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, 2001
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)
Delaware 94-3240473
- ------------------------------- ----------------------
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
50 California Street
Suite 2020
San Francisco, California 94111
- --------------------------------------- -------------
(Address of principal executive office) (zip code)
(415) 288-9575
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock $0.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ----
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 5, 2002, the Registrant's common shares closed at $15.40 and the
aggregate market value of the Registrant's shares of Common Stock, $.01 par
value, held by nonaffiliates of the registrant was approximately $5,333,528. At
that date approximately 346,333 shares were held by non-affiliates. The shares
are listed on the American Stock Exchange.
TABLE OF CONTENTS
PART I.........................................................................5
ITEM 1. BUSINESS..............................................................5
General...................................................................5
MORTGAGE INVESTMENT BUSINESS...................................................5
General...................................................................5
Mortgage Loan Portfolio...................................................5
Financing.................................................................6
MORTGAGE CONDUIT BUSINESS......................................................6
General...................................................................6
Marketing and Production..................................................7
Underwriting..............................................................7
Whole Loan Sales..........................................................8
WAREHOUSE LENDING BUSINESS.....................................................8
HEDGING........................................................................9
SERVICING......................................................................9
Geographical Distribution................................................10
Interest.................................................................10
Maturity.................................................................10
Delinquencies............................................................11
REGULATION....................................................................11
COMPETITION...................................................................12
EMPLOYEES.....................................................................12
ITEM 2. PROPERTIES...........................................................12
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...................................13
PART II.......................................................................15
ITEM 6. SELECTED FINANCIAL DATA..............................................15
2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................16
GENERAL..................................................................16
Organization.............................................................16
Operating Strategy.......................................................16
Loan Origination and Loan Servicing......................................16
Contingencies and Commitments............................................16
RESULTS OF OPERATIONS.........................................................17
YEAR ENDED DECEMBER 31, 2001
COMPARED TO YEAR ENDED DECEMBER 31, 2000.............................17
YEAR ENDED DECEMBER 31, 2000
COMPARED TO YEAR ENDED DECEMBER 31, 1999.............................18
INFLATION ....................................................................18
LIQUIDITY AND CAPITAL RESOURCES...............................................18
LIQUIDITY AND CAPITAL RESOURCES
FOR THE YEAR ENDED DECEMBER 31, 2001.................................18
LIQUIDITY AND CAPITAL RESOURCES
FOR THE YEAR ENDED DECEMBER 31, 2000.................................19
Forwarding-Looking Statements............................................19
Market Risk..............................................................19
Asset and Liability Management...........................................20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS .......................22
PART III......................................................................23
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT......................23
DIRECTORS.....................................................................23
EXECUTIVE OFFICERS............................................................24
ITEM 11. EXECUTIVE COMPENSATION..............................................25
COMPENSATION OF OFFICERS......................................................25
COMPENSATION OF DIRECTORS.....................................................25
Director Fees............................................................25
Committee and Other Meeting Fees.........................................25
Reimbursements...........................................................25
3
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................25
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS.................................................27
Arrangements and Transactions with CAAI..................................27
Sale and Purchase of Loans...............................................27
Other Business Activities................................................28
PART IV.......................................................................29
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS
SCHEDULES, AND REPORTS ON FORM 8-K.......................................29
(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
Statement of Operations.............................................F-3
Statements of Changes in Stockholders' Equity.......................F-4
Statement of Cash Flows.............................................F-5
Notes to Financial Statements.......................................F-6
(a)(2) Financial Statment Schedules are Listed in Part II Item 8.
(a)(3) Exhibits.............................................................29
--------
SIGNATURES....................................................................31
4
- --------------------------------------------------------------------------------
PART I
- --------------------------------------------------------------------------------
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 residential 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" or "Manager").
References to financial information of the Trust for the years ending
1999, 2000, and 2001 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.
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 junior 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
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, 2001 the Trust's loan portfolio totaled
$17,738,923 with an average loan size of $179,181, an average weighted yield of
13.21%, a weighted average adjusted maturity of 24.92 months and a weighted
average loan-to-value ratio of 65.10%. First deeds of trust comprised 26% of the
portfolio's dollar value and junior deeds of trust were 74%. 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.
5
Financing. The Mortgage Investment Business is financed by the Trust's
shareholders' equity and bank borrowings. 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,
2001 was partially encumbered by two different bank lines of credit in the
amounts of $6,964,300 and $2,250,000 respectively. Such restriction does not
apply to CAFC which utilizes warehouse lines of credit from commercial lenders.
The Trust may plan to issue Mortgage-backed Securities, such as
Collateralized Mortgage Obligations or mortgage pass-through certificates
representing an undivided interest in pools of mortgage loans formed by the
Trust. However, there is no assurance that the Trust will adopt financing
strategies in the future which will include the issuance of mortgage-backed
securities as an alternative for the financing of its Mortgage Investment
Business. Similarly, the investment policies of the Trust for its Mortgage
Investment Business and its Bylaws may be modified by the Trust's Board of
Directors.
The Trust is negotiating for additional lines of credit secured by a
portion of the Trust's mortgage loan portfolio and at the rates that are
consistent with its financing objectives described herein. The Trust, through
CAFC, has obtained third-party warehouse financing at interest rates that are
consistent with its financing objectives described herein. The Trust also
extends a warehouse reverse repurchase facility to CAFC which at December 31,
2001 aggregated $4,217,407. 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 as a taxable subsidiary
and began its mortgage origination and whole loan sales operations on a start-up
basis in August, 1997. The Mortgage Conduit Business consists primarily of the
origination and the purchase and sale of mortgage loans with a complete spectrum
of credit grades secured by first liens and second liens on single (one-to-four)
family residential properties that are originated in accordance with its
underwriting guidelines. The Trust's Mortgage Conduit Business acts as a conduit
between the originators of such mortgage loans and permanent investors in such
loans. Capital Alliance Advisors, Inc. contracts with CAFC for its management
and for its mortgage origination, loan processing and underwriting, and
secondary sales services. The Trust's Manager owns a 1% economic interest and
100% of the of voting control of CAFC.
The Management believes that non-conforming credit-rated mortgage
loans, when properly underwritten, provide an attractive net earnings profile,
producing higher yields without disproportionately higher credit risks when
compared to mortgage loans that qualify for purchase by FNMA or FHLMC. The
Trust's policy for its Mortgage Investment Business, which limits the financing
or leveraging of its mortgage loan portfolio, does not apply to its Mortgage
Conduit Business since such mortgage loans are generally held in CAFC for less
than 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.
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.
6
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.
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 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.
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. 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.
7
The Trust's Manager, through its correspondent and broker network,
including the Trust's subsidiary CAFC which is managed by CAAI, accounted for
100% of the total mortgage loans acquired by the Trust during the year ended
December 31,2001.
Underwriting. The Trust's Manager, CAAI, provides documentation for the
origination or purchase of mortgage loans and performs the underwriting function
for all of the Trust's loans on a contract basis with the Trust. The Trust's
Manager also performs a full credit review and analysis to ensure compliance
with its loan eligibility requirements. This review specifically includes, among
other things, an analysis of the underlying property and associated appraisal
and an examination of the credit, employment and income history of the borrower.
Under all of these methods, loans are originated or purchased only after
completion of a legal documentation and eligibility criteria review.
Under all of the Trust's and CAFC's underwriting methods, loan
documentation requirements for verifying the borrowers' income and assets vary
according to loan-to-value ratios, credit ratings and other factors. This
variation is necessary to be competitive and responsive to the needs of the
non-conforming mortgage loan sellers. Generally, as the standards for required
documentation are lowered, borrowers' down payment requirements are increased
and the required loan-to-value ratios are decreased. These types of loans with
less documentation are reviewed on a risk analysis underwriting basis. Reduced
documentation loans require the borrower to have a stronger credit history and
larger cash reserves and the appraisal of the property is validated by either an
enhanced desk or field review. The underwriters utilize a risk analysis approach
to determine the borrower's ability and willingness to repay the debt and to
determine if the property taken as security has sufficient value to recover the
debt in the event that the loan defaults. Each loan is reviewed for compensating
factors (i.e., credit reports, sufficient assets, appraisal, job stability,
ability to repay the loan), and overall compensating factors are reviewed to
fully analyze the risk.
CAAI reviews each loan prior to the Trust's commitment to originate or
purchase a mortgage loan to ensure that the mortgage loans meet its quality
standards. The type and extent of the quality control review depends on the
nature of the seller and the characteristics of the loans. In performing a
quality control review on a loan, CAAI analyzes the underlying property
appraisal and examines the credit and income history of the borrower. In
addition, all documents submitted in connection with the origination or purchase
of the loans, including insurance policies, title policies, deeds of trust or
mortgages and promissory notes, are examined for compliance with the Trust's and
CAFC's guidelines and to ensure compliance with state and federal regulations.
Whole Loan Sales. CAFC sells its mortgage loans on a loan-by-loan or
"flow" basis, service released. CAFC does not accumulate a pool of mortgage
loans for sale to investors in whole loan sale transactions. While the 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 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.
8
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 may be 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 $5 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 is structured to qualify under the REIT
asset tests and to generate income qualifying under the 75% gross income test.
The terms of the line are market based and may include a per loan fee of up to
$500 with an advance rate of 100% of the fair value of the mortgage loans
outstanding.
Utilizing reverse repurchase agreements, at December 31, 2001, the
Trust had outstanding balances of $4,217,407 to CAFC and $0 to Calliance Realty
Fund, LLC, both affiliated mortgage banking companies.
HEDGING
The mortgage loans held by the Mortgage Investment Business mostly
carry fixed rates and have relatively short maturities. As the portfolio of
fixed-rate mortgage loans increases or if the portfolio's scheduled 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 for investment and the mortgage volume and 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. All or a portion
of the aforementioned servicing responsibilities may be subcontracted by the
Trust's Manager.
9
Servicing Portfolio. The following tables sets forth certain
information regarding the Trust's servicing portfolio of loans for the years
ended
December 31, 1999 December 31, 2000 December 31, 2001
----------------- ----------------- -----------------
Beginning servicing portfolio $8,968,645 $10,807,644 $11,906,586
Loans added to the servicing portfolio $7,452,006 $7,457,537 $15,380,173
Loans sold, servicing released and principal
paydowns (1) $5,630,987 $6,358,592 $9,547,836
------------ ------------ ------------
Ending servicing portfolio $10,807,644 $11,906,589 $17,738,923
Number of loans serviced 82 84 99
Average loan size $131,801 $141,745 $179,181
(1) Includes normal loan payoffs, principal amortization prepayments, and
loans contributed as capital to CAFC, less reserves and foreclosures.
