of and former audit committee member of public company Board of
Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of copies of the Forms 3, 4 and 5 and amendments
thereto furnished to the Company with respect to the transition period ended
2005, or written representations that no such reports were required to be filed
with the Securities and Exchange Commission, the Company believes that, except
as noted below, during 2005 all directors and officers of the Company and
beneficial owners of more than 10% of any class of equity securities of the
Company registered pursuant to Section 12 of the Exchange Act filed their
required Forms 3, 4, or 5, as required by Section 16(a) of the Securities
Exchange Act of 1934, as amended. Directors William Offenberg, Jeffrey Black and
Patricia Wolf were required to file Statements of Beneficial Ownership on Form 3
upon their appointment to the Board in July 2005. Ms. Wolf filed her Form 3 in
November 2005, Mr Offenberg filed his Form 3 in December 2005 and Mr. Black
filed his Form 3 in January 2006. Eric Hanke was required to file a Form 3 upon
his appointment to an executive officer position in September 2004, and a Form 4
upon his acquisition of Company shares in November 2004. Mr. Hanke filed a Form
3 and a Form 5 (fulfilling the delinquent Form 4 filing requirement) in
November, 2005.
20
Code of Ethics
The Company has adopted a Code of Ethics applicable to the Chief Executive
Officer, the Chief Financial Officer, and the principal accounting officer. The
Company's Code of Ethics is set forth as Exhibit 14.1 to this report.
ITEM 11. EXECUTIVE COMPENSATION.
The following table presents executive compensation information for the nine
month period ending September 30, 2005:
Total
Name and Principal Position Fiscal Year Salary Bonus Compensation
Michael Rider
Chief Executive Officer, Director 2005 $ 235,096 $ -- $ 235,096
Eric Hanke
Vice President, Secretary 2005 123,750 -- 123,750
The Company has not paid or granted any form of non-cash compensation to it's
executive officers or directors during the periods covered by this report.
The terms of employment contracts between the Company and each of Mr. Rider and
Mr. Hanke are set forth in Exhibits 10.1 and 10.2, respectively, to this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table presents information regarding the beneficial ownership of
our capital stock as of September 30, 2005 of: (1) each of our directors and
executive officers; and (2) all of our directors and executive officers as a
group. As of the date of this report, no person is known by us to own
beneficially five percent or more of our outstanding capital stock. Unless
otherwise indicated in the footnotes to the table, the beneficial owners named
have, to our knowledge, sole voting and investment power with respect to the
shares beneficially owned, subject to community property laws where applicable.
Number Percent
Title of Class Beneficial Owner of Shares of Class
------------------ -------------------
Common Stock Robert Puette 405,241 2.70
Jeffrey Black 267,341 1.78
Patricia Wolf 167,030 1.11
William Offenberg 107,404 0.72
Michael Rider 12,164
*
Eric Hanke 2,170 *
------------------ -------------------
Total 961,350 6.41
================== ===================
* Less than one percent of our outstanding capital stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During the year ended December 31, 2004 the Company engaged in the following
transactions with Ms. Susan Fox, who until March 19, 2004 was our President and
Chief Executive Officer:
Primecore Funding Group, Inc. Transactions
Primecore Funding Group, Inc. ("PFG") served as manager of all of the Company's
business from inception through March 31, 2004. During this period, the Company
had no employees and PFG covered all operating expenses with the exception of
certain legal, accounting and insurance expenses and expenses incurred to hold
21
property taken in foreclosure from its borrowers. PFG was paid management fees
pursuant to a Management Agreement entered into at inception and amended October
17, 2002 and terminated December 31, 2003. During the year ended December 31,
2004 we incurred management fee expenses to PFG of $639,638 compared with
$3,808,260 and $9,630,701 during the years ended December 31, 2003 and 2002,
respectively.
On December 19, 2003 our Board of Directors voted not to renew the management
agreement with Primecore Funding Group, effective December 31, 2003. The Company
decided to internalize management of the Company, and proceeded to do so. The
Board believes that this action will result in greater transparency to the
shareholders, more accountability of the employees and management to the Board
of Directors and the ability to better manage company costs. On December 23,
2003 we entered into an agreement, effective January 1, 2004 with Primecore
Funding Group to provide management services during a three-month transition
period ending March 31, 2004. As of the date of this filing, the transition has
been accomplished, and the Company is now internally managed. Accordingly, all
expenses in the future will be borne by the Company, and there will be no
further payment of any management fees to an outside manager.
Our management contract with PFG provided for the payment of a termination fee
equal to 4% of our outstanding loan commitments at the date of termination. The
agreement also provided that any termination fee due under the contract would be
offset by any amounts PFG owed the Company under our Affiliate Loan Agreement
which was entered into concurrently with the Amended and Restated Management
Agreement. Under the terms of the Affiliate Loan Agreement, PFG was indebted to
the Company for approximately $15.6 million prior to offsetting the termination
fee. The amount of the termination fee was approximately $6.2 million which
payment was offset by the obligation to the Company, leaving an obligation of
approximately $9.4 million from PFG. Due to doubts about the ultimate
collectibility of this obligation from PFG, the Company has never reflected it
as an asset in its financial statements. Management does not currently believe
that PFG has assets sufficient to warrant any collection activity for this
obligation, and will therefore not reflect the receivable as an asset in its
financial statements.
On March 19, 2004, Susan Fox resigned as President, Chief Executive Officer and
Director of BellaVista Capital, Inc. Ms. Fox was retained as a consultant to the
company for a period of 12 months in order to assist with any issues that occur
in connection with the transition of management. For her services she was paid
$30,000 per month. We also agreed to compensate Ms. Fox for her assistance in
recovery of legal actions we have brought on some of our former developers. Our
agreement with her provides that she will receive 5% of any sums we actually
collect from such legal proceedings. Additionally, we purchased certain
furniture, computer equipment and software from her company, Primecore Funding
Group, for $200,000. Finally, we entered into an agreement to lease the building
at 99 El Camino Real, a property owned by 99 El Camino Partners, LLC, a limited
liability company in which Susan Fox is the sole member, at a monthly rate of
$25,000 through June 30, 2004 and then decreased to $20,000 per month through
December 31, 2004. The agreement also provides that we will pay for real estate
taxes, insurance and maintenance expenses associated with the building.
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Company accrues expenses associated with principal accountant fees and
services in the year being audited or serviced. The following table presents the
expenses accrued by the Company for such fees and services:
Nine months Year
ended ended
September 30, 2005 December 31, 2004
---------------------------------------
Audit fees $ 248,208 $ 254,094
Audit-related fees -- --
Tax fees 33,269 16,744
All other fees -- --
--------------------------------------
Total $ 281,477 $ 270,838
======================================
22
Tax fees are comprised of fees related to the preparation and filing of the
Company's federal and applicable state tax returns.
The Company does not have an independent audit committee, and the full board of
directors therefore serves as the audit committee for all purposes relating to
communication with the Company's auditors and responsibility for the Company
audit. All engagements for audit services, audit related services and tax
services are approved in advance by the full board of directors of the Company.
The Company's Board of Directors has considered whether the provision of the
services described above for the nine month transition period ended September
30, 2005 and the year ended December 31, 2004, is compatible with maintaining
the auditor's independence.
