CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
November 20, 2000
SECURITIES & EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Capital Alliance Income Trust Ltd., A Real Estate Investment Trust
SEC File No. 333-11625
Our File No. 76021.0002
Dear Sir/Madam:
Pursuant to Sections 13 and 15(d) of the Securities Exchange Act of 1934,
enclosed for filing via EDGAR please find a Form 10-Q for the quarter ended
September 30, 2000. If you have any questions, please do not hesitate to call.
Very truly yours,
/s/ Richard J. Wrensen
Richard J. Wrensen
Executive Vice President,
Chief Financial Officer
Enclosures
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
(X) Quarterly Report Under Section 13 or 15(d)of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 2000
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
- --------------------------------------- ----------------------
(Address of principal executive office) (zip code)
(415) 288-9575
--------------
(Registrant"s telephone number, including area code)
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
Indicate the number of shares outstanding of each of the issuer"s classes of
common stock, as of the latest practicable date.
As of November 15, 2000, the aggregate market value of the registrant"s shares
of Common Stock, $.01 par value, held by non affiliates of the registrant was
approximately $4,241,220. At that date 1,413,740 shares of common stock were
outstanding. The shares are listed and publicly traded on the American Stock
Exchange.
1
PART I
ITEM 1.
FINANCIAL STATEMENTS
2
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Balance Sheets
(unaudited) (audited)
September 30, 2000 December 31, 1999
------------------ -----------------
ASSETS
Cash and cash equivalents $ 189,872 $ 41,939
Restricted cash 400,232 487,174
Accounts receivable 242,512 233,017
Due from affiliates -- 637,491
Notes receivable:
Warehouse lines of credit to related parties 3,973,761 3,189,317
Mortgage notes receivable 11,254,115 10,807,664
Allowance for loan losses (76,500) (85,000)
------------ ------------
Net receivable 15,151,376 13,911,981
Real estate owned 1,695,947 644,326
Investments in affiliates 798,964 870,466
Origination costs 163,635 163,635
Loan Fee 92,917 16,667
------------ ------------
Total assets $ 18,642,538 $ 17,006,696
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks $ 400,232 $ 487,174
Mortgages payable 900,805 --
Notes payable 2,250,000 904,750
Other liabilities 159,794 187,938
------------ ------------
Total liabilities 3,710,831 1,579,862
------------ ------------
Stockholders' Equity
Preferred stock, $.01 par value (liquidation value $9.50 6,413 6,413
per share); 675,000 shares authorized; 641,283 shares
issued and 631,757 outstanding at September 30, 2000
and December 31, 1999
Additional paid in capital - preferred stock 5,752,907 5,752,907
Less: 9,526 preferred shares held in treasury (86,944) (86,944)
Common stock, $.01 par value; 5,000,000 shares 14,874 14,847
authorized ; 1,484,740 shares issued and 1,434,940
outstanding at September 30, 2000 and 1,484,740 issued
and outstanding December 31,1999
Additional paid in capital - common stock 9,393,938 9,739,611
Less: 49,800 common shares in treasury (149,481) 0
------------ ------------
Total stockholders' equity 14,931,707 15,426,834
------------ ------------
Total liabilities and stockholders' equity $ 18,642,538 $ 17,006,696
============ ============
See accompanying notes to financial statements.