Geographical Distribution. The following table sets forth the
geographic distribution of the Trust's servicing portfolio at the dates
presented:
December 31, 1999 December 31, 2000 December 31, 2001
------------------------ -------------------------- --------------------------
Number $-% of Number $-% of Number $-% of
State of Loans Portfolio of Loans Portfolio of Loans Portfolio
----- -------- --------- -------- --------- -------- ----------
CA 80 97% 75 89% 95 96%
OR 0 0% 1 1% 1 1%
UT 2 3% 4 5% 2 2%
Other 0 0% 4 5% 1 1%
-- ---- -- ---- -- ----
Totals: 82 100% 84 100% 99 100%
Interest. The weighted average interest for the Trust's portfolio of
loans in its Mortgage Investment Business at December 31, 1999 was 12.15%, at
December 31, 2000 it was 12.46%, and at December 31, 2001 it was 13.21%.
Maturity. The weighted average adjusted maturity of the Trust's
portfolio of loans in its Mortgage Investment Business at December 31, 1999 was
22.57 months, at December 31, 2000 it was 27.48 months, and at December 31, 2001
it was 24.92 months. The following table shows the Trust's loan maturities at
the dates presented.
December 31, 1999 December 31, 2000 December 31, 2001
------------------------ --------------------------- -------------------------
Terms Amount $-% Amount $-% Amount $-%
of Loans of Loans Portfolio of Loans Portfolio of Loans Portfolio
-------- --------- --------- --------- --------- -------- ---------
0-12 months 6,548,777 61% $3,254,592 27% 7,339,035 41%
13-24 months 1,365,577 13% 1,094,670 9% 1,143,689 6%
25-36 months 587,213 5% 505,576 4% 84,946 1%
37-48 months None 0% 544,132 5% 2,208,485 13%
Over 48 2,306,077 21% 6,507,619 55% 6,962,768 39%
----------- ---- ----------- ---- ----------- ----
Totals: $10,807,644 100% $11,906,589 100% $17,738,923 100%
10
Delinquencies. The following table shows the Trust's delinquency
statistics for its servicing portfolio at the dates presented.
December 31, 1999 December 31, 2000 December 31, 2001
----------------------- ----------------------- -----------------------
Loans Number $-% of Number $-% of Number $-% of
Delinquent For: of Loans Portfolio of Loans Portfolio of Loans Portfolio
31-60 days 3 3% 3 3% 6 4%
61-90 days 2 4% 3 4% 8 5%
91 days+ 7 8% 8(1) 10% 5(2) 3%
-- --- ----- --- ----- ---
Totals: 12 15% 14 17% 19 12%
(1) Four of the 91 days+ delinquent loans were either paid off in full or
brought current by March 31, 2001.
(2) Three of the 91 days+ delinquent loans were either paid off in full or
brought current by March 31, 2002. REGULATION
The Trust at all times intends to conduct its business so as not to
become regulated as an investment Trust under the Investment Trust Act. The
Investment Trust Act exempts entities that are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate" ("Qualifying Interest"). Under the current
interpretation of the staff of the Commission, in order to qualify for this
exemption, the Trust must maintain at least 55% of its assets directly in
mortgage loans, and certain other Qualifying Interests in real estate. If the
Trust fails to qualify for exemption from registration as an investment Trust,
its ability to use leverage in its Mortgage Investment Business would be
substantially reduced, and it would be unable to conduct its business as
described herein. The Trust has not requested a legal opinion from counsel
indicating that, it will be exempt from the Investment Trust Act.
Because the Trust's business is highly regulated, the laws, rules and
regulations applicable to the Trust are subject to regular modifications and
change. There are currently proposed various laws, rules and regulations which,
if adopted, could impact the Trust. There can be no assurance that these
proposed laws, rules and regulations, or other such laws, rules or regulations,
will not be adopted in the future which could make compliance much more
difficult or expensive, restrict the Trust's ability to originate, broker,
purchase or sell loans, further limit or restrict the amount of commissions,
interest and other charges earned on loans originated, brokered, purchased or
sold by the Trust, or otherwise affect the business or prospects of the Trust.
Also, members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Trust's loans are made to borrowers for
the purpose of consolidating consumer debt or financing other consumer needs,
the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Trust.
Additionally, there are various state and local laws and regulations
affecting the Mortgage Conduit Business. CAFC is licensed in those states
requiring such a license. Mortgage operations also may be subject to applicable
state usury statutes. The Trust is presently in material compliance with all
material rules and regulations to which it is subject.
11
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, 2001, the Manager employed 15 persons. Additional
employees will be required to staff the anticipated growth of 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 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.
CAFC 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, the
Trust's and CAFC's foreseeable needs and that alternate space at reasonable
rental rates is available, if necessary.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of the Trust's security holders
during the last quarter of its fiscal year ended December 31, 2001.
12
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 split-adjusted sale prices of the Common Stock as quoted on the American
Stock Exchange and NASDAQ composite were:
Dividend
Year Quarter High Low per Share
- ----------- -------------- ------------- ------------ ---------------
2000 1st* $13.20 $6.73 0.255
2nd* 10.95 7.89 0.255
3rd* 10.71 6.63 0.255
4th* 10.53 6.93 ---
2001 1st* 12.66 6.81 0.255
2nd* 13.50 8.73 0.255
3rd 13.41 11.91 0.255
4th 13.70 12.10 0.280
2002 1st 14.20 12.91 0.300
April 1-12 15.40 14.45 0.400
* All information is adjusted to reflect the May 14, 2001 one-for-three
reverse stock split.
On December 31, 2001, there were approximately 110 holders of record
(including holders who are nominees for an undetermined number of beneficial
owners) of the Trust's Common Stock and 138 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 in excess of 750 shareholders.
On March 7, 2000, the Trust's Board of Directors authorized the Trust
to repurchase up to $250,000 of the Trust's Common Stock, in open market
purchases, from time to time, at the discretion of the Trust's management. On
December 21, 2000, the Board of Directors increased the Stock Purchase Plan to
$400,000, on June 19, 2001, to $550,000, and on March 13, 2002, to $695,000. As
of March 14, 2002, $240,438 is available to repurchase the Trust's Common Stock.
Separately, in a private transaction with Sutter Capital Management, the Board
authorized the purchase of 47,500 Common Shares at $13.50 per Share. This
transaction closed on September 3, 2001. The timing and extent of future
repurchases will depend on market conditions. The Trust intends to effect such
repurchase in compliance with Rule 10b-18 under the Securities Exchange Act of
1934. As of December 31, 2001, the Trust had acquired 91,066 post- split Common
Shares under the repurchase plan at a total cost of $1,095,808. On December 21,
2001, Treasury Shares totaling 6,000 were used to satisfy exercised Common Share
stock options. As of December 31, 2001, the Trust held 85,066 shares of Common
Stock in the treasury.
On April 17, 2001, the Board of Directors duly approved the amendment
of the Corporation's Certificate of Incorporation to effect a one-for-three
reverse stock split of the Trust's Common and Preferred Shares, which approval
was duly ratified by the shareholders of the Trust at its annual shareholders'
meeting on August 8, 2001. The reverse stock split became effective after the
close of business on May 11, 2001.
13
To maintain its qualification as a REIT, the Trust has made and intends
during 2002 to make annual distributions to stockholders of at least 90% 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 or loan loss reserves. The Trust
declares regular quarterly Common dividend distributions and monthly Preferred
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 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
quarterly dividends on the Trust's Common Stock for the quarters ending March
31, 2001, June 30, 2001, September 30, 2001, and December 31, 2001 at $0.255,
$0.255, $0.255, and $0.280 per post-split share respectively. The Trust during
2001 paid 12 consecutive monthly dividends on the Trust's Preferred Stock at an
average of $.197 per post-split share per month.
Holders of the Preferred Shares are entitled to a dividend 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). The annualized return is the lesser of: (a) 10.25%, (b) 1.50% over the
Prime Rate (determined on a not less than quarterly basis), or (c) the rate set
by the Board of Directors. The preferred dividend preference is not cumulative.
After declaring dividends for a given year to the Preferred Shares in
the amount of the dividend preference, no further distributions may be declared
on the Preferred Shares for the subject year until the dividends declared on
each Common Share for that year equals the dividend preference for each
Preferred Share for such year. Any Distributions associated with a payment date
that are declared after the Directors have declared Distributions on Common
Shares in the amount of the additional dividend generally will be allocated such
that the amount of dividends per share to the Preferred Shares and Common Shares
for the subject year are equal. The Preferred Shares additional dividend 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.
14
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data of the
Trust derived from the audited financial statements for the years ended December
31, 1997, December 31, 1998, December 31, 1999, December 31, 2000, and December
31, 2001.
The historical 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."
Twelve Month Year Ended December 31
-----------------------------------
Financial Summary 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Operations:
Revenue $ 776,405 $ 1,677,233 $ 1,243,866 $ 1,623,656 $ 2,858,179
Net income 535,789 1,003,706 450,605 515,023 1,142,896
Per Share Data:
Weighted average basic
earnings - split adjusted -- $ 1.05 -- -- $ 1.46
Weighted average diluted
earnings - split adjusted -- $ 1.02 -- -- $ 1.05
Balance Sheet Data:
Mortgage notes receivable $ 4,915,186 $ 8,986,645 $10,807,644 $11,906,589 $17,738,923
Total assets 10,132,419 16,804,983 17,006,696 19,299,332 25,343,401
Total liabilities 311,096 757,532 1,579,862 4,589,168 11,248,860
Shareholder's equity 9,821,323 16,047,451 15,426,834 14,710,164 14,094,541
Common share equity 3,946,199 10,259,271 9,754,458 9,125,847 8,510,224
Common shares (postsplit) 187,507 494,913 494,913 467,754 410,095
Common share book value $ 21.04 $ 20.73 $ 19.71 $ 19.51 $ 20.75
15
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.
GENERAL
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".
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
completed. As of December 31, 1998, 1,484,740 Common Shares were issued and
outstanding.
On November 17, 2000, the Trust duly approved a one share for each
three share reverse stock split of its Common and Preferred Shares which became
effective at the close of business on May 11, 2001. After the split,
approximately 494,913 Common Shares were issued and outstanding and 213,761
Preferred Shares were issued and outstanding. These outstanding totals include
27,160 Common Shares and 3,176 Preferred Shares held in the Treasury on May 14,
2001.
Operating Strategy. The Trust invests as a portfolio lender primarily
in non-conforming mortgage loans on one-to-four unit residential properties
primarily 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 the correspondent network, conforming and non-conforming home equity
loans to be sold to the Trust and to be sold in the secondary mortgage market
for cash. Although the loans currently made are concentrated in California, CAFC
plans to originate and/or purchase loans on an individual basis throughout the
western United States. Loans will then be sold into the secondary market for a
premium or to the Trust at fair market value, when they meet the Trust's
underwriting standards (which include a combined loan-to- value ratio that does
not exceed 75% of the underlying collateral).
Loan Origination and Loan Servicing. Mortgage loan origination consists
of establishing a relationship with a borrower or his broker, obtaining and
reviewing documentation concerning the credit rating and net worth of borrowers,
inspecting and appraising properties that are proposed as the collateral for a
home equity loan, processing such information and underwriting and funding the
mortgage loan. Mortgage loan servicing consists of collecting payments from
borrowers, accounting for interest payments, holding borrowed proceeds in escrow
until fulfillment of mortgage loan requirements, contacting delinquent
borrowers, foreclosing in the event of unremedied defaults and performing other
administrative duties. Mortgage loan origination and loan servicing are provided
to the Trust by CAAI, its Manager.