All audit and non-audit services that may be provided by our principal
accountant to the Company shall require pre-approval by the Board. Further, our
auditor shall not provide those services to the Company specifically prohibited
by the Securities and Exchange Commission, including bookkeeping or other
services related to the accounting records or financial statements of the audit
client; financial information systems design and implementation; appraisal or
valuation services, fairness opinion, or contribution-in-kind reports; actuarial
services; internal audit outsourcing services; management functions; human
resources; broker-dealer, investment adviser, or investment banking services;
legal services and expert services unrelated to the audit; and any other service
that the Public Company Oversight Board determines, by regulation, is
impermissible.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Financial Statements. The following financial information is included as a
separate section of this Annual Report on Form 10-K:
1. Report of Independent Registered Public Accounting Firms
2. Consolidated Balance Sheets as of September 30, 2005 and December 31,
2004
3. Consolidated Statements of Operations for the nine months ended
September 30, 2005 and the years ended December 31, 2004 and 2003
4. Consolidated Statement of Shareholders' Equity for the nine months
ended September 30, 2005 and the years ended December 31, 2004 and
2003
5. Consolidated Statements of Cash Flows for the nine months ended
September 30, 2005 and the years ended December 31, 2004 and 2003
6. Notes to Consolidated Financial Statements nine months ended September
30, 2005 and the years ended December 31, 2004 and 2003
b. Exhibits
Exhibits submitted with this Form 10-K, as filed with the Securities and
Exchange Commission, or those incorporated by reference to other filings
are:
Exhibit No. Description of Exhibit
3(i) Articles of Incorporation of the Company is incorporated by
reference to Exhibit 3(i) to the Company's Form 10-12 G/A,
previously filed on April 28, 2000
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
23
3(iv) Specimen Stock Certificate, is incorporated by reference to
Exhibit 99.2 to the Company's Form 10-12 G/A, previously
filed on April 28, 2000
4.1 Registration Rights Agreement is incorporated by reference
to Exhibit 4.1 to the Company's Form 10-12 G/A, previously
filed on April 28, 2000
4.2 Founder's Registration Rights Agreement is incorporated by
reference to Exhibit to the Company's Form 10-12 G/A,
previously filed on April 28, 2000
4.3 Management Agreement dated March 30, 1999 is incorporated by
reference to Exhibit 10 to the Company's Form 10-12 G/A,
previously filed on April 28, 2000
10.1 Compensation Agreement between BellaVista Capital, Inc. and
Michael Rider is incorporated by reference to Exhibit 10.1
to the Company's 2004 Form 10-K, previously filed on May 9,
2005
10.2 Compensation Agreement between BellaVista Capital, Inc. and
Eric Hanke is incorporated by reference to Exhibit 10.1 to
the Company's 2004 Form 10-K, previously filed on May 9,
2005
10.3 Legal Services Retention Agreement between BellaVista
Capital, Inc. and Ben Hamburg is incorporated by reference
to Exhibit 10.1 to the Company's 2004 Form 10-K, previously
filed on May 9, 2005
14.1 Code of Ethics is incorporated by reference to Exhibit 14.1
to the Compnay's 2003 Form 10-K, previously filed on April
14, 2004
31.1 Certification of Chief Executive Officer and Chief Financial
Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
c. Financial Statement Schedules
None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
Chief Executive Officer, Chief
/s/ Michael Rider Financial Officer and Director January 13, 2006
- --------------------------
Michael Rider
/s/ William Offenberg Chairman January 13, 2006
- --------------------------
William Offenberg
/s/ Robert Puette Director January 13, 2006
- --------------------------
Robert Puette
/s/ Jeffrey Black Director January 13, 2006
- --------------------------
Jeffrey Black
/s/ Patricia Wolf Director January 13, 2006
- --------------------------
Patricia Wolf
25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No
-------
Report of independent registered public accounting firm - Pohl,
McNabola, Berg + Company LLP FS-1
Report of independent registered public accounting firm - Grant
Thornton LLP FS-2
Consolidated balance sheets as of September 30, 2005 and December 31, 2004 FS-3
Consolidated statements of operations for the nine months ended
September 30, 2005 and the years ended December 31, 2004 and 2003 FS-4
Consolidated statements of shareholders' equity for the nine months ended
September 30, 2005 and the years ended December 31, 2004 and 2003 FS-5
Consolidated statements of cash flows for nine months ended
September 30, 2005 and the years ended December 31, 2004 and 2003 FS-6
Notes to consolidated financial statements FS-7
FS-i
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
BellaVista Capital, Inc.
We have audited the accompanying consolidated balance sheets of BellaVista
Capital, Inc., as of September 30, 2005 and the related consolidated statements
of operations, shareholders' equity, and cash flows for the nine months ended
September 30, 2005. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BellaVista
Capital, Inc. as of September 30, 2005, and the results of its consolidated
operations and its consolidated cash flows for the nine month period ended
September 30, 2005, in conformity with accounting principles generally accepted
in the United States of America.
Pohl, McNabola, Berg + Company, LLP
San Francisco, California
December 19, 2005
FS-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
BellaVista Capital, Inc.
We have audited the accompanying consolidated balance sheet of BellaVista
Capital, Inc., as of December 31, 2004 and the related consolidated statements
of operations, shareholders' equity, and cash flows for each of the two years in
the period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BellaVista
Capital, Inc. as of December 31, 2004, and the results of its consolidated
operations and its consolidated cash flows for each of the two years in the
period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
Grant Thornton LLP
San Francisco, California
April 27, 2005
FS-2
BELLAVISTA CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2005 December 31, 2004
---------------------- ----------------------
ASSETS:
Loans receivable secured by real estate.................................. $ 6,575,000 $ --
Joint venture investments in real estate developments ................... 12,483,029 18,455,557
Investments in real estate held for sale................................. 34,041,268 42,776,676
Cash and cash equivalents................................................ 14,436,243 7,897,242
Fixed assets, net of $42,770 and $21,170 accumulated depreciation
at September 30, 2005 and December 31, 2004, respectively............. 71,773 87,914
Other assets, net........................................................ 214,435 752,043
---------------------- ----------------------
Total assets..................................................... $ 67,821,748 $ 69,969,432
====================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Secured notes payable.................................................... 8,034,447 3,185,000
Accounts payable and accrued expenses.................................... 1,897,262 339,585
---------------------- ----------------------
Total liabilities................................................ 9,931,709 3,524,585
Commitments and contingencies (see note 11)
Common stock: par value $0.01, 50,000,000 shares
authorized at September 30, 2005 and December 31, 2004;
14,991,325 and 18,304,168 shares issued and
outstanding at September 30, 2005 and December 31, 2004,
respectively.......................................................... 201,216,369 213,208,861
Accumulated dividends and distributions.................................. (90,621,455) (90,621,455)
Accumulated deficit...................................................... (52,704,875) (56,142,559)
---------------------- ----------------------
Total shareholders' equity....................................... 57,890,039 66,444,847
---------------------- ----------------------
Total liabilities and shareholders' equity....................... $ 67,821,748 $ 69,969,432
====================== ======================
The accompanying notes are an integral part of these statements.
FS-3
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended Year Ended Year Ended
September 30, 2005 December 31, 2004 December 31, 2003
--------------------- --------------------- ---------------------
REVENUES:
Income from real estate developments.......................... $ 5,720,791 $ 3,497,655 $ 11,372,436
Interest income............................................... 164,651 153,395 --
Other......................................................... 25,815 174,442 17,119
--------------------- --------------------- ---------------------
Total revenues............................................. 5,911,257 3,825,492 11,389,555
EXPENSES:
Salaries expense.............................................. 546,837 875,748 --
Facilities expense............................................ 69,143 302,690 --
Legal and accounting expense.................................. 386,303 382,436 332,359
Board of directors............................................ 208,946 253,858 171,282
Administrative expense........................................ 98,393 164,507 83,758
REO and non-recurring expenses................................ 789,238 3,195,538 1,343,323
Depreciation.................................................. 21,600 25,641 --
Transition expenses........................................... -- 450,832 --
Management fees paid to Manager............................... -- 639,698 3,808,260
Provision for impairment of real estate investments........... 1,589,863 3,412,560 27,499,639
--------------------- --------------------- ---------------------
Total expenses............................................. 3,710,323 9,703,508 33,238,621
--------------------- --------------------- ---------------------
Net income (loss) from operations.......................... 2,200,934 (5,878,016) (21,849,066)
OTHER INCOME (EXPENSE)
Income from legal settlements, net of collection costs........ 1,236,750 1,128,000 --
Loss on sale of fixed assets.................................. -- (23,829) --
--------------------- --------------------- ---------------------
Total other income (expense)............................... 1,236,750 1,104,171 --
--------------------- --------------------- ---------------------
Net income (loss).......................................... 3,437,684 (4,773,845) (21,849,066)
Preferred Stock dividends and distributions................ -- -- (10,489,238)
--------------------- --------------------- ---------------------
Net income (loss) allocable to common stock................ $ 3,437,684 $ (4,773,845) $ (32,338,304)
===================== ===================== =====================
Basic and diluted net income (loss) per common share.......... $ 0.22 $ (0.73) $ (323,383)
===================== ===================== =====================
Basic and diluted weighted-average common shares outstanding.. 15,719,422 6,476,866 100
===================== ===================== =====================
The accompanying notes are an integral part of these statements.
