-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QAqzNHcVW0qSY4bT5PexHSJwUF3mKLXJQk5qHiOVqBku7nOK6pVhpL8CSw2ngy3c 8zt9sHa4J4RAV+ykGim1iQ== 0001011723-09-000002.txt : 20090123 0001011723-09-000002.hdr.sgml : 20090123 20090123155101 ACCESSION NUMBER: 0001011723-09-000002 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20090123 DATE AS OF CHANGE: 20090123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELLAVISTA CAPITAL INC CENTRAL INDEX KEY: 0001086670 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 943324992 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-30507 FILM NUMBER: 09542299 BUSINESS ADDRESS: STREET 1: 420 FLORENCE STREET, SUITE 200 CITY: PALO ALTO STATE: CA ZIP: 94301 BUSINESS PHONE: 6503283060 MAIL ADDRESS: STREET 1: 420 FLORENCE STREET, SUITE 200 CITY: PALO ALTO STATE: CA ZIP: 94301 FORMER COMPANY: FORMER CONFORMED NAME: PRIMECORE MORTGAGE TRUST INC DATE OF NAME CHANGE: 20000425 10KSB 1 bellavista10k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------ FORM 10-KSB Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended September 30, 2008 -------------------------------- 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 Boulevard Los Gatos, CA 95030 (Address of principal offices) (408 354-8424) ((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 $17 0.01 per share (Title of class) 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 [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] State issuer's revenues for its most recent fiscal year: $12,199,295 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 a specified date within the past 60 days: N/A. The number of shares outstanding of each of the issuer's classes of common equity as of December 31, 2008: 11,171,433 Shares of Common Stock were outstanding Transitional Small Business Disclosure Format: Yes [ ] No [X] This Annual Report on Form 10-KSB 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 the Financial Statements referred to under Item - 7 Financial Statements, at Footnote 1 under the caption "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. The following information should be read in conjunction with the Financial Statements and notes thereto included in this Form 10-KSB. PART I ITEM 1. DESCRIPTION OF BUSINESS Business Focus and Strategies Organized in 1999 as a real estate investment trust or "REIT," we invest in residential real estate development projects. We generally invest in for-sale single-family or multi-family projects, typically structured as secured construction loans, secured subordinated loans, mezzanine loans, or equity investments. We will also consider investments in commercial real estate. We seek to invest throughout California; however, we have invested and will continue to invest in other states when presented with suitable opportunities. 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 that we structure as loans 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 unsecured loans to development entities or take an ownership interest in a development entity. In such circumstances we typically require a shared appreciation interest or other equity participation. 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 advanced as well as advanced interest and fees upon maturity of the loan. The loan maturity date is the earlier of the date of sale of the secured real estate or the date stated in the loan documents. Risk Factors General Economic Conditions in Lending Areas. Our business plan seeks to diversify our investments throughout California and other states in the western United States of America. Approximately 95.47% of our investments are currently located in the San Francisco Bay Area, 2.52% are in Southern California, .52% is in California's Central Valley, and 1.49% 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. 2 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 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. Company Management Investment Origination. We engage persons skilled in loan underwriting, disbursement and monitoring, and the various business and legal issues that may be involved with real estate lending and investing. Our management staff 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. Proposed investments are evaluated to determine whether the investment is of a type typically made by us, whether the developer has the experience necessary to manage the project, whether the collateral is sufficient to meet our investment standards, and whether the investment meets criteria and objectives set forth by the Board of Directors. The Board of Directors must approve any new investment. Collateral valuation. We utilize the experience of our management staff, third party appraisals or other information deemed useful to make assessments of a proposed project's viability and projected value in order to determine whether 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. We typically require third party appraisals to support valuation. 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. The Company plans to hold mortgage loans to maturity, and have not embarked on selling loans in any secondary market, nor are we aware that an efficient 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. 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 2. DESCRIPTION OF PROPERTY. The Company owns interests in real property, including joint venture interests in real property and certain real property that we have acquired through foreclosure. Our policy is to maximize the value of the foreclosed properties prior to liquidation. In some cases this may involve completing construction, sometimes through a subsidiary, and then marketing the property for sale. The properties we own are described in Notes 5 and 6 to the Consolidated Financial Statements contained as Item 7 of the Form 10-KSB and begin on page FS-1. 3 ITEM 3. LEGAL PROCEEDINGS. Legal proceedings are described in Note 12 to the financial statements included in the Form 10-KSB under Item 7, under the caption "Litigation." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of our shareholders during the year ending September 30, 2008 except for the reelection of directors at the annual meeting of shareholders. PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities are described in Note 10 to the financial statements included in the Form 10-KSB under Item 7, under the caption "Shareholder's Equity." ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION General Statements contained in this Item 6, "Management's Discussion and Analysis or Plan of Operation,'' ("MD&A") and elsewhere in this Form 10-KSB, 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-KSB. 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-KSB 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 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, 2008 the Company's available Federal net operating loss carry forwards were approximately $101.6 million. If these net operating loss carry forwards are fully utilized to offset future taxable income, at current Federal and California state tax rates, it would save the Company approximately $43.5 million in tax payments. 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 our non-performing investments, management completed the transition to internal management and significantly reduced continuing operating expenses. 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 4 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. As a result of the current difficult market conditions, the Company has taken control of 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 Direct investments in real estate developments. 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 Investments in Real Estate are being operated as either a rental or a hybrid of units used for rental and units available for sale. In a particular case, it was deemed appropriate to (1) auction the residential units for one of the properties due to its existing debt structure and to (2) lease and hold the commercial space. RESULTS OF OPERATIONS We reported revenues from Loans Receivable Secured by Real Estate totaling approximately $1.1 million during the year ended September 30, 2008 compared with $1.7 million during the year ended September 30, 2007. The decrease in revenues was due to (1) a decrease in the average amount invested in these loans during the comparable periods; and (2) a decline in our average return due to nonperforming loans in our portfolio. We reported revenues of approximately $2.8 million from our Joint Venture Investments in Real Estate Developments during the year ended September 30, 2008 compared with $1.9 million during the year ended September 30, 2007. Our revenues are derived from repayment of loans and equity participations. During the year ended September 30, 2008 we sold a number of units related to these investments which resulted in higher revenues. During the year ended September 30, 2008 we reported revenues totaling approximately $7.7 million from our Investments in Real Estate Developments compared with revenues of $11.1 million during the year ended September 30, 2007. The revenues decreased during 2008 compared with 2007 due to fewer units sold than were projected. During the year ended September 30, 2008, we reported revenues totaling $206,524 from our investment in rental property compared with zero revenues during the year ended September 30, 2007. This was due to the conversion of MSB Brighton, one of the Company's Investments in Real Estate Development to a rental property. Expenses We group our operating expenses in three categories: recurring expenses, nonrecurring expenses, and impairments. Recurring expenses are associated with the ongoing operations of the Company. Nonrecurring expenses are legal costs and carrying costs of real estate owned (REO) included with investments in real estate. During the year ended September 30, 2008 our recurring operating expenses were approximately $2.0 million compared with $1.5 million for 2007. The increase is principally due to increased rental and depreciation expenses in 2008. 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 significantly curtailed funding new trust deed investments while we wait for the market to stabilize. In order to streamline the operations of the company and its expense structures to the eroding current market conditions and declining property values, the Board of Directors determined that the best course of action to preserve shareholder's value was to outsource a significant portion of the Company's day-to-day administrative and asset management functions. As a result, effective September 30, 2008 we terminated the positions of the Chief Investment Officer, the Chief Executive Officer, and the two administrative employees. The Executive and Financial Officer responsibilities have been assumed by two of the existing board members, with a third member also overseeing the operational aspects of the business on an as-needed basis. In addition, the day-to-day administrative and asset management functions have been outsourced to a professional asset manager, Cupertino Capital. The agreement governing the services to be provided by, and the terms of the Company's relationship with, Cupertino Capital is filled with this report as Exhibit 10.4. During the year ended September 30, 2008 our nonrecurring operating expenses were approximately $362,000 compared with $327,000 during the year ended September 30, 2007. The increase in nonrecurring operating expenses was due to the cost associated with carrying and warranty costs of prior investments in real estate. 5 During the year ended September 30, 2008 our rental expenses were approximately $264,000 compared with $0 during the year ended September 30, 2007. The increase is due to converting the investment in MSB Brighton to a rental property from a property held for sale. For the year ended September 30, 2007, Brighton was under construction and was reported as a joint venture investment. We recorded impairment charges totaling approximately $17.0 million during the year ended September 30, 2008, compared with $7.7 million during the year ended September 30, 2007. The recorded impairments during 2008 pertain to investments that suffered significant declines in values due to the prevailing conditions for the real estate market coupled with slower sales rates on these investments than projected. We have impaired our investments based on our estimate of the resulting decrease in value due to these two factors as well as the increase in costs associated with holding or renting the properties for an extended period of time in this highly uncertain real estate market. Capitalized interest cost associated with our borrowings was $53,781 during the year ended September 30, 2008 compared with $9,522 during the year ended September 30, 2007. The increase was due to an increase in our outstanding debt during the year ended September 30, 2008, mainly resulting from the consolidation of the Cummings Park project. 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 September 30, 2008 our primary source of liquidity was the collection of our investments in real estate, $3.0 million in lines of credit and the cash we had in the bank. We do not currently have any plan to sell equity or issue debt securities. However, we do have the ability to borrow money from various funding sources using our real estate investments as collateral if we determine that we need additional liquidity. 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 year ended September 30, 2008 we received repayments, including income, totaling $17.9 million compared with $28.2 million during the year ended September 30, 2007. The following table summarizes our liquidity expectations based on current information regarding project completion and sales absorption assumptions for the investments we held at September 30, 2008. The expected proceeds in the following table are higher than our net realizable value estimates because they include our estimated costs to complete and are presented net of $12,453,057 in secured debt. Expected Proceeds ------------------------ Scheduled investment completion: Year ended 09/30/09 $ 5,467,548 Year ended 09/30/10 6,394,008 Year ended 09/30/11 7,820,773 Year ended 09/30/12 13,484,600 Year ended 09/30/13 3,767,959 ------------------------ Total $ 36,934,888 ======================== It is possible that our repayments may not be sufficient to timely meet our commitments 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. 6 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: Year Year ended ended Total September 30, 2009 September 30, 2010 ------------------ ------------------- ------------------- Investment fundings $ 948,766 $ 948,766 $ -- ------------------ ------------------- ------------------- Total $ 948,766 $ 948,766 $ -- ================== =================== =================== Investment fundings are the largest use of our cash. During the year ended September 30, 2008 we invested $14.9 million in continuing development projects compared with $27.9 million during the year ended September 30, 2007 At September 30, 2008, 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 $948,766. 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, 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 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 January 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.