16
Contingencies and Commitments. As of December 31, 2001, the Trust's
real estate investments included two properties held for sale at a capitalized
cost of $234,527 and a loan portfolio of $17,738,923 consisting of 99 loans, of
which 13 loans totaling $1,543,353 or 8% of the portfolio loan value were
delinquent over 60 days.
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 11 loans totaling
$1,637,574 or 14% of the portfolio loan value were delinquent over 60 days.
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, 2001 and December 31, 2000.
RESULTS OF OPERATIONS
The results of operation for the years ended December 31, 2001,
December 31, 2000, and December 31, 1999 follows. The historical information
presented herein is not necessarily indicative of future operations.
YEAR ENDED DECEMBER 31, 2001
COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues for the year ended December 31, 2001 increased to $2,858,179
as compared to $1,623,656 for 2000, primarily from CAFC's 2001 operating gain of
$381,156 compared to CAFC's 2000 operating loss of $489,507 which was reported
as part of the Trust's gross revenues and CAIT's increased interest income from
a larger mortgage portfolio during 2001. Other income for the year ended
December 31, 2001 increased on account of prepayment fees from early mortgage
payoffs.
At year ended December 31, 2001, the mortgage notes receivable balance
was $5,832,334 greater than the year ended December 31, 2000 mortgage notes
receivable balance. At year ended December 31, 2001, the warehouse lines of
credit balance to related parties was $527,266 less than the year ended December
31, 2000 warehouse lines of credit. At year ended December 31, 2001, the real
estate held for sale balance was $295,473 less than the year ended December 31,
2000 real estate held for sale balance.
Expenses for the year ended December 31, 2001 increased to $1,695,149
as compared to $1,083,519 for the previous year. The increase in 2001 compared
to 2000 is primarily due to higher compensation to the Manager, higher interest
expenses from increased borrowings, and the increased general and administrative
expenses of operating a larger company.
The 2000 and 2001 gains or losses from sales of real estate held and
real estate owned operating expenses 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, 2001was $1,142,896. Net
Income for the year ended December 31, 2000 was $515,023.
17
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 $1,089,925 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 $1,083,519
as compared to $775,709 for the previous year. The increase in 2000 compared to
1999 is primarily due to higher interest expenses 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 and real estate owned
operating expenses 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.
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,
and warehouse lines of credit currently available and warehouse lines of credit
which the Trust and CAFC anticipate will be acquired during 2002 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, 2001
As of January 1, 2001, the Trust had $368,241 of cash and cash
equivalents. After taking into effect the various transactions discussed below,
cash and cash equivalents at December 31, 2001 were $441,909. 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.
18
The principal source of the Trust's increased liquidity was the
$5,875,781 increase in borrowings. Offsetting the increased loans payable
balance was a $5,832,334 increase in mortgage notes receivable.
Net cash provided by the operating activities during the 12 months
ended December 31, 2001 was $1,388,545. Net Income of $1,142,898 and the
non-cash provision for loan losses of $203,421 were the primary suppliers of
cash. The primary operating activity use of cash was CAFC's net income of
$381,156.
Net cash provided by financing activities during the 12 months ended
December 31, 2001 was $4,109,760. The provider of cash from financing activities
was $5,875,781 drawn from bank lines of credit. Dividends paid of $966,709 and
net treasury stock purchases of $791,812 were the largest users of cash from
financing activities.
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 activities during the twelve months ended
December 31, 2000 was $1,789,050. Net income of $515,023 and the non-cash
accounting loss of $489,507 in CAFC were the primary suppliers of cash.
Net cash provided in 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 most significant users of cash from financing activities.
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
Forwarding-Looking Statements. Certain statements contained herein are
not, and certain statements contained in future filings by the Trust with the
SEC, in the Trust's press releases or in the Trust's public and stockholder
communications may not be based on historical facts and are "forward- looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward- looking statements may be identified by reference to a future
period or periods, or by the use of forward- looking terms such as "may",
"will", "expect", "anticipate", or similar terms. Actual results could
materially differ from those in the forward-looking statements due to a variety
of factors.
19
Market Risk. Market risk is the exposure to loss resulting from changes
in interest rates, credit spreads, foreign exchange rates, commodity prices, and
equity prices. The primary market risks to which the Trust is exposed are
interest rate risk and credit risk.
Interest Risk. Interest rate risk is highly sensitive to many factors,
including governmental, monetary and tax policies, domestic and international
economic and political considerations and other factors beyond the control of
the Trust. Changes in the general level of the U.S. Treasury yield curve can
have significant effects on the market value of the Trust's portfolio. The
majority of the Trust's assets are fixed-rate loans with a spread to U.S.
Treasuries. The Trust's loans are valued on the December 31, 2001 balance sheet
of the lower of cost or market.
As U.S. Treasury securities are priced to a lower yield and/or the
spread to U.S. Treasuries used to price the Trust's assets are decreased, the
market value of the Trust's portfolio may increase. Conversely, as U.S. Treasury
securities are priced to a higher yield and/or the spread to U.S. Treasuries
used to price the Trust's assets is increased , the market value of the Trust's
portfolio may decline. Changes in the level of the U.S. Treasury yield curve can
also affect, among other things, the prepayment assumptions used to value
certain of the Trust's loans. In addition, changes in the general level of the
LIBOR money market rates can affect the Trust's net interest income. The
majority of the Trust's liabilities are floating rate based on a spread over one
month LIBOR. As the level of LIBOR increases or decreases, the Trust's interest
expense will move in the same direction.
On account of the relatively short adjusted weighted average maturity
of the Trust's portfolio (25 months), a variety of financial instruments
available to limit the effects of interest rate fluctuations on its operations
have not been utilized. The use of these types of derivatives (such as interest
rate swaps, caps, floors and other interest rate exchange contracts) to hedge
interest-earnings assets and/or interest-bearing liabilities carry risks,
including the risk that the net losses on a hedge position may exceed the amount
invested in such instruments.
Credit Risk. Credit risk is the exposure to loss from loan defaults and
foreclosures. Default and foreclosure rates are subject to a wide variety of
factors, including, but not limited to, property values, supply/demand factors,
construction trends, consumer behavior, regional economics, interest rates, the
strength of the American economy and other factors beyond the control of the
Trust.
All loans are subject to a certain probability of default and
foreclosure. An increase in default rates will reduce the book value of the
Trust's assets and the Trust's earnings and cash flow available to fund
operations and pay dividends.
The Trust manages credit risk through the underwriting process,
limiting loans at the time of funding to 75% of the collateral's appraised
value, establishing loss assumptions and carefully monitoring loan performance.
Nevertheless, the Trust assumes that a certain portion of its loans will default
and adjusts the allowance for loan losses based on that assumption. For purposes
of illustration, a doubling of the reserve for loan losses in the Trust's
portfolio for 2001 would reduce the 2001 GAAP income applicable to common
shareholders by $180,000 or 28%.
Asset and Liability Management. Asset and liability management is
concerned with the timing and magnitude of the maturity of assets and
liabilities. In general, management's strategy is to approximately match the
term of the Trust's liabilities to the portfolio's adjusted weighted average
maturity (25 months).
20
The majority of the Trust's assets pay a fixed coupon and the income
from such assets are relatively unaffected by interest rate changes. The Trust's
borrowings are currently under a variable rate line of credit that resets
monthly. Given this relationship between assets and liabilities, the Trust's
interest rate sensitivity gap is highly negative. This implies that a period of
falling short term interest rates will tend to increase the Trust's net interest
income, while a period of rising short term rates will tend to reduce the
Trust's net interest income.
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, 2001, June 30, 2001 and September 30,
2001 are incorporated herein by reference and filed as part of this report.
The unaudited 2001and 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, 2001.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
21
CAPITAL ALLIANCE INCOME TRUST LTD.
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
December 31
2000 2001
---- ----
REVENUES
Interest income $ 511,016 $ 641,906
Investment income from affiliates (27,005) 49,908
Other income 6,718 39,437
----------- -----------
Total revenues 490,729 731,251
EXPENSES
Loan servicing and origination
fees to related party 129,200 198,823
Interest expense 58,441 74,021
Provisions for loan losses 99,437 60,162
Operating expenses of real estate owned 4,580 7,113
General and Administrative 43,262 90,367
----------- -----------
Total expenses 334,920 430,486
NET INCOME BEFORE GAIN
ON REAL ESTATE OWNED 155,809 300,765
GAIN ON REAL ESTATE OWNED -- --
----------- -----------
NET INCOME $ 155,809 $ 300,765
=========== ===========
PREFERRED SHARE DIVIDENDS $ 145,354 $ 104,709
WEIGHTED AVERAGE PREFERRED
SHARE OUTSTANDING 210,586 210,644
BASIC EARNINGS PER
COMMON SHARE $ 0.02 $ 0.48
DILUTED EARNINGS PER
COMMON SHARE $ 0.02 $ 0.33
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC EARNINGS 473,033 406,095
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED EARNINGS 473,033 587,720
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
22
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
DIRECTORS
Thomas B. Swartz, 70; 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
2000); 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, 51; President, Director and Chief Operating Officer (1)
Class II Director since 1995; current term expires in 2004; 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 2000); 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, 46; 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).
23
Stanley C. Brooks, 52; Director (2)
Class II Director since 1996; current term expires 2004; President and
Chairman, Brookstreet Securities Corporation (1990 to date); Executive
Vice-President, Toluca Pacific Securities Corporation (1987 to 1989); Senior
Vice-President, First Affiliated Securities (1983 to 1986); Senior
Vice-President, Private Ledger Financial Services (1976 to 1983); Member,
National Futures Association (1991 to date); Member, Securities Industry
Association (1995 to date); Member, Regional Investment Bankers Association
(1990 to date); Licensed Principal, NASD (1970 to date); California State
Polytechnic Institute, B.S. Business Administration 1970. Mr. Brooks was elected
to the Board of Directors pursuant to the Underwriting Agreement between the
Trust and Brookstreet Securities Corporation as the Managing Broker-Dealer of
the Trust's current public offering of its Common Stock.
Harvey Blomberg, 61; 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,49; 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 degree (specialization in Tax Accounting) (1976),
University of Texas; 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 or, where indicated, the Trust's Manager. The Trusts's Executive Officers
hold office at the discretion of the Directors.
Name Age Position
---- --- --------
Thomas B. Swartz 70 Chairman and Chief
Executive Officer
Dennis R. Konczal 51 President and Chief
Operating Officer
Richard J. Wrensen 46 Executive Vice President
and Chief Financial Officer
William W. Aubrey, II 42 Senior Vice President of Manager
Linda St. John 46 Corporate Secretary
24
The principal occupations of the non-Director Executive Officers of the
Trust during the last five years or more are set forth below:
William W. Aubrey, II, 42; Senior Vice President of Manager
Senior Vice-President, Capital Alliance Advisors, Inc. (1998 to date);
Senior Vice-President, Sierra Capital Acceptance (1995 to 2000); 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).
