UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. ____)
Filed by the Registrant [X]
Filed by a Party other than the Registrant
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6
(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-12
Capital Alliance Income Trust Ltd.
(Name of Registrant as Specified in its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Not
applicable
(2) Aggregate number of securities to which transaction applies: Not
applicable
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined): Not
applicable
(4) Proposed maximum aggregate value of transaction: [$1,800,000]
(5) Total fee paid: [$2,360]
Fee paid previously with preliminary materials:_______________________
Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:________________________________________
(2) Form, Schedule or Registration Statement No.:__________________
(3) Filing Party:__________________________________________________
(4) Date Filed:____________________________________________________
[GRAPHIC OMITTED]
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTICE OF ANNUAL MEETING,
PROXY STATEMENT AND PROXY
FOR
2006 ANNUAL MEETING OF SHAREHOLDERS
YEAR ENDED DECEMBER 31, 2005
SEPTEMBER 6, 2006
Capital Alliance Income Trust Ltd.,
A Real Estate Investment Trust
- --------------------------------------------------------------------------------
100 Pine Street, Suite 2450 o San Francisco o California 94111
415/288-9575 o Fax: 415/288-9590
July 28, 2006
Dear Fellow Shareholders:
RE: Annual Meeting of Shareholders - Request for Proxies
----------------------------------------------------
You are cordially invited to attend the 2006 Annual Meeting of shareholders of
Capital Alliance Income Trust Ltd. (the "Corporation") which is scheduled for
10:00 a.m., Wednesday, September 6,, 2006 and is to be held in the Corporation's
offices at 100 Pine Street, Suite 2450, San Francisco, California, 94111.
Enclosed is a Notice to Shareholders of Annual Meeting, a Proxy Statement
describing the business to be transacted, a form of proxy for your use in voting
at the meeting, and the Corporation's Annual Report to the SEC on Form 10-KSB.
At the Annual Meeting you will be asked:
(i) to elect two Class I Directors of the Corporation;
(ii) to approve the proposal of the Board of Directors that the
corporation be dissolved and liquidated pursuant to a Plan of
Liquidation and Dissolution and that such Plan be approved by
the holders of a majority of the outstanding shares of the
corporation entitled to vote;
(iii) to approve a proposal of the Board of Directors that the
Corporation restructure and convert its current management and
business operations from an "externally-managed" Real Estate
Investment Trust ("REIT") to an "internally-advised" REIT;
(iv) to approve the proposal of the Board of Directors to renew the
existing Restated Management Agreement with Capital Alliance
Advisors, Inc. for a two-year term and to continue the existing
"External Management";
(v) to approve the selection of Rothstein, Kass & Company LLP as the
independent auditors for the Corporation for the year 2006, and
(vi) to act on such other business as may properly come before the
meeting or any adjournment thereof.
The Corporation's Annual Report to the SEC on Form 10-KSB for the year ended
December 31, 2005 accompanies this notice.
Your prompt response would be most appreciated.
Very truly yours,
/s/Thomas B. Swartz
-------------------
Thomas B. Swartz,
Chairman and Chief Executive Officer
i
Capital Alliance Income Trust Ltd.,
A Real Estate Investment Trust
- --------------------------------------------------------------------------------
NOTICE TO SHAREHOLDERS OF
ANNUAL MEETING TO BE HELD ON SEPTEMBER 6, 2006
PLEASE TAKE NOTICE that the 2006 Annual Meeting of shareholders ("Annual
Meeting") of Capital Alliance Income Trust Ltd., A Real Estate Investment Trust,
a Delaware corporation (the "Corporation"), will be held on Wednesday, September
6, 2006 at 10:00 a.m., local time, at 100 Pine Street, Suite 2450, San
Francisco, California 94111, to consider and vote on the following matters:
1. Election of two Class I Directors of the Corporation to serve until the
third annual meeting of the Corporation's shareholders following their
election and until the election and qualification of their respective
successors;
2. Approval of the proposal of the Board of Directors that the Corporation be
dissolved and liquidated pursuant to a Plan of Liquidation and Dissolution;
3. Approval of the proposal of the Board of Directors that the Corporation
restructure and convert its current management and business operations from
an "externally advised" or externally managed Real Estate Investment Trust
("REIT") to a "self-advised" and internally managed" REIT;
4. Approval and Ratification of the proposal of the Board of Directors of the
Corporation to renew the existing Restated Management Agreement with
Capital Alliance Advisors, Inc. ("CAAI") for a two (2) year term and to
continue the existing "external management" of the Corporation.
5. Approval of the selection by the Board of Directors of Rothstein, Kass &
Company LLP to be appointed as independent auditors of the Corporation for
the year ending December 31, 2006;
6. Such other business as may properly come before the Annual Meeting or any
postponements or adjournments thereof.
The Corporation's Annual Report to the SEC on Form 10-KSB for the year ended
December 31, 2005 accompanies this notice.
Only shareholders of record at the close of business on July 14, 2006, the
record date of the Annual Meeting, will be entitled to notice of, and to vote
at, the Annual Meeting or any postponements or adjournments thereof. A majority
of the outstanding shares of the Corporation entitled to vote must be
represented at the Annual Meeting in order to constitute a quorum. Whether or
not you plan to be present, please complete, date, sign and return the enclosed
proxy.
You may revoke your proxy at any time before it is voted by filing with the
Corporation a written revocation or a duly executed proxy bearing a later date.
If you are present at the Annual Meeting and vote in person, your proxy will not
be used.
We look forward to seeing you at the Annual Meeting.
BY ORDER OF THE CORPORATION,
Thomas B. Swartz, Acting Corporate Secretary
San Francisco, California
July 28, 2006
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN THE
ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
II
TABLE OF CONTENTS
- --------------------------------------------------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING 1
GENERAL 1
VOTING RIGHTS AND OUTSTANDING SHARES 1
REVOCABILITY OF PROXIES 2
GENERAL CORPORATION INFORMATION 2
MANAGEMENT 2
BOARD COMMITTEES 3
BOARD AND COMMITTEE MEETINGS 4
EXECUTIVE OFFICERS 4
STOCK HOLDINGS OF PRINCIPAL STOCKHOLDERS, DIRECTORS AND MANAGEMENT 5
COMPENSATION OF DIRECTORS 6
EXECUTIVE COMPENSATION 6
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 6
PROPOSAL ONE - ELECTION OF DIRECTORS 8
GENERAL 8
NOMINEES FOR ELECTION AS CLASS I DIRECTORS FOR TERM EXPIRING IN 2009 9
DIRECTORS CONTINUING IN OFFICE 9
PROPOSAL TWO- THE BOARD OF DIRECTORS PROPOSES THAT THE CORPORATION BE
LIQUIDATED AND DISSOLVED 9
PROPOSAL THREE - PROPOSAL OF THE BOARD OF DIRECTORS THAT THE CORPORATION
RESTRUCTURE AND CONVERT ITS CURRENT MANAGEMENT FROM AN EXTERNALLY ADVISED
REAL ESTATE INVESTMENT TRUST (REIT) TO A SELF-ADVISED REIT 21
PROPOSAL FOUR- RATIFICATION AND APPROVAL OF THE PROPOSAL TO RENEW THE
RESTATED MANAGEMENT AGREEMENT FOR A TWO-YEAR TERM AND CONTINUE THE EXISTING
"EXTERNAL MANAGEMENT" OF THE CORPORATION 25
PROPOSAL FIVE - APPROVAL OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANT 27
PROPOSAL SIX - OTHER BUSINESS 27 STOCKHOLDER PROPOSALS AND NOMINATIONS 28
MISCELLANEOUS 29
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934 29
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 29
AUDIT COMMITTEE REPORT 29
EXHIBIT "A"- PLAN OF LIQUIDATION AND DISSOLUTION 31
iii
Capital Alliance Income Trust Ltd.,
A Real Estate Investment Trust
- --------------------------------------------------------------------------------
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed proxy (the "Proxy") is being solicited from the stockholders
of Capital Alliance Income Trust Ltd., A Real Estate Investment Trust, a
Delaware corporation (the "Corporation"), on behalf of the Corporation's Board
of Directors (the "Board") for use at the Annual Meeting of the Corporation's
shareholders to be held at the Corporation's offices, 100 Pine Street, Suite
2450, San Francisco, California 94111 at 10:00 a.m., local time, on Monday,
September 6, 2006, and at any postponements or adjournments thereof (the "Annual
Meeting") for the purposes set forth herein. The Corporation's principal
executive offices are located at 100 Pine Street, Suite 2450, San Francisco,
California 94111.
The Corporation's 2006 Annual Report to the SEC on Form 10K-SB, including
the Corporation's audited financial statements for calendar year 2005, is being
forwarded to each shareholder of record as of July 14, 2006, together with this
Proxy Statement.
The Corporation is mailing this Proxy Statement, the accompanying Notice to
Shareholders of Annual Meeting and the Proxy on or about July 28, 2006 to all
shareholders entitled to notice of, and to vote at, the Annual Meeting.
The cost of this solicitation of proxies will be borne by the Corporation.
Solicitations will be made by mail. In addition, the officers and regularly
engaged employees of Capital Alliance Advisors Inc., the Corporation's manager
(the "Manager," or "CAAI") may, in a limited number of instances, solicit
proxies personally or by telephone. The Corporation will reimburse banks,
brokerage firms, other custodians, nominees and fiduciaries for reasonable
expenses incurred in sending proxy materials to beneficial owners of stock.
Voting Rights and Outstanding Shares
Only shareholders of record at the close of business on July 14, 2006 (the
"Record Date"), are entitled to notice of, and to vote at, the Annual Meeting.
At the close of business on the Record Date, there were issued and outstanding
and entitled to vote 500,032 shares of the Corporation's Common Stock, par value
$.01 per share ("Common Stock") and 213,820 shares of the Corporation's Series
"A" Preferred Stock, par value $.01 per share ("Series "A" Preferred Stock")
(individually, "Stock", and collectively, the "Stock").
The Corporation holds, as of March 31, 2006, treasury stock of 119,500
shares of Common Stock and 12,659 shares of Series "A" Preferred Stock. Treasury
shares may not vote.
The presence at the Annual Meeting in person or by proxy of shareholders
entitled to cast a majority of all the votes entitled to be cast at the Annual
Meeting is necessary to constitute a quorum for the transaction of business.
Proxies received but marked as abstentions and "broker non-votes", that may
result from beneficial owners' failure to give specific instructions to their
brokers or other nominees holding in "street name" will be counted as "present"
to determine whether there is a quorum. However, abstentions and "broker
non-votes" will have the effect of a vote against a proposal requiring the
affirmative vote of a certain percentage of shares outstanding. A broker will
vote shares held by the broker only if the holder of the shares provides the
broker with instructions how to vote. A properly signed proxy marked "Withhold
1
Authority" with respect to the election of one or more directors will not be
voted for the directors so indicated but will be counted to determine whether
there is a quorum. Each outstanding share of stock is entitled to one vote on
each matter to be voted upon at the Annual Meeting.
If there are insufficient holders of shares of stock present to constitute
a quorum or insufficient affirmative votes to approve any matter presented for
approval, the Annual Meeting may be postponed or adjourned one or more times to
permit for solicitation of proxies. For each matter presented for approval, each
stockholder is entitled to one vote for each share of stock held. Directors are
elected by plurality vote. A majority of the votes cast at a meeting of
stockholders duly called and at which a quorum is present will be sufficient to
approve any other matter which may properly come before the meeting, unless more
than a majority of votes cast is required by statute or by the bylaws of the
Corporation.
Shares of stock represented by properly executed and returned Proxies,
unless revoked, will be voted at the Annual Meeting in accordance with the
instructions thereon. If a properly executed and returned Proxy contains no
instructions, it will be voted: (i) for the election to the Board of the persons
specified on the Proxy; (ii) for approval of the proposal of the Board of
Directors that the Corporation be dissolved and liquidated pursuant to a Plan of
Liquidation and Dissolution of Capital Alliance Income Trust, Ltd, a Real Estate
Investment Trust, a Delaware corporation (See Exhibit "A" - "Plan of Liquidation
and Dissolution"); (iii) for approval of the proposal of the Board of Directors
that the Corporation restructure and convert its management and business
operations from an "externally advised" and externally managed Real Estate
Investment Ltd ("REIT") to a "self-advised" and internally managed REIT; (iv)
for approval of the renewal of the Restated Management Agreement of the
Corporation's Manager; (v) for approval of the selection of Rothstein, Kass &
Company LLP as the independent auditors for the Corporation for 2006, and (vi)
in the discretion of the proxy holder as to any other matter that properly may
come before the Annual Meeting. The Corporation's directors do not know of any
matter that will be presented for consideration at the Annual Meeting other than
the proposals described in this Proxy Statement.
Revocability of Proxies
Any shareholder giving a Proxy pursuant to this solicitation has the power
to revoke that Proxy at any time before the shares to which it relates are voted
either (i) by filing with the Corporation, at its principal executive offices,
written notice of revocation or a duly executed Proxy bearing a later date, or
(ii) by attending the Annual Meeting, withdrawing the Proxy, and voting in
person.
GENERAL CORPORATION INFORMATION
Management
The Board, which currently consists of the five individuals listed below,
directs the management of the Corporation's business and affairs. Directors
Blomberg and Brooks are Independent Directors (i.e., are not officers, full-time
employees or members of the immediate family of officers or full-time
employees).
The Corporation's current directors (the "Directors") and executive
officers and their respective positions are as follows:
Name Position
---- --------
Directors:
Thomas B. Swartz...........Class I Director, Chairman of the Board and
Chief Executive Officer
Harvey Blomberg............Class I Director
Stanley C. Brooks..........Class II Director
Dennis R. Konczal..........Class II Director, President and Chief
2
Operating Officer
Richard J. Wrensen.........Class III Director, Executive Vice-President
and Chief Financial Officer
Name Position
---- --------
Officers:
Thomas B Swartz............Chairman of the Board and Chief Executive
Officer
Dennis R. Konczal..........President and Chief Operating Officer
Richard J. Wrensen.........Executive Vice-President and Chief Financial
Officer
William W. Aubrey II.......Senior Vice President of Manager
Thomas B. Swartz...........Acting Corporate Secretary
Board Committees
As is discussed below, the Board has three standing committees: an Audit
Committee, a Nominating Committee and an Executive Committee. It has no
compensation committee.
Executive Committee. The Executive Committee is empowered to exercise any
of the Board's powers over the Corporation's business affairs (including the
declaration of dividends) except those powers specifically reserved to the full
Board, its Audit Committee or to the shareholders. The Executive Committee
consists of Messrs. Blomberg, Konczal, Swartz and Wrensen.
Nominating Committee. The Nominating Committee makes annual recommendations
to the Board regarding the selection of nominees to stand for election as
members of the Board of Directors to fill any vacancies that may develop in (i)
the Board of Directors and (ii) in the offices of Chairman of the Board of
Directors. The Nominating Committee for the year ended December 31, 2005
consisted of Messrs. Stanley C. Brooks and Donald Looper. The members of the
Nominating Committee are independent directors (as independence is defined in
Section 121(A) of the American Stock Exchange listing standards). As discussed
below under Proposal One-Election of Directors, Mr. Looper resigned as a
director effective June 21, 2006.
