September 1, 2006
Ms. Charito Mittelman
Securities and Exchange Commission
Division of Corporation Finance
Washington, D.C. 20549
Dear Ms. Charito Mittelman:
RE: Response to Review of Proxy Statement of
Capital Alliance Income Trust Ltd.
Schedule 14A Proxy Statement
Filed June 26, 2006
File No. 0-12941
This response letter ("R/L") to your review and revised filing of the subject
proxy statement is organized so that our response follows each of your comments
1 through 14 to simplify your review. If the response consumes an additional
page(s), that page will be attached to the letter and numbered accordingly.
Please note that the mailing date of the proxy statement (the "P/S") has been
changed to September 18 and the meeting date has been changed to October 18,
2006 due to the time required to finalize the P/S and allow 20 days to obtain
the return of proxies (the record date of September 12, 2006 cannot be more than
60 days prior to the meeting date) pursuant to the By-laws and Delaware General
Corporation Law ("DGLC"). As you know, resolution of your comment No. 14
required some time as well. Given the delay, the mailing date will obviously be
delayed.
All changes from the original filing of the P/S are underlined in a copy of the
P/S, which we are sending under separate cover.
Our responses (underlined) follow.
General
- -------
1. Since shareholders are given the option to vote yes or no on one or all of
proposals two, three and/or four, the outcome of the vote is unclear in the
event that two of the proposals obtain a majority of votes. Please revise to
discuss the consequences of such an outcome. In particular, please clarify that
if proposal two is adopted, proposals three and four will not be adopted,
irrespective of the shareholder vote.
R/L-1: The Proxy consists of five Proposals. Proposals Two (2), Three (3), and
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Four (4) are referendums on the future of the management of the Corporation. The
- --------------------------------------------------------------------------------
Board of Directors neither recommends nor opposes Proposals Two, Three, or Four.
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The Shareholders' votes on Proposals Two, Three, and Four will provide the Board
- --------------------------------------------------------------------------------
of Directors with information on the Shareholders' organizational/management
- ----------------------------------------------------------------------------
preferences. If the Shareholders' votes cause a conflict among the Proposals
- -------------------------------------------------------------------------------
under consideration, the approved Proposal with the greatest number of "for"
- ----------------------------------------------------------------------------
votes will be the most influential in the Board's decision in implementing the
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future organizational structure of the Corporation.
- ---------------------------------------------------
If Proposal Two (2) is adopted by the affirmative vote of the shareholders of a
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1
majority of the outstanding Common and Preferred Shares "entitled to vote", as
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required by Delaware General Corporation Law, Section 275, Proposals Three (3)
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and Four (4) will not be adopted, regardless of the Shareholders' votes for
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Proposals Three (3) and Four (4).
- ---------------------------------
If, Proposal Three (3) receives the affirmative vote of a majority of the
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Shareholders who are present and voting in person or by proxy at the Annual
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Meeting (i.e. a majority of the quorum) and if Proposal Two (2) is not approved
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by the holders of a majority of the outstanding Common and Preferred Shares
- ---------------------------------------------------------------------------
"entitled to vote", Proposal Three (3) will be approved.
- --------------------------------------------------------
If Proposal Four (4) receives the affirmative vote of a majority of the
- -----------------------------------------------------------------------
outstanding Common and Preferred Shares "entitled to vote", as required by the
- ------------------------------------------------------------------------------
Bylaws of the Corporation, and if Proposal Two (2) is not approved by the
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holders of a majority of the outstanding Common and Preferred Shares "entitled
- ------------------------------------------------------------------------------
to vote", Proposal Four (4) will be approved.
- ---------------------------------------------
If, however, both Proposal Three (3) and Proposal Four (4) are approved, the
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Proposal with the greatest number of "for" votes will be the most influential in
- --------------------------------------------------------------------------------
the Board's decision in implementing the future organizational structure of the
- -------------------------------------------------------------------------------
Corporation and will be approved.
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Certain Relationships and Related Transactions
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2. Please disclose in detail the circumstances of Mr. Looper's resignation.
R/L-2: Mr. Looper's resignation was due to a disagreement with the Corporation
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concerning the approval of a motion addressed by the Board. On June 14, 2006 the
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Board considered a motion by Mr. Looper not to renew the Management Agreement
- -----------------------------------------------------------------------------
between the Corporation and Capital Alliance Advisors Inc., its Manager for
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"cause". Messrs. Blomberg, Brooks, and Looper voted in favor of the motion, and
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Messrs. Swartz, Konczal, and Wrensen, who were interested in the matter as the
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owners of the Manager, voted against the motion. As a majority of the Board did
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not vote in favor of the motion, the Corporation, after consultation with its
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legal counsel, concluded that the motion had not passed. Mr. Looper disagreed
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with this determination and tendered his resignation on June 21, 2006.
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The Legal Background of Mr. Looper's Resignation. Mr. Looper, who is an
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attorney, at the Corporation's Board Meeting in San Francisco on the 21st of
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June, 2006, moved that the Management Agreement between Capital Alliance
- ------------------------------------------------------------------------
Advisors Inc., the Manager, and the Corporation, not be renewed for "cause", the
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basis of which was not discussed. Mr. Looper and Messrs. Blomberg and Brooks
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voted "for" and Messrs. Swartz, Konczal, and Wrensen, who were interested in the
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transaction as owners of the Manager voted "nay".
- -------------------------------------------------
After the vote, the Chairman consulted with the Corporation's outside legal
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counsel who was present and who advised that the motion for non-renewal did not
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pass, notwithstanding the "interest" of Messrs Swartz, Konczal, and Wrensen in
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the matter at issue since Section 141 of the Delaware General Corporation Law
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provides that "The vote of the majority of the directors present at a meeting of
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which a quorum was present shall be the act of the board of directors". Counsel
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further advised that the votes of interested directors were implicitly validated
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notwithstanding their interest in the transaction in question. Therefore, the
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motion failed for lack of a majority vote of the Board.
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Discussion regarding Mr. Looper's resignation have been inserted, as discussed
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with you on Monday, August 21, in "General Corporation Information" on page 3
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and in "Election of Directors" on page 9.
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Interest of Certain Persons in the Proposals, page 7
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2
3. We refer to your statement that you intend to obtain an independent appraisal
in determining the fair market value to the manager of the management agreement.
Please provide an estimate of the termination fee you expect to pay and disclose
that amount here and on page 11 where you discuss the Review of Alternatives and
Conclusion of the Board of Directors.
R/L-3 (a) Appraisals: The statement you refer to regarding the obtaining of
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independent appraisals in determining the fair market value to the Manager of
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the Management Agreement is not a matter of the Manager's voluntary "intent". It
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is a function of the Restated Management Agreement which provides in Section
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6.03 of the Restated Management Agreement as follows:
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Section 6.03. "In the event this Agreement is terminated by the Trust without
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cause, or in the event this Agreement is not renewed by the Trust without cause,
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the Trust, in addition too its obligations under Article IV and Article VI,
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shall pay the Manager a termination or non-renewal fee determined by independent
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appraisals equal to the fair market value to Manager of this effective date of
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termination. Such appraisal shall be conducted by a nationally-recognized
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appraisal firm, .........In such event, (i) the termination fee shall be deemed
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to be the average of the appraisals as conducted by each party's chosen
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appraiser and (iii) each party shall pay the costs of its appraiser so
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chosen.........".
