UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-30507
BellaVista Capital, Inc.
(Exact name of registrant as specified in its charter)
Maryland 94-3324992
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
15700 Winchester Blvd.
Los Gatos, CA 95030
(Address of principal offices) (zip code)
(408) 354-8424
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a smaller reporting company. See the definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting company" in Rule
12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Yes [ ] No [X] Yes [ ] No [X]
Non-accelerated filer (Do not
Check if a smaller reporting company) Smaller reporting company
Yes [ ] No [ ] Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the registrant's only class of common equity, its common
stock, outstanding as of July 15, 2009: 11,171,433
This Quarterly Report on Form 10-Q of BellaVista Capital, Inc. (the "Company")
contains forward-looking statements. All statements other than statements of
historical fact may be forward-looking statements. These include statements
regarding the Company's future financial results, operating results, business
strategies, projected costs and capital expenditures, investment portfolio,
competitive positions, and plans and objectives of management for future
operations. Forward-looking statements may be identified by the use of words
such as "may," "will," "should," "expect," "plan," anticipate," "believe,"
"estimate," "predict," "intend," "seek," "target" and "continue," or the
negative of these terms, and include the assumptions that underlie such
statements. The Company's actual results could differ materially from those
expressed or implied in these forward-looking statements as a result of various
risks and uncertainties, including those set forth in Part II, Item 1A - Risk
Factors. All forward-looking statements in this report are based on information
available to the Company as of the date hereof and the Company assumes no
obligation to update any such statements.
Table of Contents
Part I. Financial Information
Item 1. Financial Statements (unaudited) 2
Condensed Consolidated Balance Sheets as of March 31, 2009
(unaudited) and September 30, 2008 (Note 1) 3
Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended March 31, 2009 and 2008 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2009 and 2008 (unaudited) 5
Notes to the Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4T. Controls and Procedures 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 22
Signatures 23
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Attached are the following unaudited financial statements of BellaVista
Capital, Inc., formerly known as Primecore Mortgage Trust, Inc. (the "Company"):
(1) Condensed Consolidated Balance Sheets as of March 31, 2009
(unaudited), and September 30, 2008
(2) Condensed Consolidated Statements of Operations for the Three Months
and Six Months ended March 31, 2009 and 2008 (unaudited)
(3) Condensed Consolidated Statements of Cash Flows for the Six Months
ended March 31, 2009 and 2008 (unaudited)
(4) Notes to Condensed Consolidated Financial Statements (unaudited)
The financial statements referred to above should be read in conjunction
with the Company's audited financial statements for the fiscal year ended
September 30, 2008 as filed with the Securities and Exchange Commission in our
Annual Report on Form 10-KSB, filed January 23, 2009.
2
BELLAVISTA CAPITAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2009 and September 30, 2008
March 31, 2009 September 30, 2008
(unaudited) (Note 1)
------------------ ------------------
ASSETS:
Cash and cash equivalents $ 123,397 $ 636,346
Loans receivable secured by real estate 6,025,297 11,251,773
Joint venture investments in real estate developments 9,385,815 9,944,197
Investments in real estate developments 21,720,430 19,026,984
Investment in rental property, net of accumulated depreciation of $142,258
and $130,038 at March 31, 2009 and September 30, 2008, respectively 3,916,209 3,928,429
Fixed assets, net of accumulated depreciation of $15,945 and $12,831 at
March 31, 2009 and September 30, 2008, respectively 32,216 24,379
Other assets, net 542,382 670,836
------------------ ------------------
Total assets $ 41,745,746 $ 45,482,944
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable and lines of credit $ 13,672,702 $ 12,453,057
Accounts payable and accrued expenses 539,812 1,062,168
Capital lease 3,258 4,985
------------------ ------------------
Total Liabilities 14,215,772 13,520,210
SHAREHOLDERS' EQUITY:
Common stock: par value $0.01, 50,000,000 shares authorized; 11,171,433 and
11,590,870 shares issued and outstanding at March 31, 2009 and September
30, 2008, respectively 111,714 115,908
Additional paid-in capital 102,630,358 103,360,168
Accumulated deficit (75,212,098) (71,513,342)
------------------ ------------------
Total shareholders' equity 27,529,974 31,962,734
------------------ ------------------
Total liabilities and shareholders' equity $ 41,745,746 $ 45,482,944
================== ==================
See accompanying notes to these consolidated financial statements
3
BELLAVISTA CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended March 31, 2009 and 2008
(unaudited)
Three Months Ended March 31, Six Months Ended March 31,
----------------------------------- -----------------------------------
2009 2008 2009 2008
----------------- ----------------- ----------------- -----------------
REVENUES:
Revenues from loans receivable $ 143,214 $ 130,972 $ 276,335 $ 455,018
Equity in earnings from joint venture investments -- 673,589 -- 965,460
Sales of real estate 130,833 -- 885,833 --
Rental revenue 234,149 -- 428,200 --
Other revenue 202,535 85 202,535 14,841
----------------- ----------------- ----------------- -----------------
Total revenues 710,731 804,646 1,792,903 1,435,319
Cost of sales of real estate (134,421) (105,982) (1,081,674) (105,982)
Rental expense (180,209) -- (315,278) --
----------------- ----------------- ----------------- -----------------
Total cost of revenue (314,630) (105,982) (1,396,952) (105,982)
----------------- ----------------- ----------------- -----------------
Gross profit 396,101 698,664 395,951 1,329,337
----------------- ----------------- ----------------- -----------------
EXPENSES:
Salaries and related expense 725 143,573 2,414 278,397
Facilities expense 1,232 26,668 2,463 49,757
Legal and accounting expense 39,680 71,719 70,781 123,256
Board of directors fees 49,250 78,808 90,500 119,725
Asset management fees 55,511 -- 206,236 --
Officers consulting fees - related party 39,661 5,346 57,914 25,853
D & O liability insurance 27,844 25,375 55,688 50,750
General and administrative expense 10,895 19,753 17,983 37,680
Reserve for uncollectible interest 40,983 -- 93,915 --
Depreciation expense 1,557 2,973 3,114 6,093
REO expense 105,639 63,250 163,250 106,251
Provision for impairment of investments in real estate 90,307 2,266,161 2,943,295 8,355,876
----------------- ----------------- ----------------- -----------------
Total expenses 463,284 2,703,626 3,707,553 9,153,638
----------------- ----------------- ----------------- -----------------
Net loss from operations (67,183) (2,004,962) (3,311,602) (7,824,301)
OTHER INCOME (EXPENSE)
Loss on sale of fixed assets -- (14,888) -- (14,888)
Interest income -- 7,513 1,081 11,402
Interest expense (193,436) -- (388,235) --
----------------- ----------------- ----------------- -----------------
Total other expense (193,436) (7,375) (387,154) (3,486)
----------------- ----------------- ----------------- -----------------
Net loss before tax (260,619) (2,012,337) (3,698,756) (7,827,787)
----------------- ----------------- ----------------- -----------------
Income tax expense -- -- -- (2,400)
----------------- ----------------- ----------------- -----------------
Net loss allocable to common stock $ (260,619) $ (2,012,337) $ (3,698,756) $ (7,830,187)
================= ================= ================= =================
Basic and diluted net loss per share $ (0.02) $ (0.16) $ (0.33) $ (0.60)
================= ================= ================= =================
Basic and diluted weighted average shares outstanding 11,171,433 12,537,504 11,217,525 12,952,901
================= ================= ================= =================
See accompanying notes to these consolidated financial statements
4
BELLAVISTA CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 2009 and 2008
(unaudited)
March 31, 2009 March 31, 2008
------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,698,756) $ (7,830,187)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 15,334 6,093
Reserve for uncollectible interest 93,915 --
Provision for impairment 2,943,295 8,355,876
Loss on sale of fixed assets -- 14,888
Changes in assets and liabilities:
Decrease in other assets 34,539 588,874
Decrease in accounts payable and accrued expenses (522,356) (49,448)
------------------- -------------------
Net cash (used in) provided by operating activities (1,134,029) 1,086,096
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets -- 2,200
Purchases of fixed assets (10,952) --
Proceeds from repayments of investments in real estate 1,518,376 7,304,479
Investments in real estate (1,370,260) (8,001,357)
------------------- -------------------
Net cash provided by (used in) investing activities 137,164 (694,678)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock repurchases (734,004) (2,574,388)
Borrowings under notes payable and lines of credit 2,400,225 3,020,005
Repayment of notes payable and lines of credit (1,180,578) (853,000)
Payments under capital lease (1,727) (2,672)
------------------- -------------------
Net cash provided by (used in) financing activities 483,916 (410,055)
------------------- -------------------
Net decrease in cash and cash equivalents (512,949) (18,637)
Beginning cash and cash equivalents 636,346 1,759,241
------------------- -------------------
Ending cash and cash equivalents $ 123,397 $ 1,740,604
=================== ===================
Cash paid for interest $ 368,912 $ --
------------------- -------------------
Cash paid for income taxes $ -- $ --
=================== ===================
See accompanying notes to these consolidated financial statements
5
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BUSINESS:
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete annual financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and six months ended March 31, 2009 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 2009 or for any other future period.
