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As filed with the Securities and Exchange Commission on April 21, 1997
Registration No. 333-11625
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-11
POST-EFFECTIVE AMENDMENT NO. 2
TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CAPITAL ALLIANCE INCOME TRUST LTD,
A REAL ESTATE INVESTMENT TRUST
(Exact Name of Registrant as Specified in the Governing Instrument)
50 California Street, Suite 2020
San Francisco, CA 94111
(Address of Principal Executive Offices)
THOMAS B. SWARTZ
Chief Executive Officer
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
50 California Street, Suite 2020
San Francisco, CA 94111
(Name and Address of Agent for Service)
Copies to:
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Stephen C. Ryan, Esq. Ronald Warner, Esq.
Landels Ripley & Diamond LLP Arter & Hadden
350 The Embarcadero 700 South Flower Street
San Francisco, CA 94105 Los Angeles, CA 90071-4101
Tel: (415) 512-8700 Tel: (213) 629-9300
Fax: (415) 512-8750 Fax: (213) 617-9255
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of
this Registration Statement.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this Registration Statement so such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 9(a),
may determine.
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CALCULATION OF REGISTRATION FEE
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Proposed
Title of Maximum Proposed Amount
Securities Amount Offering Maximum Of
Being Being Price Offering Registration
Registered Registered Per Share Price Fee
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Shares of Common Stock,
par value $.01 1,500,000 $ 10.00 $12,000,000
Shareholder Warrants
to Purchase Shares of
Common Stock 150,000 $ 0.00(1) $ 0.00
Shares of Common Stock,
issuable upon exercise
of Shareholder Warrants 150,000 $ 5.60(2) $ 840,000
Total Fees Payable(3) $12,840,000 $3,890.90
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(1) No separate consideration is payable for the Warrants.
(2) Maximum price upon exercise of Shareholder Warrants.
(3) The maximum number of Shares of Common Stock that can be issued initially
and upon exercise of the Shareholder Warrants is 1,650,000 and their
maximum offering price is $12,840,000. The registration fee for the
Common Shares issuable is therefore $3,890.90.
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CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
Cross-Reference Sheet Showing Location in Prospectus
or Registration Statement of Information
Required by Items 1-29
(Pursuant to item 501(b) of Regulation S-K)
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Form S-11 Items Number and Caption Caption in Prospectus or Page Reference
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1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus............ Forepart of Registration Statement; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus............................... Inside Front Cover Page of Prospectus; Outside Back
Cover Page of Prospectus
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed........................ Prospectus Summary; Risk Factors
4. Determination of Offering Price....................... Outside Front Cover Page of Prospectus; Risk
Factors; Plan of Distribution
5. Dilution.............................................. Sources of Additional Funds
6. Selling Security Holders.............................. Not applicable
7. Plan of Distribution.................................. Outside Front Cover Page of Prospectus; Plan of
Distribution
8. Use of Proceeds....................................... Prospectus Summary; Estimated Use of Proceeds
9. Selected Financial Data............................... Selected Financial Data
10. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ Management's Discussion and Analysis of Financial
Condition and Results of Operations
11. General Information as to Registrant.................. Prospectus Summary; The Trust; Business
12. Policy with Respect to Certain Activities............. Inside Front Cover Page of Prospectus; Risk Factors;
Business; Summary of Organizational Documents and
13. Investment Policies of Registrant..................... Securities; Additional Information
14. Description of Real Estate............................ Prospectus Summary; Risk Factors; Business
15. Operating Data........................................ Selected Financial Data; Index to Financial Statements
16. Tax Treatment of Registrant and Its
Security Holders.................................. Prospectus Summary; Risk Factors; Federal Tax
Considerations; ERISA Investors
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17. Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters............................... Prospectus Summary; Risk Factors; Distributions and
Dividend Policy; Sources of Additional Funds;
Plan of Distribution
18. Description of Registrant's Securities................ Outside Front Cover Page of Prospectus; Prospectus
Summary; Summary of Organizational Documents and
Securities; Federal Income Tax Considerations;
ERISA Investors
19. Legal Proceedings..................................... Business
20. Security Ownership of Certain Beneficial
Owners and Management............................. Prospectus Summary; The Trust; Business
21. Directors and Executive Officers...................... Management
22. Executive Compensation................................ Executive Compensation
23. Certain Relationships and Related
Transactions...................................... Risk Factors; Business; Relationships with Affiliates
24. Selection, Management and Custody of
Registrant's Investments.......................... Business; Risk Factors
25. Policies with Respect to Certain Transactions......... Risk Factors; Business; Certain Transactions and
Relationships with Affiliates
26. Limitations of Liability.............................. Risk Factors; Business
27. Financial Statements and Information.................. Selected Financial Information; Index to Financial
Statements
28. Interests of Names Experts and Counsel................ Experts; Legal Matters
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities....................................... Plan of Distribution
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CAPITAL ALLIANCE
INCOME TRUST
Minimum offering of: $4,000,000
Minimum of 50,000 Units (Consisting of 500,000 Shares of Common Stock and 50,000
Warrants to purchase up to 50,000 additional shares of Common Stock)
Each Unit consists of 10 Shares and 1 Warrant for an additional share
Capital Alliance Income Trust Ltd., A Real Estate Investment Trust (the
"Trust") is a specialized mortgage banking firm, incorporated in Delaware that
intends to qualify as a real estate investment trust ("REIT") for federal income
tax purposes. In its existing portfolio lending business, the Trust invests
primarily in collateral-oriented, high-yielding non-conforming home equity loans
("Home Equity Loans") secured primarily by first and second deeds of trust on
single-family residences and two-to-four-unit residential properties located in
California and other western states ("Mortgage Investment Business").
The proceeds of this offering will be used by the Trust to continue to
capitalize, expand and diversify its Mortgage Investment Business. The Trust, as
an adjunct to its Mortgage Investment Business, also plans to utilize a portion
of the proceeds of this offering to establish and conduct a wholesale
non-conforming residential mortgage banking business specializing in
non-conforming, A-, B/C credit-rated residential mortgage loans ("Mortgage
Conduit Business"), either directly, through a non-qualified REIT subsidiary, or
indirectly, through a joint venture. It is anticipated that the mortgage loans
to be originated or purchased by the Mortgage Conduit Business initially will be
packaged and sold in whole loan sales at a premium to institutional investors
and ultimately may be securitized.
THESE SECURITIES INVOLVE CERTAIN RISK FACTORS. (See "RISK FACTORS at page
15.") These risks include:
- Possible Losses from Real Estate Financing Due to Borrower Defaults
and Insufficient Values of Foreclosed Properties.
- Competition for Non-conforming Mortgage Loans May Reduce
Profitability.
- Losses from Planned Expansion of Mortgage Investment Business and
Establishment of Mortgage Conduit Business.
- Preferred Share Current Distribution Preference May have an Adverse
Effect on Common Share Dividends.
- Policies and Strategies by Board of Directors are Subject to Future
Revisions.
- Higher Taxation of Trust as a Regular Corporation and Reduced Funds
for Dividends if Trust Fails to Maintain REIT Status.
- Absence of Prior Public Market Adversely Affecting Market Value of
Common Shares.
- Risk of Trust's Total Reliance on Manager and its Affiliates.
- Manager's Conflicts of Interest and Involvement in Other Investment
Activities Adversely Affecting Trust's Operations.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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Price Underwriting Proceeds
to the Public Commissions(1) to the Trust(2)
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Per Share (Minimum investment 100 Shares) $ 8.00 $ .48 $ 7.52
Total Minimum (50,000 Units with each Unit
consisting of 10 Shares and 1 Warrant
for an Additional Share) $ 4,000,000.00 $240,000.00 $ 3,760,000.00
Maximum if 150,000 Units Sold (each Unit
consisting of 10 Shares and 1 Warrant for
an additional share(3) $12,000,000.00 $720,000.00 $11,280,000.00
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(See Notes to Table, Page 2)
BROOKSTREET SECURITIES CORPORATION
The Date of This Prospectus is April ____, 1997
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The holders of the Trust's outstanding Series "A" Preferred Shares (the
"Preferred Shares") as a class have (1) a stated preferential, non-cumulative
right to distributions declared each year by the Board of Directors and (2) a
specified preference with respect to liquidating distributions. (See
"DISTRIBUTIONS TO SHAREHOLDERS" and "SUMMARY OF ORGANIZATION DOCUMENTS AND
SECURITIES.")
There is and will be no public market for the Common Shares (the "Shares")
until the conclusion of this Initial Public Offering. The Shares have been
approved for listing on the American Stock Exchange ("AMEX") subject to
official notice of issuance. Until a minimum of $4,000,000 in subscription funds
have been accumulated in escrow ("Minimum Subscription Level") with Golden Gate
Bank ("Escrow"), San Francisco, California, and certain other conditions have
been satisfied, the proceeds of the offering will remain on deposit with Escrow
and will not be available for operations of the Trust. (See "PLAN OF
DISTRIBUTION.")
----------------------------------------
In addition to issuing Common Shares, the Trust will issue to shareholders
Warrants to purchase additional Common Shares ("Shareholder Warrants" or
"Warrants"). The Trust will issue one Shareholder Warrant for each 10 Common
Shares purchased. Each Shareholder Warrant entitles the holder to purchase one
Common Share at $5.60 per Share. The Shareholder Warrants may be exercised
during the twenty-fifth through the forty-eighth month following the effective
date of this offering. Shareholder Warrants for fractional Shares will not be
issued. (See "SUMMARY OF ORGANIZATIONAL DOCUMENTS AND SECURITIES: DESCRIPTION OF
SHAREHOLDER WARRANTS.")
All Shares and Warrants will be held in uncertificated form during the
offering period. Certificates evidencing ownership of Shares will be issued to
requesting shareholders upon the conclusion of the offering and certificates
evidencing ownership of Warrants will be issued to shareholders upon written
request at the commencement of the Warrant exercise period. (See "PLAN OF
DISTRIBUTION.") The Shares and Warrants will be freely and separately
transferable, except to the extent set forth under "Summary of Organizational
Documents and Securities: Redemption of Shares and Prohibition of Transfer of
Shares and Exercise of Warrants." The public offering price of the Shares and
the exercise price of the Warrants have been determined arbitrarily by the Trust
and Managing Dealer.
NOTES TO TABLE ON COVER PAGE:
(1) The Trust will pay retail commissions of up to 6% on the sale of Shares
during the initial offering period. The Shares and Warrants will be offered
through Brookstreet Securities Corporation, Irvine, California ("Managing
Dealer" or "Brookstreet") and other selected selling agents (collectively,
the "Selected Dealers"). There is no firm commitment to purchase or sell any
Shares or Warrants. The offering will terminate one year from the date
hereof unless extended by the Trust for up to an additional year. (The Trust
will pay broker/dealers 2.8% per share upon the exercise of Shareholder
Warrants for costs associated with the exercise of warrants facilitated by
such broker.) The Trust has agreed to indemnify the Managing Dealer and the
Selected Dealers with respect to certain liabilities, including
liabilities under the Securities Act of 1933 as amended (the "Act").
(2) Before expenses, estimated at $560,000, all of which are payable by the
Trust. The Managing Dealer will also receive reimbursement for offering
services which consist of expenses relating to legal, accounting, due
diligence, printing expenses, a non-accountable underwriting fee of $35,000,
and for other expenses relating to the registration, marketing and
distribution of the offering (other than retail sales commissions). This
reimbursement is limited to 3% per Share for each Share sold during the
Initial Public Offering. The Managing Dealer will also receive a
non-accountable expense allowance equal to .5% and reimbursement of up to
.5% per share for actual and bona fide due diligence expenses.
(3) If 1,500,000 Shares and 150,000 Shareholder Warrants are issued and all
2
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Shareholder Warrants are exercised at $5.60 per Share, the "Price to the
Public" of all securities sold hereunder will be increased to $12,840,000
and the "Proceeds to the Trust" will be increased to $12,086,400. If less
than all the Warrants are exercised, these amounts will be correspondingly
decreased.
SPECIAL NEW YORK REQUIREMENTS. Each purchaser of Shares in New York must
certify that the purchaser has either (i) a minimum annual gross income of
$35,000 and a net worth at fair market value of at least $35,000 (exclusive of
equity in home, home furnishings and personal automobile), or (ii) a net worth
of $10,000 (similarly defined). No purchaser of Shares in New York may initially
purchase less than 315 Shares ($2,520) (125 Shares [$1,000] for IRA
investments).
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF SOLICITATION IN ANY
STATE OR OTHER JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION IN THAT STATE OR JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT NO CHANGE IN THE AFFAIRS OF THE TRUST HAS OCCURRED SINCE THE
DATE HEREOF. IF, HOWEVER, ANY MATERIAL CHANGE IN THE TRUST'S AFFAIRS OCCURS
DURING THE TIME THIS PROSPECTUS IS REQUIRED TO BE DELIVERED, THE TRUST WILL
AMEND OR SUPPLEMENT THIS PROSPECTUS APPROPRIATELY.
SUPPLEMENTS UPDATING THIS PROSPECTUS WILL BE CONTAINED INSIDE THE BACK COVER
IN THE EVENT OF ANY MATERIAL CHANGES TO THE OFFERING.
THE TRUST INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS
CONTAINING FINANCIAL STATEMENTS AUDITED BY ITS INDEPENDENT AUDITORS AND
QUARTERLY REPORTS FOR THE FIRST THREE QUARTERS OF EACH FISCAL YEAR CONTAINING
UNAUDITED FINANCIAL INFORMATION.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY........................................................................................................7
The Trust ...........................................................................................................7
Risk Factors.........................................................................................................7
Estimated Use of Proceeds............................................................................................8
Sources of Additional Funds..........................................................................................9
Distributions and Dividend Policy....................................................................................9
Capitalization......................................................................................................10
Selected Financial Data.............................................................................................11
Management's Discussion and Analysis of Financial Condition and Results of Operations...............................11
Business............................................................................................................11
Management..........................................................................................................12
Executive Compensation..............................................................................................13
Certain Transactions and Relationships with Affiliates..............................................................13
Principal Stockholders..............................................................................................14
Summary of Organizational Documents and Securities..................................................................14
The Offering........................................................................................................14
Federal Income Tax Considerations...................................................................................15
ERISA Considerations................................................................................................15
Plan of Distribution................................................................................................15
Legal Matters.......................................................................................................16
Experts.............................................................................................................16
Additional Information..............................................................................................16
RISK FACTORS.............................................................................................................17
Lending and Real Estate Financing Risks.............................................................................17
Loan Defaults Present a Risk of Loss to the Trust...............................................................17
Risk That Periods of Economic Slowdown or Recession May Adversely Affect Trust Operations.......................17
Loans Made to Non-Conventional Borrowers May Entail a Higher Risk of Delinquency and Higher Losses..............17
Risk That Competition and Demand for Non-Conforming Mortgage
Loans May Adversely Affect Trust's Profitability.............................................................17
Risk of Trust's Dependence on Independent Mortgage Loan Brokers To Originate Loans..............................18
Risks of Reduced Profitability Due to Changes in Interest Rates.................................................18
General Business and Investment Risks...............................................................................18
Risk of Losses Inherent in Planned Expansion of Mortgage Investment and Mortgage Conduit Businesses.............18
Risk of Competition From Mortgage Banking Firms Adversely Affecting Trust Operating Results.....................18
Risk that Limited History of Independent Operations May Not Reflect Future Operations...........................18
Risk of Future Revisions in Policies and Strategies.............................................................19
Risk that Limited Liability of Directors and Indemnification May Limit Shareholder Recourse.....................19
Risk that Absence of Prior Public Market For Common Shares May Adversely Affect Market Values...................19
Risk of Adverse Effects of Preferred Dividend Preference on Common Share Dividends..............................19
Tax and Regulatory Risks............................................................................................19
Risk of Higher Taxation of Trust as a Regular Corporation and Reduced Funds for
Dividends if Trust Fails to Maintain REIT Status.............................................................19
Risk of Regulation of Lending Activities and Changing Regulatory Environment....................................20
Risk of Regulation as an Investment Company Adversely Affecting Trust Operations................................20
Financing Risks.....................................................................................................20
Adverse Effect of Unavailability of Funding Sources.............................................................20
Risks of Conflicts of Interest and Related Party Transactions.......................................................20
Risk of Trust's Total Reliance on Manager and its Affiliates....................................................20
Risk of Adverse Effects on Trust's Operations Due to Manager's Conflicts of Interest
and Investment in Other Investment Activities................................................................21
Risk of Other Activities of Management..........................................................................
Risk of Conflicts from Lack of Separate Representation..........................................................21
THE TRUST................................................................................................................22
ORGANIZATION CHART.......................................................................................................23
ESTIMATED USE OF PROCEEDS................................................................................................24
SOURCES OF ADDITIONAL FUNDS..............................................................................................25
DISTRIBUTIONS AND DIVIDEND POLICY........................................................................................26
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CAPITALIZATION...........................................................................................................29
SELECTED FINANCIAL DATA..................................................................................................30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................................................32
General.............................................................................................................32
Results of Operations...............................................................................................33
Inflation...........................................................................................................33
Liquidity and Capital Resources.....................................................................................34
BUSINESS.................................................................................................................35
General.............................................................................................................35
Mortgage Investment Business........................................................................................35
Mortgage Conduit Business...........................................................................................37
Hedging.............................................................................................................41
Loan Servicing......................................................................................................41
Other Investment Policies...........................................................................................43
Competition.........................................................................................................43
Regulation..........................................................................................................44
Employees...........................................................................................................45
Properties..........................................................................................................45
Legal Proceedings...................................................................................................45
REIT Industry Data..................................................................................................46
MANAGEMENT...............................................................................................................46
Directors and Officers..............................................................................................48
The Manager.........................................................................................................49
Management Agreement................................................................................................51
Management Compensation.............................................................................................51
Management Expenses.................................................................................................52
Limits of Responsibility............................................................................................52
Home Equity Loan Origination and Loan Servicing Agreement...........................................................52
Origination and Servicing Expenses..................................................................................53
EXECUTIVE COMPENSATION...................................................................................................54
Executive Compensation..............................................................................................54
Stock Options.......................................................................................................55
Employment Agreements...............................................................................................55
CERTAIN TRANSACTIONS AND RELATIONSHIPS WITH AFFILIATES...................................................................56
Arrangements and Transactions with CAAI.............................................................................56
Investment in Related Mortgage Banking Firm.........................................................................56
Sale and Purchase of Loans..........................................................................................56
Other Business Activities...........................................................................................57
PRINCIPAL STOCKHOLDERS...................................................................................................58
SUMMARY OF ORGANIZATIONAL DOCUMENTS AND SECURITIES.......................................................................59
Description of Shares...............................................................................................59
Dividend Preferences................................................................................................59
Directors...........................................................................................................60
Amendment of the Certificate of Incorporation and Bylaws............................................................60
Shareholder Limited Liability.......................................................................................61
Redemption of Shares and Prohibition of Transfer of Shares and Exercise of Warrants.................................61
Reports to Shareholders and Rights of Examination...................................................................61
Description of Shareholder and Managing Dealer Warrants.............................................................61
FEDERAL INCOME TAX CONSIDERATIONS........................................................................................63
Taxation of the Trust...............................................................................................63
Record keeping Requirements.........................................................................................68
Failure to Qualify..................................................................................................68
Taxation of Taxable U.S. Stockholders Generally.....................................................................69
Information Reporting and Backup Withholding........................................................................70
Taxation of Tax-Exempt Stockholders.................................................................................70
Taxation of Non-U.S. Stockholders...................................................................................71
Other Tax Consequences..............................................................................................72
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ERISA CONSIDERATIONS.....................................................................................................73
Fiduciary and Prohibited Transaction Considerations.................................................................73
Plan Asset Issue....................................................................................................73
PLAN OF DISTRIBUTION.....................................................................................................75
Sales Material......................................................................................................76
LEGAL MATTERS............................................................................................................77
EXPERTS..................................................................................................................77
ADDITIONAL INFORMATION...................................................................................................77
GLOSSARY.................................................................................................................78
INDEX TO FINANCIAL STATEMENTS............................................................................................82
HOW TO INVEST; ORDER FORM...............................................................................................103
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statement appearing elsewhere in this Prospectus.
Capitalized and certain other terms used in this Prospectus are defined in the
"Glossary."
THE TRUST: Capital Alliance Income Trust Ltd., A Real Estate
Investment Trust (the "Trust" or "CAIT") is a specialized
mortgage banking firm which is in the business - as a
portfolio lender - of originating, purchasing and servicing
collateral-oriented, high-yielding non-conforming, A-, B/C
(or less) credit-rated home equity loans secured primarily
by first and second deeds of trust on single-family
residences and two-to-four unit residential properties
located in California and other western states ("Home Equity
Loans") ("Mortgage Investment Business"). The Trust's
principal executive office is 50 California Street, Suite
2020, San Francisco, California 94111 (Telephone (415)
288-9575).
The Trust, which will elect to be taxed as a REIT, resulted
from the consolidation in April 1996 of two private
affiliated mortgage lending firms. The Trust was
incorporated in Delaware in 1995. The predecessors to the
Trust were formed and managed by Capital Alliance Advisors,
Inc. ("CAAI"), which is also the Manager of the Trust, and
began making Home Equity Loans in 1991 and 1995,
respectively. As of November 30, 1996, the Trust had a
combined loan portfolio of 58 Home Equity Loans, aggregating
$4,716,884 in principal amount with a Combined-Loan-to-Value
Ratio of 69.18%, an average loan size of $90,709, and an
average weighted yield of $13.06%. 56.67% of the portfolio
are first deeds of trust and 43.33% are second deeds of
trust.
RISK FACTORS: An investment in the Trust involves certain risks. The "RISK
FACTORS" section of the Prospectus discusses in more detail
the most important risks associated with an investment in
the Shares, including risks associated with mortgage lending
on real estate, risks associated with investment on entities
such as the Trust and tax risks. These risks include:
- The lending business is subject to the risk that
borrowers will not satisfy their debt service payments
and that on foreclosure and liquidation of the property
securing such loans the Trust may suffer a loss due to
valuation errors in the Trust's appraisals or
fluctuations in the value of real estate.
- The availability of non-conforming mortgage loans
meeting the Trust's criteria is dependent upon, among
other things, the size of and level of activity in
residential real estate. To the extent the Trust is
unable to obtain sufficient mortgage loans meeting its
criteria, the Trust's businesses will be adversely
affected.
- The Trust's growth to date was primarily due to
increased mortgage origination activities as its
capital base expanded. The Trust intends to continue to
pursue a growth strategy for the foreseeable future in
both its Mortgage Investment Business and its planned
Mortgage Conduit Business. There can be no assurance
that the Trust will successfully achieve its planned
expansion or, if achieved, that the expansion will
result in profitable operations.
- The Preferred Shares are entitled to a current
Distribution Preference each quarter. In order to pay
Current Distributions on Common Shares, the Trust must
declare and pay a dividend on the Preferred Shares
equal to the Current Distribution Preference for the
entire quarter before declaring or paying any dividends
on the Common Shares. The Trust anticipates that it
will have sufficient funds available for, and will be
7
<PAGE> 12
able to legally declare and pay such
distributions, although no assurance can be given
in this regard.
- The Board of Directors has established the
investment policies and operating policies and
strategies set forth in this Prospectus as the
investment policies and operating policies and
strategies of the Trust. However, any of the
policies, strategies and activities described in
this Prospectus may be modified or waived by the
Board of Directors, without stockholder consent.
The Board of Directors may amend the Trust's
Bylaws without stockholder consent.
- In order to maintain its qualification as a REIT
for federal income tax purposes, the Trust must
continually satisfy certain tests with respect to
the sources of its income, the nature and
diversification of its assets, the amount of its
distributions to stockholders and the ownership
of its stock.
- If the Trust fails to qualify as a REIT in any
taxable year and certain relief provisions of the
Code do not apply, the Trust would be subject to
federal income tax as a regular, domestic
corporation, and its stockholders would be subject
to tax in the same manner as stockholders of such
corporation.
- There is no prior public market for the Common
Shares of the Trust. Although the Common Shares
of the Trust are listed on the American Stock
Exchange, there is no assurance that an active
public trading market for the Common Shares will
develop after the Offering or that, if developed,
it will be sustained.
- No assurance can be given that the Trust's
relationships with CAAI and its affiliates will
continue indefinitely. The failure or inability of
CAAI to provide the services required of it under
the Management Agreement or its Loan Origination
and Loan Servicing Agreement or any other
agreements or arrangements with the Trust would
have a material adverse effect on the Trust's
business.
ESTIMATED USE OF PROCEEDS: The proceeds of this Offering will be used by the
Trust to continue to capitalize, expand and
diversify its Mortgage Investment Business. The
Trust, also plans to utilize a portion of the
proceeds of this Offering to establish and conduct
a wholesale non-conforming residential mortgage
banking business specializing in non-conforming
A-, B/C credit-rated residential mortgage loans
("Mortgage Conduit Business"). It is anticipated
that the net proceeds of this offering will be
received over a period of twelve months and that
approximately up to 6% of such proceeds will be
invested in the Mortgage Conduit Subsidiary
(which amount will not exceed 5% of the total
assets of the Trust) with the balance being
invested in the Mortgage Investment Business and
for general corporate purposes. A minimum of 90%
of each dollar invested will be available for
investment in mortgage investments if at least
500,000 shares are sold. (See "ESTIMATED USE OF
PROCEEDS").
SOURCES OF ADDITIONAL FUNDS: Although at this time there is no plan to seek
additional capital from alternative sources, the
Trust may seek the following sources for funds
for investment or other Trust purposes as needed:
(i) the issuance of convertible or other debt,
(ii) the receipt of additional capital
contributions through the sale of additional
Common Shares and Preferred Shares; and (iii) the
receipt of additional capital contributions
through the exercise of warrants.
DISTRIBUTIONS AND DIVIDEND
POLICY: DISTRIBUTIONS AND DIVIDEND POLICY. Current
Distribution and Liquidating Distributions will be
made to Common Shares and Preferred Shares as set
forth in the Trust's Certificate of Incorporation
and Bylaws. The Preferred
8
<PAGE> 13
Shares, as a class, have a non-cumulative preferential right
to distributions declared each year. The Distribution
Preference is equal to an annualized return on the Adjusted
Net Capital Contributions of the Preferred Shares which is
equal to the lesser of 10.25 % or a rate equal to 150 basis
points over the Prime Rate which currently equals 9.75% or
the amount legally available for distribution by the Trust.
The Trust commenced payment of distributions to the
Preferred Shareholders on May 16, 1996 in an amount equal to
the current Distribution Preference and has made consecutive
monthly distributions to the Preferred Shareholders at such
rate since that date. The holders of the Common Shares, on a
per share basis, are generally entitled to the next such
distributions up to an amount equal to that paid to the
holders of the Preferred Shares, on a per share basis. The
Trust, to comply with the REIT Provisions of the Code,
intends to and must distribute 95% or more of its net
taxable income (which does not necessarily equal net income
as calculated in accordance with GAAP) to its stockholders
each year to comply with the REIT Provisions of the Code.
Accordingly, Excess Distributions on the Preferred and
Common Shares will be made at the end of each year if 95% of
the Trust's net taxable income has not theretofore been
declared as a Distribution and any Excess Distributions made
on a payment date generally will be allocated such that the
per share distributions to the Preferred Shares and Common
Shares for that payment date will be the same per share.
The holders of Preferred Shares as a class will receive all
declared liquidating distributions ("Liquidating
Distributions") until they have recovered their entire
Adjusted Net Capital Contribution per Preferred Share as
Liquidating Distributions. The holders of Common Shares will
as a class be entitled to all subsequent Liquidating
Distributions until they have recovered their Adjusted Net
Capital Contribution per Common Share in a similar manner.
Any remaining Liquidating Distributions generally will then
be shared pro-rata by the holders of Common Shares and
Preferred Shares. (See "SUMMARY OF ORGANIZATIONAL DOCUMENTS
AND SECURITIES" and "DISTRIBUTIONS TO SHAREHOLDERS.")
Once the Minimum Subscription Level is reached and the
escrow conditions are met, Net Escrow Interest will be paid
to Common shareholders from escrow if such Net Escrow
Interest allocable to a Shareholder is at least $10.00.
Otherwise the funds will be paid to the Trust (See "PLAN
OF DISTRIBUTION".) After the Trust has achieved the Minimum
Subscription Level, the Trust intends to pay dividends on
Common Shares on at least a quarterly basis as determined by
the Directors. The Directors intend to adopt a dividend
policy which will provide for distributions per Common Share
at a rate approximately equivalent to rates being paid by
money market funds from the time the Trust raises $4,000,000
until substantially all of the capital contributions of
investors are invested in Home Equity Loans and the Mortgage
Conduit Business. The actual timing and amount of dividends
will be determined by the Directors based on, among other
things, the Trust's earnings, cash flow, operations, and
financial condition. The Board of Directors has not
established an initial or minimum distribution level for the
Common Shares.
The Trust's predecessors from December 1991 through April
1996 paid 53 regular consecutive monthly distributions to
the Preferred Shareholders (formerly Class "A" Shares of the
Trust's predecessors) at rates ranging from 10.50% to 11% of
Net Capital Contributions per Class "A" Share. The Net
Capital Contribution per Preferred Share is $9.50.
The Trust may adopt in the future a Dividend Reinvestment
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<PAGE> 14
Plan ("DRP") that allows shareholders
who have enrolled in the DRP to reinvest their
dividends automatically in Common Shares of the Trust.
(see "DISTRIBUTIONS AND DIVIDEND POLICY.")
CAPITALIZATION: The capitalization of the Trust (1) as of September 30,
1996 and (2) as adjusted to reflect the sale of Common
Shares offered hereby (assuming sale of all Common
Shares offered) is as follows:
<TABLE>
<CAPTION>
AS ADJUSTED FOR AS ADJUSTED
MINIMUM FOR MAXIMUM
SUBSCRIPTION SUBSCRIPTION
ACTUAL LEVEL(1) LEVEL(2)(3)
------ --------------- ------------
<S> <C> <C> <C>
SHAREHOLDER'S EQUITY:
Preferred Shares, $.01 par value $ 6,413 $ 6,413 $ 6,413
675,000 Preferred Shares authorized;
641,283 Preferred Shares issued and
outstanding actual and as adjusted
Common Shares, $.01 par value $ 0 $ 5,000 $15,000
2,000,000 Common Shares authorized;
no shares issued and outstanding actual;
500,000 Common Shares issued and
outstanding as adjusted for minimum
subscription level; 1,500,000 Common
Shares issued and outstanding as
adjusted for maximum subscription level.
Warrants $ 0 $ 20,000 (4) $60,000 (4)
Additional Paid - In Capital $5,935,967 $9,510,967 $16,600,967
TOTAL CAPITALIZATION $5,942,380 $9,542,380 $16,742,380
</TABLE>
------------------------------
footnotes on following page
(1) Assumes only the Minimum Subscription Level is
subscribed after deducting estimated underwriting
commissions and estimated offering expenses payable
by the Trust.
(2) Assumes offering is fully subscribed after
deducting estimated underwriting commissions and
estimated offering expenses payable by the Trust.
(3) Does not include 150,000 Common Shares reserved
for issuance pursuant to the Shareholders' Warrants.
Warrants to acquire 150,000 Common Shares at an
exercise price of $5.60 per share will be granted to
Common Shareholders on the basis of one Warrant for
each ten Common Shares purchased. (See "PLAN OF
DISTRIBUTION").
(4) The Trust's estimated fair value of the
Shareholder Warrants is $.40 per Warrant. There is
no current or anticipated market for the Warrants.
SELECTED FINANCIAL DATA: Certain selected historical financial data of the
Trust and its Predecessors through April 30, 1996 is
presented on page 30 of this Prospectus. The combined
information gives effect to the combination of
Capital Alliance Income Trust I and Capital Alliance
Income Trust II (collectively, the
10
<PAGE> 15
"Predecessors") with the Trust due to common
boards of directors and management (See "SELECTED
FINANCIAL DATA").
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS: The Trust resulted from the consolidation of CAIT
I and CAIT II (the "Combination") on April 30,
1996. The Trust exchanged shares of preferred
stock for all of the outstanding whole shares of
CAIT I and CAIT II on April 30, 1996. Thereafter
all assets and liabilities of CAIT I and CAIT II
were transferred to the Trust. The Trust's
mortgage loan acquisitions in the nine month
period ended September 30, 1996 declined to
$2,276,410 from $2,601,810 in the same period of
the previous year due primarily to a decrease in
cash available for investments in mortgage loans.
In 1995 mortgage loan acquisitions increased to
$3,740,011 from $1,569,985 in 1994. (See "SELECTED
FINANCIAL DATA" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS").
BUSINESS: Trust is a specialized mortgage banking firm which
is in the business, as a portfolio lender, of
originating, purchasing and servicing collateral
oriented, high yielding non-conforming, A-, B/C
(or less) credit-rated home equity loans secured
primarily by first and second deeds of trust
on single-family residences and two-to-four unit
residential properties located in California and
other western states ("Home Equity Loans")
("Mortgage Investment Business"). As of November
30, 1996, the Trust had a combined loan portfolio
of 58 Home Equity Loans, aggregating $4,716,884 in
principal amount with a combined-loan-to-value
ratio of 69.18% and average loan size of $90,709
and an average weighted yield of 13.06%. 56.67% of
the portfolio are first deeds of trust and 43.33%
are second deeds of trust. The Trust plans to
expand its Mortgage Investment Business with the
proceeds of this Offering.
The Trust also plans, with a portion of the
proceeds of this Offering, to establish and
conduct a wholesale non-conforming residential
mortgage banking business specializing in A-, B/C
credit rated residential mortgage loans which are
originated in accordance with its underwriting
guidelines ("Mortgage Conduit Business"). The
REIT Provisions of the Code limit the amount of
capital which the Trust may invest in the Mortgage
Conduit Business up to 5% of the value of the
Trust's total assets. Accordingly, approximately
up to 6% of the proceeds of this Offering (which
amount will not exceed 5% of the total assets of
the Trust) will be invested in the Mortgage
Conduit Business.
The Trust's principal sources of income from its
Mortgage Investment Business are the interest from
its investment portfolio of Home Equity Loans and
the fees associated with their origination. The
Trust's principal sources of income from its
Mortgage Conduit Business will be gains recognized
on the sale of A-, B-C credit Mortgages ("A-, B-C
Mortgages"), the net spread between interest
earned on A-, B-C mortgages and the interest
charges associated with borrowings used to finance
such loans pending their sale, and fees associated
with their origination.
The Mortgage Conduit Business will be conducted
either directly, through a non-qualified REIT
subsidiary, or indirectly through a joint venture
which may be with Sierra Capital Acceptance
("SCA"), an affiliated company in which the Trust
holds a strategic investment of $200,000 or with
an unaffiliated third-party wholesale mortgage
banking firm (See "CERTAIN TRANSACTIONS AND
RELATIONSHIPS WITH AFFILIATES"). It is anticipated
that the mortgage loans to be originated or
purchased by the Mortgage Conduit Business
initially will be packaged and sold in whole loan
sales at a premium to institutional investors and
ultimately may be securitized. Management believes
that the Trust's Mortgage Investment Business will
compliment its Mortgage Conduit Business by
providing it
11
<PAGE> 16
with a reliable investor for a portion of its loan
sales and that the Mortgage Conduit Business will
provide a continuing source of Home Equity Loans to the
Mortgage Investment Business.
MANAGEMENT: THE MANAGER. Capital Alliance Advisors, Inc. ("Manager"
and "CAAI"), formed in 1989 in California, will oversee
the day-to-day operations of the Trust, subject to the
supervision of the Trust's Board of Directors and
pursuant to the terms of a Management Agreement (the
"Management Agreement") which will become effective on
the effective date of this Offering. Two of the members
of the Board of Directors, Messrs. Brooks and Blomberg,
are independent directors and are unaffiliated with the
Trust. The Manager employs all of the personnel who
conduct the Trust's Mortgage Investment Business and
will employ the personnel who will conduct its Mortgage
Conduit Business unless such personnel are directly
employed by the Mortgage Conduit Business.
The Manager and its principals and officers, (Messrs.
Swartz, Konczal and Thompson) who are also officers and
directors of the Trust, collectively have substantial
experience in originating, purchasing, financing,
servicing and investing in Home Equity Loans and A-,
B/C credit-rated residential mortgages. Also, Messrs.
Swartz and Konczal collectively have extensive
experience in the management and operations of
publicly-held REITs, in real estate asset management
and financing, and in providing real estate investment
advisory services as a real estate investment fiduciary
for both public and private real estate investment
companies and REITs. The Manager is a licensed real
estate broker in California. (See "THE TRUST",
"MANAGEMENT - The Manager" and "CERTAIN TRANSACTIONS
AND RELATIONSHIPS WITH AFFILIATES").
MANAGEMENT COMPENSATION. The Manager will be entitled
to receive as compensation for its services to the
Trust's Mortgage Investment Business (1) a per annum
Base Management Fee payable monthly in arrears in an
amount equal to 1% of the gross Mortgage assets plus
1/2% of cash or equivalent assets of the Trust for
supervisory, administrative and management services;
and (2) a per annum combined Loan Origination and Loan
Servicing Fee, payable monthly in an amount equal to 2%
of the Gross Mortgage Assets of the Trust for loan
origination and servicing services. All origination
"points" charged in connection with the closing of Home
Equity Loans (other than those retained by the
referring brokers) will be paid to the Trust. The
Manager, in addition to the base Management Fee, will
also receive incentive compensation equal to 25% of the
Trust's net income in excess of a return on equity
equal to the ten year U.S. Treasury Rate plus 2%
provided the payment of such compensation does not
reduce the Trust's net income to an amount less than
such return on equity and provided that all amounts
payable on account of the Series A Preferred
Preference amount have been paid. The Manager and its
principals will also be entitled to receive certain
miscellaneous fees (i) from borrowers which are
customarily payable in connection with the origination
and servicing of mortgage loans; (ii) for other
services requested by the Trust pursuant to separate
agreements approved by the Board of Directors (such as
property management fees and real estate brokerage
commissions in connection with the management and
disposition of foreclosure property); and (iii) for
services rendered to the Mortgage Conduit Business.
(See "MANAGEMENT - The Manager".)
EXECUTIVE COMPENSATION: The executive officers of the Trust serve without
compensation from the Trust. The affiliated Directors
of the Trust serve without compensation from the Trust.
The unaffiliated Directors of the Trust are anticipated
to receive an annual Fee of $5,000 and an additional
$500 for each Director's meeting attended ($300 for
telephonic meetings). Both affiliated and unaffiliated
Directors may receive reimbursement for all
out-of-pocket travel expenses and disbursement incurred
in attending Director's meetings and in carrying out
the business of the Trust. Such Director's Fees and
reimbursements are not to exceed $17,000 for the
Trust's first full
12
<PAGE> 17
fiscal year following this Offering. (See
"EXECUTIVE COMPENSATION").
CERTAIN TRANSACTIONS AND
RELATIONSHIPS WITH AFFILIATES: CAAI is the Manager of the Trust and will
to the Trust in accordance with the
Management Agreement and (b) mortgage
origination and loan servicing services to
the Trust in accordance with the Mortgage
Origination and Servicing Agreement. CAAI
owns 1% of the Preferred Shares of the Trust.
In addition, a majority of the Directors and
the officers of the Trust also serve as
Directors and/or officers of CAAI. Upon the
formation of the Mortgage Conduit Subsidiary,
CAAI will own all of the voting common stock
and 1% economic interest in the Mortgage
Conduit Subsidiary. The Trust will own all of
the non-voting preferred stock which
represents 99% of the economic interest in
the Mortgage Conduit Subsidiary. The Trust
will account for the 99% preferred stock
investment in the Mortgage Conduit Business
using the equity method of accounting.
The Trust, because of its Predecessors'
investment of $200,000, holds Class B
Preferred Shares of Sierra Capital
Acceptance ("SCA"). SCA is a wholesale
mortgage banking firm. The business of SCA
and of the Mortgage Conduit Business are
similar and may be competing. Messrs. Swartz
and Konczal are principals, directors and
officers of SCA and the Trust and its Manager
(See "MANAGEMENT" and "CERTAIN TRANSACTIONS
AND RELATIONSHIPS WITH AFFILIATES").
PRINCIPAL STOCKHOLDERS: Certain information known to the Trust with
respect to the beneficial ownership of the
Trust's common stock as of December 31, 1996,
and as adjusted to reflect the sale of common
stock being offered hereby is presented on
page 57 of this Prospectus (See "PRINCIPAL
STOCKHOLDERS").
SUMMARY OF ORGANIZATIONAL The Trust was incorporated in Delaware in
DOCUMENTS AND SECURITIES: December 1995. The Trust's authorized
capital stock consists of 2,000,000 Common
Shares and 675,000 Preferred Shares. The
Common and Preferred Shares each have a par
value of $0.01. Each Preferred and Common
Share is generally entitled to one vote on
all matters to be voted upon by the
Shareholders. Shareholders have all voting
rights provided by the Delaware General
Corporation Law in addition to the right to
vote upon (1) the election or removal of
directors and (2) the ratification of the
Directors' approval, renewal or termination
of the Management Agreement with CAAI.
The Board of Directors consists of five
members (two of whom are unaffiliated
directors) who are divided into three classes
and will serve until the first annual meeting
of Shareholders at which Directors in their
respective classes are to be elected or until
their successors are elected. (See
"MANAGEMENT" and "EXECUTIVE COMPENSATION").
The number of Directors may be increased or
decreased by the Directors or the
Shareholders, but shall not be less than
three, or more than seven.
The Trust's Bylaws may be amended or altered
by the Board of Directors or by Shareholders
owning a majority of the Shares.
Within 120 days following the close of each
fiscal year, the Trust will mail an annual
report on Trust affairs to its Shareholders.
This report will include audited financial
statements and contain a balance sheet, an
income statement, a statement of changes in
shareholder equity and a statement of changes
in financial position.
<TABLE>
<S> <C> <C>
THE OFFERING: Common Shares Offered by the Trust(1)......1,500,000 Shares
Common Stock to be Outstanding after
</TABLE>
13
<PAGE> 18
<TABLE>
<S> <C>
the Offering............................ 500,000 Shares
(Minimum)
1,500,000 Shares
(Maximum)
Use of Proceeds..................To provide funding for
Trust's Mortgage Investment Business,
for its planned Mortgage Conduit Business
and for general corporate purposes.
American Stock Exchange Symbol(2)................"CAIT"
</TABLE>
------------------------------
(1) Does not include up to 150,000 Common Shares
reserved for issuance upon exercise of Shareholder
Warrants. Shareholder Warrants to acquire up to
150,000 Common Shares have a 4 year term. (See
"CAPITALIZATION" and "SUMMARY OF ORGANIZATIONAL
DOCUMENTS AND SECURITIES").
(2) The shares have been approved for listing on the
American Stock Exchange ("AMEX"), subject to the
official notice of issuance.
FEDERAL INCOME TAX
CONSIDERATIONS: The Trust intends to elect to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended (the "Code"), commencing with its
taxable year ending December 31, 1996, and believes its
organization and proposed method of operation will
enable it to meet the requirements for qualification as
a REIT. To maintain REIT status, an entity must meet a
number of organizational and operational requirements,
including a requirement that it currently distribute at
least 95% of its taxable income to its stockholders. As
a REIT, the Trust generally will not be subject to
federal income tax on net income it distributes
currently to its stockholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be
subject to federal income tax at regular corporate
rates. (See "FEDERAL INCOME TAX CONSIDERATIONS" and
"RISK FACTORS Risk of Higher Taxation of Trust as a
Regular Corporation and Reduced Funds for Dividends if
Trust Fails to Maintain REIT Status.") Even if the
Trust qualifies for taxation as a REIT, the Trust may
be subject to certain federal, state and local taxes on
its income and property. The section of this Prospectus
entitled "FEDERAL INCOME TAX CONSIDERATIONS" contains a
discussion of the most significant federal income tax
issues pertinent to the Trust. It also contains a
description of Tax Counsel's legal opinion as to
federal income tax issues which are expected to be of
relevance to U.S. taxpayers who are individuals. Other
tax issues of relevance to other taxpayers should be
reviewed carefully by such investors to determine
special tax consequences of an investment prior to
their subscription.
ERISA CONSIDERATIONS: The Trust's objectives and policies are designed to
make an investment in Shares appropriate for Tax-Exempt
Investors. The Trust and its policies have been
structured to meet the standard for (i) excluding the
assets of the Trust from the assets of the shareholders
which are employee benefit plans for purposes of the
Employee Retirement Income Security Act of 1974
("ERISA") in accordance with the exemptions contained
in the regulations of the Department of Labor and (ii)
eliminating "unrelated business taxable income" to
tax-exempt entities. However, see "FEDERAL INCOME TAX
CONSIDERATIONS - Investment by Tax-Exempt Investors"
and "ERISA
14
<PAGE> 19
CONSIDERATIONS" herein.
PLAN OF DISTRIBUTION: The Trust is offering a minimum of 500,000 Common
Shares ($4,000,000) and a maximum of 1,500,000 Common
Shares ($12,000,000) at $8.00 per Share, together with
Warrants for the purchase of up to 175,000 additional
Common Shares. The Minimum Investment is 100 Shares.
There is no firm commitment to purchase or sell any
Common Shares or Warrants. Common Shares will be
offered by selling agents, on a best efforts basis,
which means that no one is guaranteeing any minimum
number of Shares will be sold. The Selling Agents, who
are members of the NASD, will be selected by
Brookstreet Securities Corporation, the Managing
Dealer, and the Trust. The Trust will pay retail
commissions of up to 6%, non-accountable expense
reimbursements of 3%, accountable expense
reimbursements of .5% and reimbursement of up to .5%
for actual and bona fide due diligence expenses on the
sale of Shares during the initial offering period.
LEGAL MATTERS: The legality of the securities offered hereby has been
passed upon for the Trust by the Trust's special
counsel, Landels Ripley & Diamond LLP, San Francisco,
California, which has also reviewed and approved the
discussion of law and legal conclusions set forth in
"FEDERAL INCOME TAX CONSIDERATIONS", and "ERISA
CONSIDERATIONS". (See "RISK FACTORS - Risk of Conflicts
from Lack of Separate Representation").
EXPERTS: The combined financial statements of Capital Alliance
Income Trust, A Real Estate Investment Trust as of
December 31, 1995 and 1994 and for the three years then
ended have been included herein and in the Registration
Statement in reliance upon the report of Novogradac &
Company LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION: Copies of the Registration Statement of which this
Prospectus forms a part and the exhibits thereto as
well as any periodic reports or other information will
be on file at the offices of the Commission in
Washington, D.C. and may be obtained at rates
prescribed by the Commission upon request to the
Commission and inspected, without charge, at the
offices of the Commission. Additionally, the Commission
maintains a website that contains reports, proxy
information statements and other information regarding
registrants such as the Trust that file electronically.
The address of the Commission website is
http://www.sec.gov. (See "ADDITIONAL INFORMATION").
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
15
<PAGE> 20
- --------------------------------------------------------------------------------
RISK FACTORS
- --------------------------------------------------------------------------------
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered before making an
investment in the Trust. This Prospectus contains forward-looking statements
which involve risks and uncertainties. The Trust's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Prospectus.
LENDING AND REAL ESTATE FINANCING RISKS.
1. LOAN DEFAULTS PRESENT A RISK OF LOSS TO THE TRUST. The lending
business is subject to the risk that borrowers will not satisfy their debt
service payments and that on foreclosure and liquidation of the property
securing such loans the Trust may suffer a loss due to valuation errors in the
Trust's appraisals or fluctuations in the value of real estate.
As of November 30, 1996, the Trust's loan portfolio included total
loans of $4,641,886 of which $50,000, representing 1% of the loans, were
delinquent 90 days or more, (compared to $341,984 or 9% of such loans at
December 31, 1995). The balance of delinquent loans in the process of
foreclosure at November 30, 1996 totalled $410,195 or 8% of the loan portfolio
(compared to $139,000 or 3% of the loan portfolio at December 31, 1995) of which
$378,195 involved loans to borrowers in bankruptcy (See "BUSINESS"). With
respect to second mortgage loans, the Trust's security interest in the property
securing its loan is subordinated to the interest of a first mortgage lender. If
the value of the property securing a second mortgage loan is not sufficient to
repay the borrower's obligation to the first mortgage holder upon foreclosure,
there will be no realizable value in such property to satisfy the borrower's
obligation to the Trust. Similarly, if the value of the property securing a
mortgage loan declines sufficiently over time, the realizable value in such
property may be less than the borrower's obligation to the Trust. While such
risks could have an adverse effect on the Trust's operations, the Trust's policy
to make only loans with no more than a 75% Combined-Loan-to-Value is intended to
mitigate such risks.
2. RISK THAT PERIODS OF ECONOMIC SLOWDOWN OR RECESSION MAY ADVERSELY
AFFECT TRUST OPERATIONS. Such periods of economic slowdown or recession may be
accompanied by decreased demand for consumer credit and declining real estate
values. Any material decline in real estate values reduces the ability of
borrowers to use home equity to support borrowings and increases the
loan-to-value ratios of loans previously made by the Trust, thereby weakening
collateral coverage and increasing the possibility of a loss in the event of
default. Further, delinquencies, foreclosures and losses generally increase
during economic slowdowns or recessions. Because of the Trust's focus on
borrowers who have tarnished credit and who are unable or unwilling to obtain
mortgage financing from conventional mortgage sources ("Non-conventional
Borrowers"), the actual rates of delinquencies, foreclosures and losses on such
loans could be higher under adverse economic conditions than those currently
experienced in the conforming mortgage lending industry in general. Also, any
sustained period of such increased delinquencies, foreclosures or losses could
adversely affect the pricing of the Trust's whole loan sales in its planned
Mortgage Conduit Business.
3. LOANS MADE TO NON-CONVENTIONAL BORROWERS MAY ENTAIL A HIGHER RISK OF
DELINQUENCY AND HIGHER LOSSES. While many non-conforming lenders will accept
loans with a Combined Loan-to-Value Ratio of 90% or more, the Trust believes
that the underwriting criteria it employs, (particularly the maximum of 75%
Combined Loan-to-Value Ratio of its Home Equity Loans and the 90% Test applied
to all loans) are conservative and will enable it to mitigate the higher risks
inherent in loans made to Non-conventional Borrowers. However, no assurance can
be given that such criteria or methods will afford adequate protection against
such risks.
4. RISK THAT COMPETITION AND DEMAND FOR NON-CONFORMING MORTGAGE LOANS
MAY ADVERSELY AFFECT TRUST'S PROFITABILITY. The availability of non-conforming
mortgage loans meeting the Trust's criteria is dependent upon, among other
things, the size of and level of activity in residential real estate. The size
and level of activity in the residential lending market depend on various
factors, including the level of interest rates, regional and national economic
conditions and inflation and deflation in residential property values, as well
as the general regulatory and tax environment as it relates to mortgage lending.
To the extent the Trust is unable to obtain sufficient mortgage loans meeting
its criteria, the Trust's businesses will be adversely affected.
5. RISK OF TRUST'S DEPENDENCE ON INDEPENDENT MORTGAGE LOAN BROKERS TO
ORIGINATE LOANS. The Trust, through its Manager, depends and will depend largely
on independent mortgage loan brokers, financial institutions and mortgage
bankers for its originations and purchases of mortgage loans in both its
Mortgage Investment Business and its planned Mortgage Conduit Business. The
Trust's competitors also seek to establish relationships with such
16
<PAGE> 21
independent mortgage brokers, financial institutions and mortgage bankers, none
of whom is contractually obligated to continue to do business with the Trust.