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We believe that determination of the Termination Fee under the above appraisal
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process with a subsequent averaging process is merely a "guess" and not a
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reliable number, readily quantifiable. Due to the uncertainty surrounding this
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amount, the Contingent Reserve includes this fee and other contingent
- ---------------------------------------------------------------------
liabilities. The estimated Contingent Reserve is nine hundred and forty-seven
- -----------------------------------------------------------------------------
thousand dollars ($947,000).
- ----------------------------
4. As a related matter, we note that the "termination fee" payable is in
addition to any fees or expenses then outstanding under the management
agreement. Please disclose the anticipated amount of additional fees payable to
the manager under the management agreement.
R/L-4: The expense reimbursements payable to the Manager under the Management
- -----------------------------------------------------------------------------
Agreement are estimated, then reconciled at the end of each quarter as part of
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the Corporation's 10-Q and 10-K filings. Any outstanding balances are promptly
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satisfied. A balance "due to" or "due from" the Manager is not estimated to be a
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material amount to the Corporation.
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Proposal Two
- ------------
The Board of Directors Proposes that the Corporation be Liquidated and
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Dissolved, page 9
- -----------------
5. Please expand your discussion of proposal two to include all relevant
information required by item 14 of schedule 14A, including pro forma financial
statements.
R/L - 5: The Following financial statements are included to address this
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requirement:
- ------------
o Please see the P/S: Proposal Two - second paragraph
---------------------------------------------------
o Exhibit "A" - Capital Alliance Income Trust Pro Forma Financial Information
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(attached hereto as Exhibit "B" and included in the Proxy Statement as
----------------------------------------------------------------------
Exhibit "B")
------------
6. On page 10 we note your discussion of a future July 28, 2006 date in which
you claim you have not yet received any offers to purchase the business as a
going concern. Since it is not possible to make the determination at this time,
please revise to reference a current date to support your statement.
3
R/L-6: The July 28 date was the initially estimated mailing date of the Proxy
- -----------------------------------------------------------------------------
Statement to the Shareholders. If an offer occurred, we intended to insert it
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into the Proxy Statement. We are shifting the subject "mailing date" to
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September 18, depending, on the finalization of the Proxy Statement. We would
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appreciate your assistance in expediting the process. We have shifted the
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Meeting Date to October 18, 2006 and the Record Date to September 12, 2006 to
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accommodate the finalization of the Proxy Statement, since the DGLC and our
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By-laws provide that the Meeting Date has to be within 60 days of the Record
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Date. If a viable proposal is received prior to the actual mailing date and/or
- ------------------------------------------------------------------------------
the printing date, it will be included in the Proxy Statement disclosures.
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7. At the bottom of page 10, please provide an estimate of the compensation, or
the maximum amount of compensation, you intend to provide to the trustee or
liquidator should Proposal Two be adopted. Provide similar disclosure of the
compensation payable to your officers, directors and agents for services
rendered in connection with the implementation of the plan. Please also discuss
whether your manager could be constructively terminated upon adoption of the
plan of liquidation, paid the termination fee, and then receive compensation
separately in connection with the liquidation.
R/L-7: The Corporation's Board of Directors intends to oversee and effect the
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efficient liquidation of the assets, prompt satisfaction of liabilities, and
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timely distribution of the residual proceeds, if any, to the shareholders. The
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Corporation's Independent Directors may continue to receive an annual retainer
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of $10,000 and $300 per telephonic meeting and $500 per meeting attended in
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person and $4,000 per meeting, if held in California. All Directors will
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continue to be reimbursed for reasonable travel and other out of pocket expenses
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incurred in serving on and attending board and committee meetings. If the
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Manager, a Corporation's officer, or a director is chosen to oversee the
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Liquidation, the liquidator may receive compensation separate from their role as
- --------------------------------------------------------------------------------
a director or officer of the Corporation. Exclusive of the Corporation's legal,
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accounting, loan servicing, loan disposition, and other general and
- -------------------------------------------------------------------
administrative expenses, the Pro Forma Financial Statement, presented in Exhibit
- --------------------------------------------------------------------------------
"B", estimates the liquidator's fee at fifteen thousand dollars per month. If
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the Manager were selected to liquidate the Corporation, the Manager would
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receive compensation, in connection with the liquidation, in addition to a
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Termination Fee.
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8. Please state in this section that the company is not required to obtain
appraisals or other third party opinions as to the value of its assets in
connection with the liquidation as mentioned in section 3(a) of Exhibit A.
R/L-8: The Corporation will not be required to obtain appraisals or other third
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party opinions as to the value of its properties and assets in connection with
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the liquidation.
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Review of Alternatives and Conclusions of the Board of Directors, page 11
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9. Please provide us with copies of any reports the Board considered in
determining to approve the plan of liquidation. Please advise us whether the
Board considered any estimate of potential liquidation proceeds.
R/L-9: See the "Overview of Business Plan" memoranda presented to the Board of
- ------------------------------------------------------------------------------
Directors. Attached as Exhibit "B" to this letter.
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Creditor Liability, page 11
- ---------------------------
4
10. Please expand to quantify the funds reserved to defend lawsuits and the
amount you expect to owe creditors on October 18, 2006 adoption date.
R/L-10 (a): The Corporation currently has only one litigation matter and has no
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material exposure to the cost of defense or liability due to errors and omission
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insurance coverage.
- -------------------
R/L-10 (b): The Corporation has estimated the amount due existing creditors on
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October 17, 2006 to be seven million, three hundred and seventeen thousand,
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one hundred, and thirty-three dollars ($7,317,133). This liability does not
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include a Contingent Reserve estimate of nine hundred and forty-seven thousand
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dollars ($947,000).
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Abandonment: Amendment, page 13
- -------------------------------
11. Please expand your disclosure regarding the Board's ability to modify, amend
or abandon the liquidation plan as approved by the shareholders. In particular,
please discuss any limitations in the charter or under Delaware law on its
ability to not proceed with the liquidation if approved by the shareholders.
Similarly, please discuss whether this discretion is only in the event of a
change in circumstances or may be exercised without limitation.
R/L-11: Subsection (e) of DGLC Section 275 DISSOLUTION GENERALLY; PROCEDURE
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provides for abandonment of dissolution as follows:
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(a) If it should be deemed advisable in the judgment of the board of directors
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of any corporation that it should be dissolved, the board, after the adoption of
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a resolution to that effect by a majority of the whole board at any meeting
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called for that purpose, shall cause notice to be mailed to each stockholder
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entitled to vote thereon of the adoption of the resolution and of a meeting of
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stockholders to take action upon the resolution.
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(b) At the meeting a vote shall be taken upon the proposed dissolution. If a
------------------------------------------------------------------------
majority of the outstanding stock of the corporation entitled to vote thereon
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shall vote for the proposed dissolution, a certification of dissolution shall be
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filed with the Secretary of State pursuant to subsection (d) of this Section.
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(c) Dissolution of a corporation may also be authorized without action of the
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directors if all the stockholders entitled to vote thereon shall consent in
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writing and a certificate of dissolution shall be filed with the Secretary of
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State pursuant to subsection (d) of this Section.
