UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 2000
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.,
AL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
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Delaware 94-3240473
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(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
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(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
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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 __ No _X_
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 April 11, 2001, the aggregate market value of the Registrant's shares of
Common Stock, $.01 par value, held by nonaffiliates of the registrant was
approximately $5,131,875. At that date 1,387,461 shares were outstanding. The
shares are listed and publicly traded on the American Stock Exchange.
1
TABLE OF CONTENTS
PART I......................................................................4
ITEM 1. BUSINESS...........................................................4
General............................................................4
MORTGAGE INVESTMENT BUSINESS...........................................4
General............................................................4
Mortgage Loan Portfolio............................................4
Financing..........................................................5
MORTGAGE CONDUIT BUSINESS..............................................5
General............................................................5
Marketing and Production...........................................6
Underwriting.......................................................7
Whole Loan Sales...................................................8
WAREHOUSE LENDING BUSINESS.............................................8
HEDGING................................................................8
SERVICING..............................................................9
Servicing Portfolio................................................9
Geographical Distribution..........................................9
Interest..........................................................10
Maturity..........................................................10
Delinquencies.....................................................10
REGULATION............................................................10
COMPETITION...........................................................11
EMPLOYEES.............................................................11
ITEM 2. PROPERTIES........................................................11
ITEM 3. LEGAL PROCEEDINGS.................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS...............12
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.......................12
PART II....................................................................14
ITEM 6. SELECTED FINANCIAL DATA...........................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............15
GENERAL...............................................................15
Predecessors......................................................15
Organization......................................................15
Operating Strategy................................................16
Loan Origination and Loan Servicing...............................16
Contingencies and Commitments.....................................16
2
RESULTS OF OPERATIONS.................................................17
YEAR ENDED DECEMBER 31, 2000
COMPARED TO YEAR ENDED DECEMBER 31, 1999..........................17
YEAR ENDED DECEMBER 31, 1999
COMPARED TO YEAR ENDED DECEMBER 31, 1998..........................17
INFLATION.............................................................18
LIQUIDITY AND CAPITAL RESOURCES.......................................18
LIQUIDITY AND CAPITAL RESOURCES
FOR THE YEAR ENDED DECEMBER 31, 2000..............................18
LIQUIDITY AND CAPITAL RESOURCES
FOR THE YEAR ENDED DECEMBER 31, 1999..............................18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.....................20
PART III...................................................................21
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT...................21
DIRECTORS.............................................................21
EXECUTIVE OFFICERS....................................................22
ITEM 11. EXECUTIVE COMPENSATION...........................................24
COMPENSATION OF OFFICERS..............................................24
COMPENSATION OF DIRECTORS.............................................24
Director Fees.....................................................24
Committee and Other Meeting Fees..................................24
Reimbursements....................................................24
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................24
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS..............................................25
Arrangements and Transactions with CAAI...........................25
Sale and Purchase of Loans........................................26
Other Business Activities.........................................26
PART IV....................................................................27
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS
SCHEDULES, AND REPORTS ON FORM 8-K....................................27
(a)(1) Financial Statements..............................................27
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(a)(3) Exhibits..........................................................27
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SIGNATURES............................................................29
3
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 years ending 1997,
1998, 1999, and 2000, 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 for such periods.
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 Irvine and San Diego, 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
4
investment policy, all loans held for the Trust's portfolio have a
loan-to-value, at the time of origination, of 75% or less. This is verified by
independent appraisal. At December 31, 2000 the Trust's loan portfolio
totaled $11,906,589 with an average loan size of $141,745, an average weighted
yield of 12.46%, an average maturity of 27.98 months and a combined
loan-to-value ratio of 67.96%. 38% of the portfolio were first deeds of trust
and 62% were second deeds of trust. The highest concentration of nonconforming
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 and secondarily by term loans from
institutional lenders. The Trust's 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, 2000 was partially
encumbered by two different bank lines of credit in the amounts of $1,505,638
and $2,231,873 respectively. 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 and increased 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 a third-party institutional warehouse financing at interest
rates that are consistent with its financing objectives described herein, as
needed by CAFC for a specified period of time. The Trust also extends a
warehouse reverse repurchase facility to CAFC which at December 31, 2000
aggregated $3,501,939. 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
5
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 ninety days prior to their sale to permanent investors who securitize such
loans in the secondary market and their acquisition or funding will generally be
facilitated through a warehouse line of credit or reverse repurchase agreement.
As of December 31, 2000 CAFC held twenty-three loans for sale longer than ninety
days.
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. 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.
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 to offer to its mortgage loan broker and correspondent
network, a complete spectrum of credit-grade residential mortgage loans to be
sold either to the Trust or 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 provide responsive and consistent underwriting and funding services to its
mortgage broker and correspondent networks. 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.
6
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 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.
The mortgage loans originated or acquired by the Mortgage Conduit Business
will 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.
The Trust's Manager, through its correspondent and broker network,
including its subsidiary CAFC which is also managed by CAAI, accounted for 100%
of the total mortgage loans acquired by the Trust during the year ended December
31, 2000. 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 and CAFC's loans on a contract basis with the Trust and
CAFC. 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.
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
7
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. 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 CAlliance Realty Fund, LLC. The non-conforming mortgage loans
funded with such financing maybe 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 $4 million and $1.5 million reverse repurchase
facilities to CAFC and CAlliance Realty Fund, LLC. The lines of credit
outstanding on the Trust's balance sheet are structured to qualify under the
REIT asset tests and to generate income qualifying under the 75% gross income
test.
Utilizing reverse repurchase agreements, at December 31, 2000, the Trust
had outstanding balances of $3,501,939 to CAFC and $1,242,734 to CAlliance
Realty Fund, LLC, both affiliated mortgage banking companies. The Trust finances
its Warehouse Lending Business through equity.
HEDGING
The mortgage loans held by the Mortgage Investment Business mostly carry
fixed rates and have relatively short maturities. As the production of
8
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.