Audit Committee. The members of the Audit Committee are independent (as
independence is defined in Section 121(A) of the American Stock Exchange listing
standards). The Audit Committee makes recommendations concerning the annual
appointment of the Corporation's public accountants and reviews the arrangements
for and the scope of the audit conducted by those accountants. This committee
(i) reviews the Corporation's accounting functions and operations, (ii)
considers the adequacy and effectiveness of the system of accounting controls,
including any proposed corrective actions, (iii) reviews and monitors the
Corporation's policies regarding business ethics and conflicts of interest, and
(iv) discusses with management and the independent accountants the Corporation's
draft annual financial statements and key accounting and reporting matters. The
members of the Audit Committee are independent (as independence is defined in
Section 121(A) of the American Stock Exchange listing standards).
The Audit Committee has reviewed and discussed the audited financial
statements with management and has discussed with the Corporations' auditors the
matters required to be discussed by SAS 61. The Audit Committee has received the
written disclosure and the letter from the independent accountants required by
Independence Standards Board Standard No. 1 and has discussed with the
independent accountants its independence. Based on the foregoing reviews and
discussions, the Audit Committee has recommended to the Board that the audited
financial statements be included in the Corporation's Annual Report on Form
10-KSB.
The Audit Committee for the year ended December 31, 2005 consisted of
Messrs. Blomberg (Chairman), Brooks and Looper, all of whom are independent
directors within the meaning of Section 121(a) of the listing standards of the
American Stock Exchange. Mr. Looper resigned as a director effective June 21,
2006.
3
Board and Committee Meetings
During 2005, the Board held four directors' meetings and acted by unanimous
written consent four times; the Executive Committee held no meetings and acted
by unanimous written consent one time; and the Audit Committee held four
meetings. Each Director attended all of the 2005 Board Meetings (either in
person or by telephonic conference calls).
Executive Officers
The business experience of each of the Corporation's executive officers is
set forth below.
Thomas B. Swartz, age 74, has served as Chairman and Chief Executive
Officer of the Corporation since its formation in 1995 and of the Corporation's
predecessors since their formation in 1991 and 1994. As a Class I Director, his
term expires in 2006 and he is nominated for reelection at the 2006 Annual
Meeting. Mr. Swartz has also served as Chairman and Chief Executive Officer of
Capital Alliance Advisors, Inc., the Corporation's Manager, since its formation
in 1989 and of Sierra Capital Companies which he founded in 1980 and which
sponsored and advised six publicly-held equity real estate investment trusts.
From 1989 to 1990, he served as President of the National Association of Real
Estate Investment Trusts and as a Member of its Board of Governors from 1983 to
1993. Prior to founding Sierra Capital Companies, Inc., Mr. Swartz was a partner
in the San Francisco law firm of Bronson, Bronson & McKinnon from 1960 to 1980.
He graduated from Yale University in 1954 and from Boalt School of Law of the
University of California in 1959. He was an officer in the U.S. Navy from 1954
to 1959.
Dennis R. Konczal, age 55, has served as President and Chief Operating
Officer of the Corporation since its formation in 1995 and of the Corporation's
predecessors since their formation in 1991 and 1994. As a Class II Director, his
term expires in 2007. Mr. Konczal has also served as President and Chief
Operating Officer of Capital Alliance Advisors, Inc., the Corporation's Manager,
since 1989, and of the Sierra Capital Companies since 1984. Prior to joining
Sierra Capital Companies, Mr. Konczal was President and Chief Operating Officer
of Granada Management Corporation and related companies, an agribusiness
concern, from 1981 to 1984. He graduated in 1972 with a B.S. degree in
Agricultural Economics from Michigan State University.
Richard J. Wrensen, age 50, has served as Executive Vice-President and
Chief Financial Officer of the Corporation and of its Manager, Capital Alliance
Advisors, Inc., since December 1997. As a Class III Director, his term expires
in 2008. Prior to joining the Manager and the Corporation, Mr. Wrensen was
Senior Vice-President of Finance and Chief Financial Officer with SNK Realty
Group, a Japanese merchant builder, during 1997 and from 1987 to 1997 was
Vice-President-Finance of Mattison and Shidler, a national real estate
investment firm. From 1979 through 1987, Mr. Wrensen held financial positions
with several real estate management and development firms. After an accountancy
position with Coopers & Lybrand from 1978 to 1979, Mr. Wrensen became a
Certified Public Accountant in 1979. He graduated in 1985 from Hass School of
Business Administration of the University of California, Berkeley with a Masters
of Business Administration and received his B.S. Accounting degree from the
University of Florida in 1978.
William W. Aubrey II, age 46, has served as Senior Vice-President of
Capital Alliance Advisors, Inc., the Corporation's Manager, from 1998 to date.
Mr. Aubrey has also served as Executive Vice-President of an affiliate of Sierra
Capital Companies since 1995. From 1990 to 1995, Mr. Aubrey held the positions
of Senior Vice-President; Vice-President and Regional Supervisor at Citizens
Thrift and Loan Association (responsible for overall supervision of regional
production and operations; specialized in non-conforming, sub-prime residential
secured loans); from 1988 to 1990, Branch Manager, First Fidelity Thrift and
Loan (negotiated and underwrote real estate secured construction and equity
loans); Vice President, and from 1984 to 1988, Topa Thrift and Loan Association
(established loan brokerage and mortgage banking relationships). He received his
B.S in Finance from La Roche College of Pittsburg, PA in 1983.
4
Stock Holdings of Principal Stockholders, Directors and Management
The following table sets forth certain information regarding beneficial
ownership of the Corporation's Common and Preferred Stock as of March 31, 2006
by (1) each person that beneficially owns more than five percent of the
Corporation's Common and Preferred Stock, (2) each Director as of such date, (3)
the Corporation's executive officers and (4) all Directors and executive
officers as a group.
Unless otherwise indicated in the footnotes to the table, the beneficial
owners named have, to the knowledge of the Corporation, sole voting and
investment power with respect to the shares beneficially owned, subject to
community property laws where applicable.
Number of Shares Percentage of Shares
of Stock of Stock
Beneficially Owned Beneficially Owned
------------------ ------------------
Name of Beneficial Owner Common Preferred Common Preferred
- ------------------------ ------ --------- ------ ---------
Thomas B. Swartz (1)(4).................... 5,133 1,879 1.0% *
Dennis R. Konczal (2)(4)................... 17,632 984 3.5% *
Richard J. Wrensen (3)(4).................. 72,832 4,946 14.5% 2.3%
William W. Aubrey II (5)................... 2,500 0 * 0
Stanley C. Brooks.......................... 0 0 0 0
Harvey Blomberg............................ 0 0 0 0
Donald R. Looper.......................... 0 0 0 0
All directors and executive officers
as a group (7 persons) (6)............... 119,115 11,470 23.8% 5.5%
Thomas Morford (7)......................... 0 16,344 0 7.6%
* Represents less than 1% of outstanding shares.
- --------------------
(1) Mr. Swartz has unexercised options to purchase 50,816 shares of Common
Stock. Mr. Swartz's wife owns 633 shares of Series "A" Preferred Stock, in
which Mr. Swartz claims no beneficial interest.
(2) Mr. Konczal has unexercised options to purchase 38,124 shares of Common
Stock.
(3) Mr. Wrensen has unexercised options to purchase 23,766 shares of Common
Stock.
Mr. Wrensen's wife owns 10,000 shares of Common Stock and 3,036 Series "A"
Preferred shares as of March 31, 2006, in which Mr. Wrensen claims no
beneficial interest. Such holdings represent 2.0% of the outstanding Common
shares and 1.4% of the outstanding Preferred shares.
(4) Capital Alliance Advisors, Inc., the Corporation's Manager, owns
beneficially 25,618 shares of Common Stock and 3,661 shares of Series "A"
Preferred shares as of March 31, 2006, representing 5.1% of the outstanding
Common shares and 1.7% of the outstanding Series "A" Preferred shares.
Messrs. Swartz, Konczal and Wrensen are officers and directors of the
Manager and collectively own all of the outstanding Common shares of the
Manager. The Manager has unexercised options to purchase 16,689 shares of
Common Stock.
(5) Mr. Aubrey has unexercised options to purchase 9,050 shares of Common
Stock.
(6) This total includes the Common and Preferred shares owned by Capital
Alliance Advisors.
(7) Mr. Morford is a private investor.
5
Compensation of Directors
Each Independent Director receives an annual fee of $10,000, a $500 fee for
each board and committee meeting attended in person (commencing February 27,
2006, $4,000 per each board meeting attended in California), and $300 for each
board and committee meeting held telephonically together with reimbursement of
expenses incurred in attending those meetings. In 2005 Messrs. Brooks, Blomberg
and Looper each received $10,000 as a Director's fee. During 2005, total
committee and meeting fees for Mr. Brooks, Mr. Blomberg and Mr. Looper were
$1,800, $2,100 and $1,800, respectively. Messrs. Blomberg and Brooks are
participants in CAIT's Incentive Stock Option Plan of 1998 and each of them
holds options to purchase 12,375 shares of Common Stock underlying the options.
Independent Directors receive reasonable reimbursement of expenses incurred in
attending board or committee meetings. Directors who are affiliates of the
Manager do not receive board or committee meeting fees but do receive reasonable
reimbursement of expenses incurred in attending those meetings.
Executive Compensation
The Corporation has no employees. All officers of the Corporation are
employees of Capital Alliance Advisors, Inc., the Corporation's Manager, and
receive no executive compensation directly from the Corporation other than
non-qualified stock options.
Certain Relationships and Related Transactions
Arrangements and Transactions with Capital Alliance Advisors, Inc. ("CAAI") and
- --------------------------------------------------------------------------------
the Executive Officers of CAAI and CAIT.
- ---------------------------------------
CAAI is the Manager of the Corporation and provides (a) management and
advisory services to the Corporation in accordance with the Restated Management
Agreement ("Management Agreement") and (b) mortgage origination and loan
servicing services to the Corporation in accordance with the Home Equity Loan
Origination and Mortgage Loan Servicing Agreement ("LOS Agreement"). As
previously described, the Corporation will utilize the mortgage banking
experience, management expertise and resources of CAAI in conducting its
Mortgage Investment and its Mortgage Conduit Businesses. In addition, three of
the Directors and all of the officers of the Corporation also serve as Directors
and/or officers of CAAI. The amounts paid by the Corporation to CAAI under the
Management Agreement and the Home Equity Loan Origination and Mortgage Loan
Servicing Agreement for the year ended December 31, 2005 were $231,315 and
$455,369, respectively.
The Corporation on December 30, 2005 for $1.00 acquired from CAAI 100% of
the voting Common Stock in Capital Alliance Funding Corporation ("CAFC") and
also owns all of the non-voting Preferred Stock of CAFC, making CAFC a
wholly-owned taxable REIT subsidiary. The Corporation now elects all of the
directors of CAFC and has the ability to control the outcome of all matters for
which the consent of the holders of the Common Stock of such subsidiary is
required. CAAI and/or the officers and directors of CAFC who may be officers and
directors of the Corporation, are separately compensated for their management
services to the subsidiary and provide origination, financing and administrative
services to the subsidiary through separate management and mortgage loan
origination and servicing agreements and by an allocation of the cost of such
services. The amount paid to CAAI by CAFC for mortgage loan administrative
services under such agreements for the year ended December 31, 2005 was
$103,283.
The Trustees, the Manager and their affiliates have fiduciary duties and
obligations which will require them to resolve any conflicts of interest by
exercising the utmost good faith and integrity. Additionally, the Bylaws provide
that the Manager must upon request by the Directors disclose any investments
which are within the purview of the Corporation's investment policies.
6
Messrs. Swartz, Konczal and Wrensen, officers and directors of CAAI are
also officers and directors of the Corporation. The officers and directors of
CAAI are also involved in other businesses which may generate profits or other
compensation. The Corporation will not share in such compensation. It is the
intention of the Corporation and CAAI that any agreements and transactions,
taken as a whole, between the Corporation, on the one hand, and CAAI or its
affiliates, on the other hand, are fair to both parties. However, there can be
no assurance that each of such agreements or transactions will be on terms at
least as favorable to the Corporation as could have been obtained from
unaffiliated third parties.
Interests of Certain Persons in the Proposals
Three of the directors on the Board serve as executive officers of the
Corporation, as well as being principals of Capital Alliance Advisors, Inc., the
Corporation's Manager (the "Manager"). Thomas B. Swartz is currently the
Chairman and Chief Executive Officer of the Manager. Dennis R. Konczal is
currently the President and Chief Operating Officer of the Manager, and Richard
J. Wrensen is currently the Executive Vice-President and Chief Financial Officer
of the Manager. The other two directors, Harvey Blomberg and Stanley C. Brooks
do not hold executive positions in the Corporation or the Manager. Each of
Messrs. Swartz, Konczal and Wrensen (collectively, the "Interested Directors"),
owns a one-third interest in the Manager and is therefore interested in
transactions between the Corporation and the Manager, including matters
involving the Restated Management Agreement (the "Management Agreement") and the
Home Equity Loan Origination Services and Loan Servicing Agreement (the "LOS
Agreement").
Proposals Two, Three and Four in this proxy statement relate directly or
indirectly to the Management Agreement. Proposals Two and Three also relate
directly or indirectly to the LOS Agreement. If Proposals Two and Three are
adopted, the Management Agreement and the LOS Agreement will be terminated.
Consequently, the Manager will no longer receive compensation from the
Corporation pursuant to the Management Agreement and the LOS Agreement if
Proposals Two and Three are adopted. In addition, under the Management
Agreement, upon termination or non-renewal of the Management Agreement by the
Corporation without cause, the Corporation is required to pay the Manager a
termination fee as determined by an independent appraisal equal to the fair
market value to the Manager of the Management Agreement assuming it was newly
renewed for two years (the "Termination Fee"). This is in addition to any fees
or expenses outstanding, payable to the Manager under the Management Agreement.
If Proposal Two on liquidation is adopted, the Termination Fee is payable to the
Manager, since a liquidation is deemed to be a termination of the Management
Agreement by the Corporation without cause. If Proposal Three on the Corporation
becoming a "self-advised" REIT is adopted, the Termination Fee would be payable
since this would also be deemed to be a termination of the Management Agreement
by the Corporation without cause, but the Manager has agreed to waive the
Termination Fee in that event. Proposal Three does require the Corporation to
pay the Manager a one-time lump sum payment of $500,000.
If Proposal Three is adopted, Mr. Wrensen would become Chief Executive
Officer, President and Chief Financial Officer of the newly self-advised
Corporation. It is proposed that Mr. Wrensen will enter into an employment
agreement with the Corporation for a base annual salary of at least $180,000 for
a term of thirty (30) to thirty-six (36) months, plus provision for bonuses, and
health, dental and other benefits. If Proposal Three is adopted, Mr. Swartz has
advised the Corporation that he will resign as Chief Executive Officer of the
Corporation but will remain on the Board of Directors as Chairman of the Board,
and Mr. Konczal has advised the Corporation that he will resign as President and
Chief Operating Officer but will remain on the Board as an independent director.