Linda St. John, 46, Corporate Secretary
Operations Officer and Secretary, Capital Alliance Advisors, Inc. (1995
to date); Secretary, Sierra Capital Companies and Affiliates (1995 to date).
Operations Manager, Gruen Gruen & Associates (1994- 1995); MIS Manager, Hannum
Associates (1991-1993); Rochester Business Institute, A.A. Business
Administration (1984).
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF OFFICERS
The Trust has no full time employees and is managed by Capital Alliance
Advisors, Inc. as Manager of the Trust under a Management Agreement which
requires CAAI to pay the employment expenses of its personnel. Accordingly, no
compensation was paid by the Trust to any of the named executives.
COMPENSATION OF DIRECTORS
Director Fees. The Trust pays each unaffiliated Director an annual fee
of $5,000. In 2001 Messrs. Brooks and Blomberg each received $5,000 as a
Director's fee. Mr. Looper received $3,750.
Committee and Other Meeting Fees. The Directors are also entitled to
$500 for each director's or committee meeting attended in person and $300 if
attended by telephonic means. During 2001 total committee and meeting fees for
Mr. Brooks, Mr. Blomberg and Mr. Looper were $2,800, $3,000 and $2,400,
respectively.
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.
25
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 and Preferred
Shares as of March 31, 2002 by (1) each person known to the Trust to
beneficially own more than five percent of the Trust's Common Shares or
Preferred Shares, (2) each Director, (3) the Trust's executive officers, (4) the
Manager's executive officers, and (5) 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.
Number of Shares Percentage of Shares
of Stock Of Stock
Beneficially Owned Beneficially Owned
------------------ ------------------
Name of Beneficial Owner Common Preferred Common Preferred
------------------------ ------ --------- ------ ---------
Thomas B. Swartz (1)(4)................. 1,029 1,263 * *
Dennis R. Konczal (2)(4)................ 9,632 984 2.3% *
Richard J. Wrensen (3)(4)............... 48,767 1,555 11.7% *
Linda St. John (5)..................... 3,750 0 * 0
William W. Aubrey II (6)................ 1,500 0 * 0
Stanley C. Brooks (7)................... 0 0 0 0
Harvey Blomberg (8)..................... 0 0 0 0
Donald R. Looper....................... 0 0 0 0
All directors and executive officers
as a group (7 persons) (9)............ 90,096 7,546 21.6% 3.6%
Thomas Morford (10)..................... 0 16,334 0 7.7%
* Represents less than 1% of outstanding shares.
--------------------
(1) Mr. Swartz has unexercised options to purchase 55,687 shares of Common
Stock.
(2) Mr. Konczal has unexercised options to purchase 54,687 shares of Common
Stock.
(3) Mr. Wrensen has unexercised options to purchase 47,213 shares of Common
Stock.
Mr. Wrensen's wife owns 20,400 shares of Common Stock and 1,355 Series A
Preferred Shares as of March 31, 2002, in which Mr. Wrensen claims no
beneficial interest. Such holdings represent 4.9% of the outstanding
Common Shares and less than 1% of the outstanding Preferred Shares.
(4) Capital Alliance Advisors, Inc., the Trust's Manager, owns beneficially
25,418 Shares of Common Stock and 3,661 shares of Series A Preferred
Shares as of March 31, 2002, representing 6.2% of the outstanding Common
Shares and 1.7% of the outstanding Series A Preferred Shares. Messrs.
Swartz, Konczal and Wrensen are officers and directors of the Manager and
collectively own all of the outstanding Common Shares of the Manager. The
Manager has unexercised options to purchase 9,189 shares of Common Stock.
(5) Ms. St. John has unexercised options to purchase 3,750 shares of Common
Stock.
26
(6) Mr. Aubrey has unexercised options to purchase 11,250 shares of Common
Stock.
(7) Mr. Brooks has unexercised options to purchase 12,375 shares of Common
Stock.
(8) Mr. Blomberg has unexercised options to purchase 12,375 shares of Common
Stock.
(9) This total includes the Common and Preferred Shares owned by Capital
Alliance Advisors.
(10) Mr. Morford, a private investor, owns beneficially 16,334 shares of Series
A Preferred Shares as of March 31, 2002, representing 7.7% of the
outstanding Series A Preferred Shares.
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 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 of CAFC 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 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 including
Calliance Realty Fund 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.
27
Sale and Purchase of Loans. To provide a source of mortgage loans for
the Trust's Mortgage Investment Business, CAFC, the Mortgage Conduit Subsidiary,
offers to the Trust for purchase all non- conforming mortgage loans and Home
Equity Loans meeting the Trust's investment criteria and policies. Commitments
to acquire loans will obligate the Trust to purchase such loans from the
Mortgage Conduit Subsidiary upon the closing and funding of the loans, pursuant
to the terms and conditions specified in the commitment.
The Trust accounts for the purchase of loans from CAFC on a fair market
value basis. When the Trust computes the equity and earnings or loss of the
Mortgage Conduit Subsidiary, it will eliminate any intercompany profit.
Other Business Activities. The Bylaws provide that the Directors and
the Trust's agents, officers and employees may engage with or for others in
business activities of the types conducted by the Trust and that they will not
have any obligation to present to the Trust any investment opportunities which
come to them other than in their capacities as Directors regardless of whether
those opportunities are within the Trust's investment policies. Each Director is
required to disclose any interest he has, and any interest known to him of any
person of which he is an Affiliate, in any investment opportunity presented to
the Trust.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
28
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
FINANCIAL STATEMENTS
with
Independent Auditors' Report
For the three-year period ended December 31, 2001
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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
NOVOGRADAC & COMPANY LLP
San Francisco, California
April 16, 2002
F-1
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
BALANCE SHEETS
as of December 31, 2001 and 2000
ASSETS 2001 2000
---- ----
Cash and cash equivalents $ 441,909 $ 368,241
Restricted cash 1,285,382 654,084
Accounts receivable 292,588 293,592
Notes receivable:
Lines of credit to related parties 4,217,408 4,744,674
Mortgage notes receivable 17,738,923 11,906,589
Allowance for loan losses (180,000) (80,000)
------------ ------------
Net receivable 21,776,331 16,571,263
Real estate owned 234,527 530,000
Investments in affiliate 1,062,210 603,459
Origination costs 227,392 197,131
Loan fees, net of amortization of $128,750 in 2001,
and $39,688 in 2000 23,062 81,562
------------ ------------
Total assets $ 25,343,401 $ 19,299,332
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Liabilities
Mortgage note holdbacks $ 1,285,382 $ 654,084
Loans payable 9,613,292 3,737,511
Due to affiliates 126,984 42,190
Other liabilities 223,202 155,383
------------ ------------
Total liabilities 11,248,860 4,589,168
------------ ------------
Stockholders' Equity
Preferred stock, $.01 par value, 675,000 shares authorized;
213,819 shares issued and outstanding in 2001,
641,238 shares issued and outstanding in 2000 2,138 6,413
Additional paid in capital-preferred stock 5,669,123 5,664,848
Less: treasury stock, 3,176 preferred shares in 2001,
9,526 unadjusted preferred shares in 2000, at cost (86,944) (86,944)
Common stock, $.01 par value, 5,000,000 shares authorized;
495,161 shares issued and outstanding in 2001
and 1,484,740 shares issued and outstanding in 2000 4,952 14,847
Additional paid in capital-common stock 9,370,895 9,361,000
Less: treasury stock, 85,066 common shares in 2001,
81,479 unadjusted common shares in 2000, at cost (1,041,812) (250,000)
Retained earnings 176,189 --
------------ ------------
Total stockholders' equity 14,094,541 14,710,164
------------ ------------
Total liabilities and stockholders' equity $ 25,343,401 $ 19,299,332
============ ============
See accompanying notes.
F-2
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
STATEMENT OF OPERATIONS
For the years ended December 31, 2001, 2000, and 1999
REVENUES 2001 2000 1999
---- ---- ----
Interest income $ 1,893,211 $ 1,614,889 1,611,363
Interest income from affiliates 510,235 486,030 342,367
Equity in gain (loss) of affiliates 381,156 (489,507) (732,016)
Other income 73,577 12,244 22,152
----------- ----------- -----------
Total revenues 2,858,179 1,623,656 1,243,866
EXPENSES
Loan servicing fees to related parties 407,701 277,224 251,655
Management fees to related party 290,180 197,556 162,546
Interest expense on loans 463,984 203,658 100,038
Interest expense on loans from related party 22,657 -- --
Interest expense on real estate owned -- 68,617 --
Provision for loan loss 203,549 175,937 162,500
Taxes 32,567 22,334 22,540
Amortization 66,625 35,730 3,333
General and administrative 207,884 102,463 73,097
----------- ----------- -----------
Total expenses 1,695,147 1,083,519 775,709
INCOME BEFORE GAIN (LOSS) ON REAL
ESTATE OWNED 1,163,032 540,137 468,157
Operating expenses of real estate owned (20,134) (22,590) (5,427)
Gain (loss) on real estate owned -- (2,524) (1,779)
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 1,142,898 515,023 460,951
Cumulative effect on prior years of
accounting change -- -- (10,346)
----------- ----------- -----------
NET INCOME $ 1,142,898 $ 515,023 $ 450,605
=========== =========== ===========
NET INCOME PER PREFERRED SHARE $ 2.37 $ 2.45 $ 2.14
WEIGHTED AVERAGE PREFERRED
SHARES OUTSTANDING 210,644 210,586 210,586
BASIC EARNINGS PER COMMON SHARE $ 1.46 $ -- $ --
DILUTED EARNINGS PER COMMON SHARE $ 1.05 $ -- $ --
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING-BASIC EARNINGS
PER SHARE 442,371 485,811 494,913
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING-DILUTED EARNINGS
PER SHARE 614,996 485,811 608,618
See accompanying notes.
F-3
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 2001, 2000, and 1999
(Common)
Additional
Common Common Paid in Preferred
Shares Stock Capital Shares
------ ----- ------- ------
BALANCE AS OF JANUARY 1, 1999 1,484,740 $ 14,847 $ 10,244,424 631,757
Net income -- -- -- --
Dividends -- -- (504,813) --
------------ ------------ ------------ ------------
BALANCE AS OF DECEMBER 31, 1999 1,484,740 14,847 9,739,611 631,757
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
Three to one reverse stock split (935,507) (9,898) 9,898 (421,171)
Issue of shares from rounding of stock split 247 3 -- 58
Purchase of 63,906 shares of Treasury Stock (63,906) -- -- --
Exercise of options for 6,000 chares of
Common stock 6,000 -- -- --
Net income -- -- -- --
Dividends -- -- -- --
------------ ------------ ------------ ------------
BALANCE AS OF DECEMBER 31, 2001 410,095 $ 4,952 $ 9,370,898 210,644
============ ============ ============ ============
(Preferred)
Additional
Preferred Paid in Retained Treasury
Stock Capital Earnings Stock Total
----- ------- -------- ----- -----
BALANCE AS OF JANUARY 1, 1999 $ 6,413 $ 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 6,413 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) (515,025) -- (981,693)
------------ ------------ ------------ ------------ ------------
BALANCE AS OF DECEMBER 31, 2000 6,413 5,664,848 -- (336,944) 14,710,164
Three to one reverse stock split (4,275) 4,275 -- -- --
Issue of shares from rounding of stock split -- -- -- -- --
Purchase of 63,906 shares of Treasury Stock -- -- -- (845,812) (845,812)
Exercise of options for 6,000 chares of
Common stock -- -- -- 54,000 54,000
Net income -- -- 1,142,898 -- 1,142,898
Dividends -- -- (966,709) -- (966,709)
------------ ------------ ------------ ------------ ------------
BALANCE AS OF DECEMBER 31, 2001 $ 2,138 $ 5,669,123 $ 176,189 $ (1,128,756) $ 14,094,541
============ ============ ============ ============ ============
See accompanying notes.