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(d) If dissolution is authorized in accordance with this Section, a certificate
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of dissolution shall be executed, acknowledged and filed, and shall become
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effective, in accordance with Sec. 103 of this Title. Such certificate of
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dissolution shall set forth:
- ----------------------------
(1) the name of the corporation;
----------------------------
(2) the date dissolution was authorized;
------------------------------------
(3) that the dissolution has been authorized by the board of directors and
----------------------------------------------------------------------
stockholders of the corporation, in accordance with subsections (a) and (b) of
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this Section, or that the dissolution has been authorized by all of the
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stockholders of the corporation entitled to vote on a dissolution, in accordance
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with subsection (c) of this section; and
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(4) the names and addresses of the directors and officers of the corporation.
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(e) The resolution authorizing a proposed dissolution may provide that
------------------------------------------------------------------
notwithstanding authorization or consent to the proposed dissolution by the
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stockholders, or the members of a nonstick corporation pursuant to Sec. 276 of
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this title, the board of directors or governing body may abandon such proposed
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dissolution without further action by the stockholders or members.
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5
(f) Upon a certificate of dissolution becoming effective in accordance with Sec.
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103 of this title, the corporation shall be dissolved. (Last amended by Ch. 136,
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L. '87, eff. 7-1-87.)
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(See expanded disclosure on page 15 of the P/S.)
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Contingent Liabilities: Contingency Reserve: Liquidating Trust, page 15
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12. Based on your current assets, liabilities, expenses and obligations, please
provide an estimate range of contingency reserve that may be required.
R/L-12: The Corporation's Liquidation Pro Forma Financial Statements presented
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within Exhibit "B" have reserved nine hundred and forty-seven thousand dollars
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($947,000) as a Contingent Reserve. The adequacy of the Contingent Reserve is
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uncertain, because the reserve is established for unknown, but possible
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liabilities that may or may not be insured. The actual contingency requirement
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may vary significantly from the pro forma reserve.
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Proposal Four, page 25
- ----------------------
13. In your discussion on page 26 relating to your current Manager's performance
since inception, please revise subsections (a), (b) and (c) to provide
information on performance for 2005 and 2006 to the extent practicable.
R/L-13: Detailed annual performance information, including 2005 and the first
- ------- ---------------------------------------------------------------------
half of 2006, was added to the P/S.
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Unresolved Staff Comments on Form 10-KSB for the year ended December 31, 2004
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14. We note that there are unresolved Staff comments relating to your forms
10-KSB and 10-KSB/A for the year ended December 31, 2004, filed April 15, 2005
and April 20, 2005, respectively. Please respond to the comments contained in
our letter dated September 30, 2005.
R/L-14: The Division of Corporation Finance, as stated in its letter of August
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21, 2006, Exhibit "C" hereto, has completed its review of our Form 10-KSB and
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related filings and does not, at this time, have any further comments.
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Sincerely,
/s/ Thomas B. Swartz
--------------------
Thomas B. Swartz
Chairman
6
EXHIBIT "A"
TO: CAIT Board of Directors
FROM: Capital Alliance Advisors, Inc.
RE: Overview of Business Plan for CAIT for 2006 & Beyond
DATE: March 7, 2006
OPERATIONAL CHANGES
The major assumptions on which the attached 2006 Forecast for Capital Alliance
Income Trust Ltd. is based are as follows:
A. Growth in Gross Mortgage Assets to $25 million by year end 2006. Gross
----------------------------------------------------------------
Mortgage Assets were $19.9 Million at year end 2005. See schedule on average
Mortgage Notes Receivable ("MNR"). The Loan Loss Reserve is capped at 1.25% of
Gross Mortgage Assets.
B. Shut down the sellable loan business of CAFC by 3/31/06. The steps to be
--------------------------------------------------------
taken to close down these activities are:
1. Last Loan Approvals were issued 3/3/06, all loans must fund by 3/17/06.
2. CAAI anticipates that 6 to 9 people will be laid off and/or compensation
restructured by month end with notice given on or about 3/10/06. Discuss
severance liability.
3. All remaining CAFC loan inventory to be sold by 3/31/06. Transfer third
party Investor approvals to CAAI.
C. CAAI Fee Modification
---------------------
1. Effective April 1, 2006, compensation under the Management Agreement
will be reduced by 1% of Gross Mortgage Assets.
2. Amend the Loan Origination & Servicing Contract to provide CAAI 25% of
the origination points that are paid by third party borrowers for portfolio
loans designated for CAIT.
OTHER CONSIDERATIONS
A. CAIT to become Internally and/or Self Advised.
----------------------------------------------
1. Given the Schedule 13-D filing, the Board of Directors should
consideration on what basis that CAIT could or should become self advised during
2006.
7
WRENSEN CAIT / CAFC Scenario #1
- ------- Operating Results & Forecast -----------
2006
---------- ------------------------------------- --------- ------------------------------
2005 1st Q 2nd Q 3rd Q 4th Q 2006 Comment
---------- ------------------------------------ --------- ------------------------------
Revenues $2,274,384 1 536,213 573,908 630,273 675,000 2,415,393 Base revenues
Amort of Origination Points 2 - 10,000 19,000 27,800 56,800 Discussion required
CRF/CAFC borrowing fee - 3 - 3bp of CRF borrowing from
------------------------------------------------------ --------- CAIT/CAFC/Gateway
Total Revenues 2,274,384 4 536,213 583,908 649,273 702,800 2,472,193
5
Expenses 6
Interest Expense (Gateway) 894,014 7 159,129 136,039 97,400 96,552 489,120 Franklin effect
CAFC (Gateway) allocatation 42,235 8 6,094 - - - 6,094 Eliminate Gateway/CAFC
Borrowing Fee
Interest Expense (Franklin) - 9 33,200 66,500 116,375 141,313 357,388 More benefits in 2007
10
Mgt Fee - CAAI 235,815 11 55,241 57,682 61,140 64,826 238,890 See Assumptions
Incentive Fee - CAAI - 12 - - - - - Discussion required
LOS Fee - CAAI 471,630 13 105,857 55,792 57,133 58,786 277,568 Discussion required
Amort. of Capitalized Orig. Costs 43,742 14 - - - - - Discussion required
15
Loss Reserve 75,000 16 - 47,340 45,810 46,300 139,450 See Assumptions
REO Loss 223,464 17 - - - - - See Assumptions
REO Expenses 23,900 18 - - - - - See Assumptions
19
Professional Services 135,070 20 30,016 30,016 22,512 22,512 105,054 Undetermined
21
Directors Fees 37,700 22 21,600 10,000 10,000 10,000 51,600 Reasonable
Travel, lodging, meals 3,259 23 3,000 1,000 1,000 1,000 6,000 Reasonable
24
Other 110,938 25 28,000 27,000 26,000 25,000 106,000 Reasonable
---------- ------------------------------------------ ---------
TOTAL EXPENSES 2,296,767 26 442,138 431,368 437,370 466,288 1,777,164
27
---------- ------------------------------------------ ---------
PRE-CAFC NET INCOME (LOSS) (22,383) 28 94,075 152,539 211,903 236,512 695,029
---------- ------------------------------------------ ---------
29 CAFC
CAFC Operating Net Income (159,925) 30 (80,000) (10,500) (6,500) (1,500) (98,500) - Irvine lease app.$3K/mo.