The Interested Directors have an interest in Proposal Four because of their
interest in the Manager. If the Management Agreement is not earlier terminated
or renewed, it will expire by its own terms on December 31, 2006. The Management
Agreement may be renewed bi-annually, subject to the approval of the majority of
the Board, and to ratification of such approval by the holders of a majority of
the outstanding shares of the Corporation's common stock and Series A preferred
stock. Upon any termination or non-renewal of the management Agreement, the
Manager will cease to receive the compensation provided for in
7
the Management Agreement, and, upon any non-renewal of the Management Agreement
other than for cause, the Corporation will be required to pay the Termination
Fee to the Manager.
Sale and Purchase of Loans.
To provide a source of mortgage loans for the Corporation's Mortgage
Investment Business, CAAI offers to the Corporation for purchase mortgage loans
meeting the Corporation's investment criteria and policies. Commitments to
acquire loans will obligate the Corporation to purchase such loans from CAAI
upon the closing and funding of the loans, pursuant to the terms and conditions
specified in the commitment. The Corporation accounts for the purchase of loans
from CAAI on a fair market value basis.
PROPOSAL ONE
------------
ELECTION OF DIRECTORS
General
The Bylaws of the Corporation provide for a variable Board of Directors
with a range between three and seven members. The Board of Directors currently
consists of five members. The Directors are divided into three classes. Each
class of Directors except Class III consists of two Directors, with each class
serving for a staggered three-year term. The Class I Directors are Messrs.
Swartz and Blomberg (whose terms expire in 2006) and who are nominated for
reelection at this Annual Meeting for a three-year term. The Class II Directors
are Messrs. Brooks and Konczal (whose terms expire in 2007). The Class III
Director is Mr. Wrensen (whose term expires in 2008). Each director is elected
to serve until the next annual meeting of shareholders at which his Class stands
for reelection and until their successors are elected and qualified (typically a
3 year term). Each of the nominees for Class I, if elected, will serve for a
term expiring at the 2009 annual meeting of stockholders and until their
successors are elected and qualified. The Board currently has two Independent
Directors, Messrs. Brooks and Blomberg. The Board has nominated the individuals
named below to serve as Class I members of the Board. Messrs. Konczal, Swartz
and Wrensen do not qualify as Unaffiliated Directors.
Donald R. Looper resigned from the Board of Directors, effective June 21,
2006, due to a disagreement with the Corporation concerning the effectiveness of
a motion addressed by the Board. On June 14, 2006, the Board considered a motion
not to renew the Management Agreement for cause. Messrs. Blomberg, Brooks and
Looper voted in favor of the motion, and Messrs. Swartz, Konczal and Wrensen,
who are interested in the matter, voted against it. As a majority of the Board
did not vote in favor of the motion, the Corporation, after consultation with
its legal counsel, concluded that the motion had not passed. Mr. Looper
disagreed with this determination, and accordingly tendered his resignation on
June 21, 2006.
The Corporation's Bylaws provide a procedure for shareholder nomination of
persons for election to the Board of Directors. Please see "Stockholder
Proposals and Nominations".
Thomas B. Swartz and Harvey Blomberg, the nominees listed below, currently
are Class I Directors whose present terms expire at the Annual Meeting. The
nominees have agreed to serve if elected, and management has no reason to
believe that the nominee will be unavailable to serve. Unless otherwise
instructed, the proxy holders will vote Proxies received by them in favor of the
election of the nominee named below. However, if the nominee becomes unavailable
for election for any reason, the shares represented by those Proxies will be
voted for any substitute nominee designated by the Directors. Assuming that a
quorum is present, a plurality of all the votes cast at the Annual Meeting will
be sufficient to elect a nominee as a Director. For purposes of the election of
directors, abstentions will not be counted as votes cast and will have no effect
on the result of the vote, although they will be counted in determining the
presence of a quorum.
8
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED BELOW, AND,
IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY, PROXIES SOLICITED IN CONNECTION
WITH THIS PROXY STATEMENT WILL BE SO VOTED.
The following presents information concerning the person nominated for
election as the Class III Directors of the Corporation and for those directors
whose terms will continue after the meeting:
Nominees for Election as Class I Directors for Term Expiring in 2009
Thomas B. Swartz. Biographical information for Mr. Swartz is set forth in the
section of this Proxy Statement entitled "General Corporation Information:
Executive Officers."
Harvey Blomberg, age 62; Class I Director since 1996; current term expires 2006;
Founder and principal, MRHB Real Estate (real estate management company) (1988
to date); Regional Director, Connecticut Small Business Development Center (1996
to date); Partner and Chief Financial Officer, Bay Purveyors, Inc. (1976 to
1995); General Manager, Deerfield Communications (1987 to 1990); Consultant to
numerous companies (financial restructuring, refinancing and marketing) (1989 to
date). Rensselaer Polytechnic Institute, M.S. Management, 1995; Hofstra
University, M.B.A., 1985; B.S. Engineering, 1966.
Directors Continuing In Office
Stanley C. Brooks, age 56; Class II Director since 1996; current term expires
2007; President and Chairman, Brookstreet Securities Corporation (1990 to date);
Executive Vice-President, Toluca Pacific Securities Corporation (1987 to 1989);
Senior Vice-President First Affiliated Securities (1983 to 1986); Senior
Vice-President, Private Ledger Financial Services (1976 to 1983); Member,
National Futures Association (1991 to date); Member, Securities Industry
Association (1995 to date); Member, Regional Investment Bankers Association
(1990 to date); Licensed Principal, NASD (1970 to date); California State
Polytechnic Institute, B.S. Business Administration, 1970. Mr. Brooks was
elected to the Board of Directors pursuant to the Underwriting Agreement between
the Corporation and Brookstreet Securities Corporation as the Managing
Broker-Dealer of the Corporation's public offering of its Common Stock.
Dennis R. Konczal. Biographical information for Mr. Konczal is set forth in the
section of this Proxy Statement entitled "General Corporation Information:
Executive Officers."
Richard J. Wrensen. Biographical information for Mr. Wrensen is set forth in the
section of this Proxy Statement entitled "General Corporation Information:
Executive Officers."
PROPOSAL TWO
THE BOARD OF DIRECTORS PROPOSES THAT THE CORPORATION
BE LIQUIDATED AND DISSOLVED.
General
The Board of Directors believes that it is appropriate that the
shareholders have an opportunity to consider three different alternatives as to
the ongoing direction of the Corporation. Proposal Two proposes that the
Corporation be liquidated and dissolved. Proposal Three proposes that that the
Corporation restructure and convert its current management and business
operations from an "externally advised" REIT to a "self advised" REIT. Proposal
Four proposes that the Corporation retain and renew its existing Restated
Management Agreement and remain "externally
9
advised". The Board of Directors neither recommends nor opposes any of these
proposals. A shareholder may vote "For" or "Against" any or all of these
Proposals Two, Three and Four.
The Board of Directors has proposed a Plan of Liquidation and
Dissolution (the "Plan") for ratification and approval by stockholders owning
and holding, as of the record date, a majority of the outstanding shares of the
Corporation entitled to vote at the Annual Meeting. The Plan was approved by the
Board of Directors on March 14, 2006, subject to stockholder approval, and will
go into effect on September 6, 2006 if approved and ratified by a majority of
the shareholders entitled to vote, which includes all holders of the outstanding
Common and Preferred shares of the Corporation. A copy of the Plan is attached
as Exhibit A to this Proxy Statement. Certain material features of the Plan are
summarized below.
The Board of Directors unanimously adopted a resolution on March 14, 2006 (the
"Effective Date") which authorized the orderly liquidation of the Corporation's
assets pursuant to the Plan if a majority of the shareholders entitled to vote
at a meeting of shareholders vote for the proposed dissolution and liquidation.
The Board of Directors' resolution further provided that notwithstanding a
resolution of the shareholders authorizing or consenting to the proposed
dissolution, the Board of Directors may, without further action by the
shareholders abandon or amend such proposed dissolution.
If a majority of the shareholders entitled to vote on the resolution to
ratify and consent to the dissolution and liquidation, the Plan of Liquidation
and Dissolution will be adopted as of September 6, 2006 (the "Adoption Date").
After the "Adoption Date," September 6, 2006, the Corporation will not
engage in any business activities except to the extent necessary to preserve the
value of its assets, wind up its business affairs and distribute its assets in
accordance with the Plan.
As of July 28, 2006 the Corporation had not received any offers to purchase
the business as a going concern. The Corporation's officers will commence the
sale of assets and the general winding down of the Corporation's business,
including such things as terminating commercial agreements and exiting related
obligations if the shareholders ratify Proposal Two. As of the date of this
Proxy Statement, the Corporation has not commenced the sale of its assets and
has not paid or settled a substantial portion of its liabilities. After
September 6, 2006, the Adoption Date, the Manager will not engage in any
business activities except for the purpose of preserving the value of the
Corporation's assets, prosecuting and defending lawsuits by or against the
Corporation, adjusting and winding up its business and affairs, selling and
liquidating properties and assets, including its intellectual property and other
intangible assets, paying the Corporation's creditors, terminating commercial
agreements and relationships and preparing to make distributions to
stockholders, in accordance with the Plan. In addition, the Manager will file a
Certificate of Dissolution with the Secretary of State of the State of Delaware
after the Adoption Date which provides a three year period to liquidate and
dissolve the Corporation.
The Board of Directors may, concurrently with the adoption of the plan,
turn management of the Corporation over to its existing management or to a third
party to complete the liquidation of our remaining assets and distribute
proceeds from the sale of assets to our stockholders pursuant to the Plan. This
third-party management may be in the form of a liquidating trust which, if
adopted, would succeed to all of the assets, liabilities and obligations of the
Corporation. The Board of Directors may appoint one or more of its members, an
officer of the Corporation or a third party to act as a Trustee of such
liquidating trusts or as Liquidator of the Corporation. If, however, all assets
are not distributed within three years after the date the Certificate of
Dissolution is filed within the State of Delaware, the Manager or Liquidator
will transfer the Corporation's remaining assets to a liquidating trust if its
has not already done so. Your ratification and approval of the Plan will also
constitute your approval of any appointment and compensation of such trustees or
liquidator.
10
During the liquidation of assets, we may pay to our officers, directors,
and agents, or any of them, compensation for services rendered in connection
with the implementation of the Plan. Your ratification and approval of the Plan
will constitute your approval of the payment of any such compensation.
Review of Alternatives and Conclusion of the Board of Directors
On March 14, 2006, after considering alternate business plans submitted by
the Manager regarding potential operational changes which could improve
earnings, none of which were acceptable to the Board of Directors, the Board
concluded that an orderly wind down of the Corporation was the course of action
that should be presented to the Corporation's stockholders for their
consideration, and unanimously adopted the Plan. In arriving at this conclusion,
the Board considered a number of factors, including the increase in interest
rates, reduced interest spreads, increased competition in the Corporation's
markets, declining earnings, omitted dividends, the continued material declining
value of comparably traded public companies and the future prospects of the
Corporation. The Board of Directors had been kept informed continuously by the
Manager of the Corporation's business affairs and financial condition and has
convened numerous separate meetings to consider these issues. Accordingly, the
Board of Directors determined that it may not be advisable to continue to
operate the Corporation on an independent basis if the potential for growth and
availability of financing were so limited. Based on this information, the Board
of Directors determined that distribution to the stockholders of cash proceeds
from the sale of the Corporation's assets would be an option that should be
presented to the stockholders and that liquidation would prevent further erosion
of the stockholders' equity through continuing net losses and market declines.
There can be no assurance that the liquidation value per share of Common Stock
in the hands of the stockholders will equal or exceed the book value of the
Common Stock or prices at which the Common Stock has been recently traded or may
trade in the future, or that the liquidation value will exceed zero. If the Plan
is ratified, the Corporation shall pay CAAI a termination or non-renewal fee
determined by independent appraisals equal to the fair market value to CAAI of
the Restated Management Agreement assuming that it was newly renewed for a
period of two (2) years after the effective date of the termination. If the Plan
is not ratified and approved by the stockholders, the Board of Directors will
explore what, if any, alternatives, including Proposal Three and Proposal Four
presented at this meeting, are available for the future.
There are many factors that the Corporation's stockholders should consider
when deciding whether to vote to ratify and approve the Plan. Such factors
include those set forth in the Corporation's publicly filed reports, including
its Annual Report on Form 10K-SB for the fiscal year ended December 31, 2005 and
its Form 10Q-SB, dated March 31, 2006, as well as those factors set forth below.
Risks Associated With Forward Looking Statements
This Proxy Statement contains certain forward looking statements, including
statements concerning the value of the Corporation's net assets, the anticipated
liquidation value per share of Common Stock as compared to its market price
absent the proposed liquidation, and the likelihood of stockholder value
resulting from sale of certain of its assets. Some of our other assets may be
difficult for the Corporation to convert into cash, and we can make no assurance
that we will receive any material amounts in respect of such assets. No
assurance can be given that the amount to be received in liquidation will equal
or exceed the book value per Common Share or prices at which the Common Stock
has recently traded or may trade in the future, or that the liquidation value
will exceed zero.
Creditor Liability
If the Plan is approved by a majority of the stockholders entitled to vote,
a Certificate of Dissolution will be filed with the State of Delaware dissolving
the Corporation. Pursuant to the Delaware General Corporation Law (the "DGCL"),
the Corporation will continue to exist for three years after the dissolution
becomes effective or for such longer period as the Delaware Court of Chancery
shall direct, for the purpose of prosecuting and defending suits against it and
enabling the Corporation gradually to close its business, to
11
dispose of its property, to discharge its liabilities and to distribute to its
stockholders any remaining assets. Under the DGCL, in the event the Corporation
fails to create an adequate contingency reserve for payment of its expenses and
liabilities during this three-year period, each stockholder could be held liable
for payment to the Corporation's creditors of such stockholder's pro rata share
of amounts owed to creditors in excess of the contingency reserve. The liability
of any stockholder would be LIMITED TO the amounts previously received as a
liquidating distribution by such stockholder from the Corporation (and from any
liquidating trust or trusts. Accordingly, in such event a stockholder could be
required to return all liquidating distributions previously made to such
stockholder. In such event, a stockholder could receive nothing from the
Corporation under the Plan. Moreover, in the event a stockholder has paid taxes
on amounts previously received, a repayment of all or a portion of such amount
could result in a stockholder incurring a net tax cost if the stockholder's
repayment of an amount previously distributed does not cause a commensurate
reduction in taxes payable. There can be no assurance that the contingency
reserve established by the Corporation will be adequate to cover any expenses
and liabilities. See "Contingent Liabilities; Contingency Reserve; Liquidating
Trust."