F-4
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000, and 1999
CASH FLOWS FROM OPERATING ACTIVITIES 2000 2000 1999
---- ---- ----
Net income $ 1,142,898 $ 515,023 $ 450,605
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization 66,625 35,730 3,333
Loss on real estate owned -- 2,524 1,779
(Income) loss from investment in affiliates (381,156) 489,507 732,016
Provision for loan losses 203,549 175,937 162,500
(Increase) decrease in interest receivable 1,004 (60,575) (39,776)
Accrued interest capitalized to real estate owned -- (16,847) (34,075)
Decrease in organization costs -- -- 10,346
Increase in security deposits -- -- 32,133
Increase (decrease) in due to affiliates 84,794 679,681 (534,190)
Increase (decrease) in other liabilities 67,819 (31,930) 25,099
------------ ------------ ------------
Net cash provided by operating activities 1,185,533 1,789,050 809,770
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in origination costs (30,261) (33,496) (43,418)
(Increase) decrease in warehouse lines of credit 527,266 (1,056,928) 1,967,781
Increase in investments in affiliates -- (222,500) (100,000)
Increase in related party note receivable -- -- (22,500)
Investment in mortgage notes receivable (15,500,173) (8,029,562) (7,452,006)
Repayment of mortgage notes receivable 9,486,695 5,338,680 4,395,441
Net proceeds from sale of real estate owned 295,473 1,072,675 147,884
Capital costs of real estate owned -- (31,435) (45,251)
------------ ------------ ------------
Net cash used in investing activities (5,221,000) (2,962,566) (1,152,069)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans 5,875,781 2,832,761 904,750
Loan fees paid (8,125) (101,250) (20,000)
Purchase of treasury stock (845,812) (250,000) --
Sale of treasury stock 54,000 -- --
Common dividends paid (468,102) (378,611) (504,813)
Preferred dividends paid (498,607) (603,082) (566,409)
------------ ------------ ------------
Net cash provided by (used in) financing activities 4,109,135 1,499,818 (186,472)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 73,668 326,302 (528,771)
CASH AT BEGINNING OF PERIOD 368,241 41,939 570,710
------------ ------------ ------------
CASH AT END OF PERIOD $ 441,909 $ 368,241 $ 41,939
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest expense paid $ 454,456 $ 272,275 $ 100,038
Taxes paid $ 32,567 $ 16,900 $ 800
NON-CASH INVESTING AND FINANCING ACTIVITY
Transfer of real estate owned to CAFC $ -- $ 291,463 $ --
Transfer of mortgage loans to CAFC $ 77,595 $ 498,429 $ 670,546
See accompanying notes.
F-5
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
1. Organization
-------------
Capital Alliance Income Trust Ltd., A Real Estate Investment Trust (the
"Trust"), a Delaware corporation, invests primarily 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 Trust acquired an investment in Capital Alliance Funding Corporation
("CAFC"), a taxable subsidiary, during the second quarter of 1997. The
investment in CAFC is accounted for by the equity method and its financial
statements are not consolidated with those of the Trust. The Trust holds
100% of the non-voting preferred stock of CAFC with a 99% economic interest
in CAFC. CAFC acquires loans for sale, secured by deeds of trust on
one-to-four unit residential property as the loans primary collateral. The
investment in CAFC is reported in "Investments in affiliates" on the
Trust's Balance Sheet and in "Equity in earnings of affiliates" in the
Trust's Statement of Operations. CAFC's audited Balance Sheet and Statement
of Operations are summarized in Note 10.
Capital Alliance Advisors, Inc. (the "Manager") originates, services and
sells the Trust's and CAFC's loans.
2. Summary of significant accounting policies & nature of operations
-----------------------------------------------------------------
Basis of accounting. The Trust prepares its financial statements on the
accrual basis of accounting consistent with accounting principles generally
accepted in the United States of America. The Trust's year-end for tax and
financial reporting purposes is December 31.
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.
Use of estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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.
F-6
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
2. Summary of significant accounting policies & nature of operations
-----------------------------------------------------------------
(continued)
------------
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 potential
losses inherent in the loan portfolio. The Trust's actual losses may differ
from the estimate. Accounts receivable deemed uncollectible are written off
or reserved. The Trust does not accrue interest income on impaired loans
(Note 7).
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 rental
income, interest expense and operating expenses of real estate owned on the
Statements of Operations (Note 8).
Investments. The Trust owns 100% of the non-voting preferred shares and has
a 99% economic interest in CAFC. As the Trust does not own the voting
common shares of CAFC or control CAFC, its investment in CAFC is presented
by the equity method of accounting. Under this method, original equity
investments are recorded at cost and adjusted by the Trust's share of
earnings or losses and decreased by dividends received (Note 10).
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
operated 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)
Origination costs. Origination costs relating to mortgage notes receivable
are capitalized and amortized over the term of the notes.
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.
F-7
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
2. Summary of significant accounting policies & nature of operations
------------------------------------------------------------------
(continued)
-----------
State taxes. The state of Delaware imposed a tax on the capitalization of
the Trust. The Trust expensed $31,766, $16,100, and $21,740 for these taxes
in 2001, 2000, and 1999. The Trust paid $800 in franchise tax to the state
of California in 2001, 2000, and 1999.
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
90% (95% in 2000 and 1999) of its taxable income to its stockholders. To
qualify as a REIT, the Trust must elect to be so treated and must meet on a
continuing basis certain requirements relating to the Trust's organization,
sources of income, nature of assets, and distribution of income to
stockholders. The Trust must maintain certain records and request certain
information from its stockholders designed to disclose actual ownership of
its stock. In addition the Trust must satisfy certain gross income
requirements annually and certain asset tests at the close of each quarter
of its taxable year.
If the Trust fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Trust will be subject to tax on
its taxable income at regular corporate rates. Distributions to
stockholders in any year in which the Trust fails to qualify will not be
deductible by the Trust nor will they be required to be made. Unless
entitled to relief under specific statutory provisions, the Trust will also
be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost.
Based on the Trust's belief that it has operated in a manner so as to allow
it to be taxed as a REIT since inception, no provision for federal income
taxes has been made in the financial statements. For the years ended
December 31, 2001, 2000, and 1999, the distributions per Preferred Share
are allocated 100% as ordinary income. The distributions per Common share
are allocated 100% as ordinary income.
Reclassifications. Certain 1999 and 2000 amounts may have been reclassified
to conform to 2001 classifications. Such reclassifications had no effect on
reported net income.
Earnings per share. Earnings per share and shares outstanding for 2000 and
1999 have been adjusted on the Statement of Operations for the three to one
reverse stock split made May 11, 2001.
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, 2001 and 2000, mortgage note holdbacks from
the consummation of mortgage loans made amounted to $1,285,382 and
$654,084, respectively.
F-8
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
4. Accounts receivable
-------------------
Accounts receivable consists primarily of accrued interest on mortgage
notes receivable and other amounts due from borrowers. As of December 31,
2001 and 2000, accrued interest and other amounts due from borrowers were
$292,588 and $293,592, respectively.
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, 2001 and 2000, the Trust
advanced to CAFC $4,217,408 and $3,501,940, respectively. The interest rate
on this line of credit varies with market conditions and is payable
monthly. As of December 31, 2001 and 2000 the applicable interest rate was
7.0% and 10.0%, respectively. The Trust earned interest in the amount of
$447,246, $310,495, and $180,345, during 2001, 2000, and 1999,
respectively, of which $740, $25,930 and $18,348 was outstanding as of
December 31, 2001, 2000, and 1999, 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. CRF had repaid the advances as of
December 31, 2001 and owed the Trust $1,242,734 for advances as of December
31, 2000. Annual interest on this line of credit is between 7.0% and 12.0%
and is payable monthly. The Trust earned interest in the amount of $62,989,
$97,663, and $23,760 during 2001, 2000, and 1999, respectively, of which
$10,733 was outstanding as of December 31, 2000. The Trust also borrows on
an unsecured basis from CRF with interest payable monthly at an annual rate
of between 5.0% and 12.0%. As of December 31, 2001 and 2000 the Trust had
repaid all borrowings from CRF. The Trust paid interest in the amount of
$22,657 in 2001, of which $2,250 remains outstanding.
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 $428,250 to SCA. 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 and $100,325 during 2000 and 1999,
respectively, of which $4,610 was outstanding as of December 31, 1999.
F-9
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
5. Lines of credit to related parties (continued)
----------------------------------------------
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 2000
and 1999, respectively.
6. Mortgage notes receivable
-------------------------
Mortgage notes receivable represent home equity loans primarily secured by
deeds of trust on one to four unit residential real estate. At the time of
origination, all but one loan 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 usually due as a balloon
payment at loan maturity.
A reconciliation of mortgage notes receivable is as follows:
December 31, December 31, December 31,
2001 2000 1999
-------------- ------------- -------------
Balance, beginning of period $ 11,906,589 $ 10,807,664 $ 8,986,645
Additions during period:
New mortgage loans 15,500,173 8,029,562 7,452,006
Deductions during period:
Collections of principal 9,486,695 5,338,680 4,395,441
Foreclosures, net of reserve --- 1,093,528 565,000
Write off of uncollectible loans 103,549 --- ---
Transfer to CAFC 77,595 498,429 670,546
-------------- ------------- -------------
Balance, close of period $ 17,738,923 $ 11,906,589 $ 10,807,664
============== ============= =============
F-10
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
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, 2001.