The condensed consolidated balance sheet at September 30, 2008 has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The accompanying
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the BellaVista Capital, Inc. Annual Report on Form 10-KSB for the
fiscal year ended September 30, 2008.
Organization
BellaVista Capital, Inc., a Maryland corporation (the Company, BellaVista, our,
we), was formed on March 18, 1999 and commenced operations effective May 1,
1999. We have been engaged in the business of investing in real estate
development projects, primarily in California. Our investments are structured as
loans secured by real estate, loans made to real estate development entities and
joint venture investments in real estate development entities. Our operations
are treated as one operating segment. BellaVista Capital, Inc. is also the 100%
shareholder of Sands Drive San Jose, Inc., and Frank Norris Condominiums Inc.,
both of which are California corporations formed for the purpose of developing
and selling residential real estate. The Company holds a 100% interest in
Cummings Park Associates, LLC, a California Limited Liability Company formed to
develop and sell a mixed use residential and retail project in East Palo Alto
California. The Company also holds a 100% interest in MSB Brighton LLC,
currently operated as a rental property. During the period ended March 31, 2009,
the Company became the sole owner of one of its investments through foreclosure.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation Policy
These condensed consolidated financial statements include the accounts of
BellaVista Capital, Inc. and its wholly owned subsidiaries: Sands Drive San
Jose, Inc., MSB Brighton LLC, Frank Norris Condominiums, Inc., and Cummings Park
Associates, LLC. All intercompany accounts and transactions have been eliminated
in consolidation. Investments acquired or created are evaluated based on
Financial Accounting Standards Board ("FASB") Interpretation ("FIN") 46R,
"Consolidation of Variable Interest Entities," which requires the consolidation
of VIEs in which we are considered to be the primary beneficiary. If the
investment is determined not to be within the scope of FIN 46R, then the
investments are evaluated for consolidation under the American Institute of
Certified Public Accountants' Statement of Position 78-9, "Accounting for
Investments in Real Estate Ventures," as amended by Emerging Issues Task Force
Issue No. 04-5, "Determining Whether a General Partner, or the General Partners
as a Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights.
Use of Estimates
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Valuations of investments in real estate include management's
best estimates of the amounts expected to be realized on the sale of its
6
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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
deeds of trust on real property, 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 Issues (SAB 102), and Financial
Accounting Statement No. 5, Accounting for Contingencies (FAS 5), in setting
credit reserves for our residential and commercial loans. We follow the
guidelines of Financial Accounting Statement No. 114, Accounting by Creditors
for Impairment of a Loan (FAS 114), in determining impairment on commercial real
estate loans.
Joint Venture Investments in Real Estate Developments
Our joint venture investments in real estate developments are comprised of
loans, known as Acquire, Develop, and Construct loans ("ADC Loans"), which are
secured by real estate and have many characteristics of joint venture
investments and investments in real estate joint ventures.
ADC Loans
We have originated secured loans to acquire, develop and construct residential
real estate. These loans contain many of the following characteristics which are
identified with ADC Loans:
1. The lender has agreed to provide all or substantially all necessary funds
to acquire, develop or construct the property. The borrower has title to
but little or no cash equity in the project;
2. The lender funds substantially all the interest and fees during the term of
the loan by adding them to the loan balance;
3. Typically, the lender's only security is the project itself. The lender has
no recourse to other assets of the borrower, and the borrower does not
guarantee the debt;
4. In order for the lender to recover its investment in the project, the
property must be sold to independent third parties or the borrower must
obtain refinancing from another source.
Because our ADC Loans contain many of the characteristics of investments in real
estate, they are classified for financial reporting purposes as joint venture
investments in real estate developments (Note 4). ADC Loans with no equity
participation interest are stated at the lower of cost or fair value and
accounted for as an investment in real estate. Revenue from interest and points
is recognized as cash is received from the sale or refinancing of such
properties. ADC Loans that include an equity participation interest are
accounted for in the same manner as joint venture investments in real estate
developments. ADC Loans include amounts funded under the loan agreements and
capitalized interest expense, where applicable. If our ADC Loans qualified as
borrowings under US GAAP, interest and points would be recognized in income as
earned instead of at the time of sale of the underlying property.
Joint Venture Investments in Real Estate
We provide equity financing to real estate developers necessary to acquire,
develop and construct real estate developments. Such investments are structured
as membership interests in the development entity. We account for such
investments using the equity method of accounting.
Our management conducts a review of our investments for impairment on an
investment-by-investment basis, whenever events or changes in circumstances
indicate that the carrying amount of an investment may not be recoverable or at
least quarterly. An impairment charge is recognized when estimated expected
future cash flows (undiscounted and without interest charges), are less than the
carrying amount of the investment, which does not include accrued interest and
7
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
points. Typically, we receive cash flows from the sale of a completed property,
The estimation of expected future net cash flows is inherently uncertain and
relies to a considerable extent on assumptions regarding current and future
economic and market conditions. If, in future periods, there are changes in the
estimates or assumptions incorporated into the impairment review analysis, the
changes could result in an adjustment to the carrying amount of the investments.
To the extent impairment has occurred, the excess of the carrying amount of the
investment over its estimated fair value, less estimated selling costs, is
charged to operations.