Preferred Share Preference
Pursuant to the Corporation's Certificate of Incorporation, upon the
Corporation's liquidation, holders of shares of Series A Preferred Stock will be
entitled to receive approximately $25.75 per share before any distribution of
funds is made to holders of our Common Stock. Based on the foregoing, funds
available in the liquidation would be distributed first to the holders of Series
A Preferred Stock until they had received an amount estimated to be
approximately $5,503,865. The Board of Directors has determined that if Proposal
Two is adopted, the Corporation will also make payments, estimated to be
approximately $135,000 in the aggregate, to certain former holders of Series A
Preferred who recently sold shares of Series A Preferred Stock to the
Corporation, which will reduce the amount otherwise distributable to
stockholders. After these amounts have been paid, any available funds will be
distributed to the holders of Common Stock until they have received
approximately $21.75 per share. If any funds are available for distribution
thereafter, they would be distributed pro rata among the holders of both classes
of stock.
Principal Provisions of the Plan
The Corporation will distribute pro rata to its stockholders, in cash or
in-kind, or sell or otherwise dispose of, all its property and assets. To obtain
the highest price for the sale of the Corporation's assets and to preserve value
for the stockholders, the Corporation will commence the sale of its assets
immediately after approval of the Plan by the Board on September 6, 2006.
As of the date of this Proxy Statement, the Corporation has not started or
completed the sale of a substantial portion of its assets nor paid or settled a
substantial portion of its liabilities on its commercial agreements,
relationships and overall operations. Sales of the Corporation's assets will be
made in private or public transactions and on such terms as are approved by the
Board of Directors or the Trustees or the Liquidator of the Corporation. Votes
of the Corporation's stockholders will not be solicited with respect to the
approval of the specific terms of any particular sales of assets approved by the
Board of Directors.
See "Sales of the Corporation's Assets."
Subject to the payment or the provision for payment of the Corporation's
indebtedness and other obligations, the Corporation's cash on hand, together
with the cash proceeds of any sales of the Corporation's other assets, will be
distributed from time to time pro rata to the holders of the Preferred and
Common Stock. The Corporation intends to establish a reasonable reserve (a
"Contingency Reserve") in an amount determined by the Board of Directors to be
sufficient to satisfy the liabilities, expenses and obligations of the
Corporation not otherwise paid, provided for or discharged. The net balance, if
any, of any such Contingency Reserve remaining after payment, provision or
discharge of all such liabilities, expenses and obligations will also be
distributed to the Corporation's stockholders pro rata. No assurances can be
given that available cash and amounts received from the sale of assets will be
adequate to provide for the
12
Corporation's obligations, liabilities, expenses and claims and to make cash
distributions to stockholders. The Corporation currently has no plans to
repurchase shares of capital stock from its stockholders.
If all of the Corporation's assets (other than the Contingency Reserve) are
not sold or distributed prior to the third anniversary of the effectiveness of
the dissolution of the Corporation, the Corporation will transfer in final
distribution such remaining assets to a trust. The Board of Directors may also
elect in its discretion to transfer the Contingency Reserve, if any, to such a
trust. Any of such trusts are referred to in this Proxy Statement as
"liquidating trusts." It is anticipated that the interests in any such trusts
will not be transferable; therefore, although the recipients of the interests
would be treated for tax purposes as having received their pro rata share of
property transferred to the liquidating trust or trusts and will thereafter take
into account for tax purposes their allocable portion of any income, gain or
loss realized by such liquidating trust or trusts, the recipients of the
interests will not realize the value thereof unless and until such liquidating
trust or trusts distributes cash or other assets to them.
The Corporation will close its stock transfer books and discontinue
recording transfers or shares of Common Stock on the earliest to occur of (i)
the close of business on the record date fixed by the Board of Directors for the
final liquidating distribution, (ii) the close of business on the date on which
the remaining assets of the Corporation are transferred to a liquidating trust,
or (iii) the Final Record Date, and, thereafter, certificates representing
shared of Preferred and Common Stock will not be assignable or transferable on
the books of the Corporation except by will, intestate succession or operation
of law. After the Final Record Date, the Corporation will not issue any new
stock certificates, other than replacement certificates. Any person holding
options, warrants or other rights to purchase Preferred or Common Stock must
exercise such instruments or rights prior to the Final Record Date. See "Listing
and Trading of the Common Stock and Interests in the Liquidating Trust or
Trusts" and "Final Record Date" below.
Following approval of the Plan by the stockholders, a Certificate of
Dissolution will be filed with the State of Delaware dissolving the Corporation.
The dissolution of the Corporation will become effective, in accordance with the
DGCL, upon proper filing of the Certificate of Dissolution with the Secretary of
State or upon such later date as may be specified in the Certificate of
Dissolution. Pursuant to the DGCL, the Corporation will continue to exist for
three years after the dissolution becomes effective or for such longer period as
the Delaware Court of Chancery shall direct, for the purpose of prosecuting and
defending suits, whether civil, criminal or administrative, by or against it,
and enabling the Corporation gradually to settle and close its business, to
dispose of and convey its property, to discharge its liabilities and to
distribute to its stockholders any remaining assets, but not for the purpose of
continuing the business for which the Corporation was organized.
Abandonment; Amendment
Under the Plan, the Board of Directors may modify, amend or abandon the
Plan, notwithstanding stockholder ratification and approval, to the extent
permitted by the DGCL. The Corporation will not amend or modify the Plan under
circumstances that would require additional stockholder solicitations under the
DGCL or the federal securities laws without complying with the DGCL and the
federal securities laws.
Liquidating Distributions; Nature; Amount; Timing
Although the Board of Directors has not established a firm timetable for
distributions to stockholders if the Plan is ratified and approved by the
stockholders, the Board of Directors intends, subject to contingencies inherent
in winding up the Corporation's business, to make such distributions as promptly
as practicable. As of the date of this Proxy Statement, the Corporation has not
commenced the sale of its assets nor paid or settled any portion of its
liabilities. The liquidation is expected to be concluded prior to the third
anniversary of the filing of the Certificate of Dissolution in Delaware by a
final liquidating distribution either directly to the stockholders or to a
liquidating trust. After payment of the initial Series A Preferred Stock
liquidation preference, the proportionate interests of all of the stockholders
of the Corporation shall be fixed
13
on the basis of their respective stock holdings at the close of business on the
Final Record Date, and after such date, any distributions made by the
Corporation shall be made solely to stockholders of record on the close of
business on the Final Record Date, except to reflect permitted transfers. The
Board of Directors is, however, currently unable to predict the precise nature,
amount or timing of this distribution or any other distributions pursuant to the
Plan. The actual nature, amount and timing of all distributions will be
determined by the Board of Directors, in its sole discretion, and will depend in
part upon the Corporation's ability to convert its remaining assets into cash
and pay and settle its significant remaining liabilities and obligations.
The Corporation does not plan to satisfy all of its liabilities and
obligations prior to making distributions to its stockholders, but will instead
reserve assets deemed by management and the Board of Directors to be adequate to
provide for such liabilities and obligations. See "Contingent Liabilities;
Contingency Reserve; Liquidating Trust."
Management and the Board of Directors believe that available cash and
amounts received on the sale of assets will be adequate to provide for the
Corporation's obligations, liabilities, expenses and claims (including
contingent liabilities) and to make cash distributions to stockholders.
Factors to be Considered With Respect to Sale of the Company's Assets
The Plan involves the sale of all of the assets of the Corporation. The
sale by the Corporation of an appreciated asset will result in the recognition
of taxable gain by the Corporation to the extent the fair market value of such
asset exceeds the Corporation's tax basis in such asset.
Conduct of the Corporation Following Adoption of the Plan
Following ratification and approval of the Plan by the Corporation's
stockholders, the Corporation's activities will be limited to distributing its
assets in accordance with the Plan, establishing a contingency reserve for
payment of the Corporation's expenses and liabilities, including liabilities
incurred but not paid or settled prior to ratification of the Plan, selling any
remaining assets of the Corporation and terminating any remaining commercial
agreements, relationships or outstanding obligations of the Corporation.
Following the ratification and approval of the Plan by the Corporation's
stockholders, the Corporation shall continue to indemnify its officers,
directors, employees and agents in accordance with its Restated Certificate of
Incorporation, as amended, and bylaws, including for actions taken in connection
with the Plan and the winding up of the affairs of the Corporation. The
Corporation's obligation to indemnify such persons may be satisfied out of the
assets of any liquidating trust. The Board of Directors and the trustees of any
liquidating trust may obtain and maintain such insurance as may be necessary to
cover the Corporation's indemnification obligations under the Plan.
Reporting Requirements
Whether or not the Plan is ratified and approved, the Corporation will
still have an obligation to continue to comply with the applicable reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), even though compliance with such reporting requirements is economically
burdensome. If the Plan is ratified and approved, in order to curtail expenses
we will, after filing our Certificate of Dissolution, seek relief from the
Securities & Exchange Commission ("SEC") from the reporting requirements under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We
anticipate that, if such relief is granted, we would continue to file current
reports on Form 8-K to disclose material events relating to our liquidation and
dissolution along with any other reports that the SEC might require.
14
Contingent Liabilities; Contingency Reserve; Liquidating Trust
- --------------------------------------------------------------
Under the DGCL, the Corporation is required, in connection with its
dissolution, to pay or provide for payment of all of its liabilities and
obligations. Following the ratification and approval of the Plan by the
Corporation's stockholders, the Corporation will pay all expenses and fixed and
other known liabilities or set aside as a Contingency Reserve cash and other
assets which it believes to be adequate for payment thereof. The Corporation is
currently unable to estimate with precision the amount of any Contingency
Reserve which may be required, but any such amount (in addition to any cash
contributed to a liquidating trust, if one is utilized) will be deducted before
the determination of amounts available for distribution to stockholders.
The actual amount of the Contingency Reserve will be based upon estimates
and opinions of management and the Board of Directors and derived from
consultations with outside experts and review of the Corporation's estimated
operating expenses and future estimated liabilities, including, without
limitation, anticipated compensation payments, estimated legal and accounting
fees, operating lease expenses, payroll and other taxes payable, miscellaneous
office expenses, expenses accrued in the Corporation's financial statements, and
reserves for litigation expenses. There can be no assurance that the Contingency
Reserve in fact will be sufficient. The Corporation has not made any specific
provision for an increase in the amount of the Contingency Reserve. Subsequent
to the establishment of the Contingency Reserve, the Corporation will distribute
to its stockholders any portions of the Contingency Reserve which it deems no
longer to be required. After the liabilities, expenses and obligations for which
the Contingency Reserve had been established have been satisfied in full, the
Corporation will distribute to its stockholders any remaining portion of the
Contingency Reserve.
If deemed necessary, appropriate or desirable by the Board of Directors for
any reason, the Corporation may, from time to time, transfer any of its unsold
assets to one or more liquidating trusts, or other structure it deems
appropriate, established for the benefit of the stockholders of the Corporation,
which property would thereafter be sold or distributed on terms approved by its
trustees. The Board of Directors and management may determine to transfer assets
to a liquidating trust in circumstances where the nature of an asset is not
susceptible to distribution (for example, interests in intangibles) or where the
Board of Directors determines that it would not be in the best interests of the
Corporation and its stockholders for such assets to be distributed directly to
the stockholders at such time. If all of the company's assets (other than the
Contingency Reserve) are not sold or distributed prior to the third anniversary
of the effectiveness of the dissolution the Corporation must transfer in final
distribution such remaining assets to a liquidating trust. The Board of
Directors may also elect in its discretion to transfer the Contingency Reserve,
if any, to such a liquidating trust. The purpose of a liquidating trust would be
to distribute such property or to sell such property on terms satisfactory to
the liquidating trustees and/or Liquidator, and distribute the proceeds of such
sale after paying those liabilities of the Corporation, if any, assumed by the
trust, to the Corporation's stockholders. Any liquidating trust acquiring all of
the unsold assets of the Corporation will assume all of the liabilities and
obligations of the Company and will be obligated to pay any expenses and
liabilities of the Company which remain unsatisfied. If the Contingency Reserve
transferred to the liquidating trust is exhausted, such expenses and liabilities
will be satisfied out of the liquidating trust's other unsold assets.
The Plan authorizes the Board of Directors to appoint one or more
individuals or entities to act as trustee or trustees of the liquidating trust
or trusts and to cause the Corporation to enter into a liquidating trust
agreement or agreements with such trustee or trustees on such terms and
conditions as may be approved by the Board of Directors. It is anticipated that
the Board of Directors will select such trustee or trustees on the basis of the
experience of such individual or entity in administering and disposing of assets
and discharging liabilities of the kind to be held by the liquidating trust or
trusts and the ability of such individual or entity to serve the best interests
of the Corporation's stockholders. Approval of the Plan by the stockholders will
also constitute the approval by the Corporation's stockholders of any such
appointment and any liquidating trust agreement or agreements.
15
The Corporation may decide to use a liquidating trust or trusts, and the
Board of Directors believes the flexibility provided by the Plan with respect to
the liquidating trusts to be advisable. The trust would be evidenced by a trust
agreement between the Corporation and the trustees. The purpose of the trust
would be to serve as a temporary repository for the trust property prior to its
disposition or distribution to the Corporation's stockholders. The transfer to
the trust and distribution of interests therein to the Corporation's
stockholders would enable the Corporation to divest itself of the trust property
and permit the Corporation's stockholders to enjoy the economic benefits of
ownership thereof. Pursuant to the trust agreement, the trust property would be
transferred to the trustees immediately prior to the distribution of interests
in the trust to the Corporation's stockholders, to be held in trust for the
benefit of the stockholder beneficiaries subject to the terms of the trust
agreement. It is anticipated that the interests would be evidenced only by the
records of the trust and there would be no certificates or other tangible
evidence of such interests and that no holder of Common Stock would be required
to pay any cash or other consideration for the interests to be received in the
distribution or to surrender or exchange shares of Common Stock in order to
receive the interests. It is further anticipated that pursuant to the trust
agreements (i) a majority of the trustees would be required to be independent of
the Corporation's management; (ii) approval of a majority of the trustees would
be required to take any action; and (iii) the trust would be irrevocable and
would terminate after the earliest of (x) the trust property having been fully
distributed, or (y) a majority in interest of the beneficiaries of the trust, or
a majority of the trustees, having approved of such termination, or (z) a
specified number of years having elapsed after the creation of the trust.
Under the DGCL, in the event the Corporation fails to create an adequate
Contingency Reserve for payment of its expenses and liabilities, or should such
Contingency Reserve and the assets held by the liquidating trust or trusts be
exceeded by the amount ultimately found payable in respect of expenses and
liabilities, each stockholder could be held liable for the payment to creditors
of such stockholder's pro rata share of such excess, limited to the amounts
theretofore received by such stockholder from the Corporation or from the
liquidating trust or trusts.
If the Corporation were held by a court to have failed to make adequate
provision for its expenses and liabilities or if the amount ultimately required
to be paid in respect of such liabilities exceeded the amount available from the
Contingency Reserve and the assets of the liquidating trust or trusts, a
creditor of the Corporation could seek an injunction against the making of
distributions under the Plan on the ground that the amounts to be distributed
were needed to provide for the payment of the Corporation's expenses and
liabilities. Any such action could delay or substantially diminish the cash
distributions to be made to stockholders and/or interest holders under the Plan.