Since independent mortgage loan brokers are generally unable to directly fund
mortgages for their clients they are dependent on financial institutions and
mortgage banking firms, such as the Trust and its competitors to fund such
loans.
6. RISKS OF REDUCED PROFITABILITY DUE TO CHANGES IN INTEREST RATES.
Profitability may be directly affected by the level of and fluctuations in
interest rates which affect the Trust's ability to earn a spread between
interest received on its loans held for investment and its cost of capital in
its Mortgage Investment Business or for loans held for sale in its planned
Mortgage Conduit Business and rates paid on warehouse lines and premiums
available in the securitization market. A substantial and sustained increase in
interest rates could adversely affect the Trust's ability to originate and
purchase loans. A significant decline in interest rates could increase the level
of loan prepayments and reduce a portfolio's yield since the funds from such
prepayments would generally be replaced in lower yielding loans. Substantially
all variable rate mortgages to be originated or purchased by the Trust, either
in its Mortgage Investment or Conduit Business will include a "teaser" rate,
i.e., an initial interest rate significantly below the fully indexed interest
rate at origination. Although these loans are underwritten at the fully indexed
rate at origination, borrowers may encounter financial difficulties as a result
of increases in the interest rate over the life of the loan.
GENERAL BUSINESS AND INVESTMENT RISKS.
1. RISK OF LOSSES INHERENT IN PLANNED EXPANSION OF MORTGAGE INVESTMENT
AND MORTGAGE CONDUIT BUSINESSES. The Trust's growth to date was primarily due to
increased mortgage origination activities as its capital base expanded. The
Trust intends to continue to pursue a growth strategy for the foreseeable future
in both its Mortgage Investment Business and its planned Mortgage Conduit
Business. Such expansion and its operating results will depend on the Trust's
ability to expand its mortgage origination, purchasing and sales activities. The
Trust plans to continue its loan origination growth in its Mortgage Investment
Business by expanding its lending area, through CAAI's expansion of its
cooperating broker network, and establishment of correspondent relationships and
through loan originations and purchases from its planned Mortgage Conduit
Business. There can be no assurance that the Trust will anticipate and respond
effectively to all of the changing demands that its expanding operations will
have on the Trust's management, information and operating systems, and the
failure to adapt its systems could have a material adverse effect on the Trust's
result of operations and financial condition. There can be no assurance that the
Trust will successfully achieve its planned expansion or, if achieved, that the
expansion will result in profitable operations.
2. RISK OF COMPETITION FROM MORTGAGE BANKING FIRMS ADVERSELY AFFECTING
TRUST OPERATING RESULTS. As a marketer of mortgage loans, the Trust faces
intense competition, primarily from mortgage banking companies, commercial
banks, credit unions, thrift institutions, finance companies and other private
lenders. Many of these competitors are substantially larger and have more
capital and other resources than the Trust. The current level of gains being
realized in the mortgage banking industry on the sale of the type of loans the
Trust's Mortgage Conduit Business plans to originate and purchase is attracting
and may continue to attract additional competitors into this market with the
possible effect of lowering gains that may be realized on the Trust's Mortgage
Conduit Business loan sales. (See "BUSINESS - Competition").
3. RISK THAT LIMITED HISTORY OF INDEPENDENT OPERATIONS MAY NOT REFLECT
FUTURE OPERATIONS. The Trust through its predecessors commenced operations in
January 1991. Although the Trust's Predecessors and the Trust have been
profitable for each year since inception and have experienced growth in mortgage
loan originations and total revenues relative to prior years, there can be no
assurance that the Trust will be profitable in the future or that these rates of
growth will be sustainable or are indicative of future results. Additionally,
the loss experience of the Trust's loans to date may not be indicative of future
results since loans have been outstanding for a relatively short period of time
and only seven loans have been foreclosed since the inception of the Trust's
Predecessors. (See "BUSINESS - Mortgage Investment Business").
4. RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES. The Board of
Directors has established the investment policies and operating policies and
strategies set forth in this Prospectus as the investment policies and operating
policies and strategies of the Trust. However, any of the policies, strategies
and activities described in this Prospectus may be modified or waived by the
Board of Directors, without stockholder consent. The Board of Directors may
amend the Trust's Bylaws without stockholder consent.
5. RISK THAT LIMITED LIABILITY OF DIRECTORS AND INDEMNIFICATION MAY
LIMIT SHAREHOLDER RECOURSE. The Directors are directors of a Delaware
corporation, and are required to perform their duties in good faith, and in a
manner believed by the Directors to be in the best interests of the Trust.
Pursuant to the Delaware General Corporation
17
<PAGE> 22
Law, the Directors are not personally liable to any person, other than the Trust
or a Shareholder, for any act, omission or obligation of the Trust or any
director thereof, except for liability arising from his own willful misfeasance,
bad faith, gross negligence or disregard of duty. The Trust's officers,
employees and agents are also required to act in good faith and in a manner
believed by them to be in the best interests of the Trust in handling its
affairs.
The Directors intend to obtain insurance at Trust expense in reasonable
amounts and to the extent that it is available at economical costs, against
losses arising from tort claims or other claims that may be made against a
Director, officer, employee or other agent of the Trust. The Trust will
indemnify its Directors, officers and employees. Other agents of the Trust may
be indemnified on the same basis in the discretion of the Directors in a
specific case. The Trust intends to enter into contracts which provide indemnity
to its Directors and officers and agents, including the Manager, as permitted by
the Certificate of Incorporation. Shareholders, accordingly, will be entitled to
more limited rights of action than they would have absent the Certificate of
Incorporation's limitations of Directors', officers' and agents' liability and
such indemnification agreements.
6. RISK THAT ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON SHARES MAY
ADVERSELY AFFECT MARKET VALUES. There is no prior public market for the Common
Shares of the Trust. Although the Shares have been approved for listing on the
American Stock Exchange, subject to the official notice of issuance, there can
be no assurance that an active public trading market for the Common Shares will
develop after the Offering or that, if developed, it will be sustained. The
public offering price of the Common Shares offered hereby has been determined by
negotiations between the Trust and the Managing Dealer and may not be indicative
of the price at which the Common Shares will trade after the Offering. (See
"PLAN OF DISTRIBUTION"). Consequently, there can be no assurance that the market
price for the Common Shares will not fall below the initial public offering
price.
7. RISK OF ADVERSE EFFECTS OF PREFERRED DIVIDEND PREFERENCE ON COMMON
SHARE DIVIDENDS. The Preferred Shares are entitled to a Current Distribution
Preference each quarter. In order to pay Current Distributions on Common Shares,
the Trust must declare and pay a dividend on the Preferred Shares equal to the
Current Distribution Preference for the entire quarter before declaring or
paying any dividends on the Common Shares. The Trust anticipates that it will
have sufficient funds available for, and will be able to legally declare and pay
such distributions, although no assurance can be given in this regard. (See
"DISTRIBUTIONS AND DIVIDEND POLICY").
TAX AND REGULATORY RISKS.
1. RISK OF HIGHER TAXATION OF TRUST AS A REGULAR CORPORATION AND
REDUCED FUNDS FOR DIVIDENDS IF TRUST FAILS TO MAINTAIN REIT STATUS. The Trust
currently operates and has operated in a manner intended to allow it to qualify
as a REIT under the Internal Revenue Code of 1986, as amended (the "Code").
Although the Trust believes that it will continue to operate in such a manner,
no assurance can be given that the Trust will remain qualified as a REIT.
Qualification as a REIT involves the satisfaction of numerous requirements (some
on an annual and others on a quarterly basis) established under highly technical
and complex Code provisions for which there are only limited judicial and
administrative interpretations, and involve the determination of various factual
matters and circumstances not entirely within the Trust's control. For example,
in order to qualify as a REIT, at least 95% of the Trust's gross income
(including its share of income from its investment in SCA) in any year must be
derived from qualifying sources and the Trust must pay distributions to
stockholders aggregating annually at least 95% of its taxable income, including
income from its investment in SCA (calculated without regard to the dividends
paid deduction and excluding net capital gains). No assurance can be given that
legislation, new regulations, administrative interpretations or court decisions
will not significantly change the tax laws with respect to qualification as a
REIT.
Among the requirements for REIT qualification is that the value of any
one issuer's securities held by a REIT may not exceed the value of 5% of the
REIT's total assets on certain testing dates. (See "FEDERAL INCOME TAX
CONSIDERATIONS - Requirements for Qualification"). The Trust believes that the
aggregate value of the securities of SCA held by the Trust are less than 5% of
the value of the Trust's total assets.
If the Trust was to fail to qualify as a REIT in any taxable year, the
Trust would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its stockholders. Moreover, unless entitled to relief under
certain statutory provisions, the Trust also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would reduce the net earnings of the Trust
available for investment or distribution to stockholders because of the
additional tax liability of
18
<PAGE> 23
the Trust for the years involved. In addition, distributions to stockholders
would no longer be required to be made. (See "FEDERAL INCOME TAX CONSIDERATIONS
- - Failure to Qualify").
2. RISK OF REGULATION OF LENDING ACTIVITIES AND CHANGING REGULATORY
ENVIRONMENT. The operations of the Trust are subject to extensive regulation by
federal, state and local governmental authorities. Although the Trust believes
that its Mortgage Investment Business is in compliance in all material respects
with applicable local, state and federal laws, rules and regulations, and that
its planned Mortgage Conduit Business will conduct its business in the same
manner, there can be no assurance that more restrictive laws, rules and
regulations will not be adopted in the future which could make compliance much
more difficult or expensive, restrict the Trust's ability in its separate
businesses to originate or sell loans, further limit or restrict the amount of
interest and other charges earned under loans originated or purchased by the
Trust, or otherwise adversely affect the business or prospects of the Trust.
(See "BUSINESS - Regulation").
3. RISK OF REGULATION AS AN INVESTMENT COMPANY ADVERSELY AFFECTING
TRUST OPERATIONS. The Trust at all times intends to conduct its business so as
not to become regulated as an investment company under the Investment Company
Act. Accordingly, the Trust does not expect to be subject to the restrictive
provisions of the Investment Company Act. The Investment Company Act exempts
entities that are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interest"). Under the current interpretation of the staff of the
Commission, in order to qualify for this exemption, the Trust must maintain at
least 55% of its assets directly in mortgage loans, and certain other Qualifying
Interests in real estate. The Trust does not intend to invest in or issue
mortgage securities with respect to an underlying pool of mortgages, mortgage
securities which would not qualify as Qualifying Interests for purposes of the
55% requirement. If the Trust fails to qualify for exemption from registration
as an investment company, its ability to use leverage in its Mortgage Investment
Business would be substantially reduced, and it would be unable to conduct its
business as described herein. Any such failure to qualify for such exemption
could have a material adverse effect on the Trust.
FINANCING RISKS.
1. ADVERSE EFFECT OF UNAVAILABILITY OF FUNDING SOURCES. Financial
service companies like the Trust have a constant need for capital to finance
their lending activities. The Trust's planned Mortgage Conduit Business will
fund the majority of its loan origination and purchasing activities by borrowing
on warehouse lines of credit secured by pledges of its loans, in most cases
until the pledged loans are sold and the lenders repaid. While the Trust expects
to be able to obtain financing for its Mortgage Conduit Business, there can be
no assurance that financing will be obtainable on favorable terms. To the extent
that the Mortgage Conduit Business is not successful in financing the funding of
loans or in selling its loans into the secondary markets for such loans, it may
have to curtail its loan origination and purchasing activities, which could have
a material adverse effect on its operations.
RISKS OF CONFLICTS OF INTEREST AND RELATED PARTY TRANSACTIONS.
1. RISK OF TRUST'S TOTAL RELIANCE ON MANAGER AND ITS AFFILIATES. The
Trust is subject to conflicts of interest arising from its relationship with its
Manager, CAAI and its affiliates. The Trust will rely upon CAAI to provide
management, loan origination and loan servicing services to the Trust for the
day-to-day operations of its business. CAAI will have approximately 7 employees
on the effective date of this Offering who are engaged in the management and
operations of the Trust's Mortgage Investment Business. The Trust will have five
Directors, three of whom are principals of the Manager. The Directors and the
Manager will have sole discretion and authority to manage the affairs of the
Trust. (See "MANAGEMENT" and "EXECUTIVE COMPENSATION"). The Bylaws of the Trust,
however, prohibit any loan by the Trust to the Manager. In the event of the
resignation or dissolution of the Manager or all of the Directors, the Trust
would continue and the Shareholders would be entitled to elect successor
Directors who could, in turn, retain a new Manager. (See "SUMMARY OF
ORGANIZATIONAL DOCUMENTS AND SECURITIES"). The success of the operation of the
Trust depends in large part upon the services and knowledge of Messrs. Swartz,
Konczal and Thompson, officers and directors of CAAI. Since the loss of one or
more of those officers' services for any reason could have a material adverse
effect on the Trust, the Trust will carry key man insurance for CAAI on the
lives of Messrs. Swartz, Thompson and Konczal. If their services become
unavailable for any reason, it may be difficult or impossible for the Trust to
find a suitable replacement. The Unaffiliated Directors constitute a majority of
19
<PAGE> 24
the Audit Committee of the Trust which will review the Trust's financial
statements and will deal with the Trust's annual report and its auditors.
2. RISK OF ADVERSE EFFECTS ON TRUST'S OPERATIONS DUE TO MANAGER'S
CONFLICTS OF INTEREST AND INVESTMENT IN OTHER INVESTMENT ACTIVITIES. The Manager
and its Affiliates also may engage in other business activities, investments or
ventures, independently or with others, and are not obligated to devote all of
their time to the Trust's affairs. No assurance can be given that the Trust's
relationships with CAAI and its affiliates will continue indefinitely. The
failure or inability of CAAI to provide the services required of it under the
Management Agreement or its Loan Origination and Loan Servicing Agreement or any
other agreements or arrangements with the Trust would have a material adverse
effect on the Trust's business. In addition, as the holder of all of the
outstanding voting stock of the planned Mortgage Conduit Business, CAAI will
have the right to elect all directors of the Mortgage Conduit Subsidiary and the
ability to control the outcome of all matters for which the consent of the
holders of the common stock of the Mortgage Conduit Subsidiary is required. (See
"BUSINESS - Mortgage Conduit Business").
3. RISKS OF OTHER ACTIVITIES OF MANAGEMENT. Messrs. Swartz and Konczal
provide services to, and receive compensation from, other businesses not
related to the Trust (See "MANAGEMENT" and "CERTAIN TRANSACTIONS AND
RELATIONSHIPS WITH AFFILIATES"). As a consequence, neither Mr. Swartz nor Mr.
Konczal will devote all of their professional time on the operations of the
Trust. Although Messrs. Swartz and Konczal believe that they will have
sufficient time to discharge fully their responsibilities to the Trust, they
will have conflicts of interest in allocating their time between the Trust and
their other business activities in which they are involved.
4. RISK OF CONFLICTS FROM LACK OF SEPARATE REPRESENTATION. Stephen C.
Ryan & Associates of San Francisco is acting as counsel to both the Trust and
the Manager, and, as such, has rendered legal services with respect to certain
Trust matters. Stephen C. Ryan & Associates is also counsel to certain
Affiliates of the Manager. Stephen C. Ryan & Associates is now furnishing, and
may in the future furnish, legal services to other entities and the Trust, which
are sponsored by the Manager or its Affiliates. In the event that a conflict of
interest should develop, the Manager will cause the entities with conflicting
interest to engage separate counsel. No separate counsel has been retained to
represent the interest of shareholders in connection with this offering.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 25
- --------------------------------------------------------------------------------
THE TRUST
- --------------------------------------------------------------------------------
The Trust is a specialized mortgage banking firm engaged in the
business of originating, purchasing, and servicing collateral-oriented,
high-yielding non-conforming residential mortgages, consisting primarily of Home
Equity Loans (the "Mortgage Investment Business"). Home Equity Loans are
primarily made to borrowers with impaired credit who own single-family
residences or two-to-four unit residential properties with relatively low
combined loan-to-value ratios for the purposes of debt consolidation, business,
home improvements and a variety of other purposes.
The Trust was incorporated in Delaware on December 12, 1995 and is the
surviving entity of a consolidation effective as of April 30, 1996 of Capital
Alliance Income Trust I ("CAIT I") and Capital Alliance Income Trust II ("CAIT
II"), which were Delaware business trusts formed in 1991 and 1994, respectively.
(See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"). Both CAIT I and CAIT II were managed by CAAI, the Manager of the
Trust. The consolidation of CAIT I and CAIT II into the Trust was effected after
a "fairness" hearing conducted by the California Corporations Commissioner, the
issuance of a permit by the California Commissioner of Corporations qualifying
the issuance of the Trust's Preferred Shares in the consolidation, and the
approval of the consolidation by the shareholders of both CAIT I and CAIT II.
The Trust intends to operate in a manner that permits the Trust to
elect, and it intends to elect, to be a REIT for federal income tax purposes.
The Trust expects to generate income for distribution to its stockholders
primarily from the net interest and origination income derived from its Mortgage
Investment Business and dividend income from the operation of its Mortgage
Conduit Business. As a result of its REIT status, the Trust will be permitted to
deduct dividend distributions to stockholders in calculating its taxable income,
thereby effectively eliminating the "double taxation" that generally results
when a corporation earns income and distributes that income to stockholders in
the form of dividends. The Trust and its Mortgage Investment Business generally
will not be subject to federal income tax to the extent that certain REIT
qualifications are met. The Trust's Mortgage Conduit Business, which will be
conducted either directly through a non-qualified REIT subsidiary ("Mortgage
Conduit Business") or indirectly through a joint venture, will not be
consolidated with the Trust and its Mortgage Investment Business for accounting
purposes because, pursuant to the REIT provisions of the Internal Revenue Code,
the Trust will not own any of the Mortgage Conduit Business' voting common stock
and the Trust will not control the Mortgage Conduit Business. On formation of
the Mortgage Conduit Business, CAAI will own all of the voting common stock and
a 1% economic interest in the Mortgage Conduit Business. The Trust will own all
of the non-voting preferred stock representing 99% of the economic interest in
the Mortgage Conduit Business. CAAI will have the power to elect all of the
directors of the Mortgage Conduit Business and 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. Additionally, the REIT provisions of the Code
limit the amount of capital which the Trust may invest in its planned Mortgage
Conduit Business to up to 5% of the value of the Trust's total assets. All
taxable income of the Mortgage Conduit Business is subject to federal and state
income taxes, where applicable. See "FEDERAL INCOME TAX CONSIDERATIONS."
The principal executive offices of the Trust and the Manager are
located at 50 California Street, San Francisco, California 94111, telephone
(415) 288-9575.
The Manager, Capital Alliance Advisors, Inc., will, pursuant to the
Management Agreement and the Loan Origination and Servicing Agreement, oversee
the day-to-day operations of the Trust, subject to the supervision of the
Trust's Board of Directors, two of whom (Messrs. Brooks and Blomberg) are
independent and unaffiliated. Messrs. Brooks and Blomberg form a majority of the
Trust's Audit Committee and Mr. Blomberg also serves on the Trust's Executive
Committee. The Manager will be involved in three primary activities: (1)
asset-liability management - the analysis and oversight of the acquisition,
financing and disposition of Trust assets; (2) capital management - primarily
the oversight of the Trust's structuring, analysis, capital raising and investor
relations activities; and (3) operations - the providing of the management,
personnel, assets and systems of the Trust's operating division - the Mortgage
Investment Business. The Mortgage Conduit Business will be operated by the
Manager pursuant to separate agreements which will be entered into, depending on
the form of organization selected for that entity. The Manager has employed
personnel who have significant experience in mortgage finance and in the
origination, purchase and administration of mortgage assets. See "Manager -
Management Agreement."
- --------------------------------------------------------------------------------
ORGANIZATION CHART
- --------------------------------------------------------------------------------
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<PAGE> 26
[FLOW CHART]
Capital Alliance Income Trust
("Trust")
<TABLE>
<S> <C> <C> <C>
Board of Directors (5) Manager;
Loan Origination;
Loan Servicing
Thomas B. Swartz(1)(2)
Dennis Konczal(1)(2)
Douglas A. Thompson(1)
Stanley C. Brooks
Harvey Blomberg Mortgage Investment Business
(4) Mortgage Conduit Business (4) Capital Alliance
Advisors, Inc.
("Manager") (1)(3)
Capital Alliance
Mortgage
Investors
Sierra Capital Acceptance (2) SCSI Corporation
("SCA")
</TABLE>
(1) Messrs. Swartz, Konczal and Thompson, directors of the Trust, control and
are directors and officers of the Manager (See "MANAGEMENT").
(2) SCSI Corporation is a Class "A" common shareholder of SCA holding 99%
of the voting power of SCA and is controlled by Messrs. Swartz and
Konczal. All of SCSI's stock interest in SCA is subject to options held by
Messrs. Swartz and Konczal and by Messrs. John D. Dewey and Richard H.
McKannay, a shareholder of the Manager.
(3) The Manager holds 1% of the Series "A" Preferred stock of the Trust.
(4) The Trust will hold a 99% economic interest (through non-voting preferred
stock) in the Mortgage Conduit Business and the Manager will hold a 1%
economic interest in the Mortgage Conduit Business.
(5) The Trust holds a $200,000 investment in the 15% Preferred Class "B" Shares
of SCA which are non voting.
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<PAGE> 27
- --------------------------------------------------------------------------------
ESTIMATED USE OF PROCEEDS
- --------------------------------------------------------------------------------
Capital Alliance Income Trust Ltd. intends to invest the net proceeds
of this offering primarily in Home Equity Loans and other non-conforming
residential mortgage loans in its Mortgage Investment Business and in its
Mortgage Conduit Business. It is anticipated that the net proceeds of this
offering will be received over a period of twelve months and that approximately
up to 6% of such proceeds will be invested in the Mortgage Conduit Subsidiary
(which amount will not exceed 5% of the total assets of the Trust) with the
balance being invested in the Mortgage Investment Business and for general
corporate purposes, including legal and accounting expenses and transfer agency
and dividend distribution expenses. To the extent that the Trust does not
immediately so invest those proceeds, they will be invested temporarily in
short-term financial instruments and deposits. There are no present contracts or
understandings to purchase mortgage loans from any source.
Although its Manager is continually reviewing its pipeline of
applications for Home Equity Loans, the Trust has not specifically identified
any Home Equity Loans or other mortgage loans in which to invest the proceeds of
this Offering.
The following table reflects the intended initial application from the
sale of the Shares (exclusive of the Warrants) being offered hereby.
<TABLE>
<CAPTION>
Assuming 500,000 Assuming 1,500,000
Shares Sold and No Shares Sold and No
Warrants Exercised Warrants Exercised(1)
--------------------- ---------------------
Amount % Amount %
<S> <C> <C> <C> <C>
Gross Proceeds of Offering $4,000,000 100.0% $12,000,000 100.0%
Less:
Expenses of Offering:(2)(3)
Retail Commissions $ 240,000 6.0% $ 720,000 6.0%
Expenses and Reimbursements $ 160,000 4.0% $ 480,000 4.0%
Amount Available for Investment:
Reserves and Operations $3,600,000 90.0% $10,800,000 90.0%
</TABLE>
- -----------------------------
(1) If 1,500,000 Shares are sold, a total of 150,000 Shareholder Warrants
will be issued. The exercise of all Shareholder Warrants will increase the
gross proceeds to the Trust from $12,000,000 to $12,840,000. "Proceeds to
the Trust" (gross proceeds less underwriting commissions and a commission
of 2.8% per Shareholder Warrant exercised) will increase to $12,086,400. If
less than all Shareholder Warrants are exercised, these amounts will
correspondingly decrease. Shareholder Warrants issued in connection with
the purchase of Shares by shareholders in the Initial Public Offering will
not be exercisable until a date two to four years from the date of this
Prospectus). (See "PLAN OF DISTRIBUTION" and "SUMMARY OF ORGANIZATIONAL
DOCUMENTS AND SECURITIES.")
(2) These amounts include retail brokerage commissions and expenses for
marketing and offering services payable to the Managing Dealer, Brookstreet
Securities Corporation (of which a Director of the Trust, Mr. Brooks, is
Chairman and President) and reallowable in part to its selected selling
agents. (See "PLAN OF DISTRIBUTION" and "MANAGEMENT"). This reimbursement
is limited to 4% per Share for each Share sold.
(3) All retail sales commissions in the Initial Public Offering will be the
obligation and responsibility of the Trust. Selected Selling Agents may
receive a retail commission of 2.8% per Share for each Share sold pursuant
to the exercise of Shareholders Warrants, provided such sales are
facilitated by them and specified conditions are met. (See "PLAN OF
DISTRIBUTION").
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<PAGE> 28
- --------------------------------------------------------------------------------
SOURCES OF ADDITIONAL FUNDS
- --------------------------------------------------------------------------------
Although at this time there is no plan to seek additional capital from
alternative sources, the Trust may seek the following sources for funds for
investment or other Trust purposes as needed: (i) the issuance of convertible or
other debt, (ii) the receipt of additional capital contributions through the
sale of additional Common Shares and Preferred Shares; and (iii) the receipt of
additional capital contributions through the exercise of Warrants.
The Trust's Bylaws authorize the Trust to issue additional Preferred
Shares or Common Shares (which would require shareholder approval by class of an
amendment of the Trust's certificate of incorporation to increase its authorized
capital) and to borrow funds from institutional lenders, banks and other lenders
through the issuance of commercial paper, notes, debentures, bonds and other
debt obligations (which may be convertible into Preferred Shares or Common
Shares or have attached Warrants to acquire Preferred Shares or Common Shares).
The issuance of such securities may involve the dilution of the interests of the
Trust's then existing shareholders and such securities may have rights,
preferences or privileges equal to or greater than the existing preferred and
common shares. The Trust will not issue any debt securities to the public unless
the historical or substantiated future cash flow of the Trust, excluding
extraordinary items, is sufficient to cover the interest on those securities.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 29
- --------------------------------------------------------------------------------
DISTRIBUTIONS AND DIVIDEND POLICY
- --------------------------------------------------------------------------------
DISTRIBUTION PREFERENCES.
Current Distribution and Liquidating Distributions will be made by the
Trust to holders of Common Shares and Preferred Shares in accordance with the
preferences set forth under "SUMMARY OF ORGANIZATIONAL DOCUMENTS AND
SECURITIES."
DURING OFFERING PERIOD.
After the Minimum Subscription Level of $4,000,000 (or such other
amount as may be approved by the NASD) is reached and the escrow conditions are
met, Net Escrow Interest on the subscriptions held in escrow will be paid to
subscribers earning more than $10.00, although interest credited to each
participant in the Trust's Dividend Reinvestment Plan will be used to purchase
additional Common Shares. The Trust then intends to declare dividends on a
quarterly basis during the balance of the offering period. Thereafter, the Trust
will pay such dividends on a quarterly basis.
If the Minimum Subscription Level of $4,000,000 is not reached within
twelve months of the date of this Prospectus, (unless such period is extended by
the Directors for up to an additional twelve months) the Trust will terminate
this offering and, all monies paid by subscribers will be promptly returned to
them together with their proportionate share of Net Escrow Interest earned on
the offering proceeds based on the amount of their investment and the amount of
time the investment was on deposit in the Escrow Account. (See "PLAN OF
DISTRIBUTION.")
AFTER OFFERING PERIOD.
After the offering is completed and the Offering Proceeds have been
substantially invested, the Trust will make distributions in amounts determined
by the Directors and in accordance with the Distribution Preferences of the
Preferred and Common Shares, based upon the cash flow from Trust investments in
Home Equity Loans, the Trust's operations and its financial condition. The level
of such distributions may be more or less than the level of such distributions
determined during the offering. The Trust's policy is to make distributions at
least quarterly in amounts aggregating annually at least 95% of its REIT taxable
income (which term does not include capital gains realized by the Trust). (See
the following Distribution Table).
Taxable income remaining after the distribution of the regular
quarterly dividends and any Excess Distribution, will to the extent declared by
the Board of Directors, be distributed annually in a special dividend on or
prior to the date of the first regular quarterly dividend payment date of the
following taxable year. The dividend policy is subject to revision at the
discretion of the Board of Directors. All distributions in excess of those
required for the Trust to maintain REIT status will be made by the Trust at the
discretion of the Board of Directors and will depend on the taxable earnings of
the Trust, the financial condition of the Trust and such other factors as the
board of Directors deems relevant. The Board of Directors has not established a
minimum distribution level. Distributions may be made from (a) surplus, or (b)
out of net profits for the fiscal year in which the dividend is declared and/or
the preceding fiscal year unless the capital represented by the Preferred Shares
has been impaired. (See "FEDERAL INCOME TAX CONSIDERATIONS.")
25
<PAGE> 30
PAST PERFORMANCE-PREFERRED SHARE DISTRIBUTIONS
<TABLE>
<S> <C>
Income for the year ended December 31, 1995 $ 414,414
Income for the nine months ended September 30, 1996 451,327
Less: income for the nine months ended September 30, 1995 (311,529)
---------
Income for the twelve months ended September 30, 1996 554,212 (1)(2)
Adjustments:
Non cash items included in income:
For the year ended December 31, 1995 (11,048) (3)
For the nine months ended September 30, 1996 (88,652) (3)
Less: for the nine months ended September 30, 1995 47,557 (3)
---------
For the twelve months ended September 30, 1996 (52,143)
Cash flows from operations available for distributions to Preferred
Shareholders for the twelve months ended September 30, 1996 502,069 (1)(2)
Total estimated distributions for the twelve months ended
September 30, 1997 $ 593,988 (1)(2)
---------
Deficiency: (91,919) (1)
Estimated Distributions to Preferred Shareholders
for the twelve months ended September 30, 1997.
Amount: 593,988
Per Share: $ .926
</TABLE>
- ------------------------
(1) Proceeds of Predecessors' Offerings of Preferred Shares during 12 months
ending September 30, 1996 were raised throughout such period and were not
fully invested during such period. Source of funds for deficiency: gain on
sale of properties or from operations or return of capital.
(2) No Common Shares were outstanding prior to this Offering. Distributions to
Common Shareholders will be derived from investment of the proceeds of this
Offering. Assuming that the maximum net proceeds of this Offering were
invested during all of the twelve months ended September 30, 1997 with the
same yield as the existing mortgage portfolio (i.e. 13.06%) the Estimated
Distributions to Preferred Shareholders would be $593,988, and would equal
$.926 per Preferred Share.
(3) The nature and amounts of non-cash adjustments required to convert income
to cash flow from operations is detailed by year below:
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
December 31, September 30,
---------------------
1995 1995 1996
------------ ---- ----
<S> <C> <C> <C>
Amortization $ 560 $ --- $ 187
Increase in amounts receivable (57,162) (52,807) (189,853)
Increase in loan loss reserve 12,000 5,000 53,000
Increase (decrease) in amount due to affiliates 15,285 (11,356) 16,190
Increase in other liabilities 18,269 11,606 31,824
--------- -------- --------
$ (11,048) $(47,557) $(88,652)
========= ======== ========
</TABLE>
Distributions to stockholders will generally be taxable as ordinary
income, although a portion of such distributions may be designated by the Trust
as capital gain or may constitute a tax-free return of capital. The Trust will
annually furnish
26
<PAGE> 31
to each of its stockholders a statement setting forth distributions paid during
the preceding year and their characterization as ordinary income, capital gains
or return of capital. For a discussion of the federal income tax treatment of
distributions by the Trust, see "FEDERAL INCOME TAX CONSIDERATIONS."
DIVIDEND REINVESTMENT PLAN.
The Directors may in the future establish a Dividend Reinvestment
Plan ("DRP") for purposes of enabling Common Shareholders to have Trust
distributions automatically invested in Common Shares.
Any Shares issuable by the Trust pursuant to such a DRP are not being
registered by means of the Registration Statement of which this Prospectus forms
a part. To the extent such shares are issued by the Trust, such shares will be
registered under the Securities Act by means of a separate registration
statement.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
27
<PAGE> 32
- --------------------------------------------------------------------------------
CAPITALIZATION
- --------------------------------------------------------------------------------
The capitalization of the Trust (1) as of September 30, 1996 and (2) as
adjusted to reflect the sale of Common Shares offered hereby (assuming sale of
all Common Shares offered ) is as follows:
<TABLE>
<CAPTION>
AS ADJUSTED FOR AS ADJUSTED FOR
MINIMUM MAXIMUM
SUBSCRIPTION SUBSCRIPTION
ACTUAL LEVEL(1) LEVEL(2)(3)
------ --------------- ---------------
<S> <C> <C> <C>
SHAREHOLDER'S EQUITY:
Preferred Shares, $.01 par value $ 6,413 $ 6,413 $ 6,413
675,000 Preferred Shares
authorized; 641,283 Preferred
Shares issued and outstanding actual
and as adjusted
Common Shares, $.01 par value $ 0 $ 5,000 $ 15,000
2,000,000 Common Shares
authorized; no shares issued and
outstanding actual; 500,000 Common
Shares issued and outstanding as
adjusted for minimum subscription;
1,500,000 Common Shares issued and
outstanding as adjusted for
maximum subscription
Warrants $ 0 $ 20,000(4) $ 60,000(4)
Additional Paid - In Capital $5,935,967 $9,510,967 $16,660,967
TOTAL CAPITALIZATION $5,942,380 $9,542,380 $16,742,380
</TABLE>
- ---------------------------
(1) Assumes only the Minimum Subscription Level is subscribed after deducting
estimated underwriting commissions and estimated offering expenses payable
by the Trust.
(2) Assumes offering is fully subscribed after deducting estimated underwriting
commissions and estimated offering expenses payable by the Trust.
(3) Does not include 150,000 Common Shares reserved for issuance pursuant to
the Shareholders' Warrants. Warrants to acquire 150,000 Common Shares at an
exercise price of $5.60 per share will be granted to Common Shareholders on
the basis of one Warrant for each ten Common Shares purchased. (See "PLAN
OF DISTRIBUTION").
28
<PAGE> 33
(4) The Trust's estimated fair value of the Shareholder Warrants is $.40 per
Warrant. There is no current or anticipated market for the Warrants.
29
<PAGE> 34
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The following table presents selected historical financial data of the
Trust and its Predecessors. The combined information gives effect to the
combination of Capital Alliance Income Trust I and Capital Alliance Income Trust
II (collectively, the "Predecessors") with the Trust due to common boards of
directors and management. The historical combined statement of operations data
and the historical combined balance sheet data of the Trust for all periods
through December 31, 1995 and as of April 30, 1996 and for the four months then
ended were prepared based upon the historical combined financial data of the
Predecessors. For the five months ended September 30, 1996, the financial data
represents the operations of the Trust (Successor) after the merger.
The selected historical combined financial data set forth below for the
Trust for each of the years in the three-year period ended December 31, 1995 are
derived from the audited financial statements of the Predecessors. The selected
financial data for the nine months ended September 30, 1995, the four months
ended April 30, 1996 and for the years ended December 31, 1991 and 1992 are
derived from unaudited financial statements of the Predecessors, which in the
opinion of management reflect all adjustments, consisting only of normal,
recurring adjustments, necessary for a fair statement of the results of the
subject periods. The selected financial data for the five months ended September
30, 1996, are derived from unaudited financial statements of the Trust, which in
the opinion of management reflect all adjustments, consisting only of normal,
recurring adjustments, necessary for a fair statement of the results of the
subject periods.
The historical combined financial information is not necessarily
indicative of future operations and should not be so construed. (See "INDEX TO
FINANCIAL STATEMENTS"). The selected financial data should be read in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS."
30
<PAGE> 35
SELECTED FINANCIAL DATA
CAPITAL ALLIANCE INCOME TRUST
A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
Combined (Predecessors)
-----------------------
Year Ended December 31
HISTORICAL STATEMENT OF OPERATIONS DATA: 1991 1992 1993 1994 1995
(unaudited)
---------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 537 $ 30,626 $100,582 $174,997 $489,363
Net income -- 26,593 83,722 147,056 414,414
Net income per weighted average Preferred Shares(1) -- (1) 0.934 0.823 0.938
Weighted average Preferred Shares (1) (1) 89,644 178,689 442,026
</TABLE>
<TABLE>
<CAPTION>
Combined (Predecessors) (Successor)
--------------------------- -----------
Nine Months Four Months Five Months
Ended Ended Ended
September 30 April 30 September 30
HISTORICAL STATEMENT OF OPERATIONS DATA: 1995 1996 1996
(unaudited) (unaudited) (unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
Revenue $353,648 $273,709 $300,735
Net income 311,529 226,643 224,684
Net income per weighted average Preferred Shares(1) 0.777 0.350 0.350
Weighted average Preferred Shares 400,739 646,971 641,804
</TABLE>
<TABLE>
<CAPTION>
Combined (Predecessors)
-----------------------
At December 31
HISTORICAL BALANCE SHEET DATA: 1991 1992 1993 1994 1995
(unaudited)
-------------------------
<S> <C> <C> <C> <C> <C>
Mortgage notes receivable -- $ 524,000 $ 620,500 $1,889,485 $4,790,070
Total assets 294,290 696,794 1,071,505 3,148,661 6,254,052
Total liabilities 10,641 16,710 29,269 55,741 164,022
Shareholders' capital 283,649 680,084 1,042,236 3,092,920 6,090,030
</TABLE>
<TABLE>
<CAPTION>
Combined
(Predecessors) (Successor)
-------------- ------------
Four Months Five Months
Ended Ended
April 30 September 30
HISTORICAL BALANCE SHEET DATA: 1996 1996
-------------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Mortgage notes receivable $4,725,895 $4,987,408
Total assets 6,267,251 6,840,541
Total liabilities 263,316 897,295
Shareholders' capital 6,003,935 5,943,246
</TABLE>
- -----------------------
(1) There are no Preferred Shares issued for the predecessor to CAIT I for
these years.
31
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial statements of Capital Alliance Income Trust, A Real Estate
Investment Trust (the "Trust") included elsewhere herein were prepared based
upon the combined historical operations of Capital Alliance Income Trust I
("CAIT I") and Capital Alliance Income Trust II ("CAIT II") (CAIT I and CAIT II
are collectively referred to as the "Predecessors"). The operations of the
Predecessors have been combined due to the common management and directors. The
unaudited interim financial statements subsequent to the merger represent the
operations of the Trust (Successor). (See Note 2 to the financial statements).
GENERAL
Predecessors; The Combination. The Trust resulted from the consolidation
of CAIT I and CAIT II (the "Combination") on April 30, 1996. The Trust exchanged
shares of preferred stock for all of the outstanding whole shares of CAIT I and
CAIT II at April 30, 1996. Holders of the fractional shares of CAIT I and CAIT
II received cash in lieu of fractional shares of preferred stock of the Trust.
Thereafter, all assets and liabilities of CAIT I and CAIT II were transferred to
the Trust. CAIT I and CAIT II were both privately-held mortgage investment
trusts which invested primarily in loans secured by deeds of trust on
residential property. The Trust was incorporated in Delaware on December 12,
1995. CAIT I resulted from the reorganization of Capital Alliance Managed Income
Fund, L.P., a California limited partnership ("CAMIF") on March 9, 1993. CAMIF
was formed July 11, 1991 and was also in the business of investing in home
equity loans. CAIT II was formed October 18, 1994 and began its first year of
operations in 1995. CAIT I and CAIT II were formed and managed by Capital
Alliance Advisors, Inc. ("CAAI") which will also manage the Trust and originate,
service and sell the Trust's mortgage loans.
Recent Trends. The Trust's mortgage loan acquisitions in the nine-month
period ended 1996 declined to $2,276,410 from $2,601,810 in the same period of
the previous year, primarily due to a decrease in cash available for investments
in mortgage loans. In 1995 mortgage loan acquisitions increased to $3,740,011
from $1,569,985 in 1994.
The Trust invests in non-conforming mortgage loans in one-to-four unit
residential properties because management believes that there is a large demand
for non-conforming mortgage loans on these kinds of properties which produce
higher yields without comparably higher credit risks when compared with
conforming mortgage loans. Management invests primarily in A-, B/C (or less)
credit rated home equity loans secured by deeds of trust. In general, A-, B and
C credit rated home equity loans are made to borrowers with lower credit ratings
than borrowers of higher credit quality, such as A credit rated home equity
loans. Home equity loans rated A-, B/C (or less) tend to have higher rates of
loss and delinquency, but higher rate of interest than borrowers of higher
credit quality.
Management believes there is increased demand for high-yielding
non-conforming mortgage loans caused by a demand by investors for higher yields
due to low interest rates over the past few years and increased securitization
of high-yielding non-conforming mortgage loans by the investment banking
industry.
Loan Origination and Loan Servicing. Mortgage loan origination consists
of obtaining and reviewing documentation concerning the credit rating and net
worth of borrowers, inspecting and appraising properties that are proposed as
the subject of a home equity loan, processing such information and underwriting
and funding the mortgage loan. Mortgage loan servicing consists of collecting
payments from borrowers, accounting for interest payments, holding escrow funds
until fulfillment of mortgage loan requirements, contacting delinquent
borrowers, foreclosing in the event of unremedied defaults and performing other
administrative duties. Mortgage loan origination and loan servicing were
provided to the Trust by CAAI.
Commitments and Contingencies. As of November 30, 1996, the Trust's loan
portfolio included total loans of $4,641,886 of which $50,000 representing 1% of
the loans were delinquent. The balance of delinquent loans in the process of
foreclosure at November 30, 1996 totalled $410,195 or 8% of the loan portfolio.
In assessing the collectibility of these delinquent mortgage loans, management
estimates a net gain will be realized upon sale of the properties securing these
loans if it is necessary to foreclose the mortgage loans due to the Trust.
Management's estimate is based on an anticipated sales price of the 1995
appraised value of the property discounted at 15% less the sum of pre-existing
liens, costs of sale, the face amount of the mortgage loan and accrued interest
receivable. The Trust generally issues loan commitments only on a conditional
basis and generally funds such loans promptly upon removal of any conditions.
Accordingly, the Trust does not have any commitments to fund loans as of
December 31, 1995 and September 30, 1996.
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<PAGE> 37
RESULTS OF OPERATIONS.
The following discussion relates to the Trust's Mortgage Investment
Business. The results of operations of the Trust for all periods through
December 31, 1995 were prepared based upon the combined historical operations of
the Predecessors. In the comparison that follows references to the nine months
ended September 30, 1996 refer to the four months ended April 30, 1996
(Predecessor) and the five months ended September 30, 1996 (Successor) added
together. The operations of the Predecessors have been combined due to the
common management and directors. The historical information presented herein is
not necessarily indicative of future operations.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995. Revenues for the nine months ended September 30, 1996
increased to $574,444 as compared to $353,648 for the same period of the
previous year. Such revenues are composed of interest income earned on the
mortgage notes receivable outstanding.
Expenses for the nine months ended September 30, 1996 increased to
$123,117 as compared to $42,119 for the same period of the previous year due to
an increase in general administration expenses and the establishment of a
$53,000 loan loss reserve for the nine months ended September 30, 1996 as
compared to the establishment of a $5,000 loan loss reserve for the same period
of the previous year.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994.
Revenues for the year ended December 31, 1995 increased to $489,363 as compared
to $174,997 for 1994. The increase was due to interest collected on the higher
average outstanding balance of mortgage notes receivable as compared to the
average outstanding balance of mortgage notes receivable for the same period in
the previous year.
Expenses for the year ended December 31, 1995 increased to $74,949 as
compared to $27,941 for 1994. The increase in expenses was the result of
increased loan servicing fees resulting from the increase in the Trust's net
asset value ("Net Asset Value"). The Trust paid loan servicing fees equal to 1%
annually of its Net Asset Value for loan servicing and administration of the
Trust's loan portfolio. Management defined Net Asset Value as the aggregate book
value of the Trust's deed loans plus other assets less all liabilities and loan
loss reserves. In addition, total expenses for 1995 include a $12,000 loan loss
reserve as compared to no loan loss reserve for the same period of the previous
year.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993.
Revenues for the year ended December 31, 1994 increased to $174,997 as compared
to $100,582 for 1993. The increase was due to interest collected on the higher
average outstanding balance of mortgage notes receivable as compared to the
average outstanding balance of mortgage notes receivable for the same period in
the previous year and due to a $17,990 gain on the sale of foreclosed
properties.
Expenses for the year ended December 31, 1994 increased to $27,941 as
compared to $16,860 for 1993. The increase in expenses was primarily due to an
increase in loan servicing fees resulting from the increase in the Trust's Net
Asset Value.
INFLATION
The financial statements of the Trust, prepared in accordance with
generally accepted accounting principles, report the Trust's financial position
and operating results in terms of historical dollars and does not consider the
impact of inflation. Inflation affects the Trust's operations primarily through
its effect on interest rates, since interest rates normally increase during
periods of high inflation and decrease during periods of low inflation. When
interest rates increase, the demand for mortgage loans and a borrower's ability
to qualify for mortgage financing may be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity of the Trust will be based upon the need to fund
investments in mortgage loans. In previous years, the Trust's mortgage
investment operations have been funded by capital contributions. The major
portion of the proceeds from issuance of common stock in this Offering will be
used to fund future investments in mortgage loans by the Trust's Mortgage
Investment Business. Pending completion of this Offering, the Trust's liquidity
requirements will be funded by periodical payoffs of existing loans which are
generally short term in duration and by the sale of foreclosed properties, one
of which as of December 20, 1996 is under contract of sale for a sale price of
$490,000. Management believes that the Trust's liquidity is sufficient to meet
its cash requirements for the next twelve months regardless of whether the
Minimum
33
<PAGE> 38
Subscription Level is achieved in this Offering. Restrictions on cash attributed
to holdbacks do not significantly impact the Trust's liquidity.
Net cash provided by operating activities during the nine months ended
September 30, 1996 and 1995 was $362,675 and $263,972, respectively, and during
the years ended December 31, 1995, 1994 and 1993 was $403,366, $147,780 and
$91,508, respectively. Net cash for all periods was positively affected by
improved market conditions in the mortgage banking industry.
Net cash used in investing activities for the nine months ended September
30, 1996 and 1995 was $502,084 and $2,078,201, respectively, and during the
years ended December 31, 1995, 1994 and 1993 was $3,112,538, $1,268,972 and
$96,500, respectively. During these periods, fundings of mortgage note
receivables exceeded the repayment rate for such receivables primarily due to
higher mortgage loan acquisition volumes.
Net cash (used in) provided by financing activities during the nine
months ended September 30, 1996 and 1995 was $(422,136) and $1,697,601,
respectively, and during the years ended December 31, 1995, 1994 and 1993 was
$2,317,185, $1,903,628 and $278,430, respectively. For all periods except for
the nine-month period ended September 30, 1996, capital contributions exceeded
organizational and offering costs and dividends paid to shareholders, having a
positive effect on net cash. For the nine months ended September 30, 1996, net
cash was negatively affected by dividends paid to shareholders, organizational
and offering costs, and a redemption of shares.
The Trust will use the net proceeds of this Offering to provide
additional funding for the Trust's Mortgage Investment Business and, to a more
limited extent, the establishment of its planned Mortgage Conduit Business.
Management believes that cash flow from operations and the net proceeds of this
Offering plus the establishment of a warehouse line of credit for the Mortgage
Conduit Business will be sufficient to meet the liquidity needs of the Trust's
businesses for the next twelve months even if only the Minimum Subscription
Level is achieved.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
34
<PAGE> 39
BUSINESS
GENERAL
The Trust is a Delaware corporation which will elect to be taxed as a
REIT. As a result of this election, the Trust will not, with limited exceptions,
be taxed at the corporate level on the net income distributed to the Trust's
shareholders. The Trust will operate two businesses, one of which will include
the existing and ongoing Mortgage Investment Business of the Trust which is a
portfolio lender primarily for high-yielding non-conforming A- and B/C-credit
residential mortgage loans. The second business which has not been commenced to
date, but which the Trust plans to establish with a portion of the proceeds of
this Offering, will be a wholesale mortgage banking business which will
originate and purchase high-yielding non-conforming residential mortgage loans
and subsequently will make whole loan sales of such loans to permanent investors
("Mortgage Conduit Business").
Non-conforming A-, B/C (or less) credit-rated residential mortgage loans
are loans that do not qualify for purchase by government-sponsored agencies such
as FNMA and FHLMC. Such loans provide higher yields than conforming loans. A-,
B/C residential mortgage loans are made to borrowers with lower credit ratings
than borrowers of higher quality or so-called "A" grade mortgage loans, and are
normally considered to be subject to concomitantly higher rates of loss and
delinquency. As a result, A- and B/C mortgage loans normally bear a higher rate
of interest and are subject to higher fees as well as higher risks than loans of
"A" quality (See "RISK FACTORS - Loan Defaults Present a Risk of Loss to the
Trust"). The principal differences between conforming loans and Home Equity
Loans and other non-conforming residential loans include the applicable
loan-to-value ratios, the credit and income histories of the mortgagors, the
documentation required for approval of the mortgagors, the type of properties
securing the mortgage loans, the loan sizes, and the mortgagor's occupancy
status with respect to the mortgaged properties. Home Equity Loans are
higher-yielding collateral-based mortgage loans made to borrowers owning
single-family homes or two-to-four unit residential properties, for the purpose
of debt consolidation, home improvements, business, education and a variety of
other purposes. Management of the Trust has experience in managing mortgage loan
investment portfolios of the type in which the Trust invests.
MORTGAGE INVESTMENT BUSINESS
General. The Trust will originate or acquire Home Equity Loans and other
high-yielding non-conforming residential mortgage loans, including, second
mortgage loans for longer-term investment. Such loans pursuant to the Trust's
current loan policies, will have Combined Loan-to-Value Ratios of not more than
75%, and maturities of not more than 15 years. In addition to the Trust's policy
of a 75% maximum Combined Loan-to-Value Ratio, the Trust's Mortgage Investment
Business will calculate the cost of carrying each Home Equity Loan or other
mortgage loan for 12 months, assuming that there has been a foreclosure on the
property. This calculation assumes that, once a delinquency occurs, the Trust
will foreclose on the property within the first six months and sell the property
within the next six months. If the estimate of total cost to carry the property
for 12 months (including keeping any prior mortgage current and foreclosure,
selling and repair costs) exceed 90% of the property's appraised value at the
time of projected funding, the Trust will not make the loan ("90% Test"). In
addition, the Trust will maintain reasonable reserves to be utilized to cover
the costs of any foreclosure and to protect the Trust's Home Equity Loans
against the foreclosure of any prior liens. The Trust's Mortgage Investment
Business pursuant to restrictions imposed by the Trust's Bylaws, will not invest
in loans on commercial, or agricultural properties or on undeveloped land,
although such properties may be taken as additional collateral for Home Equity
Loans and considered in the Loan-to-Value computations at up to 25% of their
appraised value. Income is earned principally from the net interest income
received by the Trust on the Home Equity Loans and other non-conforming
residential mortgage loans acquired and held in its portfolio and from fees
received in connection with their origination. Such loans will be acquired with
the major portion of the Trust's capital, as well as borrowings (which are
limited by restrictions in the Trust's Bylaws to 20% of the Trust's Net Capital
Contributions) provided through reverse repurchase agreements or lines of
credit. Such restrictions established in the Trust's Bylaws may be modified by
the Trust's Board of Directors. The Trust's Mortgage Investment Business
currently originates loans primarily through two branch offices in San Diego and
Danville, California which have established relationships with independent
mortgage loan brokers through which the Trust originates loans. It is expected
that the Mortgage Conduit Business will support the investment objectives of the
Trust's Mortgage Investment Business by supplying non-conforming residential
mortgage loans to the Trust at competitive costs. All loans by the Mortgage
Investment Business must be approved by the Manager's Investment Committee
(currently comprised of Messrs. Swartz, Konczal and Thompson). The Mortgage
Investment Business intends to expand its loan origination volume through the
addition of account executives to establish relationships with additional
independent mortgage loan brokers and financial institutions such as small
commercial banks, savings banks and thrift institutions. Continued maintenance
of these broker relationships will be equally important to both the Mortgage
Investment Business and the Mortgage Conduit Business. The Mortgage
35
<PAGE> 40
Investment Business also intends to expand its geographic areas of lending
throughout the Western United States as its capital base and its underwriting
capability increases.