Investments in Real Estate Developments
Investments in Real Estate Developments represent development projects that the
Company has obtained through foreclosure of its mortgage loans or controls by
virtue of its operating agreements with development entities, and relate to real
properties for which the Company has a controlling ownership interest. For
simplicity in this document these properties will be referred to as REOs. We
consolidate the assets and liabilities of these Investments in Real Estate
Developments in our financial statements. The Company's basis in the projects is
the carrying amount of the project at the time of loan foreclosure. Management
conducts a review for impairment of these assets on an investment-by-investment
basis whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable, but not less frequently than quarterly.
Impairment is recognized when estimated expected future cash flows (undiscounted
and without interest charges), typically from the sale of a completed property,
are less than the carrying amount of the investment, which does not include
accrued interest and points. The estimation of expected future net cash flows is
inherently uncertain and relies to a considerable extent on assumptions
regarding current and future economic and market conditions. If, in future
periods, there are changes in the estimates or assumptions incorporated into the
impairment review analysis, the changes could result in an adjustment to the
carrying amount of the investments. To the extent impairment has occurred, the
excess of the carrying amount of the investment over its estimated fair value,
less estimated selling costs, is charged to operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash held in financial institutions and other
highly liquid short-term investments with original maturities of three months or
less. As of March 31, 2009 the Company's cash was fully insured by the Federal
Deposit Insurance Corporation ("FDIC").
Fixed Assets
Fixed assets, which include equipment and furniture, are carried at cost less
accumulated depreciation. Depreciation and amortization is recorded using the
straight-line method over the estimated useful life of the asset Furniture and
equipment have useful lives ranging from 3 to 7 years. Buildings have useful
life of 30 to 40 years.
Income Taxes
Our taxable income differs from income measured in accordance with generally
accepted accounting principles in the United States of America due to timing
differences in the recognition of income from our ADC loans and REO properties.
For tax purposes, interest and points are accrued as income according to the
terms of our loan contracts, but not recognized under generally accepted
accounting principles in the United States of America until the contract has
been paid through sale or refinancing of the secured property.
The Company uses the asset and liability method whereby deferred tax assets and
liability account balances are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company provides a valuation allowance, if necessary,
to reduce deferred tax assets to their estimated realizable value.
Recent Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board ("FASB") issued
three Staff Positions ("FSPs") that are intended to provide additional
application guidance and enhance disclosures about fair value measurements and
impairments of securities. FSP FAS 157-4 clarifies the objective and method of
fair value measurement even when there has been a significant decrease in market
activity for the asset being measured. FSP FAS 115-2 and FAS 124-2 establishes a
new model for measuring other-than-temporary impairments for debt securities,
including establishing criteria for when to recognize a write-down through
earnings versus other comprehensive income. FSP FAS 107-1 and APB 28-1 expands
the fair value disclosures required for all financial instruments within the
8
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
scope of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to
interim periods. All of these FSPs are effective beginning April 1, 2009. The
adoption of these FSPs is not expected to have a material impact on our
financial statements.
3. LOANS RECEIVABLE SECURED BY REAL ESTATE:
As of March 31, 2009, loans receivable secured by real estate summarized by
location consisted of the following:
Amount Recognized Carrying
Invested Impairments Amount In Default
Description ------------------ ------------------ ------------------ ------------------
SF Bay Area $ 4,605,197 $ 165,000 $ 4,440,197 $ 2,372,199
California Central Valley 800,000 -- 800,000 --
Southern California 185,100 -- 185,100 --
Other States 600,000 -- 600,000 --
------------------ ------------------ ------------------ ------------------
Total $ 6,190,297 $ 165,000 $ 6,025,297 $ 2,372,199
================== ================== ================== ==================
As of September 30, 2008, loans receivable secured by real estate summarized by
location consisted of the following:
Amount Recognized Carrying
Invested Impairments Amount In Default
Description ------------------ ------------------ ------------------ ------------------
SF Bay Area $ 9,971,673 $ 165,000 $ 9,806,673 $ 6,858,673
California Central Valley 660,000 -- 660,000 210,000
Southern California 185,100 -- 185,100 --
Other States 600,000 -- 600,000 --
------------------ ------------------ ------------------ ------------------
Total $ 11,416,773 $ 165,000 $ 11,251,773 $ 7,068,673
================== ================== ================== ==================
Loans Receivable Secured by Real Estate consist of loans to real estate
developers which are secured by deeds of trust on real property, pay interest
monthly and generally have repayment guarantees from the principals of the
borrowing entity. As of March 31, 2009 $3,799,925 of these loans were secured by
first trust deeds and $2,390,372 were secured by second trust deeds.
Additionally, at March 31, 2009 four loans totaling $2,372,199 were in default
under the terms of our loans. As of March 31, 2009, we had recorded an
impairment on one of our loans receivable in the amount of $165,000. Included as
components of Other Assets in the Balance Sheet are interest receivable of
$305,057 and $309,559, less an allowance for uncollectible interest in the
amount of $(162,965) and $(189,849) as of March 31, 2009 and September 30, 2008,
respectively. During the three months ended March 31, 2009, we foreclosed on a
loan receivable in the California Central Valley and it is now classified as an
Investment in Real Estate Development (REO).
4. JOINT VENTURE INVESTMENTS IN REAL ESTATE DEVELOPMENTS:
As of March 31, 2009, joint venture investments in real estate developments
summarized by location consisted of the following:
Remaining
Amount Carrying Funding
Invested Impairments Amount Obligation
Description ------------------ ------------------ ------------------ ------------------
SF Bay Area $ 11,440,827 $ 2,055,012 $ 9,385,815 $ 28,774
Southern California 9,206,795 9,206,795 -- --
------------------ ------------------ ------------------ ------------------
Total $ 20,647,622 $ 11,261,807 $ 9,385,815 $ 28,774
================== ================== ================== ==================
As of September 30, 2008, joint venture investments in real estate developments
summarized by location consisted of the following:
9
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Remaining
Amount Carrying Funding
Invested Impairments Amount Obligation
Description ------------------ ------------------ ------------------ ------------------
SF Bay Area $ 11,081,830 $ 1,964,705 $ 9,117,125 $ 297,461
Southern California 8,886,797 8,059,725 827,072 320,000
------------------ ------------------ ------------------ ------------------
Total $ 19,968,627 $ 10,024,430 $ 9,944,197 $ 617,461
================== ================== ================== ==================
Joint Venture Investments in real estate developments consist of ADC loans and
joint investments with real estate developers. ADC Loans, which are loan
arrangements that are typically secured by real property, provide for the
payment of interest from an interest reserve established from loan funds and may
also provide for the payment of an exit fee as a percentage of sales from each
unit in the development or a share of project profits. Joint Venture investments
are equity investments in operating entities formed for the purpose of
developing real estate. Our investment typically earns a preferred return
calculated based on our investment amount at a specific rate during the term of
the investment and a share of the project profits. As of March 31, 2009 and
September 30, 2008, we have recognized impairments totaling approximately $11.2
million and $10 million respectively, on four and two respectively, of our joint
venture investments in real estate developments.