(exp. 9/06)
CAFC MNR Loss - 31 (20,000) - - - (20,000) - copier app.$500/mo.
Severence - 32 open - - - - = - est. liquidation losses
---------- ------------------------------------------ ---------
CAFC Net Income (159,925) 33 (100,000) (10,500) (6,500) (1,500) (118,500) .5% of $4,000,000 = 40,000
---------- ------------------------------------------ --------- plus P/R?
CONSOLIDATED-INCOME /(LOSS) (182,308) 34 (5,925) 142,039 205,403 235,012 576,529 1st Q liquidation and sale
---------- ------------------------------------------ --------- of CAFC
35
36
8
37 CAIT / CAFC Scenario #1
38 Operating Results & Forecast -----------
Assumptions: (i) Input 39
(o) output 40 2006
--------------------------------------------------
(g) given 41 1st Q 2nd Q 3rd Q 4th Q Comments
--------- -------------------------------------------------- -------------------------------
Interest Rates 42
- --------------
Prime i 43 7.40% 7.50% 7.50% 7.50% estimate
LIBOR (30 day) i 44 4.64% 4.65% 4.65% 4.65% estimate
10 Yr. Treasury i 45 4.60% 4.61% 4.62% 4.63% estimate
46
Mortgage Notes Receivable 47
- -------------------------
BOQ MNR g/i 48 19,900,000 19,600,000 21,800,000 23,300,000
+New/Renewal MNR i 49 2,350,000 5,000,000 4,500,000 4,400,000 16,250,000
- Payoffs/Renewals & REO i 50 (2,650,000) (2,800,000) (3,000,000) (3,000,000) (11,450,000)
--------------------------------------------------
EOQ MNR o 51 19,600,000 21,800,000 23,300,000 24,700,000
--------------------------------------------------
Average MNR inventory o 52 19,750,000 20,700,000 22,550,000 24,000,000 (BOQ + EOQ) /2 GMA
Weighted Avg. Interest Rate (BOQ) i 53 10.67% 11.05% 11.13% 11.23% Base rate
MAROE effect 54 0.38% 0.08% 0.10% 0.04%
--------------------------------------------------
Weighted Avg. Interest Rate (EOQ) 55 11.05% 11.13% 11.23% 11.27%
--------------------------------------------------
Quarterly Eff. Wd. Avg. Int. Rate 56 10.86% 11.09% 11.18% 11.25%
--------------------------------------------------
New/Renewal Loan Points 57 0.00% 2.00% 2.00% 2.00%
WAM - months i 58 30 30 30 30
59
Interest & Advances Arrearage 60
- -----------------------------
in months i 61 2.40 2.35 2.30 2.25 limited to 90 days on 2nd; 120
days on 1st
in dollars o 62 421,465 447,939 481,048 505,350 Based on BOQ % and GMA
63 Anerage MNR
Financing: 64
- ----------
Franklin Availability g 65 7,000,000 7,000,000 9,000,000 9,000,000 Current ceiling
Wd. Average Usage i 66 2,000,000 4,000,000 7,000,000 8,500,000
Rate (LIBOR + 2.00%) o 67 6.64% 6.65% 6.65% 6.65%
68
Gateway Availability g 69 25,000,000 25,000,000 25,000,000 25,000,000
Usage o/i 70 6,771,465 5,727,939 4,101,048 4,065,350 GMA +cash+ other assets-Equity-
FB usage-Other A/P
Rate (Prime +1.00% to Prime + 4.00%) o/i 71 9.40% 9.50% 9.50% 9.50% 2.00% = Average margin
72
CAAI - Management Fees o 73 21,171,465 22,147,939 23,531,048 25,005,350 Total GMA
- ----------------------
Reg Management Fee o 74 52,929 55,370 58,828 62,513 1.00% Annualized % of GMA
-----
REO Fee o 75 1,500 1,500 1,500 1,500 $ 500 per REO per month
-----
Cash Management fee 76 813 813 813 813 0.50% of cash
-----
Incentive Fee Threshold g/o 77 245,895 247,449 247,637 247,826 25% of Common ROE > 10 yr
----- Tr. + 2.00% /Q
Incentive Fee o 78 - - - - Accurate, but not relational
Loan Origination & Servicing (LOS) g/i 79 2.00% 1.00% 1.00% 1.00% Annualized % of GMA (only orig
commencing 4/1/06)
Loan Origination & Servicing (LOS) i 80 105,857 55,370 58,828 62,513
LOS % allocated to originations i/o 81 32.50% 65.00% 65.00% 65.00% 185,000 Unamortized12/31/05
------- balance
Amort.Capitalized Orig. Fees (existing) g/i 82 - 34,613 31,032 27,452 Sum of months amortization
Capitalization of Orig. Fees (new) g/i 83 - 35,990 38,238 40,634 Capitalization Rate % * LOS Fee
Amort. Capitalized Orig. Fees (new) g/i 84 - 1,800 5,511 9,455 Sum of months amortization
Balance Unamort Capitalized Orig Fees o 85 185,000 184,578 186,273 190,000 EOQ balance
9
86 CAIT / CAFC Scenario #1
87 Operating Results & Forecast -----------
Assumptions: (i) Input 88
(o) output 89 2006
----------------------------------------------
(g) given 90 1st Q 2nd Q 3rd Q 4th Q Comments
--------- ---------------------------------------------- --------------------------------
Loan Loss Reserve 91 19,750,000 20,700,000 22,550,000 24,000,000 See line 53
- -----------------
Current - Loss Reserve % i 92 0.000% 0.120% 0.120% 0.120% % of Average Quartely MNR balance
(current)
---------------------------------
Current - Loss Reserve $ o 93 - 24,840 27,060 28,800 80,700 + 58,750 = 139,450
---------------------------------
EOQ MNR Increase o 94 - 1,800,000 1,500,000 1,400,000
Experience Loss Reserve i/o 95 - 22,500 18,750 17,500 1.25% Experience rating (20MM at
12/05)
REO Loss i 96 0.00% 0.00% 0.00% 0.00% Absorbed in Loss reserve
REO Expenses i 97 0.00% 0.00% 0.00% 0.00% Absorbed in Loss reserve
98
Other Assets, liabilities & equity 99
- ----------------------------------
Cash i 100 650,000 650,000 650,000 650,000 Estimate - f (New loans &
Repayments)
Investments, prepaids,other A/R i 101 50,000 50,000 50,000 50,000 Other assets
A/P other i 102 100,000 120,000 130,000 140,000 Estimate - f (operations & assets)
equity i 103 13,000,000 13,000,000 13,000,000 13,000,000 Estimate - f(balance+NI-Loss-
Distributions)
104
105
106
REO (Net) i 107 1,000,000 1,000,000 500,000 500,000 1 # REO per quarter GMA
- ---------
108
109
Portfolio Origination Points 110
- ----------------------------
Portfolio Orig. Points o 111 - 100,000 90,000 88,000 278,000 New/rerewal MNR * Points
Recognition of Portfolio Orig points o 112 - (10,000) (10,000) (10,000) (30,000) 2nd quarter
Recognition of Portfolio Orig points o 113 - - (9,000) (9,000) (18,000) 3rd quarter
Recognition of Portfolio Orig points o 114 - - - (8,800) (8,800) 4th quarter
----------------------------------------------- --------
Quarter's recognition - (10,000) (19,000) (27,800) (56,800)
----------------------------------------------- --------
Unrecognized Portfolio Points o 115 - 90,000 71,000 60,200 221,200
----------------------------------------------- --------
Cumulative Balance o 116 0 90,000 161,000 221,200 Deferred income
----------------------------------------------
117
118
119
120
10
EXHIBIT "B"
CAPITAL ALLIANCE INCOME TRUST
PRO FORMA FINANCIAL INFORMATION
CAPITAL ALLIANCE INCOME TRUST
Liquidation - Pro Forma Balance Sheet
(unaudited)
October 17, December 31, December 31, December 31,