As of September 30, -------------------------------------- 2008 2007 -------------------- ----------------- Loans receivable secured by real estate $ 11,251,773 $ 11,163,000 Joint Venture investments in real estate developments 9,944,197 33,704,973 Investments in real estate developments 19,026,984 -- Investment in rental property 3,928,429 -- -------------------- ----------------- Total investments in real estate per US GAAP 44,151,383 50,081,193 Collectible interest and preferred return not reportable per US GAAP 4,023,463 4,487,203 -------------------- ----------------- Estimated realizable value of investments in real estate $ 48,174,846 $ 54,968,396 ==================== =================
7 Net Realizable Value of Assets per Share The following calculation determines the estimated net realizable value per share of stock at September 30, 2008 and 2007:
As of September 30, -------------------------------------- 2008 2007 -------------------- ----------------- Cash $ 636,346 $ 1,759,241 Other assets 682,411 1,015,379 Estimated realizable value of investments in real estate 48,174,846 54,968,396 -------------------- ----------------- Total realizable assets 49,493,603 57,743,016 Accounts and notes payable (13,520,210) (597,313) -------------------- ----------------- Estimated net realizable assets $ 35,973,393 $ 57,145,703 Shares outstanding 11,590,870 13,951,452 -------------------- ----------------- Estimated net realizable assets per share $ 3.10 $ 4.10 ==================== =================
Our estimated net realizable assets per share were $3.10 at September 30, 2008, a decrease of $1.00 per share from the $4.10 we estimated at September 30, 2007. The decrease in the estimated realizable value of several of our investments was the result of the continuing significant declines in real estate values and the substantial reduction in inventory absorption rates. Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition or Plan 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 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 8 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. During the year ended September 30, 2008, we acquired control and became the 100% owner of two of our joint ventures investments MSB Brighton, a multi-unit condominium conversion in California and Cummings Park Associates, a residential and retail project in East Palo Alto. As discussed earlier, due to weak market conditions we chose to convert the MSB Brighton project to a rental property and thus classified it as an Investment in Rental Property on our financial statements. ITEM 7. FINANCIAL STATEMENTS Required financial statements and supplementary data are included in this Form 10-KSB commencing on page FS-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 8A. CONTROLS AND PROCEDURES Evaluation of Effectiveness of Disclosure Controls and Procedures Our management, including our Chief Executive Officer and our Chief Financial Officer, have evaluated our 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 period ended September 30, 2008, the period covered by this Annual Report on Form 10-KSB. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were not fully effective as of September 30, 2008 due to the significant deficiency described below. Management's Annual Report on Internal Control Over Financial Reporting Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of September 30, 2008 based on the framework set forth in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness in internal control over financial reporting is defined by the Public Company Accounting Oversight Board's Audit Standard No. 5 as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting. 9 Our management conducted an evaluation of the effectiveness of our internal control over financial reporting. Based on this evaluation, management concluded that our internal control over financial reporting was not fully effective as of September 30, 2008. Management's assessment identified the following significant deficiency in internal control over financial reporting: the changes in personnel and systems during fiscal 2008 reduced management's ability to maintain the financial control system and produce financial statements. In order to address this significant deficiency, the Company's management and the board of directors decided to meet on a regular basis to review and approve significant transactions affecting the financial statements, to review to the financial information reported on forms 10-QSB and 10-KSB, and to seek expertise as deemed necessary in critical accounting and financial reporting matters. This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report. Changes in Internal Control Over Financial Reporting As noted above, the Company hired an independent management company to help administer the company's operations. The changes are still being evaluated to determine the ongoing effect on internal control. ITEM 8B. OTHER INFORMATION None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Our Board of Directors consists of four director positions. Our directors, executive officers and senior officers and their positions, as of the date of this filing, are: Name Position - ---- -------- William Offenberg Executive Chairman of the Board and Chief Executive Officer Robert Puette Director Jeffrey Black Treasurer, Chief Financial Officer and Director Patricia Wolf Secretary and Director The business background and experience of our directors and executive officers is as follows: William Offenberg, age 55, 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. 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 Operating Partner, Mr. Offenberg has served in a variety of executive and board positions at various Morgenthaler portfolio companies. 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 66, 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 10 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 Bentek Corporation (Private), Fat Spaniel Corporation (Private), AuditSolutions, Inc. (Private), Angstrom Power, Inc. (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 54 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 30 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 Santa Clara University. Patricia Wolf, age 62, is currently 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. 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 four director positions. Mr. Puette is a Class I director and his term expires as of the annual meeting of shareholders for the fiscal year ended in 2009. Mr. Black and Ms. Wolf are Class II directors and their terms expire as of the meeting for the fiscal year ended in 2010. Mr. Offenberg is a Class III director, and his term expires as of the meeting for the fiscal year ended in 2009. 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. The full Board acts to nominate candidates for the Board, as there is no separate nominating committee. There have been no changes during the year covered by this report in the procedures for nomination or by which shareholders may recommend nominees to the Board. Upon Mr. Rider's resignation from the Board of Directors as of September 30, 2008, a resolution was passed to decrease the number of directors from five to four. 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. 11 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 financial expert, Robert Puette, who has 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 fiscal year ended 2008, or written representations that no such reports were required to be filed with the Securities and Exchange Commission, the Company believes that during the year ended September 30, 2008, 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. 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 incorporated by reference as Exhibit 14.1 to this report. ITEM 10. EXECUTIVE COMPENSATION. Compensation of Officers
Summary Compensation Table - ---------------- ------ ------------ ---------- ---------- ---------- ---------- ---------- ----------- ---------- Name Year Salary Bonus Stock Option Non- Nonquali- All Total and ($) ($) Awards Awards Equity fied Other ($) Principal ($) ($) Incentive Deferred Compen- Position Plan Compen- sation Compen- sation ($) sation Earnings ($) ($) - ---------------- ------- ----------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- Michael 2008 $250,000 $ 7,500 0 0 0 0 0 $257,500 Rider, Chief Executive Officer, ------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- Director 2007 $250,000 $12,500 0 0 0 0 0 $262,500 - ---------------- ------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- Eric 2008 $103,846 0 0 0 0 0 0 $103,846 Hanke, Chief Investment ------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- Officer, 2007 $150,000 $20,500 0 0 0 0 0 $170,500 Secretary - ---------------- ------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- ----------
On September 30, 2008, the Company terminated Mr. Rider. According to the terms of his separation agreement, Mr. Rider shall receive payment of $125,000, in the form of salary continuance from the date of his termination to March 31, 2009. 12 In addition Mr. Rider received a payment of $7,500. Mr. Rider has agreed to provide assistance to the Company on an as needed basis during this six month period. On November 30, 2007, the Company terminated Mr. Hanke. According to the terms of his employment agreement Mr. Hanke received payments of $75,000 in the form of salary continuance from the date of his termination to May 31, 2008.