Servicing Portfolio. The following tables sets forth certain information
regarding the Trust's servicing portfolio of loans for the years ended
December 31, 1998 December 31, 1999 December 31, 2000
----------------- ----------------- -----------------
Beginning servicing portfolio $4,915,186 $8,968,645 $10,807,644
Loans added to the servicing portfolio $10,342,300 $7,452,006 $8,029,562
Loans sold, servicing released and principal
paydowns (1) $6,270,841 $5,630,987 $6,930,617
Ending servicing portfolio $8,986,645 $10,807,644 $11,906,589
Number of loans serviced 72 82 84
Average loan size $124,815 $131,801 $141,745
<FN>
(1) Includes normal loan payoffs, principal amortization and 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, 1998 December 31, 1999 December 31, 2000
----------------------- ----------------------- -----------------------
Number % of Number %of Number %of
State of Loans Portfolio of Loans Portfolio of Loans Portfolio
- ----- -------- --------- -------- --------- -------- ---------
CA 69 95% 80 97% 75 89%
OR 1 1% 0 0% 1 1%
UT 2 4% 2 3% 4 5%
Other --- --- --- --- 4 5%
9
Interest. The weighted average interest for the Trust's portfolio of
loans in its Mortgage Investment Business at December 31, 1998 was 12.43%, at
December 31, 1999 it was12.15%, and at December 31, 2000 it was 12.46%.
Maturity. The weighted average maturity of the Trust's portfolio of loans in its
Mortgage Investment Business at December 31, 1998 was 14.06 months, at December
31, 1999 was 22.57 months, and at December 31, 2000 it was 27.48 months (after
adjusting for shortened loan maturities on account of schedule interest rate
increases). The following table shows the Trust's loan maturities at the dates
presented.
December 31, 1998 December 31, 1999 December 31, 2000
--------------------------- -------------------------- --------------------------
Terms Amount % of Amount % of Amount %of
of Loans of Loans Portfolio of Loans Portfolio of Loans Portfolio
-------- -------- --------- -------- --------- -------- ---------
0-12 months $5,530,300 62% 6,548,777 61% $3,754,592 32%
13-24 months 1,429,900 16% 1,365,577 13% 1,094,670 9%
25-36 months 824,712 9% 587,213 5% 1,005,576 8%
37-48 months None 0% None 0% 1,044,132 9%
Over 48 months 1,201,733 13% 2,306,077 21% 5,007,619 42%
--------- ---- ---------- ---- ----------- ----
$8,986,645 100% 10,807,644 100% $11,906,589 100%
Delinquencies. The following table shows the Trust's delinquency statistics
for its servicing portfolio at the dates presented.
December 31, 1998 December 31, 1999 December 31, 2000
--------------------- ---------------------- -----------------------
Loans Number % of Number % of Number % of
Delinquent For: of Loans Portfolio of Loans Portfolio of Loans Portfolio
- -------------- -------- --------- -------- --------- -------- ---------
31-60 days 6 5% 3 3% 3 4
61-90 days 2 2% 2 4% 3 4
91 days+ 3 3% 7 8% 8 9% (1)
-- --- -- --- - --
Totals: 11 10% 12 15% 14 17% (2)
-- --- -- --- -- ---
<FN>
(1) Four of the 91 days+ delinquent loans were either paid off in full or
brought current by March 31, 2001. (2) 17% of total loans by number, 14% by
dollar value.
</FN>
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.
10
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.
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, 2000, 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 Irvine 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.
11
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, 2000.
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 during the last quarter of 2000 and the first
quarter of 2001 as quoted on the American Stock Exchange were: Fourth Quarter of
2000: High- $3.37, Low- $2.50; First Quarter of 2001: High- $3.90, Low- $2.75.
At December 31, 2000 the Trust had issued and outstanding 1,403,261 shares of
the Trust's Common Stock and warrants to acquire an additional 178,625 shares of
Common Stock at $5.60 per share. The warrants expired April 28, 2001.
On November 17, 2000, the Trust duly approved (subject to satisfaction of
miscellaneous filing requirements) a one share for each three shares (1 for 3)
reverse stock split or consolidation of its Common and Preferred Shares which
will become effective at the close of business on May 11, 2001. Upon
effectiveness of the consolidation-reverse split on May 11, 2001, one (1) new
Common Share and one (1) new Series "A" Preferred Share will be exchanged for
each three (3) outstanding Common and Preferred Share, respectively, and there
will be approximately 494,913 issued and outstanding Common Shares (of which
32,426 post-split shares will be held as treasury stock) and approximately
213,761 issued and outstanding Series "A" Preferred Shares (of which 3,175
post-split shares will be held as treasury stock) each with $.01 par value. The
price of the Common Shares on the American Stock Exchange ("AMEX") will
initially be increased to three (3) times the closing price of such shares on
the Amex on May 11, 2001 and the Adjusted Net Capital Contribution attributable
to each Series "A" Preferred Share will be increased to $26.51 per share (3
times the existing Adjusted Net Capital Contribution of each such Preferred
share ($8.83) as of March 31, 2001. The authorized capital of the Trust will
remain unchanged with 5,000,000 Common Shares and 675,000 Series "A" Preferred
Shares being authorized. The Reverse- Split was approved by the Trust's Board to
enable shareholders to take advantage of margin purchases and more favorable
bid-ask spreads, to lower transaction costs and to facilitate a market price
above $5.00 per share which may enable the Common Shares to obtain institutional
interest which is otherwise generally unavailable for shares trading below $5.00
per share.
On December 31, 2000, there were approximately 111 holders of record
(including holders who are nominees for an undetermined number of beneficial
owners) of the Trust's Common Stock and 131 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 approximately 790 shareholders.
On March 7, 2000, the Trust's Board of Directors established a Stock
Repurchase Plan and 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. On
December 21, 2000 the Trust's Board of Directors increased the amount to be used
for repurchase of the Trust's Common Shares by $150,000. As of December 31,
2000, the Trust had acquired 81,479 shares under the repurchase plan of the
Trust's Common Stock.
12
On April 9, 2001, Sutter Opportunity Fund 2, LLC ("Sutter") initiated a
tender offer for up to 20% of the Common Shares at $4.50 per share (less
distributions declared or paid during the offering period). The Trust paid a
dividend of $.085 per Common Share on April 16, 2001. The tender offer, unless
extended, expires on May 4, 2001. The Board of Directors of the Trust voted
unanimously to recommend that shareholders of the Trust reject such offer as
being inadequate.
To maintain its qualification as a REIT, the Trust has made and intends
during 2000 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 January 1,
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
paid dividends on the Trust's Common Stock on January 17, 2000, April 17, 2000,
and July 17, 2000 at $.085 per share. The Trust during 2000 paid 12 consecutive
monthly dividends on the Trust's Preferred Stock at an average of $.082 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 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 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 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.
