UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-11625
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
Delaware 94-3240473
- -------------------------------- -------------------
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
50 California Street
Suite 2020
San Francisco, California 94111
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(Address of principal executive office) (zip code)
(415) 288-9575
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock $0.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (P. 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
As of March 31, 2000, the aggregate market value of the Registrant's shares of
Common Stock, $.01 par value, held by nonaffiliates of the registrant was
approximately $4,454,200. At that date 1,484,740 shares were outstanding. The
shares are listed and publicly traded on the American Stock Exchange.
TABLE OF CONTENTS
PART I...................................................................5
ITEM 1. BUSINESS...................................................5
General....................................................5
MORTGAGE INVESTMENT BUSINESS....................................5
General....................................................5
Mortgage Loan Portfolio....................................5
Financing..................................................6
MORTGAGE CONDUIT BUSINESS.......................................6
General....................................................6
Marketing and Production...................................7
Underwriting...............................................8
Whole Loan Sales...........................................9
WAREHOUSE LENDING BUSINESS......................................9
HEDGING........................................................10
SERVICING......................................................10
Servicing Portfolio.......................................11
Geographical Distribution.................................11
Interest..................................................11
Maturity..................................................11
Delinquencies.............................................12
REGULATION.....................................................12
COMPETITION....................................................13
EMPLOYEES......................................................13
ITEM 2. PROPERTIES................................................13
2
ITEM 3. LEGAL PROCEEDINGS.........................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.......13
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.........................13
PART II.................................................................16
ITEM 6. SELECTED FINANCIAL DATA...................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............17
GENERAL........................................................17
Predecessors..............................................17
Organization..............................................17
Operating Strategy........................................18
Loan Origination and Loan Servicing.......................18
Contingencies and Commitments.............................18
RESULTS OF OPERATIONS..........................................19
YEAR ENDED DECEMBER 31, 1999
COMPARED TO YEAR ENDED DECEMBER 31, 1998..................19
YEAR ENDED DECEMBER 31, 1998
COMPARED TO YEAR ENDED DECEMBER 31, 1997..................19
INFLATION .....................................................20
LIQUIDITY AND CAPITAL RESOURCES................................20
LIQUIDITY AND CAPITAL RESOURCES
FOR THE YEAR ENDED DECEMBER 31, 1999......................20
LIQUIDITY AND CAPITAL RESOURCES
FOR THE YEAR ENDED DECEMBER 31, 1998......................20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.............22
3
PART III................................................................23
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT...........23
DIRECTORS......................................................23
EXECUTIVE OFFICERS.............................................24
ITEM 11. EXECUTIVE COMPENSATION...................................25
COMPENSATION OF OFFICERS.......................................25
COMPENSATION OF DIRECTORS......................................25
Director Fees.............................................25
Committee and Other Meeting Fees..........................26
Reimbursements............................................26
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................26
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS.......................................27
Arrangements and Transactions with CAAI...................27
Investment in Related Mortgage Banking Firms..............27
Sale and Purchase of Loans................................28
Other Business Activities.................................28
PART IV.................................................................29
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS
SCHEDULES, AND REPORTS ON FORM 8-K.............................29
(a)(1) Financial Statements.........................29
(a)(3) Exhibits.....................................29
SIGNATURES.....................................................31
4
PART I
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ITEM 1. BUSINESS
General. Unless the context otherwise requires, references herein to
the "Company" refer to Capital Alliance Income Trust Ltd., A Real Estate
Investment Trust (the "Trust"), and Capital Alliance Funding Corporation
("CAFC"), collectively.
Capital Alliance Income Trust Ltd., A Real Estate Investment Trust is a
specialty mortgage finance company which, together with its subsidiary, operates
a mortgage banking concern with three divisions which are referred to herein as
(1) the Mortgage Investment Business, (2) the Mortgage Conduit Business, and (3)
the Warehouse Lending Business. The Trust directly conducts its Mortgage
Investment Business, which invests for the Trust's portfolio of
collateral-oriented, high-yielding, non-conforming residential mortgage loans
and home equity loans and its Warehouse Lending Business which provides secured
warehouse and repurchase financing to CAFC and an affiliated mortgage banker.
The Mortgage Conduit Business, which originates and purchases as a wholesale
mortgage banker, non-conforming mortgage loans is conducted through CAFC in
which the Trust holds a 99% economic interest. Both the Company and CAFC are
externally advised by Capital Alliance Advisors, Inc. ("CAAI").
The Trust resulted from the consolidation in April 1996 of two private
affiliated mortgage lending firms ("Predecessors"). The Trust was incorporated
in Delaware in 1995. The Predecessors to the Trust were formed and managed by
CAAI. On September 30, 1998 the Trust concluded an initial public offering of
its Common Stock for $11,877,92 (1,484,740 shares at $8.00 per share with
warrants to purchase 148,474 additional shares of Common Stock).
References to financial information of the Trust for the year ended
1998 and 1999, reflect the financial operations of the Trust and its Mortgage
Investment and Mortgage Warehouse businesses and the Trust's equity interest in
the Mortgage Conduit Business conducted by CAFC. References to financial
information of the Trust for the year ended 1996, reflect the financial
operations of the Trust and its Predecessors.
MORTGAGE INVESTMENT BUSINESS
General. The Trust, through its Mortgage Investment Business, acquires
mortgage loans which are principally nonconforming residential mortgage loans
with a maximum 75% combined loan-to-value ratio for long-term investment. The
Mortgage Investment Business invests in both first and second mortgage loans.
Income is earned principally from the net interest income received by The Trust
on mortgage loans held in its portfolio and from fees received in connection
with their origination. Such acquisitions are financed with a portion of the
Trust's capital. Loans, other than warehouse lines of credit and repurchase
financing obtained by CAFC, are restricted by the Trust's Bylaws to four (4)
times the Trust's total shareholders' equity. (See "Mortgage Conduit Business.")
Mortgage Loan Portfolio. The Trust (a) through its Manager
originates mortgage loans, through its Advisor's executive office in San
Francisco and its branch offices in Laguna Hills, San Diego, and Los Gatos,
California and through its network of mortgage brokers and correspondents, and
(b) invests a substantial portion of its portfolio in non-conforming first and
second mortgage loans. The Trust also purchases such loans from third parties,
including CAFC, for long-term investment. Management believes that
non-conforming mortgage loans provide an attractive net earnings profile and
produce higher yields without commensurately higher credit risks when compared
with conforming mortgage loans. As a matter of investment policy, all loans held
for the Trust's portfolio have a loan-to-value, at the time of
5
origination, of 75% or less. This is verified by independent appraisal. At
December 31, 1999 the Trust's loan portfolio totaled $10,807,644 with an average
loan size of $131,801 an average weighted yield of 12.15%, an average maturity
of 22.57 months and a combined loan-to-value ratio of 63.88%. 53% of the
portfolio were first deeds of trust and 47% were second deeds of trust. The
highest concentration of non conforming mortgage loans originated or purchased
by the Trust relates to properties located in California because of the
generally higher property values and mortgage loan balances prevalent there.
Financing. The Mortgage Investment Business is financed principally by
the Trust's total shareholders' equity. The Trust's recently amended Bylaws
restrict the encumbrance of the Trust's assets to four (4) times the Trust's
total shareholders' equity. The Trust's portfolio of mortgage loans at December
31, 1999 was partially encumbered by a $2,000,000 bank line of credit, although
increased amounts of leverage are currently being negotiated. Such restriction
does not apply to CAFC which utilizes warehouse lines of credit from commercial
lenders.
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 Bylaws may be modified by the Trust's Board
of Directors.
The Trust is negotiating for additional lines of credit secured by a
portion of the Trust's mortgage loan portfolio and at the rates that are
consistent with its financing objectives described herein. The Trust, through
CAFC, has obtained warehouse financing with a third-party commercial lender, at
interest rates that are consistent with its financing objectives described
herein, as needed by CAFC for a specified period of time. CAFC's warehouse
financings are guaranteed by the Trust. The Trust also extends a warehouse
reverse repurchase facility to CAFC which at December 31, 1999 aggregated
$2,140,360. A reverse repurchase agreement, although structured as a sale and
repurchase obligation, acts as a financing vehicle under which CAFC effectively
pledges its mortgage loans as collateral to secure a short-term loan. Generally,
the other party to the agreement makes the loan in an amount equal to a
percentage of the market value of the pledged collateral.
MORTGAGE CONDUIT BUSINESS
General. CAFC was organized on April 15, 1997 and began its mortgage
origination and whole loan sales operations on a start-up basis in August, 1997.
The Mortgage Conduit Business consists primarily of the origination and the
purchase and sale of mortgage loans with a complete spectrum of credit grades
secured by first liens and second liens on single (one-to-four) family
residential properties that are originated in accordance with its underwriting
guidelines. The Trust's Mortgage Conduit Business acts as a conduit between the
originators of such mortgage loans and permanent investors in such loans.
Capital Alliance Advisors, Inc. contracts with CAFC for its management and for
its mortgage origination, loan processing and underwriting, and secondary sales
services. The Trust's Manager owns a 1% economic interest and 100% of the of
voting control of CAFC.
The Management believes that non-conforming 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, does not apply to its Mortgage
Conduit Business since such mortgage loans are generally held in CAFC for less
than sixty days prior to their sale to permanent investors who securitize
6
such loans in the secondary market and their acquisition or funding will
generally be facilitated through a warehouse line of credit or reverse
repurchase agreement.
Correspondents originate and close mortgage loans under CAFC's mortgage
loan programs on a loan-by-loan basis. Correspondents include mortgage bankers
and mortgage brokers. During the years ended December 31, 1998 and 1999, CAFC
acquired mortgage loans from its correspondents (primarily mortgage brokers) or
funded directly (through its Manager) $6,580,685 and $25,695,513 respectively.
All non-conforming loans purchased or originated by CAFC which meet the
Trust's underwriting guidelines, including its 75% Combined Loan-to-Value
limitation, are made available for sale to the Trust at fair market value at the
date of sale and subsequent transfer to the Trust. Loans not purchased by the
Trust for its Mortgage Investment Business will be sold in the secondary market
through whole loan sales.
The Mortgage Conduit Business acquires 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 generally has 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 and Production. CAFC's competitive strategy in its Mortgage
Conduit Business is, through its Mortgage Loan Origination Services Agreement
with CAAI, to be a substantial originator, through a mortgage loan broker and
correspondent network, of the complete spectrum of credit-grade residential
mortgage loans to be sold in the secondary market network. This should enable
CAFC 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 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, where they
meet the Trust's underwriting standards, to the Trust's Mortgage Investment
Business. To accomplish these objectives, the Mortgage Conduit Business intends
to expand its reach, geographically, to develop and provide responsive and
consistent underwriting and funding services to the mortgage broker and
correspondent networks which it plans to develop.