5. INVESTMENTS IN REAL ESTATE DEVELOPMENTS:
Investments in Real Estate Developments (REOs) include real estate development
projects we own, either directly or through a subsidiary company we own or
control. The following table summarizes our Investments in Real Estate
Developments by location as of March 31, 2009:
Amount Invested Recognized Carrying Costs to
(net of payments) Impairment Amount Complete
Description ------------------ ------------------ ------------------ ------------------
SF Bay Area $ 25,659,539 $ 4,636,850 $ 21,022,689 $ 425,615
Central Valley 897,741 200,000 697,741 --
------------------ ------------------ ------------------ ------------------
Total $ 26,557,280 $ 4,836,850 $ 21,720,430 $ 425,615
================== ================== ================== ==================
The following table summarizes our Investments in Real Estate Developments by
location as of September 30, 2008:
Amount Invested Recognized Carrying Costs to
(net of payments) Impairment Amount Complete
Description ------------------ ------------------ ------------------ ------------------
SF Bay Area $ 21,584,416 $ 3,004,897 $ 18,579,519 $ 331,305
Central Valley 647,465 200,000 447,465 --
------------------ ------------------ ------------------ ------------------
Total $ 22,231,881 $ 3,204,897 $ 19,026,984 $ 331,305
================== ================== ================== ==================
6. INVESTMENT IN RENTAL PROPERTY:
The rental property is summarized as follows at March 31, 2009 and September
30, 2008:
March 31, 2009 September 30, 2008
------------------ ------------------
Land $ 1,076,589 $ 1,076,589
Building 2,969,348 2,969,348
Furniture and equipment 12,530 12,530
------------------ ------------------
Total rental property 4,058,467 4,058,467
Accumulated depreciation (142,258) (130,038)
------------------ ------------------
Rental property, net $ 3,916,209 $ 3,928,429
================== ==================
Depreciation expense on rental property was $12,220 and zero for the six months
ended March 31, 2009 and 2008, respectively.
10
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. FIXED ASSETS:
Fixed assets at March 31, 2009 and September 30, 2008 consisted of the
following:
March 31, 2009 September 30, 2008
------------------ ------------------
Computer equipment $ 18,756 $ 18,756
Furniture 29,405 18,454
------------------ ------------------
Total office equipment 48,161 37,210
Accumulated depreciation (15,945) (12,831)
------------------ ------------------
Fixed assets, net $ 32,216 $ 24,379
================== ==================
Depreciation expense on fixed assets was $3,114 and $6,093 for the six months
ended March 31, 2009 and 2008, respectively.
8. NOTES PAYABLE AND LINES OF CREDIT:
Notes payable and lines of credit as of March 31, 2009 and September 30, 2008
consisted of the following:
March 31, 2009 September 30, 2008
------------------ ------------------
Secured loan $ 2,600,000 $ 2,600,000
Secured loan 6,375,973 7,331,328
Secured loan 2,521,729 2,521,729
Secured line of credit 675,000 --
Secured line of credit 1,500,000 --
------------------ ------------------
Total $ 13,672,702 $ 12,453,057
================== ==================
The secured loan of $2,600,000 represents the outstanding balance as of March
31, 2009 and September 30, 2008 secured by a deed of trust on one of our
investments. It bears interest at the Wells Fargo Prime Rate plus 2.0% (5.25%
and 5.50% at March 31, 2009 and September 30, 2008, respectively). The line
matured on June 5, 2008, and was extended to April 18, 2009. The loan is due on
demand but the bank is allowing the Company to make interest only payments until
final extension terms are negotiated. The Company is currently negotiating an
extension.
The secured loan amount totaling $6,375,973 and $7,331,328 at March 31, 2009 and
September 30, 2008, respectively remains outstanding on a $14.9 million
construction loan originated for the purpose of financing the construction of a
residential and retail mixed use project in East Palo Alto, California. The loan
is owed by Cummings Park Associates, LLC and is secured by the real property.
The loan bears interest at Prime plus 2%, (5.25% at March 31, 2009) and matured
on March 15, 2009. Interest-only payments are due monthly on the outstanding
balance of the note. Principal payments will be made from the proceeds when
units are sold. On May 22, the loan was paid down by $3,698,716, due to the sale
of a portion of the property. The Company is currently negotiating an extension.
The secured loan of $2,521,729 is the outstanding balance as of March 31, 2009
and September 30, 2008 on an assumed loan for the Frank Norris Condominium Inc.
property that is now fully owned by the Company and is secured by the property.
The loan bears interest at The Wall Street Journal Prime plus 1% with a floor of
6.0% (6% at March 31, 2009) and matured on April 15, 2009. The loan was extended
to April 15, 2012, and bears interest at The Wall Street Journal Prime rate plus
1%, but not less than 6.5%.
The $1.5 million secured line of credit has an outstanding balance of $675,000
as of March 31, 2009 and is secured by the 2555 Pulgas property. The line bears
interest at 11.5%. Interest-only payments are due monthly on the outstanding
balance of the note. The line matures on February 1, 2012. The total amount owed
is due to related parties.
The $1.5 million secured line of credit has an outstanding balance of $1,500,000
as of March 31, 2009 and is secured by the MSB Brighton rental property. The
line bears interest at 11.5%. Interest-only payments are due monthly on the
11
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
outstanding balance. The line matures on February 1, 2012. Of the total amount
owed, $1,470,000 is due to related parties.
9. SHAREHOLDERS' EQUITY:
There is currently no public trading market for our stock. We are authorized to
issue up to 50,000,000 shares of Common Stock. As of March 31, 2009 we have
repurchased 1,564,097 shares in connection with legal settlements and 6,747,822
shares under tender offers at various prices. At March 31, 2009 we had
11,171,433 shares of Common Stock outstanding.
Since June 2005, a group of entities associated with Mackenzie Patterson Fuller,
Inc. (collectively "MPF") have acquired an aggregate of 1,390,046 shares as of
March 31, 2009, through a series of unsolicited tender offers.
The Company has not declared or paid any dividends on its capital stock during
the period from January 1, 2005 through the date of this report.
During the six months ended March 31, 2009, the Company repurchased 419,437
shares of stock.
10. COMMITMENTS AND CONTINGENCIES:
Litigation
As of March 31, 2009, the Company was involved in the following litigation in
which claims for damages would be material if the plaintiff prevailed and there
is at least a reasonable possibility that a loss may have occurred:
Richard Aster v BellaVista Capital, Inc. et al. A lawsuit alleging
construction defects in the installation of windows, decking and
roofing related to a single family home that was purchased by the
plaintiff from the Company after the Company acquired the property
through foreclosure. This lawsuit names several defendants, including
the Company and the original developer. In addition, a lawsuit has been
filed by the original developer against the Company for indemnification
and defense. The Company believes it has strong and viable defenses and
plans to vigorously defend these actions. The Company has hired both
legal and engineering experts who specialize in construction defects
matters.
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.
12
BELLAVISTA CAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. SUBSEQUENT EVENTS:
The company closed the sale of approximately 7,500 s.f. of the retail space in
our Cummings Park Development for $4.4 million on May 22, 2009. The net proceeds
of $3.7 million were used to pay down the secured loan on the property. The
Company plans to lease and hold the remainder of the retail space until the
market for sale of such space improves.