Outstanding Equity Awards At Fiscal Year-End - -------------------------------------------------------------------------------------------------------------------- Name Number Number Equity Option Option Number Market Equity Equity of of Incentive Exercise Expiration of Shares Value of Incentive Incentive Securities Securities Plan Price Date or Units Shares or Plan Plan Underlying Underlying Awards; ($) of Stock Units of Awards; Awards; Unexercised Unexercised Number That Have Stock Number Market or Options Options of Not That Have of Payout (#) (#) Securities Vested Not Unearned Value Exercisable Unexercisable Underlying (#) Vested Shares, Of Unexercised ($) Units or Unearned Unearned Other Shares, Options Rights Units or (#) That Have Other Not Rights Vested That Have (#) Not Vested ($) - -------------------------------------------------------------------------------------------------------------------- None - --------------------------------------------------------------------------------------------------------------------
Compensation of Directors
- --------------- ------------- ------------- ------------- -------------- --------------- --------------- ------------- Name Fees Stock Option Non-Equity Nonqualified All Other Total Earned Awards Awards Incentive Deferred Compensation ($) Or ($) ($) Plan Compensation ($) Paid in Compensation Earnings Cash ($) ($) ($) - --------------- ------------- ------------- ------------- -------------- --------------- --------------- ------------- William $44,500 0 0 0 0 $84,725 $129,225 Offenberg - --------------- ------------- ------------- ------------- -------------- --------------- --------------- ------------- Robert 38,000 0 0 0 0 0 38,000 Puette - --------------- ------------- ------------- ------------- -------------- --------------- --------------- ------------- Patricia 38,000 0 0 0 0 0 38,000 Wolf - --------------- ------------- ------------- ------------- -------------- --------------- --------------- ------------- Jeffrey 46,000 0 0 0 0 0 46,000 Black - --------------- ------------- ------------- ------------- -------------- --------------- --------------- -------------
As Chairman of the Board, Mr. Offenberg received $30,000 while Messrs. Puette, Black and Ms. Wolf received $25,000 each for their participation in our standard board meetings. All directors excluding direct management employees are also compensated $1,000 for every special board meeting they attend. On September 25, 2007, the Company entered into an agreement to compensate William Offenberg, as Executive Chairman of the Board. The compensation paid Mr. Offenberg during the fiscal year covered by this report under such agreement is shown under the "All Other Compensation" column in the above table. 13 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 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. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The following table presents information regarding the beneficial ownership of the only known beneficial owners of in excess of 5% of our outstanding common shares. Security Ownership of Certain Beneficial Owners Number Percent Title of Class Name and Address of Beneficial Owner of Shares of Class -------------- ----------- Common Stock MacKenzie Patterson Fuller, LLC 1,390,046 12.44 1640 School Street Moraga, California 94556 Jay Duncanson 658,735 5.90 c/o Menlo Advisors 800 Oak Grove Avenue Menlo Park, CA 94025 -------------- ----------- Total 2,048,781 18.34 ============== =========== The following table presents information regarding the beneficial ownership of our capital stock as of December 31, 2008 of: (1) each of our directors and executive officers; and (2) all of our directors and executive officers as a group. 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 3.50 Jeffrey Black 250,852 2.16 Patricia Wolf 167,030 1.44 William Offenberg 107,404 * ------------------ ------------------- Total 930,527 8.03 ================== =================== * Less than one percent of our outstanding capital stock. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Two out of four of the current members of the Board, William Offenberg and Jeffrey Black act as executive officers of the Company and cannot be considered independent directors while the other two members of the Board are considered independent, as that term is defined under New York Stock Exchange Rule Section 303A, the NYSE's Corporate Governance Rules. Under those Rules, no director qualifies as "independent" unless the Board of Directors affirmatively determines that the director has no material relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company). Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others. However, as the concern is independence from management, the NYSE does not view ownership of even a significant amount 14 of stock, by itself, as a bar to an independence finding. Accordingly, while Mr. Puette and Ms. Wolf own shares of the Company's common stock, the Board views these directors/nominees as independent under these standards. In addition, a director is not independent under the NYSE Rules if: (i) the director is, or has been within the last three years, an employee of the Company, or an immediate family member is, or has been within the last three years, an executive officer, of the Company; (ii) the director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $100,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service; (iii) (A) the director or an immediate family member is a current partner of a firm that is the Company's internal or external auditor; (B) the director is a current employee of such a firm; (C) the director has an immediate family member who is a current employee of such a firm and who participates in the firm's audit, assurance or tax compliance (but not tax planning) practice; or (D) the director or an immediate family member was within the last three years (but is no longer) a partner or employee of such a firm and personally worked on the Company's audit within that time; (iv) the director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the Company's present executive officers at the same time serves or served on that company's compensation committee; or (v) the director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other company's consolidated gross revenues. ITEM 13. EXHIBITS. a. Financial Statements. The following financial information is included as a separate section of this Annual Report on Form 10-KSB: 1. Report of Independent Registered Public Accounting Firms 2. Consolidated Balance Sheets as of September 30, 2008 and 2007 3. Consolidated Statements of Operations for the years ended September 30, 2008 and 2007 4. Consolidated Statement of Shareholders' Equity for the years ended September 30, 2008 and 2007 5. Consolidated Statements of Cash Flows for the years ended September 30, 2008 and 2007 6. Notes to Consolidated Financial Statements for the years ended September 30, 2008 and 2007 b. Exhibits Exhibits submitted with this Form 10-KSB, 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 are 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 are 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 are 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 15 10.2 Compensation Agreement dated September 25, 2007 between BellaVista Capital, Inc. and William Offenberg, previously filed on December 19, 2007 10.3 Compensation Agreement dated May 12, 2007 between BellaVista Capital, Inc. and Eric Hanke is incorporated by reference to Exhibit 1042 to the Annual Report on Form 10-KSB for the year ended September 30, 2007, previously filed on December 19, 2007. 10.4 Management Agreement between BellaVista and RMRF Enterprises, Inc., dba Cupertino Capital 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 c. Financial Statement Schedules None 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: Year Ended September 30, ------------------------------------- 2008 2007 ------------------ ------------------ Audit fees $ 103,587 $ 162,028 Audit-related fees -- -- Tax fees 49,810 24,170 All other fees -- -- ------------------ ------------------ Total $ 153,397 $ 186,198 ================== ================== 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 years ended September 30, 2008 and 2007 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. 16 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 President, Chief Executive Officer /s/ William Offenberg and Executive Chairman January 21, 2009 - ----------------------------- William Offenberg /s/ Robert Puette Director January 22, 2009 - ----------------------------- Robert Puette Treasurer, Chief Financial Officer /s/ Jeffrey Black Officer and Director January 21, 2009 - ----------------------------- Jeffrey Black /s/ Patricia Wolf Secretary and Director January 21, 2009 - ----------------------------- Patricia Wolf 17 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page No Report of independent registered public accounting firm - PMB Helin Donovan, LLP FS-1 Consolidated condensed balance sheets as of September 30, 2008 and 2007 FS-2 Consolidated statements of operations for the years ended September 30, 2008 and 2007 FS-3 Consolidated statements of shareholders' equity for the years ended September 30, 2008 and 2007 FS-4 Consolidated statements of cash flows for the years ended September 30, 2008 and 2007 FS-5 Notes to consolidated financial statements FS-6 - FS-17 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, 2008 and 2007 and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended September 30, 2008 and 2007 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 included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of 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, 2008 and 2007 and the results of its consolidated operations and its consolidated cash flows for the years ended September 30, 2008 and 2007, in conformity with accounting principles generally accepted in the United States of America. PMB Helin Donovan, LLP San Francisco, California January 15, 2009 FS-1
BELLAVISTA CPITAL, INC. CONSOLIDATED CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 2008 AND 2007 2008 2007 ---------------------- ---------------------- ASSETS: Cash and cash equivalents $ 636,346 $ 1,759,241 Loans receivable secured by real estate September 11,251,773 11,163,000 Joint venture investments in real estate developments 9,944,197 33,704,973 Investments in real estate developments 19,026,984 5,213,220 Investment in rental property, net of accumulated depreciation of $130,038 and $0 at September 2008 and 2007, respectively 3,928,429 -- Fixed assets, net of accumulated depreciation of $12,831 and $95,620 at September 30, 2008 and 2007, respectively 24,379 32,220 Other assets, net 670,836 958,201 ---------------------- ---------------------- Total assets $ 45,482,944 $ 52,830,855 ====================== ====================== LIABILITIES AND SHAREHOLDERS' EQUITY: Notes payable and line of credit 12,453,057 -- Accounts payable and accrued expenses 1,062,168 587,791 Capital lease 4,985 9,521 ---------------------- ---------------------- Total liabilities 13,520,210 597,312 Commitments and contingencies (see note 12) Common stock: par value $0.01, 50,000,000 shares authorized at September 30, 2008 and 2007; 11,590,870 and 13,951,452 shares issued and outstanding at September 30, 2008 and 2007, respectively 115,908 139,514 Additional paid-in capital 103,360,168 108,051,407 Accumulated deficit (71,513,342) (55,957,378) ---------------------- ---------------------- Total shareholders' equity 31,962,734 52,233,543 ---------------------- ---------------------- Total liabilities and shareholders' equity $ 45,482,944 $ 52,830,855 ====================== ======================
FS-2