FS-4
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND THE YEARS ENDED
DECEMBER 31, 2004 AND 2003
Preferred Stock Common Stock
--------------------------- ---------------------------
Accumulated
Dividends and Accumulated
Shares Amount Shares Amount Distributions Deficit Total
------------- ------------- ------------- ------------- ------------- ------------- -------------
Shareholders' equity at January
1, 2003...................... 22,496,804 $226,079,882 100 $ 1 $(80,132,217) $(29,519,648) $116,428,018
Issuance of preferred stock
under dividend reinvestment
plan......................... 235 1,499 -- -- -- -- 1,499
Adjustment for dividend
reinvestment................. (9,433) (94,330) -- -- -- -- (94,330)
Redemptions of preferred stock.. (257,867) (844,190) -- -- -- -- (844,190)
Dividends and distributions
paid to preferred
shareholders................. -- -- -- -- (10,489,238) -- (10,489,238)
Net loss....................... -- -- -- -- -- (21,849,066) (21,849,066)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Shareholders' equity at
December 31, 2003 ........... 22,229,739 $225,142,861 100 $ 1 $(90,621,455) $(51,368,714) $83,152,693
Redemptions of Stock............ (2,746,487) (7,625,644) (1,179,184) (4,308,357) -- -- (11,934,001)
Conversion of Preferred Stock... (19,483,252) (217,517,217) 19,483,252 217,517,217 -- -- --
Net loss........................ -- -- -- -- -- (4,773,845) (4,773,845)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Shareholders' equity at -- -- 18,304,168 $213,208,861 $(90,621,455) $(56,142,559) $66,444,847
December 31, 2004 ...........
Redemptions of stock............ -- -- (3,312,843) (11,992,492) -- -- (11,992,492)
Net income...................... -- -- -- -- -- 3,437,684 3,437,684
------------- ------------- ------------- ------------- ------------- ------------- -------------
Shareholders' equity at
September 30, 2005 .......... -- -- 14,991,325 $201,216,369 $(90,621,455) $(52,704,875) $57,890,039
============= ============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these statements.
FS-5
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Nine Months Ended Year Ended Year Ended
September 30, 2005 December 31, 2004 December 31, 2003
--------------------- --------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 3,437,684 $ (4,773,845) $ (21,849,066)
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities:
Depreciation......................................... 21,600 25,641 --
Loss on sale of furniture............................ -- 23,829 --
Provision for impairment............................. 1,589,863 3,412,560 27,499,639
Increase (decrease) in accrued expenses and other.... 68,719 (17,543) (568,411)
Decrease (increase) in other assets, net............. 115,325 752,429 (1,178,227)
--------------------- --------------------- ---------------------
Net cash provided by (used in) operating
activities....................................... 5,233,191 (576,929) 3,903,935
--------------------- --------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayments of investments in real estate... 34,595,593 37,642,307 69,877,905
Investments in real estate............................... (26,141,279) (23,105,422) (26,146,923)
Purchase of fixed assets................................. (5,459) (137,384) --
--------------------- --------------------- ---------------------
Net cash provided by investing activities............ 8,448,855 14,399,501 43,730,982
--------------------- --------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions of capital stock.............................. (11,992,492) (11,934,001) (844,190)
Adjustment for dividend reinvested....................... -- -- (94,330)
Borrowings under unsecured notes payable.................. -- -- 476,679
Repayment of unsecured notes payable..................... -- (4,692,517) (10,126,707)
Borrowings under secured notes payable.................... 8,034,447 -- --
Repayment of secured notes payable........................ (3,185,000) -- (4,508,000)
Net repayments of secured line of credit.................. -- -- (14,431,132)
Payment of preferred stock dividends...................... -- -- (11,800,156)
--------------------- --------------------- ---------------------
Net cash used in financing activities................ (7,143,045) (16,626,518) (41,327,836)
--------------------- --------------------- ---------------------
Net (decrease) increase in cash and cash
equivalents...................................... 6,539,001 (2,803,946) 6,307,081
Beginning cash and cash equivalents................ 7,897,242 10,701,188 4,394,107
--------------------- --------------------- ---------------------
Ending cash and cash equivalents................... 14,436,243 $ 7,897,242 $ 10,701,188
===================== ===================== =====================
Cash paid for interest, net of amounts capitalized
of $351,102, $256,886 and $1,743,658, for the nine
months ending September 30, 2005 and the years
ending December 31, 2004 and 2003, respectively........... $ -- $ -- $ --
===================== ===================== =====================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Reinvested Preferred Stock dividends......................... $ -- $ -- $ 1,499
===================== ===================== =====================
Reinvested interest on Notes Payable......................... $ -- $ 4,264 $ 65,616
===================== ===================== =====================
The accompanying notes are an integral part of these statements.
FS-6
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
1. ORGANIZATION AND BUSINESS:
Organization
BellaVista Capital, Inc., a Maryland corporation (the Company, our, we), was
formed on March 18, 1999 and commenced operations effective May 1, 1999. We are
engaged in the business of investing in for-sale residential real estate
development projects, primarily in California. Our investments are structured as
loans secured by real estate, loans made to real estate development entities, or
as joint venture investments in real estate development entities. We are
organized in a single operating segment for purposes of making operating
decisions and assessing performance. BellaVista Capital, Inc. is also the 100%
shareholder of 99 Investors, Inc. and Sands Drive San Jose, Inc., both
California corporations formed for the purpose of developing and selling
residential real estate.
Change in Fiscal Year End
On November 7, 2005 the Company's Board of Directors voted to change its fiscal
year end from December 31 to September 30 and adopted changes to the Company's
Bylaws reflecting this change. Accordingly, these financial statements contain
transitional period comparisons and disclosures.
Risk Factors
General Economic Conditions in Lending Areas. Although our business plan seeks
to diversify our investments throughout California and other states in the
United States of America, currently, primarily all of our investments are
located in the San Francisco Bay Area, with a concentration in the counties of
Santa Clara and San Mateo. Since the investments are located in a limited
geographical region, they may be subject to a greater risk of delinquency or
default if the industries concentrated there suffer adverse economic or business
developments.
Realization of Assets. The Company's liquidity and ability to meet its
obligations as they become due are subject to, among other things, its ability
to obtain timely repayments of its investments. Many of the investments rely on
the completion and sale of the developed real estate in order to obtain
repayment. In the event that repayments are not sufficient to timely meet our
commitments and credit facilities are not extended on terms favorable to us, we
may be forced to reduce prices on properties we control in order to expedite
their repayment. In such cases, the amount of proceeds received could be
substantially less than what we would have expected if we allowed a proper
marketing period for the property. This would have a negative impact on the
estimated net realizable value of our assets and would force the Company to
adopt an alternative strategy that may include actions such as seeking
additional capital or further downsizing of the Company. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Other. In addition, we are subject to other significant business and financial
risks, including but not limited to liquidity, the prevailing market for
residential real estate, interest rates, timely completion of projects, and
potential environmental matters relating to properties on which we have made
investments or received through foreclosure.
In April, 2004 the Company provided certain documents requested by the
Securities and Exchange Commission in connection with a letter of inquiry.