On March 17, 2009 MacKenzie Patterson Fuller (MPF) sent a letter to the Board
demanding that the Board resign in favor of MPF designees and turn over complete
control of the administration and asset management of the Company to MPF for
which MPF would be compensated with an asset management fee and a 15% stock
option. After careful consideration and discussions with MPF, the Board
concluded that the MPF demand was not in the best interest of the shareholders,
and therefore, declined. MPF then began a campaign to communicate with the
Company's shareholders and subsequently has initiated a hostile takeover by
means of a series of proxy solicitations. The Board vigorously opposes these
solicitations and will soon issue its own proxy solicitation on this matter.
In May 2009, BellaVista and its wholly owned subsidiary, Frank Norris
Condominiums, Inc., (collectively referred to as "BellaVista") were named as a
defendant in an adversary proceeding in the bankruptcy of 1314 Polk Street
Associates, LLC ("1314 Polk"). In this action, 1314 Polk Street Associates, LLC
v BellaVista Capital, Inc. et al., the bankruptcy trustee has filed the lawsuit
on behalf of 1314 Polk claiming damages arising from 1314 Polk's transfer of 14
condo units to BellaVista. BellaVista believes it has strong and viable defenses
and plans to vigorously defend these actions. The Company has hired expert
bankruptcy counsel to defend BellaVista in the adversary proceeding.
In June 2009, the Company was made aware of a dispute and a complaint filed
relative to a real estate commission on the sale of the Cummings Park retail
space previously mentioned. BellaVista believes it has strong and viable
defenses and plans to vigorously defend these actions. The Company has hired
expert real estate counsel to defend BellaVista in the adversary proceeding.
As of July 1, 2009, the total balance owed on the financing lines secured by
trust deeds to the Brighton and Pulgas properties was reduced by $600,000 to
$2.4 million, as we received a partial payoff from a borrower related to the
sale of a condo unit.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
General
Our material financial transactions have been purchasing and holding a portfolio
of construction mortgage loans, and the construction and sale of real estate
acquired through foreclosure or deed in lieu of foreclosure. Statements
contained in this Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in this Form 10-Q, which are
not historical facts, may be forward-looking statements. Forward-looking
statements include statements which are predictive in nature, which depend upon
or refer to future events or conditions, which include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," or similar
expressions. In addition, any statements concerning future financial performance
(including future revenues, earnings or growth rates), ongoing business
strategies or prospects, and possible future actions, which may be provided by
management, are also forward-looking statements. These statements are not
guaranties of future performance. Forward-looking statements are based on
current expectations and projections about future events and are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. These risks include those described under the heading
"Risk Factors" included in Part II, Item 1A above. Investors are cautioned not
to attribute undue certainty to these forward-looking statements, which speak
only as of the date of this Form 10-Q. We undertake no obligation to publicly
release any revisions to these forward-looking statements, to reflect events or
circumstances after the date of this Form 10-Q, or to reflect the occurrence of
unanticipated events, other than as required by law.
OVERVIEW
BellaVista Capital was incorporated in March 1999 as Primecore Mortgage Trust,
Inc. Since incorporation and through December 2000, Primecore engaged in the
business of providing loans for the development of primarily high-end single
family residential real estate. During 1999 and 2000 Primecore raised the
capital to fund these loans from the sale of shares of Preferred Stock. This
capital was invested primarily in high priced San Francisco Bay Area residential
real estate at a time when prices were increasing at a rapid pace. By the end of
2000, Primecore had loan commitments of $436 million on 117 loans with over $216
million funded.
After 2000, the market for high-end real estate in the San Francisco Bay Area
began to deteriorate; Primecore began to experience borrower defaults and
through 2003 took title to 48 properties by way of foreclosure or deed in lieu
of foreclosure. Primecore also recognized significant impairments in its
portfolio. The impairment of the investment portfolio resulted in substantial
operating losses. The Company realized that these net operating losses could be
carried forward and used to reduce future taxable income. In prior years, the
company used its REIT status, and the payment of dividends, to eliminate
corporate level taxation. However, the REIT rules restricted the types of loans
the Company could make. In particular, the Company was prohibited from making
loans with equity participation. With the ability to carry forward prior years'
net operating losses to offset future taxable income, the Company was free to
terminate its REIT status, which it did effective January 1, 2004, and was no
longer restricted in the types of investments it could make.
In April 2004 Primecore changed its name to BellaVista Capital in order to
reflect its new business focus. During 2004 new management focused on completing
and liquidating the existing portfolio of assets, internalizing operations,
resolving outstanding legal issues and developing a pipeline of new investment
opportunities. In addition to the completion and sale of a number of our
non-performing investments, management completed the transition to internal
management and reduced continuing operating expenses.
In October 2007, the Board began a restructuring program that has ultimately
resulted in significant operating cost savings and increased efficiencies,
including: closing the Palo Alto office, terminating all direct employees,
outsourcing the administration and asset management functions and enlisting a
Board member to function as CEO on an as needed basis as a consultant.
The current real estate market is best characterized by significant erosion in
real estate values and significant decrease in rate of inventory absorption;
thus the Company has currently discontinued investments in subordinated debt and
equity investments. Any investments made during this very difficult economic
period, which we believe is expected to last through 2010, will range between
$0.5 million and $2.0 million and will typically be secured by first deeds of
trust requiring monthly interest payments.
14
As a result of the current difficult market conditions, the Company has taken
control of the underlying project associated with certain nonperforming loans
and equity partnership investments. Control was obtained by settlement with the
borrower or by assuming the role of managing partner. These properties are now
categorized as Investments in real estate developments (REOs). For each of these
properties, the Company has made a determination on how to maximize value based
on the local market conditions, potential for future appreciation, and the
properties' operating and debt structure. In a number of cases, these REO's are
being operated as either a rental or a hybrid of units used for rental and units
available for sale. In a particular case of a mixed use, retail and residential
project, it was deemed appropriate (1) to auction the residential units due to
its existing debt structure and (2) to lease and hold the commercial space, a
portion of which closed escrow May 22, 2009.
In terms of our path forward, as was discussed at the most recent annual
shareholders meeting, the Company has evaluated the climate and analyzed the
existing portfolio and is not planning on make any new investments in the
foreseeable future. The Company is in the process of managing the existing REO
and other properties under its control to maximize their value, with the goal of
selling these properties over the next several years (market permitting) with
proceeds first being used to retire existing debt and then being used to fund
repurchase of shares from the existing shareholders. It should clearly be noted
that the timing for share repurchases is highly dependent on when properties are
sold, at what price and when all of the existing debt is repaid.
RESULTS OF OPERATIONS
Three and Six Months Ended March 31, 2009 vs. Three and Six Months Ended
March 31, 2008
Revenues
We reported revenues from Loans Receivable Secured by Real Estate totaling
$143,214 and $276,335 during the three months and six months ended March 31,
2009, respectively compared with $130,972 and $455,018 during the three months
and six months ended March 31, 2008, respectively. The decrease in revenues was
due to a decrease in the average amount invested in these loans during the
comparable periods and a decline in our average return due to nonperforming
loans in our portfolio.
We reported zero revenues from our Joint Venture Investments in Real Estate
Developments during the three months and six months ended March 31, 2009
compared with $673,589 and $965,460 during the three months and six months ended
March 31, 2008. These revenues are derived from repayment of loans and equity
participations. Due to nonperformance, the Company assumed control of several of
these properties and discontinued accruing interest payments. The Company will
then recognize revenues from certain of these properties upon their sale.