2006 2006 2007 2008
------------- ------------ ------------ ------------
Assets:
Cash and cash equivalents $ 500,000 $ 1,525,774 $ 1,975,005 $ -
Restricted & contingency cash 400,000 1,197,000 997,000 947,000
Allowance for contingency reserve - (947,000) (947,000) (947,000)
------------ ------------ ------------ ------------
Net, restricted and contingency cash 400,000 250,000 50,000 -
Marketable securities 25,000 - - -
Accounts receivable 594,000 415,800 137,214 -
Other assets, net 100,000 - - -
Notes receivable 18,000,000 12,600,000 4,158,000 -
Allowance for loan losses (333,000) (233,000) (158,802) -
------------ ------------ ------------ ------------
Net notes receivable 17,667,000 12,367,000 3,999,198 -
Real estate owned 300,000 - - -
Origination costs, net 145,487 101,841 33,607 -
------------ ------------ ------------ ------------
$ 19,731,487 $ 14,660,415 $ 6,195,024 $ -
============ ============ ============ ============
Liabilities and
Stockholders' Equity:
Liabilities
Mortgage note holdback $ 400,000 $ 250,000 $ 50,000 -
Bank loans payable 6,750,000 2,850,000 - -
Other liabilities 167,133 111,979 75,026 -
------------ ------------ ------------ ------------
Total liabilities 7,317,133 3,211,979 125,026 -
Stockholder's equity
Preferred stock 5,325,287 5,325,287 5,325,287 5,325,287
Distributions -- -- (5,325,287) (5,325,287)
------------ ------------ ------------ ------------
Preferred stock, net 5,325,287 5,325,287 - -
Common stock
7,089,067 7,089,067 7,089,067 7,089,067
Net income (loss) during - (965,918) (1,019,069) (1,399,863)
liquidation
Distributions - - - (5,689,204)
------------ ------------ ------------ ------------
Common stock, net 7,089,067 6,123,149 6,069,998 -
------------ ------------ ------------ ------------
Total stockholders' equity 12,414,354 11,448,436 6,069,998 -
------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity $ 19,731,487 $ 14,660,415 $ 6,195,024 $ -
============ ============ ============ ============
11
CAPITAL ALLIANCE INCOME TRUST
Liquidation - Pro Forma Income Statement
(unaudited)
October 18, 2006 Twelve months Twelve months
through ended ended
December 31, 2006 December 31, 2007 December 31, 2008
----------------- ------------------ -----------------
Revenues:
Interest income $ 353,003 $ 935,856 $ 224,705
Loan origination income - - -
Service release premium - - -
Other income - - -
--------- --------- ---------
Total revenue 353,003 935,856 244,705
Expenses:
Loan servicing fees 62,571 163,662 39,992
Interest expense on loans 80,850 115,211 --
Accounting 13,542 65,000 65,000
Amortization of origination costs 43,646 68,233 33,607
Legal 60,000 60,000 30,000
General and administrative 73,813 336,900 276,900
Liquidation administration fee 37,500 180,000 180,000
Loss on asset liquidation - - -
--------- --------- ---------
Total expenses 371,921 989,007 625,499
INCOME FROM OPERATIONS $ (18,918) $ (53,150) $(380,794)
Contingency reserve $ 947,000 - -
Operating expenses of real estate
owned - - -
Gain (loss) on real estate owned - - -
--------- --------- ---------
NET INCOME (LOSS) $(965,918) $ (53,150) $(380,794)
========= ========= =========
12
CAPITAL ALLIANCE INCOME TRUST
Liquidation - Pro Forma
Book Value and Distribution Schedule
(unaudited)
October 18, 2006 January 1, 2007 January 1, 2008
through through through
December 31, 2006 December 31, 2007 December 31, 2008
----------------- ------------------ -----------------
Preferred stock:
Beginning account balance, net $ 5,325,287 $ 5,325,287 $ --
Less: Cumulative distribution -- $ 5,325,287 $ --
------------------ ------------------ -----------------
Ending account balance, net $ 5,325,287 $ -- $ --
================== ================== =================
Preferred stock book value:
Book value per preferred share (beginning of period $ 26.47 $ 26.47 $ --
Less: Current period distribution per preferred share $ -- $ 26.47 $ --
------------------ ------------------ -----------------
Book value per preferred share (end of period) $ 26.47 $ -- $ --
================== ================== =================
Preferred stock distributions:
Prior period distributions $ -- $ -- $ 26.47
Current period distribution per preferred share $ -- $ 26.47 $ --
------------------ ------------------ -----------------
Cumulative distribution per preferred share $ -- $ 26.47 $ 26.47
================== ================== =================
Common stock:
Beginning account balance $ 7,089,067 $ 6,123,149 $ 6,069,998
Plus: Net income (loss) during period $ (965,918) $ (53,150)$ (380,794)
Less: Additional preferred stock distribution $ -- $ -- $ 210,635
Less: Cumulative common stock distribution $ -- $ -- $ 5,478,569
------------------ ------------------ -----------------
Ending account balance, net $ 6,123,149 $ 6,069,998 $ --
================== ================== =================
Common stock book value:
Book value per common share (beginning of perriod) $ 18.63 $ 16.09 $ 15.95
Net income (loss) per common share $ (2.54) $ (0.14) $ (1.00)
Additional preferred share distribution $ -- $ -- $ (0.55)
Less: Current period distribution per common ahare $ -- $ -- $ 14.40
------------------ ------------------ -----------------
Book value per common share (end of period) $ 16.09 $ 15.95 $ --
================== ================== =================
Common stock distributions:
Prior period distributions $ -- $ -- $ --
Current period distribution per common share $ -- $ -- $ 14.40
------------------ ------------------ -----------------
Cumulative distribution per common share $ -- $ -- $ 14.40
================== ================== =================
13
EXHIBIT "C"
United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Logo)
Division of
Corporation Finance
Mail Stop 4561
Mr. Richard J. Wrensen
Executive Vice President and Chief Financial Officer
Capital Alliance Income Trust LTD., A Real Estate Investment Trust
100 Pine Street, Suite 2450
San Francisco, CA 94111
RE: Capital Alliance Income Trust LTD., A Real Estate Investment Trust
Form 10-KSB for the fiscal year ended December 31, 2004
Filed April 15, 2005
Form 10-KSB/A for the fiscal year ended December 31,
2004 Filed April 20, 2005 Forms 10-QSB for the
quarterly period ended March 31, 2005 and June 30,
2005
File No. 1-12941
Dear Mr. Wrensen:
We have completed our review of your Form 10-KSB and related filings
and do not, at this time, have any further comments.