Principal
amountof
loans with
delinquent
Monthly Face amount principal or
Final maturity payment Prior of Carrying amount interest
Principal outstanding Interest rate date terms liens mortgage(s) of mortgage(s) (Note A)
--------------------- ------------- -------------- --------- ------ ----------- -------------- ------------
Individual loans greater
than $500,000: 13.50% 07/01/02 $9,169 First $ 815,000 815,000 $ ---
13.50% 08/01/06 $7,875 First 700,000 700,000 ---
13.00% 09/01/06 $6,500 Second 600,000 600,000 ---
13.00% 02/01/02 $6,496 Second 600,000 599,610 ---
13.95% 05/01/05 $6,198 First 533,200 533,200 ---
14.00% 02/01/06 $6,054 None 518,900 518,900 ---
Loans from $400,000-$500,000 11.75% to 13.50% 1 to 56 months 1,900,000 1,900,000 ---
Loans from $300,000-$399,999 11.75% to 13.99% 1 to 60 months 3,419,000 3,399,411 ---
Loans from $200,000-$299,999 10.62% to 13.50% 4 to 336 months 2,164,538 2,167,410 ---
Loans from $100,000- 199,999 8.87% to 14.50% 1 to 130 months 5,394,936 4,332,834 493,161
Loans up to $99,000 9.70% to 17.75% 1 to 327 months 2,187,435 2,172,558 125,905
----------- ----------- ---------
Total Mortgage Notes Receivable at December 31, 2001 $18,833,009 $17,738,923 $ 619,066
=========== =========== =========
(A) Delinquent loans are loans where the monthly interest payments in arrears
are 90 or more days overdue. As of December 31, 2001, there were three (3) loans
totaling $344,874 of principal and $25,392 of interest that were 90 to 180 days
delinquent on interest payments. Two (2) loans with the principal amount of
$274,192 and $26,144 of interest have been delinquent for over 180 days.
Management has reviewed all of the delinquent loans and believes that 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.
F-11
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
7. Loan loss reserve
-----------------
The Trust measures loan impairment based on the fair value of the related
collateral since all loans subject to this measurement are collateral
dependent. Management believes a $180,000 loan loss reserve is adequate to
protect against potential losses inherent in all receivables as of December
31, 2001. The Trust's actual losses may differ from the estimate.
A reconciliation of loan loss reserve is as follows:
2001 2000 1999
---------- ---------- ----------
Balance, beginning of period $ 80,000 $ 85,000 $ 170,000
Provision for loan loss 203,549 175,937 162,500
Write off of uncollectible loans (103,549) (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 $ 180,000 $ 80,000 $ 85,000
========== =========== ==========
8. Real estate owned
-----------------
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. During
2001 the Trust obtained a parcel split on one property, thereby creating
two properties and sold two properties. At December 31, 2001 the Trust
owned two properties.
A reconciliation of the real estate owned account shows its cash and
non-cash activities:
2001 2000 1999
---- ---- ----
Real estate owned at beginning of year $ 530,000 $ 644,326 $ 149,663
Foreclosed mortgage notes, net of reserve (non-cash) -- 912,591 565,000
Accrued interest capitalized (non-cash) -- 16,847 34,075
Capital costs of real estate owned (cash paid) -- 31,435 45,251
Gain (loss) on sale (non-cash) -- (2,524) (1,779)
----------- ----------- -----------
530,000 1,602,675 792,210
Less: Proceeds from sale of real estate owned (net of closing
costs of $35,116, $30,429, and $11,116, in 2001, 2000 and 1999,
respectively) 295,473 1,072,675 147,884
----------- ----------- -----------
Real estate owned at end of year $ 234,527 $ 530,000 $ 644,326
=========== =========== ===========
F-12
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
9. Gain (loss) on real estate owned
--------------------------------
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. Two real
estate properties were sold in 2001 at their carrying costs. Neither a gain
nor loss from real estate owned was reported in 2001.
10. Investment in affiliates
------------------------
Capital Alliance Funding Corporation
------------------------------------
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 by the equity method.
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. In 2001 the Trust
contributed one mortgage loan totaling $77,595. The transfer of mortgage
notes receivable is a non-cash transaction that is not shown on statements
of cash flows.
F-13
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
CAPITAL ALLIANCE FUNDING CORPORATION
BALANCE SHEET
As of December 31, 2001
ASSETS 2001
----
Cash and cash equivalents $ 338,146
Restricted cash 517,655
Accounts receivable 164,261
Mortgage notes receivable 8,631,751
Allowance for losses (118,000)
------------
Net receivable 8,513,751
Real estate owned 567,000
Investment in affiliate 5,000
Other assets 45,934
------------
Total assets $ 10,151,747
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable $ 52,133
Prepaid interest on mortgage loans 92,851
Mortgage note holdbacks 517,655
Due to affiliates 12,283
Warehouse lines of credit 8,423,103
------------
Total liabilities 9,098,025
------------
Stockholders' equity
Preferred shares, no par value, 2,000 shares --
authorized, 2,000 shares issued and outstanding
Common shares, no par value, 1,000 shares
authorized, 1,000 shares issued and outstanding --
Additional paid in capital 1,925,730
Accumulated deficit (872,008)
------------
Total stockholders' equity 1,053,722
------------
Total liabilities and stockholders' equity $ 10,151,747
============
F-14
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
CAPITAL ALLIANCE FUNDING CORPORATION
STATEMENT OF OPERATIONS
For the year ended December, 31 2001
REVENUES 2001
----
Interest income $ 907,434
Loan origination income 993,376
Service release premium 86,426
Other income 23,886
-----------
Total revenues 2,011,122
-----------
EXPENSES
Management fees to related party 66,822
Interest expense on warehouse lines of credit 556,246
Loan origination costs 137,755
Wages and salaries 459,040
General and administrative 113,346
Legal and professional 9,457
Taxes 11,818
Provision for loan losses 252,331
-----------
Total expense 1,606,815
-----------
INCOME BEFORE LOSSES ON REAL
ESTATE OWNED 404,307
Gain on real estate owned 20,207
Property holding costs on real estate owned (39,508)
-----------
NET INCOME $ 385,006
===========
F-15
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
CAPITAL ALLIANCE FUNDING CORPORATION
STATEMENT OF CASH FLOWS
For the year ended December, 31 2001
CASH FROM OPERATING ACTIVITIES 2001
----
Net income $ 385,006
Adjustments to reconcile net income to cash
provided by operating activities
Gain on real estate owned (20,207)
Provision for loans losses 252,331
Increase in accounts receivable (121,518)
Increase in other assets (22,597)
Increase in accounts payable 25,620
Decrease in interest payable (20,520)
Increase in prepaid mortgage
interest 4,594
Increase in due to affiliates 9,757
------------
Net cash provided by operating activities 492,466
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in mortgage notes receivable (25,720,690)
Repayment of mortgage notes receivable 2,400,395
Sale of mortgage notes 19,503,729
Investment in affiliate (5,000)
Proceeds from sale of real estate owned 308,403
------------
Net cash used in investing
activities (3,513,163)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from warehouse lines of credit 3,172,860
Repayment of mortgage note (394,434)
------------
Net cash provided by financing activities 2,778,426
------------
NET DECREASE IN CASH (242,271)
CASH AT BEGINNING OF PERIOD 580,417
------------
CASH AT END OF YEAR $ 338,146
============
F-16
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
10. Investment in affiliates (continued)
------------------------------------
The following are selected footnote disclosures from CAFC's financial
statements:
Accounts receivable
-------------------
Accounts receivable consists primarily of amounts due from borrowers for
items such as property taxes, insurance, and interest on a first deed
mortgage that were paid by CAFC on behalf of the property securing the
mortgage notes. As of December 31, 2001, amounts due from borrowers were
$49,071.
Mortgage notes receivable
-------------------------
Mortgage notes receivable are stated at the principal outstanding. Interest
on the loans is due monthly. The loans are secured by first and junior
deeds of trust on commercial and residential properties. CAFC is subject to
the risks inherent in finance lending including the risk of borrower
default and bankruptcy.
A reconciliation of the mortgage notes receivable is as follows:
December 31,
2001
-------------
Balance, beginning of period $ 4,845,117
Additions during period:
New mortgage loans 25,720,690
Transferred from CAIT 77,595
Deductions during period:
Repayment of mortgage loans (2,400,395)
Sale of mortgage loans (19,503,729)
Write off of uncollectible loans (107,527)
--------------
Balance, close of period $ 8,631,751
==============
Some of the mortgage loans originated and purchased by CAFC are held for
sale to CAIT. The remaining originations and purchases are designated for
sale to independent third parties. CAIT's purchase price is the mortgage
loans outstanding balance (par value) plus any accrued interest. Loans
designated for sale to a third party are pre-approved for purchase by the
third party, before the loan is acquired by CAFC. Sales to third parties
are usually greater than CAFC's total purchase price.
Loan loss reserve
-----------------
CAFC measures loan impairment based on the fair value of the related
collateral since all loans subject to this measurement are collateral
dependent. Management believes a $118,000 loan loss reserve is adequate to
protect against potential losses inherent in all receivables as of December
31, 2001. CAFC's actual losses may differ from the estimate.
F-17
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
10. Investment in affiliates (continued)
------------------------------------
Activity in the loan loss reserve was as follows:
December 31,
2001
------------
Balance, beginning of period $ 78,000
Provision for loan loss 252,331
Write off of uncollectible loans
and write down of real estate owned (212,331)
---------
Balance, end of period $ 118,000
=========
Real estate owned
-----------------
As of December 31, 2001, the Company held one foreclosed property with a
value of $567,000. In 2001, two properties were sold for a gain of $20,207.
Two properties were written off and one property was written down for a
total of $155,458. Net proceeds from the sales were $308,403. Costs
incurred by holding the properties were $39,508 in 2001.
A reconciliation of real estate owned is as follows:
2001
----
Real estate owned at beginning of year $ 960,000
Capital costs of real estate owned (cash paid) 50,654
Real estate sold (288,196)
Property written down (155,458)
-----------
Real estate owned at end of year $ 567,000
==========
Warehouse lines of credit
-------------------------
As of December 31, 2001, the Company had borrowed $4,205,695 of funds under
a warehouse line of credit. The Company receives advances under the
agreement, up to a maximum of $5,000,000, with the mortgage loans pledged
as collateral against the advances received and with a permissible
warehouse period of ninety (90) days. Interest is at LIBOR (London
Interbank Offered Rate for U.S. dollar deposits) plus 1.50% (3.46% at
December 31, 2001) during the permissible warehouse period and is payable
monthly. Interest on loans that are held for more than 90 days is LIBOR
plus 3.00% (4.96% at December 31, 2001). Maturity date for this line of
credit is March 31, 2002.
As of December 31, 2001, the Company had borrowed $4,217,408 of funds under
a warehouse line of credit with CAIT. The funds are secured by pledged
mortgage loans as collateral. Interest on this warehouse line of credit is
adjusted monthly depending on market rates and is currently at 7% per
annum.
F-18
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
10. Investment in affiliates (continued)
------------------------------------
The due dates on both warehouse lines of credit revolve monthly and are
paid off as the mortgage loans held are sold.
Related party transactions
--------------------------
The Manager earns an administration fee equal to 25 basis points on home
loans funded for the benefit of the Company as defined in the First Amended
Residential Mortgage Loan Services Agreement. The Company expensed $66,822
for these costs in 2001.
As described in Note 7, the Company received an advance of $4,217,408 under
a warehouse line of credit from CAIT, and accrued interest of $740 related
to this line of credit as of December 31, 2001. CAIT charges a variable
interest rate on this warehouse line of credit determined by current market
rates. The rate charged to CAFC on the line of credit as of December 31,
2001 is 7% per annum. The Company expensed interest of $447,246 in 2001 and
paid interest of $472,436.