CAFC and the Trust emphasize flexibility in their mortgage loan
products to attract correspondents and establish relationships. CAFC also
maintains relationships with numerous end-investors so that it may develop
products that they may be interested in as market conditions change, which in
turn may be offered through the correspondent network. As a consequence, CAFC
and the Trust have acquired increasing volumes of non-conforming loans.
Additionally, in response to the needs of its non-conforming mortgage loan
correspondents, CAFC's marketing strategy offers efficient response time in the
origination and purchase process, and direct and frequent contact with its
correspondents.
A substantial portion of the mortgage loans to be originated or
purchased through the Mortgage Conduit Business are 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
7
FNMA and FHLMC primarily with respect to loan size, 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 $450,000 since such
loans generally entail greater credit risks than other non-conforming loans
although it is not precluded from doing so.
In general, non-conforming residential mortgage loans made to borrowers
with lower credit ratings than borrowers of higher quality, or so called "A"
grade mortgage loans, 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, these 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.
It is anticipated that mortgage loans originated or acquired by the
Mortgage Conduit Business will generally be secured by first liens and/or 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 adjusted 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 or originated by the
Mortgage Conduit Business will fully amortize over their remaining terms.
The Mortgage Conduit Business' planned focus on the origination and
acquisition of non- conforming credit mortgage loans may affect CAFC'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 CAFC and
are reduced by the relatively short period that such loans are held and
accumulated prior to sale to permanent investors.
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, Arizona and Washington.
The Trust's Manager, through its correspondent and broker network,
accounted for 100% of the total mortgage loans acquired by the Trust during the
year ended December 31,1999, and together with CAFC (which is also managed by
CAAI) for 100% of the total mortgage loans acquired by the Trust during the year
ended December 31, 1999. CAFC and the Trust's Manager are affiliates of the
Trust.
Underwriting. The Trust's Manager, CAAI, provides documentation for the
origination or purchase of mortgage loans and performs the underwriting function
for all of the Trust's loans on a contract basis with the Trust. The Trust's
Manager also performs a full credit review and analysis to ensure compliance
with its loan eligibility requirements. This review specifically includes, among
other things, an analysis of the underlying property and associated appraisal
and an examination of the credit, employment and income history of the borrower.
Under all of these methods, loans are originated or purchased only after
completion of a legal documentation and eligibility criteria review.
8
Under all of the Trust's and CAFC's underwriting methods, loan
documentation requirements for verifying the borrowers' income and assets vary
according to loan-to-value ratios, credit ratings and other factors. This
variation is necessary to be competitive and responsive to the needs of the
non-conforming mortgage loan sellers. Generally, as the standards for required
documentation are lowered, borrowers' down payment requirements are increased
and the required loan-to-value ratios are decreased. These types of loans with
less documentation are reviewed on a risk analysis underwriting basis. Reduced
documentation loans require the borrower to have a stronger credit history and
larger cash reserves and the appraisal of the property is validated by either an
enhanced desk or field review. The underwriters utilize a risk analysis approach
to determine the borrower's ability and willingness to repay the debt and to
determine if the property taken as security has sufficient value to recover the
debt in the event that the loan defaults. Each loan is reviewed for compensating
factors (i.e., credit reports, sufficient assets, appraisal, job stability,
ability to repay the loan), and overall compensating factors are reviewed to
fully analyze the risk.
CAAI reviews each loan prior to the Trust's commitment to originate or
purchase a mortgage loan to ensure that the mortgage loans meet its quality
standards. The type and extent of the quality control review depends on the
nature of the seller and the characteristics of the loans. In performing a
quality control review on a loan, CAAI analyzes the underlying property
appraisal and examines the credit and income history of the borrower. In
addition, all documents submitted in connection with the origination or purchase
of the loans, including insurance policies, title policies, deeds of trust or
mortgages and promissory notes, are examined for compliance with the Trust's and
CAFC's guidelines and to ensure compliance with state and federal regulations.
Whole Loan Sales. The Mortgage Conduit Business conducted by CAFC
primarily uses a reverse repurchase financing from the Trust and warehouse
financing from commercial warehouse lender to finance the origination or
acquisition of mortgage loans from correspondents. Although CAFC from time-
to-time makes sales of mortgage loans on a loan-by-loan or "flow" basis, it
generally seeks to accumulate a sufficient volume of mortgage loans (generally
packages of $1 million to $2 million) with similar characteristics for sale to
investors at a premium in whole loan sale transactions on a service-released
basis.
Neither the Trust nor CAFC currently plans to sell senior interests 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's 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 a portion
of 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.
WAREHOUSE LENDING BUSINESS
The Trust's third line of business is its Warehouse Lending Business.
Such operations consist primarily of financing for its affiliated mortgage
bankers, including CAFC and Sierra Capital Funding, LLC, all of which act as
correspondents of the Trust. The non-conforming mortgage loans funded with
9
such financing are acquired by the Trust for its portfolio when such loans meet
its investment criteria. These facilities provide reverse financing for mortgage
loans from the time of closing the loan to the time of its sale or other
settlement with the pre-approved investor. The Trust's financing is non-recourse
and the Trust can only look to the sale or liquidation of the mortgage loans as
a source of repayment or repurchase. Any claim of the Trust as a secured lender
in a bankruptcy proceeding may be subject to adjustment and delay. Borrowings
under these facilities are presented on the Trust's balance sheet as "Notes
receivables from related party."
The Trust provides a $3 million reverse repurchase facility to CAFC.
The CAFC financing balance outstanding on the Trust's balance sheet is
structured to qualify under the REIT asset tests and to generate income
qualifying under the 75% gross income test. The terms of the line are based on
the rate of the Mortgage Note plus a fee of $50 or such other fee (not to exceed
$500) as the parties may agree and with an advance rate of 100% of the fair
value of the mortgage loans outstanding.
Utilizing reverse repurchase agreements, at December 31, 1999, the
Trust had outstanding balances of $2,140,360 to CAFC, $428,250 to SCA and
$620,707 to Equity 1-2-3, divisions of SCF/LLC, all affiliated mortgage banking
companies. The Trust finances its Warehouse Lending Business through equity.
HEDGING
The Mortgage Conduit Business to date has originated or purchased
primarily fixed-rate mortgage loans. The mortgage loans held by the Mortgage
Investment Business mostly carry fixed rates and have relatively short
maturities. As the production of fixed-rate mortgage loans increases or if
maturities increase, 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 Manager 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 or Mortgage
Investment 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 or Mortgage Investment
Business may be prevented from effectively hedging its interest rate risks,
without significantly reducing its return on equity.
SERVICING
As the Trust or CAFC originates mortgage loans, they acquire the
servicing rights. The Trust and CAFC subcontract all of their servicing
obligations under such loans to CAAI, the Trust's Manager. Servicing includes
collecting and remitting loan payments, making required advances, accounting for
principal and interest, holding escrow or impound funds for payment of
improvement holdbacks, interest, taxes and insurance, if applicable, making
required inspections of the mortgaged property, contacting delinquent borrowers
and supervising foreclosures and property dispositions in the event of
unremedied defaults in accordance with the Trust's guidelines.
10
Servicing Portfolio. The following tables sets forth certain information
regarding the Trust's servicing portfolio of loans for the years ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
Beginning servicing portfolio $4,696,238 $4,915,186 $8,968,645
Loans added to the servicing portfolio $3,254,256 $10,342,300 7,452,006
Loans sold, servicing released and principal
paydowns (1) $3,035,308 $6,270,841 5,630,987
Ending servicing portfolio $4,915,186 $8,986,645 10,807,644
Number of loans serviced 45 72 82
Average loan size $109,226 $124,815 131,801
<FN>
(1) Includes normal loan payoffs, principal amortization, prepayments, less
reserves and foreclosures.
</FN>
Geographical Distribution. The following table sets forth the geographic
distribution of the Trust's servicing portfolio at the dates presented:
December 31, 1997 December 31, 1998 December 31, 1999
----------------------------- --------------------------- ---------------------------
Number % of Number %of Number %of
State of Loans Portfolio of Loans Portfolio of Loans Portfolio
----- -------- --------- -------- --------- -------- ---------
CA 45 100% 69 95% 80 97%
OR 0 0% 1 1% 0 0%
UT 0 0% 2 4% 2 3%
Interest. The weighted average interest for the Trust's portfolio of
loans in its Mortgage Investment Business at December 31, 1999 was 12.15%, at
December 31, 1998 it was 12.43%, and at December 31, 1997 it was 12.43%.
Maturity. The weighted average maturity of the Trust's portfolio of
loans in its Mortgage Investment Business at December 31, 1999 was 22.57 months,
at December 31, 1998 was 14.06 months and at December 31, 1997 it was 18.75
months. The following table shows the Trust's loan maturities at the dates
presented.
December 31, 1997 December 31, 1998 December 31, 1999
------------------------------- ------------------------------- ------------------------------
Terms Amount % of Amount % of Amount %of
of Loans of Loans Portfolio of Loans Portfolio of Loans Portfolio
-------- -------- --------- -------- --------- -------- ---------
0-12 months $2,651,900 54% $5,530,300 62% 6,548,777 61%
13-24 months 896,412 18% 1,429,900 16% 1,365,577 13%
25-36 months 636,349 13% 824,712 9% 587,213 5%
37-48 months None 0% None 0% None 0%
Over 48 730,525 15% 1,201,733 13% 2,306,077 21%
months ------------ ---- --------- ---- --------- ----
$4,915,186 100% $8,986,645 100% 10,807,644 100%
11
Delinquencies. The following table shows the Trust's delinquency statistics
for its servicing portfolio at the dates presented.
December 31, 1997 December 31, 1998 December 31, 1999
----------------------------- ------------------------- ----------------------------
Loans Number % of Number % of Number % of
Delinquent For: of Loans Portfolio of Loans Portfolio of Loans Portfolio
-------------- -------- --------- -------- --------- -------- ---------
31-60 days 6 7% 6 5% 3 3%
61-90 days 2 3% 2 2% 2 4%
5%%
91 days+ 2 6% 3 3% 7 8%
--- --- --- ---- --- ---
Totals: 10 16% 11 10% 12 15%
REGULATION
The Trust at all times intends to conduct its business so as not to
become regulated as an investment Trust under the Investment Trust Act. The
Investment Trust 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. If the
Trust fails to qualify for exemption from registration as an investment Trust,
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 Trust 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.
Additionally, there are various state and local laws and regulations
affecting the Mortgage Conduit Business. CAFC is licensed in those states
requiring such a license. Mortgage operations also may be subject to applicable
state usury statutes. The Trust is presently in material compliance with all
material rules and regulations to which it is subject.
12
COMPETITION
The Trust believes that it will continue to 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.
Continued consolidation in the mortgage banking industry may also
reduce the number of current correspondents to the Mortgage Conduit Business,
thus reducing the Trust's potential customer base, resulting in CAFC or the
Trust purchasing a larger percentage of mortgage loans from a smaller number of
sellers. Such changes could negatively impact the Mortgage Conduit Business.