During the three months and six months ended March 31, 2009 we reported revenues
totaling $130,833 and $885,833 from our Investments in Real Estate Developments
compared with zero revenues during the three months and six months ended March
31, 2008. This increase is due to sales of units that were under development in
the prior comparative period.
During the three months and six months ended March 31, 2009, we reported
revenues totaling $234,149 and $428,200 from our investment in rental property
compared with zero revenues during the three months and six months ended March
31, 2008. This was due to the conversion of MSB Brighton, one of the Company's
Investments in Real Estate Development to a rental property in the latter half
of 2008.
During the three months and six months ended March 31, 2009, rental expenses
excluding depreciation were $173,746 and $303,058, respectively compared with
zero during the three months and six months ended March 31, 2008. The increase
is due to converting the investment in MSB Brighton to a rental property from a
property held for sale. For the three months and six months ended March 31,
2008, Brighton was reported as a joint venture investment.
Expenses
As a result of the continuing downturn in the real estate market and significant
uncertainties associated with future investments, we have discontinued funding
any new equity investments and ceased funding new trust deed investments. In
order to streamline the operations of the company and reduce operating expenses
15
to compensate for the eroding current market conditions and declining property
values, in 2007 the Board of Directors determined that the best course of action
to preserve shareholder's value was to begin implementation of a restructuring
program. The Board has continued to make significant progress under this program
which has ultimately resulted in significant operating cost savings and
increased efficiencies, including: closing the Palo Alto office, terminating all
direct employees, outsourcing the administration and asset management functions
and enlisting a Board member to function as CFO on an as needed basis and
another board member to assume the responsibilities of CEO on an as needed basis
as a consultant.
We group our expenses in three categories: BellaVista operating expenses, REO
expenses, and impairments. BellaVista operating expenses are associated with the
ongoing operations of the Company. REO expenses include all of the carrying
costs for REO properties such as property taxes, insurance, maintenance,
marketing, legal, debt service and general and administrative expenses.
During the three months and six months ended March 31, 2009 BellaVista operating
expenses were approximately $267,338 and $601,008, compared with $374,215 and
$691,511 for the three months and six months ended March 31, 2008. This decrease
is mainly due to decreased salaries, facilities, legal and accounting, and
administration expenses. The following items should be noted to understand or
evaluate actual cash operating expenses. (1) The Asset management fees for the
six months ended March 31, 2009 include a one-time, non-recurring startup fee of
$75,000 that includes systems and financial records migration and conversions,
new office space setup at Cupertino Capital including phone and IT systems, and
all preparatory work done from July 2008 to September 2008. (2) The BellaVista
operating expenses for the three months and six months ended March 31, 2009
include reserve for bad debt expense and depreciation of fixed assets of
approximately $42,540 and $97,029, respectively. Excluding the reserve for
uncollectible interest expense and depreciation expense, BellaVista operating
expenses would have been $224,798 and $503,979 for the three and six months
ended March 31, 2009, respectively.
During the three months and six months ended March 31, 2009, REO expenses were
$105,639 and $163,250 compared with $63,250 and $106,251 during the three months
and six months ended March 31, 2008, respectively. This increase is due to the
increased number of REO properties in 2009.
We recorded impairment charges totaling $90,307 and $2,943,295 during the three
months and six months ended March 31, 2009, respectively compared with
$2,266,161 and $8,355,876 during the three months and six months ended March 31,
2008, respectively. The impairments reported during the three months and six
months ended March 31, 2009 were related to certain investments in which their
values had declined due to declining real estate prices and longer than normal
estimated marketing periods. The recorded impairments during the three months
and six months ended March 31, 2008 related to certain investments that declined
in value due to the prevailing conditions for the real estate market coupled
with slower sales rates on these investments than projected. We have impaired
these investments based on our estimate of the decrease in value resulting from
the increase in costs associated with holding or renting the properties for an
extended period of time in this highly uncertain real estate market.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity means the need for, access to and uses of cash. Our principal source
of liquidity is the repayment of our real estate investments. Our principal
demands for liquidity are funds that are required to satisfy obligations under
existing loan commitments, costs of operating and holding investments in real
estate development for future sales, and operating expenses.
Sources of Cash
As of March 31, 2009 our primary sources of liquidity were proceeds from the
sale of our completed investments in REO properties, investments in trust deeds
that paid interest monthly, our lines of credit and the cash we held in the
bank.
We typically receive repayment on our investments when the development project
has been completed and sold or refinanced to third parties. Accordingly, our
repayments are a function of our developers' ability to complete and sell the
development properties in which we have invested. During the six months ended
March 31, 2009 we received repayments, totaling $1.5 million compared with $7.3
million during the six months ended March 31, 2008. Due to the continued
weakness and uncertainty in the real estate and credit markets in 2009, we
16
believe that there is a high degree of uncertainty in estimating the timing of
the sales or the proceeds we might receive from the sale of our investments.
It is possible that our repayments may not be sufficient to meet our commitments
including REO and operating expenses and we may be forced to sell assets or seek
financing at terms that may not be favorable to us. This would have a negative
impact on the estimated net realizable value of our assets.
At March 31, 2009, we had cash and cash equivalents of approximately $123,397.
During 2008, the Company foreclosed on or took control of a number of projects
that had cash needs ranging from capital needed for project completion to cash
needed for carrying costs and operating expenses, such as the monthly payments
due on the debt encumbering these properties at the time the Company took
control, property taxes, utilities, maintenance and insurance. These cash
requirements were in addition to the cash required to fund the daily operation
of the Company and service existing Company debt. In early fall 2008, the
Company anticipated the need to raise additional cash to fund all of the above
mentioned requirements. In the absence of any near term property sales, the
Company determined that the only viable and reasonable source for the required
funds would be borrowing against its properties to fund these REO property and
Company related requirements. During the second half of 2008, the local,
national and international credit markets were experiencing an unprecedented
crisis and underwriting standards had severely constrained the possibilities for
any traditional commercial or bank financing, particularly for a company that
had recorded annual losses and whose primary assets were REO real estate. During
this time, and in spite of the severe lending constraints, the Company had been
aggressively pursuing negotiations with several interested commercial
institutions. However, during the later phases of these application processes,
what had been positive negotiations with initially favorable responses to
applications were suddenly terminated and, ultimately, rejected in the final
stages of approval. This left the Company in a position such that it was unable
to access commercial financing sources to meet its cash needs in the time
required.
In August, 2008, the Company's Board performed its regular review of cash flow
projections including the incremental cash needed to fund the REO carrying and
operational costs as well as Company operations for the next twelve months. The
Board considered its potential capital sources, and the availability and cost of
capital associated with its limited alternative sources of capital. The Board
determined that it would be in the best interests of the Company to pursue
privately placed debt rather than attempt to raise additional equity. In its
deliberations, the Board determined that the relatively high cost of a private
debt placement, under the prevailing capital market conditions, would
nevertheless be preferred to the sale of additional shares to generate the
needed capital, because the Board determined that efforts to raise equity
capital would have a low probability of success, would be very costly, and take
a much longer time to complete. In addition, the Board concluded that such
equity capital, if available at all, would likely only be available at a price
resulting in both a much higher effective cost of capital (versus private debt
placement) and permanent dilution of the Company's existing shareholders.