On occasion the Company and its affiliates had related receivables and
payables arising from ordinary business transactions. As of December 31,
2001, the Company had a payable of $12,283 to the Manager. This account is
shown on the balance sheet as Due To Affiliates. No interest is charged on
these inter-company accounts.
The Company sold $15,500,173 loans to CAIT in 2001 at par value.
The Company paid $5,000 in 2001 for an option to purchase Sierra Capital
Corporate Advisors (SCCA).
Sierra Capital Acceptance
-------------------------
As described in Note 5, the Trust held a $200,000 preferred share
investment in Sierra Capital Acceptance, a division of Sierra Capital
Funding LLC. The investment accrued distributions at 15% per annum. For the
year ended December 31, 1999, the Trust earned $30,000 from this investment
as interest income from affiliates. Sierra Capital Acceptance ceased
operations in 2000. The Trust received cash and applied the over
collateralized portion of a reverse repurchase agreement as settlement of
the investment.
F-19
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
11. Notes Payable
-------------
As of December 31, 2001 and 2000, the Trust had borrowed $6,964,300 and
$2,231,873, respectively, 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. The annual interest rate is the preceding 30-day average of
1-month LIBOR (London Interbank Offered Rate for U.S. dollar deposits
30-day average at December 31, 2001 was 1.96%) plus 2.00% and is payable
monthly. Maturity date for this line of credit is September 26, 2002.
As of December 31, 2001 and 2000, the Trust had borrowed $2,250,000 and
$1,505,638, respectively, under a second 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 (4.75% as of
December 31, 2001) plus 0.50% and is payable monthly. During the first
quarter of 2002 the maximum advance was increased to $4,000,000 and the
maturity date was extended to April 30, 2003.
The due dates on both warehouse lines of credit revolve monthly and are
paid off as the mortgage loans held are sold.
The Trust financed a portion of its stock repurchases in 2001 by borrowing
on margin from a brokerage. The amount borrowed on margin is charged at the
broker call rate (3.5% as of December 31, 2001) plus 0.75%. Margin debt is
callable at the discretion of the lender. As of December 31, 2001, the
Trust owed $398,991 in margin debt.
12. Related party transactions
--------------------------
The Manager, which is owned by several of the directors 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 from the Trust for clerical and
administrative services at cost based on relative utilization of facilities
and personnel. The Manager is also reimbursed by CAFC for direct expenses
and administrative services.
The Manager receives a management fee equal to one-twelfth (1/12) of 1%
annually of the book value of mortgages, mortgage-related investments and
real property ("Gross Mortgage 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 management fee
also includes reimbursement for the direct costs of overseeing the
administration and disposition of real estate owned by the Trust and CAFC
and includes any applicable incentive compensation. The total management
fees paid by the Trust to the Manager were $219,046, $180,156, and $149,146
for the year ended December 31, 2001, 2000, and 1999, respectively.
The Manager also began earning a REO management fee for managing and
servicing the properties that the Trust and CAFC have obtained through
foreclosure of mortgage notes held. The fee for these services is $500 per
month for each property held by the Trust and CAFC. The Trust paid the
Manager $22,500 in REO management fees in 2001.
F-20
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
12. Related party transactions (continued)
--------------------------------------
The Manager's incentive compensation for each fiscal quarter, equals 25% of
the net income of the Trust in excess of an annualized return on common
equity for such quarter equal to the ten year U.S. Treasury Rate plus
2.00%, provided that the payment of such incentive compensation does not
reduce the Trust's annualized return on common equity for such quarter to
less than the ten year U.S. Treasury Rate after the preferred dividend has
been paid. The incentive compensation for 2001 was $26,684. No incentive
compensation was earned in 2000 and 1999. Incentive compensation awards are
reported as part of the management fees.
The Manager also receives a loan origination and servicing fee equal to
one-twelfth (1/12) of 2% annually of the Gross Mortgage Assets of the Trust
computed at the end of each month. The Trust capitalizes 55% (75% in 2000
and 1999) of this fee as loan origination costs and amortizes them over the
average life of the loans originated in the month. The remaining 45% (25%
in 2000 and 1999) of the fee is expensed as the portion attributed for
servicing. For the years ended December 31, 2001, 2000, and 1999 the Trust
paid loan origination and servicing fees of $428,185, $310,720, and
$295,073, respectively. In 2001, 2000, and 1999 the Trust expensed
$192,683, $77,680 and $72,313, respectively, as servicing fees and
$215,018, $199,544, and $179,342, respectively, as amortization of loan
origination costs. As of December 31, 2001 and 2000, the Trust capitalized
$235,502 and $233,040 of loan origination fees, respectively.
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 with interest 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,
2001, the Trust had a receivable of $740 from CAFC, a receivable of $150
from Sierra Capital Corporate Advisors and a payable of $127,874 to the
Manager. As of December 31, 2000, the Trust had a receivable of $10,773
from CRF and a payable of $52,963 to the Manager. These accounts are netted
on the balance sheet and shown as Due To Affiliates of $126,984 and $42,190
as of December 31, 2001 and 2000, respectively. No interest is charged on
these inter-company accounts.
As described in Note 5, for the year ended December 31, 2001 the Trust
advanced $4,217,408 under lines of credit to affiliates and earned interest
of $510,235 on such financing. For the year ended December 31, 2000, the
Trust advanced $4,744,674 under lines of credit to related parties and
earned interest of $486,030 on such financing. For the year ending December
31, 1999 the Trust earned interest of $342,367 from related party lines of
credit.
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.
F-21
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
13. Preferred, common and treasury stock
------------------------------------
The Preferred Shareholders are entitled to a dividend 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). The annualized return is the lesser of: (a) 10.25%, (b) 1.50 %
over the Prime Rate (determined on a not less than quarterly basis) or (c)
the rate set by the Board of Directors. The preferred dividend preference
is not cumulative.
After declaring dividends for a given year to the Preferred Shareholders in
the amount of the dividend preference, no further dividends may be declared
on the Preferred Shares for the subject year, until the dividends declared
on each Common Share for that year equals the dividend preference for each
Preferred Share for such year. Any additional dividends generally will be
allocated such that the amount of dividends per share to the Preferred
Shareholders and Common Shareholders for the subject year are equal. The
Preferred Shareholder's additional dividends, if any, are 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 its
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/or
options and to prohibit the transfer of shares to persons that would result
in a violation of the Trust's shareholding requirements. The Bylaws provide
that only with the explicit approval of the Trust's Board of Directors may
a shareholder own more than 9.8% of the total outstanding shares.
One Shareholder Warrant was issued for every 10 Common Shares purchased in
the Trust's initial public offering. Each Shareholder Warrant entitled the
holder to purchase one Common Share. The exercise price for each
Shareholder Warrant was $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 could 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 was
also made to protect against dilution in the event
F-22
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
13. Preferred, common and treasury stock (continued)
------------------------------------------------
of a merger, consolidation or disposition of all or substantially all of
the Trust's assets. Warrant holders did not have the rights of a
shareholder and they were not entitled to participate in a distribution of
the Trust's assets in liquidation, dissolution or winding up of the Trust,
unless the Warrants were exercised. On April 28, 2001 all issued warrants
expired unexercised.
The 1998 Incentive Stock Option Plan, adopted by the board of directors and
approved by stockholders, provided 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. Options for the purchase
of 68,875 shares were granted April 1, 1999 with an exercise price of
$13.50 per new Common Share (as adjusted for the 1 for 3 reverse stock
split on May 11, 2001). As of December 31, 2001 and 2000, 68,875 of these
options were outstanding. On February 2, 2000, options for the purchase of
109,750 shares were granted with an adjusted exercise price of $9.00 per
new Common Share. As of December 31, 2001 and 2000, 103,750 and 109,750,
respectively, of these options were outstanding. On February 8, 2001,
options for the purchase of 68,875 shares were granted with an adjusted
exercise price of $9.06 per new Common Share. As of December 31, 2001,
68,875 of these options were outstanding. On December 21, 2001 options to
purchase 6,000 new Common Shares with an adjusted exercise price of $9.00
per share were exercised. The exercise of common stock options reduced the
number and cost of shares held in the Trust's treasury.
During 2000, the Trust purchased the equivalent of 27,160 post-split common
shares as treasury stock. The purchase was recorded at cost and as a
reduction to common stock outstanding. During 2001 the Trust's cumulative
Common Stock purchases reached 91,066. Exercised Common Stock options
reduced the treasury's Common Stock balance to 85,066 shares.
On March 7, 2000, the Board of Directors authorized the Trust to purchase
up to $250,000 of the Trust's Common Stock. On December 21, 2000, the
authorized repurchase ceiling was increased to $400,000. On June 19, 2001
the repurchase authorization was increased to $550,000. Separately, in a
private transaction the Board of Directors authorized the purchase of
47,500 Common Shares at $13.50. This transaction closed on September 3,
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 of its Common and Preferred Shares which became
effective at the close of business on May 11, 2001. Upon effectiveness of
the reverse split, one (1) new Common Share and one (1) new Series "A"
Preferred Share was exchanged for each three (3) outstanding Common and
Preferred Share, respectively, and there were approximately 495,161 issued
and outstanding Common Shares and approximately 213,819 issued and
outstanding Preferred Shares. As a result, the December 31, 2000 Common
Share treasury balance became 27,160 post-split shares and the December 31,
2000 Preferred Share treasury balance became 3,176 post-split shares, each
with $.01 par value. On May 14, 2001, the commencement of post-split
trading, the price of a Common Share on the American Stock Exchange was
increased to three (3) times the closing price of such shares on May 11,
2001 and the Adjusted Net Capital Contribution attributable to each Series
"A" Preferred Share was increased to approximately $26.51 per share, three
(3) times the existing Adjusted Net Capital Contribution of each such
Preferred Share (approximately $8.83) as of March 31, 2001. The authorized
capital of the Trust remained unchanged with 5,000,000 Common Shares and
675,000 Series "A" Preferred Shares authorized.
F-23
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three-year period ended December 31, 2001
14. 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,
------------ ------------- ------------
2001 2000 1999
---- ---- ----
Numerator:
Net income $1,142,898 $ 515,023 $ 450,605
Preferred dividends attributable
to income 498,607 515,023 450,605
---------- ---------- ----------
Numerator for basic and diluted
Earnings per share-income
available to common stockholders $ 644,291 $ -- $ --
========== ========== ==========
Denominator:
Basic weighted average shares 442,371 485,811 494,913
(adjusted for 2001's 1-for-3
reverse stock split)
Dilutive effect of warrants -- -- 113,705
Dilutive effect of options 172,625 -- --
---------- ---------- ----------
Diluted weighted average shares 614,996 485,811 608,618
========== ========== ==========
Basic earnings per common share $ 1.456 $ -- $ --
========== ========== ==========
Diluted earnings per common share $ 1.048 $ -- $ --
========== ========== ==========
F-24
- --------------------------------------------------------------------------------
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(8)
27.3 Revised Financial Data Schedule-Capital Alliance Income Trust,
A Real Estate Investment Trust(3)
28.1 Impound and Escrow Agreement(4)
28.2 Impound and Escrow Agreement, as amended October 23, 1997(5)
--------------------
29
(1) These exhibits were previously contained in Registrant's Registration
Statement filed on Form S-11 with the Commission on September 9, 1996,
and are incorporated by reference herein.