BELLAVISTA CPITAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 2008 2007 ------------------- ------------------ REVENUES: Revenues from loans receivable $ 1,080,230 $ 1,685,510 Equity in earnings from joint venture investments 2,779,574 1,855,390 Proceeds from sale 7,769,865 11,117,701 Rental revenue 206,524 -- Other income 363,102 17,151 ------------------- ------------------ Total revenues 12,199,295 14,675,752 Cost of investments in real estate developments (7,945,659) (11,288,647) ------------------- ------------------ Gross profit 4,253,636 3,387,105 EXPENSES: Salaries expense 601,484 714,245 Facilities expense 53,212 93,440 Legal and accounting expense 256,790 290,239 Board of directors fees 395,983 318,023 General and administrative expense 176,790 84,432 REO and non-recurring expenses 362,071 327,064 Rental expenses 264,371 -- Depreciation expense 139,245 21,701 Reserve for uncollectible interest 189,849 -- Provision for impairment of real estate investments 17,017,722 7,665,943 ------------------- ------------------ Total expenses 19,457,517 9,515,087 ------------------- ------------------ Net loss from operations (15,203,881) (6,127,982) OTHER INCOME (EXPENSE) Loss on sale of fixed assets (14,888) -- Interest income 36,694 49,932 Interest expense (369,889) (213,496) ------------------- ------------------ Total other income (expense) (348,083) (163,564) ------------------- ------------------ Net loss before tax (15,551,964) (6,291,546) Income tax expense (4,000) (27,395) ------------------- ------------------ Net loss allocable to common stock (15,555,964) (6,318,941) =================== ================== Basic and diluted net loss per common share................................................ $ (1.25) $ ( 0.44) =================== ================== Basic and diluted weighted-average common shares outstanding............................... 12,415,253 14,286,236 =================== ==================
FS-3
BELLAVISTA CAPITAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 Common stock ----------------------------------- Additional Accumulated Shares Amount paid-in capital deficit Total ----------------- ----------------- ----------------- ----------------- ----------------- Shareholders' equity at October 1, 2006 14,991,325 $ 149,913 $ 110,445,001 $ (49,638,437) $ 60,956,477 Stock repurchases (1,039,873) (10,399) (2,393,594) -- (2,403,993) Net loss -- -- -- (6,318,941) (6,318,941) ----------------- ----------------- ----------------- ----------------- ----------------- Shareholders' equity at September 30, 2007 13,951,452 139,514 108,051,407 (55,957,378) 52,233,543 Stock repurchases (2,360,582) (23,606) (4,691,239) -- (4,714,845) Net loss -- -- -- (15,555,964) (15,555,964) ----------------- ----------------- ----------------- ----------------- ----------------- Shareholders' equity at September 30, 2008 11,590,870 $ 115,908 103,360,168 $ (71,513,342) $ 31,962,734 ================= ================= ================= ================= =================
FS-4
BELLAVISTA CAPITAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 2008 2007 -------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (15,555,964) $ (6,318,941) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 139,245 21,701 Loss on sale of fixed assets 14,888 -- Allowance for uncollectible interest 189,849 -- Provision for impairment 17,017,722 7,665,943 Decrease (increase) in other assets 146,840 (210,529) Decrease in accounts payable and accrued expenses (70,357) (263,266) -------------------- -------------------- Net cash provided by operating activities 1,882,223 894,908 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from repayments of investments in real estate 17,895,238 28,198,247 Cash proceeds from consolidation of entities 81,080 -- Investments in real estate (14,866,827) (27,935,945) Proceeds from sale of fixed assets 2,200 -- Purchase of fixed assets (18,454) -- -------------------- -------------------- Net cash provided by investing activities 3,093,237 262,302 CASH FLOWS FROM FINANCING ACTIVITIES: Stock repurchases (4,714,845) (2,403,993) Borrowings under notes payable and line of credit 8,543,781 2,770,000 Repayment of notes payable and line of credit (9,922,755) (2,770,000) Payments under capital lease (4,536) -- -------------------- -------------------- Net cash used in financing activities (6,098,355) (2,403,993) -------------------- -------------------- Net decrease increase in cash and cash equivalents (1,122,895) (1,246,783) Beginning cash and cash equivalents 1,759,241 3,006,024 -------------------- -------------------- Ending cash and cash equivalents $ 636,346 1,759,241 ==================== ==================== Cash paid for interest $ 371,128 -- ==================== ==================== Cash paid for income taxes and franchise fees $ 4,000 2,400 ==================== ==================== Supplementary disclosure of noncash investing and financing activities: Acquisition of property and equipment through a capital lease $ -- $ 9,521 During 2008, the company assumed ownership of three entities and exchanged its investments in real estate of $7,985,161 for noncash assets of $31,098,567 and liabilities of $23,113,406 prior to consolidation of these entities
FS-5 BELLAVISTA CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 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 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. 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 Sands Drive San Jose, Inc., and Frank Norris Condominiums Inc., both of which are California corporations formed for the purpose of developing and selling residential real estate. The Company holds a 100% interest in Cummings Park Associates, LLC a California Limited Liability Company formed to develop and sell a mixed use residential and retail project in East Palo Alto California. The Company also holds a 100% interest in MSB Brighton LLC, currently operated as a rental property. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Consolidation Policy The consolidated financial statements include the accounts of BellaVista Capital, Inc. and its wholly owned subsidiaries: Sands Drive San Jose, Inc., MSB Brighton LLC, Frank Norris Condominiums Inc., and Cummings Park Associates, LLC. All intercompany accounts and transactions have been eliminated in consolidation. Investments acquired or created are evaluated based on Financial Accounting Standards Board ("FASB") Interpretation ("FIN") 46R, "Consolidation of Variable Interest Entities," which requires the consolidation of VIEs in which we are considered to be the primary beneficiary. If the investment is determined not to be within the scope of FIN 46R, then the investments are evaluated for consolidation under the American Institute of Certified Public Accountants' Statement of Position 78-9, "Accounting for Investments in Real Estate Ventures," as amended by Emerging Issues Task Force Issue No. 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. Use of Estimates These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Valuations of investments in real estate include management's best estimates of the amounts expected to be realized on the sale of its investments. The estimates are based on an analysis of the properties, including 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 FS-6 BELLAVISTA CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 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 capital 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. 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 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. FS-7 BELLAVISTA CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 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. 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 September 30, 2008 we had cash totaling approximately $110,960 in excess of the $100,000 limits provided by the Federal Deposit Insurance Corporation. 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 June 2006, the FASB issued Interpretation No.48, "Accounting for Uncertainty in Income Taxes -- An Interpretation of FASB Statement No. 109", (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48 also prescribes a recognition threshold FS-8 BELLAVISTA CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit. Additionally, FIN 48 provides guidance on de-recognition, statement of operations classification of interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of January 1, 2007, as required. The Company has determined that there is no impact in adopting FIN 48. In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS 141R") which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations the Company engages in will be recorded and disclosed following existing GAAP until January 1, 2009. The Company does not expect SFAS 141R will have an impact on its financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions the Company consummates after the effective date. The Company is evaluating the impact of this standard and currently does not expect it to have a significant impact on its financial position, results of operations or cash flows. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 introduces significant changes in the accounting and reporting for business acquisitions and noncontrolling interest ("NCI") in a subsidiary. SFAS 160 also changes the accounting for and reporting for the deconsolidation of a subsidiary. Companies are required to adopt the new standard for fiscal years beginning after January 1, 2009. The Company is evaluating the impact of this standard and currently does not expect it to have a significant impact on its financial position, results of operations or cash flows. In February 2008, The FASB issued FSP No. 140-3, "Accounting for Transfers of Financial Assets and Repurchase Financing Transactions" ("FSP No. 140-3"). FSP No. 140-3 clarifies repurchase financing, which is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties (or consolidated affiliates of either counterparty), that is entered into contemporaneously with, or in contemplation of, the initial transfer. FSP No. 140-3 is effective for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company is evaluating the impact of this standard and currently does not expect the adoption of FSP No. 140-3 to have a significant impact on its financial position, cash flows and results of operations. In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements." The Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. The provisions of SFAS No. 157 were to be effective for fiscal years beginning after November 15, 2007. On February 6, 2008, the FASB agreed to defer the effective date of SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is evaluating the impact of this standard and currently does not expect it to have a significant impact on its financial position, results of operations or cash flows. In February 2007, the FASB issued SFAS No. 159 ", "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value. Effective January 1, 2008, the Company adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115." SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement of certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in the results of operations. SFAS No. 159 also establishes additional disclosure requirements. The Company did not elect the fair value option under SFAS No. 159 for any of its financial assets or liabilities upon adoption. The adoption of SFAS No. 159 did not have a significant impact on its financial position, cash flows and results of operations. FS-9 BELLAVISTA CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 In March 2008, the FASB issued SFAS No. 161 "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. Companies are required to adopt the new standard for be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect the adoption of SFAS 161 to have a significant impact on its financial position, results of operations or cash flows. In June 2007 the FASB ratified EITF No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities" ("EITF 07-3") which requires non-refundable advance payments for goods and services to be used in future research and development activities to be recorded as an asset and the payments to be expensed when the research and development activities are performed. EITF 07-3 is effective for fiscal years beginning after December 15, 2007. Effective January 1, 2008, the Company adopted EITF 07-3. The adoption of EITF 07-3 did not have a significant impact on its financial position, results of operations or cash flows. In April 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 142-3, "Determination of the Useful Life of Intangible Assets," ("FSP 142-3"). The intent of this FSP is to improve consistency between the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), and the period of expected cash flows used to measure the fair value of the intangible asset under SFAS No. 141R. FSP No. 142-3 will require that the determination of the useful life of intangible assets acquired after the effective date of this FSP shall include assumptions regarding renewal or extension, regardless of whether such arrangements have explicit renewal or extension provisions, based on an entity's historical experience in renewing or extending such arrangements. In addition, FSP No. 142-3 requires expanded disclosures regarding intangible assets existing as of each reporting period. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company does not expect the adoption of FSP 142-3 to have a significant impact on its financial position, results of operations or cash flows. In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) No. 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years, and is not expected to have a significant impact on the Company's results of operations, financial condition or liquidity. In May 2008, the FASB issued Financial Accounting Standard (FAS) No. 162, "The Hierarchy of Generally Accepted Accounting Principles." The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are prepared in conformance with generally accepted accounting principles. Unlike Statement on Auditing Standards (SAS) No. 69, "The Meaning of Present in Conformity With GAAP," FAS No. 162 is directed to the entity rather than the auditor. The statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with GAAP," and is not expected to have any impact on the Company's results of operations, financial condition or liquidity. FS-10 BELLAVISTA CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 3. LOANS RECEIVABLE SECURED BY REAL ESTATE: As of September 30, 2008, loans receivable secured by real estate summarized by location consisted of the following:
Amount Recognized Carrying Description Invested Impairments Amount In Default ------------------- ------------------ ------------------- ------------------ SF Bay Area $ 10,421,673 $ 165,000 $ 10,256,673 $ 6,858,673 California Central Valley 210,000 -- 210,000 210,000 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 September 30, 2008 $9,445,926 of these loans were secured by first trust deeds and $1,970,847 were secured by second trust deeds. Additionally, at September 30, 2008 five loans totaling $7,068,673 were in default under the terms of our loans. As of September 30, 2008, we have impaired loans receivable totaling approximately $165,000 on one of our loans receivable. Included on the Balance Sheet in Other assets is an allowance for uncollectible interest in the amount of $189,849 and zero as of September 30, 2008 and 2007, respectively. 4. JOINT VENTURE INVESTMENTS IN REAL ESTATE DEVELOPMENTS: As of September 30, 2008, joint venture investments in real estate developments summarized by location consisted of the following:
Remaining Amount Carrying Funding Description Invested Impairments Amount Obligation ------------------- ------------------ ------------------- ------------------ SF Bay Area $ 10,909,306 $ 1,964,705 $ 9,117,125 $ 297,461 Southern California 7,143,683 6,337,835 827,072 320,000 ------------------- ------------------ ------------------- ------------------ Total $ 18,052,989 $ 8,302,540 $ 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 September 30, 2008 we have recognized impairments totaling approximately $8.3 million on three of our joint venture investments in real estate developments. FS-11 BELLAVISTA CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 5. INVESTMENTS IN REAL ESTATE DEVELOPMENTS: Investments in Real Estate Developments 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 September 30, 2008:
Description Amount Invested Recognized Carrying Costs to (net of payments) Impairment Amount Complete ------------------ ------------------ ------------------ ------------------ SF Bay Area $ 19,385,494 $ 3,748,223 $ 19,026,984 $ 331,305 ------------------ ------------------ ------------------ ------------------ Total $ 19,385,494 $ 3,748,223 $ 19,026,984 $ 331,305 ================== ================== ================== ==================
6. INVESTMENT IN RENTAL PROPERTY: During the fiscal year ended September 30, 2008, the Company acquired control and became the 100% owner of the joint venture investment MSB Brighton LLC, a multi-unit condominium conversion in California. Management converted this property from a held-for-sale to a rental property as of September 30, 2008. The rental property is summarized as follows: Land $ 1,076,589 Building 2,969,348 Furniture and equipment 12,530 ------------------- Total rental property 4,058,467 Accumulated depreciation (130,038) ------------------- Rental property, net $ 3,928,429 =================== 7. FIXED ASSETS: During March 2008 the Company disposed of furniture and equipment with a net book value of $17,088 and received $2,200 in cash. The $14,888 loss from the sale is included in the statement of operations. Fixed Assets at September 30, 2008 and September 30, 2007 consisted of the following: As of September 30, --------------------------------------- 2008 2007 ------------------- ------------------- Computer equipment $ 18,756 $ 88,110 Furniture 18,454 39,730 ------------------- ------------------- Total office equipment 37,210 127,840 Accumulated depreciation (12,831) (95,620) ------------------- ------------------- Fixed assets, net $ 24,379 $ 32,220 =================== =================== FS-12 BELLAVISTA CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 8. CONSOLIDATION OF SUBSIDIARIES AND SUPPLEMENTARY CASH FLOW INFORMATION: During the year ended September 30, 2008, the Company became the 100% owner of three properties previously classified as joint venture investments. Upon taking ownership, the Company recorded the assets and liabilities of each entity and eliminated the intercompany accounts. Below is a summary of the assets and liabilities of each consolidated entity as of the date of consolidation, as recorded in these financial statements: Cummings Park, LLC as of January 1, 2008 Cash $ 35,106 Land 1,260,000 Work in Process 13,534,865 Deposits 14,930 Accounts Payable (511,888) Construction loan payable (11,310,302) Security Deposits (32,846) --------------------- Pre-consolidation investment in joint venture $ 2,989,865 ===================== Frank Norris Condominiums Inc., as of July 3, 2008 Cash $ 45,974 Accounts Receivable 14,330 Building 7,544,086 Accounts Payable (6,285) Loan Payable (2,521,729) --------------------- Pre-consolidation investment in real estate $ 5,076,376 ===================== MSB Brighton, LLC as of January 1, 2008 Land $ 1,076,589 Buildings 7,626,443 Prepaid property taxes 27,324 Construction loan payable (8,730,356) --------------------- Pre-consolidation investment in joint venture $ -- ===================== ---------------------------------------------------------------------------- 9. NOTES PAYABLE AND LINE OF CREDIT: Notes payable as of September 30, 2008 and 2007 consisted of the following: As of September 30, --------------------------------------- 2008 2007 ------------------- ------------------- Secured line of credit $ 2,600,000 $ -- Secured loan 7,331,328 -- Secured loan 2,521,729 -- =================== =================== Total $ 12,453,057 $ -- =================== =================== The line of credit of $2,600,000 represents the outstanding balance as of September 30, 2008 on a $3.0 million revolving line of credit secured by a deed of trust on one of our investments. It bears interest at Prime plus 1.0% (5.50% September 30, 2008). The line matured on June 5, 2008, and was extended to April 18, 2009. The secured loan of $7,331,328 represents the outstanding balance as of September 30, 2008 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 Company has FS-13 BELLAVISTA CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 consolidated the project's financial statements effective January 1, 2008. Prior to January 1, 2008 the Company reported its investment in this project on the equity method. The loan bears interest at Prime plus 2%, (6.0% at September 30, 2008) and matures on March 15, 2009. Interest-only payments are due monthly on the outstanding balance of the note. Principal payments will be made from the proceeds when units are sold. The secured loan of $2,521,729 represents the outstanding balance as of 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 Company consolidated the property's financial statements beginning July 3, 2008. The loan bears interest at Prime plus 1% with a floor of 6.0% (6% at September 30, 2008) and matures on April 15, 2009. Interest-only payments are due monthly on the outstanding balance of the note. 10. 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 September 30, 2008 we have repurchased 1,564,097 shares in connection with legal settlements and 6,328,385 shares under tender offers at various prices. At September 30, 2008 we had 11,590,870 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 1,388,046 shares as of September 30, 2008, through a series of unsolicited tender offers. During the year ended September 30, 2008, the Company responded to tender offers made by MPF at prices the Company believed were overly opportunistic by commencing its own tender offer to repurchase shares and purchased shares as shown in the table below: Offer Date Shares Price per Total Amount Purchased share --------------- --------------- ---------------- October 1, 2007 1,257,982 $2.00 $ 2,515,964 March 20, 2008 731,687 $2.00 1,463,374 --------------- ---------------- 1,989,669 $ 3,979,338 =============== ================ On October 17, 2007, the Company negotiated settlements and releases of certain claims against the Company and certain of its current and former officers and directors the terms of which provided that the shareholder tender 130,000 shares of the Company's stock to the Company for no consideration and additionally provided that the Company would repurchase 25,966 shares of Company stock from the shareholder at a price of $2.25 per share for a total payment of $58,424. During the year ended September 30, 2008, the Company negotiated settlements and releases of certain claims against the Company and certain of its current and former officers and directors made by certain shareholders holding 214,947 shares. The settlement included, among other terms, the repurchase of the 214,947 shares held by the shareholders at $3.15 per share for a purchase price of $677,083, and the dismissal of the claims of the shareholders included in the complaint originally served on the Company in April 2006. Insurance reimbursements pertaining to this case of $166,649 have been reported as miscellaneous income. In August 2008, MPF commenced another tender offer to purchase up to 400,000 shares at a price of $1.00 per share. The Company responded with its own tender offer to repurchase up to 750,000 shares at a price of $1.75 per share and completed the repurchase of 419,437 shares at $1.75 per share in October, 2008. 