The Trust faces competition in its Mortgage Investment Business and
Mortgage Conduit Business from other financial institutions, including but not
limited to banks and investment banks. At present such competition is not
material to the Trust's Warehouse Lending Operations. Many of the institutions
with which the Trust competes have significantly greater financial resources
than the Trust.
EMPLOYEES
The Trust has no employees. The Manager employs and provides all of the
persons required for the operation of the Trust and its Mortgage Investment
Business. At December 31, 1999, the Manager employed 15 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.
ITEM 2. PROPERTIES
The Trust's and its Manager lease executive and administrative offices
located at 50 California Street, Suite 2020, San Francisco, California, 94111,
and consist of approximately 3,000 square feet.
The Manager also leases space in Los Gatos, Laguna Hills, and San
Diego, California for its branch offices on a short-term basis.
Management believes that the terms of the leases are at least as
favorable as could have been obtained from an unaffiliated third party.
Management believes that these facilities are adequate for the Manager's and the
Trust's foreseeable needs and that alternate space at reasonable rental rates is
available, if necessary.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of the Trust's security holders
during the last quarter of its fiscal year ended December 31, 1999.
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Trust's Common Stock was listed and began trading on the American
Stock Exchange under the symbol "CAA" on October 1, 1998. The range of high and
low sale prices of the Common Stock as
13
quoted on the American Stock Exchange were: Fourth Quarter of 1999: High- 3
9/16, Low- 2-3/8; First Quarter of 2000: High- 3-5/8, Low- 2-3/8. At December
31, 1999 the Trust had issued and outstanding 1,484,740 shares of the Trust's
Common Stock and warrants to acquire an additional 148,474 shares of Common
Stock.
On December 31, 1999, there were approximately 202 holders of record
(including holders who are nominees for an undetermined number of beneficial
owners) of the Trust's Common Stock and 139 holders of record of the Trust's
Preferred Stock which is not publicly traded. The Trust believes that its Common
Stock is beneficially held by an excess of 750 shareholders.
On March 7, 2000, the Trust's Board of Directors authorized the Trust
to repurchase up to $250,000 of the Trust's Common Stock, in open market
purchases from time to time at the discretion of the Trust's management; the
timing and extent of the repurchases will depend on market conditions. the Trust
intends to effect such repurchase in compliance with Rule 10b-18 under the
Securities Exchange Act of 1934. As of April 14, 2000 the Trust had not
initiated purchases under the repurchase plan due to restrictions imposed by
Rule 10b-18 and the level of trading of the Trust's Common Stock.
To maintain its qualification as a REIT, the Trust has made and intends
during 1999 to make annual distributions to stockholders of at least 95% of its
taxable income (which may not necessarily equal net income as calculated in
accordance with GAAP), determined without regard to the deduction for dividends
paid and excluding any net capital gains. the Trust declares regular quarterly
dividend distributions. Any taxable income remaining after the distribution of
the regular quarterly or other dividends will be distributed annually on or
prior to the date of the first regular quarterly dividends payment date of the
following taxable year. The REIT Rules have been amended (effective beginning in
2001) to reduce to 90% the percentage of the Trust's taxable income that must be
distributed to maintain REIT status. 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 CAFC, 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 for the Trust's Common Stock.
The Trust omitted its quarterly dividend on the Trust's Common Stock
for the quarter ended March 31, 1999 in order to help finance its planned
expansion of the wholesale loan origination capacity of its mortgage banking
conduit subsidiary. The Trust paid quarterly dividends on the Trust's Common
Stock for the quarters ending June 30, 1999, September 30, 1999 and December 31,
1999 at $.085 per share. The Trust during 1999 paid 12 consecutive monthly
dividends on the Trust's Preferred Stock at an average of $.07 per share per
month.
Holders of the Preferred Shares will be entitled to the Distribution
Preference with respect to such 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 Distributions to the holders
of Preferred Shares in the amount of the Distribution Preference, no further
distributions may be declared on the Preferred Shares for the subject quarter
until the total dollar amount of Distributions declared on the Common Shares as
a class for that quarter equals an amount (the "Matching Distribution") as the
Distribution Preference for each Preferred Share for such quarter or period. Any
Distributions associated with a payment date that are declared after the
Trustees have declared Distributions on Common Shares in the amount of the
Matching Distribution (i.e. excess Distributions) generally will be allocated
such that the amount of Distributions
14
per share paid to or declared to the holders of the Preferred Shares and Common
Shares for the subject quarter are equal. The Distribution Preferences of the
Preferred Shares is not cumulative.
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 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.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
15
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PART II
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ITEM 6. 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 selected historical combined financial data set
forth below for the Trust for each of the years in the period ended December 31,
1995 and the four months ended April 30, 1996 are derived from the audited
financial statements of the Predecessors. The selected financial data for the
eight months ended December 31, 1996 and for the years ended December 31, 1997,
December 31, 1998, and December 31, 1999 are derived from audited financial
statements of the Trust.
Novogradac & Company, LLP audited the aforementioned financial
statements. The historical combined financial information is not necessarily
indicative of future operations and should not be so construed. The selected
financial data should be read in conjunction with "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Five Year Combined (Predecessors) Combined (Predecessors) Successor
Financial Summary ----------------------- ----------------------- ---------
Year Ended Four Months Ended Eight Months Ended
December 31, 1995 April 30, 1996 December 31, 1996
Operations:
Revenue $489,363 $273,709 $490,300
Net income 414,414 226,643 373,132
Per Share Data:
Net Income
Basic --- --- ---
Diluted --- --- ---
Balance Sheet Data:
Mortgage notes receivable $4,790,070 $4,757,895 $4,696,238
Total assets 6,254,052 6,267,251 6,702,261
Total liabilities 164,022 263,316 756,073
Shareholder's equity 6,090,030 6,003,935 5,946,188
[continued on the following page]
16
Five Year Successor Successor Successor
Financial Summary --------- --------- ---------
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1998 December 31, 1999
Operations:
Revenue $776,405 $1,677,233 1,243,866
Net income 535,789 $1,003,706 450,605
Per Share Data:
Net Income
Basic --- .351 ---
Diluted --- .341 ---
Balance Sheet Data:
Mortgage notes receivable $4,915,186 $8,986,645 10,807,644
Total assets 10,132,419 16,804,983 17,006,696
Total liabilities 311,096 757,532 1,579,862
Shareholder's equity 9,821,323 16,047,451 15,426,834
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The preparation of Trust's financial statements were based upon the
operating results of the Trust and 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 their common
management and directors.
GENERAL
Predecessors. The Trust resulted from the consolidation of CAIT I and
CAIT II (the "Combination") on April 30, 1996 when the Trust ("Successor")
exchanged shares of preferred stock for all of the outstanding shares of CAIT I
and CAIT II. All assets and liabilities of CAIT I and CAIT II were transferred
to and assumed by the Trust. CAIT I and CAIT II were both privately-held
residential mortgage investment trusts and were formed and managed by Capital
Alliance Advisors, Inc. ("CAAI").
Organization. The Trust registered its common shares with the
Securities and Exchange Commission under the Securities Act of 1933 , as
amended, in May of 1997 in an offering of 1,500,000 common shares at $8.00 per
share. The shares are listed on the American Stock Exchange with the exchange
symbol of "CAA".
17
On April 15, 1997 the Trust formed its non-qualified REIT subsidiary to
conduct a mortgage conduit business and holds a 99% economic interest in CAFC
through ownership of all of its Series "A" Preferred Stock. The Trust's Manager
holds all of the Common Shares of CAFC and a 1% economic interest in CAFC.
On September 30, 1998, the initial public offering of Common Shares was
terminated. As of December 31, 1998, 1,484,740 Common Shares were outstanding.
Operating Strategy. The Trust invests as a portfolio lender primarily
in non-conforming mortgage loans on one-to-four unit residential properties
secured by first and second deeds of trust. Management believes that this
segment of the mortgage market is inadequately served and that there is a large
demand for non-conforming mortgage loans with a complete spectrum of credit
grades.
CAFC's operating strategy is to originate, through mortgage loan
brokers and a correspondent network, conforming and non-conforming home equity
loans to be sold in the secondary mortgage market for cash. Although the loans
currently made are concentrated in California, CAFC plans to originate and/or
purchase loans on both an individual and bulk basis throughout the western
United States. Loans will then be sold into the secondary market for a premium
or to the Trust at fair market value, when they meet the Trust's underwriting
standards (which include a combined loan-to-value ratio that does not exceed 75%
of the underlying collateral).
Loan Origination and Loan Servicing. Mortgage loan origination consists
of establishing a relationship with a borrower or his broker, obtaining and
reviewing documentation concerning the credit rating and net worth of borrowers,
inspecting and appraising properties that are proposed as the collateral for 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 borrowed proceeds in escrow
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 are provided
to the Trust by CAAI, its Manager.
Contingencies and Commitments.
-----------------------------
As of December 31, 1999, the Trust's real estate investments included
four properties held for sale at a capitalized cost of $644,326 and a loan
portfolio of $10,807,664 consisting of 82 loans, of which nine loans totaling
$1,294,982 or 11.98% of the portfolio were delinquent.
As of December 31, 1998, the Trust's real estate investments included
one property held for sale at a capitalized cost of $149,663 and a loan
portfolio of $8,986,645 consisting of 72 loans of which six loans totaling
$717,453 or 7.98% of the portfolio were delinquent.
In assessing the collectibility of the real estate held for sale and
the delinquent mortgage loans, management estimates a net gain will be
recognized upon sale of the real estate and the properties securing these loans,
if it is necessary to foreclose the mortgage loans due the Trust. Management's
estimate is based on an anticipated sales price of the property that includes a
discount from the latest appraised value of the property, 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 all conditions.
Accordingly, the Trust did not have any commitments to fund loans as of December
31, 1999 and December 31, 1998.
18
RESULTS OF OPERATIONS
The results of operation for the years ended December 31, 1997,
December 31, 1998, and December 31, 1999 follows. The historical information
presented herein is not necessarily indicative of future operations.
YEAR ENDED DECEMBER 31, 1999
COMPARED TO YEAR ENDED DECEMBER 31, 1998
The Trust's operating revenues (after adjusting for CAFC's operating
loss, which is reported as part of the Trust's gross revenues) increased to
$1,975,882 as compared to $1,689,082 for 1998, primarily from the increased
interest income of a larger mortgage portfolio. Other income for the year ended
December 31, 1999 decreased on account of lower rental income from real estate
held for sale.
At year ended December 31, 1999 the mortgage notes receivable balance
was $1,821,019 greater than the year ended December 31, 1998 mortgage notes
receivable balance. At year ended December 31, 1999, the lines of credit balance
was $1,967,781 less than the year ended December 31, 1998 lines of credit
balance. At year ended December 31, 1999 the real estate held for sale balance
was $494,663 greater than the year ended December 31, 1998 real estate held for
sale balance.