While the Trust intends to expand the geographic areas of lending
throughout the western United States, substantially all of the mortgage loans
currently held in the Trust's Mortgage Investment Business portfolio are located
in California. Such concentration increases the risk of delinquent loans when
real estate conditions in the areas of California where the Trust's loans are
located are weaker than those in the rest of the country. The California economy
has been affected in the past several years by the generally prevailing
recessionary influence which has caused an overall reduction in values in real
property. Values were also reduced further by the cut-backs in defense spending
and the relocation of existing businesses outside of California. However, the
Federal Reserve Bank of San Francisco in July 1996, reported that a wide variety
of indicators suggest that economic growth in California was strong in the first
half of 1996, and is well positioned for fast growth in the second half of 1996.
Job growth over the past year in the western United States, including Nevada,
Utah, Idaho and Oregon where the Trust intends to expand its lending activities,
has been the fastest in the country. Additionally, job growth in California,
Arizona and Washington has been increasing at a faster rate than other parts of
the United States. The Federal Reserve Bank of San Francisco also reported that
California real estate values were now increasing and that the housing market
was improving. The Trust believes that its portfolio investments in California,
given its restriction of residential loans to a 75% combined loan to value and
the current economic climate, are, in general, adequately secured.
Management, based on its review and analysis of published industry data
and its own experience, believes that there is a large demand for non-conforming
A-, B/C credit-rated mortgage loans (including Home Equity Loans) and that such
non-conforming mortgage loans, given the maximum 75% Combined Loan-to-Value
policy established by the Trust, produce higher yields without commensurately
higher credit risks when compared with conforming mortgage loans. The Trust
expects that a substantial portion of all the loans purchased or originated for
the Trust's Mortgage Investment Business will be "A-", "B" and "C" grade
non-conforming mortgage loans. The Trust believes that a structural change in
the mortgage banking industry has occurred which has increased demand for higher
yielding non-conforming mortgage loans. This change has been caused by a number
of factors, including: (1) a demand for higher yields on the part of investors,
due to historically low interest rates over the past few years; (2) increased
securitization of high-yielding non-conforming mortgage loans by the investment
banking industry; (3) increased competition within the securitization industry
and (4) the increased number of home owners and purchasers with impaired credit
as a result of the economic slowdown and recessionary conditions during the late
1980s and the early 1990s. The Management of the Trust believes, based on its
past marketing experience, that its competitive strengths in its Mortgage
Investment Business are its responsive and prompt service, and its flexible
underwriting to independent mortgage brokers who offer loans to borrowers with
impaired credit whose needs are not met by traditional financial institutions.
As of November 30, 1996, the Trust's Mortgage Investment Business had a
combined loan portfolio of 58 Home Equity Loans, aggregating $4,716,884 in
principal amount with a Combined-Loan-to-Value Ratio of 69.18%, an average loan
size of $90,709, an average weighted yield of $13.06% and an average maturity of
16.94 months. 56.67% of the portfolio were first deeds of trust and 43.33% were
second deeds of trust. All of the Mortgage Investment Business' portfolio loans
are secured by California properties and are serviced by the Manager. (See
"MANAGEMENT - The Manager and Home Equity Loan Origination and Loan Servicing
Agreement").
Financing. Mortgage loans for the Trust's Mortgage Investment Business
will be financed primarily by the Trust's capital (See "ESTIMATED USE OF
PROCEEDS" and "ADDITIONAL SOURCES OF FUNDS"). Such loans may also be financed at
short-term borrowing rates through reverse repurchase agreements, borrowings
under lines of credit and other financings which the Company may establish, but
such financing pursuant to the Trust's Bylaws may not exceed 20% of the Trust's
Net Capital Contributions. It is expected that reverse repurchase agreements or
a secured line of credit will be the principal financing devices utilized by the
Trust to leverage its mortgage loan portfolio. A reverse repurchase agreement,
although structured as a sale and repurchase obligation, acts as a financing
under which the Trust effectively pledges its mortgage loans as collateral to
secure a short-term loan. Generally, the other party to the agreement will make
the loan in an amount equal to a percentage of the market value of the pledged
collateral.
The Trust does not currently plan to issue Mortgage-Backed Securities
such as Collateralized Mortgage Obligations ("CMOs") or mortgage pass-through
certificates representing an undivided interest in pools of mortgage loans
formed by the Trust. There is no assurance that the Trust will not adopt
financing strategies in the future which will include the issuance of
mortgage-backed securities as an alternative for the financing of its Mortgage
Investment Business. Similarly, the investment policies of the Trust for its
Mortgage Investment Business and its by-laws may be modified by the Trust's
Board of Directors.
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As of November 30, 1996, the Trust's loan portfolio included total loans
of $4,641,886 of which $50,000, representing 1% of the loans, were delinquent 60
days or more, (compared to $341,984 or 9% of such loans at December 31, 1995).
The balance of delinquent loans in the process of foreclosure at November 30,
1996 totalled $410,195 or 8% of the loan portfolio (compared to $139,000 or 3%
of the loan portfolio at December 31, 1995) of which $378,195 involved loans to
borrowers in bankruptcy (See "BUSINESS - Delinquencies"). With respect to second
mortgage loans, the Trust's security interest in the property securing its loan
is subordinated to the interest of a first mortgage lender. If the value of the
property securing a second mortgage loan is not sufficient to repay the
borrower's obligation to the first mortgage holder upon foreclosure, there will
be no realizable value in such property to satisfy the borrower's obligation to
the Trust. Similarly, if the value of the property securing a mortgage loan
declines sufficiently over time, the realizable value in such property may be
less than the borrower's obligation to the Trust. While such risks could have an
adverse effect on the Trust's operations the Trust's policy to make only loans
with no more than a 75% Combined-Loan-to-Value are intended to mitigate such
risks.
The Mortgage Investment Business will bear the potential risk of
increased delinquency rates and/or credit losses as well as interest rate risk
with respect to the loans held in its portfolio. However, Management believes
that such risks are substantially mitigated by the Combined Loan-to-Value ratios
maintained by the Trust's Mortgage Investment Business and by the higher yield
of its portfolio.
MORTGAGE CONDUIT BUSINESS.
General. The Trust plans to commence its Mortgage Conduit Business either
through a non-qualified, taxable subsidiary of the Trust or through a joint
venture of such subsidiary and a third party mortgage banking firm, since the
REIT provisions of the Code preclude the Trust from directly dealing in
mortgages and mortgage securities. They also require the Trust to distribute to
its stockholders substantially all of the its net earnings and, as a result,
restrict the Trust's ability to retain earnings and replenish the capital
committed to its business activities. On formation of the Mortgage Conduit
Subsidiary, CAAI will own all of the voting common stock and a 1% economic
interest in the Mortgage Conduit Subsidiary. The Trust will own all of the
non-voting preferred stock representing 99% of the economic interest in the
Mortgage Conduit Subsidiary. CAAI will have the power to elect all of the
directors of the Mortgage Conduit Subsidiary and 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. One advantage of the Trust's planned Mortgage
Conduit Business is that it allows the Trust, through its subsidiary, the
flexibility to originate or buy and then sell loans to permanent investors in
volume. By focusing on non-conforming mortgage products with positive spreads,
the velocity of the sale of loans by the Mortgage Conduit Business should
enhance its profitability and the level of its dividend payments to the Trust.
The Trust currently has a strategic investment of $200,000 in Preferred Shares
of Sierra Capital Acceptance ("SCA"), a wholesale mortgage banking firm in
Irvine, California, which is an affiliate of the principals of the Trust's
Manager. Such $200,000 investment and any other investment in a nonqualified
subsidiary or company will be monitored so that it does not exceed 5% of the
value of the Trust's assets through an appraisal of an independent appraiser of
the value of such investments at the end of the second quarter of 1997 and
periodically thereafter. No decision has been made to date as to whether the
Trust's Mortgage Conduit Business will be established directly, or indirectly
through such a joint venture with SCA, or another wholesale unaffiliated
mortgage firm. To the extent that SCA is utilized, the Trust's $200,000
investment in SCA will be included in calculating the Trust's 5% investment in
the Mortgage Conduit Business. SCA is currently originating through mortgage
correspondents and brokers "A-", "B" and "C" credit-rated non-conforming
residential mortgage loans at the rate of $2.5 million to $5 million per month
for sale to permanent investors, including The Money Store, Ford Consumer
Finance Company, GMAC's Residential Finance Corporation, Access Financial
(Cargill Corporation), and others. The Trust's Mortgage Conduit Business will
commence upon the earlier of completion of this offering, or when the required
state licensing as a Consumer Finance Lender in California is completed and
required warehouse lending facilities are arranged. It is anticipated that the
Consumer Finance Lender License will be acquired during the first quarter of
1997 and that the warehouse lending facilities will be arranged on or about the
same date. The Mortgage Conduit Business will originate mortgage loans both
through a network of mortgage loan brokers and through mortgage loan
correspondents which will be developed directly through CAAI or which will be
provided by a joint venture partner if such a joint venture is established.
The Mortgage Conduit Business will consist primarily of the origination
and the purchase and sale of A- and B/C credit rated mortgage loans secured by
first liens and, to a lesser extent, second liens on single (one-to-four) family
residential properties that are originated in accordance with its underwriting
guidelines. As a non-conforming mortgage loan conduit, the Trust's Mortgage
Conduit Business will act as a conduit between the originators of such mortgage
loans and permanent investors in such loans. The Management believes that
non-conforming A- and B/C credit rated mortgage loans, when properly
underwritten, provide an attractive net earnings profile, producing higher
yields without disproportionately higher credit risks when compared to mortgage
loans that qualify for purchase by FNMA or FHLMC. The Trust's policy for its
Mortgage Investment Business which limits the financing or leveraging of its
mortgage loan portfolio will not apply to its
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Mortgage Conduit Business since such mortgage loans are generally held for less
than sixty days prior to their sale to permanent investors who securitize such
loans in the secondary market and their acquisition or funding will generally be
facilitated through a warehouse line of credit. Such warehouse lending facility
typically involves short term lines of credit which are used to finance the
hypothecation of mortgage loans from the time of acquisition of the loan to the
time of its sale or other settlement with a pre-approved investor or purchaser.
It is expected that reverse repurchase agreements or a secured line of
credit will be the principal financing devices utilized by the Trust to leverage
its Mortgage Conduit Business. A reverse repurchase agreement, although
structured as a sale and repurchase obligation, acts as a financing under which
the Trust effectively pledges its mortgage loans as collateral to secure a
short-term loan. Generally, the other party to the agreement will make the loan
in an amount equal to a percentage of the market value of the pledged
collateral. At the maturity of the reverse repurchase agreement, the Trust is
required to repay the loan and correspondingly receives back its collateral.
Under reverse repurchase agreements, the Trust may retain the incidents of
beneficial ownership, including the right to interest paid on the collateral.
Upon a payment default under such agreements, the lending party may liquidate
the collateral. The Trust expects that its borrowing agreements will require the
Trust to pledge cash or additional mortgage loans in the event the market value
of existing collateral declines. In the normal course of business it is
anticipated that the Mortgage Conduit Subsidiary will sell packages of its whole
loans on a frequent basis so that payment defaults will be minimized.
The use of reverse repurchase agreements by lenders in the event of the
insolvency or bankruptcy of the Trust, among other things, allows the creditor
under such agreements to avoid the automatic stay provisions of the Bankruptcy
Code and to foreclose on the collateral agreements without delay. In the event
of the insolvency or bankruptcy of a lender during the term of a reverse
repurchase agreement, the lender may be permitted, under the Bankruptcy Code, to
repudiate the contract, and the Trust's claim against the lender for damages
therefrom may be treated simply as one of the unsecured creditors. In addition,
if the lender is a broker or dealer subject to the Securities Investor
Protection Act of 1970, the Trust's ability to exercise its rights to recover
its loans under a reverse repurchase agreement or to be compensated for any
damages resulting from the lender's insolvency may be further limited by such
statute rather than the Bankruptcy Code. The effect of these various statutes
is, among other thing, that a bankrupt lender, or its conservator or receiver,
may be permitted to repudiate or disaffirm its reverse repurchase agreements,
and the Trust's claims against the bankrupt lender for damages resulting
therefrom may be treated simply as one of an unsecured creditor. Should this
occur, the Trust's claims would be subject to significant delay and, if and when
received, may be substantially less than the damages actually suffered by the
Trust.
To reduce its exposure to the credit risk of reverse repurchase agreement
lenders, the Trust intends to enter into such agreements with several different
parties to reduce credit exposure. The Trust will monitor the financial
condition of its reverse repurchase agreement lenders on a regular basis,
including the percentage of mortgage loans that are the subject of reverse
repurchase agreements with a single lender. Notwithstanding these measures, no
assurance can be given that the Trust will be able to avoid such third party
risks.
All loans originated or purchased by the Mortgage Conduit Business and
meeting the Trust's investment criteria and policies will be made available for
sale to the Trust first on terms no less favorable to the Trust than is
generally available from other institutional investors in similar mortgage loans
which will likely include a payment of a premium as is generally the case in
such transactions. Loans not purchased by the Trust's Mortgage Investment
Business will be sold in the secondary market through whole loan sales.
The Mortgage Conduit Business intends to acquire all of the servicing
rights on loans it originates or purchases and such servicing rights will
normally be relinquished when loans are sold into the secondary market. The
Mortgage Conduit Business will generally have no on-going risk of loss after a
whole loan sale other than liability with respect to normal warranties and
representations given in such sales and for fraud in the origination process.
The Trust's Mortgage Conduit Business does not currently plan to directly
securitize the loans originated and purchased by it as such securitization
generally requires a mortgage portfolio of at least $50 million together with
substantial reserves to fund defaults in the portfolio. There is no assurance
that in the future, if the Mortgage Conduit Business had a large enough
portfolio and sufficient reserves it would not securitize such loans, either
directly or indirectly, (as a participant with other mortgage banking firms in a
multiple party securitization program).
Marketing Strategy. The Trust's competitive strategy in its Mortgage
Conduit Business, is to be a substantial originator, through a mortgage loan
broker and correspondent network, of A-, B/C residential mortgage loans to be
sold in the secondary market network. This will enable the Trust to shift the
high fixed costs of interfacing with the homeowner to the correspondents and
brokers. The marketing strategy for the Mortgage Conduit Business is designed to
accomplish three
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objectives: (1) attract a diverse group of loan originators and loan
correspondents throughout California and the western United States, (2)
establish relationships with such brokers and correspondents and, (3) originate
and/or purchase the loans on both an individual and bulk basis and sell them
into the secondary market or to the Trust's Mortgage Investment Business. In
order to accomplish these objectives, the Trust will offer loan products that
are attractive to potential non-conforming borrowers as well as to end-investors
in non-conforming mortgage loans. To accomplish these objectives, the Mortgage
Conduit Business intends to establish a Wholesale Division and a Correspondent
Division, to expand the reach, geographically, of each of such divisions, and to
develop and provide responsive and consistent underwriting and funding services
to the mortgage broker and correspondent networks which it plans to develop.
Mortgage Loans to be Originated and Acquired. A substantial portion of
the mortgage loans to be originated or purchased through the Mortgage Conduit
Business are expected to be "A-", "B" and "C" grade non-conforming mortgage
loans. Such non-conforming loans may involve some greater risk as a result of
underwriting and product guidelines which will differ from those applied by FNMA
and FHLMC primarily with respect to loan-to-value ratios, borrower income or
credit history, required documentation, interest rates, and borrower occupancy
of the mortgaged property. The Mortgage Conduit Business generally will not
originate or acquire mortgage loans with principal balances above $300,000 since
such loans generally entail greater credit risks than other non-conforming
loans.
It is anticipated that mortgage loans originated or acquired by the
Mortgage Conduit Business will generally be "A-", "B" and "C" grade mortgage
loans secured by first liens and, to a lesser extent, second liens on single
(one-to-four) family residential properties with either fixed or adjustable
interest rates. Fixed-rate mortgage loans have a constant interest rate over the
life of the loan, which is generally 15, 20 or 30 years. The interest rate on an
adjustable rate mortgage ("ARM") is typically tied to an index (such as LIBOR)
and is adjustable periodically at various intervals. Such mortgage loans are
typically subject to lifetime interest rate caps and periodic interest rate
and/or payment caps. The interest rates on ARMs are typically lower than the
average comparable fixed rate loan initially, but may be higher than average
comparable fixed rate loans over the life of the loan. Management anticipates
that substantially all mortgage loans purchased by the Mortgage Conduit Business
will fully amortize over their remaining terms. In general, "A-", "B" and "C"
grade loans are non-conforming residential mortgage loans made to borrowers with
lower credit ratings than borrowers of higher quality, or so called "A" grade
mortgage loans, and are normally subject to higher rates of loss and delinquency
than the other non-conforming loans to be purchased by the Mortgage Conduit
Business. As a result, "A-", "B" and "C" grade loans normally bear a higher rate
of interest, and may be subject to higher fees (including greater prepayment
fees and late payment penalties), than non-conforming loans of "A" quality. In
general, greater emphasis is placed upon the credit history of the borrower in
underwriting "A-", "B" and "C" grade mortgage loans than in underwriting "A"
grade loans. In addition, "A-", "B" and "C" grade loans are generally subject to
lower loan-to-value ratios than "A" grade loans.
The Mortgage Conduit Business' planned focus on the origination and
acquisition of non-conforming A- and B/C credit mortgage loans may affect the
Trust's financial performance. For example, the origination and purchase market
for non-conforming loans has typically provided for higher interest rates,
thereby potentially enhancing the interest income earned by the Mortgage Conduit
Business during the accumulation phase for loans held for sale. However, the
Mortgage Conduit Business will assume the potential risk of any increased
delinquency rates and/or credit losses as well as interest rate risk in the
event there is a delay in the sale of such loans to permanent investors.
Normally, such on-going risks, upon the sale of a loan will pass to the
purchaser without recourse to the Trust and are reduced by the relatively short
period that such loans are held and accumulated prior to sale to permanent
investors. (See "RISK FACTORS - Lending and Real Estate Financing Risks").
The Mortgage Conduit Business' loan purchase activities are expected in
the future to focus on those Western states of the United States where higher
volumes of non-conforming mortgage loans are originated, including California,
Nevada, Utah, Colorado, Oregon and Washington.
Pricing. The Mortgage Conduit Business will set purchase prices for
mortgage loans it originates or acquires based on prevailing market conditions.
Different prices will be established for the various types of loans based on the
anticipated price it will receive upon sale of the loans, the anticipated
interest spread realized during the accumulation period, and the targeted profit
margin.
Underwriting. The Mortgage Conduit Business will develop underwriting
guidelines which will be provided to its account executives and to all mortgage
loan brokers and mortgage bankers prior to accepting any loan application or any
single or bulk purchase package. Upon receipt of a loan application from a
mortgage loan broker, the underwriting staff (or a contract underwriter) will
determine if the loan meets the underwriting guidelines. To assess the quality
of the loan, the underwriter will consider various factors, including the
appraised value of the collateral property, the applicant's debt
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payment history, credit profile and employment status, and the combined debt
ratio and Loan-to-Value Ratio upon completion of the loan.
Prior to funding a loan, the underwriting staff will determine the
applicant's creditworthiness and ability to service the loan. In addition, the
underwriting staff will review the value of the underlying collateral based on a
full appraisal completed by a pre-approved licensed independent appraiser or, if
the appraiser has not been approved, a new or a review appraisal may be
required. The Mortgage Investment Business and the Mortgage Conduit Business
will select appraisers based on professional experience, education, membership
in related professional organizations and by reviewing the appraiser's
experience with the type of property being used as collateral. For loans
purchased, the Mortgage Conduit Business will typically request a second
appraisal if the original appraisal was completed by an appraiser not approved
by the Mortgage Conduit Business.
Verification of personal financial information and credit history will
also be required prior to the closing of a loan. Generally, applicant will be
required to have two years of employment with their current employer or two
years of similar business experience. Applicants who are salaried must provide
current employment information as well as recent employment history. The
underwriting staff will verify this information for salaried borrowers based on
written confirmation from employers, or a combination of a telephone
confirmation from the employer and the most recent pay stub or W-2 tax form.
Self-employed applicants will generally be required to provide copies of
complete federal income tax returns filed for the most recent two years. A
credit report of from an independent, nationally recognized credit reporting
agency reflecting the applicant's credit history will be used. Verification of
information regarding the first mortgage, if any, is also required, including
balance, status and whether local taxes, interest, insurance and assessment are
included in the applicant's monthly payment or paid.
Upon completion of the underwriting process, the closing of the loan will
be completed in accordance with established closing procedures.
Whole Loan Sales. The Mortgage Investment Business, in order to qualify
as a REIT, may not regularly sell or be a "dealer" in its mortgage loans and
will therefore hold its loans as a portfolio lender for a longer period.
However, the Mortgage Conduit Business, as a separate taxable subsidiary, will
sell its entire interest in its loans through whole loan sales. It does not
currently plan to sell senior interest in its loans in the secondary market
through a securitization program under which it could retain a residual interest
in each loan securitization. While the pools of loans sold by the Trust in its
Mortgage Conduit Business will generally be sold on a non-resource basis with
respect to economic interest and rate risk, such bulk whole loan sales will
generally be made pursuant to agreements that provide for recourse by the
purchaser against the Trust's Mortgage Conduit Business in the event of a breach
of any representation or warranty made by the Trust's Mortgage Conduit Business,
any fraud or misrepresentation during the mortgage loan origination process or
upon early default on such mortgage loans. The Trust's Mortgage Conduit Business
will generally try to limit the remedies of such purchasers to the remedies the
Trust's Mortgage Conduit Business receives from the persons from whom the
Trust's Mortgage Conduit Business purchases such mortgage loans. However, in
some cases, the remedies available to a purchaser of mortgage loans may be
broader than those available to the Trust's Mortgage Conduit Business against
its seller, and should a purchaser exercise its remedies and rights against it,
the Mortgage Conduit Business may not always be able to enforce whatever
remedies it may have against its sellers.
HEDGING
It is anticipated that the Mortgage Conduit Business will primarily
originate or purchase variable rate mortgage loans which do not carry the
inherent interest rate risk of fixed-rate loans. It is anticipated that a large
portion of the mortgage loans held by that Mortgage Investment Business will
carry fixed rates, a portion of which will have relatively short maturities. As
the production of fixed-rate mortgage loans increases, it is anticipated that
various hedging strategies will be implemented to provide protection against
interest rate risks. The nature and quantity of hedging transactions will be
determined by the Management based on various factors, including market
condition, the expected volume of mortgage loan originations and purchases and
the period of time required to accumulate and to sell mortgage loans.
However, an effective hedging strategy is complex and no hedging strategy
can completely insulate the Mortgage Conduit Business from interest rate risks.
In addition, hedging involves transaction and other costs, and such costs could
increase as the period covered by the hedging protection increases or in period
of rising and fluctuating interest rates. Therefore, the Mortgage Conduit
Business may be prevented from effectively hedging its interest rate risks,
without significantly reducing its return on equity.
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LOAN SERVICING
Servicing. The Trust through its Mortgage Investment Business and the
planned Mortgage Conduit Business currently plans to purchase all mortgage loans
on a "servicing released" basis, thereby acquiring the servicing rights on the
purchased loans. All whole loan sales whether purchased or originated loans will
generally involve the sale of the servicing rights relating to such loans. If
loans are securitized either directly, or indirectly in a multiple party
securitization program, a portion of such service rights may be retained. The
Mortgage Conduit Business plans to subcontract and the Mortgage Investment
Business currently subcontracts all of its servicing obligations for loans to
CAAI during the loan accumulation period pursuant to a servicing agreement
containing fees and other terms that are comparable to industry standards. CAAI
will service all of the loans of the Mortgage Investment Business under a
servicing contract. (See "MANAGEMENT - The Manager: Loan Origination and Loan
Servicing Agreement").
Delinquencies and Foreclosures. Loans originated or purchased by the
Mortgage Investment Business and the planned Mortgage Conduit Business will be
secured by mortgages, deeds of trust, security deeds or deeds to secure debt,
depending upon the prevailing practice in the state in which the property
securing the loan is located. Depending on local law, foreclosure will be
effected by judicial action or nonjudicial sale, and will be subject to various
notice and filing requirements. In general, the borrower, or any person having a
junior encumbrance on the real estate, may cure a monetary default by paying the
entire amount in arrears plus other designated costs and expenses incurred in
enforcing the obligation during a statutorily prescribed reinstatement period.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorneys fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
may be required to pay the loan in full to prevent the scheduled foreclosure
sale.
Although foreclosure sales are typically public sales, third-party
purchasers rarely bid in excess of the lender's lien because of the difficulty
of determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashiers
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the sum of the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending on market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property.
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OTHER INVESTMENT POLICIES
The Trust's investment policies and guidelines are summarized in the
Prospectus in "BUSINESS", "SOURCES OF ADDITIONAL FUNDS", "DISTRIBUTIONS AND
DIVIDEND POLICY;" "CERTAIN TRANSACTIONS AND RELATIONSHIPS WITH AFFILIATES;"
"SUMMARY OF ORGANIZATIONAL DOCUMENTS AND SECURITIES;" and "PLAN OF
DISTRIBUTION." In addition, the Trust will be governed by the following
guidelines.
The Trust does not intend to issue additional Preferred Shares although
it is authorized to do so by its Bylaws (See "SOURCES OF ADDITIONAL FUNDS"). To
the extent the Trust determines that it requires further capital, it presently
anticipates that it would issue additional Common Shares.
The Trust is empowered to borrow funds in order to carry out its business
activities. (See "SOURCES OF ADDITIONAL FUNDS"). The Trust anticipates that it
will finance its business activities primarily through the Trust's existing
capital and the additional capital procured through the Initial Public Offering
rather than through borrowings (See "BUSINESS - Financing").
While the Trust's primary business activities comprise of mortgage
lending activities, the Trust does not anticipate lending money to third parties
other than for mortgage lending purposes as described in "BUSINESS."
The Trust has made an investment in SCA and may make additional
investments on a limited basis in other entities in order to further its
Mortgage Conduit Business. (See "Mortgage Conduit Business; Certain Transactions
and Relationships with Affiliates"). Outside of such strategic investments which
complement or promote such business, the Trust does not intend to invest in the
securities of other issuers or businesses. Other than its own Offering, (See
"PLAN OF DISTRIBUTION") the Trust will not underwrite the securities of any
other issuer.
While the Trust has been organized primarily for the purpose of making
mortgage investments it may engage on "a limited basis" in the purchase and sale
of such mortgage investments in furtherance of such primary business activities,
(See "BUSINESS", "MORTGAGE INVESTMENT BUSINESS", "MORTGAGE CONDUIT BUSINESS",
"CERTAIN TRANSACTIONS AND RELATIONSHIPS WITH AFFILIATES", "FEDERAL INCOME TAX
CONSIDERATIONS - Taxation of the Trust").
The Trust's Common Shares are being offered to the public on the terms
set forth in "PLAN OF DISTRIBUTION." The Trust will not offer Common Shares, or
other securities, in exchange for Mortgage Investments or other property. The
Trust does not intend to reacquire its own securities either directly or
indirectly in any fashion, other than as needed in connection with its DRP (See
"DISTRIBUTIONS AND DIVIDEND POLICY."
The Trust will provide Shareholders with quarterly and annual reports
and proxy statements with respect to any meetings or when appropriate (See
"SUMMARY OF ORGANIZATIONAL DOCUMENTS - Reports to Shareholders and Rights of
Examination").
COMPETITION
The Trust, in both its Mortgage Investment Business and its Mortgage
Conduit Business will face considerable competition in the business of
originating, purchasing and selling mortgage loans. Traditional competitors in
the financial services business include other mortgage banking companies,
commercial banks, credit unions, thrift institutions, private lenders, credit
card issuers and finance companies. Many of these competitors in the consumer
finance business are substantially larger and have considerably greater
financial, technical and marketing resources than the Trust. In addition, many
financial services organizations have formed national loan origination networks
that are substantially similar to the loan origination programs contemplated by
the Trust. Competition can take many forms including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and terms of
the loan, and interest or crediting rates. In addition, the current level of
gains realized by the Mortgage Conduit Business and its competitors on the sale
of non-conforming loans could attract additional competitors into this market
with the possible effect of lowering gains on future loan sales.
The Trust believes that it will be able to compete in both its Mortgage
Investment Business and its Mortgage Conduit Business on the basis of providing
prompt and responsive service and flexible underwriting for independent mortgage
brokers and correspondents to offer to their customers.
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REGULATION
The operations of the Mortgage Conduit Business and the Mortgage
Investment Business are subject to extensive regulation, supervision and
licensing by federal, state and local government authorities. Regulated matters
include, without limitation, loan origination, credit activities, maximum
interest rates and finance and other charges, disclosure to customers, the terms
of secured transactions, the collection, repossession and claims handling
procedures utilized by the Mortgage Investment Business and Mortgage Conduit
Business, multiple qualification and licensing requirements for doing business
in various jurisdictions and other trade practices.
The Trust's loan origination activities in both of its businesses are
subject to the laws and regulations in each of the states in which those
activities are conducted. The Trust's activities as a lender in both of its
businesses are also subject to various federal laws including the Truth in
Lending Act, the Real Estate Settlement Procedures Act, the Equal Credit
Opportunity Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act
and the Fair Housing Act.
The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder
contain disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans and
credit transactions in order to give consumers the ability to compare credit
terms. TILA also guarantees consumers a three day right to cancel certain credit
transactions including loans of the type originated by the Trust. Management of
the Trust believes that it is in compliance with TILA in its existing Mortgage
Investment Business in all material aspects.
In September 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Riegle Act") was enacted. Among other things, the
Riegle Act makes certain amendments to TILA. The TILA amendments, which became
effective in October 1995, generally apply to mortgage loans, such as some of
the Home Equity Loans made or held by the Mortgage Investment Business, with (i)
total points and fees upon origination in excess of eight percent of the loan
amount or (ii) an annual percentage rate of more than ten percentage points
higher than U.S. treasury securities of comparable maturity ("Covered Loans"). A
substantial number of the loans originated or purchased by the Trust's Mortgage
Investment Business are or can be expected to be Covered Loans.
The TILA amendments impose additional disclosure requirements on lenders
originating Covered Loans and prohibit lenders from originating Covered Loans
that are underwritten solely on the basis of the borrowers' home equity without
regard to the borrowers' ability to repay the loan. The Trust believes that only
a small portion of loans it originated are of the type that, unless modified,
would be prohibited by the TILA amendments. The Trust's underwriting criteria
take into consideration the borrowers' ability to repay.
The TILA amendments also prohibit lenders from including prepayment fee
clauses in Covered Loans to borrowers with a debt-to-income ratio in excess of
50% or Covered Loans used to refinance existing loans originated by the same
lender. The Trust did not collect prepayment fees on loans originated in its
Mortgage Investment Business prior to the effectiveness of the TILA amendments
and does not currently utilize pre-payment penalties in connection with its Home
Equity Loans. The TILA amendment imposes other restrictions on Covered Loans,
including restrictions on balloon payments and negative amortization features,
which the Trust does not believe will have a material impact on its operations.
The Trust is also required to comply with the Equal Credit Opportunity
Act of 1974, as amended ("ECOA"), which prohibits creditors from discriminating
against applicants on the basis of race, color, sex, age or marital status.
Regulation B promulgated under ECOA restricts creditors from obtaining certain
types of information from loan applicants. It also requires certain disclosures
by the lender regarding consumer rights and requires lenders to advise
applicants of the reasons for credit denial. In instances where the applicant is
denied credit or the rate or charge for loans increases as a result of
information obtained from a consumer credit agency, another statute, the Fair
Credit Reporting Act of 1970, as amended, requires lenders to supply the
applicant with the name and address of the reporting agency. The Trust is also
subject to the Real Estate Settlement Procedures Act and is required to file an
annual report with the Department of Housing and Urban Development pursuant to
the Home Mortgage Disclosure Act.
In the course of its business, the Trust in both of its businesses, may
acquire properties securing loans that are in default. While the Trust will
inquire as to presence of hazardous substances, there is a risk that hazardous
or toxic waste could be found on such properties. In that event, the Trust could
be held responsible for clean-up or removal costs, which costs could exceed the
value of the underlying property.
The Trust at all times intends to conduct its business so as not to
become regulated as an investment company under the Investment Company Act. The
Investment Company Act exempts entities that are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate" ("Qualifying Interest"). Under
43
<PAGE> 48
the current interpretation of the staff of the Commission, in order to qualify
for this exemption, the Trust must maintain at least 55% of its assets directly
in mortgage loans, and certain other Qualifying Interests in real estate. If the
Trust fails to qualify for exemption from registration as an investment company,
its ability to use leverage in its Mortgage Investment Business would be
substantially reduced, and it would be unable to conduct its business as
described herein. The Trust has not requested a legal opinion from counsel
indicating that, it will be exempt from the Investment Company Act.
Because the Trust's business is highly regulated, the laws, rules and
regulations applicable to the Trust are subject to regular modifications and
change. There are currently proposed various laws, rules and regulations which,
if adopted, could impact the Trust. There can be no assurance that these
proposed laws, rules and regulations, or other such laws, rules or regulations,
will not be adopted in the future which could make compliance much more
difficult or expensive, restrict the Trust's ability to originate, broker,
purchase or sell loans, further limit or restrict the amount of commissions,
interest and other charges earned on loans originated, brokered, purchased or
sold by the Trust, or otherwise affect the business or prospects of the Trust.
Also, members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Trust's loans are made to borrowers for
the purpose of consolidating consumer debt or financing other consumer needs,
the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Trust.
EMPLOYEES
The Manager employs and provides all of the persons required for the
operation of the Trust and its Mortgage Investment Business. At May 1, 1996, the
Manager employed 7 persons plus several contract personnel. Additional employees
will be required to staff the Mortgage Conduit Business. None of the Manager's
employees is subject to a collective bargaining agreement. The Manager believes
that its relations with its employees are satisfactory.
PROPERTIES
The Trust's and its Manager's executive and administrative offices are
located at 50 California Street, Suite 2020, San Francisco, California, 94111,
and consist of approximately 3,000 square feet.
The Manager also leases space for its two branch offices on a short-term
basis.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than those
arising in the ordinary course of its business, i.e. appointments of receivers
in foreclosure proceedings and motions to lift the automatic stay against a
borrower's bankruptcy proceeding. Receivers are appointed to collect rents and
handle other administrative functions relating to a property during the course
of a foreclosure proceeding. Motions to lift the automatic stay in a bankruptcy
proceeding allows the creditors of the estate to foreclose on the property
pursuant to the auspices of the bankruptcy trustee. Such actions typically do
not involve any liability on the Trust's part and the Manager does not believe
that such actions will have a material effect on the operations, liquidity and
financial condition of the Trust.
In the ordinary course of its business, the Trust may also be subject to
claims made against it by borrowers arising from, among other things, losses
that are claimed to have been incurred as a result of alleged breaches of
fiduciary obligations, misrepresentations, errors and omissions of employees,
officers and agents of the Trust (including its appraisers), incomplete
documentation and failures by the Trust to comply with various laws and
regulations applicable to its business. The Trust believes that any claims
asserted in the future could result in legal expenses or liabilities which could
have a material adverse effect on the Trust's results of operations and
financial condition.
REIT Industry Data
The National Association of Real Estate Investment Trusts (NAREIT)
headquartered in Washington, D.C. has published the following information about
investment performance of REITs: The charts below are based on data from tables
published in "REIT WATCH," an official publication of NAREIT which provided as
follows:
NAREIT Total Return Indexes
For Period Ending January 31, 1997
1 Year 3 Years 5 Years
------ ------- -------
All 34.69% 16.70% 15.71%
Equity 34.56% 16.49% 16.29%
Mortgage 49.26% 23.14% 16.29%
Hybrid 23.77% 16.62% 17.49%
S&P 500 26.34% 20.73% 17.03%
Also appearing in official publication of NAREIT are the following
items. Data source quoted by NAREIT include Federal Reserve and Dow Jones
Publications.
o REIT shares may be converted to cash because they trade on public
exchanges.
o Over 300 REITs are operating in the U.S. with over 70% trading on the
national stock exchanges.
o The unique tax status of a REIT ensures that at least 95% of REIT
income can be distributed to investors. There is no double taxation of income
to investors.
o Since 1986 - REITs produced a greater average annual yield than
Treasury bonds, although REITs are not backed by the "full faith and credit of
the United States."
o In five of the last six years, REITs have produced a greater annual
total return than the Standard & Poor's (S&P) 500.
o A REIT combines features of real estate and stocks, providing an
investor the opportunity to invest in real estate similar to other publicly
traded industry sectors.
o The stock value of REITs in the last two years has grown from about
$44 billion to more than $88 billion.
o Since 1992, the total capitalization of publicly traded REITs has
increased 152% to reach more than $142 billion.
MORTGAGE REITs
ANNUAL TOTAL RETURN COMPARISONS
5-Year Total Return Percent 15.71% 17.03% 16.29%
3-Year Total Return Percent 16.70% 20.73% 23.14%
Annual Total Return Percent 34.69% 26.34% 49.26%
ONE-YEAR - MORTGAGE REITs have a significantly greater annual total return than
the S&P 500 and the average of all REITs over the period from 1-31-96 to
1-31-97, as published in the January 1997 NAREIT Summary Performance Numbers
report.
NOTE: As with any investment, past performance is not a guarantee of future
performance.
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<PAGE> 49
MANAGEMENT
There are five directors of the Trust, two of whom (Messrs. Brooks and
Blomberg) are not affiliated with the Trust, its officers and directors or its
Manager. The directors and officers and their principal occupations and relevant
affiliations during the last five years or more are set forth below.
DIRECTORS AND OFFICERS
Thomas B. Swartz, 64; Chairman and Chief Executive Officer(1)
Chairman and Chief Executive Officer, Capital Alliance Advisors, Inc.
(1989 to date); Chairman, Capital Alliance Income Trust I (1991 to 1996) and
Capital Alliance Income Trust II (1994 to 1996); Chairman, Sierra Capital
Acceptance (1995 to date); Chairman and Chief Executive Officer of Sierra
Capital Companies and its Affiliates (1980 to date); Founder Chairman, Chief
Executive Officer and Trustee of seven equity real estate investment trusts
(1980-1991); Attorney at Law, Thomas Byrne Swartz, Inc. (1980 to date), and
Bronson, Bronson, & McKinnon, San Francisco, California (Partner 1960-1980);
Past President (1989-1990) and Member, Board of Governors (1983 to 1993),
National Association of Real Estate Investment Trusts; Director (representing
Federal Deposit Insurance Corporation) of two subsidiaries of American
Diversified Savings Bank (in liquidation) (1990 to 1992) Member, Real Estate
Advisory Committee to California Commissioner of Corporations (1972-1973);
University of California at Berkeley Boalt School of Law, L.L.B. 1959;
Lieutenant, U.S.N.R. 1954-1956 (active) and to 1977 (reserve); Yale University,
A.B. 1954. (See "The Manager").
Dennis R. Konczal, 46; President, Director and Chief Operating Officer(1)(2)
President (1996 to date) and Executive Vice President (1989 to 1996) and
Chief Operating Officer, Capital Alliance Advisors, Inc.; Executive
Vice-President, Trustee and Chief Operating Officer of Capital Alliance Income
Trust I (1991 to 1996)and of Capital Alliance Income Trust II (1994 to 1996);
President and Director, Sierra Capital Acceptance (1995 to date); President,
Director and Chief Operating Officer of Sierra Capital Companies and of Capital
Alliance Investments Incorporated (a NASD broker-dealer and Registered
Investment Advisor) (1984 to date); Director, President and Chief Operating
Officer, Granada Management Corporation and Granada Financial Services, Inc.,
agribusiness concerns (1981-1984); Licensed Principal, NASD (1981 to date);
B.S. Agricultural Economics, Michigan State University (1972). (See "The
Manager").
Douglas A. Thompson, 52; Executive Vice-President, Director and Chief Investment
Officer(2)
Executive Vice-President, Capital Alliance Advisors, Inc. (1995 to date);
Trustee, Capital Alliance Income Trust I and Capital Alliance Income Trust II
(1995 to 1996); Founder, First Blackhawk Financial, Inc. (mortgage banking firm)
(1992 to 1995); Owner, The Paradigm Group and Investors Mortgage Exchange,
Danville, California (whole loan brokerage for private and institutional
clients) (1990 to date); Vice President, Principal Residential Advisors,
Danville, California (1988 to 1990); Secondary Mortgage Specialist, Morgan
Stanley & Co. (1985-1988); Investment Banking/Mortgage Specialist, Merrill Lynch
Pierce Fenner & Smith, Los Angeles, California (1982 to 1985 ); Manager. Watson
Mortgage, Bakersfield, California (1981 to 1982); California Real Estate Broker
(1992 to date); Member, Pepperdine University Board (1988 to 1991); B.S.E.,
1967, Abeline Christian University; M.A., 1969 University of Southern
California. (See "The Manager").
Stanley C. Brooks, 46; Director(2)(3)
President and Chairman, Brookstreet Securities Corporation (1970 to
date); Executive Vice-President, Toluca Pacific Securities Corporation (1987 to
1989); Senior Vice-President, First Affiliated Securities (1983 to 1989); 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.
- ----------------------------
footnotes on the following page
45
<PAGE> 50
Harvey Blomberg, 56; Director(1)(2)(3)
Founder and principal MRHB Real Estate (real estate management company)
(1988 to date); Regional Director, Connecticut Small Business Development Center
(1996 to date); Partner and Chief Financial Officer, Bay Purveyors, Inc. (1976
to 1995); General Manager, Deerfield Communications (1987 to 1990); Consultant
to numerous companies (financial restructuring, refinancing and marketing) (1989
to date). Renessler Polytechnic Institute, M.S. Management, 1995; Hofstra
University, M.B.A. 1985; B.S. Engineering, 1966.
Directors are divided into three classes. Each class, after its initial
re-election will serve 3 year terms. The Class One directors will be re-elected
in 1997, the Class Two directors in 1998 and the Class Three directors in 1999.
Replacements for vacancies occurring among the Directors may be filled by the
Board of Directors. Nominations for Directors when a Director is removed or
withdraws may be made by the Board of Directors, or subject to certain
conditions, by a Shareholder holding 10% or more of the Shares outstanding.
Initially, the Trust intends to pay to each unaffiliated Director an
annual fee of $5,000 plus $500 for each director's or committee meeting of the
Directors attended in person ($300 if any are attended by telephonic means) and
to reimburse all Unaffiliated Directors for their travel expenses and other
out-of-pocket disbursements incurred in connection with attending any such
meeting and for carrying on the business of the Trust. It is estimated that the
aggregate remuneration so payable (exclusive of reimbursement for expenses ) to
the Unaffiliated Directors for the first full fiscal year of the Trust (i.e.,
calendar year 1997) will not exceed $17,000. Directors who are affiliated with
the Manager will receive no compensation from the Trust for their service as
Directors. The officers of the Trust who are Directors and are also officers and
directors of the Manager, however, will be reimbursed by the Trust or its
subsidiaries for their expenses in attending meetings of the Directors or an
Executive Committee and in carrying on the business of the Trust, and may be
compensated in the future by the Trust or its subsidiaries for other services
performed for the Trust under separate agreements.
The Directors have designated an Audit Committee which will be
responsible for general relations between the Trust and its Independent Auditors
as well as overseeing the annual audit of the Trust's financial statements. The
Audit Committee is composed of Mr. Brooks and Mr. Blomberg, unaffiliated
Directors, and Mr. Konczal.
The Directors have also designated an Executive Committee which has the
authority of the full Board except for the declaration of dividends and other
non-delegable matters specified in the Delaware Corporations Law. The Executive
Committee is composed of Messrs. Swartz, Konczal, and Blomberg, an unaffiliated
Director.
Neither the Board of Directors in the aggregate, nor any Director
individually, owns beneficially in excess of 1% of either the Trust's Preferred
Stock or its Common Shares.
- --------------------------
(1) Also is a member of the Executive Committee.
(2) Also is a member of the Audit Committee.
(3) Is an independent unaffiliated Director.
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<PAGE> 51
THE MANAGER
Capital Alliance Advisors, Inc., a California Corporation, is the Manager
of the Trust to coordinate assist and manage the duties and responsibilities of
the Trust, subject to the supervision of the Board of Directors, - all in
accordance with the terms of the Management Agreement. The Manager and its
principals have collectively had substantial experience in the origination,
servicing and administration of Home Equity Loans and other mortgage loans
secured by trust deeds, in real estate asset management and financing, and in
providing investment advisory services as a real estate investment fiduciary to
both public and private real estate investment programs. The Manager, from 1991
through 1996, managed and advised The Trust's predecessors, Capital Alliance
Income Trust I ("CAIT I") and Capital Alliance Income Trust II ("CAIT II"). CAIT
I and CAIT II were consolidated with Capital Alliance Income Trust, A Real
Estate Investment Trust, ("Trust") on April 30, 1996. The Manager is a licensed
real estate broker in California and also manages a private mortgage banking
firm with investment criteria similar to those of the Trust. The Manager owns
beneficially 1% of the Trust's Preferred Stock.
Messrs. Swartz and Konczal, principals of the Manager, are also
principals and Chairman and President, respectively, of SCA, a privately-owned
wholesale residential mortgage banking firm which specializes in A-, B-C credit-
rated residential mortgage loans. SCA was founded in 1995 and is located in
Irvine, California. The Trust holds a strategic investment in SCA as holder of
preferred shares which are valued at $200,000 and which have yielded a 15%
return thereon to date. The investment, was undertaken to afford the Trust's
predecessors exposure to the wholesale mortgage banking business and the
institutional investors who were potential purchasers of the predecessors'
mortgage loans. It also afforded the Trust's predecessors a source of mortgage
loans which could meet their criteria and not those of SCA.
Messrs. Swartz and Konczal, principals of the Manager, are also
principals of Sierra Capital Companies ("Sierra Capital"), and have been
extensively engaged since 1980 in various aspects of the real estate investment
advisory, asset management, and finance business. From 1985 to 1990, Sierra
Capital advised and managed (i) four publicly-held equity real estate investment
trusts ("Sponsored REITs") and (ii) Advantage Corporate Income Fund, L.P.
("Advantage Fund"), an institutional real estate limited partnership. Sierra
Capital sold its REIT advisory and property management businesses to the
Sponsored REITs in 1991 and the Sponsored REITs became "self administered. Since
April 1991, neither Sierra Capital nor Messrs. Swartz and Konczal have had any
connection or affiliation with the Sponsored REITs. Sierra Capital and its
Affiliates have arranged over $410 million in credit facilities for sponsored
entities and for their own account, including the Sponsored REITs and Advantage
Fund. Sierra Capital and its Affiliates currently manage for their own account
and for Advantage Fund, approximately $45 million of warehouse/distribution and
light industrial properties. Advantage Fund, as of December 31, 1995 had
$13,070,197 in partner's capital, seven single-tenant warehouse distribution
facilities and two single-tenant retail warehouse facilities totaling 685,768
and 171,762 square feet, respectively, that were 100% leased. The facilities are
located nationally. Sierra Capital directly owns one light industrial properties
totaling 160,000 square feet which were 88% leased. Additionally, Messrs. Swartz
and Konczal are also directors and officers of Capital Alliance Investments,
Inc., a wholly-owned subsidiary of Sierra Capital, which is a registered
investment advisor and broker-dealer.
The Sponsored REITs were Sierra Capital Realty Trust IV Co. ("Trust IV"),
Sierra Capital Realty Trust VI Co. ("Trust VI"), Sierra Capital Realty Trust VII
Co. ("Trust VII"), and Sierra Capital Realty Trust VIII Co. ("Trust VIII").
Trusts IV, VI and VII were consolidated in 1995 into Meridian Industrial Trust
("MIT"), and Trust VIII in 1993 changed its name to Meridian Point Realty Trust
VIII Co. MIT and Trust VIII are presently registered pursuant to Section 12g of
the Securities Exchange Act of 1934 and are subject to its reporting, proxy and
trading rules. The Sponsored REITs and Advantage Fund are separate and distinct
from the Trust and neither the Manager nor its Affiliates has, (nor since 1991
has had), any continuing relationship with MIT or Trust VIII, other than as a
shareholder. As of December 31, 1995 MIT and Trust VIII had approximately
$177,092,000 and $43,041,290, respectively, in Shareholders Equity. At December
31, 1995 MIT had 49 warehouse distribution facilities, 28 light industrial
facilities and 7 retail facilities aggregating 5,823,391 rentable square feet,
1,531,876 rentable square feet and 903,082 rentable square feet, respectively
that were 94%, 92% and 94% leased, respectively. Trust VIII, at said date, had 1
office building and 23 warehouse distribution facilities that were 99% leased.
The properties are located nationally, primarily in major distribution centers.
MIT is traded on the New York Stock Exchange and Trust VIII is traded on the
American Stock Exchange. Information regarding MIT and Trust VIII was obtained
from their respective December 31, 1995 10 K filings with the Securities
Exchange Commission.
Mr. Thompson, a principal of the Manager, holds a California Department
of Real Estate Broker's license, and has been involved in the mortgage industry
since 1976. During his service with the Capital Markets, Institutional Sales
Division of Merrill, Lynch, Pierce, Fenner & Smith in Los Angeles and as a
secondary mortgage specialist with Morgan Stanley & Co. in San Francisco, Mr.
Thompson was involved in the purchase and sale of over $1 billion of mortgage
products. (See "MANAGEMENT - Directors and Officers").
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<PAGE> 52
The principal office of the Manager is 50 California Street, Suite 2020,
San Francisco, California 94111 (Tel: (415) 288-9575).
The directors and executives officers of the Manager and their principal
occupations during the past five years are as follows:
<TABLE>
<S> <C>
Thomas B. Swartz* Chairman and Chief Executive Officer
(See "MANAGEMENT - Directors and Officers")
Dennis R. Konczal* Director, President and Chief Operating Officer
(See "MANAGEMENT - Directors and Officers")
Douglas A. Thompson* Director, Executive Vice-President and Chief Investment Officer
(See "MANAGEMENT - Directors and Officers")
</TABLE>
Terri L. Diver, 40; Vice President, Director of Loan Production
Vice President, Capital Alliance Advisors, Inc. (1993 to date); General Manager,
San Diego Office (1988 to date), Acting Chief Executive Officer, Mission Thrift
and Loan Association (1987-1988) and General Manager, El Cajon Office (1984-
1987), American Income Trust; Assistant Manager and Thrift Supervisor, Beverly
Hills and San Diego Offices, Foothill Thrift and Loan Association (1980 to
1984); Thrift Supervisor, Credit Investigator, Thrift Teller (1975-1980) for
First Thrift of America, Inglewood Thrift and Loan Association, Foothill Thrift
and Loan Association and Amfac Thrift and Loan Association; High School
Graduate, 1974, and Management and Continuing Education Courses and Seminars.