Sincerely,
/s/ Linda van Doorn
-------------------
Linda van Doorn
Senior Assistant Chief Accountant
14
[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
OCTOBER 18, 2006
Capital Alliance Income Trust Ltd.,
A Real Estate Investment Trust
- --------------------------------------------------------------------------------
100 Pine Street, Suite 2450 o San Francisco o California 94111 o
415/288-9575 o Fax: 415/288-9590
September 18, 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, October 18, 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:
1) to elect two Class I Directors of the Corporation;
2) 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;
3) 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;
4) 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";
5) to approve the selection of Rothstein, Kass & Company LLP as the
independent auditors for the Corporation for the year 2006.
The Corporation's Annual Report to the SEC on Form 10-KSB for the year ended
December 31, 2005 accompanies this letter.
If you have any questions on the enclosed proxy, please contact Richard
Wrensen, the Corporation's Executive Vice-President and Chief Financial Officer
at (415) 288-9575. 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 OCTOBER 18, 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, October
18, 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;
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 September 12, 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,
/s/ Thomas B. Swartz
Thomas B. Swartz, Acting Corporate Secretary
San Francisco, California
September 18, 2006
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN THE
ENCLOSED PROXY PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING.............................. 1
GENERAL 1
VOTING RIGHTS AND OUTSTANDING SHARES 1
REVOCABILITY OF PROXIES 3
GENERAL CORPORATION INFORMATION............................................. 3
MANAGEMENT 3
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 7
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 7
PROPOSAL ONE - ELECTION OF DIRECTORS........................................ 9
GENERAL.............................................................. 9
NOMINEES FOR ELECTION AS CLASS I DIRECTORS FOR TERM EXPIRING IN 2009 10
DIRECTORS CONTINUING IN OFFICE 10
PROPOSAL TWO- THE BOARD OF DIRECTORS PROPOSES THAT THE CORPORATION BE
LIQUIDATED AND DISSOLVED.................................................... 10
PROPOSAL THREE - PROPOSAL OF THE BOARD OF DIRECTORS THAT THE CORPORATION
RESTRUCTURE AND CONVERT FROM AN EXTERNALLY ADVISED REAL
ESTATE INVESTMENT TRUST (REIT) TO A SELF-ADVISED REIT................ 23
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................ 28
PROPOSAL FIVE - APPROVAL OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANT...... 30
OTHER BUSINESS.............................................................. 30
STOCKHOLDER PROPOSALS AND
NOMINATIONS 30
MISCELLANEOUS 31
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934 31
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 31
THE CORPORATION'S QUARTERLY REPORTS ON FORM 10Q-SB FOR THE QUARTERS
ENDED 31 MARCH 31, 2006 AND JUNE 30, 2006 31
AUDIT COMMITTEE REPORT 32
EXHIBIT "A" - PLAN OF LIQUIDATION AND
DISSOLUTION 34
EXHIBIT "B" - PRO FORMA FINANCIAL INFORMATION 38
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 Wednesday, October 18, 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 September 12, 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 September 18,
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 Corporation's
officers and regularly engaged officers and 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 September 12,
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 June 30, 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
1
the shares provides the broker with instructions how to vote. A properly signed
proxy marked "Withhold 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.
The Proxy consists of five Proposals. Proposals Two (2), Three (3), and
Four (4) are referendums on the future of the management of the Corporation. The
Board of Directors neither recommends nor opposes Proposals Two, Three, or Four.
The Shareholders' votes on Proposals Two, Three, and Four will provide the Board
of Directors with information on the Shareholders' organizational/management
preferences. If the Shareholders' votes cause a conflict among the Proposals
under consideration, the approved Proposal with the greatest number of "for"
votes will be the most influential in the Board's decision in implementing the
future organizational structure of the Corporation.
If Proposal Two (2) is adopted by the affirmative vote of the
shareholders of a majority of the outstanding Common and Preferred Shares
"entitled to vote", as required by Delaware General Corporation Law, Section
275, Proposals Three (3) and Four (4) will not be adopted, regardless of the
Shareholders' votes for Proposals Three (3) and Four (4).
If proposal Three (3) receives the affirmative vote of a majority of
the Shareholders who are present and voting in person or by proxy at the Annual
Meeting (i.e. a majority of the quorum) and if Proposal Two (2) is not approved
by the holders of a majority of the outstanding Common and Preferred Shares
"entitled to vote", Proposal Three (3) will be approved.
If Proposal Four (4) receives the affirmative vote of a majority of the
outstanding Common and Preferred Shares "entitled to vote", as required by
Bylaws of the Corporation, and if Proposal Two (2) is not approved by the
holders of a majority of the outstanding Common and Preferred Shares "entitled
to vote", Proposal Four (4) will be approved.
If, however, both Proposal Three (3) and Proposal Four (4) are
approved, the Proposal with the greatest number of "for" votes will be the most
influential in the Board's decision in implementing the future organizational
structure of the Corporation and will be approved.
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: (1) for the election to the Board of the persons
specified on the Proxy; (2) 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"); (3) 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; (4) for
approval of the renewal of the Restated Management Agreement of the
Corporation's Manager; and (5) for approval of the selection of Rothstein, Kass
& Company LLP as the independent auditors for the Corporation for 2006. 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.
2
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). Donald R. Looper resigned as a Director effective June 21, 2006 as
discussed under "Proposal One, Election of Directors" and under "Audit
Committee", below.
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
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.
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
3
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 ss. 121(a) of the listing standards of the
American Stock Exchange. Mr. Looper resigned as a director effective June 21,
2006, as discussed below under Proposal 1, "Election of Directors", 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 by Mr.
Looper not to renew the Management Agreement between the Corporation and Capital
Alliance Advisors Inc., its Manager for "cause". Messrs. Blomberg, Brooks, and
Looper voted in favor of the motion, and Messrs. Swartz, Konczal, and Wrensen,
who were interested in the matter as the owners of the Manager, voted against
the motion. 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 tendered
his resignation June 21, 2006.
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 above, Mr. Looper resigned as a director effective June 21, 2006.
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.
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
4
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 56, 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 51, has served as Executive Vice-President and
Chief Financial Officer of the Corporation, since December 1997. As a Class III
Director, his term expires in 2008. From December, 1997 until June, 2006, Mr.
Wrensen was Executive Vice-President and Chief Financial Officer of the Manager.
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.
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 June 30, 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.
5
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 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 representing 5.1% of the outstanding Common shares and
1.7% of the outstanding Series "A" Preferred shares. Messrs. Swartz and
Konczal 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.
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
6
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,
except the Executive Vice-President and Chief Financial Officer, 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. The Executive Vice-President and Chief Financial Officer receives
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, two of the
Directors and two 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.
Messrs. Swartz and Konczal, 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.
7
Interests of Certain Persons in the Proposals
Two of the non-independent 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 and of the
Corporation. Dennis R. Konczal is currently the President and Chief Operating
Officer of the Manager and of the Corporation. Richard J. Wrensen, a
non-independent director, is also the Executive Vice-President and Chief
Financial Officer of the Corporation. The other two directors, Harvey Blomberg
and Stanley C. Brooks do not hold executive positions in the Corporation or the
Manager and are independent directors. Messrs. Swartz and Konczal (collectively,
the "Interested Directors"), own the Manager and are 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 or 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 either
Proposals Two or 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 independent appraisals equal to the fair market value to the
Manager of the Management Agreement assuming it was newly renewed for two years
(the "Termination Fee"). Due to the uncertainty surrounding this amount, the
Contingent Reserve includes this fee and other contingent liabilities. The
estimated Contingent Reserve is nine hundred and forty-seven thousand dollars
($947,000).