Expenses for the year ended December 31, 1999 increased to $781,136 as
compared to $676,708 for the previous year. The increase in 1999 compared to
1998 is primarily due to higher interest expense of $65,431, higher compensation
of $138,853 to the Manager, and lower general and administrative expenses of
$47,082. The 1999 and 1998 sale of real estate held were reported as a separate
line item and did not reduce either year's expenses or increase either year's
revenues.
Net income for the year ended December 31, 1999 was $450,605. Net
Income for the year ended December 31, 1998 was $1,003,706.
YEAR ENDED DECEMBER 31, 1998
COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues for the year ended December 31, 1998 increased to $1,677,233
as compared to $776,405 for 1997, primarily from the increased interest income
of a larger mortgage portfolio and larger warehouse lines of credit outstanding
during 1998. Other income for the year ended December 31, 1998 decreased on
account of lower rental income from real estate held for sale and the
elimination of portfolio loan sales.
At year ended December 31, 1998 the mortgage notes receivable balance
was $4,071,459 greater than the year ended December 31, 1997 mortgage notes
receivable balance. At year ended December 31, 1998 the warehouse lines of
credit balance was $2,971,141 greater than the year ended December 31, 1997
warehouse lines of credit. At year ended December 31, 1998 the real estate held
for sale balance was $172,887 less than the year ended December 31, 1997 real
estate held for sale balance.
Expenses for the year ended December 31, 1998 increased to $686,708 as
compared to $259,611 for the previous year. The increase in 1998 compared to
1997 is primarily due to a $205,855 provision for loan losses and loss reserves,
from higher compensation of $124,978 to the Manager and higher general and
administrative expenses of operating a larger enterprise. The 1998 and 1997 gain
from sale of real estate held were reported as a separate line item and did not
reduce either year's expenses or increase either year's revenues.
19
Net income for the year ended December 31, 1998 was $1,003,706. Net
Income for the year ended December 31, 1996 was $535,789.
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 operation primarily through
the effect on interest rates, since interest rates normally increase during
periods of high inflation and decrease during periods of low inflation. When
interest rate increase, the demand for mortgage loans and a borrower's ability
to qualify for mortgage financing may be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that cash flow from operations, the mortgage loans
that are paid off, the disposition of real estate owned, a $2,000,000 bank loan
plus the extension of a $4,000,000 warehouse lines 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.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE YEAR ENDED DECEMBER 31, 1999
As of January 1, 1999, the Trust had $570,710 of cash and cash
equivalents. After taking into effect the various transactions discussed below,
cash and cash equivalents at December 31, 1999 were $41,939. The following
summarizes the changes in net cash provided by operating activities, net cash
used for investing activities and net cash provided by financing activities.
The principal source of the Trust's reduced liquidity was the
$1,821,019 increase in mortgage notes receivables. Offsetting the increased
mortgage notes receivable balance was a $1,967,781 reduction in the line of
credit to related parties.
Net cash provided by the activities during the twelve months ended
December 31, 1999 was $809,770. Net income of $450,605 and the non-cash
accounting loss of $732,016 in CAFC were was the primary suppliers of cash. The
largest user of cash from operating activities was the $534,190 reduction in
affiliate borrowings.
Net cash used in financing activities during the twelve months ended
December 31, 1999 was $186,472. The principal generators of cash from financing
activities was $904,750 provided from a bank loan. Dividends paid of $1,071,222
were the users of cash from financing activities.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE YEAR ENDED DECEMBER 31, 1998
As of January 1, 1998, the Trust had $1,748,485 of cash and cash
equivalents. After taking into effect the various transactions discussed below,
cash and cash equivalents at December 31, 1998 were $570,710. The following
summarizes the changes in net cash provided by operating activities, net cash
used for investing activities and net cash provided by financing activities.
The principal source of the Trust's enhanced liquidity are the proceeds
from the issuance of common stock. From January 1, 1998 through September 30,
1998, the Trust received net common stock proceeds of $6,638,256. Management's
strategy is to invest the common stock proceeds primarily in the
20
Trust's Mortgage Investment Business. In the interim, the Trust's has used the
net proceeds of its current public offering to provide funding for the Trust's
recently established Warehouse Lending Business and to invest in subordinated
debt of a strategic partner mortgage banking firm which yields 15% per annum. At
December 31, 1998 the Trust had $2,414,435 of warehouse facilities outstanding
to CAFC, $820,100 to SCA, $1,472,564 to Equity 1-2-3, and $450,000 to CMT.
Net cash provided by the operating activities during the twelve months
ended December 31, 1998 was $1,099,341. Net income of $1,003,706 was the primary
supplier of cash and the largest user of cash from operating activities was the
$114,119 increase in receivables from affiliates.
Net cash used in investing activities during the twelve months ended
December 31, 1998 was $7,603,400. The principal generators of cash from
investment activities were $6,270,811 provided from the repayments of mortgage
notes receivable. Investments in new mortgage notes receivable utilized
$10,342,300 and the previously described warehouse lines of credit extended to
CAFC, SCA, Equity 1-2-3, and CMT utilized $2,971,141.
Net cash provided by financing activities during the twelve months
ended December 31, 1998 was $5,326,324. The principal source of cash from
financing activities were the gross proceeds of $7,375,840 from the issuance of
common stock. Dividends of $1,143,018 and organizational and offering costs of
$747,406 were the leading users of cash from financing activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in Item 14(a)(1)
are incorporated herein by reference and filed as part of this report.
Selected Quarterly Financial Data required by Item 302(a) of Regulation
S-K is set forth in the financial statements filed as part of Registrant's Form
10-Qs for the quarters ended March 31, 1999, June 30, 1999 and September 30,
1999 are incorporated herein by reference and filed as part of this report.
The unaudited 1998 and 1999 fourth quarter operating statement is
presented below with the accompanying notes to the operating statement
incorporated herein by reference to the Financial Statements with Independent
Auditor's Report for the three year period ended December 31, 1999.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
21
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
December 31
1998 1999
---- ----
REVENUES
Interest income ............................. $ 528,359 $ 483,999
Investment income from affiliates ........... (6,146) (132,281)
Other income ................................ 2,950 14,832
--------- ---------
Total revenues ........................... 525,163 366,550
EXPENSES
Loan servicing and origination
fees to related party .................... 28,901 82,526
Interest expense ............................ 17,596 12,614
Provisions for loan losses .................. 170,000 70,000
Operating expenses of real estate owned ..... 6,061 (8,150)
General and Administrative .................. 46,339 (7,691)
--------- ---------
Total expenses ........................... 268,897 149,299
NET INCOME BEFORE GAIN
ON REAL ESTATE OWNED ........................ 256,266 217,251
GAIN ON REAL ESTATE OWNED ........................ 3,181 (1,779)
CHANGE IN ACCOUNTING PRINCIPLE ................... 0 (10,346)
--------- ---------
NET INCOME ....................................... $ 259,447 205,126
PREFERRED SHARE DIVIDENDS ........................ $ 145,026 $ 147,543
BASIC EARNINGS PER
COMMON SHARE ................................ .077 .039
DILUTED EARNINGS PER
COMMON SHARE ................................ .067 .032
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
22
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
DIRECTORS
Thomas B. Swartz, 68; Chairman and Chief Executive Officer(1)
Class I Director since 1995; current term expires in 2000; 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 1967 (reserve);
Yale University, A.B. 1954.
Dennis R. Konczal, 49; President, Director and Chief Operating Officer(1)(2)
Class II Director since 1995; current term expires in 2001; 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 (1984 to date) and of Capital Alliance
Investments Incorporated (a NASD broker-dealer and Registered Investment
Advisor) (1984 to 1999); 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).
Richard J. Wrensen, 44; Senior Vice-President, Director and Chief Financial
Officer(1)
Class III Director since 2000; current term expires 2002; Senior
Vice-President and Chief Financial Officer, Capital Alliance Advisors, Inc. and
its Affiliates (including Capital Alliance Income Trust Ltd. and of Sierra
Capital Companies and its affiliates) (1997 to date); Senior Vice-President and
Chief Financial Officer, SNK Realty Group (Japanese merchant builder) (1997);
Vice-President Finance, Mattison and Shidler (national real estate investment)
(1987 to 1997); Associate, Marakon Associates (1985 to 1987); Vice-President and
Controller, Ring Brothers Corp. (real estate syndication and management (1981 to
1983); Division Controller, Great Southwest Corp. (1979 to 1981); Certified
Public Accountant (1979); Coopers & Lybrand (1978 to 1979); B.S. Accounting,
University of Florida (1978); MBA, Haas School of Business Administration,
University of California, Berkeley (1985).
Stanley C. Brooks, 50; Director(2)
Class II Director since 1996; current term expires 2001; President and
Chairman, Brookstreet Securities Corporation (1990 to date); Executive
Vice-President, Toluca Pacific Securities Corporation (1987 to 1989); Senior
Vice-President, First Affiliated Securities (1983 to 1986); Senior
Vice-President,
23
Private Ledger Financial Services (1976 to 1983); Member, National Futures
Association (1991 to date); Member, Securities Industry Association (1995 to
date); Member, Regional Investment Bankers Association (1990 to date); Licensed
Principal, NASD (1970 to date); California State Polytechnic Institute, B.S.
Business Administration 1970. Mr. Brooks was elected to the Board of Directors
pursuant to the Underwriting Agreement between the Trust and Brookstreet
Securities Corporation as the Managing Broker-Dealer of the Trust's current
public offering of its Common Stock.
Harvey Blomberg, 59; Director(1)(2)
Class I Director since 1996; current term expires 2000; 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.
- --------------------------
(1) Also is a member of the Executive Committee.
(2) Also is a member of the Audit Committee.
EXECUTIVE OFFICERS
The following persons currently serve as executive officers of the
Trust. They hold office at the discretion of the Directors.
Name Age Position
Thomas B. Swartz 68 Chairman and Chief
Executive Officer
Dennis R. Konczal 49 President and Chief
Operating Officer
Richard J. Wrensen 44 Senior Vice President
and Chief Financial Officer
Linda St. John 44 Operations Officer
and Secretary
The principal occupations of the Executive officers of the Trust during
the last five years or more are set forth below.
Thomas B. Swartz, 68; Chairman and Chief Executive Officer
Class I Director since 1995; current term expires in 2000; 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-
24
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 1967 (reserve); Yale University, A.B. 1954.
Dennis R. Konczal, 49; President, Director and Chief Operating Officer
Class II Director since 1995; current term expires in 1998; 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 (1984 to date) and of Capital Alliance
Investments Incorporated (a NASD broker-dealer and Registered Investment
Advisor) (1984 to 1999); 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).