Rosemarie Franceschi, 47; Vice-President and Chief Lending Officer
Vice President, Capital Alliance Advisors, Inc. (1993 to date); Vice President,
EquityAide Real Estate Finance Corporation (1983 to 1995); Founder and Manager,
Robertson Mortgage Company (1981-1982); Loan Officer, Loan Servicing and Vault
Teller, Eureka Savings & Loan Association (1966-1981); High School Graduate and
Management and Continuing Education Courses and Seminars.
Jeannette Hagey, 38; Controller
Controller, Capital Alliance Advisors, Inc. (1994 to date); Controller, Sierra
Capital Companies and Affiliate (1994 to date); Accounting Manager, VCA Hills
(subsidiary of Colgate-Palmolive) (1991 to 1993); Senior Accountant, Cygnet
Systems (1988 to 1991); Senior Accountant, Hare Brewer and Kelley (1985 to
1988); Accountant, Squaw Valley Ski Corporation (1984 to 1985); San Jose State
University, B.S. Business-Accounting (1983); Management and Continuing Education
Courses and Seminars.
Linda St. John, 40; Secretary and Operations Officer
Operations Officer and Secretary, Capital Alliance Advisors, Inc. (1995 to
date); Secretary, Sierra Capital Companies and Affiliates (1995 to date);
* Also officers and directors of the Trust. (See "THE TRUST - Organization
Chart").
48
<PAGE> 53
MANAGEMENT AGREEMENT
The Management Agreement between the Trust and the Manager will be
effective upon the effective date of this Offering for an initial term ending
December 31, 1998. The term of the Management Agreement will be automatically
renewed for an additional two year term subject to the approval of the holders
of a majority of the outstanding Common and Preferred Shares unless a notice of
non-renewal is given by the Trust at least 120 days prior to the end of the term
or any extension thereof and such termination is approved by the holders of a
majority of the outstanding Common and Preferred Shares. The Management
Agreement may be terminated by (i) either the Trust, its Board of Directors or
shareholders holding a majority of the voting power of the Trust, or by the
Manager without cause upon 120 days prior written notice and (ii) approval of
the termination of the Manager by the Shareholders holding a majority of the
Common and Preferred Shares. The Trust or the Manager may also terminate the
Management Agreement for cause upon the occurrence of certain specified events
including a material breach of the Agreement or other breach of the Agreement by
the Manager which remains uncured for 60 days. Any such termination or failure
to extend by the Trust without cause will result in the payment of a termination
or non-renewal fee to the Manager determined by independent appraisals of the
fair market value of the Agreement assuming its continuance for a two year term.
These agreements have been developed by CAAI and the Trust in the context of a
related party consolidation and therefore are not the result of arm's- length
negotiations between independent parties. It is the intention of the Trust and
CAAI that such agreements and the transactions provided for therein, taken as a
whole, are fair to both parties, while continuing certain mutually beneficial
arrangements. However, there can be no assurance that each of such agreements,
or the transactions provided for therein, have been effected on terms at least
as favorable to the Trust as could have been obtained from unaffiliated third
parties.
The Manager will be subject to the supervision of the Trust's Board of
Directors and will provide investment, management and advisory services to the
Trust, including (a) the presenting of a continuing and suitable investment
program consistent with the Trust's investment policies and objectives and (b)
the supervision and management of the day-to-day operations of the Trust.
The Management Agreement provides for a regular management fee for its
regular management and advisory services ("Management Compensation"), and for
the retention of independent contractors (including the Manager or its
affiliates) to perform loan origination and loan servicing services. (See
"MANAGEMENT: Management Compensation").
The Manager as of August 1, 1996 had a total of seven officers and
directors plus several contract personnel dedicated to the oversight and conduct
of the Trust's operations.
MANAGEMENT COMPENSATION
The Manager will be entitled to a per annum Regular Management Fee
payable monthly in arrears of an amount equal to 1% of the Gross Mortgage Assets
of the Trust (computed monthly) plus 1/2% of cash or money-market or equivalent
assets. The Manager also will be entitled to receive incentive compensation for
each fiscal quarter, equal to 25% of the net income of the Trust in excess of an
annualized return on equity for such quarter equal to the ten year U.S. Treasury
Rate plus 2% provided that the payment of such incentive compensation does not
reduce the Trust's annualized return on equity for such quarter to less than the
ten year U.S. Treasury Rate plus 2% and amounts payable on account of the Series
A Preferred Preference Amount have been paid. The term "Return on Equity" is
calculated for any quarter by dividing the Trust's Net Income for the quarter by
its Average Net Worth for the quarter. For such calculations, the "Net Income"
of the Trust means the income of the Trust determined in accordance with GAAP
before the Manager's incentive compensation, the deduction for dividends paid
and any net operating loss deductions arising from losses in prior periods. A
deduction for all of the Trust's interest expenses for borrowed money is also
taken in calculating Net Income. "Average Net Worth" for any period means the
arithmetic average of the sum of the gross proceeds from any offering of its
equity securities by the Trust, before deducting any underwriting discounts and
commissions and other expenses and costs relating to the offering, plus the
Trust's retained earnings (without taking into account any losses incurred in
prior periods) computed by taking the daily average of such values during such
period. The definition "Return on Equity" is only for purposes of calculating
the incentive compensation payable, and is not related to the actual
distributions received by stockholders. The 25% Incentive Payment to the Manager
will be calculated quarterly in arrears before any income distributions are made
to stockholders for the corresponding period.
The Manager's base and incentive fees shall be calculated by the Manager
within 60 days after the end of each calendar quarter, with the exception of the
fourth quarter for which compensation will be computed within 30 days, and such
calculation shall be promptly delivered to the Company. The Company is obligated
to pay the base fee within 90 days after the end of each calendar quarter.
49
<PAGE> 54
The Manager (including its principals) is also entitled to receive
additional compensation for services rendered to the Trust pursuant to separate
agreements approved by the Board of Directors, including compensation for loan
origination and loan servicing services and for additional services rendered
under separate contracts with the Trust or its subsidiaries, including the
Mortgage Conduit Subsidiary.
MANAGEMENT EXPENSES
Pursuant to the Management Agreement, the Trust will also pay all
operating expenses of the Trust except those specifically required to be borne
by the Manager under the Management Agreement. The operating expenses required
to be borne by the Manager include the compensation and other employment costs
of the Manager's controlling officers and directors in their capacities as such,
and the cost of office space, utilities, telephones, furnishings and other
office expenses incurred or allowable to the Manager for its own benefit and
account and not required for oversight and management of the Trust's operations.
The expenses that will be paid by the Trust will include issuance and
transaction costs incident to the acquisition, disposition and financing of
investments; regular legal and auditing fees and expenses of the Trust; fees and
expenses of the Trust's directors, premiums of directors' and officers'
liability insurance and fidelity and errors and omissions insurance; servicing
and origination expenses payable under the Origination and Loan Servicing
Agreement; expenses connected with investor relations and communications,
payment of dividends, transfer and registration of securities and other ordinary
and necessary expenses of the business and affairs of the Trust. Expenses
incurred by the Manager (including allocations of employment expenses and
overhead) which are the responsibility of the Trust will be reimbursed at cost
and will be made monthly.
In addition to expenses payable by the Trust under the Management
Agreement, the Trust is responsible for all expenses (including legal, auditing,
and other expenses) in connection with this offering, estimated at $600,000.
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and will
not be responsible for any action of the Trust's Board or shareholders and
employees, will not be liable to the Trust, any mortgage security issuer, any
subsidiary of the Trust, the Unaffiliated Directors, the Trust's stockholders or
any subsidiary's shareholders for acts performed in accordance with and pursuant
to the Management Agreement, except by reason of acts or omissions constituting
bad faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. The Manager does not have significant
assets. Consequently, there can be no assurance that the Trust would be able to
recover any damages for claims it may have against the Manager. The Trust has
agreed to indemnify the Manager, and its directors, officers, Shareholders and
employees with respect to all expenses, losses, damages, liabilities, demands,
charges and claims arising from any acts or omissions of the Manager made in
good faith in the performance of its duties under the Management Agreement. (See
"RISK FACTORS - Risk that Limited Liability of Directors and Indemnification May
Limit Shareholder Recourse; Risks of Conflicts of Interest and Related Party
Transactions - Risk of Trust's Total Reliance on Manager and its Affiliates -
Risk of Adverse Effects on Trust's Operations Due to Manager's Conflicts of
Interest and Investment in Other Investment Activities.").
HOME EQUITY LOAN ORIGINATION AND LOAN SERVICING AGREEMENT
The Home Equity Loan Origination Services and Loan Servicing Agreement
("Origination and Servicing Agreement") between the Trust and CAAI will be
effective upon the effective date of this Offering for an initial term ending
December 31, 2000. The term of the Origination and Servicing Agreement and any
extension thereof will be automatically renewed for an additional term of four
years unless a notice of non-renewal is given by the Trust at least six months
prior to the end of the term or extension. In addition, the Trust may terminate
the Origination and Servicing Agreement upon the occurrence of certain specified
events, including a violation of the Agreement which remains uncured for thirty
days.
CAAI will use its best efforts to originate and present to the Trust Home
Equity Loans, other mortgage loans, and other investment opportunities which may
be committed and funded only when approved by the Manager's Investment
Committee. CAAI will also use its best efforts to service the Trust's portfolio
of Home Equity Loans and to manage and dispose of any foreclosure property of
the Trust.
CAAI will be entitled to receive for its services under the Origination
and Servicing Agreement a per annum combined Origination and Servicing Fee
payable monthly of two percent (2%) of the Gross Mortgage Assets of the Trust,
computed monthly. All "origination points" received in connection with a Home
Equity Loan shall be payable to the Trust which shall pay any compensation due
with respect to a loan to a cooperating broker. CAAI shall also be entitled to
retain miscellaneous fees paid by borrowers for appraisal, documentation,
processing, underwriting and funding of Home Equity Loans and
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<PAGE> 55
auxiliary fees related to the servicing of such loans, including late charges,
returned check fees, assumption fees and other incidental fees permitted by the
loan documents.
ORIGINATION AND SERVICING EXPENSES
Pursuant to the Origination and Servicing Agreement, CAAI will bear the
employment expenses of its officers, directors and employees of CAAI in their
capacities as such and expenses incidental to the origination and servicing of
Home Equity Loans to the extent such expenses are paid by borrowers in
connection with any loan. CAAI, will retain payments of miscellaneous auxiliary
fees paid by borrowers for certain expenses including the cost of office space,
utilities, telephones, furnishings and other office expenses. CAAI, based upon
its fiduciary obligations to the Trust, will allocate such expenses between its
Affiliates, including the Trust. Expenses that will be paid by the Trust include
travel expenses to inspect properties that are proposed as the subject of a Home
Equity Loan; fees and expenses paid to independent contractors, appraisers,
consultants and other agents retained by the Trust and direct expenses of
acquiring, financing, servicing, disposing of and owning interests in real
estate and other property; and the expenses of foreclosing upon, managing,
owning and selling foreclosure properties and other property of the Trust.
CAAI is a licensed real estate broker and is applying to be licensed as a
California Consumer Finance Lender and Broker. Its principal office is located
at 50 California Street, Suite 2020, San Francisco, California 94111 (Tel: (415)
288-9575).
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<PAGE> 56
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table contains information on the annual cash compensation
paid to the executive officers of the Trust for the year ending December 31,
1996 for services rendered.
<TABLE>
<CAPTION>
Cash Compensation
Name of Individual Capacities in Which Served from Trust
- ------------------ -------------------------- -----------------
<S> <C> <C>
Thomas B. Swartz Chairman of the Board and Chief $ 0 (1)(2)
----------------
Executive Officer of Trust and Chairman
of the Board and Chief Executive Officer of
the Manager
Dennis R. Konczal Director, President and Chief Operating Officer $ 0 (1)(3)
----------------
of Trust and Executive Vice President of the
Manager
Douglas A. Thompson Director, Executive Vice President of Trust and $ 0 (1)(4)
----------------
Executive Vice President of the Manager
Jeannette Hagey Chief Financial Officer (Principal Financial $ 0 (1)(5)
----------------
and Accounting Officer) of the Trust and the
Manager
Stanley C. Brooks Director $ 300 (1)(6)
----------------
Harvey Blomberg Director $ 300 (1)
----------------
</TABLE>
- ------------------------
(1) The executive officers of the Trust serve without compensation from the
Trust. The affiliated Directors of the Trust serve without compensation
from the Trust. The unaffiliated Directors of the Trust are anticipated
to receive an annual Director's Fee of $5,000 and an additional $500 for
each Director's meeting attended ($300 for telephonic meetings). Both
affiliated and unaffiliated Directors may receive reimbursement for all
out-of-pocket travel expenses and disbursement incurred in attending
Director's meetings and in carrying out the business of the Trust. Such
Director's Fees and reimbursements are not anticipated to exceed $17,000
for the Trust's first full fiscal year following this Offering.
(2) Mr. Swartz received no compensation from either the Trust or the Manager
for the year ended December 31, 1996. He received compensation for his
services to, and from investments in, businesses not related to the
Trust. The Manager, of which Mr. Swartz serves as Chairman of the Board
and Chief Executive Officer, receives management and incentive fees from
the Trust. The Manager reimburses a firm controlled by Mr. Swartz and Mr.
Konczal for the expense of providing certain facilities, equipment and
services. See below "Management Compensation" and "Management Expenses."
(3) Mr. Konczal received no compensation from either the Trust or the Manager
for the year ended December 31, 1996. He received compensation for his
services to, and from investments in, businesses not related to the
Trust. He also received $6,000 from SCA as compensation for his services
for the year ended December 31, 1996. The Manager, of which Mr. Konczal
serves as Director and President, receives management and incentive fees
from the Trust. The Manager reimburses a firm controlled by Mr. Swartz
and Mr. Konczal for the expense of providing certain facilities,
equipment and services. See below "Management Compensation" and
"Management Expenses."
(4) Mr. Thompson received no compensation from the Trust for the year ended
December 31, 1996. He received $54,834 from the Manager as compensation
for his services for the year ended December 31, 1996. The Manager, of
which Mr. Thompson serves as Director and Executive Vice President,
receives management and incentive fees from the Trust. See below
"Management Compensation" and "Management Expenses."
(5) Ms. Hagey receives compensation for her services from Sierra Capital, a
portion of which is reimbursed by the Manager.
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<PAGE> 57
(6) Mr. Brooks is the President of Brookstreet Securities, the Managing
Dealer, which will receive retail sales commissions, expense
reimbursements and Managing Dealer Warrants in connection with the
Offering. See, "PLAN OF DISTRIBUTION."
STOCK OPTIONS
The Trust has not adopted and at present does not intend to adopt any
stock option, deferred or restricted stock plan ("Stock Option Plan"), which
would provide for the grant of qualified incentive stock options ("ISOs") that
meet the requirements of Section 422 of the Code, stock options not so qualified
("NQSOs") or deferred stock, restricted stock, stock appreciation rights or
limited stock appreciation rights awards ("Awards"). Any Stock Option Plan would
be administered by a committee of directors appointed by the Board of Directors
(the "Committee"). The purpose of any Stock Option Plan would be to provide a
means of performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects the
Trust.
EMPLOYMENT AGREEMENTS
Messrs. Swartz, Konczal and Thompson have not, to date, entered into any
employment agreements nor have they commenced any negotiations with respect to
such agreements with the Trust. It is anticipated, though, that upon the
completion of this Offering, Messrs. Swartz, Konczal and Thompson will enter
into employment agreements with the Trust or the Manager the terms of which
have not been negotiated but will be typical and customary within the industry
for the services being provided. It is probable based on the standards within
the industry that Messrs. Swartz, Konczal and Thompson will each receive annual
salaries or benefits of at least $100,000.
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<PAGE> 58
CERTAIN TRANSACTIONS AND RELATIONSHIPS WITH AFFILIATES
ARRANGEMENTS AND TRANSACTIONS WITH CAAI.
CAAI is the Manager of the Trust and will provide (a) management and
advisory services to the Trust in accordance with the Management Agreement and
(b) mortgage origination and loan servicing services to the Trust in accordance
with the Mortgage Origination and Servicing Agreement. As previously described,
the Trust will utilize the mortgage banking experience, management expertise and
resources of CAAI in conducting its Mortgage Investment and its planned Mortgage
Conduit Businesses. In addition, a majority of the Directors and the officers of
the Trust also serve as Directors and/or officers of CAAI. However, Unaffiliated
Directors constitute a majority of the Audit Committee of the Board of Directors
of the Trust. (See "RISK FACTORS - Risk of Conflicts of Interest and Related
Party Transactions" and "MANAGEMENT"). On formation of the Mortgage Conduit
Subsidiary, CAAI will own all of the voting common stock and a 1% economic
interest in the Mortgage Conduit Subsidiary. The Trust will own all of the
non-voting preferred stock representing 99% of the economic interest in the
Mortgage Conduit Subsidiary. CAAI will have the power to elect all of the
directors of the Mortgage Conduit Subsidiary and 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 the
Mortgage Conduit Subsidiary who may be officers and directors of the Trust, will
be separately compensated for their management services to the subsidiary and
will provide origination, financing and administrative services to the
subsidiary through separate agreements and an intercompany allocation of the
cost of such services. No decision has been made to date regarding the details
of such arrangements. 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 Trust's
investment policies.
CAAI through its affiliation with Sierra Capital Companies and its
affiliates, also has interests that may conflict with those of the Trust in
fulfilling certain duties. (See "MANAGEMENT - The Manager"). In addition,
Messrs. Swartz, Thompson and Konczal, the officers and Directors of CAAI are
also officers and Directors of the Trust. (See "MANAGEMENT - Directors and
Executive Officers"). The Officers and Directors of CAAI are also involved in
other businesses which may generate profits or other compensation. The Trust
will not share in such compensation.
It is the intention of the Trust and CAAI that any agreements and
transactions, taken as a whole, between the Trust, 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 Trust as could have been obtained from unaffiliated
third parties. (See "BUSINESS" and "MANAGEMENT - The Manager".)
INVESTMENT IN RELATED MORTGAGE BANKING FIRM.
The Trust, as a result of strategic investments totaling $200,000 by its
predecessors, CAIT I and CAIT II, holds 20,000 Class "B" Preferred Shares of
Sierra Capital Acceptance ("SCA") of Irvine, California. SCA is a wholesale
mortgage banking firm specializing in A-, B-C credit rated non-conforming
residential mortgages. The SCA investment held by the Trust has a 15%
distribution preference (which has been paid quarterly) and a liquidation
preference. The business of SCA and the Mortgage Conduit Business planned for
the Trust's Mortgage Conduit Subsidiary are similar and may be competitive in
the origination, purchasing and sale of A- and B-C credit rated non-conforming
residential mortgages unless the Mortgage Conduit Business is conducted through
a joint venture between SCA and the Mortgage Conduit Subsidiary. Messrs. Swartz
and Konczal are principals, directors and officers of SCA as well as of the
Trust and its Manager. No decision has been made to date regarding the
establishment of a joint venture between SCA and the Trust's proposed Mortgage
Conduit Subsidiary. (See "MANAGEMENT - The Manager" and "THE TRUST Organization
Chart").
SALE AND PURCHASE OF LOANS.
To assure a source of mortgage loans for the Trust's Mortgage Investment
Business, it is anticipated that the Mortgage Conduit Subsidiary will grant to
the Trust an option to purchase all non-conforming mortgage loans and Home
Equity Loans meeting the Trust's investment criteria and policies. Commitments
to acquire loans will obligate the Trust to purchase such loans from the
Mortgage Conduit Subsidiary upon the closing and funding of the loans, pursuant
to the terms and conditions specified in the commitment. It is also anticipated
that compensation to be paid by the Mortgage Conduit Subsidiary to the Trust
will be no less favorable to the Trust than is generally available from other
nationally-recognized dealers in similar mortgage loans as approved by the Board
of Directors.
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<PAGE> 59
Such a loan purchase agreement would generally remain in force until one
year after the effective date of this Offering and thereafter would be
automatically renewed on a year-to-year basis unless written notice is delivered
by either the Trust or the Mortgage Conduit Subsidiary thirty day prior to the
end of the term or any renewal term of such an agreement.
Also, the Trust would be able to terminate the loan purchase agreement
upon 30 days' notice following the happening of one or more events specified in
the agreement. Such events would relate generally to the Mortgage Conduit
Subsidiary's proper and timely performance of its duties and obligations under
the agreement. The Trust will account for the purchase of loans from the
Mortgage Conduit Business on a fair value basis. When the Trust computes the
equity and earnings or loss of the Mortgage Conduit Subsidiary, it will
eliminate any intercompany profit. In addition, either party would be able to
terminate the loan purchase agreement without cause upon 30 days' notice.
Additional or modified arrangements and transactions may be entered into
by the Trust, CAAI, and their respective subsidiaries or Affiliates, after
completion of this Offering. Any such future arrangements and transactions will
be determined through negotiation between the Trust and such entities and it is
possible that conflicts of interest will be involved.
OTHER BUSINESS ACTIVITIES.
The Bylaws provide that the Directors and the Trust's agents, officers
and employees may engage with or for others in business activities of the types
conducted by the Trust and that they will not have any obligation to present to
the Trust any investment opportunities which come to them other than in their
capacities as Directors regardless of whether those opportunities are within the
Trust's investment policies. Each Director is required to disclose any interest
he has, and any interest known to him of any person of which he is an Affiliate,
in any investment opportunity presented to the Trust. (See "RISK FACTORS - Risk
of Conflicts of Interest and Related Party Transactions - Risk that Limited
Liability of Directors and Indemnification May Limit Shareholder Recourse", and
"SUMMARY OF ORGANIZATIONAL DOCUMENTS AND SECURITIES" regarding the extent to
which the Bylaws provide for indemnification, and prohibit or permit
transactions between the Trust and the Directors, the Manager and certain of
their Affiliates).
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<PAGE> 60
- --------------------------------------------------------------------------------
PRINCIPAL STOCKHOLDERS
- --------------------------------------------------------------------------------
The following table sets forth certain information known to the Trust
with respect to beneficial ownership of the Trust's Common Shares as of December
31, 1996, and as adjusted to reflect the sale of Common Shares being offered
hereby, by (1) each person known to the Trust to beneficially own more than five
percent of the Trust's Common Shares, (2) each Director, (3) the Trust'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
name have, to the knowledge of the Trust, sole voting and investment power with
respect to the shares beneficially owned, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
Percentage of
Shares Beneficially
Number of Owned
Shares -------------------
Beneficially Before After
Owned Offering Offering(1)
------------ -------- --------
<S> <C> <C> <C>
Name of Beneficial Owner
- ------------------------
Thomas B. Swartz (1)...... ........ ........ 0 0 0
Dennis R. Konczal ........ ........ ........ 0 0 0
Douglas A. Thompson ...... ........ ........ 0 0 0
Stanley C. Brooks (2)..... ........ ........ 0 0 0
Harvey Blomberg........... ........ ........ 0 0 0
All directors and executive officers as a group (5 persons)... 0 0 0
Thomas Morford (3)............................................ 0 0 0
50 California Street, Suite 2020
San Francisco, CA 94104
</TABLE>
- --------------------
(1) Mr. Swartz owns beneficially 2,286 shares of Series A Preferred Shares
as of December 31, 1996, representing less than 1% of the outstanding
Series A Preferred Shares.
(2) Mr. Brooks is the President of the Managing Dealer. It is assumed that
no Managing Dealer Warrants are exercised (See "PLAN OF DISTRIBUTION").
(3) Mr. Morford owns beneficially 50,000 shares of Series A Preferred
Shares as of December 31, 1996, representing 7.7% of the outstanding
Series A Preferred Shares.
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<PAGE> 61
- --------------------------------------------------------------------------------
SUMMARY OF ORGANIZATIONAL DOCUMENTS AND SECURITIES
- --------------------------------------------------------------------------------
The following is a summary of significant provisions of the Trust's
Certificate of Incorporation and Bylaws and a summary of the Trust's Shares and
Warrants. Additional significant provisions are summarized elsewhere in this
Prospectus. (See "ADDITIONAL INFORMATION: AND SOURCES OF ADDITIONAL FUNDS.")
DESCRIPTION OF SHARES.
Authorized Capital. The Trust's authorized capital stock consists of
2,000,000 Common Shares and 675,000 Preferred Shares. The Common Shares and
Preferred Shares each have a par value of $0.01. The Trust will not issue more
than 1,500,000 Common Shares during the initial offering period. 643,730
Preferred Shares were issued and outstanding at April 30, 1996. The number of
Warrants issued in the Initial Public Offering will vary depending upon the
amount of sales of Common Shares. Moreover, the extent to which such Warrants
are exercised and the timing of such exercises will affect the number of Common
Shares outstanding at any time.
Voting Rights. Each Preferred and Common Share is generally entitled to
one vote on all matters to be voted upon by the shareholders. The shareholders
will have all the voting rights provided by the Delaware General Corporation Law
to shareholders of Delaware corporations (in addition to those described below),
and will be entitled to vote upon: (1) the election or removal of Directors; and
(2) the ratification of the Directors approval, renewal or termination of the
Management Agreement. As permitted by Delaware law, the Trust's Certificate of
Incorporation allows the Directors to amend the Trust's bylaws without
shareholder consent.
Further Issuance of Shares; Redemption Shares may be issued upon
Warrant exercise and the possible sale of additional Preferred Shares or Common
Shares or issuance of debt securities that are convertible into Preferred Shares
or Common Shares. (See "SOURCES OF ADDITIONAL FUNDS.:) Upon issuance, Shares
will be fully-paid and non-assessable and, except as stated under "Redemption of
Shares and Prohibition of Transfer of Shares and Exercise of Warrants" below,
shares (except as noted under "Redemption of Transfer of Shares and Exercise of
Warrants" below) will not be subject to redemption.
Annual Meeting of Shareholders. The first annual meeting of the
shareholders will be held following the close of the Trust's fiscal year ending
December 31, 1996. Special meeting may be called by the Chairman, the President,
at least two Directors, subject to certain conditions, or shareholders holding
10% or more of the outstanding Shares of the Trust.
Transferability of Shares. The Shares and Warrants will be freely and
separately transferable, except to the extent stated under "Redemption of Shares
and Prohibition on Transfer of Shares and Exercise of Warrants" below. The Trust
has applied for listing on the NASDAQ-NMS subject to official notice of
issuance, but actual trading of Shares on the NASDAQ-NMS, if approved, will not
commence until the termination of the Initial Public Offering. Other transfers
of Shares that do not involve a sale can be accomplished by providing the
necessary documentation to the stock transfer agent, GEMISYS Transfer Agent.
Warrants will not be listed on the NASDAQ-NMS, but will be freely transferable,
except as set forth below.
Issuance of Share Certificates. The actual issuance of a certificate
evidencing the Shares is optional. Shareholders who do not elect to receive a
certificate will own Shares in "unissued certificate" form and will be treated
in like manner as those who do receive a certificate. Owning Shares in unissued
certificate form will (a) eliminate the physical handling and safekeeping
responsibilities inherent in owning transferable stock certificates, and (b)
eliminate the need to return a duly executed certificate to the transfer agent
to effect a transfer. After the Minimum Subscription Level is reached, all
Shares will be held in unissued certificate form until the end of the Initial
Public Offering period. Upon the conclusion of the offering, Share certificates
will be issued to those Shareholders who in writing have requested it.
DIVIDEND PREFERENCES.
Current Distributions. Holders of the Preferred Shares will be entitled
to the Current Distribution Preference with respect to such Current
Distributions as are declared each year equal to: the lesser of (a) an amount
equal to an annualized return on the Net Capital Contribution of Preferred
Shares at each dividend record date during such year (or, if the Directors do
not set a record date, as of the first day of the month) equal to 10.25% or 150
basis points over the Prime Rate (determined on a not less than quarterly
basis).
After declaration for a given quarter of Current Distributions to the
holders of Preferred Shares in the amount of the Current Distribution
Preference, no further distributions may be declared on the Preferred Shares for
the subject quarter
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<PAGE> 62
until the total dollar amount of Current Distributions declared on the Common
Shares as a class for that quarter equals an amount (the "Matching
Distribution") as the Current Distribution Preference for each Preferred Share
for such quarter or period. Any Current Distributions associated with a payment
date that are declared after the Trustees have declared Current Distributions on
Common Shares in the amount of the Matching Distribution (i.e. excess
Distributions) generally will be allocated such that the amount of Current
Distributions per share paid to or declared to the holders of the Preferred
Shares and Common Shares for the subject quarter are equal. The Current
Distribution Preferences of the Preferred Shares is not cumulative
Liquidating Distributions. Holders of Preferred Shares are entitled to
receive all Liquidating Distributions until the Aggregate Adjusted Net Capital
Contribution of all Preferred Shares has been reduced to zero. Thereafter,
holders of Common Shares are entitled to all Liquidation Distributions until the
Aggregate Adjusted Net Capital Contributions of all Common Shares has been
reduced to zero. Any subsequent Liquidating Distributions will be allocated
among the holders of the Common shares and Preferred Shares pro rata.
DIRECTORS.
The Board of Directors consists of five members (two of whom are
Unaffiliated Directors) who are divided into three classes and will serve until
the first annual meeting of shareholders at which directors in their respective
classes are to be elected or until their successors are elected. Thereafter, the
term of each Director elected by the Shareholders will continue until the next
annual meeting of the shareholders at which directors in their respective
classes are to be elected. The number of Directors may be increased or decreased
by the Directors or the shareholders, but shall be not less than three nor more
than seven. Vacancies, which can be created by the death, resignation,
bankruptcy, adjudicated incompetence or other incapacity of a Director, or by an
increase in the number of Directors, may be filled by a majority of the
remaining Directors. Removal of a Director by the Shareholders or court order
may be filled only by shareholders. Any Director may resign at any time and may
be removed, with or without cause, by the holders of a majority of the Shares.
The Directors are empowered to appoint an Executive Committee of two or
more Directors to which may be delegated most of the powers of the Board of
Directors and an Audit Committee of two or more Directors.
The Directors will be entitled to be indemnified against all
liabilities incurred by them in the course of their activities as Directors
except that no indemnity will be provided for willful misconduct or for conduct
that is knowingly fraudulent or deliberately dishonest.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION AND BYLAWS.
Approval by shareholders owning a majority of the Shares represented by
shareholders present either in person or by proxy at a duly authorized meeting
may by affirmative vote amend or alter the Trust's Bylaws. Bylaws may also be
amended by the Board of Directors. Except as noted below, approval by
shareholders owning a majority of the outstanding Shares is necessary to amend
or alter the Trust's Certificate of Incorporation. Except as noted below, in
addition, no reduction in the voting rights of the holders of Trust Shares or in
their right to distributions on liquidation of the Trust may be made without
shareholder approval. The holders of two-thirds of the outstanding Preferred
Shares must approve any change in rights, privileges or preferences of Preferred
Shares from that set forth in the Trust's Bylaws and Certificate of
Incorporation or the creation of any additional class of preferred stock senior
to the Preferred Shares. The holders of a majority of the outstanding Preferred
Shares must approve the creation of any additional class of preferred stock
equal in preference to the Preferred Shares.
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<PAGE> 63
SHAREHOLDER LIMITED LIABILITY.
Under Delaware general corporate law, a shareholder will generally not
be liable for claims made against the Trust in the absence of a voluntary
assumption of liability.
REDEMPTION OF SHARES AND PROHIBITION OF TRANSFER OF SHARES AND EXERCISE OF
WARRANTS.
The Preferred Shares are redeemable by a Shareholder at the option of
the Board of Directors annually on June 30 provided a request for such
redemption by a Preferred Shareholder is received by May 15 of such year. The
Board of Directors may arbitrarily and in their sole discretion deny, delay or
postpone or consent to any or all requests for redemption. The Redemption Amount
to be paid for redemption of such Preferred Shares shall be the Adjusted Net
Capital Contribution plus accrued but unpaid dividends attributable to the
Preferred Shares which the Preferred Shareholder requests be redeemed, divided
by the Aggregate Net Capital Contributions plus accrued but unpaid Dividends
attributable to all Preferred Shares outstanding, multiplied by the Net Asset
Value of the Trust attributable to the Preferred Shares which shall be that
percentage of the Trust's Net Asset Value that the Aggregate Adjusted Net
Capital Contributions of all Preferred Shares bears to the Adjusted Net Capital
Contributions of all Shares outstanding. A contingent liquidation charge will be
paid to the Trust in connection with each redemption as follows: 2% of
Redemption Amount in 1997; 1% of Redemption Amount in 1998; and none thereafter.
With certain exceptions, for the Trust to qualify as a REIT under the
Code, not more than 50% of its outstanding Shares may be owned by five or fewer
individuals during the last half of the Trust's taxable year, and the shares
must be owned by 100 or more persons during at least 335 days of a taxable year
of twelve months or during a proportionate part of a shorter taxable year. The
Trust has over 100 Preferred Shareholders. (See "FEDERAL INCOME TAX
CONSIDERATIONS.") In order to meet these requirements, the Trustees are given
power to redeem or prohibit the transfer of a sufficient number of Common and/or
Preferred Shares or the exercise of a sufficient number of Warrants to maintain
or bring the ownership of shares into conformity with those requirements and to
prohibit the transfer of Shares to persons whose acquisition thereof would
result in a violation of those requirements. In addition, the Bylaws provide
that no shareholder may own more than 9.8% of the total outstanding Shares,
although this limit will not apply to Shares acquired before the conclusion of
the Initial Public Offering of Common Shares.
REPORTS TO SHAREHOLDERS AND RIGHTS OF EXAMINATION.
Within 120 days following the close of each fiscal year, the Trust will
mail an annual report on Trust affairs to its shareholders. This report will
include audited financial statements and contain a balance sheet, an income
statement, a statement of changes in shareholder equity and a statement of
changes in financial position. The Trust will provide a proxy statement in
connection with the annual meeting. The Trust will send shareholders quarterly
reports on the affairs of the Trust. Financial statements in reports will be
prepared in accordance with generally accepted accounting principles. The
shareholders will have the right to inspect the books and records of the Trust
during usual business hours for any purpose reasonably related to such
shareholder's interest as a shareholder.
DESCRIPTION OF SHAREHOLDER AND MANAGING DEALER WARRANTS.
Each Shareholder Warrant will entitle the holder thereof to purchase
one Common Share. The exercise price for each Shareholder Warrant is $7.00, and
such Warrants may be exercised during the twenty-fifth through the forty- eighth
month following the effective date of this Prospectus. The Shareholder Warrants
will be issued pursuant to a Shareholder Warrant Agreement between the Warrant
Agent and the Trust.
In order to protect Warrant holders against dilution, the Warrant
Agreement provides that upon the occurrence of certain events, the exercise
price of the Warrants and the number of Shares which may be purchased upon the
exercise of Warrants will be adjusted. The events generating adjustments include
stock dividends, split-ups, combinations and reclassifications, but do not
include the sale of Shares at less than the exercise price or cash distributions
whether paid out of capital or otherwise. Provision is also made to protect
against dilution in the event of merger, consolidation or disposition of all or
substantially all of the Trust's assets. Warrant holders do not have any rights
of shareholders and in the event of a partial or total liquidation, dissolution
or winding up of the Trust, holders of Warrants will not be entitled to
participate
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<PAGE> 64
in a distribution of Trust assets unless such Warrants have been exercised. The
Shares and the Warrants may be transferred separately after their issuance.
Warrants will be dated and issued in certificate form to the shareholders upon
written request at the time of the warrant exercise period and they may be
exercised by completing and executing the form on the back side of the Warrant
certificate. Warrants will not be issued for fractional Shares.
The Trust may refuse to allow the exercise of a Warrant if the effect
of such exercise would, in the opinion of special counsel for the Trust,
disqualify the Trust as a REIT under the Code. (See "FEDERAL INCOME TAX
CONSIDERATIONS - Taxation of the Trust and Requirements for Qualification" and
"ERISA CONSIDERATIONS.")
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- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
The following discussion summarizes certain federal income tax
considerations to the Trust and the purchasers of the Common Shares. This
discussion is based on existing federal income tax law, which is subject to
change, possibly retroactively. This discussion does not address all aspects of
federal income taxation that may be relevant to a particular investor in light
of its personal investment circumstances or to certain types of investors
subject to special treatment under the federal income tax laws (including
financial institutions, insurance companies, broker-dealers and, except to the
extent discussed below, tax-exempt entities and foreign taxpayers) and it does
not discuss any aspects of state, local or foreign tax law. This discussion
assumes that investors will hold their Common Shares as a "capital asset"
(generally, property held for investment) under the Code. Prospective investors
are advised to consult their tax advisors as to the specific tax consequences to
them of purchasing, holding and disposing of the Common Shares, including the
application and effect of federal, state, local and foreign income and other tax
laws.
TAXATION OF THE TRUST.
General. The Trust plans to elect to become subject to tax as a REIT,
for federal income tax purposes, under Sections 856 through 860 of the Code and
applicable Treasury Regulations (the "REIT Requirements" or the "REIT
Provisions") commencing with the taxable year ending December 31, 1996. The
Board of Directors of the Trust currently expects that the Trust will continue
to operate in a manner that will permit the Trust to maintain its qualifications
as a REIT for each taxable year thereafter. This treatment will permit the Trust
to deduct dividend distributions to its stockholders for federal income tax
purposes, thus effectively eliminating the "double taxation" that generally
results when a corporation earns income and distributes that income to its
stockholders.
The REIT Provisions are highly technical and complex. The following
summary sets forth the material aspects of the REIT Provisions that govern the
federal income tax treatment of a REIT and its stockholders. This summary is
qualified in its entirety by the REIT Provisions, rules and regulations
promulgated thereunder, and administrative and judicial interpretations thereof.
Opinion of Tax Counsel. In the opinion of Landels Ripley & Diamond
LLP, a Limited Liability Partnership, commencing with the Trust's taxable year
ended December 31, 1996, the Trust has been organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
has enabled and will enable it to meet the requirements for qualification and
taxation as a REIT under the Code. Further, in the opinion of Landels Ripley &
Diamond LLP, the section of the Prospectus entitled "FEDERAL INCOME TAX
CONSIDERATIONS" identifies and fairly summarizes the federal income tax
considerations that are likely material to a holder of Shares and to the extent
such summaries involve matters of law, such statements of law are correct under
the Code. It must be emphasized that such opinion will be based on various
factual assumptions relating to the organization and operation of the Trust and
certain representations as to factual matters. In addition, such opinion will be
based upon the factual representations of the Trust concerning its business and
assets as set forth in the Prospectus. Moreover, such qualification and taxation
as a REIT depends upon the Trust's ability to meet (through actual annual
operating results, distribution levels and diversity of stock ownership) the
various qualification tests imposed under the REIT Provisions discussed below,
the results of which have not been and will not be reviewed by Stephen C. Ryan &
Associates. Accordingly, no assurance can be given that the actual results of
the Trust's operation for any particular taxable year have satisfied or will
satisfy such requirements. Further, the anticipated income tax treatment
described in this Prospectus may be changed, perhaps retroactively, by
legislative, administrative or judicial action at any time. (See "RISK FACTORS -
Tax and Regulatory Risks - Risk of Higher Taxation of Trust as a Regular
Corporation and Reduced Funds for Dividends if Trust Fails To Maintain REIT
Status").
As long as the Trust qualifies for taxation as a REIT, it generally
will not be subject to federal corporate income taxes on its net income that is
currently distributed to stockholders. This treatment substantially eliminates
the "double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. Even if the Trust qualifies
for taxation as a REIT, however, it may be subject to federal income tax as
follows: First, the Trust will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Trust may be subject to the
"alternative minimum tax" on its items of tax preference, if any. Third, if the
Trust has (i) net income from the sale or other disposition of "foreclosure
property" (generally, property acquired at or in lieu of foreclosure of the
mortgage secured by such property or as a result of a default under a lease of
such property) which is held primarily for sale to customers in the ordinary
course of business, or (ii) other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, if the Trust has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property held primarily
for sale to customers in the ordinary course of business other than foreclosure
property), such income will be subject to a 100%
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tax. Fifth, if the Trust should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed below), but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Trust fails the 75% or
95% test multiplied by (b) a fraction intended to reflect the Trust's
profitability. Sixth, if the Trust should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Trust would be subject to a
4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, pursuant to IRS Notice 88-19, if the Trust has a
net unrealized built-in gain, with respect to any asset (a "Built-In Gain
Asset") acquired by the Trust from a corporation which is or has been a C
corporation (i.e., generally a corporation subject to full corporate-level tax)
in a transaction in which the basis of the Built-In Gain Asset in the hands of
the Trust is determined by reference to the basis of the asset in the hands of
the C corporation, and the Trust will recognize gain on the disposition of such
asset during the ten-year period (the "Recognition Period") beginning on the
date on which such asset was acquired by the Trust, then, to the extent of the
Built-In Gain (i.e., the excess of (a) the fair market value of such asset over
(b) the Trust's adjusted basis in such asset, determined as of the beginning of
the Recognition Period), such gain will be subject to tax at the highest regular
corporate rate pursuant to Treasury Regulations that have not yet been
promulgated. The results described above with respect to the recognition of
Built-In Gain assume that the Trust will make an election pursuant to Notice
88-19 and that such treatment is not modified by certain revenue proposals in
the Administration's 1997 Budget Proposal.
Requirements for Qualification. To qualify as a REIT, the Trust must
elect to be so treated and must meet on a continuing basis certain requirements
(as discussed below) relating to the Trust's organization, sources of income,
nature of assets, and distribution of income to shareholders. The Code defines a
REIT as a corporation, trust or association (i) which is managed by one or more
trustees or directors; (ii) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest;
(iii) which would be taxable as a domestic corporation, but for the REIT
Provisions; (iv) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (v) the beneficial ownership
of which is held by 100 or more persons; (vi) during the last half of each
taxable year not more than 50% in value of the outstanding stock of which is
owned, actually or constructively, by or for five or fewer individuals (as
defined in the Code to include certain entities); and (vii) which meets certain
other tests, described below, regarding the nature of its income and assets. The
REIT Provisions provide that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of twelve months, or during a proportionate
part of a taxable year of less than twelve months. Conditions (v) and (vi) will
not apply until after the first taxable year for which an election is made by
the Trust to be taxed as a REIT.
The Trust believes that it has previously issued sufficient Preferred
Shares and that during the course of this Offering it will issue sufficient
shares of Common Shares with sufficient diversity of ownership to allow the
Trust to satisfy conditions (v) and (vi). In addition, the Trust's constituent
documents provide for restrictions regarding the transfer and ownership of
shares, which restrictions are intended to assist the Trust in continuing to
satisfy the share ownership requirements described in (v) and (vi) above. Such
ownership and transfer restrictions are described in "Summary of Organizational
Documents and Securities." These restrictions may not ensure that the Trust
will, in all cases, be able to satisfy the share ownership requirements
described above. If the Trust fails to satisfy such share ownership
requirements, the Trust's status as a REIT will terminate. (See "Failure to
Qualify," below).
In addition, in order to be taxed as a REIT, the Trust must maintain
certain records and request certain information from its stockholders designed
to disclose the actual ownership of its stock. The Trust has represented that it
will comply with these requirements. A corporation may also not elect to become
a REIT unless its taxable year is the calendar year. the Trust has a calendar
taxable year.
Income Tests. In order to maintain its qualification as a REIT, the
Trust annually must satisfy three gross income requirements. First, at least 75%
of the Trust's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from:
(i) rents from real property; (ii) interest on obligations secured by mortgages
on real property or on interests in real property; (iii) gain from the sale or
other disposition of real property (including interests in real property and
interests in mortgages on real property) not held primarily for sale to
customers in the ordinary course of business; (iv) dividends or other
distributions on, and gain (other than gain from prohibited transactions) from
the sale or other disposition of, transferable shares in other real estate
investment trusts; (v) abatements and refunds of taxes on real property; (vi)
income and gain derived from foreclosure property; (vii) amounts (other than
amounts the determination of which depend in whole or in part on the income or
profits of any person) received or accrued as consideration for entering into
agreements (a) to make loans secured by mortgages on real property or on
interests in real property or (b) to purchase or lease real property (including
interests in real property and interests in mortgages on real property); (viii)
gain from the sale or other disposition of a real estate asset which is not a
prohibited transaction; and (ix) qualified temporary investment income. Second,
at least 95% of the Trust's gross income (excluding gross income from
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prohibited transactions) for each taxable year must be derived from the sources
described above with respect to the 75% gross income test, dividends, interest,
and gain from the sale or disposition of stock or securities (or from any
combination of the foregoing). Third, short-term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions, and gain
on the sale or other disposition of real property held for less than four years
(apart from involuntary conversions and sales or other disposition of
foreclosure property) must represent less than 30% of the Trust's gross income
(including gross income from prohibited transactions) for each taxable year.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
Generally, if a loan is secured by both personal property and real
property, interest must be allocated between the personal property and the real
property, with only the interest allocable to the real property qualifying as
mortgage interest under the 75% gross income test. Treasury Regulations provide
that if a loan is secured by both personal and real property and the fair market
value of the real property as of the commitment date equals or exceeds the
amount of the loan, the entire interest amount will qualify under the 75% gross
income test. If the amount of the loan exceeds the fair market value of the real
property, the interest income allocated to the real property is an amount equal
to the interest income multiplied by a fraction, the numerator of which is the
fair market value of the real property as of the commitment date, and the
denominator of which is the amount of the loan. The interest income allocated to
the personal property is an amount equal to the excess of the total interest
income over the interest income allocated to the real property.
Interest earned on mortgage loans, and mortgage-backed securities
secured by or representing an interest in such loans will qualify as "interest"
for purposes of the 95% and 75% gross income tests if such assets are treated as
obligations secured by mortgages on real property or on interests in real
property. However, income attributable to securities (other than Qualified REIT
Assets) that the Trust holds directly or indirectly, dividends on stock
(including any dividends the Trust receives from any subsidiary), interest on
any other obligations not secured by real property, and gains from the sale or
disposition of stock or other securities that are not Qualified REIT Assets will
not qualify under the 75% gross income test if such income is not treated as
interest on obligations secured by mortgages on real property or on interests in
real property or gain from the sale or other disposition of a Qualified REIT
Asset, which is not a prohibited transaction. Such income will qualify under the
95% gross income test, however, if such income constitutes interest, dividends
or gain from the sale or disposition of stock or securities. Income from loan
guarantee fees, mortgage servicing contracts or other contracts under which the
Trust would earn fees for performing services will not qualify under either the
95% or 75% gross income tests if such income constitutes fees for services
rendered by the Trust or is not treated as interest (on obligations secured by
mortgages on real property or on interests in real property for purposes of the
75% gross income test). Similarly, income from hedging, including the sale of
hedges, will not qualify under the 75% or 95% gross income tests unless such
hedges constitute Qualified Hedges, in which case such income will qualify under
the 95% gross income test.
In order to comply with the 95% and 75% gross income tests, the Trust
has limited and will continue to limit substantially all of the assets that it
acquires to Qualified REIT Assets. As a result, the Trust may limit the type of
assets, including hedging contracts, that it otherwise might acquire and,
therefore, the type of income it otherwise might receive, including income from
hedging, other than income from Qualified Hedges. See "Business--Hedging."
In addition, to comply with the 30% gross income test, the Trust may
have to hold mortgage loans and mortgage-backed securities for four or more
years and securities (other than securities that are Qualified REIT Assets) and
hedges for one year or more at times when the Trust might otherwise have opted
for the disposition of such assets for short term gains.
In order to comply with the REIT gross income tests, the Trust has
monitored and will continue to monitor its income, including income from
dividends, hedging transactions, futures contracts, servicing and sales of
Mortgage Assets, gains on the sale of securities, and other income not derived
from Qualified REIT Assets. The Trust believes that the aggregate amount of any
nonqualifying income in any taxable year has not exceeded and will not exceed
the limit on nonqualifying income under the gross income tests.
If the Trust fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions will be generally available if the Trust's failure to
meet such tests was due to reasonable cause and not due to willful neglect, the
Trust attaches a schedule of the sources of its income to its federal income tax
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
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circumstances the Trust would be entitled to the benefit of these relief
provisions. For example, if the Trust fails to satisfy the gross income tests
because nonqualifying income that the Trust intentionally incurs exceeds the
limits on such income, the Internal Revenue Service (the "Service") could
conclude that the Trust's failure to satisfy the tests was not due to reasonable
cause. If these relief provisions are inapplicable to a particular set of
circumstances involving the Trust, the Trust will not qualify as a REIT. As
discussed above in "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of the
Trust--General," even if these relief provisions apply, a tax would be imposed
with respect to the excess net income. There can be no assurance that the Trust
will always be able to maintain compliance with the gross income tests for REIT
qualification despite its periodic monitoring procedures. No similar mitigation
provision provides relief if the Trust fails the 30% gross income test. In such
case, the Trust would cease to qualify as a REIT. (See "Failure To Qualify,"
below).
Any gain realized by the Trust on the sale of any property (including
mortgage loans and mortgage-backed securities) held as inventory or other
property held primarily for sale to customers in the ordinary course of business
will be treated as income from a prohibited transaction that is subject to a
100% penalty tax. Such prohibited transaction income may also have an adverse
effect upon the Trust's ability to satisfy the income tests for qualification as
a REIT. Under existing law, whether property is held as inventory or primarily
for sale to customers in the ordinary course of a trade or business is a
question of fact that depends on all the facts and circumstances with respect to
the particular transaction. (See "BUSINESS--Mortgage Conduit Business.") If the
Trust were to sell directly such mortgage securities on a regular basis, there
is a substantial risk that such sales would constitute prohibited transactions
and that all of the profits therefrom would be subject to a 100% tax. Therefore,
such sales are contemplated to be made only through a Non-qualified REIT
Subsidiary which itself will not be subject to the 100% penalty tax on income
from prohibited transactions, which is only applicable to a REIT.
Asset Tests. The Trust, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of the Trust's total assets must be represented by
Qualified REIT Assets, cash, cash items and government securities. Qualified
REIT Assets include (i) interests in real property and interests in mortgages on
real property, (ii) interests in REMICs, and (iii) stock or debt instruments
held for not more than one year purchased with the proceeds of a stock offering
or long-term (at least five years) public debt offering of the Trust. Second,
not more than 25% of the Trust's total assets may be represented by securities
other than those in the 75% asset class. Third, of the investments included in
the 25% asset class, the value of any one issuer's securities owned by the Trust
may not exceed 5% of the value of the Trust's total assets and the Trust may not
own more than 10% of any one issuer's outstanding voting securities. The Trust
believes that, other than as described immediately below, substantially all of
its current assets are Qualified REIT Assets.
As described above, the Trust may engage in its Mortgage Conduit
Business through a Non-qualified REIT Subsidiary. It is presently anticipated
that under this arrangement, the Trust would own 100% of the nonvoting preferred
stock of the non-qualified REIT subsidiary. The Trust does not plan to own any
of the voting common shares of such non-qualified REIT subsidiary, and therefore
the Trust will not be considered to own more than 10% of its voting securities.
In addition, the Trust anticipates that the aggregate value of its securities of
such subsidiary would not at any time exceed, 5% of the total value of the
Trust's assets.