Final Record Date
The Corporation intends to close its stock transfer books and discontinue
recording transfers of shares of Preferred and Common Stock on the Final Record
Date and thereafter certificates representing shares of Preferred or Common
Stock will not be assignable or transferable on the books of the Corporation
except by will, intestate succession or operation of law. After the Final Record
Date, the Corporation will not issue any new stock certificates, other than
replacement certificates. It is anticipated that no further trading of the
Corporation's shares will occur on or after the Final Record Date. See "Listing
and Trading of the Common Stock and Interests in the Liquidating Trust or
Trusts" below. All liquidating distributions from the Corporation or a
liquidating trust on or after the Final Record Date will be made to stockholders
according to their holdings of capital stock as of the Final Record Date.
Subsequent to the Final Record Date, the Corporation may at its election require
stockholders to surrender certificates representing their shares of the capital
stock in order to receive subsequent distributions. Stockholders should not
forward their stock certificates before receiving instructions to do so. If
surrender of stock certificates should be required, all distributions otherwise
payable by the Corporation or the liquidating trust, if any, to stockholders who
have not surrendered their stock certificates may be held in trust for such
stockholders, without interest, until the surrender of their certificates
(subject to escheat pursuant to the laws relating to unclaimed property). If a
stockholder's certificate evidencing the capital stock has been lost, stolen or
destroyed, the stockholder may be
16
required to furnish the Corporation with satisfactory evidence of the loss,
theft or destruction thereof, together with a surety bond or other indemnity, as
a condition to the receipt of any distribution.
Listing and Trading of the Common Stock and Interests in the Liquidating Trust
or Trusts
The Corporation currently intends to close its stock transfer books on the
Final Record Date and to cease recording stock transfers and issuing stock
certificates (other than replacement certificates) at such time. Accordingly, it
is expected that trading in the shares will cease on and after such date.
The Common Stock is currently listed for trading on the American Stock
Exchange. For continued listing, a company, among other things, must meet
certain minimum requirements with respect to net tangible assets, market value
of its securities held by non-affiliates, and minimum bid prices per share. The
Corporation expects that, as a result of the cessation of its operations and the
anticipated decrease in its assets resulting from distributions to its
stockholders, its Common Stock will be delisted from the American Stock Exchange
not later than shortly after the approval of the Plan of Liquidation by the
stockholders if such approval occurs. Trading, if any, in the Common Stock would
thereafter be conducted in the over-the-counter market in the so-called "pink
sheets" or the NASD's "Electronic Bulletin Board." In any event, the Corporation
will close its stock transfer books upon the filing of the Certificate of
Dissolution. Thereafter, the stockholders will not be able to transfer their
shares. Such determination will be made by the Board of Directors and management
prior to the transfer of unsold assets to the liquidating trust and will be
based on, among other things, the Board of Directors and management's estimate
of the value of the assets being transferred to the liquidating trust or trusts,
tax matters and the impact of compliance with applicable securities laws. Should
the interests be transferable, the Corporation plans to distribute an
information statement with respect to the liquidating trust or trusts at the
time of the transfer of assets and the liquidating trust or trusts may be
required to comply with the periodic reporting and proxy requirements of the
Exchange Act. Even if transferable, the interests are not expected to be listed
on a national securities exchange and the extent of any trading market therein
cannot be predicted.
As stockholders will be deemed to have received a liquidating distribution
equal to their pro rata share of the value of the net assets distributed to an
entity which is treated as a liquidating trust for tax purposes (see "Certain
Federal Income Tax Consequences"), the distribution of non-transferable
interests could result in tax liability to the interest holders without their
being readily able to realize the value of such interests to pay such taxes or
otherwise.
Certain Federal Income Tax Consequences
The following discussion summarizes certain U.S. federal income tax
considerations that may be relevant to shareholders of the Corporation as a
result of its liquidation. This discussion is based on the Internal Revenue Code
(the "Code"), Treasury Regulations promulgated under the Code, judicial
decisions, and administrative rulings as of the date of this proxy statement,
all of which are subject to change or differing interpretations, including
changes and interpretations having retroactive effect. The discussion below does
not address all U.S. federal income tax consequences or any state, local or
foreign tax consequences of the liquidation. Shareholders subject to special
treatment, including dealers in securities or foreign currency, tax-exempt
entities, non-U.S. shareholders, banks, thrifts, insurance companies, persons
that hold our capital stock as part of a "straddle", a "hedge", a "constructive
sale" transaction or a "conversion transaction," persons that have a "functional
currency" other than the U.S. dollar, and investors in pass-through entities,
may be subject to special rules not discussed below. This discussion also does
not address the U.S. federal income tax consequences of the liquidation to a
holder of our capital stock that does not hold such stock as a capital asset, or
to a holder of our capital stock who is not United States person (generally
defined by the Code as a U.S. citizen or resident, a U.S. domestic corporation,
an estate the income of which is includable in its gross income for U.S. federal
income tax purposes without regard to its source, or a trust if a U.S. court is
able to exercise primary supervision over the administration of the trust and
one or more U.S. persons have the authority to control all the substantial
decisions of the trust).
17
This U.S. federal income tax discussion is for general information only and
may not address all tax considerations that may be significant to a holder of
our capital stock. The following discussion has no binding effect on the
Internal Revenue Service (the "IRS") or the courts, and assumes that the
Corporation will liquidate in accordance with the Plan in all material respects.
No ruling has been requested from the IRS with respect to the anticipated tax
treatment of the Plan, and the Corporation will not seek an opinion of counsel
with respect to the anticipated tax treatment. If any of the anticipated tax
consequences described herein proves to be incorrect, the result could be
increased taxation at the corporate and/or shareholder level, thus reducing the
benefit to the shareholders and the Corporation from the liquidation. Tax
considerations applicable to particular shareholders may vary with and be
contingent on the shareholder's individual circumstances. Shareholders are urged
to consult with their own tax advisor as to the particular tax consequences of
the liquidation, including the applicability and effect of any state, local or
foreign laws and changes in applicable tax laws.
Tax Consequences to the Corporation
The Corporation has qualified as a REIT under Sections 856-860 of the Code
since its formation in 1997. As a REIT, the Corporation is generally not subject
to federal corporate income tax on the portion of its taxable income that is
currently distributed to shareholders in distributions that are eligible for the
dividends paid deduction. If the Plan is adopted, the Corporation is expected to
carry out the liquidation in a manner that will allow it to continue to meet the
requirements for qualification as a REIT until the Corporation has distributed
all its assets to its shareholders, which may include the transfer of assets to
a liquidating trust. The Board of Directors, however, has the authority under
the Plan to cause the Corporation to discontinue its status as a REIT at any
time if the Board of Directors finds it in the best interests of the
shareholders to do so.
In order to maintain the Corporation's status as a REIT it must, among
other things, continue to derive income from qualified sources, principally
rents from real property, interest from mortgages on real property and gains
from the sale or exchange of real estate assets. In addition, the Corporation's
principal investments must continue to be in real estate assets.
So long as the Corporation continues to qualify as a REIT, any net gain
from "prohibited transactions" will be subject to a 100% tax. "Prohibited
transactions" are sales of property held primarily for sale to customers in the
ordinary course of a trade or business. Whether a real estate asset is property
held primarily for sale to customers in the ordinary course of a trade or
business is a highly factual determination. The Corporation believes that none
of the sales of its assets in accordance with the Plan would constitute a
prohibited transaction. There can, however, be no assurance that the IRS would
not successfully challenge the characterization of assets the Corporation holds
for purposes of applying the 100% tax.
The Corporation expects to completely liquidate within 24 months after the
adoption of the Plan. Assuming that the Corporation liquidates, distributions
made pursuant to the Plan within such 24-month period will be treated as
dividends paid for purposes of computing the Corporation's dividends paid
deduction, but only to the extent of its earnings and profits (computed without
regard to capital losses), for the taxable year in which any such distributions
are made. As a result, and provided that it continues to qualify as a REIT, the
Corporation believes that it will not be subject to federal corporate income tax
on gain recognized in connection with liquidating sales of our assets, nor will
it be subject to federal corporate income tax on gains realized upon a
liquidating distribution of any of its appreciated assets.
While the Corporation expects to continue to qualify as a REIT for the
period prior to the distribution of all of its assets to its shareholders, which
includes the transfer of assets to a liquidating trust, no assurance can be
given that the Corporation will not lose or terminate its status as a REIT as a
result of unforeseen circumstances. Should the Corporation lose its status as a
REIT, either inadvertently or because the Board of
18
Directors deems such loss to be in the best interests of its shareholders, the
Corporation would be taxable as a corporation for federal income tax purposes
and would be liable for federal income taxes at the corporate rate with respect
to its entire income from operations and from liquidating sales and distribution
of its assets for the taxable year in which its qualification as a REIT
terminates and in any subsequent years.
Consequences to U.S. Shareholders
Distributions made by the Corporation within 24 months of the adoption of
the Plan will not be treated as dividend income to shareholders, notwithstanding
the Corporation's treatment of such distributions for purposes of the dividends
paid deduction. Distributions in the liquidation, including an amount equal to a
shareholder's pro rata share of the fair market value of the assets transferred
to a liquidating trust, should first reduce the basis of such shareholder's
shares of the Corporation's capital stock, with any excess constituting a
capital gain. If the sum of all liquidating distributions is less than a
shareholder's basis in its shares, the difference will constitute a capital loss
which is recognized at the time such shareholder receives its final liquidating
distribution, which includes the transfer of assets to a liquidating trust. Such
capital gain or loss will be long or short term, depending on whether such
shares have been held for more than one year.
The maximum tax rate imposed on the long-term capital gains of
non-corporate taxpayers is currently 15%, although a 25% maximum tax rate is
imposed on the portion of such gains attributable to the prior depreciation
claimed in respect of depreciable real property held for more than one year and
not otherwise treated as ordinary "recapture" income under Section 1250 of the
Code. The Secretary of the Treasury has the authority to prescribe appropriate
regulations regarding the manner in which the capital gains rates will apply to
sales and exchanges by partnerships and REITs and of interests in partnerships
and REITs. Pursuant to this authority, the Secretary of the Treasury issued
final regulations on September 20, 2000 relating to the taxation of capital
gains in the case of sales and exchanges of interests in partnerships, S
corporations and trusts, but not of interests in REITs. Accordingly,
shareholders are urged to consult with their own tax advisors with respect to
their capital gain tax liability resulting from the Corporation's liquidation
and their receipt of liquidating distributions.
Backup Withholding
Unless a shareholder complies with applicable reporting and/or
certification procedures, or is an exempt recipient under applicable provisions
of the Code and Treasury Regulations, such shareholder may be subject to a 28%
backup withholding tax with respect to any cash payments received pursuant to
the liquidation. Shareholders should consult their own tax advisors to ensure
compliance with these procedures.
Backup withholding generally will not apply to payments made to exempt
recipients such as a corporation or financial institution or to a shareholder
who furnishes a correct taxpayer identification number or provides a certificate
of foreign status and provides other required information. If backup withholding
applies, the amount withheld is not an additional tax but is credited against
that shareholder's U.S. federal income tax liability.
Tax Consequences of the Liquidating Trust
In the event that the Corporation is unable to dispose of all of its assets
within 24 months after adoption of the Plan, or if it is otherwise advantageous
or appropriate to do so, the Board of Directors may establish a liquidating
trust to which the Corporation could distribute in kind its unsold assets. In
any event, even if all of the Corporation's assets were disposed of within such
period, the Board of Directors may decide to establish a liquidating trust to
retain cash reserves beyond such 24-month period to meet its contingent
liabilities. Under the Code, a trust will be treated as a liquidating trust if
it is organized for the primary purpose of liquidating and distributing the
assets transferred to it, and if its activities are all reasonably necessary to
and consistent with the accomplishment of that purpose. However, if the
liquidation is
19
prolonged or if the liquidation purpose becomes so obscured by business
activities that the declared purpose of the liquidation can be said to be lost
or abandoned, it will no longer be consider a liquidating trust. Although
neither the Code nor the Treasury Regulations thereunder provide any specific
guidance as to the length of time a liquidating trust may last, the IRS's
guidelines for issuing rulings with respect to liquidating trust status call for
a term not to exceed three years, which period may be extended to cover the
collection of installment obligations.
An entity classified as a liquidating trust may receive assets, including
cash, from the liquidating entity without incurring any tax. It will be treated
as a grantor trust, and accordingly will also not be subject to tax on any
income or gain recognized by it. Instead, each shareholder will be treated as
the owner of its pro rata portion of each asset, including cash, received by and
held by the liquidating trust. Accordingly, a shareholder will be treated as
having received a liquidating distribution equal to such shareholder's share of
the amount of cash and the fair market value of any asset distributed to the
liquidating trust, and will recognize gain to the extent such value is greater
than such shareholder's basis in its stock, notwithstanding that the shareholder
may not currently receive a distribution of cash or any other assets with which
to satisfy the resulting tax liability. In addition, a shareholder will be
required to take into account in computing such shareholder's taxable income its
pro rata share of each item of income, gain and loss of the liquidating trust.
An individual shareholder who itemizes deductions may deduct his pro rata
share of fees and expenses of the liquidating trust only to the extent that such
amount, together with the shareholder's other miscellaneous deductions, exceeds
2% of his adjusted gross income. A shareholder will also recognize taxable gain
or loss when all or part of his pro rata portion of an asset is disposed of for
an amount greater or less than his pro rata portion of the fair market value of
such asset at the time it was transferred to the liquidating trust. Any such
gain or loss will be capital gain or loss so long as the shareholder holds his
interest in the assets as a capital asset.
If the liquidating trust fails to qualify as such, its treatment will
depend, among other things, upon the reasons for its failure to so qualify. In
such case, the liquidating trust would most likely be taxable as a corporation.
In such case the liquidating trust itself would be subject to tax, and
shareholders could also be subject to tax upon the receipt of distributions from
the liquidating trust. If the Board of Directors avails itself of the use of a
liquidating trust, it is anticipated that every effort will be made to ensure
that it will be classified as such for federal income tax purposes.
State and Local Income Tax
Shareholders may also be subject to state or local taxes with respect to
the liquidating distributions received from the Corporation pursuant to the
Plan. Shareholders are urged to consult their own tax advisors regarding such
taxes.
Effect of Liquidation
- ---------------------
There can be no assurance that net proceeds distributed to holders of
Common Stock in liquidation will equal or exceed the book value of the Common
Stock or prices at which the Common Stock has recently traded or may trade in
the future.
Vote Required and Board Recommendation
THE BOARD OF DIRECTORS ENCOURAGES STOCKHOLDERS TO ATTEND THE MEETING. WHETHER OR
NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE
ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. A PROMPT RESPONSE WILL GREATLY
FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION WILL BE
APPRECIATED. STOCKHOLDERS WHO ATTEND THIS MEETING MAY VOTE THEIR STOCK
PERSONALLY EVEN THOUGH THEY HAVE SENT IN THEIR PROXIES.