13
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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 the four months ended AprIil 30, 1996 are derived
from the audited financial statements of the Predecessors, and the selected
financial data for the eight months ended December 31, 1996 and for the years
ended December 31, 1997, December 31, 1998, December 31, 1999 and December 31,
2000 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) Successor Successor
----------------------- --------- ---------
Financial Summary Four Months Ended Eight Months Ended Twelve Months Ended
April 30, 1996 December 31, 1996 December 31, 1997
Operations:
Revenue $273,709 $490,300 $776,405
Net income 226,643 373,132 535,789
Per Share Data:
Net Income
Basic --- --- ---
Diluted --- --- ---
Balance Sheet Data:
Mortgage notes receivable $4,757,895 $4,696,238 $4,915,186
Total assets 6,267,251 6,702,261 10,132,419
Total liabilities 263,316 756,073 311,096
Shareholder's equity 6,003,935 5,946,188 9,821,323
[continued on the following page]
14
Successor Successor Successor
Five Year --------- --------- ---------
Financial Summary Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1999 December 31, 2000
Operations:
Revenue $1,677,233 $1,243,866 $1,623,656
Net income $1,003,706 $450,605 $515,023
Per Share Data:
Net Income
Basic .351 --- ---
Diluted .341 --- ---
Balance Sheet Data:
Mortgage notes receivable $8,986,645 $10,807,644 $11,906,589
Total assets 16,804,983 17,006,696 19,299,332
Total liabilities 757,532 1,579,862 4,589,168
Shareholder's equity 16,047,451 15,426,834 14,710,164
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".
15
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 and 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 a majority of the
loans currently made are concentrated in California, CAFC plans to continue to
originate and/or purchase loans on both an individual and bulk basis primarily
in California and also throughout the western United States. Loans will then
either 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, 2000, the Trust's real
estate investments included three properties held for sale at a capitalized cost
of $530,000 and a loan portfolio of $11,906,589 consisting of 84 loans, of which
14 loans totaling $1,637,574 or 14% of the portfolio's loan value were
delinquent.
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 9 loans totaling $1,294,982 or
12% 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, 2000 and
December 31, 1999.
16
RESULTS OF OPERATIONS
The results of operation for the years ended December 31, 1998, December
31, 1999, and December 31, 2000 follows. The historical information presented
herein is not necessarily indicative of future operations.
YEAR ENDED DECEMBER 31, 2000
COMPARED TO YEAR ENDED DECEMBER 31, 1999
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 $2,113,163
as compared to $1,975,882 for 1999, primarily from the increased interest income
of a larger mortgage portfolio. Other income for the year ended December 31,
2000 decreased on account of lower rental income from real estate held for sale.
At year ended December 31, 2000 the mortgage notes receivable balance was
$1,098,925 greater than the year ended December 31, 1999 mortgage notes
receivable balance. At year ended December 31, 1999, the lines of credit balance
was $1,555,357 more than the year ended December 31, 1999 lines of credit
balance. At year ended December 31, 2000 the real estate held for sale balance
was $114,326 less than the year ended December 31, 1999 real estate held for
sale balance.
Expenses for the year ended December 31, 2000 increased to $1,106,109 as
compared to $781,136 for the previous year. The increase in 2000 compared to
1999 is primarily due to higher interest expense of $172,237, higher
compensation of $60,579 to the Manager, and higher general and administrative
expenses of $61,763. The 2000 and 1999 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, 2000 was $515,023. Net Income
for the year ended December 31, 1999 was $450,605.
YEAR ENDED DECEMBER 31, 1999
COMPARED TO YEAR ENDED DECEMBER 31, 1998
The Trust's operating revenues for the year ended December 31, 1999
(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 expenses of $65,431, higher
compensation of $138,853 to the Manager and lower general and administrative
expenses of $47,082. The 1999 and 1998 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.
17
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.
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, bank loan facilities of
$9,250,000 plus of a $5,000,000 warehouse line of credit for the Mortgage
Conduit Business will be sufficient to meet the liquidity needs of the Trust's
businesses for the next twelve months.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE YEAR ENDED DECEMBER 31, 2000
As of January 1, 2000, the Trust had $41,939 of cash and cash equivalents.
After taking into effect the various transactions discussed below, cash and cash
equivalents at December 31, 2000 were $368,241. 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 increased liquidity was the $2,832,761
increase in borrowings. Offsetting the increased loans payable balance was a
$1,098,925 increase in mortgage notes receivable.
Net cash provided by the operating activities during the twelve months
ended December 31, 2000 was $1,789,050. Net Income of $515,023, the non-cash
accounting loss of $489,507 in CAFC and the $679,681 increase in affiliate
borrowings were the primary suppliers of cash.
Net cash provided by financing activities during the twelve months ended
December 31, 2000 was $1,499,818. The principal generators of cash from
financing activities was $2,832,761 provided from bank loans. Dividends paid of
$981,693 were the largest users of cash from financing activities.
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 receivable. Offsetting the increased mortgage notes
receivable balance was a $1,967,781 reduction in the line of credit to related
parties.
18
Net cash provided by the operating activities during the twelve months
ended December 31, 1999 was $809,770. Net Income of $450,605 increased for the
non-cash accounting loss of $732,016 in CAFC were the primary suppliers of cash.
The largest user of cash from operating activities was the $534,190 increase in
receivables from affiliates.
Net cash used by financing activities during the twelve months ended
December 31, 1999 was $186,472. The principal source of cash from financing
activities was $904,750 provided from a bank loan. Dividends of $1,071,222 were
the 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, 2000, June 30, 2000 and September 30,
2000 are incorporated herein by reference and filed as part of this report.
The unaudited 1999 and 2000 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, 2000.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
19
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
December 31
1999 2000
---- ----
REVENUES
Interest income $ 483,999 $ 511,016
Investment income from affiliates (132,281) (27,005)
Other income 14,832 6,718
--------- ---------
Total revenues 366,550 490,729
EXPENSES
Loan servicing, origination and
management fees to related party 82,526 129,200
Interest expense 12,614 58,441
Provisions for loan losses 70,000 99,437
Operating expenses of real estate owned (8,150) 4,580
Taxes, General and Administrative (7,691) 43,262
--------- ---------
Total expenses 149,299 334,920
NET INCOME BEFORE GAIN
ON REAL ESTATE OWNED 217,251 155,809
GAIN ON REAL ESTATE OWNED (1,779) --
CHANGE IN ACCOUNTING PRINCIPLE (10,346) --
--------- ---------
NET INCOME $ 205,126 $ 155,809
PREFERRED SHARE DIVIDENDS $ 147,543 $ 145,354
BASIC EARNINGS PER
COMMON SHARE .039 .007
DILUTED EARNINGS PER
COMMON SHARE .032 .006
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
20
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
DIRECTORS
Thomas B. Swartz, 69; Chairman and Chief Executive Officer(1)
Class I Director since 1995; current term expires in 2003; 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, 50; President, Director and Chief Operating Officer(1)
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, 45; Executive Vice-President, Director and Chief Financial
Officer(1)
Class III Director since 2000; current term expires 2002; Executive
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, 51; 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, Private Ledger Financial Services (1976 to 1983); Member,
National Futures Association (1991 to date);
21
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, 60; Director(1)(2)
Class I Director since 1996; current term expires 2003; 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.