3
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
REVENUES
Interest income $ 457,893 $ 383,943 $ 1,265,733 $ 1,216,954
Interest income from affiliates 111,978 40,387 324,170 252,777
Investment income from affiliates (213,995) (183,501) (462,502) (599,735)
Other income 1,230 1,884 5,526 7,320
----------- ----------- ----------- -----------
Total revenues 357,106 242,713 1,132,927 877,316
----------- ----------- ----------- -----------
EXPENSES
Loan servicing fees to related party 78,500 69,676 230,924 220,029
Management fees to related party 39,000 35,638 114,656 111,646
Interest expense 93,680 3,304 213,834 87,424
Provision for loan losses 41,000 15,000 76,500 92,500
Operating expenses of real estate owned 7,274 2,743 18,010 13,577
Taxes 5,734 6,000 18,434 16,300
General and administrative 25,978 11,526 98,831 88,582
----------- ----------- ----------- -----------
Total expenses 291,166 143,887 771,189 630,058
----------- ----------- ----------- -----------
Income Before Loss on Real Estate Owned 65,940 98,826 361,738 247,258
Loss on Real Estate Owned -- -- (2,524) (1,779)
NET INCOME $ 65,940 $ 98,826 $ 359,214 $ 245,479
=========== =========== =========== ===========
PREFERRED DIVIDENDS $ 156,793 $ 141,290 $ 460,627 $ 418,866
BASIC EARNINGS PER
COMMON SHARE $ (0.06) $ (0.03) $ (0.07) $ (0.12)
DILUTED EARNINGS PER
COMMON SHARE $ (0.06) $ (0.03) $ (0.07) $ (0.12)
WEIGHTED AVERAGE COMMON
SHARES - BASIC EARNINGS 1,458,940 1,484,740 1,476,140 1,484,740
WEIGHTED AVERAGE COMMON
SHARES - DILUTED EARNINGS 1,482,940 1,484,740 1,484,140 1,484,740
See accompanying notes to financial statements.
4
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 359,214 $ 245,479
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization / Loan fees (76,250) 3,303
(Increase) decrease in accounts receivable (9,495) (67,312)
Increase (decrease) in loan loss reserve (8,500) (155,000)
(Increase) decrease in security deposits -- (5,726)
Increase (decrease) in due to / due from affiliates 637,491 (245,509)
Increase (decrease) in other liabilities (28,144) 3,247
----------- -----------
Net cash provided by (used in) operating activities 874,316 (221,518)
----------- -----------
(Increase) decrease in restricted cash 86,942 188,926
Increase (decrease) in mortgage note holdbacks (86,942) (188,926)
(Increase) decrease in warehouse lines of credit (784,444) 2,709,172
(Increase) in investments 71,502 198,021
Increase in related party note receivable -- 225,000
Net investments in mortgage notes receivable (219,098) (2,055,349)
Capital costs of foreclosed property (1,051,621) (155,964)
----------- -----------
Net cash provided by (used in) investing (1,983,661) 920,880
----------- -----------
Redemption of shares (149,481) --
Payment of mortgages & notes payable 2,246,055 (39,339)
Preferred dividends paid (460,627) (418,867)
Common dividends paid (378,609) (378,609)
----------- -----------
Net cash provided by (used in) financing activities 1,257,338 (836,815)
----------- -----------
147,993 (137,453)
41,939 570,710
----------- -----------
$ 189,932 $ 433,257
=========== ===========
Interest expense paid $ 198,834 $ 94,992
Taxes paid $ 18,434 $ 16,300
See accompanying notes to financial statements.
5
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 2000 and 1999
(Unaudited)
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, formed December 12, 1995, 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.
Effective February 12, 1997, the Trust registered its common shares with
the Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended in connection with a"best efforts" offering of common
shares. On September 30, 1998 the offering closed and a total of 1,484,740
common shares were issued at $8.00 per share with warrants to purchase an
additional 148,474 common shares at $5.60 per share.
2. Basis of presentation.
---------------------
The accompanying financial statements include the accounts of the Trust.
The financial information presented has been prepared from the books and
records without audit. The accompanying financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and the footnotes required by generally
accepted accounting principles for complete statements. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such financial
statements, have been included.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
These financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31,
1999 filed pursuant to 15d-2 on Form 10-K with the Securities and Exchange
Commission.
The unaudited interim financial statements for the nine months ended
September 30, 2000 and September 30, 1999 represent the the financial
statements of the Trust.
3. Summary of significant accounting policies.
------------------------------------------
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the accounts reported in financial
statements and the accompanying notes. Actual results could differ from
those estimates.
6
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 2000 and 1999
(Unaudited)
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. Restricted cash represents segregated cash that
can be disbursed to mortgage loan borrowers upon completion of certain
improvements to the secured property (see Note 4).