During June 2004 Mr. Rider, our CEO and Ms. Fox, our former CEO, both provided
voluntary testimony in connection with the inquiry. In January 2005 the
Commission requested additional documentation which the Company provided in
April, 2005. As of September 30, 2005 the Company had no further communication
from the Commission.
FS-7
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation Policy
The consolidated financial statements include the accounts of BellaVista
Capital, Inc. and its wholly owned subsidiaries, 99 Investors, Inc. and Sands
Drive San Jose, Inc. All intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Valuations of investments in real estate include management's
best estimates of the amounts expected to be realized on the sale of its
investments. The estimates are based on an analysis of the properties, including
certain inherent assumptions and estimates that are involved in preparing such
valuations. The amounts the Company will ultimately realize could differ
materially in the near term from these estimates.
Loans Receivable Secured By Real Estate
We have originated loans secured by real estate. These loans are secured by
first trust deeds, pay interest on a monthly basis and are typically
additionally 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 (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.
We had no impaired loans receivable as of September 30, 2005 or December 31,
2004.
Joint Venture Investments in Real Estate Developments
Our joint venture investments in real estate developments are comprised of
loans, known as 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 (ADC)
residential real estate ("ADC loans"). These loans contain many of the following
characteristics which are identified with ADC loans:
1. The lender has agreed to provide all or substantially all necessary funds
to acquire, develop or construct the property. The borrower has title to
but little or no cash equity in the project;
2. The lender funds substantially all the interest and fees during the term of
the loan by adding them to the loan balance;
3. Typically, the lender's only security is the project itself. The lender has
no recourse to other assets of the borrower,
and the borrower does not guarantee the debt;
4. In order for the lender to recover its investment in the project, the
property must be sold to independent third parties or the borrower must
obtain refinancing from another source.
Because our ADC loans contain many of the characteristics of investments in real
estate, they are classified for financial reporting purposes in joint venture
investments in real estate developments (Note 4). ADC loans with no equity
FS-8
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
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 real estate in joint ventures. 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 capital to real estate developers necessary to acquire,
develop and construct real estate developments. Such investments are structured
as participating loans or membership interests in the development entity. We
account for such investments using the equity method of accounting.
Management conducts a review for impairment on an investment-by-investment basis
whenever events or changes in circumstances indicate that the carrying amount of
an investment may not be recoverable, or at least quarterly. Impairment is
recognized when estimated expected future cash flows (undiscounted and without
interest charges), typically from the sale of a completed property, are less
than the carrying amount of the investment, which does not include accrued
interest and points. The estimation of expected future net cash flows is
inherently uncertain and relies to a considerable extent on assumptions
regarding current and future economic and market conditions. If, in future
periods, there are changes in the estimates or assumptions incorporated into the
impairment review analysis, the changes could result in an adjustment to the
carrying amount of the investments. To the extent an impairment has occurred,
the excess of the carrying amount of the investment over its estimated fair
value, less estimated selling costs, is charged to operations.
Direct Investments in Real Estate Developments
We have taken title to property through foreclosure or by deed in lieu of
foreclosure when a borrower defaults on our ADC loans. Such properties are
termed real estate owned (REO) and are accounted for in a manner similar to our
joint venture investments in real estate developments.
Cash and Cash Equivalents
Cash and cash equivalents include cash held in financial institutions and other
highly liquid short-term investments with original maturities of three months or
less.
Income from Real Estate Developments
We recognize income from our ADC loans and REO properties as costs are
recovered, generally upon the sale or refinancing of the underlying real estate
to or by a third party. No interest income or points are recognized until the
financed property is sold or refinanced. We compute income as the difference
between cash received from the sale or refinancing of the property and the
carrying value of the investments at the date of repayment. Income earned from
our Loans Secured by Real Estate is included as Income from Real Estate
Investments. 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.
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.
FS-9
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). This Statement prescribes the
use of the asset and liability method whereby deferred tax assets and liability
account balances are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using enacted
tax rates and laws that will be in effect when the differences are expected to
reverse. The Company provides a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.
Net Loss Per Share of Common Stock
Per share amounts for our common stock are computed using the weighted average
common shares outstanding during the period. Net loss used in the calculation is
increased by declared dividends owed to preferred shareholders. There are
currently no stock options or other dilutive common stock equivalents, and as a
result, the basic and diluted weighted average common shares outstanding for the
nine months ended September 30, 2005 and the years ended December 31, 2004 and
2003, are the same and are 15,719,422, 6,476,866 and 100 shares, respectively.
On September 1, 2004 all of our outstanding shares of Preferred Stock converted
to common stock. The following table sets forth the basic and diluted net
income (loss) per common share as if the Preferred Stock had always been common
stock for the periods ended:
Nine months
ended Year ended Year ended
September 30, December 31, December 31,
2005 2004 2003
(unaudited) (unaudited)
------------------ ----------------- -----------------
Basic and diluted net income (loss) per common share........ $ 0.22 $ (0.23) $ (0.97)
================== ================= =================
Basic and diluted weighted-average common shares
outstanding ............................................... 15,719,422 20,694,926 22,422,278
================== ================= =================
Reclassification of Financial Statement Presentation
Certain reclassifications have been made to the 2003 and 2004 financial
statements to conform with the 2005 financial statement presentation. Such
reclassification had no effect on net income as previously reported.
FS-10
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
Recent Accounting Pronouncements
In September 2004, the EITF delayed the effective date for the recognition and
measurement guidance previously discussed under EITF Issue No. 03-01, "The
Meaning of Other-Than Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-01") as included in paragraphs 10-20 of the proposed
statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method. The Company is currently
evaluating the effect of this proposed statement on its financial position and
results of operations.
In December 2004, the Financial Accounting Standards Board Statement issued SFAS
No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4", which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and charges regardless of whether they meet the criterion of "so
abnormal" that was originally stated in Accounting Research Bulletin No. 43,
chapter 4. In addition, SFAS No. 151 requires that the allocation of fixed
production overheads to conversion costs be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Management does not expect
the implementation of this new standard to have a material impact on its
financial position, results of operations and cash flows.
In December 2004, the Financial Accounting Standards Board Statement issued SFAS
No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29",
which amends Opinion 29 by eliminating the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 151 is effective for a fiscal year beginning after June 15, 2005, and
implementation is done prospectively. Management does not expect the
implementation of this new standard to have a material impact on its financial
position, results of operations and cash flows.
In December 2004, the Financial Accounting Standards Board, also known as the
FASB, issued a revision to SFAS 123 "Share-Based Payment," also known as SFAS
123R, that amends existing accounting pronouncements for share-based payment
transactions in which an enterprise receives employee and certain non-employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS 123R, together with guidance included in Staff Accounting Bulletin No. 107
issued by the SEC on March 29, 2005, also known as SAB 107, eliminates the
ability to account for share-based compensation transactions using APB 25 and
generally requires such transactions be accounted for using a fair-value-based
method. SFAS 123R applies to awards that are granted, modified, or settled in
periods beginning after its applicable effective date. In April 2005, the SEC
issued a release amending the effective date of SFAS 123R for each registrant to
the start of the registrant's first fiscal year beginning after June 15, 2005.
SFAS 123R allows for three alternative transition methods. The Company intends
to adopt the prospective application method. The Company currently intends to
adopt SFAS 123R and SAB 107 in the first quarter of fiscal 2006. The adoption of
SFAS 123R will cause the Company to record a non-cash accounting charge as an
expense each quarter in an amount approximating the fair value of such
share-based compensation meeting the criteria outlined in the provisions of SFAS
123R. Currently the Company does not have any such instruments outstanding.
Management does not expect the implementation of this new standard to have a
material impact on its financial position, results of operations and cash flows.
In May 2005, the FASB Emerging Issues Task Force, or EITF, issued EITF No.
00-19-1 "Application of EITF Issue No. 00-19 to Freestanding Financial
Instruments Originally Issued as Employee Compensation". This pronouncement
clarifies existing accounting guidance relative to freestanding financial
instruments originally issued as employee compensation. EITF No. 00-19-1 becomes
FS-11
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
effective concurrent with the effective date of SFAS 123R. The Company believes
the adoption of this pronouncement will not have a material impact on our
results of operations or financial condition.