Donald R. Looper,48; Director(2)
Class III Director since March 2001; current term expires 2002; Senior
Partner of the Houston-based law firm of Looper, Reed, & McGraw (1985 to date);
Mr. Looper's legal practice has involved the representation of both public and
privately-owned corporations and the complex structuring of substantial
financings involving mortgage financings of real estate and international
business transactions. University of Texas, B.A. degree (1974); Master of
Professional Accounting (specialization in Tax Accounting) (1976); J.D. degree
in Law, University of Houston (1979).
- --------------------------
(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 69 Chairman and Chief
Executive Officer
Dennis R. Konczal 50 President and Chief
Operating Officer
Richard J. Wrensen 45 Executive Vice President
and Chief Financial Officer
William W. Aubrey, II 41 Senior Vice President
Linda St. John 45 Operations Officer
and Secretary
22
The principal occupations of the Executive Officers of the Trust during the
last five years or more are set forth below.
Thomas B. Swartz, 69; 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 (predecessors of the Trust) (1994 to 1996); 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, 50; 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 (predecessors of the Trust) (1994 to 1996);
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, 45, Executive Vice-President, Director and Chief Financial
Officer
Executive 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).
William W. Aubrey, II, 41; Senior Vice President
Senior Vice-President, Capital Alliance Advisors, Inc. (1998 to date);
Senior Vice-President, Sierra Capital Companies' affiliate (1995 to date);
Vice-President, Regional Supervisor, Citizens Thrift and Loan Association
(responsible for overall supervision of regional production and operations;
specialized in non- conforming, sub-prime residentially secured loans) (1990 to
1995); Branch Manager, First Fidelity Thrift and Loan (negotiated and underwrote
real estate secured construction and equity loans) (1988 to 1990); Vice
President, Topa Thrift and Loan Association (established loan brokerage and
mortgage banking relationships) (1984 to 1988); B.S, Finance, La Roche College,
Pittsburg, PA (1983).
23
Linda St. John, 45, Operations Officer and Secretary
Operations Officer and Secretary, Capital Alliance Advisors, Inc. (1995 to
date); Operations Officer and 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 not specifically
allocable to the Trust or CAFC under such agreement. Accordingly, no
compensation was paid by the Trust to any of the senior and controlling
executives of the Manager.
COMPENSATION OF DIRECTORS
Director Fees. The Trust pays each unaffiliated Director an annual fee of
$5,000. In 2000 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 2000 Mr. Brooks received $3,200 and Mr.
Blomberg each received $4,200 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 March
31, 2001 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.
24
Number of Percentage of
Common Shares Common Shares
Beneficially Owned Beneficially Owned
------------------ ------------------
Name of Beneficial Owner
- ------------------------
Thomas B. Swartz (1)(4)............... 3,086 *
Dennis R. Konczal (2)(4).............. 24,000 1.7
Richard J. Wrensen (3)(4)............. 61,300 4.4
Stanley C. Brooks .................... 0 0
Harvey Blomberg....................... 0 0
Donald R. Looper (5).................. 0 0
All directors and executive officers
as a group (6 persons).............. 88,386 6.3%
* Represents less than 1% of outstanding Common Shares.
- --------------------
(1) Mr. Swartz owns beneficially 4,004 shares of Series A Preferred Shares as
of March 31, 2000, representing less than 1% of the outstanding Series A
Preferred Shares.
(2) Mr. Konczal owns beneficially 2,950 shares of Series A Preferred Shares as
of March 31, 2001, representing less than 1% of the outstanding Series A
Preferred Shares.
(3) Mr. Wrensen owns beneficially 2,950 shares of Series A Preferred Shares as
of March 31, 2001, representing less than 1% of the outstanding Series A
Preferred Shares. Mr. Wrensen's wife owns 65,000 shares of Common Stock and
3,315 shares of Series A Preferred Shares as of March 31, 2001, in which
Mr. Wrensen claims no beneficial interest.
(4) Capital Alliance Advisors, Inc., the Trust's Manager, owns beneficially
65,100 shares of Common Stock and 10,981 shares of Series A Preferred
Shares as of March 31, 2001, representing 1.7% of the outstanding Series A
Preferred Shares and 4.7% of the outstanding Common Shares. On April 20,
2001 Capital Alliance Advisors, Inc. filed a Schedule 13d with the
Securities Exchange Commission disclosing its acquisition of additional
Common Shares of the Trust, bringing its holdings to 71,100 shares of
Common Stock representing 5.11% of the Common Stock. 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.
(5) Mr. Looper was elected to the Board of Directors and to the Audit Committee
of the Trust on March 21, 2001.
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, three of the
25
six Directors and the officers of the Trust also serve as Directors and/or
officers of CAAI. However, Unaffiliated Directors constitute 100% 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.
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 1-to-4 unit residential
mortgage 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.
26
- --------------------------------------------------------------------------------
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)
24.8 Power of Attorney of Donald R. Looper
27.3 Revised Financial Data Schedule-Capital Alliance Income Trust
Ltd., 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)
- ------------------
27
(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.
28
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: _____________, 2001 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: _________, 2001
- --------------------------------------------
Thomas B. Swartz
Chairman and Chief Executive Officer
(Principal Executive Officer)
s/s Richard J. Wrensen Dated: _________, 2001
- --------------------------------------------
Richard J. Wrensen
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
/s/ Dennis R. Konczal Dated: _________, 2001
- --------------------------------------------
Dennis R. Konczal
President and Director
/s/ Stanley C. Brooks Dated: _________, 2001
- --------------------------------------------
Stanley C. Brooks
Director
/s/ Harvey Blomberg Dated: _________, 2001
- --------------------------------------------
Harvey Blomberg
Director
/s/ Donald R. Looper Dated: _________, 2001
- --------------------------------------------
Donald R. Looper
Director
29
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
FINANCIAL STATEMENTS
with
Independent Auditors' Report
For the three-year period ended December 31, 2000
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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000 in conformity with generally accepted accounting
principles.