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.
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 portfolio may be affected
by changes in the economy or other conditions of the geographic area. A
portion of the 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 mortgage 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 5). As of September 30, 2000 and
September 30, 1999 the loan loss reserves were $76,500 and $15,000,
respectively.
Investments. The Trust holds an investment in Sierra Capital Acceptance
("SCA"), a Delaware limited liability company which originates and sells
residential mortgages. The Trust owns 100% of the non-voting Sierra
preferred shares of SCF. Sierra Capital Services, Inc., a related party,
owns 99% of the Sierra common shares of SCF and maintains voting control.
As of September 30, 2000, SCA is in the process of dissolution.
During 1997 the Trust formed its non-qualified REIT subsidiary Capital
Alliance Funding Corporation ("CAFC") to conduct its mortgage conduit
business. The Trust owns 100% of the outstanding Series "A" Preferred
stock (2,000 shares of non-voting stock) in CAFC, which constitute a 99%
economic interest in CAFC. The Trust"s Manager owns 100% of the Common
Shares (1,000 shares) of CAFC, which constitute a 1% economic interest and
has 100% voting control. The Trust"s Manager also manages CAFC and
provides mortgage origination and sale and services for CAFC. The Trust
accounts for its investment in CAFC under the equity method.
7
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 2000 and 1999
(Unaudited)
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 will not be subject
to federal corporate income taxes, if the Trust distributes at least 95%
of its taxable income to its shareholders. 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 Trusts organization, sources of income,
nature of assets, and distribution of assets to shareholders. 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 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 elect to be taxed as a REIT since inception, no provision for
federal income taxes has been made in the financial statements.
For the nine-month period ended September 30, 2000, the distributions per
preferred share are allocated 100% as ordinary income and the common share
distribution is allocated 93% ordinary income and 7% as a return of
capital for tax purposes. For the period ended September 30, 1999, the
distributions per preferred share are allocated 100% ordinary income and
the common share distribution is allocated 22% ordinary income and 78% a
return of capital for tax purposes.
Fair value of financial instruments. For cash and cash equivalents, the
carrying amount is a reasonable estimate of fair value. For mortgage note
receivables, fair value is estimated by discounting the future cash flows
using the current interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. It was determined that the difference between the carrying
amount and the fair value of the mortgage notes receivable is immaterial.
Origination costs. Origination costs relating to mortgage notes receivable
are deferred and recognized as an adjustment to yield over the term of the
notes.
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. At this time senior
debt to which the asset is subject is reported as mortgage payable.
Subsequent to foreclosure, the foreclosed asset value is periodically
reviewed and is adjusted to fair value. No depreciation is taken on the
real estate held for sale. Income and expenses related to real estate
owned are recorded as other income, interest expense and general and
administrative expenses on the Statements of Operations.
Reclassifications. Certain 1999 amounts have been reclassified to conform
with 2000 classifications. Such reclassifications had no effect on
reported net income.
8
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 2000 and 1999
(Unaudited)
4. Restricted cash and mortgage note holdbacks.
-------------------------------------------
Pursuant to mortgage loan agreements between the Trust and certain of its
borrowers, a portion of the loan proceeds are held by the Trust in
segregated accounts to be disbursed to such borrowers upon completion of
certain improvements on the secured property.
5. Mortgage notes receivable.
-------------------------
Mortgage notes receivable represent home equity loans secured by
residential real estate. At their original origination, all loans have a
combined loan-to-value of not more than 75% of the underlying collateral.
The Trust is subject to the risks inherent in finance lending including
the risk of borrower default, changes in value of the underlying
collateral 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.
6. Accounts receivable.
-------------------
Accounts receivable consists of accrued interest on mortgage notes
receivable and other amounts due from borrowers.
7. Mortgage notes payable.
----------------------
As of September 30, 2000, the Trust held a mortgage notes payable of
$900,805. As of September 30, 1999, the Trust, through a warehouse line of
credit issued to CAFC, had borrowed $1,392,771 to finance a portion of its
mortgage notes receivable.