20
The ratification and approval of the Plan of Liquidation requires the
affirmative vote of the holders of a majority of the outstanding shares of
Preferred and Common Stock entitled to vote.
The Board of Directors neither recommends nor opposes Proposal Two.
PROPOSAL THREE
--------------
RATIFICATION AND APPROVAL OF THE PROPOSAL OF THE BOARD OF DIRECTORS THAT
THE CORPORATION RESTRUCTURE AND CONVERT ITS CURRENT MANAGEMENT AND BUSINESS
OPERATIONS FROM AN "EXTERNALLY ADVISED" AND MANAGED REAL ESTATE INVESTMENT
TRUST ("REIT") TO A "SELF-ADVISED" AND MANAGED REIT
General
The Board of Directors believes that it is appropriate that the
shareholders have an opportunity to consider three different alternatives as to
the ongoing direction of the Corporation. Proposal Two proposes that the
Corporation be liquidated and dissolved. Proposal Three proposes that that the
Corporation restructure and convert its current management and business
operations from an "externally advised" REIT to a "self advised" REIT. Proposal
Four proposes that the Corporation retain and renew its existing Restated
Management Agreement and remain "externally advised". The Board of Directors
neither recommends nor opposes any of these proposals. A shareholder may vote
"For" or "Against" any or all of these Proposals Two, Three and Four.
In general, there are two ways that a real estate investment trust ("REIT")
is managed. Currently the Corporation is "externally advised" which means all of
the management of the Corporation is provided to it by Capital Alliance
Advisors, Inc. (the "Manager" or "CAAI") via two major contractual agreements.
Those are the Home Equity Loan Origination Services and Loan Servicing Agreement
("LOS Agreement") and the Restated Management Agreement ("Management
Agreement"). Therefore, the Corporation currently has no employees, since all of
the people needed to conduct the day-to-day affairs of the Corporation are
employees of the Manager. A second way that a REIT is managed is through being
"self-advised." Being "self-advised" means that the REIT employs its own
personnel directly and that they are responsible for managing, supervising and
directing all the affairs of the REIT.
Reasons for the "Self-Advised" Proposal
Background. Since the Corporation's inception the Manager has advised the
Corporation and overseen investments and operations, subject to the oversight of
the Board of Directors. Under the existing "externally advised" structure, the
Manager receives compensation from the Corporation based upon both the Home
Equity Loan Origination Services and Loan Servicing Agreement (the "LOS
Agreement") and the Restated Management Agreement (the "Management Agreement").
Following is a summation of the costs to the Corporation and the expenses borne
by the Manager under the existing contracts. Shareholders will need an
understanding of the existing contracts so that a comparison to the "self
advised" alternative can be evaluated.
Under the current LOS Agreement, which term expires December 31, 2008, the
Manager receives, "monthly...an amount equal to one-twelfth of two percent (2%)
annually of Gross Mortgage Assets of the Corporation computed at the end of each
month. Gross Mortgage Assets means for any month the weighted average book value
of the Mortgages and real property of the Corporation computed at the end of the
month... All compensation for origination services paid by the borrowers from
the Corporation in the form of `points' on Home Equity Loans originated... are
paid to the Corporation. The Corporation receives all
21
prepayment charges and penalties." The LOS Agreement provides that the Manager
is to bear the following expenses:
(a) employment expenses of the officers and directors and personnel of the
Manager and the expenses, incidental to the origination and servicing
of Home Equity loans hereunder;
(b) rent, telephone, utilities, office furniture and furnishings and other
office expenses incurred by or allocable to the Manager for its own
benefit and account;
(c) processing, documentation, appraisal, inspection, escrow, and other
expenses (other than postage which is paid by the Corporation) with
respect to origination and servicing of Home Equity Loans for the
Corporation;
(d) advertising and promotional expenses incurred in seeking and
originating Home Equity Loans for the Corporation; and
(e) miscellaneous administrative and other expenses of the Manager not
relating to the performance of its loan origination and servicing
functions for the Corporation.
The Management Agreement was, from the inception of the Corporation,
modeled after similar agreements used by leading Mortgage REITs in the mortgage
industry. Under the Management Agreement, the Manager receives, "a Regular
Management fee payable monthly equal to one-twelfth of one percent (1%) of the
Gross Mortgage assets of the Corporation plus one-twelfth of one-half (1/2%) of
the book value of the non-mortgage assets of the Corporation. `Gross Mortgage
Assets' means, for any month, the book value of the mortgages, mortgage related
investments and the real property of the Corporation computed at the end of the
month." In addition, the Manager can earn Incentive Management Compensation "if
the Corporation's annualized Return on Equity during any fiscal quarter
(computed by multiplying the Return on Equity for such fiscal quarter by four)
is in excess of the Ten Year U.S. Treasury Rate plus 2%, the Corporation will
pay the Manager, as incentive compensation for such quarter, an amount equal to
25% of the Net Income of the Corporation in excess of such Return on Equity, but
in no event shall any payment of incentive compensation under Management
Agreement reduce the Corporation's annualized Return on Equity for such quarter
to less than the Ten Year U.S. Treasury Rate plus 2%. Similarly, in no event
shall any payment of incentive compensation under this Section be payable unless
dividends payable on account of the Series A Preferred Preference Amount have
been paid. The Corporation's interest expenses for borrowed money are deducted
in calculating Net Income which is determined pursuant to generally accepted
accounting principles before deduction of dividends paid, and any net operating
loss deductions arising from losses in prior periods."
Reduction in the Cost of Operations. The Proposal for the Corporation to
become "Self Advised" would incorporate a significant change in the relationship
between the Manager and the Corporation and should result in an overall
reduction in the cost of operations using either historical levels of Gross
Mortgage Assets or based upon a projected increase in Gross Mortgage Assets held
by the Corporation. If Proposal Three is approved by the Board of Directors and
is ratified and approved by the shareholders, the Board of Directors would set a
date for the Corporation to become "self-advised." That date would be at the end
of the calendar quarter immediately following the Shareholder vote (the
"Transition Date"). On the Transition Date the following changes would occur.\
(a) The existing LOS and Management Agreements would be terminated. CAAI
will enter into a new Agreement(s) with the Corporation for two years.
CAAI's functions under the new Agreement(s) would be limited to loan
originations and the loan servicing needed on the loans held in
inventory. There would not be any amended or new Restated Management
Agreement between the parties nor will the Manager seek any
termination compensation that it may be entitled as a result of the
termination of the existing Restated Management Agreement. CAAI will
be paid a one time lump sum payment of $500,000 payable on the
Transition Date.
22
Loan Originations. CAAI will present "portfolio loans" to the
Corporation for acquisition at the time loan documents are sent to
escrow. The Corporation will have three business days to determine
whether it will acquire the loan subject to a predetermined formula,
the "Market Acceptable Return on Equity" ("MAROE") formula, and to
notify CAAI accordingly. On any loan that Corporation acquires, the
Corporation will pay a premium or discount to CAAI depending upon the
application of the formula. CAAI will receive any origination points
and underwriting fees generated from originating the loan and will
incur all costs of origination. The Corporation will not have an
obligation to acquire any CAAI generated loan presented for
acquisition; however, on any loan presented, the Corporation shall
have the exclusive option to purchase such loan, provided that the
Corporation has given CAAI proper notice, until the loan funds and
closes. CAAI will notify the Corporation, in writing, about any loans
that are coming up for renewal and then determine, in conjunction with
the Corporation, whether CAAI should proceed with the renewal. If CAAI
is asked to proceed, it will be compensated as it would for any loan
origination. The Corporation may renew any CAAI generated loan without
compensation to CAAI, if such renewals are coordinated by the
Corporation.
Loan Servicing. CAAI, under the "self-advised" management of the
Corporation, would continue to provide loan servicing for the
Corporation loan inventory portfolio utilizing its personnel. The
Corporation will pay directly all third party servicing costs. CAAI
will be paid $50 per loan serviced per month during the first 12
months after the Transition Date and $55 per loan serviced per month
thereafter for up to an additional 12 months. The loan count will be
based on the number of loans in inventory at the end of each month
being used as the loan count for the subsequent month. Loan servicing
will be engaged on a quarterly basis and may be terminated by a 30 day
notice prior to Quarter's end (March, June, September, December) from
either party. CAAI shall receive $500 per month for any Real Estate
Owned property that the Corporation asks CAAI to manage and oversee.
Such fee shall be subject to quarterly cancellation with 30 day notice
by either party.
(b) The Corporation will enter into a sublease from CAAI for Class "A"
office space in downtown San the Francisco for three years (with a one
year extension option). The monthly payment, under sublease, shall be
17% of the actual aggregate monthly payment incurred by CAAI each
month based on the relative square footage of the space and its use.
CAAI believes that the rate that the Corporation would pay is at or
below market rates for comparable space. The sublease may be
terminated by the Corporation if CAAI decides to no longer provide
services to CAIT under (a) above.
(c) The Corporation will reimburse CAAI for overhead costs that CAAI
incurs on the Corporation's behalf. Costs will be identified, whenever
possible, by specific identification. An equitable arrangement will be
entered into with CAAI to cover the balance of the Corporation's
overhead.
Total Focus by Management on Corporation Operations. Certain current CAAI
employees may be hired directly by the Corporation in order for it to conduct
its loan investment and portfolio business. Richard J. Wrensen will resign as an
officer and director of Capital Alliance Advisors, Inc. and will sell all of his
ownership interest in CAAI, effective June 30, 2006. If Proposal Three passes,
Mr. Wrensen would become Chief Executive Officer, President, and Chief Financial
Officer of the Corporation upon the Transition Date where he would devote all of
his time and efforts to the affairs of the Corporation. Biographical information
for Mr. Wrensen is set forth in the section of this Proxy Statement entitled
"General Corporation Information: Executive Officers". At March 31, 2006, Mr.
Wrensen had beneficial ownership percentages in the common and preferred stock
outstanding of the Corporation of 14.5% and 2.3% respectively. See the section
in the proxy entitled "Stock Holdings of Principal Stockholders, Directors and
Management." Mr. Wrensen's compensation will be documented in an employment
agreement and will
23
included; base annual salary of at least $180,000 for a term of thirty (30) to
thirty-six (36) months, provision for bonuses, and health, dental and other
benefits. For up to two years, CAAI will provide the Corporation's employees
access to the same health and dental benefits that it offers to its own
employees subject to reimbursement by the Corporation.
Thomas B. Swartz would continue on the Corporation's Board of Directors as
Chairman of the Board and on its Executive Committee and would receive $3,900
per quarter retainer while Chairman plus the same per meeting compensation on
the same basis as the Corporation's independent directors receive.
Dennis R. Konczal would resign as President and Chief Operating Officer of
the Corporation on the Transition Date. Mr. Konczal would stay on the Board of
Directors of the Corporation as a Non-Independent Director during his current
term but would resign from the Executive Committee. Mr. Konczal will receive an
extension of the final exercise date of two months on approximately 19,062 of
the existing options he holds. All of the other terms of the existing stock
option grant remain the same. Mr. Konczal shall be compensated on the same basis
as the independent directors for attending meetings, but he shall receive no
annual retainer.
Preferred REIT Structure In recent years, the number of REITs formed and
the average size of REITs have grown substantially, where institutional
investors, including mutual funds and pension funds, have contributed to this
growth. Based upon its review of becoming a self-advised REIT, the Board of
Directors believes that self-advised REITs are preferred by institutional
investors. Though it is not possible to quantify the expected benefit, the Board
of Directors believes that becoming a self-advised REIT will improve the
Corporation's ability to raise capital.
Conflicts of Interest While an externally managed REIT, the Corporation may
have interests that are different from those of the Manager. At the time the
Corporation was formed, external management of REITs was common. However,
external management is no longer prevalent, in part due to perceived conflicts
of interest. It may be perceived by the investment community that a Manager who
is paid primarily on the basis of assets invested might seek to increase those
assets without emphasizing profitability. Thus, it may be preferable to more
closely align the interests of those making decisions on behalf of the REIT and
the REIT itself. Becoming a self-advised REIT may be the preferable alternative
for reducing certain potential conflicts of interest.
New Employees Historically, the Corporation had no employees. The persons
previously managing the Corporation were employees of the Manager, not of the
Corporation. Converting the Corporation to a self-advised REIT will allow the
Corporation to be managed and run entirely by its own employees. The Corporation
will explore the possibility of adding incentive plans to further attract and
incentivize employees.
Risk Factors
The shareholders should consider carefully the specific risk considerations
set forth below as well as the other information contained in this Proxy
Statement in evaluating the potential advantages, disadvantages, terms and
conditions of Proposal Three.
By Becoming Self-Advised, the Corporation will be Exposed to Risks
Previously Assumed by the Manager. In particular, the Corporation will be
exposed to the risk of inefficiencies and the need to implement strict cost
controls in managing the day-to-day activities of the Corporation and the risks
and costs associated with the attraction and retention of qualified operating
management. The following risks to the Corporation associated with the
activities of the Manager will now be borne by the Corporation:
24
o The Corporation will compete for real estate investments with all
types of investors, including domestic and foreign corporations,
financial institutions, other real estate investment trusts and
individuals. Many of these competitors have greater resources than the
Corporation has.
o If the Corporation's employees fail to perform duties properly, the
Corporation's recourse is limited to these employees, whose liability
may be limited by indemnifications from the Corporation. Previously,
the Manager could have been liable for such failure.
o The success of the Corporation is, in part, dependent on the support,
services and contributions of Mr. Wrensen. The loss of his services
through death, disability or otherwise, after becoming a self-advised
REIT, could seriously harm the Corporation. If Mr. Wrensen ceases to
perform management services for the Corporation or its affiliated
entities, or if his performance is deemed to be unsatisfactory, the
Corporation will be required to secure management services from other
personnel. There can be no assurance in such instance that the
Corporation would be able to obtain qualified management services or
that such services could be obtained on terms favorable to the
Corporation.
o The LOS and Management Agreements provided for limitations of costs
payable by the Corporation in connection with the Corporation's
management. Under self-management, there may be no such limitations.
As a result, the costs of being a self-advised REIT could exceed the
fees payable under the Management Agreement or to a successor
third-party advisor.
The Corporation could lose its Tax Advantages as a Qualified REIT. While
the Corporation believes that it has qualified to be taxed as a REIT under
section 856(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and the Corporation intends to continue to operate so as to qualify after
becoming a self-advised REIT. A REIT generally is not subject to federal
corporate income taxes on that portion of its income distributed currently to
stockholders. Although the Corporation does not believe that becoming a
self-advised REIT will cause us to lose its status as a REIT, no assurance can
be given that we will be able to continue to operate in a manner so as to remain
so qualified. In addition, no assurance can be given that legislation, new
Department of Treasury regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to
qualification as a REIT or the federal income tax consequences of such
qualification.
Vote Required and Board Recommendation. The ratification and approval of
Proposal Three requires the affirmative vote of the holders of a majority of the
shares of Preferred and Common Stock voting at the meeting in person or by proxy
once a quorum has been achieved.
The Board of Directors neither recommends nor opposes Proposal Three.