Therefore, in order to meet the short-to-medium term cash requirements, the
Board authorized its asset manager, Cupertino Capital, to pursue up to a total
of $3 million of financing lines, that could be accessed as needed on a monthly
basis, through a private placement of debt secured by trust deeds to our
Brighton and Pulgas properties of $1.5 million each. The Board believed that
this financing would provide the necessary cash to fund the REO carrying costs
and operational expenses as well as Company operations and debt service for the
ensuing twelve months. The Board authorized borrowing on what it deemed, at the
time of this placement, to be market rate terms of: 11% interest payable to the
private lenders; a servicing fee of 0.5% per annum and an origination fee of 1%
(if funded from a Company relationship or related party) or 3% (if funded from
an independent third party) payable to Cupertino Capital; and maturity dates of
October 1, 2009 for the line on Brighton and February 1, 2012 for the line on
Pulgas. Additionally, in order to bridge the funding needed in the short to
medium term, Board members were encouraged to fund these loans as these fundings
would be subject to the lower 1% origination fee while Cupertino Capital pursued
other private third parties in the short to medium term and other commercial
lenders for the longer term.
Given the rejections of the aforementioned commercial loan applications and
faced with the Company's short to medium term cash needs as well as the benefit
to the Company of the lower origination fee, Company directors William Offenberg
and Jeffrey Black each offered to make funds available to the Company as needed
on a monthly basis on the authorized terms. The terms of these loans were then
reviewed and approved by the disinterested directors, Mr. Puette and Ms. Wolf.
17
Following that approval, Mr. Black and Mr. Offenberg made funding commitments
and began advancing funds on October 30, 2008. As of March 31, 2009, Mr.
Offenberg and Mr. Black had advanced to the Company totals of $1,695,000 and
$450,000 in principal, respectively, in each case secured by trust deeds to the
identified Company properties. Total interest paid and payable on amounts
advanced by Mr. Offenberg and Mr. Black as of such date were $57,325.57and
$17,288.63, respectively. No principal payments had been made on these loans as
of such date. During the months following this private debt placement, the
Company has continued to seek lower cost conventional financing from commercial
lenders, and the Company is now in the final phases of replacing a large portion
of this higher cost private placement debt with conventional bank financing.
As noted in the Subsequent Events Footnote 11, as of July 1, 2009, the total
balance owed on the Brighton and Pulgas financing lines secured was reduced by
$600,000 to $2.4 million, as we received a partial payoff from a borrower
related to the sale of a condo unit.
The Company expects to continue to borrow against its real estate assets in
order to fund REO and operating expenses, until its cash needs are reduced by
the sale of REO assets requiring funding of such carrying and operating costs,
and until proceeds from the sale of assets and other operating revenues are
otherwise sufficient to pay Company indebtedness, and remaining REO and
operating expenses. The Company believes that it has adequate resources to
secure necessary financing and assure its liquidity for the foreseeable future.
Uses of Cash
The following table sets forth the projected timing and amount of our
obligations through September 30, 2010, without taking into account new
investments that may be made during future periods:
Six months ended Year ended
September 30, September 30,
Obligation Total 2009 2010
- ----------------------- ------------------ ------------------ ------------------
Investment fundings $ 454,388 $ 454,388 $ --
------------------ ------------------ ------------------
Total $ 454,388 $ 454,388 $ --
================== ================== ==================
Investment fundings are the largest use of our cash. During the six months ended
March 31, 2009 we invested approximately $1.4 million in new and continuing
development projects compared with approximately $8.0 million during the six
months ended March 31, 2008. In addition, during the six months ended March 31,
2009 and March 31, 2008, we used cash of approximately $734,000 and $2.6
million, respectively to repurchase BellaVista common stock.
At March 31, 2009, we estimated the costs to complete our investments in real
estate developments plus the remaining funding obligation on our joint venture
investments in real estate developments to be approximately $454,388.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.
Stock Repurchases
In the past, given that certain Company liquidity requirements were satisfied,
we have provided liquidity to our stockholders through the repurchase of
outstanding shares. Because our stock does not trade in any secondary market, no
market value exists for our stock and another method must be used to determine
the repurchase price. The Board of Directors has used the net realizable value
of the Company's assets as well as an assessment of the risk profile for each
investment to guide in the determination of the repurchase price for planned
repurchases as well as Company repurchases in response to unsolicited tender
offers.
STOCKHOLDER LIQUIDITY AND REALIZABLE VALUE OF INVESTMENTS
The realizable value of our assets represents our current estimate of the amount
of proceeds we expect to receive once our investments are completed and ready
for sale. The estimate relies on a number of assumptions including the expected
value of the investment once completed, less applicable selling costs, the
remaining costs and the length of time required to complete the project. Many
factors outside of the Company's control can cause changes in these estimates
18
and produce significantly different results. Furthermore, as noted above, there
is no organized public market for the Company's shares, so the Company's
calculation of the estimated realizable value of its assets per outstanding
share should not be viewed as an estimate of any market value per share, and
there can be no assurance as to the amount or timing of any investment returns
on the shares.
During the period from June 2005 to June 2009, the Company has not used its
funds to pay dividends or distributions or, except in certain extraordinary
circumstances, to redeem shares. Such extraordinary circumstances have included
Company tender offers in response to unsolicited third party tender offers which
the Board deemed inadequately priced and opportunistic. The Board will determine
the timing and terms of any future share redemptions based on available
liquidity, net realizable value, and assessment of the risk profile for each
investment.
The information presented below reconciles the differences between the carrying
value of our investments based on US GAAP and the estimated realizable value of
our investments.
March 31, 2009 September 30, 2008
------------------ ------------------
Loans receivable secured by real estate $ 6,025,297 $ 11,251,773
Joint Venture investments in real estate developments 9,385,815 9,944,197
Investments in real estate developments 21,720,430 19,026,984
Investment in rental property 3,916,209 3,928,429
------------------ ------------------
Total investments in real estate per US GAAP 41,047,751 44,151,383
Collectible interest and preferred return not reportable per US GAAP 2,502,144 4,023,463
------------------ ------------------
Estimated realizable value of investments in real estate $ 43,549,895 $ 48,174,846
================== ==================
Net Realizable Value of Assets per Share
The following calculation determines the estimated net realizable value per
share of stock at March 31, 2009 and September 30, 2008:
March 31, 2009 September 30, 2008
------------------ ------------------
Cash $ 123,397 $ 636,346
Other assets 336,768 682,411
Estimated realizable value of investments in real estate 43,549,895 48,174,846
------------------ ------------------
Total realizable assets 44,010,060 49,493,603
Accounts and notes payable (14,215,771) (13,520,210)
------------------ ------------------
Estimated net realizable assets 29,794,289 35,973,393
Shares outstanding 11,171,433 11,590,870
------------------ ------------------
Estimated net realizable assets per share $ 2.67 $ 3.10
================== ==================
Our estimated net realizable value of assets per share (NRV) was $2.67 at March
31, 2009, a decrease of $0.06 and $0.43 in the three months and six months
ending March 31, 2009. The $0.06 decrease estimated in this quarter is
attributable to a decrease of $0.01 due to additional completion costs for our
MacArthur investment in Oakland and $0.05 due to REO carrying costs and
operational costs. The additional decrease of $0.37 in the 6 month period from
September 30, 2008 is primarily attributable to decreases in the estimated
realizable value of several of our investments as a result of the continuing
significant declines in real estate values and the substantial reduction in
inventory absorption rates, and secondarily attributable to REO carrying costs
and operational costs.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operation covers our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
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
19
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. Management believes the following
critical accounting policies, among others, affect the more significant
judgments and estimates used in the preparation of its consolidated financial
statements.