8. Related party transactions.
--------------------------
The Manager, which is owned by several of the Trustees and their
affiliate, contracted with the Trust to provide administration services
and receives a fee 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 receives 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 Asset") of the Trust plus one-twelfth
(1/12) of one half percent ("%) 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 $114,656 and $111,646 for the nine months
ended September 30, 2000 and September 30, 1999, respectively.
The Manager also 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. The Trust paid the Manager a loan
origination and servicing fee of $230,924 and $220,029 for the nine months
ended September 30, 2000 and September 30, 1999, respectively.
9
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 2000 and 1999
(Unaudited)
The Manager also receives incentive compensation for each fiscal quarter,
equal to 25% of the net income of the Trust in excess of an annualized
return on equity for such quarter equal to the ten year U.S. Treasury Rate
plus 2% provided that the payment of such incentive compensation does not
reduce the Trust"s annualized return on equity for such quarter to less
than the ten year U.S. Treasury Rate plus 2% after the preferred dividend
has been paid. As of September 30, 2000 and September 30, 1999 no
incentive compensation was paid.
As described in Note 3, the Trust holds an investment in Sierra Capital
Acceptance, a division of Sierra Capital Funding LLC. For each of the nine
month periods ended September 30, 2000 and September 30, 1999, the Trust
earned interest of $15,000 and $22,500, respectively, from the investment.
As described in Note 3, the Trust has a non-qualified REIT subsidiary,
Capital Alliance Funding Corporation. For the nine months ended September
30, 2000 and September 30, 1999 the Trust under the equity method of
accounting was allocated investment losses of `$462,502 and $599,735,
respectively. Both the 2000 and 1999 loss are attributable to expenses
incurred in the Trust"s expansion of the subsidiary"s wholesale loan
origination capacity.
During 1998 the Trust advanced $225,000 to Equity 1-2-3, a division of
Sierra Capital Funding, LLC, a related party, and recorded it as a related
party note receivable. On February 10, 1999 the Trust advanced an
additional $22,500 to Equity 1-2-3. The note accrued interest at 15% per
annum. For the nine months ending June 30, 1999, the Trust did not
recognize any interest from this note. The note was written off during the
third quarter of 1999.
9. Preferred stock and common stock.
--------------------------------
The Preferred Shares are entitled to a distribution preference in an
amount equal to an annualized return on the Adjusted 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 (determined on a not less than quarterly basis).
After declaration of dividends for a given quarter to the Preferred Shares
in the amount of the distribution preference, no further distributions may
be declared on the Preferred Shares for the quarter until the current
Distributions declared on each Common Share for that quarter equals the
distribution preference for each Preferred Share for such quarter. Any
additional distributions generally will be allocated such that the amount
of distributions per share to the holders of the Preferred Shares and
Common Shares for the quarter are equal. The distribution preference of
the Preferred Shares is not cumulative.
Preferred Shares are entitled to receive all liquidating distributions
until they have received an 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 the holders
of the Common Shares and Preferred Shares pro rata.
10
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 2000 and 1999
(Unaudited)
The Preferred Shares, at the option of the Board of Directors, are
redeemable by a Shareholder annually on or about 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. There is no liquidation charge.
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
violation of the Trust"s share holding 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 in the Trust"s initial public offering
of Common Shares 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. The Warrants may be exercised
through April 28, 2001. In order to protect the Warrant holders against
dilution, the exercise price of the Warrants and the number of which may
be purchased upon 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 ("1998 Plan"), adopted by the
board of directors and approved by the shareholders, options for the
purchase of a total of 75,000 common shares of the Trust were granted
effective September 30, 1998. Since the Trust has no employees, officers
and employees of the Manager, Directors of the board and other contractors
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 were
exercisable at $8.00 per share. Such options were cancelled August 3,
2000. Options for the purchase of 75,000 common shares were awarded April
1, 1999 and are exercisable at $4.50 per common share. Options to purchase
68,875 common shares of the April 1, 1999 award are outstanding. An award
of 109,750 options, exerciseable at $3.00 per share, was made on February
2, 2000. There are 68,875 options remaining to be awarded under the 1998
Plan.