Richard J. Wrensen, 44, Senior Vice-President, Director and Chief Financial
Officer
Senior Vice-President and Chief Financial Officer, Capital Alliance
Advisors, Inc. and its Affiliates (including Capital Alliance Income Trust Ltd.
and of Sierra Capital Companies and its affiliates) (1997 to date); Senior
Vice-President and Chief Financial Officer, SNK Realty Group (Japanese merchant
builder) (1997); Vice-President Finance, Mattison and Shidler (national real
estate investment) (1987 to 1997); Associate, Marakon Associates (1985 to 1987);
Vice-President and Controller, Ring Brothers Corp. (real estate syndication and
management (1981 to 1983); Division Controller, Great Southwest Corp. (1979 to
1981); Certified Public Accountant (1979); Coopers & Lybrand (1978 to 1979);
B.S. Accounting, University of Florida (1978); MBA, Haas School of Business
Administration, University of California, Berkeley (1985).
Linda St. John, 44, Operations Officer and Secretary
Operations Officer and Secretary, Capital Alliance Advisors, Inc. (1995
to date); Secretary, Sierra Capital Companies and Affiliates (1995 to date).
Operations Manager, Gruen Gruen & Associates (1994- 1995); MIS Manager, Hannum
Associates (1991-1993); Rochester Business Institute, A.A. Business
Administration (1984).
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF OFFICERS
The Trust has no full time employees and is managed by Capital Alliance
Advisors, Inc. as Manager of the Trust under a Management Agreement which
requires CAAI to pay the employment expenses of its personnel. Accordingly, no
compensation was paid by the Trust to any of the named executives.
25
COMPENSATION OF DIRECTORS
Director Fees. The Trust pays each unaffiliated Director an annual fee
of $5,000. In 1999 Messrs. Brooks and Blomberg each received $5,000 as a
Director's fee.
Committee and Other Meeting Fees. The Directors are also entitled to be
paid $500 for each director's or committee meeting attended in person and $300
if attended by telephonic means. During 1998 Messrs. Brooks and Blomberg each
received $1,700 in committee and meeting fees.
Reimbursements. All Directors are reimbursed for reasonable travel and
other out of pocket expenses incurred in attending board and committee meetings.
Such compensation and reimbursement arrangements for Directors may be
changed by the Board of Directors pursuant to authority granted by the Trust's
Bylaws.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Trust
with respect to beneficial ownership of the Trust's Common Shares as of April
14, 2000, 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.
Percentage of
Shares Beneficially
Number of Owned
Shares -----------------------
Beneficially Before After
Owned Offering Offering
----- -------- --------
Name of Beneficial Owner
- ------------------------
Thomas B. Swartz (1)(5).................... 3,086* 0 0
Dennis R. Konczal (5)...................... 8,000* 0 0
Richard J. Wrensen (3)(5).................. 14,800* 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 (4)......................... 0 0 0
* Represents less than 1% of outstanding Common Shares.
- --------------------
<FN>
(1) Mr. Swartz owns beneficially 4,004 shares of Series A Preferred Shares
as of April 14, 2000, representing less than 1% of the outstanding
Series A Preferred Shares.
(2) Mr. Brooks is the President of the Managing Dealer of the Trust's
initial public offering of its Common Stock.
26
(3) Mr. Wrensen owns beneficially 718 shares of Series A Preferred Shares
as of April 14, 2000, representing less than 1% of the outstanding
Series A Preferred Shares. Mr. Wrensen's wife owns 3,900 Shares of
Common Stock as of April 14, 2000, in which Mr. Wrensen claims no
beneficial interest. Such holdings represent less than 1% of the
outstanding Common Shares.
(4) Mr. Morford owns beneficially 49,000 shares of Series A Preferred
Shares as of April 14, 2000, representing 7.7% of the outstanding
Series A Preferred Shares.
(5) Capital Alliance Advisors, Inc., the Trust's Manager, owns
beneficially 6,500 Shares of Common Stock and 6,437 shares of Series A
Preferred Shares as of April 14, 2000, representing 1% of the
outstanding Series A Preferred Shares and less than 1% of the
outstanding Common Shares. Messrs. Swartz, Konczal and Wrensen are
officers and directors of the Manager and collectively own a majority
of the outstanding Common Shares of the Manager.
</FN>
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
Arrangements and Transactions with CAAI. CAAI is the Manager of the
Trust and provides (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 Mortgage Conduit Business. 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. CAAI
owns all of the voting common stock and a 1% economic interest in CAFC, the
Trust's Mortgage Conduit Subsidiary. The Trust owns all of the non-voting
preferred stock representing 99% of the economic interest in CAFC. CAAI has the
power to elect all of the directors of CAFC 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 CAFC
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. 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. In addition, Messrs. Swartz, Wrensen and Konczal, the
Officers and Directors of CAAI are also officers and Directors of the Trust. 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.
Investment in Related Mortgage Banking Firms. 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, a division
of Sierra Capital Funding, LLC, a Delaware limited liability company
27
("SCF/LLC"). SCF/LLC in 1997 merged with Sierra Capital Acceptance, a Delaware
business trust ("SCA"), in which the predecessors originally invested.). SCA is
a wholesale mortgage banking firm specializing in A-, B/C credit-rated
non-conforming residential mortgages. The SCF/LLC-SCA investment held by the
Trust has a 15% distribution preference (which has been paid quarterly) and a
liquidation preference. SCA contracts with the Manager to provide origination,
underwriting, processing, funding and sale of A- and B/C credit rated
non-conforming residential mortgages to CAFC and the Trust. Messrs. Swartz and
Konczal are principals, directors and officers of the SCA division of SCF/LLC as
well as of the Trust and its Manager.
The Trust has also committed and made a strategic investment totaling
$225,000 of subordinated debt in Equity 1-2-3, located in Laguna Hills,
California. The investment was written off in 1999. SCSI Corporation, which is
controlled by Messrs. Swartz and Konczal, is the Managing Member of SCF/LLC and
has invested $75,000 in the Common Shares of Equity 1-2-3, which investment was
written off in 1999.
Sale and Purchase of Loans. To provide a source of mortgage loans for
the Trust's Mortgage Investment Business, CAFC, the Mortgage Conduit Subsidiary,
offers to the Trust for 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.
The Trust accounts for the purchase of loans from CAFC on a fair market
value basis. When the Trust computes the equity and earnings or loss of the
Mortgage Conduit Subsidiary, it will eliminate any intercompany profit.
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.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
28
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS
SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1)
Financial Statements. The following Company financial statements are
filed as part of this report:
Independent Auditors' Report...................................F-1
Balance Sheets.................................................F-2
Statements of Operation........................................F-3
Statements of Changes in Stockholders' Equity..................F-4
Statements of Cash Flows.......................................F-5
Notes to Financial Statements..................................F-6
(a)(2) Financial Statement Schedules are listed in Part II - Item 8.
(a)(3) Exhibits.
--------
Exhibit No.
3.1 Charter Certificate of Incorporation and Amendment No. 1(1)
3.2 Bylaws of the Registrant(1)
3.3 Certificate of Amendment of Certificate of Incorporation(6)
4.1 Form of Stock Certificate of Common Shares of the Registrant(2)
4.2 Form of Shareholder's Warrant Agreement(4)
4.4 Form of Common Warrant Certificate(4)
5.1 Opinion of Ashby & Geddes(4)
8.1 Opinion of Landels Ripley & Diamond, LLP(4)
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)
23.1 Consent of Landels Ripley & Diamond, LLP(4)
23.2 Consent of Novogradac & Company LLP(4)
23.3 Consent of Ashby & Geddes(4)
23.4 Consent of Landels Ripley & Diamond, LLP(5)
23.5 Consent of Novogradac & Company LLP(5)
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)
24.7 Power of Attorney of Richard J. Wrensen(7)
27.3 Revised Financial Data Schedule-Capital Alliance Income Trust,
A Real Estate Investment Trust(3)
28.1 Impound and Escrow Agreement(4)
28.2 Impound and Escrow Agreement, as amended October 23, 1997(5)
- ----------
29
(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.
(3) This exhibit was previously contained in Amendment No. 2 to the
Registrant's Registration Statement filed on Form S-11 with the
Commission on February 6, 1997 and is incorporated by reference
herein.
(4) These exhibits were previously contained in Post-Effective Amendment
No. 2 to the Registrant's Registration Statement filed on Form S-11
with the Commission on April 21, 1997, and are incorporated by
reference herein.
(5) These exhibits were previously contained in Post-Effective Amendment
No. 3 to the Registrant's Registration Statement filed on Form S-11
with the Commission on December 10, 1997, and are incorporated by
reference herein.
(6) These exhibits were previously contained in Form 10-Q for the period
ending June 30, 1997 filed with the Commission on August 14, 1997, and
are incorporated by reference herein.
(7) This exhibit was previously contained in Form 10-K for the period
ending December 31, 1998 filed with the Commission on April 10, 1999,
and are incorporated by reference herein.
(b) Reports on Form 8-K.
--------------------
None.
(c) See a(3) above.
(d) Financial Statement Schedules.
-----------------------------
None.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(D) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, hereunto duly authorized.
Capital Alliance Income Trust, Ltd.
Dated: April 10, 2000 A Real Estate Investment Trust
By: s/s Thomas B. Swartz
--------------------
Thomas B. Swartz
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/ Thomas B. Swartz Dated: April 10, 2000
- --------------------------------------------
Thomas B. Swartz
Chairman and Chief Executive Officer
(Principal Executive Officer)
s/s Richard J. Wrensen Dated: April 10, 2000
- --------------------------------------------
Richard J. Wrensen
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
/s/ Dennis R. Konczal Dated: April 10, 2000
- --------------------------------------------
Dennis R. Konczal
President and Director
/s/ Stanley C. Brooks Dated: April 10, 2000
- --------------------------------------------
Stanley C. Brooks
Director
/s/ Harvey Blomberg Dated: April 10, 2000
- --------------------------------------------
Harvey Blomberg
Director
31
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
FINANCIAL STATEMENTS
with
Independent Auditors' Report
For the three-year period ended December 31, 1999
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Capital Alliance Income Trust Ltd., A Real Estate Investment Trust:
We have audited the accompanying balance sheets of Capital Alliance Income Trust
Ltd., A Real Estate Investment Trust as of December 31, 1999 and 1998, and the
related statements of operations, changes in stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Trust's 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.