The Trust currently has invested $200,000 in SCA which may act in some
capacity in its Mortgage Conduit Business (See "Mortgage Conduit Business -
General"). SCA is a Delaware business trust which is characterized as a
partnership for federal income tax purposes. SCA's trust agreement provides that
for federal income tax purposes, the Trust's investment in SCA shall be
characterized as indebtedness and not as a partnership or trust interest. Under
the REIT Provisions if the Trust's interest in SCA were treated as a partnership
interest, rather than debt, the Trust would be deemed to own its proportionate
share of each of SCA's assets and would be deemed entitled to that part of the
income of SCA which is attributable to such proportionate share for purposes of
calculating the 95% and 75% gross income tests. Even in such an event, the Trust
believes the inclusion of its proportionate share of SCA's income would not
cause the Trust to fail to comply with the income tests of the REIT Provisions
and likely would not do so in the future although it is impossible to predict
prospective performance of the Trust or SCA which would affect this
determination.
The Trust does not own any voting securities of SCA. In addition, the
Trust believes that the aggregate value of its interest in SCA has not at any
time exceeded 5% of the total value of the Trust's assets, and will not do so in
the future. However, there can be no assurance that the IRS will not contend
differently. The 5% value test requires that the Trust revalue its assets at the
end of each calendar quarter in which the Trust acquires additional securities
in SCA for the purpose of applying such test. Although the Trust plans to take
steps to ensure that it satisfies the 5% value test for any quarter with respect
to which retesting is to occur, there can be no assurance that such steps will
always be successful, or will not require a reduction in the Trust's overall
interest in SCA.
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The Trust has taken and will continue to take measures to prevent the
value of securities issued by any one entity that do not constitute Qualified
REIT Assets from exceeding 5% of the value of the Trust's total assets as of the
end of each calendar quarter. In particular, as of the end of each calendar
quarter, the Trust has limited and diversified and will continue to limit and
diversify its ownership of securities of SCA (and in the future other
securities) that do not constitute Qualified REIT Assets to less than 25%, in
the aggregate, by value of its portfolio, to less than 5% by value as to any
single issuer, including SCA, and to less than 10% of the voting stock of any
single issuer. Moreover, the Manager has monitored and will continue to monitor
(on not less than a quarterly basis) the purchase and holding of the Trust's
assets in order for the Trust to comply with the above asset tests.
When purchasing mortgage-related securities, the Trust and its counsel
may rely on opinions of counsel for the issuer or sponsor of such securities
given in connection with the offering of such securities, or statements made in
related offering documents, for purposes of determining whether and to what
extent those securities (and the income therefrom) constitute Qualified REIT
Assets (and income) for purposes of the REIT asset tests (and the REIT gross
income tests discussed above).
A regular or residual interest in a REMIC will be treated as a
Qualified REIT Asset for purposes of the REIT asset tests and income derived
with respect to such interests will be treated as interest on obligations
secured by mortgages on real property, assuming that at least 95% of the assets
of the REMIC are Qualified REIT Assets. If less than 95% of the assets of the
REMIC are Qualified REIT Assets, only a proportionate share of the assets of and
income derived from the REMIC will be treated as qualifying under the REIT asset
and income tests. the Trust believes that its REMIC interests fully qualify for
purposes of the REIT income and asset tests.
If the Trust invests in a partnership, it will be deemed to own its
proportionate share of the assets of the partnership and will be deemed to be
entitled to the income of the partnership attributable to such share. In
addition, the character of the assets and gross income of the partnership shall
retain the same character in the hands of the Trust for purposes of the REIT
gross income tests and the asset tests.
After initially meeting the asset tests at the close of any quarter,
the Trust will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Trust intends to maintain adequate records of the value of its
assets to ensure compliance with the asset tests and to take such other actions
within 30 days after the close of any quarter as may be required to cure any
noncompliance. If the Trust fails to cure noncompliance with the asset tests
within such time period, the Trust would cease to qualify as a REIT.
Annual Distribution Requirements The Trust, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount at least equal to (i) the sum of (a) 95% of the
Trust's "REIT taxable income" (computed without regard to the dividends paid
deduction and by excluding the Trust's net capital gain) and (b) 95% of the net
income (after tax), if any, from foreclosure property, minus (ii) the sum of
certain items of noncash income. In addition, if the Trust disposes of any
Built-In Gain Asset during its Recognition Period, the Trust will be required,
pursuant to Treasury Regulations which have not yet been promulgated, to
distribute at least 95% of the Built-in Gain (after tax), if any, recognized on
the disposition of such asset. Such distributions must be paid in the taxable
year to which they relate, or in the following taxable year if declared before
the Trust timely files its tax return for such year and if paid on or before the
first regular dividend payment date after such declaration and if the Trust so
elects and specifies the dollar amount on its tax return. To the extent that the
Trust does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gain corporate tax rates.
Furthermore, if the Trust should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, and (iii) any undistributed
taxable income from prior periods, the Trust would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed. The Trust intends to make timely distributions sufficient to
satisfy these annual distribution requirements.
The Trust anticipates that it will generally have sufficient cash or
liquid assets to enable it to satisfy the distribution requirements described
above. It is possible, however, that the Trust, from time to time, may not have
sufficient cash or other liquid assets to meet these distribution requirements
due to timing differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Trust. For
instance, the Trust may realize income without a corresponding cash payment, as
in the case of original issue discount or accrued interest on defaulted mortgage
loans. In the event that such timing differences occur, in order to meet the
distribution requirements, the Trust may find it necessary to sell assets,
arrange for short-term, or possibly long-term, borrowings, or pay dividends in
the form of taxable stock dividends.
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The Service has ruled that if a REIT's dividend reinvestment plan
allows stockholders of the REIT to elect to have cash distributions reinvested
in shares of the REIT at a purchase price equal to at least 95% of fair market
value on the distribution date, then such cash distributions reinvested pursuant
to such a plan qualify under the 95% distribution test. The Trust intends to
comply with this ruling in the event it adopts such a plan in the future. See
"Distribution and Dividend Policy."
Under certain circumstances, the Trust may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Trust's deduction
for dividends paid for the earlier year. Thus, the Trust may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Trust
will be required to pay interest based upon the amount of any deduction taken
for deficiency dividends.
RECORD KEEPING REQUIREMENTS.
A REIT is required to maintain certain records, including records
regarding the actual and constructive ownership of its shares, and within 30
days after the end of its taxable year, to demand statements from persons owning
above a specified level of the REIT's shares (e.g., if the Trust has over 200
but fewer than 2,000 stockholders of record, from persons holding 1% or more of
the Trust's outstanding Common Shares and if the Trust has 200 or fewer
shareholders of record, from persons holding 1/2% or more of the Common Shares)
regarding their ownership of shares. In addition, the Trust must maintain, as
part of its records, a list of those persons failing or refusing to comply with
this demand. Shareholders who fail or refuse to comply with the demand must
submit a statement with their tax returns setting forth the actual stock
ownership and other information.
FAILURE TO QUALIFY.
If the Trust fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Trust will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Trust fails to qualify will not be deductible by the Trust nor will they be
required to be made. As a result, the Trust's failure to qualify as a REIT would
substantially reduce the cash available for distribution by the Trust to its
stockholders. In addition, if the Trust fails to qualify as a REIT, all
distributions to stockholders will be taxable as ordinary income, to the extent
of the Trust's current and accumulated earnings and profits, and, subject to
certain limitations of the Code, corporate distributes may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Trust will also be disqualified from taxation as a REIT for the
four taxable years following the year during which qualification was lost. It is
not possible to state whether in all circumstances the Trust would be entitled
to such statutory relief. Failure to qualify for even one year could result in
the Trust's incurring substantial indebtedness (to the extent borrowings are
feasible) or liquidating substantial investments in order to pay the resulting
taxes.
TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY.
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Shares who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, or (iii) is an estate or trust the income
of which is subject to United States federal income taxation regardless of its
source.
As long as the Trust qualifies as a REIT, distributions made by the
Trust out of its current or accumulated earnings and profits (and not designated
as capital gain dividends) will constitute dividends taxable to its taxable U.S.
Stockholders as ordinary income. Such distributions will not be eligible for the
dividends received deduction in the case of U.S. Stockholders that are
corporations. Distributions made by the Trust that are properly designated by
the Trust as capital gain dividends will be taxable to taxable U.S. Stockholders
as long-term capital gains (to the extent that they do not exceed the Trust's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Stockholder has held his Common Shares. U.S. Stockholders that are
corporations may, however, be required to treat up to 20% of certain capital
gain dividends as ordinary income. To the extent that the Trust makes
distributions (not designated as capital gain dividends) in excess of its
current and accumulated earnings and profits, such distributions will be treated
first as a tax-free return of capital to each U.S. Stockholder, reducing the
adjusted basis which such U.S. Stockholder has in his Common Shares for tax
purposes by the amount of such distribution (but not below zero), with
distributions in excess of a U.S. Stockholder's adjusted basis in his shares
taxable as capital gains (provided that the shares have been held as a capital
asset). the Trust will notify stockholders at the end of each year as to the
portions of the distributions which constitute ordinary income, net capital
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gain or return of capital. Dividends declared by the Trust in October, November,
or December of any year and payable to a stockholder of record on a specified
date in any such month shall be treated as both paid by the Trust and received
by the stockholder on December 31 of such year, provided that the dividend is
actually paid by the Trust on or before January 31 of the following calendar
year. Stockholders may not include in their own income tax returns any net
operating losses or capital losses of the Trust.
Dividends paid with respect to Common Shares that a DRP participant
reinvests in Common Shares through purchases by the Agent in the open market
will be treated for federal income tax purposes as having been received by the
participant in the form of a taxable cash distribution. The amount of the cash
distribution will be treated as a dividend to the extent the Trust has current
or accumulated earnings and profits for federal income tax purposes.
Alternatively, dividends paid with respect to Common Shares that a participant
reinvests in Common Shares that are registered and newly issued by the Trust
will be treated for federal income tax purposes as having been received by the
participant in the form of a taxable stock distribution. In that case, the DRP
participant will be treated as having received a dividend, taxable as ordinary
income to the extent the Trust has current or accumulated earnings and profits,
in an amount equal to the fair market value of the Common Shares purchased with
the reinvested dividends, generally on the date that the Agent credits such
Common Shares to the DRP participant's account, plus brokerage commissions and
fees, if any, subtracted from the participant's distribution.
Distributions made by the Trust and gain arising from the sale or
exchange by a U.S. Stockholder of shares of Common Shares will not be treated as
passive activity income, and, as a result, U.S. Stockholders generally will not
be able to apply any "passive losses" against such income or gain. Distributions
made by the Trust (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment income limitation. Gain arising from the sale or other disposition of
Common Shares, however, will not be treated as investment income unless the U.S.
Stockholder elects to reduce the amount of such U.S. Stockholder's total net
capital gain eligible for the 28% maximum capital gains rate by the amount of
such gain with respect to such Common Shares.
Upon any sale or other disposition of Common Shares, a U.S. Stockholder
will recognize gain or loss for federal income tax purposes in an amount equal
to the difference between (i) the amount of cash and the fair market value of
any property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares of Common Shares for tax purposes. Such gain or
loss will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset, and will be long-term gain or loss if such
Shares have been held for more than one year. In general, any loss recognized by
a U.S. Stockholder upon the sale or other disposition of shares of Common Shares
that have been held for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss, to the extent of
distributions received by such U.S. Stockholder from the Trust which were
required to be treated as long-term capital gains.
The Trust does not expect to acquire or retain residual interests
issued by REMICs. Such residual interests, if acquired by a REIT, could generate
excess inclusion income taxable to the REIT's stockholders in proportion to the
dividends received from the REIT. Excess inclusion income cannot be offset by
net operating losses of a stockholder. If the stockholder of a REIT holding a
residual interest in a REMIC is a tax-exempt entity, the excess inclusion income
is fully taxable to such stockholder as UBTI. If allocated to a Non-U.S.
Stockholder (as defined below), the excess inclusion income is subject to
federal income tax withholding without reduction pursuant to any otherwise
applicable tax treaty. Potential investors, and in particular, tax-exempt
entities, are urged to consult with their tax advisors concerning this issue.
INFORMATION REPORTING AND BACKUP WITHHOLDING.
Under temporary United States Treasury regulations, United States
information reporting requirements and backup withholding tax will generally not
apply to dividends paid on the Common Shares to a Non-United States Holder at an
address outside the United States. Payments by a United States office of a
broker of the proceeds of a sale of the Common Shares is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies its Non-United States Holder status under penalties of perjury or
otherwise establishes an exemption. Information reporting requirements (but not
backup withholding) will also apply to payments of the proceeds of sales of such
shares by foreign offices of United States brokers, or foreign brokers with
certain types of relationships to the United States, unless the broker has
documentary evidence in its records that the holder is a Non-United States
Holder and certain other conditions are met, or the holder otherwise establishes
an exemption.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules will be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the Service.
These information reporting and backup withholding rules are under
review by the United States Treasury and their application to the Common Shares
could be changed by future regulations.
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TAXATION OF TAX-EXEMPT STOCKHOLDERS.
Subject to the discussion below regarding a "pension-held REIT," a
tax-exempt stockholder is generally not subject to tax on distributions from the
Trust or gain realized on the sale of the Common Shares, provided that such
stockholder has not incurred indebtedness to purchase or hold its Common Shares,
that its shares are not otherwise used in an unrelated trade or business of such
stockholder, and that the Trust consistent with its present intent, does not
hold a residual interest in a REMIC that gives rise to "excess inclusion" income
as defined under section 860E of the Code. If the Trust were to be treated as a
"taxable mortgage pool," however, a substantial portion of the dividends paid to
a tax-exempt stockholder may be subject to tax as UBTI. Although the Trust does
not believe that the Trust, or any portion of its assets, will be treated as a
taxable mortgage pool, no assurance can be given that the Service might not
successfully maintain that such a taxable mortgage pool exists.
If a qualified pension trust (i.e., any pension or other retirement
trust that qualifies under Section 401(a) of the Code) holds more than 10% by
value of the interests in a "pension-held REIT" at any time during a taxable
year, a substantial portion of the dividends paid to the qualified pension trust
by such REIT may constitute UBTI. For these purposes, a "pension-held REIT" is
any REIT (i) that would not have qualified as a REIT but for the provisions of
the Code which look through qualified pension trust stockholders in determining
ownership of stock of the REIT and (ii) in which at least one qualified pension
trust holds more than 25% by value of the interests of such REIT or one or more
qualified pension trusts (each owning more than a 10% interest by value in the
REIT) hold in the aggregate more than 50% by value of the interests in such
REIT. Assuming compliance with the Ownership Limit provisions described in
"Summary of Organizational Documents and Securities," it is unlikely that
pension plans will accumulate sufficient stock to cause the Trust to be treated
as a pension-held REIT.
Distributions to certain types of tax-exempt stockholders exempt from
federal income taxation under Sections 501(c)(7), (c)(9), (c)(17), and (c)(20)
of the Code may also constitute UBTI, and such prospective investors should
consult their tax advisors concerning the applicable "set aside" and reserve
requirements.
TAXATION OF NON-U.S. STOCKHOLDERS.
The following discussion summarizes certain United States federal tax
consequences of the acquisition, ownership and disposition of Common Shares by
an initial purchaser that, for United States federal income tax purposes, is not
a "United States person" (a "Non-United States Holder"). For purposes of this
discussion, a "United States person" means: a citizen or resident of the United
States; a corporation, partnership, or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof; or an estate or trust whose income is includable in gross
income for United States federal income tax purposes regardless of its source.
This discussion does not consider any specific facts or circumstances that may
apply to a particular Non-United States Holder. Prospective investors are urged
to consult their tax advisors regarding the United States federal tax
consequences of acquiring, holding and disposing of Common Shares as well as any
tax consequences that may arise under the laws of any foreign, state, local or
other taxing jurisdiction.
Dividends paid by the Trust out of earnings and profits, as determined
for United States federal income tax purposes, to a Non-United States Holder
will generally be subject to withholding of United States federal income tax at
the rate of 30%, unless reduced or eliminated by an applicable tax treaty or
unless such dividends are treated as effectively connected with a United States
trade or business. Distributions paid by the Trust in excess of its earnings and
profits will be treated as a tax-free return of capital to the extent of the
holder's adjusted basis in his shares, and thereafter as gain from the sale or
exchange of a capital asset as described below. If it cannot be determined at
the time a distribution is made whether such distribution will exceed the
earnings and profits of the Trust, the distribution will be subject to
withholding at the same rate as dividends. Amounts so withheld, however, will be
refundable or creditable against the Non-United States Holder's United States
federal tax liability if it is subsequently determined that such distribution
was, in fact, in excess of the earnings and profits of the Trust. If the receipt
of the dividend is treated as being effectively connected with the conduct of a
trade or business within the United States by a Non-United States Holder, the
dividend received by such holder will be subject to the United States federal
income tax on net income that applies to United States persons generally (and,
with respect to corporate holders and under certain circumstances, the branch
profits tax).
For any year in which the Trust qualifies as a REIT, distributions to a
Non-United States Holder that are attributable to gain from the sales or
exchanges by the Trust of "United States real property interests" will be
treated as if such gain were effectively connected with a United States business
and will thus be subject to tax at the normal capital gain rates applicable to
United States stockholders (subject to applicable alternative minimum tax) under
the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Also, distributions subject to FIRPTA may be subject to a 30% branch
profits tax in the hands of a foreign corporate stockholder not entitled to a
treaty exemption. The Trust is required to withhold 35% of any distribution that
could be designated by the Trust as a capital gains dividend. This amount may be
credited against
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the Non-United States Holder's FIRPTA tax liability. It should be noted that
mortgage loans without substantial equity or shared appreciation features
generally would not be classified as "United States real property interests."
A Non-United States Holder will generally not be subject to United
States federal income tax on gain recognized on a sale or other disposition of
its shares of Common Shares unless (i) the gain is effectively connected with
the conduct of a trade or business within the United States by the Non-United
States Holder, (ii) in the case of a Non-United States Holder who is a
nonresident alien individual and holds such shares as a capital asset, such
holder is present in the United States for 183 or more days in the taxable year
and certain other requirements are met, or (iii) the Non-United States Holder is
subject to tax under the FIRPTA rules discussed below. Gain that is effectively
connected with the conduct of a United States Holder will be subject to the
United States federal income tax on net income that applies to United States
persons generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax) but will not be subject to withholding.
Non-United States Holders should consult applicable treaties, which may provide
for different rules.
Gain recognized by a Non-United States Holder upon a sale of Common
Shares will generally not be subject to tax under FIRPTA if the Trust is a
"domestically controlled REIT," which is defined generally as a REIT in which at
all times during a specified testing period less than 50% in value of its shares
were held directly or indirectly by non-U.S. persons. Because only a minority of
the Trust's stockholders are expected to be Non-United States Holders, the Trust
anticipates that it will qualify as a "domestically controlled REIT."
Accordingly, a Non-United States Holder should not be subject to U.S. tax from
gains recognized upon disposition of its Shares.
OTHER TAX CONSEQUENCES.
The Trust and its stockholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it or
they transact business or reside. The state and local tax treatment of the Trust
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Trust.
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ERISA CONSIDERATIONS
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This section is a summary of certain matters arising under the Employee
Retirement Income Security Act of 1974, as amended, together with applicable
regulations ("ERISA"), and Section 4975 of the Code which a fiduciary of an
"employee benefit plan" as defined in and subject to ERISA or of a "plan" as
defined in Section 4975 of the Code who has investment discretion should
consider before deciding to purchase Common Shares (such "employee benefit
plans" and "plans" being referred to herein as "Plans" and such fiduciaries with
investment discretion being referred to herein as "Plan Fiduciaries"). This
section is not intended to deal with all matters arising under ERISA or Section
4975 of the Code that may be relevant to a prospective purchaser and does not
include state law or other legal requirements applicable to governmental or
church plans. The following statements regarding certain matters arising under
ERISA and the Code are based on the provisions of ERISA and the Code as
currently in effect and the existing administrative and judicial interpretations
thereunder. No assurance can be given that administrative, judicial or
legislative changes will not occur that could make such statements incorrect or
incomplete.
In general, the terms "employee benefit plan" as defined in ERISA and
"plan" as defined in Section 4975 of the Code together refer to any plan or
account of various types that provide retirement or welfare benefits to an
individual or to an employer's employees and their beneficiaries. Such plans
include, but are not limited to, corporate pension and profit sharing plans,
so-called KEOGH plans for self-employed individuals (including partners),
simplified employee pension plans and individual retirement accounts described
in Section 408 of the Code, medical benefit plans, bank commingled trust funds
and insurance company separate accounts for such plans and accounts and, under
certain circumstances, the general account of an insurance company.
FIDUCIARY AND PROHIBITED TRANSACTION CONSIDERATIONS.
Each Plan Fiduciary, before deciding to purchase Common Shares, must be
satisfied that such an investment is a prudent investment for the Plan, that the
investments of the Plan, including an investment in Common Shares, are
diversified so as to minimize the risks of large losses, that an investment in
Common Shares complies with the documents of the Plan and related trust, and
that an investment in Common Shares complies with any other applicable
requirements of ERISA or the Code. Plan Fiduciaries should also consider the
entire discussion concerning federal income taxes under "FEDERAL INCOME TAX
CONSIDERATIONS" and the discussion concerning shareholders' liability for
obligations of the Trust under "RISK FACTORS--Possible Liability of Trust
Shareholders" which are relevant to any decision by a Plan Fiduciary to purchase
Common Shares .
Each Plan Fiduciary, before deciding to purchase Common Shares, must
also give appropriate consideration as to whether a prohibited transaction
described in Section 406 of ERISA or Section 4975 of the Code would result from
the Plan's purchase of Common Shares and, if so, the availability of an
exemption. Those prohibited transactions include various direct and indirect
transactions, such as sales and loans, between a Plan and any person who with
respect to the Plan is a "party in interest" as defined in Section 3(14) of
ERISA or "disqualified person" as defined in Section 4975 of the Code, the use
of the Plan's assets for the benefit of any such person, and any fiduciary of
the Plan dealing with the Plan's assets in the fiduciary's own interest. The
consequences of any such prohibited transaction, if no exemption applies, can
include the imposition of excise taxes on the party in interest or disqualified
person, the persons involved in the transaction having to rescind the
transaction and pay any amount to the Plan for any losses realized by the Plan
or profits realized by such persons, disqualification of any individual
retirement account involved in the transaction with adverse tax consequences to
the owner of such account, and other liabilities that can have a significant,
adverse effect on such persons.
PLAN ASSET ISSUE.
The following paragraphs describe the rules applicable in determining
whether the assets of the Trust will for purposes of ERISA and Section 4975 of
the Code be considered assets of the Plans which purchase Common Shares or for
whose benefit Common Shares are purchased (i.e., whether Trust assets will be
considered Plan assets). If assets of the Trust will be considered Plan assets,
(i) a Plan Fiduciary must consider whether a purchase of Common Shares will
result in a violation of any of the fiduciary rules under ERISA and (ii) any
prospective purchaser of Common Shares must consider that prohibited
transactions within the meaning of Section 406 of ERISA or Section 4975 of the
Code will occur if assets of the Trust are involved in transactions that include
persons who are "parties in interest" as defined in Section 3(14) of ERISA or
"disqualified persons" as defined in Section 4975 of the Code with respect to
such Plans or if a person who manages or controls assets of the Trust deals with
those assets in that person's own interest. The possible consequences of any
such prohibited transaction, if an exemption does not apply, are described above
in the second paragraph under the heading "Fiduciary and Prohibited Transaction
Considerations" and can have a significant adverse effect.
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A regulation issued by the United States Department of Labor under
ERISA (the "Plan Asset Regulation") contains rules for determining when an
investment by a Plan or for the benefit of a Plan in an equity interest in an
entity, such as the Common Shares, will result in the underlying assets of the
entity being deemed assets of the Plan for purposes of ERISA and Section 4975 of
the Code. Those rules provide that assets of the entity will not be assets of a
Plan that purchases an equity interest therein if the equity interest qualifies
as a "publicly-offered security" or any of certain other exceptions apply.
Under the Plan Asset Regulation, a "publicly-offered security" is a
security that is (i) "freely transferable," (ii) part of a class of securities
that is "widely-held," and (iii) either (a) a part of a class of securities that
is registered under Section 12(b) or 12(g) of the Exchange Act or (b) sold to a
Plan as part of an offering of securities to the public pursuant to an effective
registration statement under the Securities Act and the class of securities of
which such security is a part is registered under the Exchange Act within 120
days (or such later time as may be allowed by the Securities and Exchange
Commission) after the end of the fiscal year of the issuer during which the
offering of such securities to the public occurred. Whether a security is
considered "freely transferable" depends on the facts and circumstances of each
case. If the security is part of an offering of which the minimum investment is
$10,000 or less, any restriction on or prohibition against any transfer or
assignment of such security for the purposes of preventing a termination or
reclassification of the entity for federal or state tax purposes will not of
itself ordinarily prevent the security from being considered freely
transferable. A class of securities is considered "widely-held" only if it is a
class of securities that is owned by 100 or more investors independent of the
issuer and of one another. A class of securities will not fail to be widely-held
solely because after the initial offering the number of independent investors
falls below 100 as a result of events beyond the control of the issuer.
The Trust believes that the Common Shares to be sold pursuant to the
Offering meet the criteria to be "publicly-offered securities" so that assets of
the Trust should not be deemed assets of the Plans purchasing Common Shares.
First, the Trust believes that the Common Shares will be considered to be freely
transferable, as the minimum investment is less than $10,000 and the only
restriction on their transfer is the Ownership Limitation. Second, the Trust
expects the Common Shares to immediately after the Offering be held by
substantially more than 100 investors and at least 100 or more of such investors
to be independent of the Trust and of one another. Third, the Common Shares are
(i) part of a class of securities that is registered under Section 12(b) or
12(g) of the Exchange Act and (ii) are being sold pursuant to the Offering as
part of an offering of securities to the public pursuant to an effective
registration statement under the Securities Act and the class of securities of
which the Common Shares are a part is registered under the Exchange Act within
120 days after the end of the year of the Trust during which the offering of
such securities to the public occurs.
THE TRUST DOES NOT REPRESENT THAT A PURCHASE OF COMMON SHARES MEETS THE
RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO OR IS APPROPRIATE FOR ANY PARTICULAR
"EMPLOYEE BENEFIT PLAN" AS DEFINED IN ERISA OR ANY "PLAN" AS DEFINED IN SECTION
4975 OF THE CODE. THE FIDUCIARY WITH INVESTMENT DISCRETION CONCERNING ANY
EMPLOYEE BENEFIT PLAN OR PLAN SHOULD CONSULT WITH ITS OWN LEGAL ADVISOR AND
OTHER APPROPRIATE ADVISORS REGARDING SPECIFIC CONSIDERATIONS ARISING UNDER
ERISA, SECTION 4975 OF THE CODE AND STATE AND OTHER LAW WITH RESPECT TO THE
PURCHASE, OWNERSHIP OR SALE OF COMMON SHARES BY SUCH EMPLOYEE BENEFIT PLAN OR
PLAN IN LIGHT OF THE CIRCUMSTANCES OF THAT PARTICULAR EMPLOYEE BENEFIT PLAN OR
PLAN.
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PLAN OF DISTRIBUTION
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The Trust is offering a minimum of 500,000 Common Shares ($4,000,000)
and a maximum of 1,750,000 Common Shares ($14,000,000) at $8.00 per Share,
together with Warrants for the purchase of up to 150,000 additional Common
Shares. The Minimum Investment is 100 Shares. There is no firm commitment to
purchase or sell any Common Shares or Warrants. Common Shares will be offered by
selling agents, on a best efforts basis, which means that no one is guaranteeing
any minimum number of shares will be sold, who are selected by Brookstreet
Securities Corporation, the Managing Dealer, and the Trust and are members of
the National Association of Securities Dealers, Inc. ("NASD"). No sales
commissions may be paid to selling agents on bona fide sales prior to receipt
and acceptance of subscriptions for 50,000 shares ($500,000) and the release of
such proceeds from Escrow. The Trust will pay retail commissions of up to 6%,
non-accountable expense reimbursements of 3%, accountable expense reimbursements
of .5% and reimbursements of up to .5% for actual and bona fide due diligence
expenses, on the sale of Shares during the initial offering period. From such
amounts payable in connection with the sale of Shares, the Managing Dealer will
pay all costs and expenses associated with the printing of the Prospectus and
related sales material which expenses are estimated to be .5%.
One Shareholder Warrant to purchase one Common Share at $5.60 per share
will be issued for each ten Common Shares purchased and may be exercised during
the twenty-fifth through the forty-eighth month following the date of this
Offering. On the exercise of Warrants, the Trust will pay a retail commission of
2.8% per Share to the selling agent who is specified in writing as the
soliciting selling agent but only if: (i) the selling agent who solicits such
exercise is in compliance with SEC Rule 10b-6; (ii) the Warrant is not exercised
from a discretionary account without the solicitation and approval of the
account holder; (iii) the market price per Share at the time of Warrant exercise
is greater than the Warrant exercise price; and (iv) disclosure of the fee is
made to the holder at the time of exercise. Warrants will be exercisable for a
period which will be no later than thirty-six months from the effective date of
this Prospectus. No retail commissions will be paid to selling agents by
Brookstreet until the Trust has received subscriptions for 50,000 shares
($500,000).
The Trust has contracted with Brookstreet to provide marketing services
as the Managing Broker-Dealer with respect to this offering. Brookstreet's
marketing services will consist of services related to the selection and
management of selling agents for this offering's selling group and the printing
of offering materials for this offering, and of related advertising and selling
agent materials. Brookstreet will receive reimbursement for offering services
which consist of expenses relating to legal, accounting, due diligence, printing
expenses, a non-accountable underwriting fee of $35,000 and for other expenses
relating to the registration, marketing and distribution of the offering (other
than retail sales commissions). The total payments to Brookstreet and the other
selling agents in connection with the offering, including retail commissions and
expense reimbursements, will not exceed 10% of the Gross Proceeds.
Prior to this offering, there has been no public market for the Common
Shares. Accordingly, the public offering price has been determined by
negotiations between the Trust and Brookstreet. Among the factors which were
considered in determining the IPO Price were the Trust's future prospects, the
experience of its management, the offering prices of the Trust's predecessors'
shares, the book value and earnings of the Trust's Shares, the economic
condition of the financial services industry in general, the general condition
of the equity securities market, the demand for similar securities of companies
considered comparable to the Trust and other relevant factors. The President of
Brookstreet serves as a Director of the Trust.
All subscription funds will be held in a separate escrow account with
Golden Gate Bank, San Francisco, California, pending the Trust's receipt of
Share subscriptions totaling the Minimum Subscription Level of $4,000,000 (or
such other amount as the NASD may approve). Once subscriptions for 500,000
shares ($4,000,000) or more have been received and accepted, the first admission
of shareholders will occur as soon as practicable, cleared funds representing
investors' subscriptions and interest earned thereon will be released to the
Trust and deposited into the Trust operating account. Net Escrow Interest will
at the end of the escrow generally be paid to Shareholders.
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If all conditions of escrow are not satisfied within twelve months of the date
of this Prospectus (unless extended), subscriptions will be promptly returned to
subscribers at the end of the escrow, together with the Net Escrow Interest. If
such escrow conditions are not met, subscriptions from IRAs, will be promptly
returned to the custodian of each IRA for reinvestment in other permitted
investments. Shareholders will be entitled to their proportionate share of the
Net Escrow Interest earned on offering proceeds during the escrow period based
on the amount of their investment and the time that investment was on deposit in
the escrow. However, if a Shareholder has $5.00 or less of net escrow interest
credited to their account, that amount will be paid over to the Trust.
The Selling Agent Agreement with participating selling agents contains
agreements of indemnification between the Trust and such selling agents as to
certain liabilities, including liabilities under the Securities Act of 1933 (the
"Act"), as amended. The Trust has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is therefore not enforceable.
The offering will terminate on a date to be declared by the Board of
Directors. Such date will be no later than two years from the effective date of
this offering.
SALES MATERIAL
Sales material may be used in connection with this offering only when
accompanied or preceded by the delivery of this Prospectus. Only sales material
which indicates that it is distributed by the Trust may be distributed to
prospective investors. In certain states, such sales material may not be
available. The offering is made only by this Prospectus, and the sales material
is qualified in its entirety by reference to this Prospectus. Sales material
does not purport to be complete and should not be considered as a part of this
Prospectus or the Registration Statement, of which this Prospectus is a part, or
as incorporated in this Prospectus or said Registration Statement by reference,
or as forming the basis of the Offering.
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LEGAL MATTERS
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The legality of the securities offered hereby has been passed upon for
the Trust by the Trust's special counsel, Landels Ripley & Diamond LLP, San
Francisco, California, which has also reviewed and approved the discussion of
law and legal conclusions set forth in "FEDERAL INCOME TAX CONSIDERATIONS", and
"ERISA CONSIDERATIONS". (See "RISK FACTORS - Conflicts of Interest and Related
Party Transactions, Risk of Conflicts from Lack of Separate Representation").
Certain issues with respect to the legality of the securities being offered
hereby with respect to Delaware Law have been passed upon for the Trust by the
Trust's Delaware counsel, Ashby, & Geddes, Wilmington, Delaware. Certain legal
matters will be passed upon for the Managing Dealer by Arter & Hadden, Los
Angeles, California.
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EXPERTS
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The combined financial statements of Capital Alliance Income Trust, A
Real Estate Investment Trust as of December 31, 1995 and 1994 and for the three
years then ended have been included herein and in the Registration Statement in
reliance upon the report of Novogradac & Company LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
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ADDITIONAL INFORMATION
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Copies of the Registration Statement of which this Prospectus forms a
part and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C. and may be obtained at rates prescribed by the Commission upon
request to the Commission and inspected, without charge, at the offices of the
Commission. The Company will be subject to the informational requirements of the
Exchange Act, and in accordance therewith, will periodically file reports and
other information with the Commission. Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W. Washington, D.C. 20549, and at the
Commission's regional offices at Northwestern Atrium Center, 500 West Madison
Street (Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York,
New York 10048. Copies of such material can also be obtained from the Commission
at prescribed rates through its Public Reference Section at 450 Fifth Street,
N.W. Washington D.C. 20549. Additionally, the Commission maintains a website
that contains reports, proxy information statements and other information
regarding registrants such as the Trust that file electronically. The address of
the Commission website is http://www.sec.gov. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
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GLOSSARY
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As used in this Prospectus, the capitalized and other terms listed
below have the meanings indicated.
AFFILIATED PERSON means of any entity: (1) any person directly or indirectly
owning, controlling, or holding with the power to vote, 10% or more of the
outstanding securities of such entity; (2) any person 10% or more of whose
outstanding voting securities are directly or indirectly owned, controlled, or
held with power to vote, by such entity; (3) any person directly or indirectly
controlling, controlled by , or under common control with, such entity or (4)
any officer, director or employee of such entity or any person set forth in (1),
(2), or (3) above. Any person who owns beneficially, either directly or through
one or more controlled companies, more than 10% of the voting securities of any
entity shall be presumed to control such entity. Any person who does not so own
more than 10% of the voting securities of any entity shall be presumed not to
control such entity. A natural person shall be presumed not to be a controlled
entity.
ADJUSTED NET CAPITAL CONTRIBUTION shall mean, with reference to each Share of
either Series A Preferred Shares or Common Shares as of any given date,
regardless of the date of issuance of the amount paid therefor, the Net Capital
Contribution with respect to such Share reduced by the amount of Distributions
of Cash from Sales thereafter paid or declared per Share with respect to Shares
of the same class or series.
AGENCY means FNMA, FHLMC or GNMA.
AGGREGATE ADJUSTED NET CAPITAL CONTRIBUTIONS as of any given date shall mean
with reference to either Series A Preferred or Common Shares, the product of the
Adjusted Net Capital Contributions of each share of the Class and the number of
outstanding shares of such class, each as of a given date.
AMEX means the American Stock Exchange.
APPRAISED VALUE shall mean the value according to an appraisal made by an
independent Qualified Appraiser. An "independent" appraiser is one who is not
"controlled" by the Directors, the Manager or its Affiliates. For purposes of
the foregoing sentence, the term "control" shall have the meaning ascribed to it
in Rule 405 under the Securities Act of 1933, as amended.
"ARM" means a mortgage loan that features adjustments of the underlying interest
rate at predetermined times based on an agreed margin to an established index. A
ARM is usually subject to periodic interest rate and/or payment caps and a
lifetime interest rate cap.
BANKRUPTCY CODE means Title 11, United States Code, as amended.
"CAAI" means Capital Alliance Advisors, Inc., a California corporation.
"CAIT" means Capital Alliance Income Trust, a Real Estate Investment Trust, a
Delaware corporation.
CASH FLOW for any fiscal quarter or fiscal year or other period shall mean (i)
the sum of cash receipts from operations and investments, including, but no
limited to, interest earned on the Trust's investments in Home Equity Loans or
other mortgage loans, including Cash from Sales to the extent not distributed to
Shareholders as a return of capital; minus (ii) all cash expenses and costs
incurred and paid in connection with the ownership, servicing and management of
Home Equity Loans or other mortgage loans held by the Trust, including, but not
limited to , fees payable to the Manager or its Affiliates to the extent not
deferred, insurance premiums, accounting and legal fees and expenses; debt
collection expenses; property taxes or other charges, assessments or levies
imposed on or with respect to Home Equity Loans or other mortgage loans held by
the Trust; debt service (but not including depreciation or amortization of
capital expenditures), including, without limitation, organization expenses.
CASH FROM SALES shall mean cash proceeds realized by the Trust (excluding sales
by any non-qualified REIT subsidiary of the Trust) from the sale, exchange or
other disposition of any of its portfolio of Home Equity Loans or other mortgage
loans (or a portion thereof), sale of foreclosure property and other assets, net
of any expenses associated with such sale or other set-offs, reserves or
holdbacks. Cash from Sales shall include cash funds from reserves which the
Board of Directors determines, in its sole discretion, may be distributed to the
Shareholders.
CODE means the Internal Revenue Code of 1986, as amended.
COMBINED LOAN-TO-VALUE RATIO means the total or combined loan-to-value ratio
(including both the mortgage loan and any senior liens encumbering a property).
75
<PAGE> 80
COMMISSION means the Securities and Exchange Commission.
COMMON SHARES means up to a maximum of 1,500,000 Shares of common stock offered
pursuant to the terms of this Offering.
CONFORMING LOAN or CONFORMING MORTGAGE LOAN means a mortgage loan that complies
with requirements for inclusion in credit support programs sponsored by FHLMC or
FNMA which are secured by first or second mortgages or deeds of trust on
single-family (one to four units) residences.
CONTRIBUTION means any money, property or services rendered, or obligation to
contribute property, or other valuable consideration as permitted by the
Delaware General Corporation Law, which a Series "A" Preferred or Common
Shareholder contributes to the Trust as capital in that shareholder's capacity
as Shareholder.
DISTRIBUTABLE CASH FLOW means Cash Flow less such amounts as the Directors, in
their sole discretion, determines should be set aside for the establishment,
restoration or enhancement of reserves.
DISTRIBUTION PREFERENCE shall mean the Series "A" Preferred Preference Amount.
DISTRIBUTIONS means any transfer of money or property by the Trust to a
Shareholder without consideration.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"ERISA PLAN" or "PLAN" means a pension, profit-sharing, retirement or other
employee benefit plan which is subject to ERISA.
EXCESS DISTRIBUTIONS for any fiscal year means Distributions of Distributable
Cash Flow declared by the Directors, after all distributions on the Series A
Preferred Shares and the Common Shares required by the Certificate of
Incorporation of the Trust have been declared to the holders of the Series A
Preferred Shares and the Common Shares.
EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
"FHA" means the United States Federal Housing Administration.
"FHLMC" means the Federal home Loan Mortgage Corporation.
"FNMA" means the Federal National Mortgage Association.
"GNMA" means Government National Mortgage Association.
"GAAP" means generally accepted accounting principles.
GROSS MORTGAGE ASSETS means for any month the aggregate book value of the
Mortgage Assets, before reserves for depreciation or bad debts or other similar
noncash reserves, computed at the end of such month.
HOME EQUITY LOAN means any home equity loan secured by a Mortgage upon a parcel
of improved well-located residential property of one to four living units in the
States of California, Oregon, Washington, Nevada, Utah and Colorado, which loan
is acquired by the Trust and which is secured primarily by a second Mortgage,
although a portion of such loans may be secured by first and/or third mortgages.
INVESTMENT COMPANY ACT means the Investment Company Act of 1940, as amended.
"IRAS" means Individual Retirement Accounts.
KEOGH PLANS means H.R. 10 Plans.
"LTV" or "LOAN-TO-VALUE RATIO" means the percentage obtained by dividing the
principal amount of a loan by the appraised value of the mortgaged property when
the loan is originated.
76
<PAGE> 81
MANAGER is CAAI and its successor in interest.
MORTGAGE means mortgages, deeds of trust or other security deeds on real
property or rights or interest in real property.
MORTGAGE ASSETS means (1) mortgage loans, (2) investment in mortgage banking
firms or mortgage-backed securities, and (3) other mortgage interests.
MORTGAGE CONDUIT BUSINESS means the wholesale mortgage banking business
conducted by the Mortgage Conduit Subsidiary of the Trust which is a
non-qualified REIT Subsidiary.
MORTGAGE INVESTMENT BUSINESS is the mortgage portfolio lending business
conducted directly by the Trust.
MORTGAGE LOANS means both conforming mortgage loans and non-conforming mortgage
loans.
MORTGAGE CONDUIT SUBSIDIARY is a non-qualified REIT Subsidiary to be formed by
the Trust to conduct the Mortgage Conduit Business of the Trust.
MORTGAGE-BACKED SECURITIES means (1) Pass-Through Certificates, (2) CMOs and (3)
REMICs.
"NASD" means the National Association of Securities Dealers.
NET ASSET VALUE means the aggregate of the book value of all Home Equity Loans
and other mortgage loans plus other corporate assets less all liabilities and
bad debt reserves of the Trust.
NET CAPITAL CONTRIBUTIONS means, with respect to a Series A Preferred Share
and/or Common Share, the gross price per Share to the Shareholder upon the
original issuance of such Shares, less the Sales Charge attributable to such
Share.
NET ESCROW INTEREST means interest earned on subscriptions placed in Escrow
until the Minimum Subscription Level is reached and the Escrow is terminated.
NET INCOME means the net income of the Trust determined in accordance with GAAP
before the deduction for dividends paid, and any net operating loss deductions
arising from losses in prior periods. The Trust's interest expenses for borrowed
money shall be deducted in calculating Net Income.
90% TEST means the underwriting calculations used in the Trust's Mortgage
Investment Business to determine the relationship of a property's appraised
value and the cost of carrying each mortgage or Home Equity Loan for 12 months
assuming that there is a foreclosure on the mortgaged property. If the cost of
carrying the property for 12 months (i.e. including the costs of keeping any
prior mortgage current, foreclosure costs, selling and repair costs) exceeds 90%
of the appraised value at the time of projected funding, the loan will not be
made.
NON-CONFORMING LOAN or NON-CONFORMING MORTGAGE LOAN means a mortgage loan that
does not qualify for purchase by government-sponsored entities such as FNMA and
FHLMC.
NON-QUALIFIED REIT SUBSIDIARY means a corporation in which a REIT owns less than
all of the stock during such corporation's existence.
OWNERSHIP LIMIT means 9.8% (in value or in number of shares, which ever is more
restrictive) of the aggregate of the outstanding shares of Common Stock and
Series "A" Preferred Stock, as may be increased or reduced by the Board of
Directors of the Trust.
PREFERRED SHARES are the Series "A" Preferred Shares of the Trust.
PRIME RATE means, during any calendar month, the Prime Rate (or base rate)
reported in the Money Rates column of the Wall Street Journal published on the
first business day of each month. In the event the Wall Street Journal ceases
publication of the Prime Rate, the Prime Rate shall mean the Prime Rate (or base
rate) in effect for Bank of America, San Francisco, California, on the first
business day of each month.
77
<PAGE> 82
QUALIFIED APPRAISER means an appraiser who (i) is approved by the Manager or
Board of Directors, (ii) is registered on the approved appraiser list of at
least four lending institutions, (iii) maintains at least $500,000 in errors and
omissions insurance, and (iv) demonstrates qualification by membership in a
recognized appraisal society or otherwise to the satisfaction of the Manager or
Board of Directors.
QUALIFIED REIT ASSETS means mortgage loans and other assets of the type
described in Code Section 856(c)(6)(B).
QUALIFIED REIT SUBSIDIARY means a corporation whose stock is entirely owned by
the REIT at all times during such corporation's existence.
QUALIFYING INTERESTS means "mortgages and other liens on and interests in real
estate," as defined in Section 3(c)(5)(C) under the Investment Company Act.
REAL ESTATE ASSET means interest in real property and interest in mortgages on
real property.
"REIT" means Real Estate Investment Trust as defined under Section 856 of the
Code.
REVERSE REPURCHASE AGREEMENT means a borrowing device by an agreement to sell
securities or other assets to a third party and a simultaneous agreement to
repurchase them at a specified future date and price, the price difference
constituting the interest on the borrowing.
SALES CHARGE means the amount of compensation paid to Broker/Dealers by the
Trust and its predecessor entities pursuant to the selected selling agent
agreements and to others in connection with the offer and sale of Shares.
SECURITIES ACT means the Securities Act of 1933, as amended.
SELLING AGENT means any broker/dealer who has executed a selected agent
agreement in connection with the sale of Shares by the Trust, in which such
Broker/Dealer agrees to participate in the offer and sale of Shares.
SERIES A PREFERRED SHARES shall mean the Shares described in the Trust's
Certificate of Incorporation.
SERIES A PREFERRED PREFERENCE AMOUNT for each calendar month shall mean
one-twelfth (1/12th) of the product of (i) the lesser of (a) 10.25% or (b) 150
basis points plus the Prime Rate times (ii) the Aggregate Adjusted Net Capital
Contributions of the Series A Preferred Shares calculated as of the Distribution
record date falling within that period.
SERIES A PREFERRED SHAREHOLDERS shall mean the holders of Series A Preferred
Shares.
SERVICE means the United States Internal Revenue Service.
SHARES means Common Shares and/or Series "A" Preferred Shares of the Trust.
TAX COUNSEL means Landels Ripley & Diamond LLP.
TAX EXEMPT ENTITY means a qualified pension, profit-sharing or other employee
retirement benefit plan, Keogh Plan, bank commingled trust fund for such plans,
an IRA or other similar entity intended to be exempt from Federal income
taxation.
TAXABLE INCOME means for any year the taxable income of the Trust for such year
(excluding any net income derived either from property held primarily for sale
to customers or from foreclosure property) subject to certain adjustments
provided in Section 857 of the Code.
"UBTI" means "unrelated trade or business taxable income" as defined in Section
512 of the Code.
UNAFFILIATED DIRECTOR means a director who is independent of the Trust, any
Manager of the Trust (including CAAI) and CAAI and its Affiliated Persons.
78
<PAGE> 83
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CAPITAL ALLIANCE INCOME TRUST, A REAL ESTATE INVESTMENT TRUST
Independent Auditors' Report F-2
Balance Sheets F-3
Statements of Operations F-5
Statements of Changes in Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-9
<PAGE> 84
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
FINANCIAL STATEMENTS
with
Independent Auditors' Report
For the nine months ended September 30, 1995 (unaudited),
the four months ended April 30, 1996 (unaudited),
the five months ended September 30, 1996 (unaudited)
and the three-year period ended December 31, 1995
80
<PAGE> 85
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Capital Alliance Income Trust,
A Real Estate Investment Trust:
We have audited the accompanying combined balance sheets of Capital Alliance
Income Trust, A Real Estate Investment Trust (see note 1 to the financial
statements) as of December 31, 1995 and 1994, and the related combined
statements of income, corpus and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Trusts' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Capital Alliance
Income Trust, A Real Estate Investment Trust as of December 31, 1995 and 1994,
and the combined results of their operations and their combined cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
NOVOGRADAC & COMPANY LLP
San Francisco, California
June 25, 1996
F-2
81
<PAGE> 86
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
BALANCE SHEETS
<TABLE>
<CAPTION>
Combined (Predecessors) (Successor)
-------------------------------------------- ----------
December 31, April 30, September 30,
1994 1995 1996 1996
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $1,221,965 $ 829,978 $1,037,271 $ 268,433
Restricted cash 19,542 94,222 186,268 54,270
Accounts receivable 16,596 73,758 117,491 166,137
Subscriptions receivable -- 265,511 -- --
Investments -- 200,000 200,000 200,000
Mortgage notes receivable (net of loan loss
reserve of $12,000, 32,000 and 65,000
at December 31, 1995, April 30, 1996
and September 30, 1996, respectively) 1,889,485 4,790,070 4,725,895 4,987,408
Real estate owned -- -- -- 1,065,193
Organization costs (net of accumulated
amortization of $1,727, $2,287, $2,474
and $2,474 at December 31, 1994 and
1995, April 30, 1996 and September 30,
1996, respectively) 1,073 513 326 9,564
Deferred offering costs -- -- -- 89,536
---------- ---------- ---------- ----------
Total assets $3,148,661 $6,254,052 $6,267,251 $6,840,541
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
82
<PAGE> 87
<TABLE>
<CAPTION>
Combined (Predecessors) (Successor)
December 31, April 30, September 30,
1994 1995 1996 1996
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdback $ 19,555 $ 94,282 $ 186,327 $ 54,274
Due to affiliates 36,186 51,471 61,947 67,660
Other liabilities -- 18,269 15,042 50,094
Mortgage payable on Real Estate Owned -- -- -- 725,267
---------- ---------- ---------- ----------
Total liabilities 55,741 164,022 263,316 897,295
---------- ---------- ---------- ----------
Stockholders' Equity
Class "A" shares, $9.50 stated value, unlimited
shares of beneficial interest authorized:
CAIT I: 325,392.02, 344,435.18, 343,843.07
shares issued and outstanding at
December 31, 1994 and 1995 and April 30,
1996, respectively 3,090,923 3,271,833 3,231,587 --
CAIT II: 297,496.95, 293,094.26
shares issued and outstanding at December 31,
1995 and April 30, 1996, respectively -- 2,815,240 2,770,351 --
Class "B" shares, no par value, three
shares of beneficial interest authorized:
CAIT I: one share issued and outstanding
at December 31, 1994 and 1995 and April
30, 1996, respectively 997 997 997 --
CAIT II: one share issued and outstanding at
at December 31, 1994 and 1995 and April
30, 1996, respectively 1,000 1,960 1,000 --
Preferred stock, $.01 par value (liquidation
value $9.50 per share) 675,000 shares
authorized; none issued and outstanding at
December 31, 1995 and April 30, 1996 and
641,283 shares issued and outstanding at
September 30, 1996 -- -- -- 6,413
Common stock, $.01 par value
2 million shares authorized; none issued
and outstanding at December 31, 1995,
April 30, 1996 and at September 30, 1996 -- -- -- --
Additional paid in capital (Preferred stock) -- -- -- 5,936,833
---------- ---------- ---------- ----------
Total stockholders' equity 3,092,920 6,090,030 6,003,935 5,943,246
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $3,148,661 $6,254,052 $6,267,251 $6,840,541
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
83
<PAGE> 88
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Combined (Predecessors) (Successor)
Nine Months Four Months Five Months
Combined (Predecessors) Ended Ended Ended
Years Ended December 31, September 30, April 30, September 30,
1993 1994 1995 1995 1996 1996
-------- -------- -------- -------- -------- --------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Interest income $ 99,124 $156,210 $463,133 $338,279 $242,136 $280,111
Other income 1,458 797 26,230 15,369 31,573 20,624
-------- -------- -------- -------- -------- --------
Total revenues 100,582 157,007 489,363 353,648 273,709 300,735
-------- -------- -------- -------- -------- --------
EXPENSES
Loan servicing fees and
other expenses to
related party 8,578 17,676 43,165 30,227 20,107 25,190
Loan loss reserve -- -- 12,000 5,000 20,000 33,000
General and administrative 8,282 10,265 19,784 6,892 6,959 17,861
-------- -------- -------- -------- -------- --------
Total expenses 16,860 27,941 74,949 42,119 47,066 76,051
-------- -------- -------- -------- -------- --------
NET INCOME BEFORE GAIN ON
SALE OF FORECLOSED ASSETS 83,722 129,066 414,414 311,529 226,643 224,684
GAIN ON FORECLOSED ASSETS -- 17,990 -- -- -- --
-------- -------- -------- -------- -------- --------
NET INCOME $ 83,722 $147,056 $414,414 $311,529 $226,643 $224,684
======== ======== ======== ======== ======== ========
NET INCOME PER PREFERRED
SHARE
0.934 0.823 0.938 0.777 0.350 0.350
WEIGHTED AVERAGE
PREFERRED SHARES
OUTSTANDING 89,644 178,689 442,026 400,739 646,971 641,804
PRO-FORMA NET INCOME
PER COMMON SHARE
(note 3) -- -- -- -- -- --
</TABLE>
See accompanying notes to financial statements.