During the nine months ended September 30, 2000, the Trust"s net purchase
of treasury common stock was 49,800 shares. No preferred shares were
purchased. The common purchases were recorded as Treasury Stock. No common
or preferred shares were purchased for the treasury during 1999.
11
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 2000 and 1999
(Unaudited)
10. Earnings per share.
------------------
The following table is a reconciliation of the numerator and denominators
of the basic and diluted earnings per common share.
Numerator: September 30, 2000 September 30, 1999
------------------ ------------------
Net income $ 359,214 $ 245,479
Less: Preferred Dividend (460,627) (418,866)
----------- -----------
Numerator for basic and diluted
earnings per share $ (101,413) $ (173,387)
----------- -----------
Denominator:
Basic weighted average shares 1,476,140 1,484,740
Effect of warrants, options & repurchases 8,000 0
----------- -----------
Diluted weighted average shares 1,484,140 1,484,740
----------- -----------
Basic earnings per common share $ (.06) $ (0.12)
----------- -----------
Diluted earnings per common share $ (.06) $ (0.12)
----------- -----------
12
PART I
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
13
MANAGEMENT"S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial statements of Capital Alliance Income Trust Ltd., A Real
Estate Investment Trust (the "Trust") dated herein were prepared from the
unaudited books and ledgers of the Trust and reflect 99% of earnings and losses
of its wholesale mortgage banking subsidiary, CAFC, under the equity method of
accounting.
General
Recent Trends. The Trust invests in non-conforming mortgage loans on
one-to-four unit residential properties because management believes that there
is a large, unsatisfied demand for non-conforming mortgage loans on these kinds
of properties which produce higher yields without comparably higher credit risks
when compared with conforming mortgage loans. Management invests primarily in
A-, B/C (or less) credit rated home equity loans secured by deeds of trust. In
general, B and C credit rated home equity loans are made to borrowers with lower
credit ratings than borrowers of higher credit quality, such as A credit rated
home equity loans. Home equity loans rated A-, B/C (or less) tend to have higher
rates of loss and delinquency, but higher rates of interest than borrowers of
higher credit quality.
Management, also, believes there is a strong investment demand for
high-yielding non-conforming mortgage loans on account of low interest rates
over the past few years and securitization of high-yielding non-conforming
mortgage loans by the investment banking industry.
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 subject of a home
equity loan, processing such information and underwriting and funding the
mortgage loan. Mortgage loan servicing consists of collecting payments from
borrowers, accounting for interest payments, holding escrow funds until
fulfillment of mortgage loan requirements, contacting delinquent borrowers,
foreclosing in the event of unremedied defaults and performing other
administrative duties. Mortgage loan origination and loan servicing were
provided to the Trust by CAAI, its Manager.
Commitments and Contingencies. . The Trust generally issues loan
commitments only on a conditional basis and generally funds such loans promptly
upon removal of any conditions. Accordingly, the Trust did not have any
commitments to fund loans as of September 30, 2000 and September 30, 1999.
As of September 30, 2000, the Trust"s loan portfolio included 75 loans
totaling $11,254,115 of which 10 loans totaling $1,630,192, were delinquent over
sixty days, and of these 10 delinquent loans 5 delinquencies representing
$912,500 of the portfolio which were in the process of foreclosure. In assessing
the collectibility of these delinquent mortgage loans, management estimates a
net loss will not occur if it is necessary to foreclose upon these mortgage
loans. Management"s estimate is based on a discounted sales price of the
property less the sum of pre-existing liens, costs of sale, the face amount of
the mortgage loan, the accrued interest receivable and the accrued loan loss
reserve balance
Results of Operations
The historical information presented herein is not necessarily indicative
of future operations.
Three months and nine months ended September 30, 2000 and 1999. Revenues
for the third quarter of 2000 increased to $357,106 as compared to $242,713 for
the same period in the previous year. Revenues for nine months of 2000 increased
to $1,132,927 as compared to $877,316 for the same period of the previous year.