In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS
No. 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change. Indirect
effects of a change in accounting principle, such as a change in
nondiscretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS No. 154 also
requires that a change in depreciation, amortization or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS No. 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. Management does not expect the implementation of this new
standard to have a material impact on the Company's financial position, results
of operations and cash flows.
On October 5, 2005, the FASB issued FASB Staff Position (FSP) FAS 13-1, "
Accounting for Rental Costs Incurred during a Construction Period". FAS 13-1
requires that the rental costs associated with ground or building operating
leases that are incurred during a construction period be expensed. The FASB
beleives there is no distintion between the right to use a leased asset druing
the construction period and the right to use that asset after the construciton
period. As prescribed, companies would be required to apply the guidance in FAS
13-1 to the first reporting beginning after December 15, 2005, with early
adoption permitted for the interim periods not yet issued. Management does not
expect the implementation of this new standard to have a material impact on the
Company's financial position, results of operations and cash flows.
3. LOANS RECEIVABLE SECURED BY REAL ESTATE:
Collateral Maturity Date Balance
--------------------- ------------------ ------------------
Loan 2724 First Trust Deed Various $2,750,000
Loan 2719 First Trust Deed Feb 2007 3,825,000
------------------
Total $6,575,000
==================
Loan 2724 - Loan 2724 comprises loans that are originated and serviced by
Cupertino Capital, a California Real Estate broker. The loans are all secured by
first deeds of trust on real property in California, pay interest monthly and
most are personally guaranteed by the principals of the borrowing entities.
BellaVista's investment in each loan, in most cases, is a portion of the entire
loan, with other individuals or companies owning the balance of the loan
receivable.
Loan 2719 - Our loan was made to a developer who is subdividing a parcel of land
in East Palo Alto, California into 78 lots for construction of live/work units.
The loan is secured by a first deed of trust on the development parcel, requires
payments of interest only each month and is due in February 2007 and is
personally guaranteed by the developer's principal partner.
4. JOINT VENTURE INVESTMENTS IN REAL ESTATE DEVELOPMENTS:
As of September 30, 2005 we had the following joint venture investments in real
estate developments which are described below:
FS-12
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
Remaining
Amount Capitalized Carrying Funding
Description Investment Type Invested Interest Costs Amount Obligation
- ------------------- ------------------- ------------------- ------------------- ------------------ ------------------
2524 Secured Loan $ 865,879 $ 4,338 $ 870,217 $ --
2525 Equity 1,904,562 7,299 1,911,861 1,345,438
2526 Secured Loan 2,835,940 12,618 2,848,558 --
2630 Secured Loan 468,434 1,374 469,808 5,073,073
2676 Equity 1,223,550 3,713 1,227,263 1,926,450
2679 Secured Loan 4,748,364 4,719 4,753,083 1,666,906
2701 Equity 401,840 399 402,239 3,698,160
------------------- ------------------- ------------------ ------------------
Total $ 12,448,569 $ 34,460 $ 12,483,029 $ 13,710,027
=================== =================== ================== ==================
Investment 2524 - This investment is structured as a $1,200,000 loan secured by
a third deed of trust on a 10.3 acre parcel in Colorado Springs, Colorado which
will comprise 148 condominium units, scheduled to be constructed in phases. The
loan is junior to a deed of trust in the amount of $2,392,000 and a revolving
construction deed of trust totaling $4,000,000, both in favor of Ohio Savings
Bank. The note was issued on May 12, 2004, bears interest at 10%, which is
accrued and payable at the loan's maturity date, November 12, 2006. The note
provides for additional interest equal to a percentage of the gross sales price
of each completed condominium unit. We have no additional funding requirement on
the non-interest portion of our commitment. The first phase of 32 units is
currently selling with a number of units completed and sold.
Investment 2525 - This $3,250,000 investment is structured as an equity
investment in a 1.1 acre development in East Palo Alto, California. The property
was originally zoned residential and the developer applied for a change in
zoning to residential/retail mixed use. On April 26, 2005 the developer received
planning commission approval. The developer received approval for zoning change
in June and has secured a $12.7 million construction loan. In November, 2005 the
developer broke ground on construction. Our agreement with the developer
provides for the payment of a preferred return on our invested capital and a
portion of the development's profits.
Investment 2526 - This investment is structured as a $3,353,000 loan secured by
a second deed of trust on a 6,551 square foot parcel in San Francisco,
California which will comprise 32 condominium units in a six story steel frame
building. Construction started in January 2005 and is expected to complete in
January 2006. The loan is junior to a deed of trust in the amount of $9.3
million in favor of East West Bank. The note was issued on December 7, 2004,
bears interest at 12%, which is accrued and payable at the loan's maturity date,
March 15, 2006. The note provides for additional interest equal to a percentage
of the gross sales price of each completed unit. We have no additional funding
requirement on the non-interest portion of our commitment. As of September 30,
2005 the steel had been hung for the six stories and the contractor was
installing the building siding.
Investment 2630 - This investment is structured as a $5.45 million loan secured
by a first deed of trust on a 7,500 square foot parcel in Oakland, California
which will comprise 16 condominium units in a four story wood frame building
over a concrete parking garage at grade. Units are expected to sell for
approximately $400,000 per unit. Our investment is secured by a first deed of
trust, with a repayment guarantee from the developer and bears interest at 9%
per annum. The note is due on June 30, 2007. In addition, we are entitled to
receive a share of the profits from the development. The developer is currently
working to obtain building permits and construction is scheduled to begin in
January 2006.
Investment 2676 - This investment is structured as a $3.15 million equity
investment in Livermore Village I, LLC for the purpose of acquiring, entitling
and developing 300 condominium units on 5.5 acres in downtown Livermore,
FS-13
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
California. We supplied 90% of the equity required with the developer
contributing the remaining 10%. We will receive a preferred return (pari-passu
with the developer) and a share of the profits from the development. The
developer is currently working with an architect to develop the site plan for
the project. He expects to receive zoning approval by the end of December 2005.
Investment 2769 - This investment is structured as a $6.7 million loan secured
by a first deed of trust on a 40 unit apartment building in Modesto, California.
The developer plans to subdivide the apartments and sell them as condominium
units. Units are expected to sell for approximately $225,000 per unit. Our
investment is secured by a first deed of trust, with a repayment guarantee from
the developer and bears interest at 9% per annum. In addition, we are entitled
to receive a share of the profits from the development. The developer is
currently working with the City of Modesto to obtain the necessary approvals to
subdivide the units.
Investment 2701 - This $4,100,000 investment is structured as an equity
investment in a 2-acre development in Goleta, California. The developer plans to
build 37 townhome units which are expected to sell for approximately $765,000
per unit. Our joint venture agreement with the developer provides for the
payment of a preferred return on our invested capital and a portion of the
development's profits. Development approvals have been secured and construction
is scheduled to begin by the end of January 2006.
5. DIRECT INVESTMENTS IN REAL ESTATE DEVELOPMENTS:
As of September 30, 2005, we or our wholly-owned subsidiary, Sands Drive San
Jose, Inc, held title to 6 properties which we received through foreclosure, by
deed in lieu of foreclosure. The properties are described below:
Carrying
Amount Funded Capitalized Recognized Amount of Costs to
Description (net of payments) Interest Costs Impairment Property Complete
- ------------------- ------------------- ------------------- ------------------- ------------------ ------------------
Property 2216 24,008,410 638,519 2,145,617 22,501,312 13,486,544
Property 2407 1,091,989 69,015 -- 1,161,004 --
Property 2423 5,647,343 262,555 1,420,233 4,489,665 --
Property 2465 208,423 13,076 127,499 94,000 --
Property 2468 2,913,513 104,328 75,978 2,941,863 207,137
Property 2518 3,676,538 225,285 1,048,399 2,853,424 1,780,279
------------------- ------------------- ------------------- ------------------ ------------------
Total 37,546,216 1,312,778 4,817,726 34,041,268 15,473,960
=================== =================== =================== ================== ==================
Property 2216 - This is an approximately 8-acre land parcel which has been
approved for development of 72 townhomes and condominiums totaling approximately
123,372 square feet in San Jose, California. The project is currently under
construction with completion of the first units scheduled for January 2006.