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. FS-14 BELLAVISTA CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 11. INCOME TAXES At September 30, 2008 and 2007, we had U.S. federal net operating loss carry forwards of approximately $101.6 million and $96.7 million, respectively. The net operating loss carry forwards expire in various amounts between the years 2016 and 2028. 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 Carry forward Operating loss carry forwards consisted of the following: Federal California Operating Loss Operating Loss Carry forward Carry forward -------------------- ------------------- September 30, 2008 $ 4,985,411 $ 4,981,411 September 30, 2006 4,413,981 4,411,581 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 7,488,817 3,915,918 -------------------- ------------------- Total $ 101,648,742 $ 82,798,823 ==================== =================== Deferred Taxes The significant components of the Company's deferred tax assets are as follows: As of September 30, ---------------------------------------- 2008 2007 -------------------- ------------------- Net operating loss carry forwards $ 39,391,387 $ 37,405,711 Income from real estate investments reported on tax returns but not includible in financial statement income 965,004 2,328,370 Impairment charges reported in financial statements but not deducted on tax return 6,768,366 3,615,978 Valuation allowance (47,124,757) (43,350,059) -------------------- ------------------- Net deferred tax assets $ -- $ -- ==================== =================== As of September 30, 2008 and 2007, the Company and its subsidiaries had provided valuation allowances of approximately $47.1 million and $43.4 million, respectively, in respect of deferred tax assets resulting from tax loss carry forwards and temporary timing differences in the reporting of revenues and expenses because it is more likely than not that the carry forwards 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 years ended September 30, 2008 and 2007: Year Ended September 30, ---------------------------------------- 2008 2007 -------------------- ------------------- Federal $ -- $ 20,525 State 4,000 6,870 -------------------- ------------------- Total $ 4,000 $ 27,395 ==================== =================== FS-15 BELLAVISTA CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 12. COMMITMENTS AND CONTINGENCIES: Capital leases The following is a schedule, by years, of future minimum payments required under capital leases that have initial or remaining noncancelable lease terms in excess of one year as of September 30, 2008: Year ended September 30, 2009 $ 3,580 Year ended September 30, 2010 1,405 ------------------- Net minimum lease payments $ 4,985 =================== Litigation As of September 30, 2008, 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 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. Aztec Foreclosure Corp v Natural Software, Inc. et al. This case is an interpleader lawsuit. The Company has been named as a defendant because the funds at issue are part of the estate of a creditor that owes money to the Company. No party in the lawsuit has asserted claims against the Company. The Company has elected not to assert a claim in the case because it has determined that the claims of certain other secured creditors are senior in priority to that of the Company and these claims in aggregate are greater than the funds at issue. Therefore, the Company has no realistic chance of collecting any of the funds at issue from the judgment debtor's 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-16 BELLAVISTA CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 13. SUBSEQUENT EVENTS Pulgas Property As of September 30, 2008, the Company had a loan on a property located in East Palo Alto, CA, in the amount of $5 million. The loan matured on April 30, 2008, and when the borrower was unable to comply with terms of an extension of the loan, the Company commenced a foreclosure proceeding as of August 2008. The process was completed and the Company took title to this property on December 31, 2008 by foreclosure. Brighton Debt Approval As of September 30, 2008, the Company owned a 43 unit townhome project in Modesto, CA. The property is currently being held as a Rental Property. The Board of Directors in October 2008 authorized the Company to borrow up to $1.5 million on a secured credit facility. As of December 31, 2008, the Company had utilized the line of credit and had an outstanding balance of $1.5 million. Tender Offer As of September 30, 2008 the Company had an open tender offer. The tender offer ended October 20, 2008, and resulted in the redemption of 419,437 shares. The redemption price paid by the Company was $1.75 per share for a total of $734,015. The Company had a total of 11,171,433 shares outstanding after the redemption was completed. FS-17 EX-10 2 bellavista10kex104.txt EXHIBIT 10.4 MANAGEMENT AGREEMENT Exhibit 10.4 Management Agreement This Agreement is dated as of October 1, 2008, by and between Bella Vista Capital, Inc., a Maryland corporation (the "Company"), and RMRF Enterprises, Inc., dba Cupertino Capital, a California corporation (the "Manager"), with respect to the following: The Company desires to retain the Manager to manage the investments of the Company and to perform certain administrative services for the Company in the manner and on the terms set forth herein; In consideration of the following mutual agreements, the parties agree as follows: Section 1. Definitions. (a) "affiliate" means, with respect to any person, another person that directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with such person. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "governing instruments" means the articles or certificate of incorporation or other charter, as the case may be, and bylaws of the Company and its subsidiaries. (d) "mortgage loans" means construction, mixed use, land acquisition and development loans primarily secured by mortgages or deeds of trust on real estate properties. (e) "Net Value" of the Company has the same meaning and is determined in the same manner as it is in the Company's public statements and disclosures. (f) "unaffiliated directors" shall mean those members of the Board of Directors of the Company, who are not officers, directors or affiliates of the Manager. (g) Net Realizable Value ("NRV") will be equal to the estimated net realizable value of the Company's assets per common share, as established by the Board of Directors and reported in the Company's quarterly report on Form 10-Q as filed with the Securities and Exchange Commission. Section 2. General Duties of the Manager. (a) Administrative Services Provided by the Manager. The Manager will be responsible for the day-to-day operations of the Company and shall perform such services and activities relating to the assets and operations of the Company as may be appropriate, including: (1) in accordance with the directions and subject to the supervision of the Company's Board of Directors, investing or reinvesting any money of the Company; (2) furnishing reports and statistical and economic research to the Company regarding the Company's real estate investment activities and the performance of its portfolio of mortgage loans; (3) administering the day-to-day operations of the Company and performing administrative functions necessary in the management of the Company, including the collection of revenues, the payment of the Company's expenses, debts and obligations and the maintenance of appropriate computer services to perform such administrative functions; (4) counseling the Company's officers and Board of Directors in connection with policy decisions to be made by the Board of Directors; (5) overseeing the servicing of the Company's construction related activities pertaining to its mortgage loans and other investments; (6) providing all actions necessary for compliance by the Company with all federal, state and local regulatory requirements applicable to the Company in respect of its business activities, including maintaining books and records, maintaining current shareholder records, and preparing or causing to be prepared all periodic reports and all financial statements required under applicable regulations and contractual undertakings; (7) providing all actions necessary to enable the Company to make required federal, state and local tax filings and reports and generally enable the Company to maintain its status as a corporation, including, but not limited to, soliciting stockholders for required information to the extent required by the provisions of the Code; (8) communicating on behalf and with the direction of the Company (with content approved in advance by the Company's Board of Directors) with the stockholders of the Company as required to satisfy any reporting requirements and to maintain effective relations with such stockholders; (9) performing such other services as may be required from time to time for management and other activities relating to the assets of the Company as the Board of Directors shall reasonably request or the Manager shall deem appropriate under the particular circumstances; and (10) Acting as the Company's transfer agent and registrar for all Company initiated stock transactions. (b) Administrative Services Provided by Subcontractors. The Manager may enter into subcontracts with other parties to provide any such services to the Company, so long as it exercises reasonable care in the selection of such subcontractors. (c) Compliance with Public Disclosure Rules. Manager agrees to comply and, in performing its services as Manager, to cause the Company to comply with all disclosure rules applicable to the Company, including the statutes, rules and regulations governing publicly held entities under the Securities Exchange Act of 1934 as now in effect and as it may be amended from time to time. (d) Cooperation of the Company. The Company agrees to take all action reasonably required to permit the Manager to carry out its duties and obligations. The Company further agrees to make available all materials reasonably required to enable the Manager to satisfy its obligations to deliver financial statements and any other information or reports with respect to the Company. Section 3. Additional Activities of Manager. (a) Except as expressly provided in paragraph 3(b) below, nothing in this agreement shall prevent the Manager or any of its officers, directors, employees or affiliates from engaging in other businesses or from rendering services of any kind to any other person or entity, including the purchase of, or advisory services to others investing in, any type of real estate investment, including investments which meet the principal investment objectives of the Company. Notwithstanding the foregoing, the Manager shall at all times during the term of this Agreement devote such time and attention, and maintain sufficient personnel and resources, to assure that it can adequately manage the operations and administration of the Company. (b) Manager agrees that certain proposed transactions, as defined below, will be considered "Company Opportunities," and any Company Opportunity that comes to the Manager's attention will first be offered or made available to the Company as provided herein before Manager or any of Manager's affiliates may enter into any such transaction for its or their own account or may offer such transaction to any third party. "Company