14
The 2000 mortgage interest income and interest income from affiliates for
the quarter and for the nine months were increased, when compared to the same
periods in the previous year. The increases were due to larger mortgage notes
receivable and warehouse lines of credit balances than in the same period of
previous year. The interest income gains, however, were partially offset by
investment income losses incurred during the quarter and nine months for the
origination expansion costs of Capital Alliance Funding Corporation.
The weighted average yield of the Trust"s mortgage investment portfolio
was 12.42%. The portfolio consisted of 37% first deeds of trust with the balance
being second deeds of trust and had a combined loan-to-value ratio of 69%.
Expenses of the Trust for the third quarter 2000 increased to $291,166 as
compared to $143,887 for the same period in the previous year and for the nine
months period of 2000 increased to$771,189 as compared to $630,058 for the same
period of the previous year.
Management and loan services expenses for the prior quarter and nine month
periods were comparable. The third quarter's expenses increased on account of a
$26,000 increase in loan loss expense and a $90,376 increase in interest
expense. The higher three month and nine month interest expenses are due to
increased borrowings and the payments of mortgage interest on a foreclosed
property.
Inflation
The financial statements of the Trust, prepared in accordance with
generally accepted accounting principles, report the Trust"s financial position
and operating results in terms of historical dollars and does not consider the
impact of inflation. Inflation affects the Trust"s operations primarily through
its effect on interest rates, since interest rates normally increase during
period of high inflation and decrease during periods of low inflation. When
interest rates increase, the demand for mortgage loans and a borrower"s ability
to qualify for mortgage financing may be adversely affected.
Liquidity and Capital Resources
The liquidity of the Trust will be based upon the need to fund investments
in mortgage loans. The Trust"s liquidity requirements will also be funded by two
separate bank provided lines of credit for $7,000,000 and $2,000,000, periodical
payoffs of existing loans and by the sale of foreclosed properties. The
$7,000,000 line of credit matures in September 2002. The $2,000,000 line of
credit matures in November 1999, and is expected to renew for another year.
Restrictions on cash attributed to holdbacks do not significantly impact the
Trust"s liquidity.
Net cash provided by operating activities during the nine months ended
September 30, 1999 and 2000 was $(221,518) and $874,316 respectively. The 1999
results are due to increased affiliates borrowing. The 2000 results are due to
higher net income and the payment of affiliates borrowings to the Trust.
Net cash (used in) investing activities for the nine months ended
September 30, 1999 and 2000 was $920,880 and ($1,983,661), respectively. The
1999 are explained by increased warehouse lending to affiliates and a reduction
in the net investment in mortgage notes receivable. The 2000 results are due to
an increase in real estate owned and an increase in the warehouse lines of
credit to affiliates.
Net cash provided by financing activities during the nine months ended
September 30, 1999 and 2000 was ($836,815) and $1,257,338, respectively. The
1999 results are primarily due to the payment of preferred and common dividends.
The 2000 results are primarily from additional line of credit borrowings.
CAFC maintains a $5,000,000 and a $2,000,000 secured warehouse line of
credit from two lenders. Both warehouse lines of credit are guaranteed by the
Trust. The $5,000,000 facility matures during September 2001 and the $2,000,000
facility during June 2001. Management believes that cash flow from operations,
the proceeds of loan repayments, the establishment of the warehouse lines of
credit for the Mortgage Conduit Business, and the Trust"s bank line of credit
will be sufficient to meet the liquidity needs of the Trust"s businesses for the
next twelve months.
15
Year 2000
The Trust has not incurred significant costs or suffered operational
problems from Year 2000 compliance.
16
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The trust is not involved in any legal proceedings at this
time.
ITEM 2 CHANGES IN SECURITIES
During the third quarterly period ending September 30, 2000,
the Trust purchased 48,100 common shares.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Trust's 2000 Annual Meeting was held on July 6, 2000. At
the Annual Meeting, Directors Thomas B. Swartz and Harvey
Blomberg were reelected as Class I directors for a three year
term. Directors Dennis R. Konczal, Stanley C. Brooks and
Richard J. Wrensen, whose terms continue for one, one and
two years, respectively, continue as Directors.