Property 2407 - This property originally consisted of 6 subdivided and improved
lots in San Rafael, California. Two of the lots closed escrow on September 24,
2004. The purchaser of the two lots has an option to purchase the remaining four
lots. The option expires on January 15, 2006 but may be extended until July 15,
2006 with a $90,000 option payment in January 2006.
Property 2423 - This property is an approximately 4,200 square foot home in
Belvedere, California. We received title to the property through foreclosure on
September 29, 2004. The home is complete and currently on the market for sale.
FS-14
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
Property 2465 - This project is an approximately 8,900 square foot unimproved
lot in Oakland, California. The property was sold for $99,000 and closed escrow
in November 2005.
Property 2468 - This property is an approximately 4,000 square foot home in
Tiburon, California. We received title to the property through foreclosure on
September 29, 2004. The home is complete and currently on the market for sale.
Property 2518 - This property will be an approximately 6,400 square foot home in
Tiburon, California. We received title to the property through foreclosure on
September 29, 2004 and, after analysis of the property, have determined that we
will maximize its value by completing the property and selling it as a finished
home. We have restarted construction that was halted prior to our taking title,
and currently expect to complete construction during Spring 2006.
6. PROPERTY, PLANT AND EQUIPMENT:
We had the following property,
plant and equipment:
September 30, 2005 December 31, 2004
------------------ -----------------
Computer Equipment 74,813 69,354
Furniture 39,730 39,730
------------------ -----------------
Total furniture and equipment 114,543 109,084
Accumulated depreciation (42,770) (21,170)
------------------ -----------------
Furniture and Equipment, net 71,773 87,914
================== =================
7. SECURED NOTES PAYABLE:
The following table describes our secured notes payable:
Maturity Date September 30, 2005 December 31, 2004
------------------ ------------------ -------------------
First Republic Bank May 2030 $ -- $ 3,185,000
China Trust Bank Nov 2006 5,934,447 --
Mid-Peninsula Bank Feb 2006 2,100,000 --
------------------ -------------------
Total $ 8,034,447 $ 3,185,000
================== ===================
The note to First Republic Bank is secured by our Property 2455 and bears
interest at Prime plus 0.5% (7.5% and 5.75% at September 30, 2005 and December
31, 2004, respectively). Interest only payments are due monthly and the note is
due May 1, 2030. The note was paid in full upon closing of the sale of property
2455 in August 2005.
The note to China Trust Bank is a $22 million construction loan whose purpose is
to finance the construction of our Villa Cortona project, Property 2216 and is
owed by Sands Drive San Jose, Inc., our wholly owned subsidiary, with the
FS-15
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
Company as the guarantor. The loan bears interest at Prime plus 1.00% (8.0% and
6.25% at September 30, 2005 and December 31, 2004, respectively) and is due in
June 2006.
The note to Mid-Peninsula Bank is secured by our investment number 2423 and
bears interest at Prime plus 1.0% (8.0% and 6.25% at September 30, 2005 and
December 31, 2004, respectively). Interest only payments are due monthly and the
note matures on February 9, 2006.
8. SHAREHOLDERS' EQUITY:
We have authorized 50,000,000 shares of capital stock with a $0.01 par value. At
September 30, 2005 and December 31, 2004, there were 14,991,325 and 18,304,168
shares of common stock outstanding, respectively.
As of December 31, 2004 and 2003 we had 0 and 40,000,000 shares of Class A
Convertible Preferred Stock authorized, with 0 and 22,229,739 issued and
outstanding. On September 1, 2004 the outstanding shares of Preferred Stock
converted to common stock in accordance with the terms of the Preferred Stock.
At the time of conversion there were 19,483,252 shares of Preferred Stock
outstanding and 100 shares of common stock outstanding.
We had sold our Preferred Stock through private placements since our inception,
issuing 26,161,438 shares at $10.00 per share. We used the proceeds from
issuance of our Preferred Stock primarily to fund additional ADC loans and also
for working capital purposes. We have not sold any shares since September 2002
and, as of September 30, 2005 we did not have an active private placement.
There is no public market for our stock. In the past the Company provided
liquidity to shareholders with a stock redemption policy. The policy generally
provided that the company would periodically make funds available for redemption
at a price determined by the Board of Directors. The repurchase of shares
follows guidelines set forth by the Securities and Exchange Commission for
issuer tender offers.
On January 28, 2005 the Company offered to purchase up to 3,314,917 shares of
common stock at a price of $3.62 per share. The Offer terminated on March 1,
2005, and a total of 6,714,420 shares were tendered and not withdrawn as of such
date. In accordance with the terms of the offer the Company agreed to purchase a
total of 3,314,929 shares at $3.62 per share for a total payment of $12,000,043.
As the number of shares tendered exceeded the maximum number of shares the
Company offered to purchase, each tendering shareholder received payment for a
prorated number of shares purchased. The proration factor was 49.37%. Subsequent
to the closing of the offer, the Company agreed to accommodate a shareholder who
requested to withdraw 2,086 shares, and reducing proceeds by $7,551, from shares
which the Company agreed to purchase under the terms of the offer. After
completion of the Offer, and the subsequent withdrawal of 2,086 from the shares
the Company agreed to purchase, a total of 14,991,325 shares remain issued and
outstanding
In October, 2005 the Board of Directors announced the Company's long-term
strategy to increase shareholder value and transform BellaVista into an
attractive investment for both new and existing shareholders. The strategy
involves a two-phased approach:
o In the medium term, the Company needs to demonstrate a track record of
consistent share price increases, and
o In the longer term, the Company should establish a regular program to
provide liquidity through a combination of distributions and share
redemption.
In order to establish a track record of consistent share price increases, the
Company determined that it would be necessary to reinvest all capital and
earnings over the next three years and, as a result, Company funds will not be
FS-16
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
used to pay dividends or distributions or redeem shares during this period. The
Company believes that successfully achieving these goals will attract new
investors and create access to other capital sources. This will allow the
Company to create a liquidity program that provides regular distributions and
share redemptions. This liquidity will enhance the value for all shareholders.
9. INCOME TAXES
On October 7, 2003 our Board of Directors voted to withdraw our REIT election
effective with the tax year beginning January 1, 2004. The withdrawal of this
election results in the loss of our ability to deduct the payment of dividends
from our taxable income. However, as the result of losses from prior years'
operations, the Company had generated a net operating loss carry forward which
it can use to offset future taxable income.
At September 30, 2005 and December 31, 2004, we had U.S. federal net operating
loss carryforwards of approximately $93.7 million and $81.2 million,
respectively. The net operating loss carryforwards expire in various amounts
between the years 2016 and 2019. If there is a change in ownership, utilization
of the U.S. net operating losses may be subject to substantial annual limitation
due to the "change in ownership" provisions of the Internal Revenue Code of
1986, as amended and similar state provisions. The annual limitation may result
in the expiration of net operating losses before utilization.