NOVOGRADAC & COMPANY LLP
San Francisco, California
April 11, 2001
F-1
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
BALANCE SHEETS
as of December 31, 2000 and 1999
2000 1999
---- ----
ASSETS
Cash and cash equivalents $ 368,241 $ 41,939
Restricted cash 654,084 487,174
Accounts receivable 293,592 233,017
Due from affiliates -- 637,491
Notes receivable:
Lines of credit to related parties 4,744,674 3,189,317
Mortgage notes receivable 11,906,589 10,807,664
Allowance for loan losses (80,000) (85,000)
------------ ------------
Net receivable 16,571,263 13,911,981
Real estate owned 530,000 644,326
Investments in affiliates 603,459 870,466
Origination costs 197,131 163,635
Loan fees 81,562 16,667
------------ ------------
Total assets $ 19,299,332 $ 17,006,696
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Liabilities
Mortgage note holdbacks $ 654,084 $ 487,174
Loans payable 3,737,511 904,750
Due to affiliates 42,190 --
Other liabilities 155,383 187,938
------------ ------------
Total liabilities 4,589,168 1,579,862
------------ ------------
Stockholders' Equity
Preferred stock, $.01 par value, 675,000 shares authorized;
641,283 shares issued and outstanding 6,413 6,413
Additional paid in capital-preferred stock 5,664,848 5,752,907
Less: treasury stock, 9,526 preferred shares at cost (86,944) (86,944)
Common stock, $.01 par value, 5,000,000 shares authorized;
1,484,740 shares issued and outstanding 14,847 14,847
Additional paid in capital-common stock 9,361,000 9,739,611
Less: treasury stock, 81,479 common shares at cost (250,000) --
------------ ------------
Total stockholders' equity 14,710,164 15,426,834
------------ ------------
Total liabilities and stockholders' equity $ 19,299,332 $ 17,006,696
============ ============
F2
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
STATEMENT OF OPERATIONS
For the years ended December 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
REVENUES
Interest income $ 1,614,889 1,611,363 1,243,495
Interest income from affiliates 486,030 342,367 409,278
Equity in loss of affiliates (489,507) (732,016) (11,849)
Other income 12,244 22,152 36,309
----------- ----------- -----------
Total revenues 1,623,656 1,243,866 1,677,233
EXPENSES
Loan servicing fees to related parties 277,224 251,655 131,864
Management fees to related party 197,556 162,546 143,484
Interest expense on loans 203,658 100,038 34,607
Interest expense on real estate owned 68,617 -- --
Provision for loan loss 175,937 162,500 205,855
Operating expenses of real estate owned 22,590 5,427 10,466
Taxes 22,334 22,540 26,920
General and administrative 138,193 76,430 123,512
----------- ----------- -----------
Total expenses 1,106,109 781,136 676,708
INCOME BEFORE GAIN (LOSS) ON REAL
ESTATE OWNED 517,547 462,730 1,000,525
Gain (loss) on real estate owned (2,524) (1,779) 3,181
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 515,023 460,951 1,003,706
Cumulative effect on prior years of
accounting change -- (10,346) --
----------- ----------- -----------
NET INCOME $ 515,023 $ 450,605 $ 1,003,706
=========== =========== ===========
NET INCOME PER PREFERRED SHARE $ 0.815 $ 0.713 $ 0.945
WEIGHTED AVERAGE PREFERRED
SHARES OUTSTANDING 631,757 631,757 626,873
BASIC EARNINGS PER COMMON SHARE $ -- $ -- $ 0.351
DILUTED EARNINGS PER COMMON SHARE $ -- $ -- $ 0.341
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING-BASIC EARNINGS 1,457,433 1,484,740 1,171,733
PER SHARE
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING-DILUTED EARNINGS 1,457,433 1,825,854 1,206,886
PER SHARE
F3
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Common)
Additional
Common Common Paid in Preferred Preferred
Shares Stock Capital Shares Stock
------ ----- ------- ------ -----
BALANCE AS OF JANUARY 1, 1998 562,760 $ 5,628 $ 3,940,571 641,283 $ 6,413
Issuance of common shares 921,980 9,219 6,628,689 -- --
Purchase of 9,526 shares of
Treasury stock -- -- -- (9,526) --
Offering costs -- -- (185,524) -- --
Net income -- -- -- -- --
Dividends -- -- (139,312) -- --
---------- -------- ------------ --------- --------
BALANCE AS OF DECEMBER 31, 1998 1,484,740 14,847 10,244,424 631,757 6,413
Net income -- -- -- -- --
Dividends -- -- (504,813) -- --
---------- -------- ------------ --------- --------
BALANCE AS OF DECEMBER 31, 1999 1,484,740 14,847 9,739,611 631,757 6,413
Purchase of 81,479 shares of
Treasury stock (81,479) -- -- -- --
Net income -- -- -- -- --
Dividends -- -- (378,611) -- --
---------- -------- ------------ --------- --------
BALANCE AS OF DECEMBER 31, 2000 1,403,261 $ 14,847 $ 9,361,000 631,757 $ 6,413
========== ======== ============ ========= ========
(Preferred)
Additional
Paid in Retained Treasury
Capital Earnings Stock Total
------- -------- ----- -----
BALANCE AS OF JANUARY 1, 1998 $ 5,868,711 $ -- $ -- $ 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 5,868,711 -- (86,944) 16,047,451
Net income -- 450,605 -- 450,605
Dividends (115,804) (450,605) -- (1,071,222)
----------- ------------ ---------- ------------
BALANCE AS OF DECEMBER 31, 1999 5,752,907 -- (86,944) 15,426,834
Purchase of 81,479 shares of
Treasury stock -- -- (250,000) (250,000)
Net income -- 515,023 -- 515,023
Dividends (88,059) (515,023) -- (981,693)
----------- ------------ ---------- ------------
BALANCE AS OF DECEMBER 31, 2000 $ 5,664,848 $ -- $ (336,944) $ 14,710,164
=========== ============ ========== ============
F4
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
STATEMENT OF CASH FLOWS
For the years ended December 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 515,023 $ 450,605 $ 1,003,706
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization 35,730 3,333 4,404
(Gain) loss on real estate owned 2,524 1,779 (3,181)
(Income) loss from investment in affiliates 489,507 732,016 --
Provision for loan losses 175,937 162,500 205,855
(Increase) decrease in interest receivable (60,575) (39,776) (98,034)
Accrued interest capitalized to real estate owned (16,847) (34,075) (6,950)
(Increase) decrease in organization costs -- 10,346 (272)
Increase (decrease) in security deposits -- 32,133 (32,133)
Increase (decrease) in due to/from affiliates 679,681 (534,190) (114,119)
Increase (decrease) in other liabilities (31,930) 25,099 140,065
------------ ------------ ------------
Net cash provided by operating activities 1,789,050 809,770 1,099,341
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash (166,910) 107,519 (389,337)
Increase (decrease) in mortgage note holdbacks 166,910 (107,519) 389,337