The shareholders also ratified the selection of Novogradac &
Co. LLP as independent public accountants for the Trust with
1,470,897 shares voting in favor of such approval, 55,544
against and 20,805 abstaining.
ITEM 5 OTHER INFORMATION
Press Release, Exhibit "A" attached here to and incorporated
herein, regarding continued improvement in earnings for the
first quarter 2000, was issued on May 22, 2000.
Press Release, Exhibit "B" attached here to and incorporated
herein, regarding receipt of approval from Freddie Mac, was
issued on June 13, 2000.
Press Release, Exhibit "C" attached here to and incorporated
herein, regarding declaration of common share dividend for
second quarter 2000, was issued on June 22, 2000.
Press Release, Exhibit "D" attached here to and incorporated
herein, regarding earnings for second quarter 2000, was issued
on August 29, 2000.
ITEM 6 REPORTS ON FORM 8-K
Not applicable.
17
EXHIBIT "A"
CAPITAL ALLIANCE INCOME TRUST LTD.
ANNOUNCES CONTINUED IMPROVEMENT IN EARNINGS
FOR THE FIRST QUARTER
SAN FRANCISCO--(Business Wire)--May 22, 2000--Capital Alliance Income
Trust Ltd., ("CAIT") (AMEX: CAA), a specialty residential mortgage company,
announced that basic earnings for the first quarter of 2000 were $220,992 or
$.047 per common share ($.047 diluted) as compared to $143,391 or $.003 per
common share ($.003 diluted) in the first quarter of 1999. The increased
earnings represent the third consecutive quarter of increased earnings for CAIT
over its prior quarter and a substantially reduced operating loss in its
mortgage banking subsidiary.
Thomas B. Swartz, CAIT"s Chairman and CEO, noted that "CAIT, commencing in
the second quarter of 2000, should start seeing a positive contribution to
CAIT"s earnings from Capital Alliance Funding Corporation ("CAFC"), CAIT"s
mortgage banking subsidiary, as opposed to losses incurred in CAFC during its
last five quarters. CAFC"s losses have resulted from the costs of expanding its
mortgage origination capacity, which costs have been expensed currently and
reflected in CAIT"s financial statements under the equity method of accounting."
CAIT is a specialty residential mortgage lender which invests primarily in
high-yielding, non-conforming residential mortgage loans on one-to-four unit
residential properties located primarily in California and other western states.
It also originates non-conforming loans for sale to investors on a whole-loan
basis for cash through CAFC.
Certain oral and written statements of the management of CAIT included in
this press release may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. The accuracy of such statements cannot be guaranteed, as
they are subject to a variety of risks and contingencies.
- --------------------------------
Contact: Richard J. Wrensen
Senior Vice- President and
Chief Financial Officer
(415) 288-9575
18
EXHIBIT "B"
CAPITAL ALLIANCE INCOME TRUST LTD.
RECEIVES APPROVAL FROM FREDDIE MAC
SAN FRANCISCO--(Business Wire)--June 13, 2000--Capital Alliance
Income Trust Ltd., ("CAIT") (AMEX: CAA), announced today that its subsidiary
Capital Alliance Funding Corporation has been approved by Freddie Mac ("FHLMC")
as a seller and servicer of "A" paper mortgage loans.
Thomas B. Swartz, Chairman and CEO, commented that, "After
extensive due diligence performed by Freddie Mac, we are very pleased to receive
their approval. With their endorsement, Capital Alliance will be able to offer a
broader range of products to our customers."
Capital Alliance Income Trust Ltd. is a specialty residential
mortgage lender which invests primarily in high-yielding, conforming and
non-conforming residential mortgage loans on one-to-four unit residential
properties located primarily in California and other western states. It also
originates loans for sale to investors on a whole-loan basis through Capital
Alliance Funding Corporation.