F-5
84
<PAGE> 89
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Combined (Predecessors) (Successor)
------------------------------------------------- -----------
Class A Class B Preferred
Shares Amount Amount Amount (1) Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1, 1993 71,515.20 $ 679,087 $ 997 $ -- $ 680,084
Corpus contributed 40,902.74 388,576 -- -- 388,576
Organizational and offering costs (2,782.13) (26,424) -- -- (26,424)
Dividends -- (82,885) (837) -- (83,722)
Net income, 1993 -- 82,885 837 -- 83,722
----------- ----------- ----------- ----------- -----------
BALANCE AS OF DECEMBER 31, 1993 109,635.81 1,041,239 997 -- 1,042,236
Corpus contributed 231,764.95 2,201,767 1,000 -- 2,202,767
Organizational and offering costs (16,008.74) (152,083) -- -- (152,083)
Dividends -- (145,585) (1,471) -- (147,056)
Net income, 1994 -- 145,585 1,471 -- 147,056
----------- ----------- ----------- ----------- -----------
BALANCE AS OF DECEMBER 31, 1994 325,392.02 3,090,923 1,997 -- 3,092,920
Corpus contributed 337,578.84 3,206,999 -- -- 3,206,999
Organizational and offering costs (21,038.73) (199,868) -- -- (199,868)
Dividends -- (421,251) (3,184) -- (424,435)
Net income, 1995 -- 410,270 4,144 -- 414,414
----------- ----------- ----------- ----------- -----------
BALANCE AS OF DECEMBER 31, 1995 641,932.13 6,087,073 2,957 -- 6,090,030
Redemption of class "A" shares (4,402.69) (44,825) -- -- (44,825)
Organizational and offering costs (592.11) (5,625) -- -- (5,625)
Dividends -- (259,061) (3,227) -- (262,288)
Net income, four months ended
April 30, 1996 (Unaudited) -- 224,376 2,267 -- 226,643
----------- ----------- ----------- ----------- -----------
BALANCE AS OF APRIL 30, 1996 636,937.33 6,001,938 1,997 -- 6,003,935
Exchange to preferred shares (636,937.33) (6,001,938) (1,997) 6,003,935 --
Redemption of shares -- -- -- (23,250) (23,250)
Organizational and offering costs -- -- -- (2,314) (2,314)
Dividends -- -- -- (259,809) (259,809)
Net income, five months ended
September 30, 1996 (Unaudited) -- -- -- 224,684 224,684
----------- ----------- ----------- ----------- -----------
BALANCE AS OF SEPTEMBER 30, 1996
(Unaudited) -- $ -- $ -- $ 5,943,246 $ 5,943,246
=========== =========== =========== =========== ===========
</TABLE>
(1) Preferred amount includes additional paid in capital of $5,936,833.
See accompanying notes to financial statements.
F-6
85
<PAGE> 90
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Combined (Predecessors)
-------------------------------------------------
Years Ended December 31,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 83,722 $ 147,056 $ 414,414
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization 560 560 560
Increase in accounts receivable (5,333) (6,753) (57,162)
Increase in loan loss reserve -- -- 12,000
Increase in due to affiliates 26,892 7,167 15,285
Increase (decrease) in other liabilities (14,333) (250) 18,269
----------- ----------- -----------
Net cash provided by operating activities 91,508 147,780 403,366
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash -- (19,542) 922
Increase (decrease) in mortgage note holdback -- 19,555 (875)
Increase in investments -- -- (200,000)
Investments in mortgage loans (434,500) (1,569,985) (3,740,011)
Repayments of mortgage loans 338,000 301,000 827,426
----------- ----------- -----------
Net cash used in investing activities (96,500) (1,268,972) (3,112,538)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 388,576 2,202,767 2,941,488
Organizational and offering costs (26,424) (152,083) (199,868)
Dividends paid (83,722) (147,056) (424,435)
----------- ----------- -----------
Net cash provided by financing activities 278,430 1,903,628 2,317,185
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 273,438 782,436 (391,987)
CASH AT BEGINNING OF YEAR 166,091 439,529 1,221,965
----------- ----------- -----------
CASH AT END OF YEAR $ 439,529 $ 1,221,965 $ 829,978
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ 45,304 $ --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase in subscriptions receivable $ -- $ -- $ (265,511)
</TABLE>
See accompanying notes to financial statements.
F-7
86
<PAGE> 91
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Combined (Predecessors) (Successor)
------------------------------ -----------
Nine Months Four Months Five Months
Ended Ended Ended
September 30, April 30, September 30,
1995 1996 1996
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 311,529 $ 226,643 $ 224,684
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization -- 187 --
Increase in accounts receivable (52,807) (43,733) (146,120)
Increase in loan loss reserve 5,000 20,000 33,000
Increase (decrease) in due to affiliates (11,356) 10,476 5,713
Increase (decrease) in other liabilities 11,606 (3,227) 35,052
----------- ----------- -----------
Net cash provided by operating activities 263,972 210,346 152,329
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash 17,399 (92,046) 131,998
Increase (decrease) in mortgage note holdback (17,352) 92,045 (132,053)
Other investments (200,000) -- --
Investments in mortgage loans (2,601,810) (1,022,056) (1,747,144)
Repayments of mortgage loans 723,562 1,066,231 1,210,179
Increase in organization costs -- -- (9,238)
----------- ----------- -----------
Net cash provided by (used in) investing
activities (2,078,201) 44,174 (546,258)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 2,109,653 -- --
Redemption of shares -- (44,825) (23,250)
Deferred offering costs -- -- (89,536)
Decrease in subscription receivable -- 265,511 --
Organizational and offering costs (128,767) (5,625) (2,314)
Dividends paid (283,285) (262,288) (259,809)
----------- ----------- -----------
Net cash provided by (used in) financing
activities 1,697,601 (47,227) (374,909)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (116,628) 207,293 (768,838)
CASH AT BEGINNING OF PERIOD 1,221,965 829,978 1,037,271
----------- ----------- -----------
CASH AT END OF PERIOD $ 1,105,337 $ 1,037,271 $ 268,433
=========== =========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure $ -- $ -- $ 1,065,193
Increase in mortgage payable $ -- $ -- $ 725,267
</TABLE>
See accompanying notes to financial statements.
F-8
87
<PAGE> 92
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1995 (unaudited),
the four months ended April 30, 1996 (unaudited),
the five months ended September 30, 1996 (unaudited)
and the three-year period ended December 31, 1995
1. Organization
Capital Alliance Income Trust, A Real Estate Investment Trust, a Delaware
corporation (the "Trust") was formed December 12, 1995 to facilitate the
consolidation of the mortgage investment operations of Capital Alliance
Income Trust I, a Delaware business trust, and Capital Alliance Income
Trust II, a Delaware business trust, (collectively referred to as the
"Predecessors", individually referred to as "CAIT I" and "CAIT II",
respectively). CAIT I and CAIT II were both privately-held mortgage
investment trusts which invested primarily in loans secured by deeds of
trust on one-to-four unit residential properties. The Manager, Capital
Alliance Advisors, Inc. (the "Manager") originates, services and sells the
Trust's loans.
The effective date of the combination (the "Combination") was midnight
April 30, 1996, pursuant to the issuance of a permit by the California
Commissioner of Corporations which qualified the issuance of the preferred
shares of the Trust issued in the consolidation. Under the Agreement and
Plan of Reorganization and Consolidation among the Trust and the
Predecessors, each outstanding share of the Predecessors' Class "A" shares
was converted into one (1) share of the Trust's Series A preferred stock
(the "Preferred Shares") and the outstanding shares of the Predecessors'
Class "B" shares were converted into Preferred Shares equal to one percent
(1%) of the total number of Preferred Shares to be issued in the
consolidation of the Predecessors.
At midnight April 30, 1996, the Trust (Successor) exchanged 347,715 and
296,015 Preferred Shares to CAIT I and CAIT II, respectively, for all whole
shares of the Predecessors' outstanding Class "A" and Class "B" shares.
Thereafter, all assets and liabilities of the Predecessors were transferred
to the Trust.
2. Basis of presentation
The operations of the Predecessors have been combined with the Trust due to
the common management and directors.
Since CAIT II was formed in late 1994 and did not begin operations until
1995, the historical operations of CAIT II are reflected in the combined
financial statements beginning in 1995.
The Combination has been accounted for as a purchase. CAIT I is considered
the acquiring entity and CAIT II the acquired entity. The purchase price
represents the net assets of CAIT II as of April 30, 1996 approximating
$2,771,351. This amount is the carrying amount of assets less liabilities
which approximates fair market value. Therefore, there is no excess
purchase price or Goodwill. The fair market value of net assets acquired
was used to determine the purchase price since the value of the Trust's
Preferred Shares exchanged is not readily determinable and the fair value
of net assets acquired is more clearly evident.
F-9
88
<PAGE> 93
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1995 (unaudited),
the four months ended April 30, 1996 (unaudited),
the five months ended September 30, 1996 (unaudited)
and the three-year period ended December 31, 1995
2. Basis of presentation (continued)
The interim unaudited financial statements as of and for the four months
ended April 30, 1996 represent the combined financial statements of the
Predecessors (immediately prior to the merger).
The interim unaudited financial statements as of and for the five months
ended September 30, 1996 represent the financial statements as of the Trust
(Successor) after the merger described in Note 1.
The following summarized pro-forma information assumes the acquisition had
occurred on January 1, 1994.
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------
CAIT I CAIT II Total 1994 (1)
------------ ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Total revenues $ 377,363 $ 112,000 $ 489,363 $ 157,007
Net income 318,397 96,017 414,414 147,056
0.938 0.823
Net income per share
</TABLE>
(1) no operations of CAIT II in 1994
3. Summary of significant accounting policies
Cash and cash equivalents. Cash and cash equivalents include cash and
liquid investments with an original maturity of three months or less. The
Trust deposits cash in financial institutions insured by the Federal
Deposit Insurance Corporation. At times, the Trust's account balances may
exceed the insured limits.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Investment. The Trust holds an interest in 99% of the outstanding Class B
preferred shares (20,000 shares of non voting stock) of beneficial interest
of Sierra Capital Acceptance ("Investee"), a Delaware business trust which
originates and sells residential mortgage loans. Sierra Capital Services,
Inc., a related party, owns 99% of the Class A common shares of beneficial
interest of the Investee and maintains voting control. The Class B
preferred shares are entitled to a 15% return per annum. All net profits
and losses are allocated to the Class A common shares. Class A common
shareholders are required to contribute or loan additional capital to cover
any operating losses. The Investee is taxed as a partnership. The Trust
accounts for its investment under the equity method and accrues earnings as
described above (15% return) in accordance with the Investee's trust
agreement.
F-10
89
<PAGE> 94
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1995 (unaudited),
the four months ended April 30, 1996 (unaudited),
the five months ended September 30, 1996 (unaudited)
and the three-year period ended December 31, 1995
3. Summary of significant accounting policies (continued)
Unaudited interim financial statements. The unaudited interim statements
reflect all adjustments necessary to make a fair presentation of the
results for the interim periods presented. All such adjustments are of a
normal recurring nature.
Income taxes. The Trust intends at all times to qualify as a real estate
investment trust ("REIT"), for federal income tax purposes, under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended and
applicable Treasury Regulations. Therefore, the Trust generally will not be
subject to federal corporate income taxes on its net income that is
currently distributed to stockholders. To qualify as a REIT, the Trust must
elect to be so treated and must meet on a continuing basis certain
requirements relating to the Trust's organization, sources of income,
nature of assets, and distribution of income to shareholders. In addition,
the Trust must maintain certain records and request certain information
from its stockholders designed to disclose actual ownership of its stock.
In order to maintain its qualification as a REIT, the Trust must annually
satisfy three gross income requirements. First, at least 75% of the Trust's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from: (i) rents from
real property; (ii) interest on obligations secured by mortgages on real
property or on interests in real property; (iii) gain from the sale or
other disposition or real property (including interests in real property
and interests in mortgages on real property) not held primarily for sale to
customers in the ordinary course of business; (iv) dividends or other
distributions on, and gain (other than gain from prohibited transactions)
from the sale or other disposition of, transferable shares in other real
estate investment trusts; (v) abatements and refunds of taxes on real
property; (vi) income and gain derived from foreclosure property; (vii)
amounts received or accrued as consideration for entering into agreements
(a) to make loans secured by mortgages on real property or on interests in
real property or (b) to purchase or lease real property (including
interests in real property and interests in mortgages on real property);
(viii) gain from the sale or other disposition of a real estate asset which
is not a prohibited transaction; and (ix) qualified temporary investment
income. Second, at least 95% of the Trust's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived
from the sources described above with respect to the 75% gross income test,
dividends, interest, and gain from the sale or disposition of stock or
securities (or from any combination of the foregoing). Third, short-term
gain from the sale or other disposition of stock or securities, gain from
prohibited transactions, and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions
and sales or other disposition of foreclosure property) must represent less
than 30% of the Trust's gross income (including gross income from
prohibited transactions) for each taxable year.
F-11
90
<PAGE> 95
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1995 (unaudited),
the four months ended April 30, 1996 (unaudited),
the five months ended September 30, 1996 (unaudited)
and the three-year period ended December 31, 1995
3. Summary of significant accounting policies (continued)
The Trust, at the close of each quarter of its taxable year, must also
satisfy three tests relating to the nature of its assets. First, at least
75% of the value of the Trust's total assets must be represented by
Qualified REIT Assets, cash, cash items and government securities.
Qualified REIT Assets include (i) interests in real property and interests
in mortgages on real property, (ii) interests in REMICS, and (iii) stock or
debt instruments held for not more than one year purchased with the
proceeds of a stock offering or long-term (at least five years) public debt
offering of the Trust. Second, not more than 25% of the Trust's total
assets may be represented by securities other than those in the 75% asset
class. Third, of the investments included in the 25% asset class, the value
of any one issuer's securities owned by the Trust may not exceed 5% of the
value of the Trust's total assets and the Trust may not own more than 10%
of any one issuer's outstanding voting securities. The Trust believes that
substantially all of its assets, are Qualified REIT Assets.
The Trust, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its stockholders in an
amount at least equal to (i) the sum of (a) 95% of the Trust's "REIT
taxable income" (computed without regard to the dividends paid deduction
and by excluding the Trust's net capital gain) and (b) 95% of the net
income (after tax), if any, from foreclosure property, minus (ii) the sum
of certain items of noncash income.
If the Trust fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Trust will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which
the Trust fails to qualify will not be deductible by the Trust nor will
they be required to be made. Unless entitled to relief under specific
statutory provisions, the Trust will also be disqualified from taxation as
a REIT for the four taxable years following the year during which
qualification was lost.
Based on the Trust's plans to qualify as a REIT, no provision for federal
income taxes has been made in the financial statements.
Loan loss reserve. Management reviews its loan loss provision periodically
and the Trust maintains an allowance for losses on mortgage notes
receivable at an amount that management believes is sufficient to protect
against losses in the loan portfolio given the combined loan to value of
the Trust's loan portfolio based on independent appraisals at the date of
the loan. Accounts receivable deemed uncollectible are written off or
reserved. The Trust does not accrue interest income on impaired loans (note
5).
F-12
91
<PAGE> 96
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1995 (unaudited),
the four months ended April 30, 1996 (unaudited),
the five months ended September 30, 1996 (unaudited)
and the three-year period ended December 31, 1995
3. Summary of significant accounting policies (continued)
Fair value of financial instruments. For cash and cash equivalents, the
carrying amount is a reasonable estimate of fair value. For mortgage note
receivables, fair value is estimated by discounting the future cash flows
using the current interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. It was determined that the difference between the carrying
amount and the fair value of the mortgage notes receivable is immaterial.
Organizational and offering costs. Organization costs are capitalized and
amortized on a straight-line basis over five years. Organizational and
offering costs are recorded as a reduction of class "A" corpus and are
neither deductible nor amortizable.
Real estate owned. Real estate owned results from foreclosure of loans and
is carried at the lower of fair value of the property minus estimated costs
to sell or carrying amount. At time of foreclosure, the foreclosed asset is
recorded at fair value. At this time senior debt to which the asset is
subject is reported as mortgage payable.
Pro-forma earnings per share. Historically the Preferred Shares received
100% of the net income. The Preferred Shares will receive an annual
preferred allocation of income and distribution. After meeting this
preference, 100% of any additional income earned from the proceeds of the
offering will be allocated to the Common Shares until the distribution
matches the Preferred Shares (see note 9). No common shares were
outstanding in prior periods.
4. Mortgage note holdback
Pursuant to mortgage loan agreements between the Trust and its borrowers, a
portion of the loan proceeds are held by the Trust in segregated accounts
to be disbursed only to borrowers upon completion of certain improvements
on the secured property. As of December 31, 1994 and 1995, April 30, 1996
and September 30, 1996, mortgage note holdbacks from the consummation of
mortgage loans made amounted to $19,555, $94,282, $186,327 and $54,274,
respectively.
5. Mortgage notes receivable
Mortgage notes receivable represent transactions with customers in which
the Trust has invested in home equity loans on residential real estate. The
Trust is subject to the risks inherent in finance lending including the
risk of borrower default and bankruptcy.
Mortgage notes receivable are stated at the principal outstanding. Interest
on the mortgages is due monthly and principal is due as a balloon payment
at loan maturity. The notes are secured by deeds of trust on residential
properties located primarily in California which results in a concentration
of
92
<PAGE> 97
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1995 (unaudited),
the four months ended April 30, 1996 (unaudited),
the five months ended September 30, 1996 (unaudited)
and the three-year period ended December 31, 1995
5. Mortgage notes receivable (continued)
credit risk. The value of the loan portfolio may be affected by changes in
the economy or other conditions of the geographical area. A portion of the
notes are secured by a second position on the underlying properties and
loans are non-conforming loans to B/C-credit borrowers.
The Trust measures impairment based on the fair value of the related
collateral since all loans subject to this measurement are collateral
dependent. There was no investment in impaired loans for all periods
presented.
A reconciliation of mortgage notes receivable is as follows:
<TABLE>
<CAPTION>
(Successor)
December 31, September 30, April 30, September 30,
------------------------------------ ------------- ----------- -------------
1993 1994 1995 1995 1996 1996
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $524,000 $ 620,500 $1,889,485 $1,889,485 $4,790,070 $4,725,895
Additions during period:
New mortgage loans 434,500 1,569,985 3,740,011 2,601,810 1,022,056 1,747,144
Deductions during period:
Collections of principal 338,000 -- 827,426 723,562 1,066,231 1,210,179
Foreclosures -- 301,000 -- -- -- 242,452
Loan loss reserve -- -- 12,000 5,000 20,000 33,000
----------
Balance at close of period $620,500 $1,889,485 $4,790,070 $3,762,733 $4,725,895 $4,987,408
======== ========== ========== ========== ========== ==========
</TABLE>
Activity in the loan loss reserve was as follows:
<TABLE>
<CAPTION>
December 31, September 30, April 30, September 30,
--------------------------------------------- ------- ------- -------
1993 1994 1995 1995 1996 1996
------------ ------------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $ -- $ -- $ -- $ -- $12,000 $32,000
Loan loss reserve -- -- 12,000 5,000 20,000 33,000
------------ ------------ ------- ------- ------- -------
Balance, end of period $ -- $ -- $12,000 $ 5,000 $32,000 $65,000
============ ============ ======= ======= ======= =======
</TABLE>
The total amount of delinquent principal as well as delinquent interest at
December 31, 1994, December 31, 1995, April 30, 1996 and September 30, 1996
are as follows:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995 April 30, 1996 September 30, 1996
- -------------------------- ------------------------------ ------------------------------ ------------------------------
(unaudited) (unaudited)
Principal Interest Principal Interest Principal Interest Principal Interest
- --------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<C> <C> <C> <C> <C> <C> <C> <C>
$ 97,000 $ 1,613 $ 327,000 $ 7,630 $ 738,990 $ 53,054 $ 1,063,538 $ 79,657
========= ============= ============= ============= ============= ============= ============= =============
</TABLE>
93
<PAGE> 98
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1995 (unaudited),
the four months ended April 30, 1996 (unaudited),
the five months ended September 30, 1996 (unaudited)
and the three-year period ended December 31, 1995
5. Mortgage notes receivable (continued)
Delinquent loans are loans where the monthly interest payments are 90 or
more days overdue.
The amounts of delinquent loans stratified by period of delinquency as of
December 31, 1995, April 30, 1996 and September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Period of Delinquency December 31, 1995 April 30, 1996 September 30, 1996
------------------ ------------------- ---------------------
(unaudited) (unaudited)
Principal Interest Principal Interest Principal Interest
<S> <C> <C> <C> <C> <C> <C>
90-180 days delinquent $210,000 $6,930 $599,990 $28,890 $ 392,000 $16,161
181-270 days delinquent 117,000 700 42,000 3,430 288,000 23,164
greater than 270 days delinquent -- -- 97,000 20,734 383,538 40,332
-------- ------ -------- ------- ---------- -------
Total $327,000 $7,630 $738,990 $53,054 $1,063,538 $79,657
======== ====== ======== ======= ========== =======
</TABLE>
94
<PAGE> 99
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1995 (unaudited),
the four months ended April 30, 1996 (unaudited),
the five months ended September 30, 1996 (unaudited)
and the three-year period ended December 31, 1995
5. Mortgage notes receivable (continued)
The Trust's mortgage notes receivable all relate to conventional loans
secured by deeds of trust on single family residences. The following is a
summary of the Trust's mortgage notes receivable at December 31, 1995.
<TABLE>
<CAPTION>
Periodic Face amount
Description Interest rate Final maturity date payment terms Prior liens of mortgages
----------- ------------- ------------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Individual loans greater than
$144,062 (3% of total mortgage
notes receivable of $4,802,070): 12.75% 03/01/96 $3,185 Second $300,000
13.75% 01/01/98 $2,658 First $232,000
12.50% 11/01/97 $2,281 Second $219,000
13.00% 04/01/97 $1,844 First $180,000
13.00% 07/01/96 $1,820 First $168,000
13.00% 11/01/98 $1,767 First $163,093
13.00% 02/01/96 $1,625 First $150,000
Loans from $100,000-$144,062 12.5% to 13.5% 6 to 36 months --- --- ---
Loans from $50,000-$99,999 12.5% to 16.0% 12 to 61 months --- --- ---
Loans from $20,000-$49,999 12.75% to 16.0% 9 to 60 months --- --- ---
Total Mortgage Notes Receivable at December 31, 1995 before loan loss reserve
Loan loss reserve
Total Mortgage Notes Receivable at December 31, 1995, net of loan loss reserve of $12,000
</TABLE>
<TABLE>
<CAPTION>
Principal amount
of loans subject
to delinquent
Carrying amount of principal or
mortgages interest
------------------ -----------------
<S> <C> <C>
Individual loans greater than
$144,062 (3% of total mortgage
notes receivable of $4,802,070): $ 299,793 $ 0
$ 232,000 $ 0
$ 219,000 $ 0
$ 170,200 $ 0
$ 168,000 $168,000
$ 163,093 $ 0
$ 150,000 $ 0
Loans from $100,000-$144,062 $ 849,100 $ 0
Loans from $50,000-$99,999 $ 2,018,900 $97,000
Loans from $20,000-$49,999 $ 531,984 $62,000
-------------
Total Mortgage Notes Receivable at December 31, 1995 before loan loss reserve $ 4,802,070
Loan loss reserve (12,000)
-------------
Total Mortgage Notes Receivable at December 31, 1995, net of loan loss reserve of $12,000 $ 4,790,070
=============
</TABLE>
95
<PAGE> 100
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1995 (unaudited),
the four months ended April 30, 1996 (unaudited),
the five months ended September 30, 1996 (unaudited)
and the three-year period ended December 31, 1995
6. Accounts receivable
Accounts receivable consists of accrued interest on mortgage notes
receivable and other amounts due from borrowers.
7. Subscriptions receivable
As of December 31, 1995, shareholders owed the Trust $265,511 for capital
contributions to the Trust. Prior to the issuance of the Predecessors'
December 31, 1995 audited financial statements, amounts outstanding as of
December 31, 1995 were collected.
8. Related party transactions
The Manager, which is owned by several of the Trustees and their
affiliates, contracted with the Trust to provide loan administration
services, and receives fees for these services from the Trust. There are no
loan origination costs paid by the Trust, since such costs are paid to the
Manager by borrowers. The Manager is also entitled to reimbursement for
clerical and administrative services at cost based on relative utilization
of facilities and personnel. The Manager bears all expenses of services for
which it is separately compensated. The Predecessors paid loan servicing
fees of $8,578, $17,676 and $43,165 during 1993, 1994 and 1995,
respectively, to the Manager. During the nine months ended September 30,
1995, the Predecessors paid $30,227 to the Manager. During the four months
ended April 30, 1996, the Predecessors paid $20,107 to the Manager.
During the five months ended September 30, 1996, the Trust paid $25,190 to
the Manager. The loan servicing fee equals 0.083% of the monthly
(1% annually) value of all assets less liabilities and reserves.
The Trust and the Predecessors also paid the Manager $0.20 per share for
organizing the business and marketing their securities. During 1993, 1994
and 1995, the Predecessors paid $7,758, $44,173 and $65,552, respectively,
to the Manager. For the nine months ended September 30, 1995, the
Predecessors paid $42,383 to the Manager. For the four months ended April
30, 1996, the Predecessors paid $5,625 to the Manager. For the five months
ended September 30, 1996, the Trust paid $2,314 to the Manager.
In addition, the Predecessors paid a sales commission of $0.50 per share to
participating broker/dealers, one of which is an affiliate of the Manager.
Total sales commissions paid to the affiliated broker/dealer was $20,369,
$40,835 and $134,316 during 1993, 1994 and 1995, respectively. For the nine
months ended September 30, 1995, the Predecessors paid $86,384 of sales
commissions to the affiliated broker/dealer. For the four months ended
April 30, 1996 the Predecessors paid no sales commissions to the affiliated
broker/dealer. For the five months ended September 30, 1996, the Trust paid
no sales commissions to the affiliated broker/dealer. Most of the sales
commissions was reallowed to third party securities broker/dealers or
registered representatives.
96
<PAGE> 101
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1995 (unaudited),
the four months ended April 30, 1996 (unaudited),
the five months ended September 30, 1996 (unaudited)
and the three-year period ended December 31, 1995
9. Preferred Stock
As noted in note 1, as of midnight April 30, 1996 the former Class A and B
shareholders exchanged all of their shares for the Trust's Preferred
Shares.
CAIT I and CAIT II (Predecessors)
CAIT I and CAIT II's net profits and distributable cash flow were allocated
1% to the class "B" shareholder and 99% to the class "A" shareholders until
the class "A" shareholders received a non-cumulative, non-compounded return
per annum on their net capital contribution equal to the lesser of 13% of
their net capital contribution or the prime rate plus 450 base points for
CAIT I and 350 base points for CAIT II. Thereafter, net profits and
distributable cash flow were allocated 50% to the class "B" shareholder and
50% to the class "A" shareholders. CAIT I and CAIT II's net losses were
allocated 1% to the class "B" shareholder and 99% to the class "A"
shareholders.
PREFERRED STOCK
As of April 30, 1996 (prior to the merger) there are no Preferred Shares
issued and outstanding and no common shares outstanding. The Predecessor's
authorized capital stock consists of 2,000,000 common shares and 675,000
preferred shares.
As of September 30, 1996 there are 641,283 Preferred Shares issued and
outstanding and no common shares outstanding. The Trust's authorized
capital stock consists of 2,000,000 common shares and 675,000 preferred
shares.
Each Preferred and Common Share is generally entitled to one vote on all
matters to be voted upon by the shareholders. The shareholders will have
all the voting rights provided by Delaware General Corporation Law to
shareholders of Delaware corporations and will be entitled to vote upon:
(1) the election or removal of Directors; and (2) the ratification of the
Directors approval, renewal or termination of the Management Agreement. As
permitted by Delaware law, the Trust's Certificate of Incorporation allows
the Directors to amend the Trust's bylaws without shareholder consent.
Holders of the Preferred Shares will be entitled to the Current
Distribution Preference with respect to such Current Distributions as are
declared each year equal to an amount equal to an annualized return on the
Net Capital Contribution of Preferred Shares at each dividend record date
during such year (or, if the Directors do not set a record date, as of the
first day of the month) equal to 10.25% or 150 basis points over the Prime
Rate (determined on a not less than quarterly basis). The Current
Distribution Preference on the Preferred Shares is not cumulative.
After declaration for a given quarter of Current Distributions to the
holders of Preferred Shares in the amount of the Current Distribution
Preference, no further distributions may be declared on the
97
<PAGE> 102
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1995 (unaudited),
the four months ended April 30, 1996 (unaudited),
the five months ended September 30, 1996 (unaudited)
and the three-year period ended December 31, 1995
9. Preferred Stock (continued)
Preferred Shares for the subject quarter until the total dollar amount of
current Distributions declared on the Common Shares as a class for that
quarter equals (the "Matching Distribution") the Current Distribution
Preference for each Preferred Share for such quarter. Any Current
Distributions associated with a payment date that are declared after the
Trustees have declared Current Distributions on Common shares in the amount
of the Matching Distribution (i.e. excess Distributions) generally will be
allocated such that the amount of Current Distributions per share paid to
or declared to the holders of the Preferred Shares and Common Shares for
the subject quarter are equal.
Holders of Preferred Shares are entitled to receive all Liquidating
Distributions until the Aggregate Adjusted Net Capital Contribution of all
Preferred Shares has been reduced to zero. Thereafter, holders of Common
Shares are entitled to all Liquidation Distributions until the Aggregate
Adjusted Net Capital Contributions of all Common Shares has been reduced to
zero. Any subsequent Liquidating Distributions will be allocated among the
holders of the Common Shares and Preferred Shares pro rata.
The Preferred Shares are redeemable by a Shareholder at the option of the
Board of Directors annually on June 30 provided a request for such
redemption by a Preferred Shareholder is received by May 15 of such year.
The Board of Directors may arbitrarily and in their sole discretion deny,
delay, postpone or consent to any or all request for redemption. The
Redemption Amount to be paid for redemption of such Preferred Shares shall
be the Adjusted Net Capital Contribution plus accrued but unpaid dividends
attributable to the Preferred Shares which the Preferred Shareholder
request be redeemed, divided by the Aggregate Net Capital Contributions
plus accrued but unpaid Dividends attributable to all Preferred Shares
outstanding, multiplied by the Net Asset Value of the Trust attributable to
the Preferred Shares which shall be that percentage of the Trust's Net
Asset Value that the Aggregate Adjusted Net Capital Contributions of all
Preferred Shares bears to the Adjusted Net Capital Contributions of all
Shares outstanding. A contingent liquidation charge will be paid to the
Trust in connection with each redemption as follows: 3% of Redemption
Amount in 1996, 2% of Redemption Amount in 1997, 1% of Redemption Amount in
1998; and none thereafter.
98
<PAGE> 103
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1995 (unaudited),
the four months ended April 30, 1996 (unaudited),
the five months ended September 30, 1996 (unaudited)
and the three-year period ended December 31, 1995
10. Mortgage Notes Payable
As of September 30, 1996 the Trust held four mortgage notes payable
totaling $725,267. These notes are payable to various banks and secured by
first deeds of trust on various residential properties, with interest
accruing at 7.0% to 8.95% per annum and principal and interest payments of
$639 to $3,123 due monthly. The maturity dates vary and the balances
outstanding are due, with any unpaid interest, on January 1, 2010 through
June 1, 2025.
Minimum annual principal payments are as follows:
<TABLE>
<S> <C>
1996 $ 146,652
1997 578,615
-------------
Total $ 725,267
=============
</TABLE>
The payments are based on management's assumption that the loans will be
paid in full upon the sale of the foreclosed properties in 1997.
99
<PAGE> 104
- --------------------------------------------------------------------------------
HOW TO INVEST
- --------------------------------------------------------------------------------
FOR ANY ACCOUNT.
1. COMPLETE ALL ITEMS ON THE ORDER FROM. This includes the number of Shares
being ordered, their total price, the manner in which the Shares are
being ordered, their total price, the manner in which the Shares are to
be registered, the shareholder's social security or taxpayer
identification number and all selling agent information.
2. TAX IDENTIFICATION CERTIFICATION. You must provide your social security
number to avoid backup withholding. Under the provisions of Section
3406(a)(1)(C) of the Internal Revenue Code, payers are required to
withhold 20% from all taxable interest, dividend and certain other
payments on accounts which do not reflect a certified social security
number or tax identification number. This is referred to as "backup"
withholding. "Backup" withholding is not an additional tax or penalty.
Any amount withheld form your account may be used as a credit against
your federal income tax.
To certify that the tax identification number is correct and that you are
not subject to any withholding under Section 3406(a)(1)(C), you must
provide your name and address and sign and date the "Taxpayer
Identification Number" section of the order form.
3. Write a check or money order for the amount of the subscription, made
payable to "Golden Gate Bank, Escrow Agent" and send the Order Form and
check to:
Capital Alliance Income Trust Ltd.
50 California Street, Suite 2020
San Francisco, CA 94111
4. If there are any questions regarding the Order Form, please contact your
representative or Brookstreet Securities Corporation's Corporate Finance
Department at (800) 268-2578 Ext. 104.
<PAGE> 105
CAPITAL ALLIANCE INCOME TRUST LTD For Office Use Only
ORDER FORM ___________________
Social Security No.
INVESTOR INFORMATION of investor whose name
Name(s) and addresses will be registered is printed on the
exactly as printed or typed below adjacent line
Name(s)_______________________________________ ______ - ___ - ______
_______________________________________ or TAX IDENTIFICATION NUMBER
_______________________________________ _____ - ___________________
Address_______________________________________ / / U.S. Citizen
City ___________________State____ Zip_________ / / U.S. Citizen residing
outside the U.S.
Phone Number ______-_____-_____ NY Residents
see other side. / / Resident alien citizen of
_________________________
/ / Non-Resident alien
citizen of ______________
Under the penalties of perjury, I certify that the information provided in this
section is true, correct and complete and that I am not subject to back-up
withholding under the provisions of Section 3406(a)(1)(C) of the Internal
Revenue Code.
X Date: X Date: ___________
______________________________________________________________________________
INVESTMENT: Check only one
1 / / INITIAL PURCHASE / / ADDITIONAL PURCHASE Please make check payable to
Golden Gate Bank, Escrow
2. TOTAL PURCHASE PRICE: Agent and send completed
No. of Common Shares order Form and check to:
__________ x $8.00/share = $________________
(Minimum $800)
Capital Alliance Income
Trust Ltd
3. / / Broker authorized to transfer c/o Golden Gate Bank
funds directly from Undersigned's 344 Pine Street
Brokerage Account. San Francisco, CA 94104
- --------------------------------------------------------------------------------
FORM OF OWNERSHIP: Mark only one box.
/ / Individual
/ / Joint Tenants with Right of Survivorship
/ / Community Property
/ / Tenants in Common
/ / Tenants by the Entirety
/ / Other
/ / Custodian
/ / Estate
/ / Trust
/ / Corporation
/ / Custodian under UGMA, State of _________________________________
or under UTMA, State of ________________________________________
TAX EXEMPT PLANS: Orders for the following registrations must be signed
by the custodian/trustee
/ / IRA/SEP (Note for use with Sierra's Prototype)
/ / Qualified Retirement Plan (Keogh)
/ / Pension/Profit Sharing Plan
/ / 401(K)
/ / Other __________________________
ADDITIONAL MAILING ADDRESS: If you are investing through a Trust Company and
want duplicate copies of investor mailings sent to you, please fill in below.
Name(s)______________________________________________
______________________________________________
______________________________________________
Address______________________________________________
______________________________________________
City ______________________ State ___ Zip _________
OPTIONAL CHECK ADDRESS: If you would like your distribution
check mailed to an address other than shown above, please
complete this section.
Payee ______________________________________________
Acct. No.____________________________________________
Address______________________________________________
______________________________________________
City ______________________ State ___ Zip _________
- ----------------------------------------------------------------------------
BROKER/DEALER INFORMATION: The Registered Representative must sign below to
complete order.
Broker/Dealer Firm ________________________________________________________
Registered Representative _________________________________________________
Representative Address ____________________________________________________
City ____________________________________ State ____ Zip __________________
Phone Number _____-_____-______
X
-------------------------------------------
Representative's Signature (Order cannot be
accepted without signature.)
<PAGE> 106
THE FOLLOWING TEXT APPEARS ON THE REVERSE SIDE OF ORDER FORM
- --------------------------------------------------------------------------------
SPECIAL NEW YORK REQUIREMENTS
- --------------------------------------------------------------------------------
Each purchaser of Shares in New York must sign the following statement:
I hereby certify that I have either (i) a minimum annual gross income
of $35,000 and a net worth at fair market value of at least $25,000 (exclusive
of equity in home, home furnishings and personal automobiles), or (ii) a net
worth of $100,000 (similarly defined). I understand that the minimum investment
in the State of New York will be 315 Shares ($2,520) (125 Shares ($1,000) for
IRA Investments).
- -----------------------------------------
- -----------------------------------------
Signature of Investor(s)
<PAGE> 107
EXHIBIT 10.4 For Office Use Only
- ----------------------------- --------------------------
CAPITAL ALLIANCE INCOME TRUST LTD ORDER FORM
INVESTOR INFORMATION Social Security No.
Name(s) and addresses will be registered of investor whose name is printed
exactly as printed or typed below on the adjacent line
Name(s) - -
- ---------------------------------------- -------- ------ -------------
- ---------------------------------------- or TAX IDENTIFICATION NUMBER
- ---------------------------------------- -
Address ----- -----------------
- ---------------------------------------- [ ] U.S. Citizen
City State Zip [ ] U.S. Citizen
- ------------------------------------------------ residing outside the U.S.
residing outside the U.S. [ ] Resident alien citizen
of ___________________
Phone Number - - NY Residents see other side.
-------- -------- ----------------
[ ] Non-Resident alien citizen of
---------------------------------
Under the penalties of perjury, I certify that the information provided in this
section is true, correct and complete and that I am not subject to back-up
withholding under the provisions of Section 3406(a)(1)(C) of the Internal
Revenue Code.
X Date: X Date:
- --------------------------------------------------------------------------------
INVESTMENT: Check only one
1. [ ] INITIAL PURCHASE [ ] ADDITIONAL PURCHASE
Please make check payable to Golden Gate Bank, Escrow Agent and send
completed order Form and check to:
Capital Alliance Income Trust Ltd.
c/o Golden Gate Bank
344 Pine Street
San Francisco, CA 94104
2. TOTAL PURCHASE PRICE:
No. of Common Shares x $8.00/ share = $
------------ ------------
(Minimum $800)
3. [ ] Broker authorized to transfer funds directly from Undersigned's
Brokerage Account.
- --------------------------------------------------------------------------------
FORM OF OWNERSHIP: Mark only one box.
[ ] Individual [ ] Custodian
[ ] Joint Tenants with Right [ ] Estate
of Survivorship
[ ] Trust
[ ] Community Property [ ] Corporation
[ ] Tenants in Common [ ] Custodian under UGMA, State of
[ ] Tenants by the Entirety ------------------------------
or under UTMA, State of
[ ] Other
----------------- ------------------------------
TAX EXEMPT PLANS: Orders for the following registrations must be signed by the
custodian/trustee
[ ] IRA/SEP (Not for use with Sierra's Prototype)
[ ] Qualified Retirement Plan (Keogh)
[ ] Pension/Profit Sharing Plan
[ ] 401(K)
[ ] Other
--------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL MAILING ADDRESS: If you are investing through a Trust Company and
want duplicate copies of investor mailings sent to you, please fill in below.
Name(s)
--------------------------------------------
--------------------------------------------
Address
--------------------------------------------
--------------------------------------------
City State Zip
--------------------------------------------
OPTIONAL CHECK ADDRESS: If you would like your distribution check mailed to an
address other than shown above, please complete this section.
Payee
--------------------------------------------
Acct. No.
--------------------------------------------
Address
--------------------------------------------
--------------------------------------------
City State Zip
--------------------------------------------
- --------------------------------------------------------------------------------
BROKER/DEALER INFORMATION: The Registered Representative must sign below to
complete order.
Broker/Dealer Firm
-------------------------------------------------------------
Registered Representative
------------------------------------------------------
Representative Address
---------------------------------------------------------
City State
-------------------------------------------------------- ----- -----
Zip
--------------------
Phone Number - -
--------------------------- X
---------------------------------
Representative's Signature
(Order cannot be accepted
without signature.)
<PAGE> 108
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 30. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
Amount
To Be
Paid
----
<S> <C>
SEC registration fee................................................. $3,890.90
NASD filing fee...................................................... 2,240.00
AMEX Listing fee..................................................... 15,000.00
Printing and engraving expenses...................................... 12,682.00
Legal fees and expenses.............................................. 30,000.00
Accounting fees and expenses......................................... 10,000.00
Blue Sky fees and expenses........................................... NONE
Transfer agent and custodian fees.................................... 5,000.00
Miscellaneous........................................................ 25,000.00
</TABLE>
Item 31. Sales to Special Parties
Not Applicable
Item 32. Recent Sales of Unregistered Securities
From October 31, 1991 through December 31, 1995, Capital Alliance Income
Trust I, ("CAIT I"), a Delaware business trust and a predecessor to the Trust,
issued 344,435 Class "A" Shares in return for capital contributions totaling $
3,444,350 and one Class "B" share for a capital contribution of $1,000.
From December 1, 1994 through December 31, 1995, Capital Alliance Income
Trust II, ("CAIT II"), a Delaware business trust and a predecessor to the Trust,
issued 297,497 Class "A" Shares in return for capital contributions totaling $
2,974,970 and one Class "B" share for a capital contribution of $1,000.
The aforementioned transactions are exempt from registration under
Section 4(2) of the Securities Act of 1933 and Regulation D issued thereunder as
transactions not involving a public offering.
On April 30, 1996 the Trust issued 643,730 Series "A" Preferred Shares to
the Class "A" and Class "B" shareholders of CAIT I and CAIT II in exchange for
all of the unissued and outstanding Class "A" and Class "B" shares of CAIT I and
CAIT II pursuant to an Agreement and Plan of Reorganization and Consolidation
which was consummated pursuant to a Permit of the Commissioner of Corporations
of the State of California after a hearing on the fairness of the terms of said
transaction pursuant to Sections 25142 of the California Corporations Code.
The aforesaid transaction was exempt from registration under Section
3(a)(10) of the Securities Act of 1933.
Item 33. Indemnification of Directors and Officers and Agents
Under applicable Delaware Law, a corporation shall have the power to
indemnify any person who was or is a party
102
<PAGE> 109
or is threatened to be made a party to any threatened, pending or contemplated
action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or was serving at the request of such
person. Such person may be indemnified against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement provided that such person
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
A corporation shall also have the power to indemnify any person under
the same circumstances above, except that no indemnification shall be made with
respect to any claim to which such person shall be adjudged liable to the
corporation unless and only to the extent that the court in which such action or
suit was brought finds, that despite liability, such person is reasonably
entitled to such indemnification.
The indemnification provisions of the Certificate of Incorporation of
the Trust provides any person who is threatened to be made a party to any action
or proceeding, by reason of being an officer or director, regardless of whether
such action is based on an alleged action or inaction, shall be, subject to any
agreement, indemnified to the fullest extent of Delaware Law including all
expenses and cost associated therewith.
However, the Trust shall not indemnify any officer or director, if
among other things, such liability was based upon acts or omissions involving
intentional misconduct or a knowing and culpable violation of law.
Accordingly, the Trust shall indemnify any officer or director to the
extent permissible under Delaware Law. However, under the Certificate of
Incorporation of the Trust, the Trust will not indemnify any person based upon
acts or omissions involving intentional misconduct or a knowing and culpable
violation of the law. This standard is more restrictive than that under Delaware
Law.
In addition, the Registrant has entered into Indemnity Agreements
(Exhibit 10.2 hereto) with its officers and Directors. The Underwriting
Agreement (Exhibit 1.1) also provides for indemnification by the Underwriters of
the Trust, its Directors and officers and persons who control the Trust within
the meaning of Section 15 of the Securities Act with respect to certain
liabilities, including liabilities arising under the Securities Act.
Item 34. Treatment of Proceeds From Stock Being Registered
Not Applicable
Item 35. Financial Statements and Exhibits
(a) Financial Statements included in the Prospectus are:
1. Financial Statement of Capital Alliance Income Trust, A Real
Estate Investment Trust with Independent Auditor's Report for
the nine months ended September 30, 1995 and 1996 (unaudited)
and the three-year period ended December 31, 1995.
All schedules have been omitted because they are either not applicable,
not required or the information required has been disclosed in the financial
statements and related notes or otherwise in the Prospectus.
103
<PAGE> 110
(b) Exhibits
Exhibit
No.
---
1.1 Form of Managing Dealer Agreement (including form of Selected Dealer
Agreement).
3.1 Charter Certificate of Incorporation and Amendment No. 1(1)
3.2 Bylaws of the Registrant(1)
4.1 Form of Stock Certificate of Common Shares of the Registrant(2)
4.2 Form of Shareholder's Warrant Agreement
[Deleted]
4.4 Form of Common Warrant Certificate
5.1 Opinion of Ashby & Geddes
8.1 Opinion of Landels, Ripley & Diamond LLP
10.1 Form of Management Agreement between the Registrant and Capital
Alliance Advisors, Inc.(1)
10.2 Form of Indemnity Agreement between the Registrant and its Directors
and Officers(1)
10.3 Form of Loan Origination and Loan Servicing Agreement between the
Registrant and Capital Alliance Advisors, Inc.(1)
[Deleted]
23.1 Consent of Landels, Ripley & Diamond LLP
23.2 Consent of Novogradac & Company LLP
23.3 Consent of Ashby & Geddes
24.1 Power of Attorney of Thomas B. Swartz(1)
24.2 Power of Attorney of Dennis R. Konczal(1)
24.3 Power of Attorney of Douglas A. Thompson(1)
24.4 Power of Attorney of Stanley C. Brooks(1)
24.5 Power of Attorney of Harvey Blomberg(1)
24.6 Power of Attorney of Jeannette Hagey(1)
27.3 Revised Financial Data Schedule-Capital Alliance Income Trust, A
Real Estate Investment Trust
28.1 Impound and Escrow Agreement
Item 36. Undertakings
THE UNDERSIGNED REGISTRANT HEREBY UNDERTAKES:
1. To provide to the Managing Dealer at the closing specified in the
Managing Dealer Agreement certificates, if any, in such denominations and
registered in such names as required by the Managing Dealer to permit prompt
delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or other wise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer of controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
- ----------
(1) These exhibits were previously contained in Registrant's Registration
Statement filed on Form S-11 with the Commission on September 9, 1996,
and are incorporated by reference herein.
(2) These exhibits were previously contained in Amendment No. 1 to the
Registrant's Registration Statement filed on Form S-11 with the
Commission on January 15,1997, and are incorporated by
reference herein.
104
<PAGE> 111
2. (a) That, for purposes of determining any liability under the
Securities Act, the information omitted from the form of Prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
3. (a) To file any prospectus required by Section 10(a)(3) as
post-effective amendments to the registration statement.
(b) That for purpose of determining any liability under the Act
each post-effective amendment may be deemed a new registration statement
relating to the securities offered therein and the offering of such securities
at that time may be deemed to be the initial bona fide offering thereof.
(c) That all post-effective amendments will comply with the
applicable forms, rules and regulations of the Commission in effect at the time
such post-effective amendments are filed.
(d) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain at the termination
of the offering.
4. (a) To file a sticker supplement pursuant to Rule 424(c) under the
Act during this distribution period describing each Loan not identified in the
Prospectus at such time as there arises a reasonable probability that such Loan
will be acquired and to consolidate all such stickers into a post-effective
amendment filed at least once every three (3) months, with the information
contained in such amendment provided simultaneously to the existing
Shareholders.
(b) To file, after the end of the distribution period, a current
report on form 8-K containing the financial statements and any additional
information required by Rule 3-14 of Regulation S-X, to reflect each commitment
(i.e., the signing of a binding purchase agreement) made after the end of the
distribution period involving the use of ten percent (10%) or more (cumulative
basis) of the net proceeds of the offering and to provide the information
contained in such report to the Shareholders at least once each quarter after
the distribution period of the offering has ended.
105
<PAGE> 112
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Francisco, State of California, on the 18th day
of April 1997.
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
By: /s/ Thomas B. Swartz
-------------------------------------
Thomas B. Swartz
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas B. Swartz Chairman of the Board and April 18, 1997
- ----------------------- Chief Executive Officer
Thomas B. Swartz (Principal Executive Officer)
/s/ Jeannette Hagey Chief Financial Officer (Principal April 18, 1997
- ----------------------- Financial and Accounting Officer)
Jeannette Hagey
/s/ Douglas A. Thompson Director and Executive Vice-President April 18, 1997
- -----------------------
Douglas A. Thompson
/s/ Dennis R. Konczal Director and President April 18, 1997
- -----------------------
Dennis R. Konczal
/s/ Stanley C. Brooks Director April 18, 1997
- -----------------------
Stanley C. Brooks
/s/ Harvey Blomberg Director April 18, 1997
- -----------------------
Harvey Blomberg
106
<PAGE> 1
EXHIBIT 1.1
MANAGING DEALER AGREEMENT
__________________, 1997
BROOKSTREET SECURITIES CORPORATION
2316 Campus Drive
Suite 210
Irvine, California 92715
Ladies/Gentlemen:
Capital Alliance Income Trust Ltd., A Real Estate Investment Trust, a
Delaware corporation (the "Company"), desires to increase the capital of the
Company in the maximum amount of $12,000,000 by the sale of (a) 1,500,000
shares of Common Stock, $0.01 par value per share, of the Company ("Shares")
and up to 150,000 detachable Warrants ("Shareholder Warrant") to purchase an
additional share of Common Stock (a "Shareholder Warrant Share") at an exercise
price of $5.60 per share to be issued in the ratio of one Shareholder Warrant
for each ten Shares purchased. The Shares and Shareholder Warrants are
hereinafter sometimes referred to collectively as the "Securities." The
purchasers therefor, each of whom will execute an order form substantially
similar to the form attached as an exhibit to the Prospectus hereinafter
referred to (the "Order"), and by which all such purchasers will be bound, will
become security holders ("Security holders") of the Company.