Operating Loss Carryforward
Operating loss carryforwards consisted of the following:
Federal California
Operating Loss Operating Loss
Carryforward Carryforward
-------------------- -------------------
September 30, 2005 $ 12,485,650 $12,485,650
December 31, 2004 34,098,334 34,098,334
December 31, 2003 38,176,549 22,905,929
December 31, 2002 8,915,070 5,349,042
-------------------- -------------------
Total $ 93,675,603 $ 74,838,955
==================== ===================
Deferred Taxes
The significant components of the Company's deferred tax assets are as follows
(in thousands):
September 30, 2005 December 31, 2004
-------------------- -------------------
Net operating loss carryforwards $ 36,216,109 $ 31,242,525
Income from real estate investments
reported on tax returns but not
includible in financial statement
income 4,229,033 7,194,989
-------------------- -------------------
Impairment charges reported in
financial statements but not
deducted on tax return 1,919,112 5,171,980
-------------------- -------------------
Valuation allowance (42,364,254) (43,609,494)
-------------------- -------------------
Net deferred tax assets $ -- $ --
==================== ===================
FS-17
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
As of September 30, 2005 and December 31, 2004, the Company and its subsidiaries
had provided valuation allowances of approximately $42.4 million and $43.6
million, respectively, in respect of deferred tax assets resulting from tax loss
carryforwards and termporary timing differences in the reporting of revenues and
expenses becauseit is more likely than not that the carryforwards may expire
unused and that future tax deductions may not be realized through future
operations.
The following table presents the income tax provision for federal and state
income taxes for the nine months ended September 30, 2005 and the years ended
December 31, 2004 and 2003.
Nine months Year Year
Ended Ended Ended
September 30, 2005 December 31, 2004 December 31, 2003
------------------- ------------------ -------------------
Federal $ -- $ -- $ --
State 2,400 2,400 800
------------------- ------------------ -------------------
Total $ 2,400 $ 2,400 $ 800
=================== ================== ===================
The provision for income taxes differs from the amount that would result from
applying the federal statutory rate for the nine months ended September 30, 2005
and the years ended December 31, 2004 and 2003 as follows:
Nine months Year Year
Ended Ended Ended
September 30, 2005 December 31, 2004 December 31, 2003
------------------- ------------------ -------------------
Stautory regular
federal income
tax benefit rate (34.00)% (34.00)% --%
State taxes (5.83)% (5.83)% --%
Change in valuation
allowance 39.83 % 39.83 % --%
------------------- ------------------ -------------------
Total --% --% --%
=================== ================== ===================
Prior to January 1, 2004 we were subject to tax rules related to Real Estate
Investment Trusts, and accordingly, were not subject to corporate level taxes
during 2003 as long as certain conditions were met. The Company believes that it
complied with such conditions.
10. TRANSACTIONS WITH AFFILIATES:
Prior to March 19, 2004, we had the following affiliates all of which were owned
by Susan Fox, who, prior to such date was the President, CEO and a Director of
the Company: Primecore Funding Group, Inc; 99 El Camino Partners, LLC; Primecore
Properties, Inc. During the year ended December 31, 2004, Primecore Funding
Group, Inc. received management fees from us, and Primecore Properties, Inc.
received real estate commissions in connection with the sale of certain REO
properties on which it acted as the listing broker. 99 El Camino Partners, LLC
owns the building where we maintained our offices until December 31, 2004 and
which we began leasing in April 2004.
FS-18
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
On December 23, 2003 we entered into an agreement, effective January 1, 2004
with Primecore Funding Group to provide management services during a period
concluding on March 31, 2004.
On March 19, 2004, Susan Fox resigned as President, Chief Executive Officer and
Director of BellaVista Capital, Inc. Ms. Fox was retained as a consultant to the
Company for a period of 12 months in order to assist with any issues that occur
in connection with the transition of management. For her services she was paid
$30,000 per month beginning April 2004. We also agreed to compensate Ms. Fox for
her assistance in recovery of legal actions we have brought on some of our
former developers. Our agreement with her provided that she will receive 5% of
any sums we collect from certain legal proceedings. During the nine months ended
September 30, 2005 and the twelve months ended December 31, 2004 she received
$65,000 and $63,000, respectively, in payments from BellaVista in accordance
with this provision of our agreement. Additionally, in March 2004 we purchased
certain furniture, computer equipment and software from her company, Primecore
Funding Group, for $200,000. Finally, we entered into an agreement to lease the
premises at 99 El Camino Real, a property owned by 99 El Camino Partners, LLC, a
limited liability company in which Susan Fox is the sole member, through
December 31, 2004, at a monthly rate of $25,000 through June 30, 2004, and then
decreasing to $20,000 per month through December 31, 2004. The agreement also
provided that BellaVista pay for real estate taxes, insurance and maintenance
associated with the building.
As of March 19, 2004, none of these entities are affiliates of the Company and,
as of the date of this filing, except as discussed in this Note 10, we have no
business relationships with these entities.
Management Fees
On December 19, 2003 our Board of Directors voted not to renew the management
agreement with Primecore Funding Group, effective December 31, 2003. On December
23, 2003 we entered into an agreement, effective January 1, 2004 with Primecore
Funding Group to provide management services during a three-month transition
period ended March 31, 2004. As of the date of this filing, the transition has
been accomplished, and the Company is now internally managed.
Our management contract with PFG provided for the payment of a termination fee
equal to 4% of our outstanding loan commitments at the date of termination. The
agreement also provided that any termination fee due under the contract would be
offset by any amounts PFG owed the Company under our Affiliate Loan Agreement
which was entered into concurrently with the Amended and Restated Management
Agreement. Under the terms of the Affiliate Loan Agreement, PFG was indebted to
the Company for approximately $15.6 million prior to offsetting the termination
fee. The amount of the termination fee was approximately $6.2 million which
payment was offset by the obligation to the Company, leaving an obligation of
approximately $9.4 million from PFG. Due to doubts about the ultimate
collectibility of this obligation from PFG, the Company has never reflected it
as an asset in its financial statements. Management does not currently believe
that PFG has assets sufficient to warrant any collection activity for this
obligation, and will therefore continue to reserve the entire asset balance from
its financial statements.
For the nine months ended September 30, 2005, the portfolio management fees
earned by Primecore Funding Group were $0 compared with $639,698 and $3,808,260
for the years ended December 31, 2004 and 2003.
FS-19
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
Real Estate Sales Commissions
We paid real estate sales commissions of $0 during the nine months ended
September 30, 2005 to Primecore Properties, Inc., compared with $250,050 and
$835,500 during the years ended December 31, 2004 and 2003. The commissions were
paid for services provided by Primecore Properties under listing agreements to
sell property acquired by us through foreclosure or deed in lieu of foreclosure.
We did not enter into any new listing agreements with Primecore Properties after
we terminated our contract with Susan Fox's management company.
11. COMMITMENTS AND CONTINGENCIES:
Operating leases
The following is a schedule, by years, of future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of September 30, 2005:
Year ended September 30, 2006 $ 115,462
Year ended September 30, 2007 45,540
-------------------
Net minimum lease payments $ 161,002
===================
Litigation
As of September 30, 2005, the Company was involved in the following litigation
in which claims for damages would be material if the plaintiff prevailed:
1. Steven Mayer v BellaVista Capital, Inc. et al. A lawsuit by a
shareholder seeking damages for securities violations. The Company
believes it has strong and viable defenses and plans to vigourously
defend the accusations.
In addition to the above matters, at September 30, 2005, the Company was
involved in several legal matters in which it sought recovery from borrowers,
guarantors, and others. The actions included the following:
1. A lawsuit filed to collect against the personal guarantors on two
loans. The matter was set for trial on September 13, 2004. However,
prior to trial, the defendants entered into a stipulation for
settlement. Under the terms of the settlement, the Company was
entitled to a judgment of $6 million if the defendants do not make
periodic payments totaling $4 million in accordance with a fixed
schedule. The defendants timely made, on September 15 and October 8,
2004, the first two payments totaling $100,000. However, defendants
thereafter defaulted in their payments, and on January 21, 2005 a
judgment was entered against the defendants, Robert A. Johnston and
Gregory Bock, in the amount of $5,900,000. The company is taking steps
to recover the amount of the judgment. The amount of the judgment is
not reflected in the financial statements, and will not be until there
is collection, as collection is not reasonably assured.