Increase in origination costs (33,496) (43,418) (120,217)
(Increase) decrease in warehouse lines of credit (1,056,928) 1,967,781 (2,971,141)
Increase in investments in affiliates (222,500) (100,000) (286,848)
(Increase) decrease in related party note receivable -- (22,500) (225,000)
Investment in mortgage notes receivable (8,029,562) (7,452,006) (10,342,300)
Repayment of mortgage notes receivable 5,338,680 4,395,441 6,270,841
Net proceeds from sale of real estate owned 1,072,675 147,884 77,181
Capital costs of real estate owned (31,435) (45,251) (5,956)
------------ ------------ ------------
Net cash used in investing activities (2,962,566) (1,152,069) (7,603,440)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans 2,832,761 904,750 --
Loan fees paid (101,250) (20,000) --
Repayment of note to related party -- -- (72,148)
Purchase of treasury stock (250,000) -- (86,944)
Proceeds from issuance of shares -- -- 7,375,840
Organizational and offering costs -- -- (747,406)
Common dividends paid (378,611) (504,813) (550,484)
Preferred dividends paid (603,082) (566,409) (592,534)
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,499,818 (186,472) 5,326,324
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 326,302 (528,771) (1,177,775)
CASH AT BEGINNING OF PERIOD 41,939 570,710 1,748,485
------------ ------------ ------------
CASH AT END OF PERIOD $ 368,241 $ 41,939 $ 570,710
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest expense paid $ 272,275 $ 100,038 $ 28,224
Taxes paid $ 16,900 $ 800 $ 15,238
NON-CASH INVESTING AND FINANCING ACTIVITY
Deferred offering costs offset against proceeds of offering $ -- $ -- $ 185,524
Transfer of real estate owned to CAFC $ 291,463 $ -- $ 678,405
Transfer of mortgage loans to CAFC $ 498,429 $ 670,546 $ --
F5
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2000
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 as the loan's
primary collateral. 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 first and second 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.
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).
F6
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2000
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 held an investment in Sierra Capital Acceptance
("SCA"), a division of Sierra Capital Funding, LLC ("SCF"), a Delaware
limited liability company that originated and sold residential mortgage
loans. SCA operates as a separate operating division of SCF. The Trust's
investment in SCA received a 15% preferential interest distribution per
annum. Sierra Capital Services, Inc., a related party, owned 99% of the
common shares of the Sierra Division of SCF and maintained voting control.
SCA ceased operations in 2000 (Note 10).
The Trust holds an investment in Capital Alliance Funding Corporation
("CAFC") that originates and sells residential mortgage loans. The trust
owns 100% of the outstanding non-voting preferred shares of CAFC with a 99%
equity interest (Note 10).
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 $185,524 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 made a payment of $16,100
for these taxes in 2000. The Trust paid $800 in franchise tax to the state
of California in 2000.
F7
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2000
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 (90% in 2001). 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 years ended
December 31, 2000, 1999, and 1998, the distributions per Preferred Share
are allocated 100% as ordinary income. The distributions per Common share
are allocated 100% as ordinary income.
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, 2000 and 1999, mortgage note holdbacks from
the consummation of mortgage loans made amounted to $654,084 and $487,174,
respectively.
4. Accounts receivable
-------------------
Accounts receivable consists primarily of accrued interest on mortgage
notes receivable and other amounts due from borrowers. As of December 31,
2000 and 1999, accrued interest from borrowers was $245,571 and $215,425,
respectively.
F8
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2000
5. Lines of credit to related parties
----------------------------------
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 is obligated to reacquire the loans from
the Trust at a preset price. As of December 31, 2000 and 1999, the Trust
advanced to CAFC $3,501,940 and $2,140,360, 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
$310,495, $180,345, and $187,316 during 2000, 1999, and 1998, respectively,
of which $25,930, $18,348, and $18,723 was outstanding as of December 31,
2000, 1999, and 1998, respectively.
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 advanced
funds to SCA to acquire mortgage loans secured by real estate. The Trust
then acquired all of SCA's rights, titles and interest in such loans. SCA
was obligated to reacquire the loans from the Trust at a preset price. SCA
ceased operations on June 30, 2000. As of December 31, 1999 the Trust had
advanced to SCA $428,250. Annual interest on this line of credit was at
prime plus one half of one percent for the first 60 days and prime plus
four percent after 60 days. Interest was payable monthly. The Trust earned
interest in the amount of $35,694, $100,325, and $55,343 during 2000, 1999,
and 1998, respectively, of which $4,610 and $18,723 was outstanding as of
December 31, 1999 and 1998, respectively.
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 advanced funds to Equity 1-2-3
to acquire mortgage loans secured by real estate. The Trust then acquired
all of Equity1-2-3's right, title and interest in such loans. Some of these
loan balances exceeded the fair market value of the properties. Equity
1-2-3 was obligated to reacquire the loans from the Trust at a preset
price. Equity 1-2-3 ceased operations in 1999 as it transferred its
remaining loans to the Trust. As of December 31, 1999 the Trust had
advanced Equity 1-2-3 $621,707. On January 1, 2000 the Trust foreclosed on
the purchased loans and these loans were retained in cancellation of the
repurchase option. Annual interest on this line of credit was at prime plus
one percent for the first 60 days and prime plus four percent after 60
days. The Trust earned interest in the amount of $7,937, and $92,026 in
1999 and 1998, respectively, of which $7,937 and $37,360 was outstanding as
of December 31, 1999 and 1998, respectively.