SECTION 1. Representations and Warranties of the Company.
(a) The Company represents, warrants, and agrees with you for your
benefit that:
(i) The Company has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement on Form S-11
(No. 333-11625) for the registration of the Securities under the Securities Act
of 1933, as amended (the "Act"), and will file such amendments thereto as may
be required. The Company will not, at any time after the date hereof and
before the Registration Statement becomes effective, file any other amendment
to the Registration Statement or any other amended prospectus to which you
shall object. The Registration Statement as amended and the prospectus on file
with the Commission at the time the Registration Statement becomes effective
are hereinafter called the "Registration Statement" and the "Prospectus",
respectively, except that (1) if the Company files a post-effective amendment
to the Registration Statement then the term "Registration Statement" shall,
from and after the declaration of the effectiveness of such post-effective
amendment, refer to the Registration Statement as amended by such
post-effective amendment thereto, and the term "Prospectus" shall refer to the
amended prospectus then on file with the Commission and (2) if the Company
files a prospectus pursuant to Rule 424(b) of the rules and regulations of the
Commission under the Act (the "Regulations") that shall differ from the
prospectus on file at the time the Registration Statement or any post-effective
amendment thereto shall have become effective, the term "Prospectus" shall
refer to the prospectus filed pursuant to Rule 424(b) from and after the date
on which it shall have been filed. The Company will not at any time after the
Registration Statement initially becomes effective file any amendment to the
Registration Statement or any amendment or supplement to the Prospectus without
your prior consent or to which you shall object.
107
<PAGE> 2
(ii) Upon payment of the consideration therefor specified
in the Order, the Shares, and upon exercise of the Warrants by the holders
thereof, Shareholder's Warrant and the Warrant Shares, will constitute valid
Shares of the Company duly issued, fully paid and nonassessable.
(iii) The Company is duly organized and validly existing as
a corporation under the laws of the State of Delaware with full power and
authority to invest in, acquire, hold, maintain, sell, transfer and otherwise
use the mortgage loans referred to or to be referred to in the Prospectus (the
"Mortgages"), or to own and manage its interest in any partnership or joint
venture holding title to particular Mortgages and to conduct the business in
which it is engaged or proposes to engage as described in the Prospectus. The
Company is duly qualified and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any properties or the
character of its operations require such qualification.
(iv) At the time the Registration Statement initially
becomes effective and at the time that any post-effective amendment thereto
becomes effective, the Registration Statement and the Prospectus, and at the
Initial Closing Date and each Subsequent Closing Date, if any, referred to
below, the Prospectus, will comply with the provisions of the Act and the
Regulations; at the time the Registration Statement initially becomes effective
and at the time that any post-effective amendment thereto becomes effective,
the Registration Statement will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and at the time the Registration
Statement initially becomes effective and at the time that any post-effective
amendment thereto becomes effective; and at each Closing Date, including the
Initial Closing Date, the Prospectus will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the representations and
warranties in this paragraph shall not apply to statements in or omissions from
the Registration Statement or the Prospectus made in reliance upon and in
conformity with written information furnished to the Company by you expressly
for use in the Registration Statement or the Prospectus.
(v) The accountants who certified the financial
statements filed with the Commission as part of the Registration Statement are,
with respect to the Company, independent public accountants as required by the
Act and the Regulations.
(vi) The financial statements filed as a part of the
Registration Statement and those included in the Prospectus present fairly the
financial position of the Company as at the dates indicated; and said financial
statements have been prepared in conformity with generally accepted accounting
principles (as described therein).
(vii) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, except as may otherwise be
stated in or contemplated by the Registration Statement and Prospectus: (A)
there has not been any material adverse change in the condition, financial or
otherwise, of the Company, or any of the Mortgages, or in the earnings, affairs
or business prospects of the Company, whether or not arising in the ordinary
course of business, and (B) there have not been any material transactions
entered into by the Company, or relating to any of the Mortgages, other than
those in the ordinary course of business.
(viii) This Managing Dealer Agreement has been duly and
validly authorized, executed and delivered by or on behalf of the Company and
constitutes the valid, binding and enforceable agreement of the Company.
(ix) The execution and delivery of this Managing Dealer
Agreement and the incurrence of the obligations herein and therein set forth
and the consummation of the transactions contemplated herein and therein and in
the Prospectus will not constitute a breach of, or default under, any
instrument by which the Company or any of the Mortgages is bound or, to the
best of its knowledge, information and belief, any order, rule or regulation
applicable to the Company or the Mortgages or of any court or any governmental
body or administrative agency having jurisdiction over the Company or any of
the Mortgages.
(x) The Company has good and marketable title to the
Mortgages and other investments owned by it.
108
<PAGE> 3
(xi) To the best of its knowledge, information and belief,
there is not pending, threatened or contemplated any action, suit or proceeding
before or by any court or other governmental body to which the Company is or
may be a party, or to which any of the Mortgages, or any property or assets of
the Company is or may be subject which is not referred to in the Prospectus and
which might result in any material adverse change in the condition (financial
or otherwise), business or prospects of the Company or might materially
adversely affect any of the Mortgages or other properties or assets of the
Company.
(xii) Neither the Company nor any affiliate thereof, has
received, or is entitled to receive, directly or indirectly, any commission,
finder's fee or similar fee from any person other than as described in the
Prospectus in connection with the acquisition, or the commitment for the
acquisition of the Mortgages by the Company.
(xiii) On the date hereof, and at all times through the
Offering Termination Date, referred to below, the Company is not and shall not
be an investment company as that term is defined in the Investment Company Act
of 1940, as amended.
(xiv) Neither the Company nor any affiliate thereof shall
give any information or make any representation in connection with the offering
other than those contained in the Prospectus or such other material as may be
provided or approved by you.
(b) Any certificate signed by the Company and delivered to you for
the purposes of this Agreement shall be deemed a representation and warranty by
the Company to you as to the matters covered thereby.
SECTION 2. Offering and Sale of Securities.
(a) On the basis of the representations, warranties and covenants
herein contained, but subject to the terms and conditions herein set forth, you
are hereby appointed the agent of the Company during the term herein specified
(the "Offering Period") for the purpose of finding purchasers for the
Securities for the account and risk of the Company through a public offering,
and subject to the performance by the Company of all of its obligations to be
performed hereunder and to the completeness and accuracy of all the
representations and warranties contained herein, you hereby accept such agency
and agree on the terms and conditions herein set forth to use your best efforts
during the Offering Period to find purchasers for the Securities at a public
offering price of (i) $8.00 for each Share. Except as provided in Section
2(f) hereof, your agency hereunder, which is coupled with an interest and,
therefore, is not terminable by the Company without your permission, shall
continue until the close of business on such date not later than 24 months
following the effective date of the Offering unless extended by the Company
with your consent. The offering may be terminated at any time by the Company
and you (the close of business of such date being hereinafter referred to as
the "Offering Termination Date").
(b) An Order must be completed by or on behalf of each person
desiring to purchase Securities in the form attached to the Prospectus, and you
shall provide such other information the Company deems reasonably necessary,
and all documents, if any, required under state securities laws. You shall
ascertain that each Order sent in by or on behalf of a prospective purchaser of
Securities has been properly completed and executed. You shall return the
Order together with the customer's check or your check or funds transfer (in
the amount or amounts required by paragraph (a) above) payable to "Golden Gate
Bank as Escrow Agent - Capital Alliance Income Trust", 50 California Street,
Suite 2020, San Francisco, California, 94111 (the "Escrow Holder"). In the
case of on-site supervisory review, your check must be transmitted to the
Escrow Holder by the end of the next business day following receipt of the
purchaser's check and, in the case of off-site supervisory review, the
subscriber's check must be transmitted to your final review office by the end
of the next business day following receipt thereof. Following receipt of the
purchaser's check by your final review office, your check must be transmitted
to the Escrow Holder by the end of the next business day. Upon receipt of an
Order and a check, the Escrow Holder will forward the original Order to the
Company.
You will comply with the requirements of Rule 15c2-4 of the Securities
Exchange Act of 1934, as amended.
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(c) You represent that you are aware of your responsibilities
under the Rules of the National Association of Securities Dealers, Inc. (the
"NASD").
(d) Prior to the Initial Closing Date (as hereinafter defined),
the Company will have no right to obtain such funds from the Escrow Holder.
The right of the Company to receive such funds on the Initial Closing Date is
subject to fulfillment of the conditions specified in Section 6 hereof.
(e) "Minimum Offering" as used herein shall mean that there shall
have occurred, no later than six (6) months from the effective date of the
Offering (unless extended by the Company with the consent of the American Stock
Exchange) (the "Minimum Offering Date") the sale of at least $4,000,000, or the
minimum dollar level of Shares approved by the NASD, of Shares, which shall be
evidenced by notification to you in writing by the Company and the Escrow Holder
that Orders and payments for at least $4,000,000 (or the proceeds of such
minimum level) of Shares shall have been received pursuant to Section 2(b)
above. The Initial Closing Date as used herein shall mean the first full
business day following the date on which the Minimum Offering is achieved or
such day thereafter as shall be mutually agreed upon by you and the Company.
(f) In the event the offering is commenced and the Minimum
Offering is not achieved by the Minimum Offering Date, all funds received from
prospective purchasers (if any) shall be returned in full, with any interest
actually earned thereon and without deduction of any escrow or other fees and
expenses; and your agency and this Managing Dealer Agreement shall terminate
without obligation on your part or on the part of the Company, except as
provided in Section 5 hereof and except that the indemnification or
contribution, as the case may be, provided in Section 7 hereof shall continue
after such termination of this Managing Dealer Agreement.
(g) Subject to fulfillment of the conditions specified in Section
6 hereof, at the Initial Closing Date payment of the purchase price for the
Securities for which you have found purchasers as of said Initial Closing Date,
and delivery, with respect to each purchaser, of a copy of the Order signed by
such purchaser, shall be made to the Company at the office of the Escrow
Holder, or at such other place as shall be agreed between you and the Company.
(h) If at least the Minimum Offering has been achieved but less
than all of the Securities have been purchased at the Initial Closing Date, the
Offering Period shall continue until the earlier to occur of the Offering
Termination Date or the date on which all Securities shall have purchased. At
all times during the Offering Period you shall follow the procedures prescribed
by Section 2(b) hereof. Securities will be issued at closing dates
("Subsequent Closing Dates") occurring after the Initial Closing Date and prior
to the Offering Termination Date as agreed upon by you and the Company.
(i) As consideration for your services and undertakings herein,
your compensation will be paid to you as follows:
(i) If the Minimum Offering is achieved and all
conditions precedent hereunder to the obligations of you and the Company are
satisfied on the Initial Closing Date or any Subsequent Closing Date, as the
case may be, you will be paid a commission of six percent (6%) of the gross
proceeds from the sale of a Security paid for at the applicable Closing Date.
Any other Selected Dealer (as defined below in clause (j)) selling Securities
shall be paid a commission as provided in subparagraphs 2(i)(i) and (j).
(ii) At the Initial Closing Date and any Subsequent
Closing Date, you will be paid a Managing Dealer's accountable expense
allowance equal to one-half of one percent (0.5%) of the gross proceeds from
the sale of Securities (other than Shareholder Warrants and Warrant Shares),
whether arranged by you or a Selected Dealer.
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From such amounts payable in connection with the sale of Shares, the
Managing Dealer will pay all costs and expenses associated with the printing of
the Prospectus and related sales material which expenses are estimated to be
.5%.
(j) Orders may be solicited by one or more dealers either
affiliated with you by reason of direct or indirect ownership or unaffiliated
members of the NASD (including Capital Alliance Investments, Inc.) (the
"Selected Dealers") and sales by Selected Dealers shall be made under a
Selected Dealer Agreement substantially in the form attached hereto as Exhibit
A. Pursuant to any Selected Dealer Agreements, you will re-allow each Selected
Dealer a concession of up to a maximum of six percent (6%) of the gross
proceeds of Securities sold with respect to each Security sold by the Company
pursuant to an Order solicited by such Selected Dealer and may re-allow a
maximum of 100% of that portion of the non-accountable allowance referred to in
subparagraph (i)(iii) of this Section 2 that relates to sales of Securities
solicited by such Selected Dealer, subject to the terms of subparagraph (i) of
this Section 2.
(k) Neither you, the Company, nor any dealer participating in the
offering of the Securities shall, directly or indirectly, pay or award any
finder's fees, commissions or other compensation to any person engaged by a
potential investor for investment advice as an inducement to such advisor to
the purchase of Securities, provided, however, that normal sales commissions
referred to in the Prospectus payable to a registered broker-dealer or other
properly licensed person for selling Securities shall not be prohibited hereby.
(l) You agree that you will not disseminate or publish any
advertisement relating to your solicitation of subscribers for the Securities
(including, without limitation, any advertisement relating to seminars) (i) the
form of which has not been submitted to the NASD by the Company and (ii) that
has not been approved by the Company.
SECTION 3. Covenants of the Company.
The Company covenants with you as follows:
(a) It shall have notified you immediately and confirmed the
notice in writing (i) when the Registration Statement and any amendment thereto
shall have become effective, (ii) of the receipt of any comments from the
Commission with respect to the Registration Statement, (iii) of any request by
the Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectus or for additional information relating thereto,
and (iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any proceedings for that
purpose. The Company will make every reasonable effort to prevent the issuance
by the Commission of any stop order and, if any such stop order shall at any
time be issued, to obtain the lifting thereof at the earliest possible moment.
(b) It will deliver to you, as soon as available, two signed
copies of the Registration Statement as originally filed and of each amendment
thereto and two sets of the exhibits thereto, and will also deliver to you such
number of conformed copies of the Registration Statement as originally filed
and of each amendment thereto (without exhibits) as you shall require for the
purposes contemplated by the Act.
(c) It will deliver to you from time to time, before the
Registration Statement becomes effective, such number of copies of the
Registration Statement as originally filed and any amendments thereto and as
soon as the Registration Statement initially becomes effective and thereafter
from time to time during the period when the Prospectus is required to be
delivered under the Act, such number of copies of the Prospectus (as amended or
supplemented) as you may reasonably request for the purposes contemplated by
the Act or the Regulations.
(d) During the period when the Prospectus is required to be
delivered pursuant to the Act, the Company will comply, so far as it is able
and at its own expense, with all requirements imposed upon it by the Act, as
now and hereafter amended, and by the Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings
in, the Securities during such period in accordance with the provisions herein
and as set forth in the Prospectus.
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(e) If any event relating to or affecting the Company or the
Mortgages Loans shall occur as a result of which it is necessary to amend or
supplement the Prospectus in order to make the Prospectus not misleading in the
light of the circumstances existing at the time it is delivered to a
subscriber, the Company will forthwith prepare and furnish to you, without
expense to you, a reasonable number of copies of an amendment or amendments of,
or a supplement or supplements to, the Prospectus which will amend or
supplement the Prospectus so that as amended or supplemented it will not
contain an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a subscriber,
not misleading. For the purposes of this subsection the Company will furnish
such information with respect to themselves as you may from time to time
reasonably request.
(f) It will make generally available to the Company's security
holders (i.e., the holders of Shares) as soon as practicable, but not later
than 120 days after the close of the period covered thereby, an earnings
statement of the Company (in form complying with the provisions of Section
11(a) of the Act and Rule 158 promulgated thereunder, which need not be
certified by independent public accountants unless required by the Act or the
Regulations) covering the twelve-month period beginning not later than the
first day of the Company's fiscal quarter following the effective date of the
Registration Statement. As used in this subsection, the terms "earnings
statement" and "made generally available to the Company's security holders"
shall have the meanings contained in Rule 158 promulgated under the Act.
(g) It will, so long as any Securities remain outstanding, furnish
directly to you the following:
(i) as soon as practicable after the end of each fiscal
year, one copy of the Company's annual report, including therein the
accountants' report, the balance sheet, the related statements of profit and
loss and cash flows for the Company (which need not be audited), together with
such accountants' comments and notations with respect thereto in such detail as
the Company may customarily receive from such accountants;
(ii) as soon as practicable after the end of each fiscal
quarterly period, one copy of a balance sheet of the Company as at the end of
such period, setting forth in reasonable detail its financial position,
together with related statements of profit and loss and cash flows, none of
which statements need be audited, but shall be certified as correct by the
Chief Financial Officer of the Company;
(iii) copies of any report, application or documents which
the Company shall file with the Commission; and
(iv) as soon as the same shall be sent to holders of
Shares, each communication which shall be sent to the holders of Shares,
including any other annual or interim report of the Company.
(h) It will deliver to you, from time to time, all supplemental
sales material (whether designated solely for broker-dealer use or otherwise)
proposed to be used or delivered by the Company in connection with the offering
of Securities.
SECTION 4. Covenants of Brookstreet Securities Corporation.
You covenant with the Company as follows:
(a) You agree to manage the distribution of the Securities and to
sell the Securities according to all of the terms and conditions of the
Registration Statement, the Rules of the NASD, including Rules 2420, 2730, 2740
and 2750 of the NASD Conduct Rules, all applicable state and federal laws,
including the Securities Act of 1933, as amended, and any and all regulations
related thereto. You agree to develop an acceptable Marketing Plan for the
offering of the Securities, and assign the equivalent of a member and/or
employee to devote a full time effort to all aspects of the marketing of the
Offering of the Securities (together with such support as is reasonably
required), including, but not limited to, developing the Selling Group,
drafting and preparing marketing materials and presentations and any other
marketing functions needed to successfully complete the Offering. You shall not
have any authority to give any information or make any representations in
connection with any offer or sale of the Securities other than as contained in
the Prospectus or as is otherwise expressly authorized in writing by the
Company, provided, however, that you shall use only such sales literature and/or
advertising in connection with the sale of the Securities as shall be approved
by the Company.
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(b) The Securities shall be offered and sold only where the
Securities may be legally offered and sold, and only to such persons in such
states who shall be legally qualified to purchase the Securities. The Company
shall give you written notice at the time of effectiveness of the Registration
Statement of those states in which the offering and sale of the Securities may
be made, and shall amend such notice thereafter as additional states are added.
No Securities shall be offered or sold in any other states.
(c) Neither you nor any person associated with you shall give any
information, written or oral, or make any representation, written or oral, in
connection with the offering other than those contained in the Prospectus or
such other material as may be provided or approved by the Company.
(d) You agree to engage as Selected Dealers only entities
affiliated with you by direct or indirect ownership or entities which are
members of the NASD.
SECTION 5. Payment of Expenses and Fees.
The Company will pay all expenses incident to the performance of the
obligations of the Company under this Managing Dealer Agreement, including (i)
the printing and delivery to you in quantities as hereinabove stated of copies
of the Registration Statement and all amendments thereto and of the Prospectus
and any supplements or amendments thereto; (ii) the printing, execution, filing
and delivery to you in quantities as hereinabove stated of copies of any
supplemental sales material to be used in connection with the offering approved
by the Company and utilized in sales of the Securities directly to the public;
(iii) the listing of the Shares on the NASDAQ-NMS, including filing fees; (iv)
the fees and disbursements of counsel and accountants for the Company; and (v)
the filing fee of the NASD.
Expenses of the Offering: The Trust shall bear all costs and expenses
incident to the registration, issuance and delivery of the Securities,
specifically all expenses and fees incident to preparation and filing of the
registration statement and the amendments thereto, the Trust's counsel fees for
qualification of the offering under state securities laws in such states as may
be designated by you, the fees and reimbursements of counsel and the
accountants for the Trust, the cost of printing the registration statement and
such number of "Red Herring" prospectuses as we may determine to be
appropriate, fees of the Trust's transfer agent and registrar, the filing fee
with the SEC and the National Association of Securities Dealers and all such
cost and fees of listing the Common Stock on AMEX. The Trust shall not be
required to pay or advance you more than $175,000 for the following: 1) due
diligence expense; 2) Managing Dealer's counsel legal fees; 3) printing of the
prospectuses and supplements thereto and other necessary marketing material;
4) $10,000 per month non-accountable expenses provided below which shall be
paid by you; and 5) the $65,000 signing fee. All of your other expenses shall
be borne by you to be reimbursed to you only from the proceeds of the offering
up to a maximum of 3% of the offering proceeds as set forth in sub-subparagraph
(b), below.
The Company will reimburse you from the proceeds of the Offering an
amount equal to 3% of the gross Offering proceeds. In addition to the $65,000
signing fee described below, the Trust agrees to advance the sum of $10,000 per
month for up to eleven (11) months commencing on the date you give your consent
to proceed with the Offering, which consent shall be given within 10 days of
the Trust's receipt of the initial comments of the SEC. Such payment shall not
include payment for general overhead, salaries, supplies or similar expenses of
the Underwriter included in the normal conduct of business. Such amount shall
be considered a reasonable advance against out-of-pocket accountable expenses
actually anticipated to be incurred by the Underwriter, which advance is
reimbursable to the Trust to the extent not actually incurred. Upon conclusion
of the offering the exact amount of the 3% Non-Accountable expense allowance
shall be calculated. To the extent the 3% non- Accountable expense allowance
exceeds $175,000 there shall be deducted from the amount due to you the amount
of the expense reimbursement payment (up to $175,000) previously made or
advanced by the Trust to you pursuant to this sub-paragraph (iii). To the
extent the 3% Non- Accountable expense allowance equals or is less than
$175,000 (resulting
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from gross offering proceeds of approximately $4,835,000 or less) the Trust
shall pay you an amount equal to 3% of the actual gross offering proceeds,
provided that if the aggregate amount advanced by the Trust to you pursuant to
this sub-paragraph (iii) (up to $175,000) exceeds 3% of the gross offering
proceeds, you shall be entitled to retain the entire amount of such previous
advances without refund to the Trust. In the event the offering is canceled
because the Trust elects not to proceed with the Offering for any reason (other
than your failure to adequately perform), the Trust will pay all of your costs
and expenses, including, but not in excess of, (a) the fee of $65,000, $35,000
of which was advanced to you upon the signing of the Letter of Intent dated May
8, 1996 (b) any of the $10,000 monthly payment previously made (c) due diligence
expense including third party reports that have been pre-approved and produced
by such firms as Houlihan Valuation Advisors (d) Managing Dealer's Counsel legal
fees (e) all costs related to the printing of the Prospectuses and other
necessary marketing material (if previously approved by us). In the event the
offering is canceled by you for a reason other than the one set forth in
paragraph 9(b) the Trust's maximum obligation to Brookstreet Securities shall be
limited to the amount (up to $175,000) advanced pursuant to this sub-paragraph.
Such commissions, fees and expense allowances shall be paid or
advanced by the Trust to you by the Escrow Holder out of the funds deposited in
the Escrow Account on the applicable Closing Date. Notwithstanding the
foregoing, if the Minimum Offering is not achieved, you will not receive any of
the foregoing compensation, except for compensation negotiated and paid to you
in connection with a transaction that occurs in lieu of the Minimum Offering as
a result of your efforts, provided that you shall be entitled to reimbursement
for your out-of-pocket accountable expenses actually incurred by you in
connection with the Minimum Offering, if not achieved.
SECTION 6. Conditions of Your Obligations.
Your obligations hereunder are subject to the accuracy of and
compliance with the representations and warranties of the Company, to the
performance by the Company of its obligations hereunder and to the following
further conditions:
(a) The Registration Statement shall initially become effective
not later than 5:30 P.M., Eastern time, on the date hereof, or, with your
consent, at a later time and date not later, however, than 5:30 P.M., Eastern
time, on the date following the date hereof, or at such later time and date as
may be approved by you; and at the Initial Closing Date and no stop order
suspending the effectiveness thereof shall have been issued under the Act or
proceeding therefor initiated or threatened by the Commission and not
rescinded. The Shares shall have been approved for listing on the NASDAQ-NMS
on notice of issuance.
(b) At the Initial Closing Date and each Subsequent Closing Date
you shall receive the opinion of Landels, Ripley & Diamond LLP, as counsel for
the Company, in the form set forth in Exhibit B hereto.
(c) At the Initial Closing Date and each Subsequent Closing Date
you shall receive a certificate signed by the Company to the effect that (i)
the signer has carefully examined the Registration Statement and the Prospectus
and, in the signer's opinion, at the time the Registration Statement initially
became effective and at the Initial Closing Date and each Subsequent Closing
Date, the Registration Statement did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Prospectus did
not contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; (ii) since the
initial effective date of the Registration Statement no event has occurred
which should have been set forth in an amendment of, or supplement to, the
Prospectus but which has not been so set forth; (iii) no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings therefor have been instituted or threatened by the Commission and
not rescinded; (iv) the representations, warranties and agreements contained in
Section l(a) are true and correct in all material respects with the same effect
as though expressly made at the Initial Closing Date and each Subsequent
Closing Date; and (v) since the initial effective date of the Registration
Statement, no material adverse change in circumstance has occurred with regard
to the transactions described in any letters of intent contained in the
Prospectus which should have been set forth in an amendment of, or supplement
to, the Prospectus, but which has not been so set forth, provided, however,
that with respect to clauses (i) and (ii) above, such certificate may exclude
from its coverage any matters relating to you.
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(d) At the time the Registration Statement initially becomes
effective, you shall have received from Novogradac & Company, LLP a letter, in
form and substance satisfactory to you and your counsel, advising that (i) they
are independent public accountants as required by the Act and the published
Regulations, (ii) it is their opinion that the financial statements of the
Company included in the Prospectus, and covered by their opinions therein,
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Regulations relating to financial statements in
registration statements on Form S-11, (iii) based on procedures set forth in
such letter nothing has come to their attention which would indicate that
during the period from April 30, 1996 to a specified date not more than five
business days prior to the date the Registration Statement becomes effective
there has been any change in the equity, capital accounts, or short-term or
long-term indebtedness of the Company or any decrease in net assets as compared
with the amounts shown in the balance sheet as of April 30, 1996, included in
the Registration Statement, except for changes or decreases that the
Registration Statement discloses have occurred or may occur; (iv) they have
carried out certain procedures, as specified in a draft of such letter approved
by you, performed for the purpose of comparing certain financial information
and percentages appearing in the Registration Statement, as specified in such
draft letter, with indicated amounts in the financial statements or accounting
records of the Company and certain of its affiliates and have found such
information and percentages to be in agreement with the relevant accounting and
financial information of the Company and certain of its affiliates.
At the Initial Closing Date and each Subsequent Closing Date, you
shall receive from Novogradac & Company, LLP a letter dated as of the Closing
Date or Subsequent Closing Date to the effect that they reaffirm, as of such
date and as though made at such date, the statements made in the letter
furnished by such accountants pursuant to this subsection (e) of this Section
6, except that the specified date referred to in such subsection will be a date
not more than five days prior to the Initial Closing Date or Subsequent Closing
Date.
(e) At the Initial Closing Date and each Subsequent Closing Date,
Landels Ripley & Diamond LLP shall have been furnished with such additional
information, opinions and documents, including supporting documents relating to
parties described in the Prospectus and certificates signed by such parties
with regard to information relating to them and included in the Prospectus as
they may reasonably require for the purpose of enabling them to pass upon the
sale of the Securities as herein contemplated and related proceedings, in order
to evidence the accuracy or completeness of any of the representations or
warranties or the fulfillment of any of the conditions herein contained; and
all actions taken by the Company in connection with the sale of the Securities
as herein contemplated shall be reasonably satisfactory in form and substance
to you and Stephen C. Ryan & Associates.
(f) If any of the conditions specified in this Section 6 shall not
have been fulfilled when and as required by this Managing Dealer Agreement to
be fulfilled, this Managing Dealer Agreement and all your obligations hereunder
may be canceled by you by notifying the Company of such cancellation in writing
or by facsimile or telegram at any time at or prior to the Initial Closing
Date, or at any time after the Initial Closing Date, all your obligations
hereunder may be canceled or terminated by you by notifying the Company of such
cancellation or termination in writing or by telegram at any time at or prior
to the Offering Termination Date and any such cancellation or termination shall
be without liability of any party to any other party except as otherwise
provided in Section 6.
SECTION 7. Indemnification.
(a) The Company agrees to indemnify and hold harmless you, your
representatives and employees, and each person, if any, who controls you within
the meaning of Section 15 of the Act, you and such person (referred to
collectively as the "Indemnified Parties"), as follows:
(i) against any and all loss, liability, claim, damage
and expense whatsoever arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto) or any omission or alleged omission therefrom of a material
fact required to be stated therein
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or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading or arising out of any
untrue statement or alleged untrue statement of a material fact contained in
the Prospectus (or any amendment or supplement thereto) or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made not misleading unless such untrue statement or omission was made in
reliance upon and in conformity with information furnished to the Company in
writing by you expressly for use in the Registration Statement (or any
amendment thereto) or the Prospectus (or any amendment or supplement thereto);
(ii) against any and all loss, liability, claim, damage
and expense whatsoever arising out of any untrue statement or alleged untrue
statement of a material fact contained in any supplemental sales material
approved by the Company for use by you, or any omission or alleged omission
therefrom of a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made and in conjunction with the Prospectus delivered
therewith, not misleading; provided, however, that with respect to any
indemnification relating to supplemental sales material designated for
broker-dealer use only such indemnification shall be limited to any untrue
statement or alleged untrue statement of a material fact or any omission or
alleged omission of a material fact related to the Company or the offering;
(iii) against any and all loss, liability, claim, damage
and expense whatsoever to the extent of the aggregate amount paid in settlement
of any litigation, commenced or threatened, or of any claim whatsoever based
upon any such untrue statement or omission or any such alleged untrue statement
or omission as provided in subparagraph (a)(i) and (a)(ii) above, if such
settlement is effected with the written consent of the Company; and
(iv) against any and all expense whatsoever reasonably
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under clause (i), (ii) or (iii) above.
The foregoing indemnity agreement is subject to the condition
that, insofar as it relates to any untrue statement, alleged untrue statement,
omission or alleged omission made in the Prospectus or any supplemental sales
material, it shall not inure to the benefit of any of the Indemnified Parties
if you failed to send or give a copy of the Prospectus (as amended or
supplemented, if the Company shall have furnished any amendment or supplement
thereto to you which shall correct such untrue statement or omission which is
the basis of the loss, liability, claim, damage or expense for which
indemnification is sought) to the person asserting any such loss, liability,
claim, damage or expense prior to or together with the written confirmation of
the receipt of the Order for Securities from such person; or if you sell any
Securities and deliver to the person asserting any such loss, liability, claim,
damage or expense a Prospectus containing an alleged untrue statement or
omission which is the basis of the loss, liability, claim, damage or expense
for which indemnification is sought at a time subsequent to having been
notified by the Company that it believes that such Prospectus should be amended
or supplemented.
(b) You agree to indemnify and hold harmless the Company, each of its
representatives and employees, and each person, if any, who controls any such
person, within the meaning of Section 15 of the Act, to the same extent as the
foregoing indemnity from the Company in Section 7(a) but only with respect to
statements or omissions in the Registration Statement (or any amendment
thereto) or the Prospectus (or any amendment or supplement thereto) or relating
to you or your affiliates in the supplemental sales literature distributed to
the public made in reliance upon and in conformity with information furnished
to the Company in writing by you expressly for use in the Registration
Statement (or any amendment thereto) or the Prospectus (or any amendment or
supplement thereto) or the supplemental sales literature distributed to the
public. In case any action shall be brought against the Company based on the
Registration Statement (or any amendment thereto) or the Prospectus (or any
amendment or supplement thereto) or the supplemental sales literature
distributed to the public and in respect of which indemnity may be sought
against you, you shall have the rights and duties given to the Company, and the
Company shall have the rights and duties given to you, by the provisions of
Sections 7(a), 7(b) and 7(c).
(c) In no case shall the Company be liable under this indemnity
agreement with respect to any claim made against any of the Indemnified Parties
unless the Company shall be notified in writing of the nature of the claim
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within a reasonable time after the assertion thereof, but failure so to notify
the Company shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. In no case shall the Company be
liable under this indemnity agreement to the Indemnified Parties for any loss,
liability, claim, damage or expense described in subparagraph 7(a) above if
such loss, liability, claim, damage or expense arose entirely or primarily,
directly or indirectly, from your negligence, misconduct, or fault. For
purposes of the foregoing sentence, an Indemnified Party shall be considered at
fault for purposes of this Managing Dealer Agreement if, without limitation,
such Indemnified Party shall be found to be at fault by any order of any court
having jurisdiction or in any settlement agreement approved by any court having
jurisdiction. The Company shall be entitled to participate at its own expense
in the defense or, if it so elects within a reasonable time after receipt of
such notice, to assume the defense of any suit so brought, which defense shall
be conducted by counsel chosen by it and satisfactory to the Indemnified
Parties, defendant or defendants therein. In the event that the Company elects
to assume the defense of any such suit and retain such counsel, the Indemnified
Parties, defendant or defendants in the suit, shall bear the fees and expenses
of any additional counsel thereafter retained by them. In the event that the
parties to any such action (including impleaded parties) include the Company
and any of the Indemnified Parties and such Indemnified Party or Parties shall
have been advised by counsel chosen by such Indemnified Party or Parties and
satisfactory to the Company that there may be one or more legal defenses
available to such Indemnified Party or Parties which are different from or
additional to those available to the Company, the Company shall not have the
right to assume the defense of such action on behalf of such Indemnified Party
or Parties and will reimburse such Indemnified Party or Parties as aforesaid
for the reasonable fees and expenses of any counsel retained by such
Indemnified Party or Parties, it being understood that the Company shall not,
in connection with any one action or separate but similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys for such Indemnified Party or Parties, which firm
shall be designated in writing by such Indemnified Party or Parties. The
Company agrees to notify you within a reasonable time of the assertion of claim
in connection with the sale of the Shares against it, any of its officers or
directors or any person who controls the Company within the meaning of Section
15 of the Act.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 7 is
for any reason held by a court of competent jurisdiction to be unavailable to
you from the Company or to the Company from you, as the case may be, for any
matters covered by Sections 7(a) or 7(b), the Company and you shall contribute
to the aggregate losses, claims, expenses, damages and liabilities (including
any investigation, legal and other expenses incurred in connection with, and
any amount paid in settlement of, any action, suit or proceeding or any claims
asserted) to which the Company and you may be subject as a result of a matter
referred to in Sections 7(a) or 7(b) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and you
and your affiliates on the other from the offering of the Shares and the
operation of the Company or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Company on the one hand and you and your affiliates
on the other in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and you and your affiliates on the other shall be
deemed to be in the same proportions so that you and your affiliates are
responsible for that portion represented by the percentage that the sales
commission and other compensation from the proceeds of the offering and the
operation of the Company received by you or your affiliates in the aggregate
bears to the aggregate payments made for the purchase of the Shares, and the
Company shall be responsible for the balance. The relative fault of the
Company on the one hand and you and your affiliates on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company on the one
hand or by you and your affiliates on the other and the parties' relative
intent, knowledge and access to information. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this Section
7(d), notify such party or parties from whom contribution may be sought; and
the omission so to notify such party or parties will relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have hereunder as to the particular item for which contribution is then being
sought but not from any other liability which it or they may have to the party
seeking contribution.
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SECTION 8. Representations, Warranties and Agreements to Survive
Delivery.
All representations, warranties and agreements contained in this
Managing Dealer Agreement (including your covenants provided in Section 4
hereof) or contained in certificates of the Company submitted pursuant hereto
shall remain operative and in full force and effect, regardless of any
investigation made by, or on behalf of, you or any person who controls you, or
by or on behalf of the Company and shall survive the Offering Termination Date.
SECTION 9. Effective Date of this Managing Dealer Agreement and
Termination Thereof.
(a) This Managing Dealer Agreement shall become effective (i) at 9:30
A.M., Eastern time, on the day on which the Registration Statement initially
becomes effective or (ii) at the time of the initial public offering by you,
after the Registration Statement initially becomes effective, of the
Securities, whichever shall first occur. The time of the initial public
offering shall mean the time of the release by you, for publication, of the
first newspaper advertisement, which is subsequently published, relating to the
Securities or the time at which the Securities are first generally offered by
you to subscribers by letter or telegram, whichever shall first occur. You or
the Company may prevent this Managing Dealer Agreement from becoming effective
without liability of any party to any other party, except as otherwise provided
in Section 4 by giving the notice indicated below in this Section prior to the
time when this Managing Dealer Agreement would otherwise become effective as
herein provided.
(b) You shall have the right to terminate this Managing Dealer
Agreement by giving the notice indicated below in this Section (A) at any time
at or prior to the Minimum Offering Date or any Subsequent Closing Date if
there shall have been, since the respective dates as of which information is
given in the Registration Statement and the Prospectus, any material adverse
change in the condition of the Company's Mortgages, the Company, financial or
otherwise, or in the earnings, affairs or business prospects of the Mortgages,
the Company, whether or not arising in the ordinary course of business, or (B)
at any time at or prior to the Minimum Subscription Date (i) if there shall
have occurred any new outbreak of hostilities or other national or
international calamity or crisis, or a bankruptcy default with respect to the
debt obligations of, or the institution of proceedings under the Federal
bankruptcy laws by or against, any State of the United States, the effect of
such outbreak, calamity or crisis on the financial markets of the United States
being such as in your judgment would make the offering or delivery of the
Securities impracticable, or (ii) if trading on the New York Stock Exchange
shall have been suspended, or minimum or maximum prices for trading shall have
been fixed, or maximum ranges for prices for securities shall have been
required on such Exchange, or if a banking moratorium shall have been declared
by either Federal or California authorities. If you terminate this Managing
Dealer Agreement as provided in this Section, such termination shall be without
liability of any party to any other party except as otherwise provided in
Section 4.
(c) If you elect to prevent this Managing Dealer Agreement from
becoming effective or to terminate this Managing Dealer Agreement as provided
in this Section 9, the Company shall be notified promptly by you, by telephone
or telegram, confirmed by letter. If the Company elects to prevent this
Managing Dealer Agreement from becoming effective as provided in this Section
9, you shall be notified promptly by the Company by telephone or telegram,
confirmed by letter.
SECTION 10. Post-Effective Amendment.
The Company represents and warrants to you that if as of one year from
the effective date of this Offering (unless extended by the Company with the
consent of the American Stock Exchange) the Minimum Offering has not been
achieved, they will file a post-effective amendment to the Registration
Statement deregistering all of the Shares and if at the Offering Termination
Date subscriptions for all the Shares shall not have been received they will
file a post- effective amendment to the Registration Statement de-registering
the unsold Securities and will terminate any additional offerings of Securities
pursuant to such Registration Statement. In addition, the Company represents
and warrants to you that they will file all reports required by the regulations
with regard to sales of the Shares and use of the proceeds therefrom.
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SECTION 11. Notices and Authority to Act.
All communications hereunder shall be in writing and, if sent to you,
shall be mailed, delivered or telegraphed and confirmed to you at Brookstreet
Securities Corporation, 2361 Campus Drive, Suite 210, Irvine, California,
92612, or, if sent to the Company, shall be delivered or telegraphed and
confirmed at Capital Alliance Income Trust, 50 California Street, Suite 2020,
San Francisco, California, 94111, with a copy to Stephen C. Ryan at Stephen C.
Ryan & Associates, 115 Sansome Street, Suite 400, San Francisco, California,
94104, with a copy to Ronald Warner, Esq. at Arter & Hadden, 700 South Flower
Street, Los Angeles, California, 90071-4101.
SECTION 12. Parties.
This Managing Dealer Agreement shall inure to the benefit of and be
binding upon each of you, the Company and your and the Company's respective
successors, this Managing Dealer Agreement and the conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of the
parties hereto and their respective successors and controlling persons, and for
the benefit of no other person, firm or corporation, except as otherwise
specifically provided herein.
SECTION 13. Applicable Law.
This Managing Dealer Agreement shall be construed in accordance with
the laws of the State of California Arbitration.
If the foregoing is accordance with your understanding of our
agreement, kindly sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement among you and the Company in
accordance with its terms.
Very truly yours,
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
a Delaware corporation
By: ______________________________
Thomas B. Swartz, Chairman
ACCEPTED: Brookstreet Securities Corporation
By: _______________________________________
Stanley C. Brooks, President
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EXHIBIT 4.2
SHAREHOLDER WARRANT AGREEMENT
DATED AS OF ______________, 1997
BETWEEN
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
AND
CAPITAL ALLIANCE ADVISORS, INC.
WARRANTS TO PURCHASE SHARES OF COMMON STOCK
OF
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
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SHAREHOLDER WARRANT AGREEMENT
AGREEMENT made as of ____________, 1997, by and between CAPITAL
ALLIANCE INCOME TRUST LTD., A Real Estate Investment Trust, a Delaware
corporation (herein called the "Trust"), and CAPITAL ALLIANCE ADVISORS, INC. a
California corporation (herein called the "Warrant Agent").
RECITALS
The Trust has determined to issue and deliver warrants in
connection with the Trust's public offering (the "Offering") of a maximum of
1,500,000 shares of the Trust's common stock ("Common Shares"), entitling the
holders thereof to purchase up to an aggregate of 150,000 Common Shares
("Shares"). The Trust desires to provide in this Agreement for the form and
provisions of those warrants (the "Warrants"), the terms upon which they shall
be issued and exercised, and the respective rights and obligations of the Trust,
the Warrant Agent and the registered holders of the Warrants.
All acts and things necessary to make the Warrants, when executed
on behalf of the Trust and countersigned by or on behalf of the Warrant Agent,
as provided in this Agreement, the valid,binding and legal obligation of the
Trust, and to authorize the execution and delivery of this Agreement, have been
done and performed.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:
ARTICLE 1
EXECUTION AND COUNTERSIGNATURE OF WARRANTS
1.1 (a) The Warrants to purchase Common Shares (the "Common
Warrants") shall be in substantially the form of Exhibit A hereto. Each Warrant
shall be signed by, or bear the facsimile signature of the Chairman of the Board
of the Trust and attested by the Secretary or an Assistant Secretary or
Treasurer or Assistant Treasurer of the Trust and shall bear a facsimile of the
Trust's seal. In case any officer whose facsimile signature has been placed upon
any Warrant shall have ceased to be such before such Warrant is issued, it may
be issued with the same effect as if such officer had not ceased to be such at
the date of issuance. No Warrant may be exercised until it has been
countersigned by the Warrant Agent as provided in paragraph (b) below.
(b) The Warrant Agent shall countersign a Warrant only
if:
(i) The Warrant is to be issued in substitution
for one or more previously duly issued and countersigned Warrants, as
hereinafter provided, or
(ii) The Trust instructs the Warrant Agent in
writing to do so.
(c) Unless and until countersigned by the Warrant
Agent pursuant to this Agreement, a Warrant shall be invalid and of no effect.
(d) Notwithstanding the provisions of this Article 1
or any other provision of this Agreement, Warrants will be issued in "unissued
certificate" form unless a shareholder makes a written request at the
commencement of the Warrant exercise period. Uncertificated Warrants will be
accounted for by the Trust's transfer agent in the same manner as Shares of the
Trust in similar form are accounted for.
ARTICLE 2
WARRANT PRICE, DURATION, EXERCISE OF WARRANTS
2.1 WARRANT PRICE. Each Warrant shall, when countersigned by the
Warrant Agent, entitle the registered holder thereof, subject to the provisions
thereof and of this Agreement, to purchase from the Trust the number of Common
Shares stated therein, at a price of $5.60 per Share, subject to adjustment as
provided in Article 3 hereto. The term "Warrant Price"
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as used in this Agreement refers to the price per Share at which Shares may be
purchased pursuant to the Warrants at the time a Warrant is exercised.
2.2 DURATION OF WARRANTS. Warrants may be exercised only (i) on
or after a date (the "Exercise Period Commencement Date") that is the last day
of the twenty-fourth month following the effective date of the Trust's initial
public offering of Shares and (ii) on or before the date that is twenty-four
months after the Exercise Period Commencement Date (the "Expiration Date"). Each
Warrant not exercised on or before the Expiration Date shall become void, and
all rights thereunder and all rights in respect thereof under this Agreement
shall cease on the Expiration Date.
2.3 EXERCISE OF WARRANTS.
(a) A Warrant, when countersigned by the Warrant Agent, may
be exercised in whole or in part on or after the Exercise Period Commencement
Date and up until the Expiration Date (the "Exercise Period"). The registered
holder may exercise the Warrant by surrendering it, at the corporate office of
the Warrant Agent, or at the office of its successor as Warrant Agent, in the
State of California, with the subscription form set forth in the Warrant duly
executed, and by paying the Warrant Price in lawful money of the United States,
so that the Warrant Price for each full Share as to which the Warrant is
exercised and any applicable taxes are paid in full.
(b) As soon as practicable after the exercise of any Warrant
and upon the order of the registered holder of such Warrant, shall issue a
certificate or certificates for the number of full shares to which the holder is
entitled, registered in such name or names as may be directed by him or failing
such order shall be issued in uncertificated form. If such Warrant shall not
have been exercised in full (except with respect to a remaining fraction of a
Share), a new countersigned Warrant shall be issued for the number of Shares as
to which such Warrant shall not have been exercised.
In the event of the exercise of any Warrant in a manner which
leaves the right to purchase a fraction of a Share unexercised, the Trust shall
pay in lieu of such fractional interest, an amount in cash equal to the current
market value of such fractional share, to the nearest one-hundredth of a share
computed on the basis of (i) the last reported sale price of Shares for which
the Warrant is exercised on the date of that exercise on the principal national
securities exchange or system on which those Shares are listed or admitted to
trading, (ii) if the Shares are not so listed or admitted to trading, the
average of the high bid and low asked price on the over-the-counter market on
that date and, (iii) if the foregoing is inapplicable, the value of the Shares
as determined in good faith by the Directors of the Trust (hereinafter referred
to as "Trustees").
(c) All Shares issued upon the exercise of a Warrant shall be
validly issued, fully paid and nonassessable, and the Trust shall pay all taxes
in respect of the issue thereof. The Trust shall not be required, however, to
pay any tax imposed in connection with any transfer involved in the issue of a
certificate for Shares in any name other than that of the registered holder of
the Warrant surrendered in connection with the purchase thereof; and in such
case the Trust shall not be required to issue or deliver any Share certificate
until such tax is paid.
(d) Each person in whose name any such certificate for Shares
is issued shall for all purposes be deemed to have become the holder of record
of such Shares on the date on which the Warrant was delivered to the Warrant
Agent and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate; except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Trust are closed, such person shall be deemed to have become the holder of
such Shares at the close of business on the next succeeding date on which the
stock transfer books are open.
(e) Notwithstanding anything contained in this Section 2.3 or
elsewhere in this Agreement, the Trust, pursuant to Sections 8.5, 8.6 and 8.7 of
its Bylaws, may refuse the exercise of a Warrant if, in the opinion of counsel
for the Trust, the issuance of Shares to the Holder, upon such exercise would
disqualify the Trust as a "real estate investment trust" within the meaning of
the United States Internal Revenue Code as in effect at the time of exercise or
subject Trust property to treatment as "plan assets" under the Employee
Retirement Income Security Act of 1974.
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ARTICLE 3
ADJUSTMENTS
3.1 RECAPITALIZATION OR SUBDIVISION.
(a) If any capital reorganization or reclassification of the
Shares of the Trust, or consolidation or merger of the Trust with another
entity, or the sale or all or substantially all of its assets to another entity,
shall be effected in such a way that holders of Shares shall be entitled to
receive stock, securities, cash or assets with respect to or in exchange for
Shares, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, each Warrant Holder shall have the right
thereafter and until the Expiration Date to exercise his Warrants for the kind
and amount of stock, securities, cash or assets receivable upon such
reorganization, reclassification, consolidation, merger or sale to which the
registered holder of such Warrant would be entitled had such Warrant been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger or sale.
(b) In cast at any time the Trust shall subdivide its
outstanding Shares into a greater number of Shares, the Warrant Price in effect
immediately prior to such subdivision shall thereupon be proportionately reduced
and the number of Shares purchasable increased accordingly. For purposes of this
subparagraph (b), a dividend by the Trust payable in Shares of the Trust shall
be treated as a subdivision of the outstanding Shares. Conversely, in case the
outstanding Shares of the Trust shall be combined into a smaller number of
shares, the Warrant Price in effect immediately prior to such combination shall
be proportionately increased and the number of Shares purchasable decreased
accordingly.
(c) In case at any time the Trust shall take a record of the
holders of Shares for the purpose of entitling them to receive a dividend or
other distribution payable in Shares, then for purposes of this Section 3.1 such
record date shall be deemed to be the date of the issue of the Shares.
3.2 NOTICES OF CHANGES IN WARRANT. Upon any adjustment of the
Warrant Price and the number of Shares issuable on exercise of a Warrant, then,
and in each such case the Trust shall give written notice thereof to the
registered holder of the Warrant(s) at the address of such holder as shown on
the books of the Trust, and to the Warrant Agent, which notice shall state the
Warrant Price resulting from such adjustment and the increase or decrease, if
any, in the number of Shares purchasable at such price upon the exercise of a
Warrant, setting forth in reasonable detail thereof, issue a new Warrant of like
denomination, tenor and date.
3.3 OTHER NOTICES. In case at any time:
(a) The Trust shall declare dividends payable in Shares or
make any liquidating distribution to the registered holders of its Shares;
(b) The Trust shall offer any additional Shares for
subscription pro rata to the registered holders of its Shares;
(c) There shall be any capital reorganization,
reclassification of the Shares, consolidations or merger of the trust with, or
sale of all or substantially all of its assets to another entity; or
(d) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Trust, then, in any one or more of such cases,
the Trust shall give written notice to the registered holders of the Warrants at
the address of such holders as shown on the books of the Trust of the date on
which (i) the books of the Trust shall close or a record or registered holders
of Shares shall be taken for such liquidating distribution or subscription
rights, or (ii) such reorganization, reclassification, consolidation, merger,
refinancing, sale, dissolution liquidation, or winding up shall take place, as
the case may be. Such notice shall also specify the date as of which the holders
of Shares of record shall participate in such liquidating distribution or
subscription rights, or shall be entitled to exchange their Shares for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding up, as the case may be. Such notice shall be given and published at
least 20 days prior to the action in question and not less than 20 days prior to
the record date or the date on which the Trust's transfer books are closed in
respect thereto. Failure to give such notice, or any defect therein, shall not
affect the legality or validity of any of the matters set forth in this Section
3.3.
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3.4 FORM OF WARRANT. The form of Warrant need not be changes
because of any change pursuant to this Article 3, and Warrants issued after such
change may state the same Warrant Price and the same number of Shares as is
stated in the Warrants initially issued pursuant to this Agreement. However, the
Trust may at any time in its soled discretion make any change in the form of
Warrant that the Trust may deem appropriate and that does not affect the
substance thereof; and any Warrant thereafter issued or countersigned, whether
in exchange or substitution for an outstanding Warrant or otherwise, may be in
the form as so changed.
ARTICLE 4
OTHER PROVISIONS RELATING TO RIGHTS
OF REGISTERED HOLDERS OF WARRANTS
4.1 NO RIGHTS AS SHAREHOLDER CONFERRED BY WARRANTS. A Warrant
does not entitle the holder thereof to any of the rights of a Shareholder of the
Trust.