Opportunities" will include any proposed investment or investment disposition transaction brought to the Manager's attention in its capacity as Manager under this Agreement, including transactions brought to its attention by members of the Company's Board of Directors, by any other party to a then existing non-Cupertino sourced Company investment, or by any party contacting the Manager concerning such a proposed transaction in its capacity as Manager of the Company. Manager shall initially pursue any such Company Opportunity on behalf of the Company, and will provide the Board of Directors promptly in writing with notice of the material proposed terms of any such transaction, to the extent practicable. The Board of Directors will meet within thirty (30) days following the date such notice is received by the Board to consider whether the Company will elect to pursue the Company Opportunity described in the notice. If the Board elects to have the Company pursue the Company Opportunity, it will so notify the Manager and direct the Manager's efforts in seeking to complete the transaction. The Manager will thereafter diligently and in good faith analyze the proposed transaction on the Company's behalf, negotiate the terms of the transaction solely in the Company's interest, communicate with the Board concerning the ongoing status of the transaction, and seek to consummate any such transaction on behalf of the Company. If the Company either notifies the Manager that it will not seek to pursue the Company Opportunity described in the notice, or fails to notify the Manager of its intention by the end of a thirty day period following the Board's receipt of such notice, the Manager may pursue such transaction for its own account or offer the transaction to a third party in its discretion. Section 4. Bank Accounts. At the direction of the Board of Directors, the Manager will establish and maintain one or more bank accounts in the name of the Company or any subsidiary of the Company, and will collect and deposit into any such account or accounts any and all funds received on behalf of the Company, and will disburse funds from any such account or accounts, under such terms and conditions as the Board of Directors may approve. All such accounts and funds held in such accounts shall be segregated from the Manager's own accounts and those of any other third party, shall not be commingled with the funds of any third party, and the Manager shall at all times assure that the Company holds clear title to such accounts subject only the claims of the Company's creditors. The Manager shall render appropriate accountings of such accounts, collections and payments to the Company's officers and Board of Directors and, upon request, to the auditors of the Company or any subsidiary of the Company. Section 5. Records The Manager shall maintain appropriate books of account and records relating to the Company's operations and the services performed under this Agreement, and such books of account and records shall be accessible for inspection by representatives of the Company or any subsidiary of the Company at any time during normal business hours. Section 6. Compensation of the Manager. (a) The manager shall receive a one-time start-up fee of $75,725 to be paid by October 15, 2008. (b) The Manager shall receive a quarterly management fee for investments not sourced by Cupertino Capital equal to 0.25% of the Net Realizable Value ("NRV") of the Company attributable to those investments not sourced by Cupertino Capital, payable as of the end of the quarter and calculated based on the NRV as published in the quarterly report for the preceding calendar quarter, except for Q4 of 2008 such fee percentage shall be 0.1875%. (c) The Manager shall also receive a quarterly management fee for Cupertino Capital sourced investments equal to 0.125% of the Net Realizable Value ("NRV") of the Company attributable to those investments sourced by Cupertino Capital, payable at the end of the quarter and calculated based on the NRV as published in the quarterly report for the preceding calendar quarter, except for Q4 of 2008 such fee percentage shall be 0.09375%. (d) Payment. The Manager shall calculate the precise figures of the Compensation Schedule in order to determine the Manager's Fee within 15 days after the end of each calendar quarter. This calculation shall be completed promptly and delivered to the Board of Directors along with a summary of all material transactions, a cash flow analysis of income and expenses, and reconciliation of bank accounts as overseen by manager on behalf of the Company for approval and payment of management fee. Attached to this agreement is the "Cupertino Capital Compensation Schedule" exhibit which illustrates the calculation of the management fees. Section 7. Expenses of the Company. (a) Expenses Borne by the Manager. Without regard to the compensation received by the Manager, the Manager shall bear any and all expenses internal to the operations of the Manager or incurred in connection with the Manager's performance of the services to be provided under this Agreement, including, but not limited to, the following expenses: (1) Employment expenses of the personnel employed by the Manager, including, but not limited to, salaries, wages, payroll taxes, and the cost of employee benefit plans; (2) Rent, telephone, utilities, office furniture, equipment and machinery (including computers, to the extent utilized) and other office expenses (such as asset/liability software, modeling software and other software and hardware) of the Manager needed in order to perform its duties as set forth herein; (3) Bookkeeping fees and expenses including any costs of computer services; (4) Miscellaneous administrative expenses incurred in supervising and monitoring the Company's investments or any subsidiary's investments or relating to performance by the Manager of its functions; (5) Expenses connected with the acquisition of the Company's assets and mortgage loans; (6) Travel and related expenses of personnel of the Manager when attending meetings or performing other business activities which relate to the Company or any subsidiary of the Company. (b) Expenses Borne by the Company. The Company or any subsidiary of the Company shall pay all of its expenses except those which are the specific responsibility of the Manager pursuant to this agreement; and, without limiting the generality of the foregoing, it is specifically agreed that the following expenses of the Company or any subsidiary of the Company shall not be paid by the Manager. Further, it is understood that none of the expenses listed below will include any expenses internal to the operations of the Manager or related in any way to the Manager's performance of the services detailed in this Management Agreement: (1) The Fund's cost of borrowed money; (2) All taxes applicable to the Company or any subsidiary of the Company including interest and penalties; (3) Legal, accounting and auditing fees and expenses relating to the Company and/or any subsidiary; (4) Expenses connected with the ownership and disposition of the Company's or any subsidiary's assets, including, but not limited to, costs of completion, foreclosure, maintenance, repair and improvement of property and premiums for insurance on property owned by the Company or any subsidiary of the Company; (5) Legal, audit, accounting, underwriting, brokerage, listing, rating agency, registration and other fees, printing, engraving and other expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of the Company's or any subsidiary's equity securities or debt securities; (6) The expenses of organizing, modifying or dissolving the Company or any subsidiary of the Company; (7) All insurance costs incurred in connection with the Company or any subsidiary of the Company; (8) Expenses connected with payments of dividends or interest or distributions in any other form made or caused to be made by the Board of Directors to holders of the securities of the Company or any subsidiary of the Company; (9) Expenses connected with the structuring and issuance of mortgage securities by the Company or any subsidiary of the Company, including but not limited to trustee's fees, insurance premiums, and costs of required credit enhancements; (10) Travel and related expenses of the directors of the Company when attending meetings or performing other business activities which relate to the Company; (11) All expenses of third parties connected with communications to holders of equity securities or debt securities of the Company or any subsidiary of the Company and the other bookkeeping and clerical work necessary in maintaining relations with holders of such securities and in complying with the continuous reporting and other requirements of governmental bodies or agencies, including any costs of computer services in connection with this function, the cost of printing and mailing certificates for such securities and proxy solicitation materials and reports to holders of the Company's or any subsidiary's securities and reports to third parties required under any indenture to which the Company or any subsidiary of the Company is a party; (12) Fees and expenses paid to trustees or directors of the Company or any subsidiary of the Company, the cost of director and officer liability insurance and premiums for fidelity and errors and omissions insurance; (13) Any judgment rendered against the Company or any subsidiary of the Company, or against any trustee or director of the Company or any subsidiary of the Company in his capacity as such for which the Company or any subsidiary of the Company is required to indemnify such trustee or director, or any court or governmental agency; and (14) Other miscellaneous expenses of the Company or any subsidiary of the Company which are not specified expenses of the Manager under this agreement. Section 8. Limits of Manager Responsibility; Indemnification. The Manager assumes no responsibility under this agreement other than to render the services called for in good faith and shall not be responsible for any action of the Board of Directors in following or declining to follow any advice or recommendations of the Manager. The Manager, its directors, officers, stockholders and employees will not be liable to the Company, any subsidiary of the Company, its subsidiary's stockholders or the unaffiliated directors for any acts or omissions by the Manager, its directors, officers, stockholders or employees under or in connection with this agreement, except by reason of acts or omissions constituting material breach of this Agreement, bad faith, willful misconduct, negligence or reckless disregard of their duties under this agreement. The Company and its subsidiaries shall reimburse, indemnify and hold harmless the Manager, its directors, officers, stockholders and employees of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, including, without limitation, attorneys' fees, in respect of or arising from any acts or omissions of the Manager, its stockholders, directors, officers and employees made in good faith in the performance of the Manager's duties under this agreement and not constituting material breach of this Agreement, bad faith, willful misconduct, negligence or reckless disregard of its duties. Section 9. Term; Termination Fee. (a) This agreement shall commence on October 1, 2008, and shall continue in force for an initial period of one year, and thereafter it shall be renewed automatically for successive one-year periods unless a notice of non-renewal is delivered by either party prior to a date 90 days following the end of any such one year initial or renewal period. (b) In addition to any other liability or obligation of either party to the other due upon termination