PROPOSAL FOUR
-------------
RATIFICATION AND APPROVAL OF THE PROPOSAL TO RENEW THE RESTATED
MANAGEMENT AGREEMENT FOR A TWO-YEAR TERM AND CONTINUE THE EXISTING
"EXTERNAL MANAGEMENT" OF THE CORPORATION
General
The Board of Directors believes that it is appropriate that the
shareholders have an opportunity to consider three different alternatives as to
the ongoing direction of the Corporation. Proposal Two proposes that the
Corporation be liquidated and dissolved. Proposal Three proposes that that the
Corporation restructure and convert its current management and business
operations from an "externally advised" REIT to a "self advised" REIT. Proposal
Four proposes that the Corporation retain and renew its existing Restated
Management Agreement and remain "externally
25
advised". The Board of Directors neither recommends nor opposes any of these
proposals. A shareholder may vote "For" or "Against" any or all of these
Proposals Two, Three and Four.
In general, there are two ways that a real estate investment trust ("REIT")
can be managed. Currently the Corporation is "externally advised" which means
all of the management of the Corporation is provided to it by Capital Alliance
Advisors, Inc. (the "Manager" or "CAAI") via two major contractual agreements.
Those agreements are the Home Equity Loan Origination Services and Loan
Servicing Agreement ("LOS Agreement") and the existing Restated Management
Agreement. The Corporation currently has no employees, since all of the people
needed to conduct the day-to-day affairs of the Corporation are employees of the
Manager. Under the existing "externally advised" structure, the Manager receives
compensation from the Corporation based upon both the Home Equity Loan
Origination Services and Loan Servicing Agreement (the "LOS Agreement") and the
Restated Management Agreement. The term of the current Restated Management
Agreement expires December 31, 2006. A vote "For" this proposal retains and
renews the Restated Management Agreement term for two (2) years until December
31, 2008. In essence, the Corporation would continue to be managed in a similar
fashion the way it has been managed since its inception. Following is a
summation of the costs to the Corporation and the expenses borne by the Manager
under the existing Restated Management Agreement, as well as the performance by
the Manager since the Corporation's inception.
CAAI, the Manager of the Corporation and its predecessors has, since 1994,
managed the Corporation under its Restated Management Agreement, dated December
31, 1996 and has provided mortgage originations and servicing services to the
Corporation under its Home Equity Loan Origination Services and Loan Servicing
Services, dated January 2, 1996. Since 1995 the Corporation has:
(a) Been profitable every year since 1995 (excepting 2005 and 2006 to
date);
(b) Paid 103 consecutive Preferred Share dividends from 1995 through 2004;
and
(c) Paid quarterly consecutive Common Share dividends from 1995 through
2004 with four omissions.
Compensation to the Manager has been paid on the same basis as it has since
1994. The losses experienced in 2005 and in 2006 to date have, the Manager
believes, resulted from the increasingly high, short term interest rates since
2004 with reduced interest spreads, increased competition and rising costs
driven by Sarbanes-Oxley regulations. The Corporation's share price on the
American Stock Exchange has suffered in a like manner, as has been the case for
most other mortgage REITs for the last several years.
The Restated Management Agreement.
The Restated Management Agreement was, from the inception of the
Corporation, modeled after similar agreements used by leading Mortgage REITs in
the mortgage industry. Under the Restated Management Agreement, the Manager
receives, "a Regular Management fee payable monthly equal to one-twelfth of one
percent (1%) of the Gross Mortgage Assets of the Corporation plus one-twelfth of
one-half (1/2%) of the book value of the non-mortgage assets of the Corporation.
`Gross Mortgage Assets' means, for any month, the book value of the mortgages,
mortgage related investments and the real property of the Corporation computed
at the end of the month." In addition, the Manager can earn Incentive Management
Compensation "if the Corporation's annualized Return on Equity during any fiscal
quarter (computed by multiplying the Return on Equity for such fiscal quarter by
four) is in excess of the Ten Year U.S. Treasury Rate plus 2%, the Corporation
will pay the Manager, as incentive compensation for such quarter, an amount
equal to 25% of the Net Income of the Corporation in excess of such Return on
Equity, but in no event shall any payment of incentive compensation under
Management Agreement reduce the Corporation's annualized Return on Equity for
such quarter to less than the Ten Year U.S. Treasury Rate plus 2%. Similarly, in
no event shall any payment of incentive compensation under this Section be
payable unless dividends payable on account of the Series A Preferred Preference
Amount have been declared and paid. The Corporation's interest expenses for
borrowed money are deducted in calculating Net Income which is determined
pursuant
26
to generally accepted accounting principles before deduction of dividends paid,
and any net operating loss deductions arising from losses in prior periods."
The Restated Management Agreement provides that if the renewal of the
agreement is not ratified by an affirmative vote of the shareholders, the
Corporation "shall pay the Manager a termination or non-renewal fee determined
by independent appraisals equal to the fair market value to Manager of this
Management Agreement assuming that it was newly renewed for a period of two (2)
years as of the effective date of such termination."
Vote Required and Board Recommendation
The ratification and approval of Proposal Four, the renewal of the
Manager's Restated Management Agreement, requires the affirmative vote of the
holders of a majority of the outstanding shares of Preferred and Common Stock
entitled to vote.
The Board of Directors neither recommends nor opposes Proposal Four.
PROPOSAL FIVE
-------------
APPROVAL OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANT
Rothstein, Kass & Company LLP has provided independent public accounting
services to the Corporation since 2005. The Board has recommended to the
shareholders that they approve the selection of Rothstein, Kass & Company LLP to
examine the Corporation's financial statements for the year ending December 31,
2006. If the shareholders do not approve the selection of Rothstein, Kass &
Company LLP as the Corporation's independent public accountant, or if
circumstances arise that make the continuation of Rothstein, Kass & Company LLP
as the Corporation's independent public accountant impossible or inappropriate
for the year ending December 31, 2006, that selection will be reconsidered by
the Audit Committee and the Board. A representative of Rothstein, Kass & Company
LLP is expected to be present at the Annual Meeting to respond to appropriate
questions and to make a statement if he/she so desires. As required by the
Sarbanes-Oxley Act of 2002, Rothstein, Kass & Company LLP has appointed new
primary and review partners for the Corporation's audit.
Assuming that a quorum is present, the affirmative vote of a majority of
all the votes cast at the Annual Meeting is necessary for approval of the
selection of Rothstein, Kass & Company LLP as the Corporation's independent
auditors for the fiscal year ending December 31, 2006. The Audit Committee has
considered whether the services included under All Other Fees is compatible with
maintaining the principal accountant's independence. Audit Fees. The aggregate
fees billed for professional services rendered for the audit of the
Corporation's annual financial statements for 2005 and for reviews of financial
statements included in the Corporation's Form 10-KSB for that fiscal year
totaled $93,125.00. The aggregate fees billed by Rothstein, Kass & Company LLP
for 2005 for services other than audit services were $6,400.00. For purposes of
the vote on this proposal, abstentions will not be counted as votes cast and
will have no effect on the result of the vote, although they will be counted in
determining the presence of a quorum.
PROPOSAL SIX
------------
OTHER BUSINESS
At this date, management knows of no other matters than proposals one, two,
three, four and five proposed to be brought before the Annual Meeting. If any
other business should properly come before the
27
Annual Meeting for shareholder action, the named proxies will vote the shares
represented by the Proxies in accordance with their best judgment
STOCKHOLDER PROPOSALS AND NOMINATIONS
The Bylaws of the Corporation provide a procedure for shareholder proposals
and shareholder nominations of persons for election to the Board of Directors.
That Procedure provides that any shareholder intending to present a proposal or
nomination for election of one or more Directors at the Annual Meeting must
deliver a written notice to the Corporation's Secretary at the Corporation's
principal executive offices by personal delivery, registered mail, or
telegraphic or facsimile transmission and be actually received by the Secretary
of the Corporation on a date in the current year which corresponds to a date at
least one-hundred twenty (120) days before the date on which the Corporation
first mailed its proxy materials for the prior year's annual meeting of
shareholders.
Any such notice of a stockholder proposal from a shareholder to the
Corporation's Secretary must set forth as to each matter such shareholder
proposes to bring before the meeting (i) a reasonably detailed description of
the business desired to be brought before the meeting and the reasons for
conducting such business at the meeting, (ii) the name and the business and
residence address of the shareholder proposing such business, (iii) the class
and number of shares of stock of the Corporation which are owned by such
shareholder, (iv) any material interest of such shareholder in such business;
and (v) any other information that is required to be provided by such
shareholder pursuant to the Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder. If the shareholder's notice to the
Corporation's Secretary proposes to nominate one or more individuals for
election or reelection as Director, that notice must set forth (a) the name and
address of the shareholder who intends to make the nomination and of the Person
or Persons to be nominated; (b) a representation that the shareholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
Person or Persons specified in the notice; (c) a description of all arrangements
or understandings between the shareholder and each nominee and any other Person
or Persons (naming such Person or Persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (d) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities Exchange Act of 1934, as amended, had the nominee been nominated, or
intended to be nominated, by the Board of Directors; and (d) the consent of each
nominee to serve as a Director if so elected.
If the shareholder's notice to the Secretary proposes to bring other
business before the meeting, that notice must include a brief description of (i)
that business, (ii) the reasons for conducting that business at the meeting, and
(iii) any material interest in that business held by that shareholder (and by
the beneficial owner, if any, on whose behalf the proposal is made). If a
shareholder proposal or nomination is not made in accordance with the procedure
set forth above, the Chairman of the Annual Meeting shall (i) determine and
declare at the Annual Meeting that the proposed business or nomination was not
properly brought before the Annual Meeting in accordance with the procedures set
forth in the Bylaws and (ii) direct that the business not be transacted or that
the defective nomination be disregarded.
28
MISCELLANEOUS
The proxy statement and the accompanying Proxy are being solicited by the
order of the Directors, and all costs related to this solicitation will be borne
by the Corporation. Proxies may be solicited by mail, telephone, or telegram or
in person. The Manager of the Corporation will request banks, brokerage houses,
and other institutions, nominees, or fiduciaries that hold shares in their names
to forward the solicitation materials to the beneficial owners thereof, and the
Corporation will reimburse those persons for their reasonable expenses in so
forwarding these materials. Directors and officers and regular employees of the
Corporation's Manager may, without additional compensation, solicit Proxies by
telephone or telegram or in person.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Act of 1934 requires the Corporation's
Directors and executive officers, and persons who own more than ten percent of a
registered class of the Corporation's securities to file with the Commission
initial reports of ownership and reports of changes in ownership of the Common
Stock and other equity securities of the Corporation. Officers, Directors and
greater than ten percent stockholders are required by the Commission's
regulations to furnish the Corporation with copies of all Section 16(a) forms
they file.
To the best of the Corporation's knowledge, all Section 16(a) filing
requirements applicable to its Officers and Directors have been satisfied by
such persons for the fiscal year which ended December 31, 2005 and the period
ending March 31, 2006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Corporation's Annual Report on Form 10-KSB for the year ended December 31,
2005, and its Quarterly Report on Form 10-QSB for the Quarter Ended March 31,
2006 are incorporated herein by reference.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the date of
the Annual Meeting of Shareholders or any adjournment or postponement thereof
shall be deemed to be incorporated by reference herein and made a part hereof
from the date of the filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Proxy Statement to the
extent that a statement contained herein or in any other document subsequently
filed with the Commission which also is deemed to be incorporated by reference
herein modified or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement.
The Company will provide without charge to each person to whom a copy of
this Proxy Statement is delivered, upon the written or oral request of such
person, a copy of any or all of the documents incorporated by reference herein
(not including the exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to Capital Alliance Income Trust Ltd., 100 Pine
Street, Suite 2450, San Francisco, California 94111, Attention: Thomas Swartz,
Chief Executive Officer.
AUDIT COMMITTEE REPORT
Composition
The Audit Committee of the Board of Directors was elected in its current
composition on March 21, 2002 for the year ended December 31, 2005 and composed
of three directors, all who are independent, as
29
required by American Stock Exchange ("AMEX") rules. The Committee operates under
a written charter adopted by the Board of Directors, a copy of which is attached
as Appendix "A". The members of the Audit Committee for the year ended December
31, 2005 were Harvey Blomberg (Chairman), Stanley C. Brooks and Donald R.
Looper.
Responsibilities
The responsibilities of the Audit Committee include assisting the Board of
Directors in selecting an accounting firm to be engaged as the Corporation's
independent accountants. Management is responsible for the Corporation's
internal controls and financial reporting process. The independent accountants
are responsible for performing an independent audit of the Corporation's
financial statements in accordance with generally accepted auditing standards
and for issuing a report thereon. The Audit Committee's responsibility is to
assist the Board in overseeing these processes and the Corporation's internal
audit activities. The charter of the Audit Committee will be revised during 2006
to incorporate matters which are being proposed by the American Stock Exchange
for inclusion in the Corporation's Listing Agreement as a result of new rules of
the Securities Exchange Commission and provisions of the Sarbanes-Oxley Act of
2002.
Review with Management and Independent Accountants
The Audit Committee is required to meet and hold discussions with
management and the independent accountants and has done so on at least two
occasions. The Audit Committee has reviewed and discussed the audited financial
statements with management and has discussed with the independent auditors the
matters required by SAS61. The Audit Committee has received the written
disclosures letter from the independent accountants required by Independence
Standards Board Standard No. 1, and has discussed with the independent
accountant, the independent accountant's independence. Messrs. Harvey Blomberg
(Chairman), Stanley C. Brooks and Donald L. Looper comprise the Corporation's
Audit Committee for the year ended December 31, 2005. Management has represented
to the Audit Committee that the Corporation's financial statements were prepared
in accordance with accounting principles generally accepted in the United
States.
Summary
Based upon the representations of management, and the report by the
independent accountants to management, the audited financial statements were
approved by the Audit Committee for inclusion in the Corporation's Annual Report
on Form 10-KSB for the year ended December 31, 2005, as filed with the
Securities and Exchange Commission.
This report is submitted by the Audit Committee: Harvey Blomberg
(Chairman) and Stanley C. Brooks.
BY ORDER OF THE DIRECTORS,
/s/Thomas B. Swartz
- ------------------------
Thomas B. Swartz, Acting Corporate Secretary
San Francisco, California
July 28, 2006
30
EXHIBIT "A"
PLAN OF LIQUIDATION AND DISSOLUTION
OF
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
This Plan of Complete Liquidation and Dissolution (the "Plan of Liquidation and
Dissolution") is intended to accomplish the complete liquidation and dissolution
of Capital Alliance Income Trust Ltd., A Real Estate Investment Trust, a
Delaware Corporation (the "Corporation"), in accordance with the Delaware
General Law and Section 331 of the Internal Revenue Code of 1986, as amended
(the "Code"), as follows:
1. The Board of Directors of the Corporation (the "Board of Directors") has
adopted this Plan and called a meeting (the "Meeting") of the holders of the
Corporation's common stock and preferred stock to take action on the Plan and
ratify the Corporation's actions taken to date on the Plan. If stockholders
holding a majority of the Corporation's outstanding common stock, par value $.01
per share (the "Common Stock"), and of the Corporation's Series "A" Preferred
Shares par value $.01 per share (the "Preferred Stock"), vote for the adoption
of this Plan at the Meeting, the Plan shall constitute the adopted Plan of the
Corporation as of the date of the Meeting, September 6, 2006 (the "Adoption
Date").