4.2 LOST, STOLEN, MUTILATED OR DESTROYED WARRANTS. If any Warrant
is lost, stolen, mutilated, or destroyed, the Trust and the Warrant Agent may,
upon such terms as to indemnify or otherwise as they may, in their discretion,
impose upon the registered holder thereof (which shall, in the case of a
mutilated Warrant, include the surrender thereof), issue a new Warrant of like
denomination, tenor, and date as the Warrant so lost, stolen, mutilated or
destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Trust, whether or not the allegedly lost, stolen, mutilated,
or destroyed Warrant shall be at any time enforceable by anyone.
4.3 RESERVATION OF SHARES. The Trust shall at all time keep
available for issuance a number of its Shares sufficient to permit the exercise
in full of all outstanding Warrants.
ARTICLE 5
TRANSFER AND EXCHANGE OF WARRANTS
5.1 The Trust will keep at the office or agency maintained
pursuant to Section 2.3 hereof a register or registers, in which, subject to
such reasonable regulations as it may prescribe, it will register all Warrants,
and the Trust hereby constitutes and appoints the Warrant Agent its Warrant
Registrar. No transfer of any Warrant shall be valid unless made upon such
register. Upon surrender for transfer of any Warrant at such office or agency,
the Trust shall execute and the Warrant Agent shall countersign and deliver, in
exchange, in the name of the transferee or transferees a new Warrant or Warrants
for a like number of Shares. The Warrants may be transferred separately from the
Shares.
All Warrants issued upon any registration of transfer or exchange
of Warrants shall be the valid obligation of the Trust, entitled to the same
benefits under this Shareholder Warrant Agreement as the Warrants surrendered
upon such registration of transfer or exchange. Every Warrant presented or
surrendered for registration of transfer or for exchange shall (if so required
by the Trust or the Warrant Agent) be duly endorsed, or be accompanied by a
written instrument of transfer in form satisfactory to the Trust and the Warrant
Agent, duly executed by the holder of the Warrant or by his attorney duly
authorized in writing. No service charge shall be made for any registration of
transfer or exchange of Warrants, but the Trust may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Warrants.
Notwithstanding any terms contained in this Section 5.1 or
elsewhere in this Agreement, the Trust may refuse to transfer a Warrant pursuant
to Sections 8.6 and 8.7 of its Bylaws.
ARTICLE 6
CONCERNING THE WARRANT AGENT
6.1 PAYMENT OF TAXES. The Trust shall from time to time promptly
pay all taxes and charges that may be imposed upon the Trust or the Warrant
Agent in respect of the issuance or delivery of Shares upon the exercise of
Warrants, but the Trust shall not be obligated to pay any transfer taxes in
respect of the Warrants of such Shares.
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6.2 DUTIES OF WARRANT AGENT. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, pursuant to which the Trust and the registered holders of Warrants
shall be bound:
(a) The statements contained herein and in the
Warrants shall be taken as statements of the Trust and the Warrant Agent assumes
no responsibility for the correctness of any of the same except for those that
describe the Warrant Agent or action to be taken by it. The Warrant Agent
assumes no responsibility with respect to the distribution of the Warrants.
(b) The Warrant Agent shall not be responsible for any
failure of the Trust to comply with any of the covenants contained in this
Agreement or in the Warrants.
(c) The Warrant Agent may execute and exercise any of
the rights or powers hereby vested in it or perform any duty hereunder either
itself or by or through its attorneys, agents or employees and the Warrant Agent
shall not be answerable or accountable for any act, default, neglect or
misconduct of any such attorneys, agents or employees or for any damage to the
Trust resulting from such act, default, neglect or misconduct, provided the
Warrant Agent has exercised reasonable care in the selection and continued
employment thereof.
(d) The Warrant Agent may consult at any time with
counsel (who may be counsel for the Trust) and the Warrant Agent shall incur no
liability or responsibility to the Trust or to any holder of any Warrant in
respect of any action taken, suffered or omitted by it hereunder in good faith
and in accordance with the opinion or the advice of such counsel.
(e) The Trust agrees to pay to the Warrant Agent
reasonable compensation for all services rendered by the Warrant Agent in the
execution of this Agreement, to reimburse the Warrant Agent for all expenses,
counsel fees, taxes and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent in the execution of this Agreement and to
indemnify the Warrant Agent and save it harmless against any and all
liabilities, losses and expenses including judgments, costs and counsel fees,
for anything done or omitted by the Warrant Agent in the execution of this
Agreement except as a result of the Warrant Agent's negligence or bad faith.
(f) The Warrant Agent shall be under no obligation to
institute any action, suit or legal proceeding or to take any other action
likely to involve expense unless the Trust, or one or more holders of Warrants
shall furnish the Warrant Agent with reasonable security and indemnity for any
cost and expenses which may be incurred, but this provision shall not affect the
power of the Warrant Agent to take such action as the Warrant Agent may consider
proper, whether with or without any such security or indemnity.
(g) The Warrant Agent and any stockholder, director,
officer or employee of the Warrant Agent may buy, sell or deal in any of the
Warrants or other securities of the Trust in accordance with applicable
requirements under the federal and state securities and other laws or become
pecuniarily interested in any transaction in which the Trust may be interested,
or contract with or lend money to the Trust or otherwise act as fully and freely
as though it were not Warrant Agent under this Agreement. Nothing herein shall
preclude the Warrant Agent from acting in any other capacity for the Trust or
for any other legal entity.
(h) The Warrant Agent shall act hereunder solely as
agent and in a ministerial capacity, and its duties shall be determined solely
by the provisions hereof. The Warrant Agent shall not be liable for anything
which it may do or refrain from doing in connection with this Agreement except
for its own negligence or bad faith.
(i) The Warrant Agent shall incur no liability or
responsibility to the Trust or to any holder of a Warrant for any action taken
in reliance on any debenture, notice, resolution, waiver, consent, order,
certificate or other paper, document or instrument believed by it in good faith
to be genuine.
(j) The Warrant Agent shall not be under any
responsibility in respect of the validity of this Agreement or the execution and
delivery hereof (except the due execution hereof by the Warrant Agent) or in
respect of the validity or execution of any Warrant (except its countersignature
thereof); nor shall the Warrant Agent by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any Shares
(or any other stock or security) to be issued pursuant to this Agreement or any
Warrant or as to whether any Shares (or any other stock or security) will,
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<PAGE> 7
when issued, be validly issued, fully paid and nonassessable or as to the
Warrant Price, or the number or kind or amount of Shares or other securities or
other property issuable upon exercise of any Warrant.
(k) The Warrant Agent is hereby authorized and
directed to accept instructions with respect to the performance of its duties
hereunder from the President or Chairman of the Board or the Secretary or any
Assistant Secretary or the Treasurer or any Assistant Treasurer of the Trust,
and to apply to such officers for advice or instructions or the determination of
any matter in connection with its duties, and it shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with the
advice or determination or instructions of any such officer.
6.3 RESIGNATION, CONSOLIDATION OR MERGER OF WARRANT AGENT.
(a) The Warrant Agent, or any successor to it
hereafter appointed, may resign and be discharged from all further duties and
liabilities hereunder after giving notice in writing to the Trust. If the office
of the Warrant Agent becomes vacant by reason of such resignation or the
incapacity to act or otherwise, the Trust shall appoint in writing a successor
Warrant Agent in place of the Warrant Agent. The Trust shall indemnify and hold
the Warrant Agent harmless from and against all claims, expenses or causes of
action resulting from the failure of the Trust to make such appointment prior to
the effective date of resignation of the Warrant Agent.
Any resignation of the Warrant Agent for cause, or after the
failure of the Company to pay any fees or expenses due to the Warrant Agent for
a period of 30 days after the date due, shall become effective immediately. Any
resignation of the Warrant Agent for any other reason shall become effective 30
days after the date on which the Warrant Agent shall give notice of resignation
to the Trust.
Any successor Warrant Agent shall be a corporation organized and
doing business under the laws of the United States of America or of any state
therein, in good standing, authorized under applicable laws to exercise
corporate trust powers and subject to supervision or examination by federal or
state authority for not less than five (5) years preceding appointment as
successor Warrant Agent. After appointment, any successor Warrant Agent shall be
vested with all the authority, powers, rights immunities, duties and obligations
of its predecessor Warrant Agent with like effect as if originally named as
Warrant Agent hereunder, without any further act or deed; but if for any reason
it becomes necessary or appropriate, the predecessor Warrant Agent shall execute
and deliver at the expense of the Trust, an instrument transferring to such
successor Warrant Agent all the authority, powers and rights of such predecessor
Warrant Agent hereunder; and upon request of any successor Warrant Agent the
Trust shall make, execute, acknowledge and deliver any and all instruments in
writing for more fully and effectively vesting in and confirming to such
successor Warrant Agent all such authority, powers, rights, immunities, duties
and obligations. Not later than the effective date of any such appointment, the
Trust shall give notice thereof to the predecessor Warrant Agent and each
transfer agent for the Shares, and shall forthwith deliver notice of the same to
each registered holder of Warrants. Failure to give such notice, or any defect
therein, shall not affect the validity of the appointment of the successor
Warrant Agent. Any corporation into which the Warrant Agent may be merged or
with which it may be consolidated, or any corporation resulting from any merger
or consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor Warrant Agent under
the provisions of this subsection (a).
(b) In case at the time such successor to the Warrant
Agent shall succeed to the agency created by this Agreement, any of the Warrants
shall have been countersigned but not delivered, any such successor to the
Warrant Agent may adopt the countersignature of the original Warrant Agent and
deliver such Warrants so countersigned; and in case at that time any of the
Warrants shall not have been countersigned, any successor to the Warrant Agent
may countersign such Warrants either in the name of the predecessor Warrant
Agent or in the name of the successor Warrant Agent; and in all such cases such
Warrant shall have the full force provided in the Warrants and in this
Agreement.
6.4 FEES AND EXPENSES OF WARRANT AGENT. The Trust agrees (a) that
it will pay the Warrant Agent for its services as such Warrant Agent hereunder,
compensation as set forth in the Fee Schedule attached hereto and will reimburse
the Warrant Agent upon demand for all expenditures that the Warrant Agent may
reasonably incur in the execution of its duties hereunder; and (b) that it will
perform, execute, acknowledge and deliver or cause to be performed, executed,
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<PAGE> 8
acknowledged and delivered all such further and other acts, instruments and
assurances as may reasonably be required by the Warrant Agent for the carrying
out or performing of the provisions of this Agreement.
6.5 MODIFICATION OF THIS AGREEMENT. The Warrant Agent may,
without the consent or concurrence of the registered holders of the Warrants, by
supplemental agreement or otherwise, concur with the Trust in making any changes
or corrections in this Agreement that it shall have been advised by counsel (who
may be counsel for the Trust) are required to cure any ambiguity or to correct
any defective or inconsistent provision or clerical omission or mistake or
manifest error herein contained.
6.6 REPLACEMENT OF WARRANT AGENT. The Trust may terminate its
Agreement with the Warrant Agent and appoint a substitute Warrant Agent at any
time on 30 days' advance notice to the Warrant Agent and the Warrant Agent may
terminate this Agreement with the Trust at any time on 30 days advance notice to
the Trust.
6.7 SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Trust and the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
ARTICLE 7
REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE TRUST
7.1 The Trust represents and warrants to the Warrant Agent that:
(a) It has a satisfactory number of Shares available
for issuance upon the exercise of the Warrants, and covenants and agrees that it
will, at all times, cause to be available and free from pre-emptive rights, out
of its authorized but unissued Shares such number of Shares as shall be required
to be issued by it from time to time upon the exercise of the Warrants, in
accordance with their terms and the terms of this Agreement, and the transfer
agent for any Shares and every subsequent transfer agent for any Shares of the
Trust issuable upon the exercise of any of the Warrants are hereby irrevocably
authorized and directed at all times to keep available such number of authorized
and unissued shares as shall be requisite for such purpose. The Trust agrees
that all Shares issued upon exercise of the Warrants shall be, at the time of
delivery of the certificate for such Shares, validly issued, fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof.
(b) The Trust has filed or will have filed with the
Securities and Exchange Commission (the "Commission") a registration statement
on Form S-11 for the registration under the Securities Act of 1933 (the "Act")
of the Warrants and Shares issuable pursuant to the exercise thereof. Before
such registration statement shall become effective, the Trust will file with the
Commission one or more amendments thereto. Such registration statement,
including all exhibits thereto, and the final prospectus, included therein, each
as amended at the time such registration statement became effective and as
further amended or supplemented, from time to time, is hereinafter called the
"Registration Statement" and the "Prospectus," respectively.
(c) With respect to the Trust's Registration Statement
as described in (b) above, the Commission has not issued any order preventing or
suspending its use and the Prospectus conforms in all material respects to the
requirements of the Securities Act of 1933 (the "Act") and the rules and
regulations of the Commission thereunder and does not include any incorrect
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and since the
respective dates as of which information is given in the Registrations Statement
and the Prospectus, there has not been any material adverse change in the
general affairs, management, financial position, shareholders' equity or results
of operations of the Trust and its subsidiaries, other than as set forth or
contemplated in the Prospectus. The Trust will use its best efforts to keep the
Registration Statement in effect as required by the Act for the duration of the
Exercise period of the Warrants.
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<PAGE> 9
ARTICLE 8
OTHER MATTERS
8.1 NOTICES AND DEMANDS TO TRUST AND WARRANT AGENT. Any notice or
demand authorized by this Agreement to be given or made by the Warrant Agent or
by the registered holder of any Warrant to or on the Trust shall be sufficiently
given or made if sent by first class or registered mail, postage prepaid,
addressed (until another address is filed in writing by the Trust with the
Warrant Agent) as follows:
CAPITAL ALLIANCE INCOME TRUST LTD.
50 California Street, Suite 2020
San Francisco, CA 94111
Any notice or demand authorized by this Agreement to be given or
made by the registered holder of any Warrant or by the Trust to or on the
Warrant Agent shall be sufficiently given or made if sent by first class or
registered mail, postage prepaid, addressed (until another address is filed in
writing by the Warrant Agent with the Trust), as follows:
CAPITAL ALLIANCE ADVISORS, INC.
50 California Street, Suite 2020
San Francisco, CA 94111
8.2 APPLICABLE LAW. The validity, interpretation and performance
of this Agreement and of the Warrants shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts made
and wholly performed in such state.
8.3 PERSONS HAVING RIGHTS UNDER THIS AGREEMENT. Nothing expressed
in this Agreement and nothing that may be implied from any of the provisions
hereof is intended, or shall be construed to confer upon, or give to, any person
or corporation other than the parties hereto and the registered holders of
Warrants any right, remedy or claim under or by reason of this Agreement or of
any covenant, warranty, condition, stipulation, promise, or agreement therein,
and all covenants, warranties, conditions, stipulations, promises and agreements
in this Agreement contained shall be for the sole and exclusive benefit of the
parties hereto and the successors of the registered holders of Warrants.
8.4 EXAMINATION OF THIS AGREEMENT AND OF THE WARRANTS. A copy of
this Agreement shall be available at all reasonable times at the corporate trust
office of the Warrant Agent for inspection by the registered holder of any
Warrant. The Warrant Agent may require any such registered holder to submit his
Warrant for inspection by it.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
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<PAGE> 10
8.5 EFFECT OF HEADINGS. The Article and Section headings herein
are for convenience only and are not part of this Agreement and shall not affect
the interpretation thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
TRUST:
CAPITAL ALLIANCE INCOME TRUST LTD.,
A Real Estate Investment Trust
By:
-------------------------------
Its:
-------------------------------
Attest:
- ------------------------------
AGENT:
CAPITAL ALLIANCE ADVISORS, INC.
By:
-------------------------------
Its:
-------------------------------
Attest:
- ------------------------------
183
<PAGE> 11
(EXHIBIT A)
CAPITAL ALLIANCE INCOME TRUST
(This Warrant will be void after ________________, 2000)
This Warrant Certificate certifies that ________________________
_________________________, or registered assigns, is the registered holder of a
Warrant or Warrants expiring _______________________ 19___ (the "Warrant") to
purchase one Share of Common Stock, without par value ("Shares") of Capital
Alliance Income Trust, a Real Estate Investment Trust, a Delaware corporation
(the "Trust") for each Warrant evidenced by this Warrant Certificate. The
Warrant entitles the holder thereof to purchase from the Trust, at any time
after 24 months following the effective date of the Trust's initial public
offering of Common Stock, and before expiration thereof 24 months after such 24
months expires, such number of Shares of the Trust at the price of $5.60 per
Share, upon surrender of this Warrant Certificate and payment of the Warrant
Price at the office or agency of the Warrant Agent, Capital Alliance Advisors,
Inc., but only subject to the conditions set forth herein and in the Shareholder
Warrant Agreement referred to on the reverse hereof. The Warrant Price and the
number of Shares purchasable hereunder are subject to adjustment upon the
occurrence of certain events set forth in the Shareholder Warrant Agreement. The
term Warrant Price as used in this Warrant Certificate refers to the price per
Share at which Shares may be purchased pursuant to the Warrant at the time the
Warrant is exercised.
The Shareholder Warrant Agreement provides that upon the
occurrence of certain events the Warrant Price and the number of Warrant Shares
purchasable hereunder, set forth on the face hereof may, subject to certain
conditions, be adjusted. No fraction of a Share will be issued upon any exercise
of a Warrant, but the person entitled to such fractional interest shall, as
provided in the Shareholder Warrant Agreement, upon exercise of the Warrant, be
entitled to a cash payment for such fractional interest equal to the current
market value of such fractional interest, determined in accordance with the
provisions of the Shareholder Warrant Agreement.
Upon any exercise of the Warrant for less than the total number
of full shares provided for herein, there shall be issued to the registered
holder hereof or his assignee a new Warrant Certificate, if requested by the
holder, covering the number of Shares for which the Warrant has not been
exercised, otherwise the Warrants will be issued in uncertificated form.
Warrant Certificates, when surrendered at the office or agency of
the Warrant Agent by the registered holder hereof in person or by attorney duly
authorized in writing, may be exchanged in the manner and subject to the
limitations provided in the Shareholder Warrant Agreement, but without payment
of any service charge, for another Warrant Certificate or Warrant Certificates
of like tenor and evidencing in the aggregate a like number of Warrants.
Upon due presentment for registration of transfer of the Warrant
Certificate at the office or agency of the Warrant Agent, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants, if requested, shall be issued to the
transferee in exchange for this Warrant Certificate, subject to the limitations
provided in the Shareholder Warrant Agreement, without charge except for any
applicable tax or other governmental charge. Otherwise, such Warrants will be
issued in uncertificated form.
Notwithstanding anything contained in the Warrant or the
Shareholder Warrant Agreement, the Trust may refuse the exercise of the Warrant
pursuant to Sections 8.5, 8.6 and 8.7 of the Bylaws.
The Trust and the Warrant Agent may deem and treat the registered
holder as the absolute owner of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, of any distribution to the registered holder, and for
all other purposes, and neither the Trust nor the Warrant Agent shall be
affected by any notice to the contrary.
This Warrant does not entitle the registered holder to any of the
rights of a Shareholder of the Trust.
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<PAGE> 12
REVERSE SIDE OF EXHIBIT A - SHAREHOLDER'S WARRANT AGREEMENT
The Warrant evidenced by this Warrant Certificate is part of a
duly authorized issue of Warrants expiring at 5:00 p.m. Pacific Time,
___________________, 19____, to purchase up to and including one Share, $.01 par
value, of the Trust, and is issued pursuant to a Shareholder Warrant Agreement
dated as of ________________, 1996 (the "Shareholder Warrant Agreement"), duly
executed and delivered by the Trust to Capital Alliance Advisors, Inc. (the
"Warrant Agent"), which Shareholder Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Warrant Agent, the Trust and the holders, the words
"holders" or "holder" meaning the registered holders or registered holder of
Warrants.
Warrants may be exercised to purchase Shares from the Trust on or
after 24 months following the effective date of the Trust's initial public
offering, and on or before ______________, 1999 (24 months thereafter) at the
Warrant Price set forth on the face hereof, subject to adjustment in certain
events. The holder of the Warrant evidence by this Warrant Certificate may
exercise it by surrendering this Warrant Certificate, with the form of election
to purchase set forth hereon properly completed and executed, together with
payment of the Warrant Price at the office or agency of the Warrant Agent,
Capital Alliance Advisors, Inc., 50 California Street, Suite 2020, San
Francisco, California 94111. The Warrant Price shall be paid by cash or bank
check.
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<PAGE> 13
FORM OF SUBSCRIPTION
[TO BE SIGNED ONLY UPON EXERCISE OF WARRANT]
To _____________________:
The undersigned hereby irrevocably elects to exercise Warrant(s)
represented by this Warrant Certificate, and to purchase the Shares issuable
upon exercise of such Warrants, and requests that certificates for such Shares
shall be issued in the name of, and cash for any fractional shares paid to,
_________________ whose address is _______________________.
By checking this box [ ], the undersigned requests that the
Shares be issued in Certificate form.
Dated:__________, 19____
_________________________________________________________
(Signature must conform in all respects to name of holder as
specified on the fact of the Warrant)
_________________________________________________________
Address
_________________________________________________________
FORM OF ASSIGNMENT
[TO BE SIGNED ONLY UPON TRANSFER OF WARRANT]
For value received, the undersigned hereby sells, assigns and
transfers unto _____________ Warrants represented by the within Warrant
Certificate, together with all right, title and interest therein, and do hereby
irrevocably constitute and appoint Capital Alliance Advisors, Inc., Attorney to
transfer said Warrants on the books of the within-named Trust, with full power
of substitution in the premises.
Dated:__________, 19____
________________________________________________________
(Signature must conform in all respects to name of holder as
specified on the fact of the Warrant)
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<PAGE> 1
EXHIBIT 4.4
SHAREHOLDER COMMON WARRANTS
SWC -
CUSIP _______________________________
SEE REVERSE FOR CERTAIN RESTRICTIONS
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
A DELAWARE CORPORATION
THIS SHAREHOULDER WARRANT MAY NOT BE EXERCISED BEFORE TWO YEARS FOLLOWING THE
EFFECTIVE DATE OF THE TRUST'S INITIAL PUBLIC OFFERING OF COMMON STOCK AND WILL
BE VOID AFTER _____________, 2000.
THIS IS TO CERTIFY THAT _________________________________________________ is the
registered holder of ___________________________________________________________
Shareholder Common Warrants of
CAPITAL ALLIANCE INCOME TRUST, A REAL ESTATE INVESTMENT TRUST
expiring ____________, 2000 (the "Warrant") to purchase one Share of Common
Stock par value $0.01 ("Shares") of Capital Alliance Income Trust, A Real Estate
Investment Trust, a Delaware corporation (the "Trust") for each Warrant
evidenced by this Warrant Certificate. The Warrant entitles the holder thereof
to purchase from the Trust, commencing two years from the effective date of the
Trust's initial public offering such number of Shares of the Trust at the price
of $5.60 per share upon surrender of this Warrant Certificate and payment of the
Warrant Price at the office or agency of the Warrant Agent,Capital Alliance
Advisors, Inc., but only subject to the conditions set forth herein and in the
Shareholder's Warrant Agreement referred to on the reverse hereof. The Warrant
Price and the number of Shares purchasable hereunder are subject to adjustment
upon the occurrence of certain events set forth in the Shareholder's Warrant
Agreement. The term Warrant Price as used in this Warrant Certificate refers to
the price per Share at which Shares may be purchased at the time the Warrant is
exercised.
The Shareholder's Warrant Agreement provides that upon the occurrence
of certain events the Warrant Price and the number of Warrant Shares purchasable
hereunder, set forth on the face hereof, may, subject to certain conditions, be
adjusted. No fraction of a Share will be issued upon any exercise of a Warrant
but the person entitled to such fractional interest shall, as provided in the
Shareholder's Warrant Agreement, upon exercise of the Warrant be entitled to a
cash payment for such fractional interest equal to the current market value of
such fractional interest, determined in accordance with the provisions of the
Shareholder's Warrant Agreement.
Upon any exercise of the Warrant for less than the total number of full
shares provided for herein, there shall be issued to the registered holder
hereof or his assignee a new Warrant Certificate covering the number of shares
for which the Warrant has not been exercised.
Warrant Certificates, when surrendered at the office or agency of the
Warrant Agent by the registered holder hereof in person or by attorney duly
authorized in writing, may be exchanged in the manner and subject to the
limitations provided in the Shareholder's Warrant Agreement but without payment
of any service charge for another Warrant Certificate or Warrant Certificates of
like tenor and evidencing in the aggregate a like number of Warrants.
Upon due presentment for registration of transfer of the Warrant
Certificate at the office or agency of the Warrant Agent, a new Warrant
Certificate or Warrant Certificate of like tenor and evidencing in the aggregate
a like number of Warrants shall be issued to the transferee in exchange for this
Warrant Certificate, subject to the limitations provided in the Shareholder's
Warrant Agreement, without charge except for any applicable law or other
governmental charge.
Notwithstanding anything contained in the Warrant or the Shareholder's
Warrant Agreement, the Trust may refuse the exercise or transfer of the Warrant
pursuant to Section 8.5, 8.6 and Section 8.7 of its By-laws. The Trust upon
request will furnish, without charge to the holder of this Warrant Certificate,
a copy of said sections of the By-laws and of the powers, designations,
preferences and relative, participating, optional or other special restrictions
of such preferences and/or rights.
The Trust and the Warrant Agent may deem and treat the registered
holder as the absolute owner of this Warrant Certificate (notwithstanding any
notation of ownership of other writing hereon made by anyone), for the purpose
of any exercise hereof, of any distribution to the registered holder, and for
all other purposes, and neither the Trust nor the Warrant Agent shall be
affected by any notice to the contrary.
This Warrant does not entitle the registered holder to any of the
rights of a Shareholder of the Trust.
WITNESS the facsimile seal of the Trust and the facsimile
signatures of the duly authorized officers of the Trust.
Countersigned and Registered:
________________________________________
Transfer Agent and Registrar
by: ____________________________________
Authorized Signature
Dated: ____________________
____________________, Secretary ____________________, Chairman
135
<PAGE> 2
CAPITAL ALLIANCE INCOME TRUST, A REAL ESTATE INVESTMENT TRUST
The warrant evidenced by this Warrant Certificate is part of a duly
authorized issue of Warrants expiring at 5:00 p.m. Pacific Time, _____________,
2000 to purchase up to and including 150,000 Shares par value $.01 of the
Trust, and is issued pursuant to a Shareholders' Warrant Agreement dated as of
____________, 1996 (the "Warrant Agreement"), duly executed and delivered by the
Trust to Capital Alliance Advisors, Inc. (the "Warrant Agent"), which Warrant
Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights,
limitations of rights, obligations, duties and immunities thereunder of the
Warrant Agent, the Trust and the holders, the words "holders" or "holder"
meaning the registered holders or registered holder of the Warrants.
Warrants may be exercised to purchase Shares from the Trust two years
after the date of the Trust's Initial Public Offering of Common Stock and on or
before four (4) years from this date of the Trust's Initial Public Offering of
Common Stock, at the Warrant Price set forth on the face hereof, subject to
adjustment in certain events. The holder of the Warrant evidenced by this
Warrant Certificate may exercise it by surrendering this Warrant Certificate,
with the form of election to purchase set forth hereon properly completed and
executed, together with payment of the Warrant Price at the office or agency of
the Warrant Agent, 50 California Street, #2020, San Francisco, California,
94111. The Warrant Price shall be paid by cash or bank check.
PROVISIONS RELATING TO PROHIBITION OF TRANSFER
OR EXERCISE OF WARRANTS AND SHARES
IF NECESSARY TO EFFECT COMPLIANCE BY THE TRUST WITH CERTAIN
REQUIREMENTS OF THE INTERNAL REVENUE CODE, THE EXERCISE OF ALL OR A PORTION OF
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE TRANSFER THEREOF MAY BE
PROHIBITED UPON THE TERMS AND CONDITIONS SET FORTH IN THE BY-LAWS. THE TRUST
WILL FURNISH A COPY OF SUCH TERMS AND CONDITIONS TO THE REGISTERED HOLDER OF
THIS CERTIFICATE UPON REQUEST AND WITHOUT CHARGE. TO ENABLE THE DIRECTORS TO
DETERMINE WHETHER DIRECT AND INDIRECT OWNERSHIP OF WARRANTS OF THE TRUST IS IN
CONFORMITY WITH SUCH REQUIREMENTS. EACH HOLDER OF THE WARRANTS REPRESENTED BY
THIS CERTIFICATE SHALL ON DEMAND DISCLOSE TO THE DIRECTORS IN WRITING SUCH
INFORMATION AS THEY MAY DEEM NECESSARY FOR SUCH PURPOSE.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO LIMITATIONS
ON THEIR TRANSFER IMPOSED BY SECTIONS 8.5, 8.6 AND 8.7 OF THE BYLAWS. THOSE
PROVISIONS PROVIDE IN PART THAT NO PERSON MAY OWN IN EXCESS OF 9.8% OF THE
TOTAL OUTSTANDING SHARES OF THE TRUST NOR SHALL ANY WARRANTS BE TRANSFERRED (OR
ISSUED) IF, FOLLOWING SUCH TRANSFER (OR ISSUANCE), A PERSON'S OWNERSHIP OF
SHARES WOULD EXCEED THAT LIMIT.
SEND THIS CERTIFICATE DIRECTLY TO CAPITAL ALLIANCE ADVISORS, INC., 50
CALIFORNIA STREET, SUITE 2020, SAN FRANCISCO, CALIFORNIA 94111.
TRANSFERS OF WARRANTS HELD IN "UNISSUED CERTIFICATE" FORM MUST ALSO BE
EFFECTED DIRECTLY THROUGH THE WARRANT AGENT AT THE ABOVE ADDRESS.
ELECTION TO PURCHASE
(To be signed only upon exercise of Warrant)
To Capital Alliance Advisor, Inc., Warrant Agent
The undersigned hereby irrevocably elects to exercise _________________
Warrants represented by this Warrant Certificate, and to purchase the Shares
issuable upon the exercise of such Warrants, and requests that such shares be
issued in the name of, and cash for any fractional shares paid to:
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________
/_______________________/ ______________________________________________________
NAME
________________________________________________________________________________
ADDRESS
by checking this box / / the undersigned requests that the shares be held in
"unissued certificate form", or be delivered to
________________________________________________________________________________
NAME
at _____________________________________________________________________________
ADDRESS
and if said number of Warrants shall not be all of the Warrants evidenced by
this Warrant Certificate, that a new Warrant Certificate for the balance of
such Warrants be registered in the name of and delivered to the undersigned at
the address of record for the account.
Dated____________________________ Signature_________________________________
Are you the original holder of the Warrants evidenced by this Warrant
Certificate? Yes / / No / /
Were your Warrants held in a discretionary account (that is, an
account giving you Broker the right to make investment decisions
on your behalf)? Yes / / No / /
Are you exercising the Warrants as a result of solicitation
by your broker? Yes / / No / /
If yes, please be advised a commission may be paid and provide the following
information.
Broker Dealer___________________________________________________________________
Registered Representative_______________________________________________________
Broker Dealer's Address_________________________________________________________
----------------------------------
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this certificate shall be construed as though they were written out in full
accordance to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship
and not as tenants in common
UNIF GIFT MIN ACT - ..............Custodian..............
(Cust) (Minor)
under the Uniform Gifts to Minors Act
.....................................
(State)
Additional abbreviations may also be used
though not in the above list
----------------------------
ASSIGNMENT
(To be signed only upon transfer of Warrant)
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________
/_______________________/ ______________________________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE
Warrants represented by the within Warrant Certificate, together with all
right, title and interest therein, and do hereby irrevocably constitute and
appoint attorney to transfer said Warrant on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated____________________________ Signature_________________________________
NOTE THE ABOVE SIGNATURE MUST CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THIS WARRANT IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATSOEVER. SIGNATURE(S) MUST BE GUARANTEED BY AN AUTHORIZED
OFFICER OR REPRESENTATIVE OF A BANK, OR A MEMBER OF AN AUTHORIZED NATIONAL
STOCK EXCHANGE.
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DRAFT
Exhibit 5.1
(Letterhead of ASHBY & GEDDES)
April ___, 1997
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
50 California Street, Suite 2020
San Francisco, CA 94111
Re: Proposed issuance of 1,500,000 shares of common stock
Ladies and Gentlemen:
You have requested our opinion as special Delaware counsel to Capital
Alliance Income Trust, a Delaware corporation (the "Company"), in connection
with certain matters of Delaware law arising out of the Company's proposed
issuance of 1,500,000 shares of its $.01 par value common stock (the "Shares").
As a basis for our opinion, we have examined copies of the following
documents (the "Documents"), provided to us by the firm of Landels, Ripley
& Diamond, LLP ("LR&D"), and, unless specifically indicated, have made no other
investigations or inquiry:
1. The Company's certificate of incorporation, dated December 1,
1995, and the certificate of amendment to the Company's certificate of
incorporation, dated February 2, 1996;
2. The Company's by-laws ;
3. Minutes of an August 5, 1996 meeting of the Company's Board of
Directors reflecting resolutions adopted by the Board in connection with the
proposed issuance of the Shares (the "Resolutions");
In addition, we have reviewed a certificate of good standing issued by
the Delaware Secretary of State for the Company, dated January ___, 1997.
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<PAGE> 2
Capital Alliance Income Trust DRAFT
January ___, 1997
Page 138
In rendering our opinion, we have assumed the following:
1. Each of the parties executing any of the Documents has duly
and validly executed and delivered each of the Documents to which such party is
a signatory, and such party's obligations set forth therein are legal, valid and
binding.
2. Each individual executing any of the Documents had the legal
capacity and authority to do so.
3. All Documents submitted to us are accurate, complete, duly
authorized, validly executed, and conform to the originals. All signatures on
the Documents are genuine, and all statements and information contained in the
Documents are true and complete. There are and have been no oral or written
modifications or amendments to the Documents, by action or conduct of the
parties or otherwise.
4. All actions that have been undertaken by, on behalf of, or in
connection with the Company, whether by its directors, officers, stockholders,
incorporator, representatives or agents, are and were valid, authorized and
effective and were not ultra vires acts.
Based upon the foregoing and subject to the assumptions, limitations
and qualifications stated herein, we are of the opinion that:
1. The Company is a corporation duly incorporated and existing
under and by virtue of the laws of the State of Delaware and is in good standing
with the State of Delaware.
2. The Shares have been authorized by the Company's certificate
of incorporation and, when and if delivered in exchange for payment in
accordance with the Resolutions, will be validly issued, fully paid and
nonassessable.
The foregoing opinion is limited to Delaware law and we do not express
any opinion herein concerning any other law.
This opinion is as of this date and we assume no obligation to
supplement this opinion even if applicable law changes after the date hereof or
we become aware of any fact that might change this opinion after the date
hereof.
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<PAGE> 3
Capital Alliance Income Trust DRAFT
January ___, 1997
Page 139
We are special counsel only and have not met any representatives of the
Company. We have dealt exclusively with and through LR&D. This opinion is being
furnished to you solely for submission to the Securities and Exchange Commission
as an exhibit to the Registration Statement, may not be relied upon for any
other purpose and, accordingly, may not be relied upon by, quoted in any manner
to, or delivered to any other person or entity (other than LR&D) without, in
each instance, our prior express permission in writing.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of the name of our firm therein. In giving
this consent, we do not admit that we are within the category of persons whose
consent is required by Section 7 of the Securities Act of 1933, as amended.
ASHBY & GEDDES
By: DRAFT
------------------------------------
For the Firm
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<PAGE> 1
EXHIBIT 8.1
[LETTERHEAD OF LANDELS RIPLEY & DIAMOND LLP]
April ___, 1997
CAPITAL ALLIANCE INCOME TRUST LTD.
50 California Street, Suite 2020
San Francisco, California 94111
Re: Registration Statement on Form S-11
Registration No. 333-11625
Ladies and Gentlemen:
We have acted as counsel to Capital Alliance Income Trust, a Delaware
corporation (the "Trust"), in connection with the sale by the Trust of up to
1,500,000 shares of common stock ("Common Shares"), par value $.01 per share of
the Trust, pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, filed with the Securities and Exchange
Commission on September 9, 1996 (such registration statement, as amended at the
time it became effective, the "Registration Statement"). You have requested our
opinion concerning certain of the federal income tax consequences to the Trust
and the purchasers of Common Shares in connection with the sale described above.
This opinion is based on various facts and assumptions and is subject
to any and all qualifications set forth in the Prospectus in the section
entitled "Federal Income Tax Considerations." In addition, this opinion is based
upon the factual representations of the Trust concerning its business and assets
as set forth in the Registration Statement.
As tax counsel to the Trust, we have made such legal and factual
examinations and inquiries, including an examination of originals or copies
certified or otherwise identified to our satisfaction of such documents,
corporate records and other instruments as we have deemed necessary or
appropriate for purposes of this opinion.
We are opining herein as to the effect on the subject transaction only
of the federal income tax laws of the United States and we express no opinion
with respect to the applicability thereto, or the effect thereon, of other
federal laws, the laws of any other jurisdiction or as to any matters of
municipal law or the laws of any other local agencies within any state.
Based on such facts, assumptions and representations, it is our opinion
that: (i) commencing with the Trust's taxable year ended December 31, 1996, the
Trust has been organized in conformity with the requirements for qualification
as a "real estate investment trust" ("REIT") under the Internal Revenue Code of
1986, as amended ("Code"), and its current and contemplated method of operating
as described in the Prospectus included in the Registration Statement and as
represented by the Trust, has enabled it and will enable it to meet the
requirements for qualification and taxation as a REIT under the Code; and
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<PAGE> 2
(ii) statements in the Registration Statement set forth under the caption
"Federal Income Tax Considerations" to the extent such information constitutes
matters of law, summaries of legal matters, or legal conclusions, have been
reviewed by us and are accurate in all material respects.
No opinion is expressed as to any matter not discussed herein.
This opinion is based on various statutory provisions, regulations
promulgated thereunder and interpretations thereof by the Internal Revenue
Service and the courts having jurisdiction over such matters, all of which are
subject to change either prospectively or retroactively. Also, any variation or
difference in the facts from those described above or any determinations made
in reliance thereon may affect the conclusions stated herein.
This opinion is rendered only to you and is solely for your use in
connection with the Registration Statement. We hereby consent to the filing of
this opinion as an exhibit to the Registration Statement and to the use of our
name under the captions "Federal Income Tax Considerations" and "Legal Matters"
in the Registration Statement. This opinion may not be relied upon by you for
any other purpose, or furnished to, quoted to, or relied upon by any other
person, firm or corporation for any purpose, without our prior written consent.
Very truly yours,
LANDELS RIPLEY & DIAMOND LLP
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<PAGE> 1
EXHIBIT 23.1
CONSENT OF COUNSEL
TO CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
We hereby consent to the use in this Registration Statement on Form
S-11, and any amendments or supplements of our form of opinions in respect to
certain tax and ERISA matters, and to any reference to our firm included in or
made a part of the Registration Statement. In giving this consent, we do not
thereby admit that we come within the category of persons whose consent is
required under the Securities Act of 1933, as amended, or the Rules and
Regulations promulgated thereunder.
/s/ Landels Ripley & Diamond LLP
_______________________________________________
LANDELS RIPLEY & DIAMOND LLP
San Francisco, California
April 21, 1997
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<PAGE> 1
EXHIBIT 23.2
CONSENT OF NOVOGRADAC & COMPANY LLP
We have issued our report dated June 25, 1996, accompanying the
combined financial statements of Capital Alliance Income Trust, A Real Estate
Investment Trust. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts".
/s/ Novogradac & Co.
--------------------------
NOVOGRADAC & COMPANY LLP
San Francisco, California
April 18, 1997
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<PAGE> 1
EXHIBIT 23.3
CONSENT OF COUNSEL
TO CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST (the "Company")
We hereby consent to the use in this amended Registration Statement on
Form S-11, and any amendments or supplements thereto of our draft form of
opinion in connection with certain matters of Delaware law arising out of the
Company's proposed issuance of 1,500,000 Shares of its $.01 par value common
stock, to any reference to our firm included in or made a part of the
Registration Statement in that context. In giving this consent, we do not
thereby admit that we come within the category of persons whose consent is
required under the Securities Act of 1933, as amended, or the Rules and
Regulations promulgated thereunder.
/s/ Ashby & Geddes
--------------------------------
ASHBY & GEDDES
Wilmington, Delaware
April 18, 1997
144
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EXHIBIT 28.1
IMPOUND AND ESCROW AGREEMENT
Agreement made as of the date set forth below by and among Capital
Alliance Income Trust Ltd., A Real Estate Investment Trust, a Delaware
corporation (the "Trust" or "CAIT"), Brookstreet Securities Corporation, a
California corporation ("Brookstreet"), and Golden Gate Bank, San Francisco,
California (the "Bank" or "Escrow Holder").
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereby agree as follows:
1. Registration Statement. A copy of the Trust's registration
statement for its proposed public offering (the "Offering") of shares in the
Trust and warrants to purchase shares in the Trust, S.E.C. registration no.
333-11625 (the "Registration Statement") has been deposited with the Bank by the
Trust and will become effective on or about _______________, 1997.
2. Deposits. The Bank, or its designated agent, shall receive
from each subscriber in the Offering all checks made payable to the Bank and
accompanied by a corresponding order form stating, among other things, the name
of the subscriber, current address and amount of the investment. Any deposits
received without a properly executed order form or check shall be returned and
not accepted.
On the same day orders and checks are received, the Bank, as agent for
the Trust, shall immediately deposit said funds into an interest bearing account
entitled "Golden Gate Bank, Escrow Agent for CAIT" Escrow, No. ______________ as
agent for the Trust. Said account shall be opened at the main office of Bank.
This account shall give Escrow Holder (the "Bank") the irrevocable right to
withdraw funds for deposit into escrow at such time as said funds are required
for escrow purposes.
3. Interest on Deposited Cash Funds. All cash funds deposited in
the escrow account shall be placed in an interest-bearing savings or other
interest-bearing account or instrument (collectively, the "Account") and shall
bear interest until the release of such cash funds from the Account at the then
current rate. Said funds shall be invested by the Bank for the benefit of
investors, to the extent reasonably possible, within seven business days from
the later of the date of deposit for collection or the date of actual collection
of such funds. The Bank in its sole discretion is authorized to invest only in
any of the following: bank savings accounts, bank money market accounts,
short-term U.S. government securities, certificates of deposit, including
certificates of deposit issued by the Bank, affiliates of the Bank or by other
commercial banks.
4. Failure to Deposit Minimum Subscription Amount. Funds will be
held in escrow hereunder pending satisfaction of the following condition (The
"Escrow Condition"):
Deposit with the Bank under this Agreement of the Minimum Subscription
Amount of $4,000,000 (the "Minimum Subscription Amount").
If, on the date one year from the effective date of the Registration
Statement (or any extension thereof that is authorized by the Registration
Statement) (the "Impound Date") all the Escrow Conditions are not satisfied, the
Bank shall release to the subscribers all monies deposited pursuant to such
subscriptions, all Order Forms and all earnings on such monies net of escrow
costs, after first having received an executed written request from the Trust
requesting such release. The Trust agrees that in that event the full amount on
deposit, including all earnings, will be distributed as is herein provided. All
cash disbursements shall be mailed by first class United States mail, postage
prepaid, to the addresses shown on the subscription agreement. In the event of
cancellation, the Trust shall furnish Escrow Holder (the "Bank") with a schedule
of the interest payable to each
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<PAGE> 2
subscriber. The decision of the Trust in allocating the interest earned on the
subscription funds shall be final and binding on all of the parties hereto and
on all subscribers.
5. Deposit of Minimum Subscription Amount. If all the Escrow
Conditions are satisfied on or before Impound Date, the Bank shall release to
the Trust those subscriptions, and the principal amount of all monies deposited
therewith, and all interest earned thereon after first having received an
executed written request of the Trust requesting such release. The Trust shall
be responsible for forwarding all interest earned net of escrow costs to the
subscribers. Prior to the satisfaction of the Minimum Subscription Amount, the
monies in such escrow shall remain the property of the subscribers but shall not
be subject to withdrawal by the subscribers prior to the Impound Date. Any
attachment of the subscribers' interest in such monies shall be subject to the
terms of this Agreement.
6. Signatures for Disbursements. The signature of the Trust's
officer, as it shall appear on an authorized document to be submitted to the
Bank by the Trust, shall serve as authorization to the Bank to make any and all
disbursements on behalf of the Trust. The Bank shall be protected in acting
upon, recognizing, or otherwise relying upon any paper or documents believed by
it to be genuine and believed by it to have been signed by the person or persons
by whom it purports to have been signed.
7. Rights of Persons Placing Orders. The Trust hereby
acknowledges and shall make a good faith effort while this Agreement remains in
effect to insure that each subscriber is made aware of the fact that his monies
shall be deposited with the Bank and shall remain subject to this Agreement, and
that such person whose monies are delivered into the escrow account shall only
have the rights with respect to those monies as are set forth herein and in the
prospectus which is a part of the Registration Statement.
8. Amendments and Modifications. This Agreement shall not be
amended, modified, or supplemented except by a writing executed between the
parties hereto.
9. Compliance with Offering. The parties hereto hereby agree that
the escrow account shall be administered in strict compliance with the terms of
this Agreement and the terms of the Registration Statement, and the Trust
warrants that the terms are consistent with the Registration Statement. The
Trust further understands and agrees that the Bank shall maintain the right and
power to immediately resign as depository at any time, without penalty,
effective upon the giving of written notice thereof to the Trust. In that event,
all monies held by the Bank will be transferred to a successor escrow holder as
may be designated by the Trust.
10. Obligation of Bank to Check Compliance. The Bank shall not be
obligated to check the compliance of any subscription or monies received with
any requirements of the Offering, except to the extent expressly requested in
writing by the Trust and agreed to by the Bank. The Bank shall not be
responsible for the collection of any funds not paid by the banks upon which
subscribers' checks are drawn. All checks deposited herein must clear the normal
banking channels prior to the release of any funds.
11. Reports. The Bank shall furnish to the Trust on a bi-monthly
basis beginning fifteen (15) days after the effective date, a written report
that details all monies on deposit hereunder and a list of all subscribers
represented thereby. At the end of the escrow period, the Bank will provide a
statement on the aggregate amount received from each subscriber and a statement
showing the monthly interest earned on the total principal held in the escrow
account.
12. Escrow Fees. The Trust hereby agrees to pay to the Bank for
all services rendered hereunder, the fees and costs set forth in Exhibit "A"
hereto.
The fees and usual charges agreed upon for the Banks services hereunder
shall be considered compensation for its ordinary services as contemplated by
this Agreement, and in the event that the conditions of this escrow are not
promptly fulfilled or that the Bank renders any service hereunder not provided
for, or that there is any assignment of any interest in the subject matter of
this escrow or modification hereof, or that any controversy arises hereunder or
that the Bank is made a party to, or intervenes in, any litigation pertaining to
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this escrow or the subject matter thereof, the Bank shall be reasonably
compensated for such extraordinary services and reimbursed for all costs and
expenses occasioned by such default, delay, controversy, or litigation, and it
shall have the right to retain all documents and/or other things of value at any
time held by it hereunder until such compensation, fees, costs and expenses
shall be paid.
13. Limitation of Liability of the Bank. The parties hereto
expressly recognize that under no circumstances shall the Bank be held liable
for the legality or validity or veracity of the Offering or any other offering
of the Trust, and, instead, the Bank's sole concern and responsibility shall be
to hold the monies in escrow and to invest the same as herein provided until the
Escrow Conditions are satisfied according to the conditions stated herein. By
the acceptance of this escrow, Bank in no way makes any warranties and/or
endorsements to any investors for this offering and is solely acting as escrow
agent for the holding of funds deposited herein in accordance with the within
instructions. The undersigned acknowledge that they have not represented Bank in
any other capacity to investors, either written or implied. The Trust further
acknowledges that the Bank shall not be held liable for the sufficiency or
correctness as to form, manner of execution or validity of any Order Form,
deposit receipt, or other instrument which may be deposited with the Bank
pursuant to this Agreement, or as to the identity, authority or rights of any
person subscribing for any Shares, or for any such person's failure to comply
with any of the provisions of the Subscription Agreement. The Bank is not to be
concerned with the issuance of shares of common or preferred stock of the
undersigned and the same shall be handled completely outside of escrow. The Bank
is only to be concerned with the terms and conditions as set forth herein.
14. Conflicting Demands. In the event conflicting demands are made
upon the Bank with respect to the escrow account, the Trust acknowledges and
agrees that the Bank shall have the absolute right to elect to do any or all of
the following: withhold and stop all further proceedings in performance of this
Agreement; act only upon the joint instructions of the Trust and any subscriber
(or any agent of the subscriber) theretofore making a conflicting demand; or
file a suit in interpleader and obtain an order from a court with jurisdiction
over such matter which requires the parties to interplead and litigate in such
court their several claims and rights against each other. In the event an
interpleader suit is brought, the Bank, at its election, shall be fully released
and discharged from all obligations to further perform any and all duties or
obligations imposed upon it under this Agreement, and the Trust agrees to pay
and reimburse the Bank for all costs, expenses, and reasonable attorneys' fees
expended or incurred by it in the defense or prosecution of such interpleader
suit as such amounts shall be fixed and deemed reasonable by the court. Any
funds and subscriptions held in the escrow which are subject to any such
conflicting demands shall not be included in computing the total funds and
subscriptions held hereunder.
The Bank shall promptly give notice to the Trust of any demands,
requests, orders, or other notices received by it from any subscriber or any
person purporting to represent any subscriber (including a conservator,
guardian, executor or administrator) where such demands, request, order, or
other notice relates to the withdrawal of all or any part of the sums on deposit
in the escrow account.
15. Hold Harmless and Lien. The Trust hereby agrees to pay on
demand, as well as to hold harmless and to indemnify the Bank from and against,
all costs, damages, judgments, attorneys' fees, obligations, and liabilities of
every kind or nature (other than its normal and usual operating expenses
incurred in the Bank's performance hereunder), which, in good faith, the Bank
may incur or sustain in connection with or arising out of this Agreement. The
Trust further grants hereby to the Bank a lien upon all rights, titles, and
interests of the Trust in all of the documents and monies and other property
deposited in escrow pursuant to this Agreement, in order that the Bank may
protect its rights and to indemnify and reimburse itself as it may be permitted
to do so pursuant to this Agreement.
16. Relationship between Parties. The parties hereto expressly
recognize that this Agreement only creates an escrow account into which up to
the Minimum Subscription Amount shall be placed in impound, and otherwise this
Agreement does not create any legal relationship whatsoever between the parties
hereto.
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17. Termination. This Agreement shall terminate effective upon
payment under either Section 4 or 5 hereof. Provided, however, that this
agreement shall not be so terminated until all fees, costs and expenses of the
Bank have been paid.
18. Notices. All instructions, notices, and demands herein
provided for shall be in writing and shall be mailed postage prepaid, first
class mail, as follows:
If to the Trust, to:
Capital Alliance Income Trust Ltd.,
A Real Estate Investment Trust
50 California Street, Suite 2020
San Francisco, California 94111
Attn: Thomas B. Swartz, Chairman
If to the Bank, to:
Golden Gate Bank
344 Pine Street
San Francisco, CA 94104
Attn: James Woolwine, President
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
_______________, 1997.
"TRUST"
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
By: __________________________________
Its: __________________________________
"BROOKSTREET"
BROOKSTREET SECURITIES CORPORATION,
A CALIFORNIA CORPORATION
By: __________________________________
Its: __________________________________
"BANK"
GOLDEN GATE BANK
By: __________________________________
Its: __________________________________
151