As discussed in Note 2 to the financial statements, the Trust changed its method
of accounting for organization costs in 1999.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Alliance Income Trust
Ltd., A Real Estate Investment Trust as of December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
NOVOGRADAC & COMPANY LLP
San Francisco, California
April 7, 2000
F-1
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Balance Sheets
December 31,
---------------------------
1998 1999
---- ----
ASSETS
Cash and cash equivalents ......................................... $ 570,710 $ 41,939
Restricted cash ................................................... 594,693 487,174
Accounts receivable ............................................... 193,241 233,017
Due from affiliates ............................................... 103,301 637,491
Notes receivable:
Note receivable from related party .......................... 225,000 --
Lines of credit to related parties .......................... 5,157,098 3,189,317
Mortgage notes receivable ................................... 8,986,645 10,807,664
Allowance for loan losses ................................... (170,000) (85,000)
------------ ------------
Net receivable ......................................... 14,198,743 13,911,981
Real estate owned ................................................. 149,663 644,326
Security deposits ................................................. 32,133 --
Investments in affiliates ......................................... 831,936 870,466
Origination costs ................................................. 120,217 163,635
Loan fee .......................................................... -- 16,667
Organization costs ................................................ 10,346 --
------------ ------------
Total assets ...................................................... $ 16,804,983 $ 17,006,696
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks ..................................... $ 594,693 $ 487,174
Loan Payable ................................................ -- 904,750
Other liabilities ........................................... 162,839 187,938
------------
------------ ------------
Total liabilities ................................................. 757,532 1,579,862
------------ ------------
Stockholders' Equity
Preferred stock, $.01 par value (liquidation value $9.50
per share), 675,000 shares authorized; 641,283 shares issued;
631,757 shares outstanding at December 31, 1999 and 1998 .... 6,413 6,413
Additional paid in capital-preferred stock .................. 5,868,711 5,752,907
Less: treasury stock, 9,526 shares at cost ................. (86,944) (86,944)
Common stock, $.01 par value, 5,000,000 shares authorized;
1,484,740 shares issued and outstanding at December 31, ..... 14,847 14,847
1999 and 1998
Additional paid in capital-common stock ..................... 10,244,424 9,739,611
------------ ------------
Total stockholders' equity ........................................ 16,047,451 15,426,834
------------ ------------
Total liabilities and stockholders' equity ........................ $ 16,804,983 $ 17,006,696
============ ============
See accompanying notes.
F-2
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Statements of Operations
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
---- ---- ----
REVENUES
Interest income ....................... $ 655,225 $ 1,243,495 $ 1,611,363
Interest income from affiliates ....... 45,624 409,278 342,367
Equity in income (loss) of affiliates . -- (11,849) (732,016)
Other income (loss) ................... 75,556 36,309 22,152
Total revenues .................. 776,405 1,677,233 1,243,866
EXPENSES
Loan servicing fees to related party .. 102,027 131,864 251,655
Management fees to related party ...... 48,343 143,484 162,546
Interest expense ...................... 46,060 34,607 100,038
Provision for loan loss ............... -- 205,855 162,500
Operating expenses of real estate owned 31,821 10,466 5,427
Taxes ................................. 6,629 26,920 22,540
General and administrative ............ 24,731 123,512 76,430
Total expenses .................. 259,611 676,708 781,136
INCOME BEFORE GAIN (LOSS) ON REAL
ESTATE OWNED .................................. 516,794 1,000,525 462,730
Gain (loss) on real estate owned ...... 18,995 3,181 (1,779)
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE .............. 535,789 1,003,706 460,951
Cumulative effect on prior years of
accounting change ..................... -- -- (10,346)
NET INCOME .................................... $ 535,789 $ 1,003,706 $ 450,605
NET INCOME PER PREFERRED SHARE ................ $ 0.835 $ 0.945 $ 0.713
WEIGHTED AVERAGE PREFERRED
SHARES OUTSTANDING .................... 641,283 626,873 631,757
BASIC EARNINGS PER COMMON SHARE ............... $ -- $ 0.351 $ --
DILUTED EARNINGS PER COMMON SHARE ............. $ -- $ 0.341 $ --
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC EARNINGS
PER SHARE ............................. 45,219 1,171,733 1,484,740
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED EARNINGS ........ 45,219 1,206,886 1,825,854
PER SHARE
See accompanying notes.
F-3
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Statements of Changes in Stockholders' Equity
(Common) (Preferred)
Additional Additional
Common Common Paid in Preferred Preferred Paid in
Shares Stock Capital Shares Stock Capital
------ ----- ------- ------ ----- -------
BALANCE AS OF JANUARY 1, 1997 -- $ -- $ -- 641,283 $ 6,413 $ 5,939,775
Issuance of common shares 562,760 5,628 4,496,459 -- -- --
Offering costs -- -- (555,888) -- -- --
Net income -- -- -- -- -- --
Dividends -- -- -- -- -- (71,064)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AS OF DECEMBER 31, 1997 562,760 5,628 3,940,571 641,283 6,413 5,868,711
Issuance of common shares 921,980 9,219 6,628,689 -- -- --
Purchase of 9,526 shares of treasury --
Stock -- -- -- -- -- --
Offering costs -- -- (185,524) -- -- --
Net income -- -- -- -- -- --
Dividends -- -- (139,312) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AS OF DECEMBER 31, 1998 1,484,740 14,847 10,244,424 641,283 6,413 5,868,711
Net income -- -- -- -- -- --
Dividends -- -- (504,813) -- -- (115,804)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AS OF DECEMBER 31, 1999 1,484,740 $ 14,847 $ 9,739,611 641,283 $ 6,413 $ 5,752,907
============ ============ ============ ============ ============ ============
Retained Treasury
Earnings Stock Total
BALANCE AS OF JANUARY 1, 1997 $ -- $ -- $ 5,946,188
Issuance of common shares -- -- 4,502,087
Offering costs -- -- (555,888)
Net income 535,789 -- 535,789
Dividends (535,789) -- (606,853)
------------ ------------ ------------
BALANCE AS OF DECEMBER 31, 1997 -- -- 9,821,323
Issuance of common shares -- -- 6,637,908
Purchase of 9,526 shares of treasury
Stock -- (86,944) (86,944)
Offering costs -- -- (185,524)
Net income 1,003,706 -- 1,003,706
Dividends (1,003,706) -- (1,143,018)
------------ ------------ ------------
BALANCE AS OF DECEMBER 31, 1998 -- (86,944) 16,047,451
Net income 450,605 -- 450,605
Dividends (450,605) -- (1,071,222)
------------ ------------ ------------
BALANCE AS OF DECEMBER 31, 1999 $ -- $ (86,944) $ 15,426,834
============ ============ ============
See accompanying notes.
F-4
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Statements of Cash Flows
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 535,789 $ 1,003,706 $ 450,605
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 4,335 4,404 3,333
(Gain) loss on real estate owned (18,995) (3,181) 1,779
Equity in income (loss) of affiliates - - 732,016
(Increase) decrease in interest receivable 14,799 (98,034) (39,776)
Accrued interest capitalized to real estate owned (24,513) (6,950) (34,075)
Provision for loan loss - 205,855 162,500
(Increase) decrease in organization costs - (272) 10,346
Increase in security deposits - (32,133) 32,133
Increase (decrease) in due to /from affiliates (10,476) (114,119) (534,190)
Increase (decrease) in other liabilities (68,619) 140,065 25,099
Net cash provided by operating activities 432,320 1,099,341 809,770
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash (140,247) (389,337) 107,519
Increase (decrease) in mortgage note holdbacks 140,365 389,337 (107,519)
Increase in origination costs - (120,217) (43,418)
Increase in warehouse lines of credit (2,185,957) (2,971,141) 1,967,781
Increase in investments in affiliates - (286,848) (100,000)
(Increase) decrease in related party note receivable - (225,000) (22,500)
Return of capital on related party investment 19,965 - -
Investments in mortgage notes receivable (3,254,256) (10,342,300) (7,452,006)
Repayments of mortgage notes receivable 2,625,113 6,270,841 4,395,441
Net proceeds from sale of real estate owned 791,416 77,181 147,884
Capital costs of real estate owned (23,956) (5,956) (45,251)
Net cash provided by (used in) investing activities (2,027,557) (7,603,440) (1,152,069)
CASH FLOWS FROM FINANCING ACTIVITIES
Loan payable to bank - - 904,750
Increase in loan fee - - (20,000)
Note payable to related party 72,148 (72,148) -
Payment of mortgage notes payable (191,297) - -
Purchase of treasury stock - (86,944) -
Proceeds from issuance of shares 4,502,087 7,375,840 -
Organizational and offering costs (499,161) (747,406) -
Common dividends paid - (550,484) (504,813)
Preferred dividends paid (606,853) (592,534) (566,409)
Net cash provided by (used in) financing activities 3,276,924 5,326,324 (186,472)
NET INCREASE (DECREASE) IN CASH 1,681,687 (1,177,775) (528,771)
CASH AT BEGINNING OF PERIOD 66,798 1,748,485 570,710
CASH AT END OF PERIOD $ 1,748,485 $ 570,710 $ 41,939
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest expense paid $ 43,604 $ 28,224 $ 100,038
Taxes paid $ 800 $ 15,238 $ 800
NON-CASH INVESTING AND FINANCING ACTIVITY (See Note 2, 9 and 10):
Deferred offering costs offset against proceeds of offering $ 555,888 $ 185,524 $ -
Transfer of real estate owned to CAFC $ 971,941 $ 678,405 $ -
Transfer of mortgage loans to CAFC $ - $ - $ 670,546
See accompanying notes.
F-5
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 1999
1. Organization
------------
Capital Alliance Income Trust Ltd., A Real Estate Investment Trust (the
"Trust"), a Delaware corporation, primarily invests in mortgage loans
secured by real estate. The Trust was formed December 12, 1995 as a
mortgage investment trust which invests 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.
On September 30, 1998, the Trust completed its initial public offering of
up to 1,500,000 common shares at $8.00 per share and warrants to purchase
an additional 150,000 common shares at $5.60 per share.
2. Summary of significant accounting policies & nature of operations
-----------------------------------------------------------------
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.
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.
Fair value of financial instruments. For cash and cash equivalents, the
carrying amount is a reasonable estimate of fair value. For mortgage notes
receivable, 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.
Concentration of credit risk. The Trust holds numerous mortgage notes
receivable. These notes are secured by deeds of trust on residential
properties located primarily in California which results in a concentration
of 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 loan portfolio is secured by second trust deeds on real estate.
Loan loss reserve. Management reviews its loan loss provision periodically
and the Trust maintains an allowance for losses on notes receivable at an
amount that management believes is sufficient to protect against losses in
the loan portfolio. Accounts receivable deemed uncollectible are written
off or reserved. The Trust does not accrue interest income on impaired
loans (Note 7).
F-6
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 1999
2. Summary of significant accounting policies & nature of operations
(continued)
---------------------------------------------------------------------------
Real estate owned. Real estate owned results from foreclosure of loans and
at time of foreclosure is recorded at the lower of carrying amount or fair
value of the property minus estimated costs to sell. Subsequent to
foreclosure, the foreclosed asset value is periodically reviewed and is
adjusted to fair value. No depreciation is taken on the real estate owned.
Income and expenses related to real estate owned are recorded as interest
income, interest expense and general and administrative expenses on the
Statements of Operations.
Investments. The Trust holds an investment in Sierra Capital Acceptance
("SCA"), a division of Sierra Capital Funding, LLC ("SCF"), a Delaware
limited liability company which originates and sells residential mortgage
loans. SCA operates as a separate operating division of SCF. The Trust's
investment in SCA receives a 15% preferential interest distribution per
annum. Sierra Capital Services, Inc., a related party, owns 99% of the
common shares of the Sierra Division of SCF and maintains voting control.