The Trust entered into a loan purchase agreement on January 1, 1998 with
CAlliance Mortgage Trust, which subsequently merged into the Mortgage
Division of CAlliance Realty Fund, LLC ("CRF") on May 30, 2000. Under the
terms of the agreement, the Trust advances funds to CRF to acquire mortgage
loans secured by real estate. The Trust then acquires all of CRF's right,
title and interest in such loans. CRF is obligated to reacquire the loans
from the Trust at a preset price. As of December 31, 2000 the Trust
advanced to CRF $1,242,734. No advances were made to CRF in 1999. Annual
interest on this line of credit is 12% and is payable monthly. The Trust
earned interest in the amount of $97,663, $23,760, and $22,093 during 2000,
1999, and 1998, respectively of which $10,733, zero, and $22,093 was
outstanding as of December 31, 2000, 1999, and 1998, respectively.
F9
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2000
6. Mortgage notes receivable
-------------------------
Mortgage notes receivable represent collateralized loans primarily secured
by deeds of trust on one to four unit 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,
1998 1999 2000
----------- ----------- -----------
Balance, beginning of period $ 4,915,186 $ 8,986,645 $10,807,664
Additions during period:
New mortgage loans 10,342,300 7,452,006 8,029,562
Deductions during period:
Collections of principal 5,997,178 4,395,441 5,338,680
Foreclosures, net of reserve 273,663 565,000 1,093,528
Transfer to CAFC -- 670,546 498,429
----------- ----------- -----------
Balance, close of period $ 8,986,645 $10,807,664 $11,906,589
=========== =========== ===========
F10
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2000
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, 2000.
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
$357,198 (3% of total mortgage
notes receivable of
$11,906,589): 14.00% 08/01/01 $ 9,333 First $ 800,000 $ 800,000 $ --
11.75% 02/01/01 $ 4,896 None 500,000 500,000 --
12.95% 03/01/01 $ 4,856 First 449,900 449,900 --
12.75% 01/01/01 $ 4,450 First 427,200 427,200 --
13.00% 09/01/05 $ 4,333 First 400,000 400,000 --
Loans from $300,000-$357,198 12.00% to 12.95% 2 to 44 months 955,000 955,000 --
Loans from $200,000-$299,999 9.13% to 13.00% 1 to 354 months 2,856,625 2,827,226 --
Loans from $100,000-$199,999 8.88% to 13.99% 2 to 355 months 3,374,796 3,244,496 935,942
Loans from $50,000-$99,999 9.70% to 14.45% 1 to 354 months 1,683,894 1,554,518 295,231
Loans up to $49,999 10.00% to 14.00% 1 to 167 months 841,929 748,249 --
----------- ----------- -----------
Total Mortgage Notes Receivable at December 31, 2000 $12,289,344 $11,906,589 $ 1,231,173
=========== =========== ===========
(A) Delinquent loans are loans where the monthly interest payments in
arrears are 90 or more days overdue. As of December 31, 2000, there were
four (4) loans totaling $359,231 of principal and $17,216 of interest that
were 90 to 180 days delinquent on interest payments. Six (6) loans with the
principal amount of $871,942 and $79,417 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.
F11
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2000
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 $80,000 of loan loss reserve is adequate to
reflect the probable impairment in all receivables as of December 31, 2000.
Activity in the loan loss reserve was as follows:
December 31, December 31, December 31,
1998 1999 2000
---------- ---------- ---------
Balance, beginning of period $ --- $ 170,000 $ 85,000
Provision for loan loss 170,000 162,500 175,937
Write off of uncollectible loans (180,937)
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 $ 80,000
========== ========== =========
8. Real estate owned
-----------------
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. During 2000 the Trust foreclosed on five
mortgage notes receivable and sold six properties. At December 31, 2000,
the Trust owned three properties. The following table shows the cash and
non-cash activities in the real estate owned account.
F12
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2000
8. Real estate owned (continued)
-----------------------------
A reconciliation of real estate owned is as follows:
1998 1999 2000
---- ---- ----
Real estate owned at beginning of year $ 322,550 $ 149,663 $ 644,326
Foreclosed mortgage notes, net of reserve (non-cash) 273,663 565,000 912,591
Accrued interest capitalized (non-cash) 6,950 34,075 16,847
Mortgage notes payable (non-cash) 292,949 -- --
Capital costs of real estate owned (cash paid) 5,956 45,251 31,435
Gain (loss) on sale (non-cash) 3,181 (1,779) (2,524)
----------- ----------- -----------
905,249 792,210 1,602,675
----------- ----------- -----------
Less: Proceeds from sale of real estate owned (net of closing
costs of $30,429, $11,116, and $2,819 in 2000, 1999 and 1998,
respectively) 77,181 147,884 1,072,675
Book value of properties transferred to CAFC (non-cash) 678,405 -- --
----------- ----------- -----------
755,586 147,884 1,072,675
----------- ----------- -----------
Real estate owned at end of year $ 149,663 $ 644,326 $ 530,000
=========== =========== ===========
9. Gain (loss) on real estate owned
--------------------------------
One real estate property was sold during 1998 for a net gain of $3,181. One
real estate property was sold during 1999 for a net loss of $1,779. Six
real estate properties were sold in 2000 for a net loss of $2,524.
10. Investment in affiliates
------------------------
On April 11, 1997 the Trust formed a non-qualified REIT subsidiary, Capital
Alliance Funding Corporation ("CAFC"), to conduct a mortgage banking
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. In 2000, the Trust contributed $100,000 cash and
forgave liabilities previously owed to CAIT totaling $322,500. The transfer
of the mortgage notes receivable is a non-cash transaction that is not
shown on statements of cash flows.
F13
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2000
10. Investment in affiliates (continued)
------------------------------------
CAPITAL ALLIANCE FUNDING CORPORATION
1999 2000
---- ----
Total assets $ 6,327,942 $ 6,385,152
=========== ===========
Total liabilities $ 5,664,870 $ 5,794,031
Total stockholders' equity 663,072 591,121
-----------
Total liabilities and equity $ 6,327,942 $ 6,385,152
=========== ===========
Revenue $ 414,159 $ 805,934
Expenses (1,153,569) (1,323,636)
Other income and expenses
Gain from sale of assets -- 23,250
----------- -----------
Net income (loss) $ (739,410) $ (494,452)
=========== ===========
As described in Note 3, the Trust also held 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 the year ended December 31, 1999, the Trust earned $30,000 from
this investment. Distributions were reported as interest. Sierra Capital
Acceptance ceased operations in 2000. The Trust received mortgage notes
held by SCA in 2000 as return of capital.