(2) These exhibits were previously contained in Amendment No. 1 to the
Registrant's Registration Statement filed on Form S-11 with the
Commission on January 15, 1997, and are incorporated by reference
herein.
(3) This exhibit was previously contained in Amendment No. 2 to the
Registrant's Registration Statement filed on Form S-11 with the
Commission on February 6, 1997 and is incorporated by reference herein.
(4) These exhibits were previously contained in Post-Effective Amendment No.
2 to the Registrant's Registration Statement filed on Form S-11 with the
Commission on April 21, 1997, and are incorporated by reference herein.
(5) These exhibits were previously contained in Post-Effective Amendment No.
3 to the Registrant's Registration Statement filed on Form S-11 with the
Commission on December 10, 1997, and are incorporated by reference
herein.
(6) These exhibits were previously contained in Form 10-Q for the period
ending June 30, 1997 filed with the Commission on August 14, 1997, and
are incorporated by reference herein.
(7) This exhibit was previously contained in Form 10-K for the period ending
December 31, 1998 filed with the Commission on April 10, 1999, and are
incorporated by reference herein.
(b) Reports on Form 8-K.
None.
(c) See a(3) above.
(d) Financial Statement Schedules.
-----------------------------
None.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(D) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, hereunto duly authorized.
Capital Alliance Income Trust, Ltd.
Dated: April 15, 2002 A Real Estate Investment Trust
By: /s/ Richard J. Wrensen By: /s/ Thomas B. Swartz
---------------------- ----------------------------
Richard J. Wrensen Thomas B. Swartz
Executive Vice President Chairman and Chief
Chief Financial Officer and Executive Officer
Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Thomas B. Swartz Dated: April 15, 2002
- ------------------------------------------
Thomas B. Swartz
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Richard J. Wrensen Dated: April 15, 2002
- ------------------------------------------
Richard J. Wrensen
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
/s/ Dennis R. Konczal Dated: April 15, 2002
- ------------------------------------------
Dennis R. Konczal
President and Director
/s/ Stanley C. Brooks Dated: April 15, 2002
- ------------------------------------------
Stanley C. Brooks
Director
/s/ Harvey Blomberg Dated: April 15, 2002
- ------------------------------------------
Harvey Blomberg
Director
/s/ Donald R. Looper Dated: April 15, 2002
- ------------------------------------------
Donald R. Looper
Director
31
EXHIBIT "A"
CAPITAL ALLIANCE INCOME TRUST LTD.
ANNOUNCES IMPROVED EARNINGS AND OPERATING RESULTS
FOR THIRD QUARTER 2001
SAN FRANCISCO - (BUSINESS WIRE) - November 7, 2001- Capital Alliance Income
Trust Ltd. ("CAIT") (AMEX: CAA-news), a specialty residential mortgage finance
company, announced net income of $325,662 ($.47 basic and $.43 diluted per
share) for the three months ended September 30, 2001 and $842,131 ($.97 basic
and $.88 diluted per share) for the nine months ended September 30, 2001 as
compared to net income of $65,940 (-$.06 basic and diluted per share) and
$359,214 (-$.07 basic and diluted per share), respectively, for the like periods
in the year 2000.
The 2001 third quarter net income reflect a 393% increase over net income for
the third quarter of 2000 and a 29% increase over the net income for the second
quarter of 2001. Similarly, the increase in net income for the nine months ended
September 30, 2001 reflects a 134% increase over the net income for the first
nine months of 2000.
Thomas B. Swartz, Chairman and CEO of CAIT, noted that "management is very
pleased to see the dramatic improvement in CAIT's earnings for the last several
quarters since they reflect the benefit of CAIT's re-emphasis of its portfolio
lending operations, reduced interest costs, and improved profitability in both
its portfolio operations and its mortgage banking subsidiary." Richard J.
Wrensen, CAIT's CFO, also observed that the improvement in CAIT's earnings over
the last five quarters is poised to continue through the fourth quarter of 2001
despite the continued weakening in the general economy. Our earnings also
include significant and increased loan loss reserves to guard against a decline
in residential property values.
CAIT is a specialty residential mortgage lender which invests in
higher-yielding, non-conforming residential mortgage loans on one-to-four unit
residential properties located in California and other western states. It also
originates non-conforming and conforming loans for sale to investors and Freddie
Mac on a whole loan basis for cash through its subsidiary, Capital Alliance
Funding Corporation.
Certain oral and written statements of management of CAIT included in the
press release may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. The accuracy of such statements cannot be guaranteed, as
they may be subject to a variety of risks and contingencies.
Contact: Capital Alliance Income Trust Ltd., San Francisco
Richard J. Wrensen, 415/288-9575
32
EXHIBIT "B"
CAPITAL ALLIANCE INCOME TRUST ANNOUNCES
SECOND CONSECUTIVE INCREASED QUARTERLY DIVIDEND AND REPORTS
CONTINUING IMPROVEMENT IN OPERATING RESULTS
SAN FRANCISCO - (BUSINESS WlRE) - December 27, 2001 - Capital Alliance Income
Trust Ltd. ("CAIT") (AMEX:CAA - news), a non-conforming specialty residential
finance company, announced that its Board has declared CAIT's second consecutive
increased Common Share dividend for the first quarter of 2002 at the increased
rate of $.30 per Common share. The increase in dividend rate is a 7.1 % increase
over the prior quarter's dividend and a 17.65% increase during the last two
quarters. The dividend will be payable on January 15,2002 to shareholders of
record on January 7, 2002. Richard J. Wrensen, executive vice president and
chief financial officer stated that "although home prices have held up better
than the rest of the California economy, it is unclear whether that strength can
continue. Therefore, CAIT is continuing to augment its loan loss reserves to
deal with that contingency and is confident and determined that it can continue
to build CAIT's long term earnings capacity to support future dividend
increases."
Thomas B. Swartz, CAIT's chairman and CEO noted that "since REIT's must
distribute 90% of their net income, the recent dividend increases signal our
belief that CAIT, through its portfolio lending strategy, can continue to
improve its operating results."
CAIT is a specialty residential mortgage lender which invests in
high-yielding, non-conforming and conforming residential mortgage loans on
one-to-four unit residential properties located primarily in California and
other western states. It also originates non-conforming and conforming loans for
sale to investors, including Freddie Mac, on a whole loan basis for cash through
its mortgage banking subsidiary, Capital Alliance Funding Corporation.
This document contains "forward-looking statements" (within the meaning of the
Private Securities Litigation Reform Act of 1995) that inherently involve risks
and uncertainties. CAIT's actual results and liquidity can differ materially
from those anticipated in these forward-looking statements because of changes in
the level and composition of CAIT's investments and unforeseen factors. As
discussed in CAIT's filings with the Securities and Exchange Commission, these
factors may include, but are not limited to, changes in general economic
conditions, the availability of suitable investments, fluctuations in and market
expectations for fluctuations in interest rates and levels of mortgage
prepayments, deterioration in credit quality and ratings, the effectiveness of
risk management strategies, the impact of leverage, the liquidity of secondary
markets and credit markets, increases in costs and other general competitive
factors.
Contact: Capital Alliance Income Trust Ltd., San Francisco
Richard J. Wrensen, 415/288-9575
33
EXHIBIT "C"
CAPITAL ALLIANCE INCOME TRUST ANNOUNCES
THIRD CONSECUTIVE INCREASED QUARTERLY DIVIDEND
AND RECORD OPERATING RESULTS FOR YEAR 2001
SAN FRANCISCO - (BUSINESS WIRE) - March 28, 2002 - Capital Alliance Income
Trust Ltd. ("CAIT") (AMEX: CAA-news) announced that its Board has declared
CAIT's third consecutive increased Common Share dividend at the increased rate
of $.40 per Common share - a 33 % increase over the prior quarter's dividend and
a 56.8 % increase during the last four quarters. Based on the current common
stock price of $14.00 per share, the annualized dividend yield is 11.4%.
The dividend is payable on April 16, 2002 to shareholders of record on April
8, 2002.
Dennis R. Konczal, CAIT's President and Chief Operating Officer, also
announced concurrently, earnings of $300,723 for the fourth quarter 2001 (as
compared to $155,809 for the fourth quarter of 2000) and $1,142,406 for the year
2001 (a 127.6% increase over earnings of $515,023 for the year 2000). Mr.
Konczal noted that CAIT's improved earnings reflect the continuing strength of
its portfolio lending operations and mortgage banking activities within
California and other western states. Despite softening in some parts of
California's economy, CAIT's results are indicative of its success in its
portfolio lending "niche" (only on property where the loan to value can be less
than 75%) and California's economic diversity. He also noted, that even though
interest rates are anticipated to rise throughout 2002, CAIT's profitability is
expected to be maintained as a result of loan portfolio growth and increased
loan origination activity.
Richard J. Wrensen, CAIT's Executive Vice-President and Chief Financial
Officer, stated "Capital Alliance had a very strong year in 2001. The stock
posted a total return of approximately 70%, provided two quarterly dividend
increases and achieved a higher ROE while continuing to build substantial loan
loss reserves to offset any future declines in California residential property
values. Our goal for 2002 is to improve on these accomplishments and thereby
deliver on our commitment to build shareholder value." CAIT's 2001 fourth
quarter achieved basic and fully diluted earnings per share of $0.48 and $0.42
vs. split adjusted fourth quarter 2000 basic and fully diluted earnings per
share of $0.02 and $0.02. The twelve month results for the fiscal year ended
December 31, 2001 produced basic and fully diluted earnings per share of $1.19
and $1.06 vs. split adjusted 2000 basic and fully diluted earnings per share of
$0.00 and $0.00.
CAIT is a specialty residential lender which originates and invests in
conforming and high-yielding, non- conforming residential mortgage loans on
one-to-four unit residential properties located primarily in California and
other western states. It also originates loans for sale to investors, including
Freddie Mac, on a whole-loan basis for cash through its mortgage banking
subsidiary, Capital Alliance Funding Corporation.
This document contains "forward-looking statements" (within the meaning of the
Private Securities Litigation Reform Act of 1995) that inherently involve risks
and uncertainties. CAIT's actual results and liquidity can differ materially
from those anticipated in these forward-looking statements because of changes in
the level and composition of CAIT's investments and unforeseen factors. As
discussed in CAIT's filings with the Securities and Exchange Commission, these
factors may include, but are not limited to, changes in general economic
conditions, the availability of suitable investments, fluctuations in and market
expectations for fluctuations in interest rates and levels of mortgage
prepayments, deterioration in credit quality and ratings, the effectiveness of
risk management strategies, the impact of leverage, the liquidity of secondary
markets and credit markets, increases in costs and other general competitive
factors.
Contact: Capital Alliance Income Trust Ltd., San Francisco
Richard J. Wrensen, 415/288-9575
www.calliance.com
34