Origination costs. Origination costs relating to mortgage notes receivable
are deferred and recognized as an adjustment of yield over the term of the
notes.
Deferred offering costs. Deferred offering costs relate to an initial
public offering of common stock of the Trust during 1997 and 1998. Until
the initial public offering of common stock broke impound on December 4,
1997, these costs were deferred. While the offering was underway, these
costs were offset pro-rata against the proceeds from the issuance of common
stock and as a reduction of stockholders' equity. Through December 31, 1997
stockholders' equity was reduced by $555,888 for deferred offering costs.
The remaining deferred costs of $176,050 was offset against proceeds from
the offering during 1998.
Cumulative effect of change in accounting principle. Effective for the year
ended December 31, 1999, the Trust adopted SOP 98-5, "Reporting on the
Costs of Start-Up Activities". As a result of this change, the Trust is
required to expense organization costs as they are incurred. The cumulative
effect of this accounting change was a reduction of income of $10,346.
Revenue recognition. Interest income is recorded on the accrual basis of
accounting in accordance with the terms of the loans. When the payment of
principal or interest is 90 or more days past due, management reviews the
likelihood that the loan will be repaid. For these delinquent loans,
management continues to record interest income and establishes a loan loss
reserve as necessary to protect against losses in the loan portfolio
including accrued interest.
State taxes. During 1999 the state of Delaware imposed a tax on the
increased capitalization of the Trust. The Trust did not make any payments
until 2000. The Trust paid $800 in franchise tax to the state of California
in 1999.
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 1999
2. Summary of significant accounting policies & nature of operations
(continued)
---------------------------------------------------------------------------
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 if the Trust distributes at least
95% of its taxable income to its 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 stockholders. The
Trust must maintain certain records and request certain information from
its stockholders designed to disclose actual ownership of its stock. In
addition the Trust must satisfy certain gross income requirements annually
and certain asset tests at the close of each quarter of its taxable year.
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 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 belief that it has operated in a manner so as to allow
it to be taxed as a REIT since inception, no provision for federal income
taxes has been made in the financial statements.
For the year ended December 31, 1997, the distributions per Preferred Share
are allocated 87.673% as ordinary income and 12.327% as a return of capital
for tax purposes. For the year ended December 31, 1998, the distributions
per Preferred Share are allocated 100% as ordinary income for tax purposes.
The distributions per Common Share are allocated 100% as ordinary income
for tax purposes. For the year ended December 31, 1999, the distributions
per Preferred Share are allocated 100% as ordinary income for tax purposes.
The distributions per Common Share are allocated 100% as ordinary income
for tax purposes.
Reclassifications. Certain 1998 amounts have been reclassified to conform
with 1999 classifications. Such reclassifications had no effect on reported
net income.
3. Restricted cash and mortgage note holdbacks
-------------------------------------------
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 to borrowers upon completion of improvements on the secured
property. As of December 31, 1999 and 1998, mortgage note holdbacks from
the consummation of mortgage loans made amounted to $487,174 and $594,693,
respectively.
4. Accounts receivable
- ------------------------
Accounts receivable consist primarily of accrued interest on mortgage notes
receivable and other amounts due from borrowers. As of December 31, 1999
and 1998, accrued interest from borrowers were $215,425 and $168,645,
respectively.
F-8
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 1999
5. Lines of credit to related parties
----------------------------------
The Trust entered into a loan purchase agreement on November 1, 1997 with
Sierra Capital Acceptance LLC ("SCA"), a division of Sierra Capital Funding
LLC, a related party. Under the terms of the agreement, the Trust advances
funds to SCA to acquire mortgage loans secured by real estate. The Trust
then acquires all of SCA's right, title and interest in such loans. SCA
must reacquire the loans from the Trust at a preset price. As of December
31, 1999 and 1998, the Trust advanced to SCA $428,250 and $820,100,
respectively. Annual interest on this line of credit is at prime plus one
half of one percent for the first 60 days and prime plus four percent after
60 days. Interest is payable monthly. The Trust earned interest in the
amount of $100,325 during 1999, of which $4,610 was outstanding as of
December 31, 1999.
The Trust entered into a loan purchase agreement on December 12, 1997 with
Capital Alliance Funding Corporation ("CAFC"). Under the terms of the
agreement, the Trust advances funds to CAFC to acquire mortgage loans
secured by real estate. The Trust then acquires all of CAFC's right, title
and interest in such loans. CAFC must reacquire the loans from the Trust at
a preset price. As of December 31, 1999 and 1998, the Trust advanced to
CAFC $2,140,360 and $2,414,435, respectively. Annual interest on this line
of credit is equal to the interest rate of the mortgage loans pledged and
is payable monthly. The Trust earned interest in the amount of $180,345
during 1999, of which $18,348 was outstanding as of December 31, 1999.
The Trust entered into a loan purchase agreement on February 1, 1998 with
Equity 1-2-3, a division of Sierra Capital Funding LLC, a related party.
Under the terms of the agreement, the Trust advances funds to Equity 1-2-3
to acquire mortgage loans secured by real estate. The Trust then acquires
all of Equity1-2-3's right, title and interest in such loans. Some of these
loan balances exceed the fair market value of the properties. Equity 1-2-3
must reacquire the loans from the Trust at a preset price. As of December
31, 1999 and 1998, the Trust advanced to Equity 1-2-3 $620,707 and
$1,472,563, respectively. Annual interest on this line of credit is at
prime plus one percent for the first 60 days and prime plus four percent
after 60 days. Interest is payable monthly. The Trust curtailed accruing
interest on this line of credit in 1999. However, by the end of 1999, the
Trust accrued interest income in the amount of $7,937, all of which was
outstanding and the Trust expects to accrue interest in the future.
The Trust entered into a loan purchase agreement on January 1, 1998 with
Calliance Mortgage Trust ("CMT"). Under the terms of the agreement, the
Trust advances funds to CMT to acquire mortgage loans secured by real
estate. The Trust then acquires all of CMT's right, title and interest in
such loans. CMT must reacquire the loans from the Trust at a preset price.
As of December 31, 1999 and 1998, the Trust advanced to CMT $0 and
$450,000, respectively. Annual interest on this line of credit is equal to
the interest rate of the mortgage loans pledged and is payable monthly. The
Trust earned interest in the amount of $23,760 during 1999, all of which
was paid as of December 31, 1999.
F-9
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 1999
6. Mortgage notes receivable
- ------------------------------
Mortgage notes receivable represent home equity loans secured by
residential real estate. At the time of origination, all loans have a
combined loan-to-value equal to or less than 75% of the underlying
collateral. 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.
A reconciliation of mortgage notes receivable is as follows:
December 31, December 31, December 31,
1997 1998 1999
---------------- ------------- ---------
Balance, beginning of period $ 4,696,238 $ 4,915,186 $ 8,986,645
Additions during period:
New mortgage loans 3,254,256 10,342,300 7,452,006
Deductions during period:
Collections of principal 2,405,113 5,997,178 4,395,441
Foreclosures, net of reserve 410,195 273,663 565,000
Transfer to CAFC --- --- 670,546
Cost of mortgages sold 220,000 --- ---
---------------- ------------- ---------------
Balance, close of period $ 4,915,186 $ 8,986,645 $ 10,807,664
================ ============= ===============
F-10
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 1999
6. Mortgage notes receivable (continued)
--------------------------------------
The Trust's mortgage notes receivable all relate to 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, 1999.
Principal amount
of loans with
Monthly Carrying delinquent
Final payment Prior Face amount of amount of principal or
Principal outstanding Interest rate maturity date terms liens mortgage(s) mortgage(s) interest (Note A)
--------------------- ------------- -------------- ---------------- ------------ ----------- ----------------
Individual loans greater
than $324,230 (3% of total
mortgage notes receivable
of $11,478,210): 10.00% 02/01/00 $4,896 None $ 500,000 $ 500,000 $ ---
12.00% 04/01/00 $4,300 First 430,000 430,000 ---
12.5% 01/01/01 $2,906 None 361,500 375,000 ---
12.50% 10/01/00 $3,400 First 340,000 340,000 ---
Loans from $300,000-$324,230 7.63% to 13.00% 14 to 56 months 615,000 615,631 300,750
Loans from $200,000-$299,999 8.00% to 13.50% 8 to 357 months 2,316,000 2,413,969 260,028
Loans from $100,000-$199,999 10.00% to 13.50% 3 to 59 months 4,419,900 4,240,795 652,717
Loans from $50,000-$99,999 11.00% to 16.00% 1 to 59 months 1,357,500 1,231,500 ---
Loans from $19,380-$49,999 10.75% to 14.00% 1 to 172 months 730,608 660,770 81,492
------------ ----------- ------------
Total Mortgage Notes Receivable at December 31, 1999 $ 11,070,508 $ 10,807,664 $ 1,294,987
============ ============ ============
<FN>
(A) Delinquent loans are loans where the monthly interest payments in
arrears are 90 or more days overdue. As of December 31, 1999, there were
three loans totaling $428,334 of principal and $19,401 of interest that
were 90 to 180 days delinquent on interest payments. Six loans with the
principal amount of $866,653 and $85,167 of interest have been delinquent
for over 180 days. Management has reviewed all of the delinquent loans and
believes that in all except two loans the fair value (estimated selling
price less cost to dispose) of the collateral is equal to or greater than
the carrying value of the loan including any accrued interest. Anticipated
loss from the two loans is included in loan loss reserve.
</FN>
F-11
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 1999
7. Loan loss reserve
-----------------
The Trust measures impairment based on the fair value of the related
collateral since all loans subject to this measurement are collateral
dependent. Management believes $85,000 of loan loss reserve is adequate to
reflect the probable impairment in all receivables as of December 31, 1999.
Activity in the loan loss reserve was as follows:
December 31, December 31, December 31,
1997 1998 1999
---------------- ------------- ---------------
Balance, beginning of period $ --- $ --- $ 170,000
Provision for loan loss --- 170,000 162,500
Write-off of note receivable
to related party --- --- (225,000)
Write-off of advance
to related party --- --- (22,500)
---------------- ------------- --------------
Balance, end of period $ --- $ 170,000 $ 85,000
================ ============= ===============
8. Real estate owned
-----------------
During 1997 the Trust foreclosed on three mortgage notes receivable, sold
three properties and contributed three properties to capitalize CAFC. At
December 31, 1997, the Trust owned one property. During 1998 the Trust
foreclosed on three mortgage notes receivable, sold one property and
contributed two properties to capitalize CAFC. At December 31, 1998, the
Trust owned one property. During 1999 the Trust foreclosed on four mortgage
notes receivable and sold one property. At December 31, 1999, the Trust
owned four properties. The following table shows the cash and non-cash
activities in the real estate owned account.
As of January 1, 1997 the Trust held mortgage notes payable totaling
$578,395. The notes were secured by residential properties with interest
accruing at 8.25% to 8.95% per annum. During 1997 one loan of $91,297 was
paid in full upon the sale of the real estate owned and the remainder of
$487,098 was contributed to capitalize CAFC.