Valuation and Realizability of Investments
All of our Acquire, Develop, and Construct loans (ADC loans) are classified for
financial reporting purposes as joint venture investments in real estate
developments. We have taken ownership on some ADC loans that are classified as
investments in real estate developments. Such investments are stated at the
lower of cost or fair value. Management conducts a review for impairment on an
investment-by-investment basis whenever events or changes in circumstances
indicate that the carrying amount of an investment may not be recoverable.
Impairment is recognized when estimated expected future cash flows (undiscounted
and without interest charges), typically from the sale of a completed property,
are less than the carrying amount of the investment, plus estimated costs to
complete. The estimation of expected future net cash flows is inherently
uncertain and relies to a considerable extent on assumptions regarding current
and future economics and market conditions. If, in future periods, there are
changes in the estimates or assumptions incorporated into the impairment review
analysis, the changes could result in an adjustment to the carrying amount of
the investments. To the extent that there is impairment, the excess of the
carrying amount of the investment over its estimated fair value, less estimated
selling costs, will be charged to income. We believe that all of our investments
are carried at the lower of cost or fair value; however conditions may change
and cause our ADC loans and investments in real estate to decline in value in 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 include amounts funded under the loan agreements. If our ADC
loans qualified as loans under GAAP, interest and points would be recognized as
income in periods prior to the sale of the underlying property.
In addition to ADC loans, we have made direct equity investments in real estate
joint ventures. These joint venture investments are accounted for in the same
manner as our ADC loans and are classified as joint venture investments in real
estate developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES.
Evaluation of Effectiveness of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and the Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended) as of the end of the fiscal period covered by this Quarterly Report on
Form 10-Q. The Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were not fully effective
as of March 31, 2009 due to the significant deficiency disclosed in item 8A of
the Company's most recent Annual Report on form 10-KSB for the twelve months
ended September 30, 2008.
Internal Control Over Financial Reporting
There have been no changes in the Company's internal controls over financial
reporting during the last quarterly period covered by this Quarterly Report on
Form 10-Q that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
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Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected. Our
disclosure controls and procedures are designed to provide reasonable assurance
of achieving its objectives.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Refer to the discussion under the heading "Litigation" in Note 10 of the Notes
to the Condensed Consolidated Financial Statements (unaudited), included in Part
I, Item 1 above, for a description of certain Legal Proceedings in which the
Company is involved.
ITEM 1A. RISK FACTORS.
General Economic Conditions in Lending Areas.
Approximately 80.2% of our investments are currently located in the San
Francisco Bay Area, 15.18% are in Southern California, 3.38% is in California's
Central Valley, and 1.24% are located in other states of the United States of
America. The potential success of real estate investments in general is subject
to fluctuations in local market conditions, including fluctuations in the supply
of and demand for similar properties, and the success of our investments will
depend, to some extent, on the economic and real estate market conditions
prevailing in the markets where our investments are located. Since the
investments are located in a limited geographical region, they may be subject to
a greater risk of delinquency or default if the industries concentrated there
suffer adverse economic or business developments.
Realization of Assets.
The Company's liquidity and ability to meet its obligations as they become due
are subject to, among other things, its ability to obtain timely repayments or
other dispositions of its investments. Many of the investments rely on the
completion and sale of the developed real estate in order to realize repayment
or other disposition proceeds. In the event that proceeds from repayments or
other investment dispositions are not sufficient to timely meet our commitments
and debt and credit facilities are not extended on terms favorable to us, we may
be forced to sell some of our investments prematurely. In such cases, the amount
of proceeds received could be substantially less than what we would have
expected if we allowed a proper marketing period for the investment. This would
have a negative impact on the estimated net realizable value of our assets and
would force the Company to adopt an alternative strategy that may include
actions such as seeking additional capital or further downsizing. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Other.
In addition, we are subject to other significant business and financial risks,
including but not limited to liquidity, the prevailing market for residential
real estate, fluctuations in prevailing interest rates, timely completion of
projects by developers, uninsured risks such as earthquake and other casualty
damage that may be uninsurable or insurable only at economically unfeasible
costs, and potential environmental liabilities relating to properties on which
we have made investments or received through foreclosure.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(a) Not Applicable.
(b) Not Applicable.
(c) Repurchases of Equity Securities.
Between October 1, 2008 and March 31, 2009, we repurchased 419,437 shares
of our common stock. See Note 9 of the Notes to the Condensed Consolidated
Financial Statements (unaudited) included in Part I, Item 1 above, for a
discussion of this repurchase of shares.
21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS.
(a) Exhibits
Exhibits submitted with this Form 10-Q, as filed with the Securities and
Exchange Commission, or those incorporated by reference to other filings
are:
Exhibit No. Description of Exhibit
3(i) Articles of Incorporation of the Company is incorporated by reference
to Exhibit 3(i) to the Company's Form 10-12 G/A, previously filed on
April 28, 2000
3(ii) Bylaws, Amended March 30, 2000 is incorporated by reference to
Exhibit 3(ii) to the Company's Form 10-12 G/A, previously filed on
April 28, 2000
3(iii) Articles Supplementary of the Company is incorporated by reference
to Exhibit 99.1 to the Company's Form 10-12 G/A, previously filed on
April 28, 2000
3(iv) Specimen Stock Certificate, is incorporated by reference to Exhibit
99.2 to the Company's Form 10-12 G/A, previously filed on April 28,
2000
4.1 Shareholder Rights Agreement dated July 19, 2004 is incorporated by
reference to Exhibit 4.4 in the Form 8-K previously filed July 20,
2004
10.1 Compensation Agreement dated May 12, 2007 between BellaVista Capital,
Inc. and Michael Rider is incorporated by reference to Exhibit 10.1 to
the Company's March 31, 2007 Form 10-QSB, previously filed on May 21,
2007
10.2 Compensation Agreement dated May 12, 2007 between BellaVista Capital,
Inc. and Eric Hanke is incorporated by reference to Exhibit 10.2 to
the Company's March 31, 2007 Form 10-QSB, previously filed on May 21,
2007
10.3 Compensation Agreement dated September 25, 2007 between BellaVista
Capital, Inc. and William Offenberg, is incorporated by reference to
Exhibit 10.4 to the Company's Annual Report on Form 10-KSB for the
year ended September 30, 2007, filed on December 31, 2007
10.4 Management Agreement between BellaVista and RMRF Enterprises, Inc.,
dba Cupertino Capital is incorporated by reference to Exhibit 10.4 to
the Company's Annual Report on Form 10-KSB for the year ended
September 30, 2008, filed on January 3, 2009
11.1 Statement regarding computation of per share earnings
14.1 Code of Ethics is incorporated by reference to Exhibit 14.1 to the
Company's 2003 Form 10-K, previously filed on April 14, 2004
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: July 22, 2009 /s/ WILLIAM OFFENBERG
-----------------------------
William Offenberg, Chief Executive Officer
23