11. Notes Payable
-------------
As of December 31, 2000, the Trust had borrowed $2,231,873 of funds under a
two-year warehouse line of credit. The Trust receives advances under the
agreement up to a maximum of $7,000,000, with the mortgage loans pledged as
collateral against the advances received. Annual interest is at LIBOR
(London Interbank Offered Rate for U.S. dollar deposits) plus 2.00% (8.68%
at December 31, 2000) and is payable monthly. Maturity date for this line
of credit is September 26, 2002.
As of December 31, 2000 and 1999, the Trust had borrowed $1,505,638 and
$904,750, respectively of funds under another warehouse line of credit. The
Trust receives advances under the agreement up to a maximum of $2,250,000,
with the mortgage loans pledged as collateral against the advances
received. Annual interest is the applicable prime rate (9.5% as of December
31, 2000) and is payable monthly. Maturity date for this line of credit was
November 1, 2000. The Trust extended the maturity of the line of credit to
April 15, 2002.
F14
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2000
12. 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 $180,156, $149,146, and $143,484 for the year
ended December 31, 2000, 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. For the years ended December 31, 2000,
1999, and 1998 the Trust paid a loan servicing fee of $77,680, $72,313, and
$63,020 to the Manager, respectively. As of December 31, 2000 and 1999,
respectively, the Trust capitalized $197,131 and $163,635 of loan
origination fees.
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 and Equity 1-2-3 terminated
operations in 1999.
On occasions the Trust and its affiliates had related receivables and
payables arising from ordinary business transactions. As of December 31,
2000, the Trust had a receivable of $10,773 from CRF, and a payable of
$52,963 to the Manager. As of December 31, 1999, the Trust had a receivable
of $331,889 from Sierra Capital Acceptance, a receivable of $769,184 from
CAFC, 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 CRF. These accounts are netted on the balance sheet and shown
as Due To Affiliates in the amount of $42,190 as of December 31, 2000 and
as Due From Affiliates of $637,491 as of December 31, 1999. No interest is
charged on these inter-company accounts.
As described in Note 5, the Trust advanced $3,189,317 of funds under lines
of credit to related parties and earned interest of $312,367 on such
financing for the year ended December 31, 1999. For the year ended December
31, 2000, the Trust advanced $4,744,674 of funds under warehouse lines of
credit to related parties and earned interest of $486,030 on such
financing.
Equity 1-2-3 and Sierra Capital Acceptance, divisions of Sierra Capital
Funding LLC, were partially owned by officers of the Trust and their
affiliated entities. As previously mentioned, Equity 1-2-3 and SCA ceased
operations and were liquidated in 1999 and 2000, respectively.
F15
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2000
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 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.
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 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 Common
Shareholders and Preferred Shareholders pro rata.
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
F16
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2000
12. Preferred, common and treasury stock (continued):
-------------------------------------------------
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.
The 1998 Incentive Stock Option Plan, adopted by the board of directors and
approved by stockholders, provides options for the purchase of a total of
247,500 Common Shares of the Trust. 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 generally two
(2) to six (6) months after the date of the grant. The initial options for
the purchase of 75,000 Common Shares were granted September 22, 1998 with
an exercise price of $8.00 per share. Options for the purchase of 75,000 of
Common Shares were granted April 1, 1999 with an exercise price of $4.50
per share. On February 2, 2000, options for the purchase of 104,512 shares
were granted with an exercise price of $3.00 per share. On August 3, 2000,
the initial award of options for the purchase of 75,000 shares at an
exercise price of $8.00 per share was cancelled. No options have been
exercised as of the date of this report.
During 1998, the Trust purchased 9,526 preferred shares as treasury stock.
The purchase was recorded at cost and as a reduction to preferred stock.
During 2000, the Trust purchased 81,479 common shares as treasury stock.
The purchase was recorded at cost and as a reduction to common stock.
The Board of Directors authorized in December 2000 to repurchase an
additional $150,000 in Common Shares as part of its Stock Repurchase Plan.
On November 17, 2000, the Trust duly approved (subject to satisfaction of
miscellaneous filing requirements) a one share for each three shares (1 for
3) reverse stock split or consolidation of its Common and Preferred Shares
which will become effective at the close of business on May 11, 2001. Upon
effectiveness of the consolidation-reverse split on May 11, 2001, one (1)
new Common Share and one (1) new Series "A" Preferred Share will be
exchanged for each three (3) outstanding Common and Preferred Share,
respectively, and there will be approximately 494,914 issued and
outstanding Common Shares (the December 31, 2000 Common treasury share
balance will provide 27,160 post-split Common treasury shares) and
approximately 213,761 issued and outstanding Preferred Shares (the December
31, 2000 Preferred treasury share balance will provide 3,176 post-split
Preferred treasury shares) each with $.01 par value. The price of the
Common Shares on the American Stock Exchange ("AMEX") will initially be
increased to three (3) times the closing price of such shares on the AMEX
on May 11, 2001 and the Adjusted Net Capital Contribution attributable to
each Series "A" Preferred Share will be increased to $26.51 per share,
three (3) times the existing Adjusted Net Capital Contribution of each such
Preferred Share ($8.83) as of March 31, 2001. The authorized capital of the
Trust will remain unchanged with 5,000,000 Common Shares and 675,000 Series
"A" Preferred Shares being authorized. The Reverse-Split was approved by
the Trust's Board to enable shareholders to take advantage of margin
purchases and more favorable bid-ask spreads to lower transaction costs and
to facilitate a market price above $5.00 per share, which may enable the
Common Shares to obtain institutional interest which is otherwise generally
unavailable for shares trading below $5.00 per share.
F17
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2000
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,
------------ ------------- -----------
1998 1999 2000
---- ---- ----
Numerator:
Net income $1,003,706 $ 450,605 $ 515,023
Preferred dividends attributable
to income 592,534 450,605 515,023
---------- ---------- ----------
Numerator for basic and diluted
Earnings per share-income
available to common stockholders $ 411,172 $ -- $ --
========== ========== ==========
Denominator:
Basic weighted average shares 1,171,733 1,484,700 1,457,433
Effect of dilutive warrants 35,153 341,114 --
---------- ---------- ----------
Diluted weighted average shares 1,206,886 1,825,854 1,457,433
========== ========== ==========
Basic earnings per common share $ 0.351 $ $
========== ========== ==========
Diluted earnings per common share $ 0.341 $ -- $ --
========== ========== ==========
F18