2. After the Adoption Date, the Corporation shall not engage in any
business activities except to the extent necessary to preserve the value of its
assets, wind up its business affairs, and distribute its assets in accordance
with this Plan. No later than thirty (30) days following the Adoption Date, the
Corporation shall file Form 966 with the Internal Revenue Service.
3. From and after the Adoption Date, the Corporation shall complete the
following corporate actions:
(a) The Corporation shall determine whether and when to (i) transfer
the Corporation's property and assets (other than cash, cash equivalents and
accounts receivable) to a liquidating trust (established pursuant to Section 6
hereof), or (ii) collect, sell, exchange or otherwise dispose of all of its
property and assets in one or more transactions upon such terms and conditions
as the Board of Directors, in its absolute discretion, deems expedient and in
the best interests of the Corporation and the stockholders, without any further
vote or action by the Corporation's stockholders. It is understood that the
Corporation will be permitted to commence the sale and disposition of its assets
as soon as possible following the adoption of this Plan by the Corporation's
Board of Directors in order to attain the highest value for such assets and
maximize value for its stockholders. The Corporation's assets and properties may
be sold in bulk to one buyer or a small number of buyers or on a piecemeal basis
to numerous buyers. The Corporation will not be required to obtain appraisals or
other third party opinions as to the value of its properties and assets in
connection with the liquidation. In connection with such collection, sale,
exchange and other disposition, the Corporation shall collect or make provision
for the collection of all accounts receivable, debts and claims owing to the
Corporation.
(b) The Corporation shall pay or, as determined by the Board of
Directors, make reasonable provision to pay, all claims and obligations of the
Corporation, including all contingent, conditional or unmatured claims known to
the Corporation and all claims which are known to the Corporation but for which
the identity of the claimant is unknown.
(c) After payment of approximately $25.75 per share to holders of
outstanding shares of Preferred Stock, the Corporation shall distribute pro rata
to its Common Stockholders, all available cash including the cash proceeds of
any sale, exchange or disposition, except such cash, property or assets as are
required for paying or making reasonable provision for the claims and
obligations of the Corporation. Such distribution may occur all at once or in a
series of distributions and shall be in cash or assets, in such
31
amounts, and at such time or times, as the Board of Directors or the Trustees
(as defined in Section 6 hereof), in their absolute discretion, may determine.
If and to the extent deemed necessary, appropriate or desirable by the Board of
Directors or the Trustees, in their absolute discretion, the Corporation may
establish and set aside a reasonable amount of cash and/or property (the
"Contingency Reserve") to satisfy claims against the Corporation, including,
without limitation, tax obligations, and all expenses of the sale of the
Corporation's property and assets, of the collection and defense of the
Corporation's property and assets, and the liquidation and dissolution provided
for in this Plan.
4. The distributions to the Stockholders pursuant to Section 3, 6 and 7
hereof shall be in complete redemption and cancellation of all of the
outstanding Preferred Stock and Common Stock of the Corporation. As a condition
to receipt of any distribution to the Corporation's stockholders, the Board of
Directors or the Trustees, in their absolute discretion, may require the
stockholders to (i) surrender their certificates evidencing the Preferred Stock
and Common Stock to the Corporation or its agents for recording of such
distributions thereon or (ii) furnish the Corporation with evidence satisfactory
to the Board of Directors or the Trustees of the loss, theft or destruction of
their certificates evidencing the Preferred Stock Common Stock, together with
such surety bond or other security or indemnity as may be required by and
satisfactory to the Board of Directors or the Trustees ("Satisfactory Evidence
and Indemnity"). As a condition to receipt of any final distribution to the
Corporation's stockholders, the Board of Directors or the Trustees, in their
absolute discretion, may require the stockholders to (i) surrender their
certificates evidencing the Common Stock to the Corporation or its agent for
cancellation or (ii) furnish the Corporation with Satisfactory Evidence and
Indemnity. The Corporation will finally close its stock transfer books and
discontinue recording transfers of Common Stock on the earliest to occur of (i)
the close of business on the record date fixed by the Board of Directors for the
final liquidating distribution, (ii) the close of business on the date on which
the remaining assets of the Corporation are transferred to the Trust or (iii)
the date on which the Corporation files its Certificate of Dissolution under the
Delaware General Law (following any post-dissolution continuation period
thereunder), and thereafter certificates representing Preferred Stock and Common
Stock will not be assignable or transferable on the books of the Corporation
except by will, intestate succession, or operation of law.
5. If any distribution to a stockholder cannot be made, whether because the
stockholder cannot be located, has not surrendered its certificates evidencing
the Preferred Stock or Common Stock as required hereunder or for any other
reason, the distribution to which such stockholder is entitled (unless
transferred to the Trust established pursuant to Section 6 hereof) shall be
transferred, at such time as the final liquidating distribution is made by the
Corporation, to the official of such state or other jurisdiction authorized by
applicable law to receive the proceeds of such distribution. The proceeds of
such distribution shall thereafter be held solely for the benefit of and for
ultimate distribution to such stockholder as the sole equitable owner thereof
and shall be treated as abandoned property and escheat to the applicable state
or other jurisdiction in accordance with applicable law. In no event shall the
proceeds of any such distribution revert to or become the property of the
Corporation.
6. If deemed necessary, appropriate or desirable by the Board of Directors,
in its absolute discretion, in furtherance of the liquidation and distribution
of the Corporation's assets to the stockholders, as a final liquidating
distribution or from time to time, the Corporation shall transfer to one or more
liquidating trustees, for the benefit of its stockholders (the "Trustees"),
under a liquidating trust (the "Trust"), any assets of the Corporation which are
(i) not reasonably susceptible to distribution to the stockholders, including
without limitation non-cash assets and assets held on behalf of the stockholders
(a) who cannot be located or who do not tender their certificates evidencing the
Common Stock or Preferred Stock to the Corporation or its agent as herein above
required or (b) to whom distributions may not be made based upon restrictions
under contract or law, including, without limitation, restrictions of the
federal securities laws and regulations promulgated thereunder, or (ii) held as
the Contingency Reserve. The Board of Directors is hereby authorized to appoint
one or more individuals, partnerships or other persons, or any combination
thereof, including, without limitation, any one or more officers, directors,
employees, agents or representatives of the Corporation, to act as the initial
Trustee or Trustees for the benefit of the stockholders and to receive any
32
assets of the Corporation. Any Trustees appointed as provided in the preceding
sentence shall succeed to all right, title and interest of the Corporation of
any kind and character with respect to such transferred assets and, to the
extent of the assets so transferred and solely in their capacity as Trustees,
shall assume all of the liabilities and obligations of the Corporation,
including, without limitation, any unsatisfied claims and unascertained or
contingent liabilities. Further, any conveyance of assets to the Trustees shall
be deemed to be a distribution of property and assets by the Corporation to the
stockholders for the purposes of Section 3 of this Plan. Any such conveyance to
the Trustees shall be in trust for the stockholders of the Corporation. The
Corporation, subject to this Section and as authorized by the Board of
Directors, in its absolute discretion, may enter into a liquidating trust
agreement with the Trustees, on such terms and conditions as the Board of
Directors, in its absolute discretion, may deem necessary, appropriate or
desirable. Adoption of this Plan by a majority of the outstanding Common Stock
shall constitute the approval of the stockholders of any such appointment, any
such liquidating trust agreement and any transfer of assets by the Corporation
to the Trust as their act and as a part hereof as if herein written.
7. Whether or not a Trust shall have been previously established pursuant
to Section 6, in the event it should not be feasible for the Corporation to make
the final distribution to its stockholders of all assets and properties of the
Corporation prior to August 31, 2009 then, on or before such date, the
Corporation shall be required to establish a Trust and transfer any remaining
assets and properties (including, without limitation, any uncollected claims,
contingent assets and the Contingency Reserve) to the Trustees as set forth in
Section 6.
8. After the Adoption Date, the officers of the Corporation shall, at such
time as the Board of Directors, in its absolute discretion, deems necessary,
appropriate or desirable, obtain any certificates required from the Delaware tax
authorities and, upon obtaining such certificates, the Corporation shall file
with the Secretary of State of the State of Delaware a certificate of
dissolution (the "Certificate of Dissolution") in accordance with the Delaware
General Laws.
9. Adoption of this Plan by holders of a majority of the outstanding Common
Stock and Preferred Stock shall constitute the approval of the stockholders of
the sale, exchange or other disposition in liquidation of all of the property
and assets of the Corporation, whether such sale, exchange or other disposition
occurs in one transaction or a series of transactions, and shall constitute
ratification of all contracts for sale, exchange or other disposition which are
conditioned on adoption of this Plan.
10. In connection with and for the purposes of implementing and assuring
completion of this Plan, the Corporation may, in the absolute discretion of the
Board of Directors, pay any brokerage, agency, professional and other fees and
expenses of persons rendering services to the Corporation in connection with the
collection, sale, exchange or other disposition of the Corporation's property
and assets and the implementation of this Plan.
11. In connection with and for the purpose of implementing and assuring
completion of this Plan, the Corporation may, in the absolute discretion of the
Board of Directors, pay the Corporation's officers, directors, employees, agents
and representatives, or any of them, compensation or additional compensation
above their regular compensation, in money or other property, as severance,
bonus, acceleration of vesting of stock or stock options, or in any other form,
in recognition of the extraordinary efforts they, or any of them, will be
required to undertake, or actually undertake, in connection with the
implementation of this Plan. Adoption of this Plan by a majority of the
outstanding Common Stock shall constitute the approval of the Corporation's
stockholders of the payment of any such compensation.
12. The Corporation shall continue to indemnify its officers, directors,
employees, agents and representatives in accordance with its certificate of in,
as amended, and by-laws and any contractual arrangements, for the actions taken
in connection with this Plan and the winding up of the affairs of the
Corporation. The Corporation's obligation to indemnify such persons may also be
satisfied out of the assets of the Trust. The Board of Directors and the
Trustees, in their absolute discretion, are authorized to obtain
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and maintain insurance as may be necessary or appropriate to cover the
Corporation's obligation hereunder, including seeking an extension in time and
coverage of the Corporation's insurance policies currently in effect.
13. Notwithstanding authorization or consent to this Plan and the
transactions contemplated hereby by the Corporation's stockholders, the Board of
Directors may modify, amend or abandon this Plan and the transactions
contemplated hereby without further action by the stockholders to the extent
permitted by the Delaware General Law.
14. The Board of Directors of the Corporation is hereby authorized, without
further action by the Corporation's stockholders, to do and perform or cause the
officers of the Corporation, subject to approval of the Board of Directors, to
do and perform, any and all acts, and to make, execute, deliver or adopt any and
all agreements, resolutions, conveyances, certificates and other documents of
every kind which are deemed necessary, appropriate or desirable, in the absolute
discretion of the Board of Directors, to implement this Plan and the
transactions contemplated hereby, including, without limiting the foregoing, all
filings or acts required by any state or federal law or regulation to wind up
its affairs.
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Capital Alliance Income Trust Ltd.
- --------------------------------------------------------------------------------
100 Pine Street, Suite 2450 o San Francisco, California 94111
Tel: 415/288-9575 o Fax: 415/288-9590
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF
CAPITAL ALLIANCE INCOME TRUST LTD.
PROXY FOR ANNUAL MEETING
SEPTEMBER 6 , 2006
The undersigned, as record owner of the securities of Capital Alliance Income
Trust Ltd., A Real Estate Investment Trust, a Delaware corporation
("Corporation"), described below, hereby revokes any previous proxies and
appoints Dennis R. Konczal, with power of substitution and revocation and for
and in the name of the undersigned, to vote and otherwise represent all of the
shares of the undersigned at the meeting and any adjournment thereof, with the
same effect as if the undersigned were present and voting the shares. The shares
represented by this proxy shall be voted in the following manner:
1. PROPOSAL ONE: ELECTION OF DIRECTORS
For the election of the following persons as Directors of the Corporation
to serve until the third annual meeting of shareholders following his
election and until his respective successor shall be elected and qualify:
[ ] FOR Thomas B. Swartz [ ] FOR Harvey Blomberg
(Instructions to shareholder: If authority to vote for director is being
withheld, strike-out the above clause (1) in its entirety and write
"Authority Withheld" in the margin. If authority to vote for any one
director is being withheld, strike-out the name of the director as to
which authority is withheld.)
2. PROPOSAL TWO: APPROVE PROPOSAL OF THE BOARD OF DIRECTORS THAT THE
CORPORATION BE LIQUIDATED AND DISSOLVED
[ ] FOR [ ] AGAINST [ ] ABSTAIN - approval, by the holders of a
majority of the shares of the corporation entitled to vote that the
determination and proposal of the Board of Directors that the Corporation
be dissolved and liquidated pursuant to Section 275 of the Delaware
General Corporation Law be approved.
3. PROPOSAL THREE: RESTRUCTURE OF MANAGEMENT
[ ] FOR [ ] AGAINST [ ] ABSTAIN - approval of proposal of Board of
Directors that the Corporation restructure and convert its current
management and business operations from an "externally advised" Real
Estate Investment Trust ("REIT) to a "self-advised" and internally managed
REIT ("Restructuring Plan").
4. PROPOSAL FOUR: RENEW EXISTING RESTATED MANAGEMENT AGREEMENT AND CONTINUE
EXISTING "EXTERNAL MANAGEMENT"
[ ] FOR [ ] AGAINST [ ] ABSTAIN - approval of the proposal of the
Board of Directors to renew the existing Restated Management Agreement for
a two-year term and to continue the existing "External Management"; and
5. PROPOSAL FIVE: ELECTION OF AUDITORS
[ ] FOR [ ] AGAINST [ ] ABSTAIN - approval of recommendation of the
Board of Directors that Rothstein, Kass & Company LLP be appointed as
independent auditors of the Corporation for the year ended December 31,
2006; and
6. PROPOSAL FIVE: OTHER ACTION
[ ] FOR [ ] AGAINST [ ] ABSTAIN - other business that may properly
come before the Annual Meeting or any postponements or adjournments
thereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS YOU HAVE INDICATED ABOVE.
IF NO INDICATION HAS BEEN MADE, THE SHARES REPRESENTED BY THIS PROXY WILL BE
VOTED FOR ITEMS 2, 3 AND 4 LISTED ABOVE AND, UNLESS ITEM 5 IS LINED OUT, AS THE
PROXY DEEMS ADVISABLE, ON ANY OTHER PROPER BUSINESS IN PROPOSAL 5 THAT MAY COME
BEFORE THE MEETING.
Dated:_________________2006. ___________________________________
(SIGN EXACTLY AS NAME APPEARS ON YOUR ACCOUNT STATEMENT.)
Shareholder of Record:___________________________________
No. of Class "A" Preferred Shares:____________________
No. of Common Shares:_________________________________
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