F-12
8. Real estate owned (continued)
-----------------------------
A reconciliation of real estate owned is as follows:
1997 1998 1999
---- ---- ----
Real estate owned at beginning of year $ 1,312,520 $ 322,550 $ 149,663
Foreclosed mortgage notes, net of reserve (non-cash) 410,195 273,663 565,000
Accrued interest capitalized (non-cash) 24,513 6,950 34,075
Mortgage notes payable (non-cash) 195,728 292,949 ---
Mortgage notes payable (cash paid) 100,000 --- ---
Capital costs of real estate owned (cash paid) 23,956 5,956 45,251
Gain (loss) on sale (non-cash) 18,995 3,181 (1,779)
------------- ----------- -----------
2,085,907 905,249 792,210
------------- ----------- -----------
Less: Proceeds from sale of real estate owned (net of closing
costs of $11,116, $2,819 and $25,871 in 1999, 1998 and 1997,
respectively) 791,416 77,181 147,884
Book value of properties transferred to CAFC (non-cash) 971,941 678,405 ---
------------- ----------- -----------
1,763,357 755,586 147,884
------------- ----------- -----------
Real estate owned at end of year $ 322,550 $ 149,663 $ 644,326
============= =========== ===========
9. Gain (loss) on real estate owned
--------------------------------
Three real estate properties were sold during 1997 for a combined gain of
$18,995. One real estate property was sold during 1998 for a gain of
$3,181. One real estate property was sold during 1999 for a loss of $1,779.
10. Investment in affiliates
------------------------
On April 11, 1997 the Trust formed a non-qualified REIT subsidiary, Capital
Alliance Funding Corporation ("CAFC"), to conduct its planned mortgage
conduit business. The Trust owns all of the outstanding Series "A"
Preferred Stock (2,000 shares of non-voting stock) which constitutes a 99%
economic interest in CAFC. The Trust's Manager owns all of the Common
Shares (1,000 shares) of CAFC, which constitutes a 1% economic interest,
and has 100% voting control. The Trust's Manager also manages CAFC and
provides mortgage origination and sale services for CAFC. The Trust
accounts for its investment in CAFC under the equity method.
CAFC commenced operations in the second quarter of 1997. To capitalize
CAFC, the Trust contributed three real estate properties with a net
carrying amount of $289,114 (fair value of $971,941 less the corresponding
mortgage loans of $682,827) in 1997. In 1998, the Trust contributed two
real estate properties net of liabilities equal to $385,940 (book value of
$678,405 less adjustment of $35,855 and the corresponding mortgage loans of
$256,610). In 1999, the Trust contributed $100,000 cash and four mortgage
loans totaling $670,546. The transfer of the mortgage notes receivable is
non-cash transaction that is not shown on statements of cash flows.
F-13
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 1999
10. Investment in affiliates (continued)
------------------------------------
CAPITAL ALLIANCE FUNDING CORPORATION
1998 1999
---- ----
Total assets $ 5,144,909 $ 6,327,942
============= =============
Total liabilities $ 4,512,973 $ 5,664,870
Total stockholders' equity 631,936 663,072
------------- -------------
Total liabilities and equity $ 5,144,909 $ 6,327,942
============= =============
Revenue $ 496,433 $ 414,159
Expenses (435,924) (1,153,569)
Other income and expenses
Loss on sale of assets (83,663) ---
----------- -----------
Net income (loss) $ (23,154) $ (739,410)
=========== ===========
As described in Note 3, the Trust also holds an investment in preferred
shares of Sierra Capital Acceptance, a division of Sierra Capital Funding
LLC, totaling $200,000 and receives distribution equal to 15% return per
annum. For each of the years ended December 31, 1999 and 1998, the Trust
earned $30,000 from this investment. Distributions are reported as
interest.
11. Related party transactions
--------------------------
The Manager, which is owned by several of the Trustees and their
affiliates, contracted with the Trust to provide management and advisory
services and receives fees for these services from the Trust. 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 Manager is entitled to a management fee equal to one-twelfth (1/12) of
1% annually of the book value of mortgages, mortgage-related investments
and real property ("Gross Mortgage Assets") of the Trust plus one-twelfth
(1/12) of one-half percent (1/2%) of the book value of the non-mortgage
assets of the Trust computed at the end of each month. The Trust paid the
Manager a management fee of $149,146 and $143,484 for the year ended
December 31, 1999 and 1998, respectively.
Also, the Manager receives a loan origination and servicing fee equal to
one-twelfth (1/12) of 2% annually of the Gross Mortgage Assets of the Trust
computed at the end of each month. Prior to February 12, 1997, the Manager
received a loan origination and servicing fee equal to 0.083% of the
monthly (1% annually) value of all assets less liabilities and reserves.
For the years ended December 31, 1999 and 1998, the Trust paid a loan
servicing fee of $72,313 and $63,020 to the Manager, respectively. As of
December 31, 1999, the Trust capitalized $163,635 of loan origination fees.
F-14
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 1999
11. Related party transactions (continued)
--------------------------------------
As of December 31, 1997, the Trust had a note payable of $72,148 to a
related party that accrued interest at 11.5% per annum. During the year
ended December 31, 1998 the Trust paid $2,456 of interest related to this
note. The note was repaid during 1998.
During 1999, the Trust advanced $22,500 to Equity 1-2-3, a division of
Sierra Capital Funding LLC, a related party, and recorded it as an addition
to the $225,000 note receivable from Equity 1-2-3. The note bore interest
at 15 percent per annum and interest is payable quarterly. The Trust wrote
off the note receivable and the advance in 1999.
On occasions the Trust and its affiliates had related receivables and
payables arising from ordinary business transactions. As of December 31,
1999, the Trust had a receivable of $331,889 from Sierra Capital
Acceptance, a receivable of $769,184 from Capital Alliance Funding
Corporation, a receivable of $1,991 from the Manager, a receivable of
$21,990 from Equity 1-2-3, a payable of $1,248 to holdback account, and a
payable of $486,315 to Calliance Mortgage Trust. As of December 31, 1998,
the Trust had a receivable of $7,500 from Sierra Capital Acceptance, a
payable of $36,756 to Capital Alliance Funding Corporation, a payable of
$11,018 to the Manager.
As described in Note 5, the Trust advanced $5,157,098 of funds under lines
of credit to related parties and earned interest of $356,778 on such
financing for the year ended December 31, 1998. For the year ended December
31, 1999, the Trust advanced $3,189,317 of funds under warehouse lines of
credit to related parties and earned interest of $312,367 on such
financing.
Equity 1-2-3 and Sierra Capital Acceptance, divisions of Sierra Capital
Funding LLC, are partially owned by officers of the Trust and their
affiliated entities.
12. Preferred, common and treasury stock
------------------------------------
The Preferred Shareholders are entitled to a distribution preference in 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 the lesser of 10.25% or 150 basis points over the Prime Rate.
After declaring dividends for a given month to the Preferred Shareholders
in the amount of the distribution preference, no further distributions may
be declared on the Preferred Shares for the month until the distributions
declared on each Common Share for that month equals the distribution
preference for each Preferred Share for such month. Any additional
distributions generally will be allocated such that the amount of
distributions per share to the Preferred Shareholders and Common
Shareholders for the month are equal. The distribution preference of the
Preferred Shares is not cumulative.
Preferred Shareholders are entitled to receive all liquidating
distributions until they have received all amount equal to their aggregate
adjusted net capital contribution. Thereafter, Common Shareholders 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 Common
Shareholders and Preferred Shareholders pro rata.
F-15
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 1999
12. Preferred, common and treasury stock (continued)
------------------------------------------------
The Preferred Shares are redeemable by a shareholder, subject to the
consent of the Board of Directors, annually on June 30 for redemption
requests received by May 15 of such year. The Board of Directors may in
their sole discretion deny, delay, postpone or consent to any or all
requests for redemption. The redemption amount to be paid for redemption of
such Preferred Shares is the adjusted net capital contribution plus unpaid
accrued dividends, 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.
The Trust has the power to redeem or prohibit the transfer of a sufficient
number of Common and/or Preferred Shares or the exercise of warrants and to
prohibit the transfer of shares to persons that would result in a violation
of the Trust's shareholding requirements. In addition, the Bylaws provide
that no shareholder may own more than 9.8% of the total outstanding shares
after the conclusion of the initial public offering of Common Shares.
One Shareholder Warrant was issued for every 10 Common Shares purchased.
Each Shareholder Warrant entitles the holder to purchase one Common Share.
The exercise price for each Shareholder Warrant is $5.60, which may be
exercised during the 25th through the 48th month after April 28, 1997. In
order to protect the Warrant holders against dilution, the exercise price
of the Warrants and the number of shares which may be purchased upon the
exercise of the Warrants will be adjusted should certain events occur (i.e.
stock dividends, split-ups, combinations and reclassifications). Provision
is also made to protect against dilution in the event of a merger,
consolidation or disposition of all or substantially all of the Trust's
assets. Warrant holders do not have the rights of a shareholder and they
are not entitled to participate in a distribution of the Trust's assets in
a liquidation, dissolution or winding up of the Trust, unless the Warrants
have been exercised. The Trust may refuse to allow the exercise of a
Warrant if the effect of such exercise would disqualify the Trust as a REIT
under the Internal Revenue Code.
Under the 1998 Incentive Stock Option Plan, adopted by the board of
directors and approved by stockholders, options for the purchase of a total
of 150,000 Common Shares of the Trust were granted effective September 30,
1998. Officers and employees of the Manager, and Directors of the board are
the eligible recipients of the options. The options have a term of 10 years
with a first exercise date six (6) months after the date of the grant. The
initial options for the purchase of 75,000 Common Shares have an exercise
price of $8.00 per share. The options for the purchase of remaining 75,000
of Common Shares have an exercise price of $4.50 per share.
During 1998, the Trust purchased 9,526 preferred shares as treasury stock.
The purchase was recorded at cost and as a reduction to preferred shares
and additional paid in capital from preferred shares.
F-16
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 1999
13. Earnings per share
The following table represents a reconciliation of the numerators and
denominators of the basic and diluted earnings per common share.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
------------- ------------- ------------
Numerator: 1997 1998 1999
---- ---- ----
Net income $ 535,789 $ 1,003,706 $ 432,605
Preferred dividends attributable
to income 535,789 592,534 432,605
------------- ------------- -------------
Numerator for basic and diluted
Earnings per share-income
available to common stockholders $ --- $ 411,172 $ ---
============= ============= =============
Denominator:
Basic weighted average shares 45,219 1,171,733 1,484,700
Effect of dilutive warrants --- 35,153 341,114
------------- ------------- -------------
Diluted weighted average shares 45,219 1,206,886 1,825,854
============= ============= =============
Basic earnings per common share --- $ 0.351 $ ---
============= ============= =============
Diluted earnings per common share --- $ 0.341 $ ---
============= ============= =============
F-17