Certain oral and written statements of the management of CAIT
included in this press release may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. The accuracy of such statements cannot be
guaranteed, as they are subject to a variety of risks and contingencies.
- ------------------------------
Contact: Thomas B. Swartz
Chief Executive Officer
(415) 288-9575
19
EXHIBIT "C"
CAPITAL ALLIANCE INCOME TRUST LTD.
ANNOUNCES DECLARATION OF COMMON SHARE
DIVIDEND FOR SECOND QUARTER 2000
SAN FRANCISCO--(Business Wire)--June 22, 2000--Capital Alliance
Income Trust Ltd., ("CAIT") (AMEX: CAA), a specialty residential finance company
announced that its Board had declared CAIT"s common share dividend for the
second quarter of 2000 at $.085 per share. The dividend will be payable on July
17, 2000 to shareholders of record on July 1, 2000.
CAIT is a specialty residential mortgage finance company which
invests for its portfolio in high-yielding, non-conforming, residential mortgage
loans on one-to-four unit residential properties located primarily in California
and the western United States. Also, through Capital Alliance Funding
Corporation ("CAFC") it originates conforming and non-conforming residential
mortgage loans for sale to investors on a whole-loan basis for cash. CAFC
recently, after a rigorous due diligence process, qualified for and was approved
as a Seller-Servicer for Freddie Mac ("FHLMC") for conforming A and A-rated
residential mortgages.
Certain oral and written statements of the management of CAIT
included in this press release may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. The accuracy of such statements cannot be
guaranteed, as they are subject to a variety of risks.
- -------------------------------------
Contact: Capital Alliance Income Trust Ltd.
Thomas B. Swartz, Chairman
(415) 288-9575
20
EXHIBIT "D"
CAPITAL ALLIANCE INCOME TRUST LTD.
ANNOUNCES EARNINGS FOR SECOND QUARTER 2000
SAN FRANCISCO--(Business Wire)--August 29, 2000--Capital Alliance
Income Trust Ltd. ("CAIT"), (AMEX:CAA-news), a specialty residential mortgage
finance company, announced that its earnings for the second quarter and for the
first six months of 2000, while improved over its earnings for the same periods
of 1999, were nevertheless disappointing - given the continuing improvement in
earnings in each of the prior three quarters. Earnings (basic and diluted) for
the second quarter of 2000 were $70,562 ($.06) per share and $291,554 ($.01) per
share for the second quarter and first six months of 2000, respectively, as
compared to $3,263 and $146,654 for the like periods of 1999.
Thomas B. Swartz, CAIT"s Chairman and CEO, noted that CAIT"s portfolio
mortgage investment business remained strong throughout the first half of 2000,
but losses from its mortgage banking subsidiary were sustained as a result of a
further compression in profit margins on the sale of mortgages into the
secondary market. He noted also, that a one-time accounting adjustment of
$74,459 for its mortgage banking subsidiary, Capital Alliance Funding
Corporation ("CAFC"), from the prior quarter contributed to the reduced
earnings.
CAIT is a specialty residential mortgage lender which invests in
high-yielding, non-conforming residential mortgage loans on one-to-four unit
residential properties located primarily in California and other western states.
It also originates non-conforming and conforming loans for sale to investors and
Freddie Mac on a whole loan basis for cash through CAFC.
Certain oral and written statements of the management of CAIT included
in this press release may contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. The accuracy of such statements cannot be guaranteed, as
they are subject to a variety of risks and contingencies.
- ---------------------------------------------
Contact: Capital Alliance Income Trust Ltd.
Richard J. Wrensen, Executive VP and CFO
(415) 288-9575
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL ALLIANCE INCOME TRUST LTD.,
A Real Estate Investment Trust
Dated: November 20, 2000 By: /s/ Thomas B. Swartz
--------------------
Thomas B. Swartz, Chairman and
Chief Executive Officer
Dated: November 20, 2000 By: /s/ Richard J. Wrensen
----------------------
Richard J. Wrensen,
Executive Vice President and
Chief Financial Officer