2. A lawsuit was filed to judicially foreclose upon and obtain a
deficiency judgment from a borrower in connection with a loan made on
a property in Palo Alto. The borrower stipulated to judgment in the
amount of $750,000, which judgment has been entered. The prospect of
collection of the judgment is not reasonably assured, therefore, if
and when payments are received, the payments will be reflected in
income. No potential recovery is currently reflected in the financial
statements.
FS-20
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
3. A lawsuit to collect against the principals of a former borrower
relating to the misappropriation and diversion of loan funds for
improper purposes. The Company seeks to recover all of the
misappropriated funds, and has alleged damages presently believed to
exceed $1,000,000. The Company has not reflected any potential
recovery in its financial statements. In addition, in the same
lawsuit, the Company seeks to recover approximately $900,000 as
usurious interest paid by the Company to another lender on the project
in order to protect the Company's security interest.
4. A lawsuit filed to collect against the personal guarantors on loans
made to develop properties which were subsequently taken back in
foreclosure (properties 2423 and 2468). In October, 2005 the Company
settled the case for payment of $1.1 million. The first payment of
$25,000 has been received. The prospect of collection of the judgment
is not reasonably assured, therefore, if and when payments are
received, the payments will be reflected in income. No potential
recovery is currently reflected in the financial statements.
Construction Contracts
In connection with our development of investments in real estate held for sale,
we have entered into contracts with construction companies totaling $13,979,355
to complete these projects where necessary. We will make payments on these
contracts as construction progresses in much the same manner we do for our
investments in real estate under development.
Guarantees
We have issued indemnity agreements to insurance companies in connection with
the sale of certain of our REO properties. The indemnity agreements were
provided in order to induce the insurance companies to issue surety bonds
covering mechanics liens recorded against properties we owned. The total amount
of the surety bonds issued with respect to which we have issued indemnity
agreements is $525,000. We believe that we have remedies against the mechanics
lien claims and that we will not become liable for their payment as such, no
amounts have been accrued in the financial statements in connection to these
liens.
We have also provided indemnity agreements to insurance companies in connection
with the issuance of surety bonds on behalf of our wholly owned subsidiary,
Sands Drive San Jose, Inc. guaranteeing the completion of certain public utility
improvements in our developments and the performance of certain requirements
related to sale of real property in accordance with regulations established by
the California Department of Real Estate. The total amount of the surety bonds
issued with respect to which we have issued indemnity agreement is $392,902. The
bonds will be released and our guarantee obligation terminated upon completion
and acceptance of the improvements and conditions imposed by the Department of
Real Estate.
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.
FS-21
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
12. CONCENTRATION OF CREDIT RISK
At September 30, 2005, the Company had approximately $14,250,000 of cash
deposits in excess of federally insured limits. The cash was placed with high
credit quality institutions.
13. CHANGE IN FISCAL YEAR END
On November 7, 2005 the Company's Board of Directors voted to change its fiscal
year end from December 31 to September 30 and adopted changes to the Company's
Bylaws reflecting this change. The following unaudited summary supplemental
information for the nine months ended September 30, 2004 is provided for
comparision between the nine-month transition period in these statements with
the nine month period ending September 30, 2004:
Nine months
Ended
September 30, 2004
-------------------
Revenue $ 2,754,137
Operating expenses 7,341,024
-------------------
Net loss from operations (4,586,887)
Other income 501,000
-------------------
Net loss $ (4,085,887)
===================
Basic and diluted net loss per
share $ (1.92)
===================
Basic and diluted weighted-average
shares outstanding 2,133,303
===================
FS-22
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
14. QUARTERLY STATEMENTS OF OPERATIONS (UNAUDITED):
The following tables contain selected unaudited quarterly financial data for the
nine months ended September 30, 2005(1) and the year ended December 31, 2004
(2):
Three Months Three Months Three Months
Ended Ended Ended
March 31, 2005 June 30, 2005 September 30, 2005
------------------- ------------------- -------------------
REVENUES:
Income from completed real estate development........... $ 454,560 $ 797,744 $ 4,468,487
Interest income......................................... 48,521 6,392 109,738
Other................................................... 203 17,469 8,143
------------------- ------------------- -------------------
Total revenues...................................... 503,284 821,605 4,586,368
EXPENSES:
Salaries................................................ 184,647 179,756 182,433
Facilities expenses..................................... 24,047 21,728 23,368
Legal and accounting expense............................ 124,992 37,019 224,292
Board of Directors...................................... 66,223 52,452 90,271
General administrative and other........................ 32,057 29,920 36,416
REO and non-recurring expense........................... 247,150 283,903 258,185
Depreciation expense.................................... 7,200 7,200 7,200
Provision for impairment of investments in real estate . 911,557 286,829 391,477
------------------- ------------------- -------------------
Total expenses....................................... 1,597,873 898,807 1,213,642
------------------- ------------------- -------------------
Net (loss) income from operations (1,094,589) (77,202) 3,372,726
OTHER INCOME (EXPENSE):
Income from legal settlements, net of collection costs.. 510,000 345,000 381,750
------------------- ------------------- -------------------
Total other income................................... 510,000 345,000 381,750
------------------- ------------------- -------------------
Net (loss) income.................................... $ (584,589) $ 267,798 $ 3,754,476
=================== =================== ===================
Basic and diluted net (loss) income per common share $ (0.03) $ 0.02 $ 0.25
=================== =================== ===================
Basic and diluted weighted-average common shares
outstanding 17,199,887 14,991,325 14,991,325
=================== =================== ===================
(1) The above 2005 Financial data differs in classification from the
presentation reflected in the filed Quarterly financial data for the fiscal year
presented.
FS-23
BELLAVISTA CAPITAL, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 AND 2003
14. QUARTERLY STATEMENTS OF OPERATIONS (UNAUDITED):
(Continued):
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2004 June 30, 2004 September 30, 2004 December 31, 2004
------------------- ------------------- ------------------- -------------------
REVENUES:
Income from completed real estate
development..................... $ 1,372,634 $ 854,192 $ 300,748 $ 970,081
Interest income.................... 35,105 28,524 31,933 57,833
Other.............................. 17,772 10,015 103,214 43,441
------------------- ------------------- ------------------- -------------------
Total revenues................. 1,425,511 892,731 435,895 1,071,355
EXPENSES:
Salaries........................... 21,838 327,745 227,013 299,152
Facilities expenses................ 88,423 91,523 53,309 69,435
Legal and accounting expense....... 161,357 107,173 56,136 57,770
Board of Directors................. 46,727 58,858 50,717 97,556
General administrative and other... 29,041 56,442 42,892 36,132
REO and non-recurring expense...... 887,433 211,559 396,084 1,700,462
Depreciation expense............... -- 8,547 8,547 8,547
Internalization transition expense. 410,970 22,702 10,394 6,766
Management fees paid to Manager.... 639,698 -- -- --
Provision for impairment of
investments in real estate ..... 927,480 1,882,283 516,134 86,663
------------------- ------------------- ------------------- -------------------
Total expenses.................. 3,212,967 2,766,832 1,361,226 2,362,483
------------------- ------------------- ------------------- -------------------
Net loss from operations (1,787,456) (1,874,101) (925,331) (1,291,128)
OTHER INCOME (EXPENSE):
Income from legal settlements, net
of collection costs............. 210,000 159,000 132,000 627,000
Loss on sale of fixed assets....... -- -- -- (23,829)
------------------- ------------------- ------------------- -------------------
Total other income (expense).... 210,000 159,000 132,000 603,171
------------------- ------------------- ------------------- -------------------
Net loss........................ $ (1,577,456) $ (1,715,101) $ (793,331) $ (687,957)
=================== =================== =================== ===================
Basic and diluted net loss per
common share.................... $ (15,775) $ (17,151) $ (0.12) $ (0.03)
=================== =================== =================== ===================
Basic and diluted weighted-average
common shares outstanding....... 100 100 6,353,334 19,413,396
=================== =================== =================== ===================
(2) The above 2004 Financial data differs in classification from the
presentation reflected in the filed Quarterly financial data for the fiscal year
presented.
FS-24