The Termination Fee is in addition to any expense reimbursements
outstanding, payable to the Manager under the Management Agreement. The expense
reimbursements payable to the Manager under the Management Agreement are
estimated, then reconciled at the end of each quarter as part of the
Corporation's 10-Q and 10-K filings. Any outstanding balances are promptly
satisfied. A balance "due to" or "due from" the Manager is not estimated to be a
material amount to the Corporation.
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 in that event the Manager has
agreed to waive the Termination Fee and cancel the LOS Agreement. Proposal Three
does, however, 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 a non-independent
director.
Messrs. Swartz and Konczal have an interest in Proposal Four because of
their ownership of 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
8
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
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. The Corporation's counsel advised that the votes of Messrs. Konczal,
Swartz, and Wrensen, who were interested directors, were properly cast and were
valid, notwithstanding their "interest" in the transaction in question. Thus,
the three-to-three vote did not constitute an act by the Board of Directors
since Section 141 of the Delaware General Corporation Law provides that the
Board can only act by a majority vote of its members. 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
9
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.
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 67; Class I Director since 1996; current term expires 2006;
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."
10
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 business operations from an "externally
advised" REIT to a "self advised" REIT. Proposal Four proposes that the
Corporation retains and renews its existing Restated Management Agreement and
remains "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.
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 October 18, 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. Pro Forma financial statements and a pro
forma liquidation distribution schedule are attached hereto as Exhibit "B".
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 October 18, 2006 (the "Adoption Date").
After the "Adoption Date," October 18, 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 August 25, 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
October 18, 2006, the Adoption Date, the Corporation 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. The Corporation will not be required
to obtain
11
appraisals or other third party opinions as to the value of its properties and
assets in connection with the liquidation. In addition, the Corporation 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 the 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.
During the liquidation of assets, the Corporation's Board of Directors
may authorize its officers, directors, and agents, or any of them, compensation
for services rendered in connection with the implementation of the Plan. The
Corporation's Board of Directors intends to oversee and effect the efficient
liquidation of the assets, prompt satisfaction of liabilities, and timely
distribution of the residual proceeds, if any, to the shareholders. The
Corporation's Independent Directors may continue to receive an annual retainer
of $10,000 and $300 per telephonic meeting and $500 per meeting attended in
person and $4,000 per meeting, if held in California. All Directors will
continue to be reimbursed for reasonable travel and other out of pocket expenses
incurred in serving on and attending board and committee meetings. If the
Manager, a Corporation's officer, or a director is chosen to oversee the
Liquidation, the liquidator may receive compensation separate from their role as
a director or officer of the Corporation. Exclusive of the Corporation's legal,
accounting, loan servicing, loan disposition, and other general and
administrative expenses, the Pro Forma Financial Statement, presented in Exhibit
"B", estimates the liquidator's fee at fifteen thousand dollars per month. If
the Manager were selected to liquidate the Corporation, the Manager would
receive compensation, in connection with the liquidation, in addition to a
Termination Fee.
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
12
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. Due to the uncertainty surrounding this amount, the Contingent
Reserve includes this fee and other contingent liabilities. The estimated
Contingent Reserve is nine hundred and forty-seven thousand dollars ($947,000).
If the Plan is not ratified and approved by the stockholders, the Board of
Directors will consider Proposal Three and Proposal Four presented in this proxy
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 June 30, 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
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.
The Corporation currently has only one litigation matter and has no
further exposure on the cost of defense or liability due to errors and admission
insurance coverage. The Corporation has estimated the amount due existing
creditors on October 18, 2006 to be seven million, three hundred and seventeen
thousand, one hundred, and thirty-three dollars ($7,317,133). This liability
does not include a Contingent Reserve estimate of nine hundred and forty-seven
thousand dollars ($947,000). See: Exhibit "B" to this Proxy Statement.
13
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 $26.47 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 $5,325,287. The Board of Directors has determined that if Proposal
Two is adopted, the Corporation will also make payments, estimated to be
approximately $210,635 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 common
stockholders. This amount is not included in the Series A Preferred stock
balance of $5,325,287. 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 October 18,
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 Corporation's obligations, liabilities,
expenses and claims and to make cash distributions to stockholders. 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. 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
14
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 and pursuant to Section 275 (e) of the Delaware General
Corporation Law ("DGLC"), there is no limitation on the Board of Directors
ability to modify, amend, or abandon the liquidation plan as approved by the
shareholders nor is there any limitation in the Corporation's Certificate of
Incorporation or in the DGLC on its ability to not proceed with liquidation once
it is approved by the shareholders. The Board of Directors may modify, amend or
abandon the Plan, notwithstanding stockholder ratification and approval, to the
extent permitted by the DGCL. Such discretion in the Board of Directors is not
dependent on a change in circumstances. 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 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,
15
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.
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
16
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. 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.
The Corporation's Liquidation Pro Forma Financial Statements, presented within
Exhibit "B", have reserved nine hundred and forty-seven thousand dollars
($947,000) as a Contingent Reserve. The adequacy of the Contingent Reserve is
uncertain, because the reserve is established for unknown, but possible
liabilities that may or may not be insured. The actual contingency requirement
may vary significantly from the pro forma 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.
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
17
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 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.
18
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).
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
19
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 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
20
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 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.
21
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.
22
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 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 business operations from an "externally
advised" REIT to a "self advised" REIT. Proposal Four proposes that the
Corporation retains and renews its existing Restated Management Agreement and
remains "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, 2006,
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 prepayment charges and
penalties." The LOS Agreement provides that the Manager is to bear the following
expenses:
23
(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 REIT plus one-twelfth of one-half (1/2%) of the
book value of the non-mortgage assets of the REIT. `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.
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
24
"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, and 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 resigned
as an officer and director of Capital Alliance Advisors, Inc. and sold 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 June 30, 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 include 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
25
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 profitability and 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:
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.
26
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 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.
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 present and 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.
27
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 business operations from an "externally
advised" REIT to a "self advised" REIT. Proposal Four proposes that the
Corporation retains and renews its existing Restated Management Agreement and
remains "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") 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). The annual Net Income for 2001 through 2005 and the first half
of 2006 follows:
2001 2002 2003 2004 2005 2006 (Q2)
---------------------------------------------------------------------------------------
Net Income $1,142,898 $1,108,264 $909,530 $669,871 $(307,308) $(374,032)
(b) Paid 103 consecutive Preferred Share dividends from 1995 through 2004.
The annual Preferred Share Dividends for 2001 through 2005 and the
first half of 2006 follows:
2001 2002 2003 2004 2005 2006 (Q2)
---------------------------------------------------------------------------------------
Dividends per share $2.37 $1.66 $1.50 $1.51 $0.76 $0.00
(c) Paid Common Share dividends from 1995 through 2004. The annual Common
Share Dividends for 2001 through 2005 and the first half of 2006
follows:
2001 2002 2003 2004 2005 2006 (Q2)
---------------------------------------------------------------------------------------
Dividends per share $1.05 $1.60 $1.35 $1.20 $0.10 $0.00
28
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. 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 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.