of this agreement, if this agreement is terminated without cause (as "cause" is defined below), the Company shall pay the Manager a termination fee in an amount equal to the compensation paid for the quarter immediately preceding the date of termination pursuant to Section 6(b) and (c) above. Section 10. Termination by Company for Cause At the option of the Company, this agreement shall be and become terminated upon written notice of termination to the Manager if any of the following events shall occur. Termination for any of these events shall constitute termination for "cause": (a) if a majority of the unaffiliated directors determines that the Manager has violated or is in breach of this agreement in any material respect and, after notice of such violation, the Manager has failed to cure such violation within 60 days; or (b) there is entered an order for relief or similar decree or order with respect to the Manager by a court having competent jurisdiction in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws; or the Manager: (1) ceases, or admits in writing its inability, to pay its debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (2) applies for, or consents, by admission of material allegations of a petition or otherwise, to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator, or other similar official, of the Manager or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against the Manager and continue undismissed for 60 days; (3) authorizes or files a voluntary petition in bankruptcy, or applies for or consents, by admission of material allegations of a petition or otherwise, to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such end are instituted against the Manager without such authorization, application or consent and are approved as properly instituted and remain undismissed for 60 days or result in adjudication of bankruptcy or insolvency; or Section 11. Action Upon Termination. From and after the effective date of termination of this agreement, except as otherwise specified, the Manager shall not be entitled to compensation for further services, but shall be paid all compensation accruing to the date of termination. Upon such termination, the Manager shall: (a) after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled, pay over to the Company or any subsidiary of the Company all money collected and held for the account of the Company or any subsidiary of the Company pursuant to this agreement; (b) deliver to the Board of Directors a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board of Directors with respect to the Company or any subsidiary of the Company; and (c) deliver to the Board of Directors all property and documents of the Company or any subsidiary of the Company then in the custody of the Manager. Section 12. Release of Money or Other Property Upon Written Request. Manager agrees that any money or other property of the Company or any subsidiary of the Company held by the Manager under this agreement shall be held solely in the name of the Company or such subsidiary by the Manager as custodian for the Company or such subsidiary, and the Manager's records shall clearly reflect the ownership of such money or other property by the Company or such subsidiary. Upon the receipt by the Manager of a written request signed by a duly authorized officer of the Company requesting the Manager to release to the Company or any subsidiary of the Company any money or other property then held by the Manager for the account of the Company or any subsidiary of the Company under this Agreement, the Manager shall promptly release such money or other property to the Company or such subsidiary of the Company; provided that such release will not cause the Manager to violate any law or breach any agreement to which the Company is a party. The Manager shall not be liable to the Company, any subsidiaries of the Company, the unaffiliated directors, or the Company's or its subsidiaries' stockholders for any acts performed or omissions to act by the Company or any subsidiary of the Company in connection with the money or other property released to the Company or any subsidiary of the Company and not constituting a material breach of this Agreement, bad faith, willful misconduct, negligence or reckless disregard of its duties. The Company and any subsidiary of the Company shall indemnify the Manager, its directors, officers, stockholders and employees against any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, which arise in connection with the Manager's release of such money or other property to the Company or any subsidiary of the Company unless such expenses, losses, damages, liabilities, demands, charges and claims arise in connection with acts or omissions which constitute material breach of this Agreement, bad faith, willful misconduct, negligence or reckless disregard of its duties. Indemnification pursuant to this provision shall be in addition to any right of the Manager to indemnification under this agreement. Section 13. Notices Unless expressly provided otherwise, all notices, requests, demands and other communications required or permitted under this agreement shall be in writing and shall be deemed to have been duly given, made and received when (1) delivered by hand or (2) upon actual receipt of registered or certified mail, postage prepaid. The parties may deliver to each other notice by electronically transmitted facsimile or email copies provided that such electronically transmitted notice is followed within twenty-four hours by a hardcopy notice delivered and received as specified in (1) or (2) in this paragraph. Any notice shall be duly addressed to the parties as follows: (a) If to the Company - Notice both by written hardcopy and email is required: Board of Directors Attn: William Offenberg P.O. BOX 3195 Monterey, CA 93942 Email: weobvc@sbcglobal.net With Copy to: Jeff.Black@Grubb-Ellis.com, Pattibwolf@aol.com, and bobpuette@earthlink.net. (b) If to the Manager: Cupertino Capital Attn: Dan Shaw 15700 Winchester Blvd. Los Gatos, CA 95030 Fax: (408) 354-9787 Email: dans@cupcapital.com Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address. Section 14. Assignments Except as set forth in this section, this agreement shall terminate automatically in the event of its attempted assignment, in whole or in part, by the Manager, other than the pledge of amounts payable by the Company to the Manager to secure the Manager's obligations to its lenders, unless such assignment is consented to in writing by the Company. Any such consented assignment shall bind the assignee in the same manner as the Manager is bound. In addition, the assignee shall execute and deliver to the Company a counterpart of this agreement naming such assignee as Manager. This agreement shall not be assigned by the Company without the prior written consent of the Manager, except in the case of assignment by the Company to a REIT or other organization which is a successor, by merger, consolidation or purchase of assets, to the Company, in which case such successor organization shall be bound by this agreement and by the terms of such assignment in the same manner as the Company is bound. Section 15. Entire Agreement This agreement contains the entire agreement and understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter. The express terms hereof control and supersede any course of performance or usage of the trade inconsistent with any of the terms. This agreement may not be modified or amended other than by an agreement in writing. Section 16. Controlling Law This agreement and all questions relating to its validity, interpretation, performance and enforcement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of California. Section 17. Execution in Counterparts This agreement may be executed in any number of counterparts. Section 18. Provisions Separable The provisions of this agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. Section 19. Confidentiality As Manager of the Company, Manager will be in possession and control of confidential and proprietary information relating to the Company and its operations as well as non public personal information relating to its shareholders. Manager hereby agrees, on its own behalf, and on behalf of its officers, employees, agents and contractors, to use all commercially reasonable measures necessary to prevent unauthorized persons from gaining access to, distributing or otherwise using such confidential or proprietary Company or shareholder information, including, but not limited to (a) adopting appropriate procedures to protect the confidentiality of such information, which procedures are at least as comprehensive and effective as those used to protect Manager's own confidential or proprietary information, (b) limiting internal access to such information to those employees of the Manager who have a need to know such information, and (c) informing its personnel of this confidentiality obligation and its binding effect on their activities and obtaining appropriate confidentiality agreements with any contractors, agents or other third parties used by Manager in performance of services hereunder. The parties hereto have executed this agreement as of the date first written above. a Maryland corporation ----------------------------- By: William E. Offenberg Its: Chairman RMRF Enterprises, Inc., dba Cupertino Capital a California corporation ----------------------------------- By: Daniel J. Shaw Its: President EX-31 3 bellavista10kex311.txt EXHIBIT 31.1 CERTIFICATION Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, William Offenberg, certify that: 1. I have reviewed this Form 10-KSB of BellaVista Capital, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this annual report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; (c) disclosed in this report any change in the small business issuer s internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. /s/ WILLIAM OFFENBERG ------------------------------- William Offenberg, Chief Executive Officer January 21, 2009 EX-31 4 bellavista10kex312.txt EXHIBIT 31.2 CERTIFICATION Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Jeffrey Black, certify that: 1. I have reviewed this Form 10-KSB of BellaVista Capital, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this annual report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; I disclosed in this report any change in the small business issuer s internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. /s/ JEFFREY BLACK --------------------------- Jeffrey Black, Chief Financial Officer January 21, 2009 EX-32 5 bellavista10kex321.txt EXHIBIT 32.1 CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-KSB of BellaVista Capital, Inc. (the "Company") for the period ended September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the Report"), and pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, I, William Offenberg, Chief Executive Officer of the Company, hereby certify that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ WILLIAM OFFENBERG - ------------------------------ William Offenberg, Chief Executive Officer of BellaVista Capital, Inc. January 21, 2009 EX-32 6 bellavista10kex322.txt EXHIBIT 32.2 CERTIFICATION Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-KSB of BellaVista Capital, Inc. (the "Company") for the period ended September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the Report"), and pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, I, William Offenberg, Chief Executive Officer of the Company, hereby certify that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ JEFFREY BLACK - -------------------------------- Jeffrey Black, Chief Financial Officer of BellaVista Capital, Inc. January 21, 2009 -----END PRIVACY-ENHANCED MESSAGE-----