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.
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.
29
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.
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 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
30
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.
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 periods
ending March 31, 2006 and June 30, 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 Reports on Form 10-QSB for the Quarters Ended March 31,
2006 and June 30, 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 meeting or any adjournment or
31
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 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.
32
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,
Thomas B. Swartz, Acting Corporate Secretary
San Francisco, California
September 18, 2006
[INTENTIONALLY LEFT BLANK]
33
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, October 18, 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 $26.47 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
34
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
35
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 October 18, 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 and maintain
insurance as may be necessary or appropriate to cover the Corporation's
obligation hereunder,
36
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.
[INTENTIONALLY LEFT BLANK]
37
EXHIBIT "B"
CAPITAL ALLIANCE INCOME TRUST
PRO FORMA FINANCIAL INFORMATION
CAPITAL ALLIANCE INCOME TRUST
Liquidation - Pro Forma Balance Sheet
(unaudited)
October 17, December 31, December 31, December 31,
2006 2006 2007 2008
------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents $ 500,000 $ 1,525,774 $ 1,975,005 $ --
Restricted & contingency cash 400,000 1,197,000 997,000 947,000
Allowance for contingency reserve -- (947,000) (947,000) (947,000)
------------ ------------ ------------ ------------
Net, restricted and contingency cash 400,000 250,000 50,000 --
Marketable securities 25,000 -- -- --
Accounts receivable 594,000 415,800 137,214 --
Other assets, net 100,000 -- -- --
Notes receivable 18,000,000 12,600,000 4,158,000 --
Allowance for loan losses (333,000) (233,000) (158,802) --
------------ ------------ ------------ ------------
Net notes receivable 17,667,000 12,367,000 3,999,198 --
Real estate owned 300,000 -- -- --
Origination costs, net 145,487 101,841 33,607 --
------------ ------------ ------------ ------------
Total assets $ 19,731,487 $ 14,660,415 $ 6,195,024 $ --
============ ============ ============ ============
Liabilities and
Stockholders' Equity:
Liabilities
Mortgage note holdback $ 400,000 $ 250,000 $ 50,000 $ --
Bank loans payable 6,750,000 2,850,000 -- --
Other liabilities 167,133 111,979 75,026 --
------------ ------------ ------------ ------------
Total liabilities 7,317,133 3,211,979 125,026 --
Stockholder's equity
Preferred stock 5,325,287 5,325,287 5,325,287 5,325,287
Distributions -- -- (5,325,287) (5,325,287)
------------ ------------ ------------ ------------
Preferred stock, net 5,325,287 5,325,287 -- --
Common stock 7,089,067 7,089,067 7,089,067 7,089,067
Net income (loss) during liquidation -- (965,918) (1,019,069) (1,399,863)
Distributions -- -- -- (5,689,204)
------------ ------------ ------------ ------------
Common stock, net 7,089,067 6,123,149 6,069,998 --
------------ ------------ ------------ ------------
Total stockholders' equity 12,414,354 11,448,436 6,069,998 --
------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity $ 19,731,487 $ 14,660,415 $ 6,195,024 $ --
============ ============ ============ ============
38
CAPITAL ALLIANCE INCOME TRUST
Liquidation - Pro Forma Income Statement
(unaudited)
October 18, 2006 Twelve months Twelve months
through ended ended
December 31, 2006 December 31, 2007 December 31, 2008
----------------- ----------------- -----------------
Revenues:
Interest income $ 353,003 $ 935,856 $ 244,705
Loan origination income -- -- --
Service release premium -- -- --
Other income -- -- --
--------- --------- ---------
Total revenue 353,003 935,856 244,705
Expenses:
Loan servicing fees 62,571 163,662 39,992
Interest expense on loans 80,850 115,211 --
Accounting 13,542 65,000 65,000
Amortization of origination costs 43,646 68,233 33,607
Legal 60,000 60,000 30,000
General and administrative 73,813 336,900 276,900
Liquidation administration fee 37,500 180,000 180,000
Loss on asset liquidation -- -- --
--------- --------- ---------
Total expenses 371,921 989,007 625,499
INCOME FROM OPERATIONS $ (18,918) $ (53,150) $(380,794)
Contingency reserve $ 947,000 $ -- $ --
Operating expenses of real estate
owned -- -- --
Gain (loss) on real estate owned -- -- --
--------- --------- ---------
NET INCOME (LOSS) $(965,918) $ (53,150) $(380,794)
========= ========= =========
39
CAPITAL ALLIANCE INCOME TRUST
Liquidation - Pro Forma
Book Value and Distribution Schedule
(unaudited)
October 18, 2006 January 1, 2007 January 1, 2008
through through through
December 31, 2006 December 31, 2007 December 31, 2008
--------------------- -------------------- -------------------
Preferred stock:
Beginning account balance, net $ 5,325,287 $ 5,325,287 $ --
Less: Cumulative distribution $ -- $ 5,325,287 $ --
------------------ ------------- ------------
Ending account balance, net $ 5,325,287 $ -- $ --
================== ============= ============
Preferred stock book value:
Book value per preferred share (beginning of period $ 26.47 $ 26.47 $ --
Less: Current period distribution per preferred share $ -- $ 26.47 $ --
------------------ ------------- ------------
Book value per preferred share (end of period) $ 26.47 $ -- $ --
================== ============= ============
Preferred stock distributions:
Prior period distributions $ -- $- $ 26.47
Current period distribution per preferred share $ -- $ 26.47 $ --
------------------ ------------- ------------
Cumulative distribution per preferred share $ -- $ 26.47 $ 26.47
================== ============= ============
Common stock:
Beginning account balance $ 7,089,067 $ 6,123,149 $ 6,069,998
Plus: Net income (loss) during period $ (965,918) $ (53,150) $ (380,794)
Less: Additional preferred stock distribution $ -- $ -- $ 210,635
Less: Cumulative common stock distribution $ -- -- $ 5,478,569
------------------ ------------- ------------
Ending account balance, net $ 6,123,149 $ 6,069,998 $ --
================== ============= ============
Common stock book value:
Book value per common share (beginning of period) $ 18.63 $ 16.09 $ 15.95
Net income (loss) per common share $ (2.54) $ (0.14) $ (1.00)
Additional preferred share distribution $ -- $ -- $ (0.55)
Less: Current period distribution per common share $ -- $ -- $ 14.40
------------------ ------------- ------------
Book value per common share (end of period) $ 16.09 $ 15.95 $ --
================== ============= ============
Common stock distributions:
Prior period distributions $ -- $ -- $ --
Current period distribution per common share $ -- $ -- $ 14.40
------------------ ------------- ------------
Cumulative distribution per common share $ -- $ -- $ 14.40
================== ============= ============
40
Capital Alliance Income Trust Ltd.
- --------------------------------------------------------------------------------
100 Pine Street, Suite 2450 o San Francisco, California 94111 o
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
OCTOBER 18, 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 [ ] ABSTAIN
(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 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.
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, 4 AND 5 LISTED ABOVE.
Dated:____________________2006. _______________________________________
SIGN EXACTLY AS NAME APPEARS ON YOUR
ACCOUNT STATEMENT.)
Shareholder of Record:________________
No. of Class "A" Preferred Shares:_____ No. of Common Shares:_____