UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
(X) Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2002
Commission File Number: 333-11625
-------------------
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3240473
- -------------------------------- ----------------------
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
50 California Street
Suite 2020
San Francisco, California 94111
- --------------------------------------- ------------
(Address of principal executive office) (zip code)
(415) 288-9575
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve 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
------- ---------
As of July 31, 2002, the registrant's common shares closed at $19.50 per share
and the aggregate market value of the registrant's common shares held by
non-affiliates of the registrant was approximately $6,385,000. At that date
approximately 330,000 shares of $.01 par value common stock were held by
non-affiliates of the registrant. The shares are listed on the American Stock
Exchange.
PART I
ITEM 1.
FINANCIAL STATEMENTS
2
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
Balance Sheet
(Unaudited) (Audited)
June 30, 2002 December 31, 2001
------------- -----------------
ASSETS
Cash and cash equivalents $ 421,325 $ 441,909
Restricted cash 681,059 1,285,382
Marketable securities 12,971 --
Accounts receivable 404,317 292,588
Due from affiliates 17,702 890
Notes receivable:
Lines of credit to related parties 2,910,927 4,217,408
Mortgage notes receivable 20,057,716 17,738,923
Allowance for loan losses (222,000) (180,000)
------------ ------------
Net Receivable 22,746,643 21,776,331
Real estate owned 92,000 234,527
Investments in affiliates 1,141,649 1,062,210
Origination costs (net) 248,197 227,392
Prepaid items (net) 42,185 23,062
------------ ------------
Total assets $ 25,808,049 $ 25,344,291
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks $ 681,059 $ 1,285,382
Loans payable 10,494,037 9,613,292
Due to affiliate 30,175 127,874
Other liabilities 259,200 223,202
------------ ------------
Total liabilities 11,464,471 11,249,750
------------ ------------
Stockholders' Equity
Preferred stock, $.01 par value; 675,000 shares authorized; 2,138 2,138
213,819 shares issued and outstanding at December 31, 2001;
213,820 shares issued and outstanding at June 30, 2002
Additional paid in capital - preferred stock 5,669,123 5,669,123
Less: 3,176 preferred shares held in treasury at cost (86,944) (86,944)
Common stock, $.01 par value; 5,000,000 shares authorized; 4,952 4,952
495,161 shares issued and outstanding at December 31, 2001;
495,161 shares issued and outstanding at June 30, 2002
Additional paid in capital - common stock 9,370,895 9,370,895
Less: 85,066 common shares held in treasury at cost (2001) -- (1,041,812)
Less: 73,242 common shares held in treasury at cost (2002) (944,996) --
Accumulated other comprehensive income 382 --
Retained Earnings 328,028 176,189
------------ ------------
Total stockholders' equity 14,343,578 14,094,541
------------ ------------
Total liabilities and stockholders' equity $ 25,808,049 $ 25,344,291
============ ============
See accompanying notes to financial statement.
3
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
Statement of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Interest income $ 656,654 $ 408,413 $ 1,332,265 $ 814,358
Interest income from affiliates 59,414 119,757 118,619 251,850
Investment income from affiliates 34,026 126,872 35,077 195,375
Other income 8,180 4,802 13,790 18,412
----------- ----------- ----------- -----------
Total revenues 758,274 659,844 1,499,752 1,279,995
----------- ----------- ----------- -----------
EXPENSES
Loan servicing fees to related parties 102,036 100,235 230,036 200,147
Management fees to related parties 83,897 56,994 148,897 114,950
Interest expense on loans 122,488 80,256 227,988 177,335
Interest expense on loans from related parties 3,103 1,670 9,661 1,670
Provision for loan losses 19,000 46,718 42,000 75,572
Taxes 5,991 7,065 17,991 11,665
Amortization 12,479 25,360 23,647 45,853
General and administrative 83,605 85,398 158,925 126,452
----------- ----------- ----------- -----------
Total expenses 432,600 403,696 859,145 753,644
----------- ----------- ----------- -----------
INCOME BEFORE GAIN (LOSS) ON REO 325,674 256,148 640,606 526,351
----------- ----------- ----------- -----------
Operating expenses of REO (88) (4,172) (1,515) (9,882)
Gain (Loss) on Real Estate Owned (16,000) -- (22,527) --
----------- ----------- ----------- -----------
NET INCOME $ 309,585 $ 251,976 $ 616,565 $ 516,469
=========== =========== =========== ===========
PREFERRED DIVIDENDS $ 87,269 $ 133,362 $ 175,691 $ 277,534
----------- ----------- ----------- -----------
NET INCOME AVAILABLE TO COMMON $ 222,316 $ 118,614 $ 440,873 $ 238,935
=========== =========== =========== ===========
BASIC EARNINGS PER
COMMON SHARE $ 0.53 $ 0.26 $ 1.06 $ 0.52
DILUTED EARNINGS PER
COMMON SHARE $ 0.43 $ 0.23 $ 0.89 $ 0.48
DIVIDENDS PAID PER
COMMON SHARE $ 0.40 $ 0.26 $ 0.70 $ 0.51
WEIGHTED AVERAGE COMMON
SHARES - BASIC EARNINGS 418,186 459,931 414,523 462,925
WEIGHTED AVERAGE COMMON
SHARES - DILUTED EARNINGS 513,577 512,637 494,629 499,033
See accompanying notes to financial statements.
4
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
Statement of Cash Flows
(Undaudited)
Six Months Ended
June 30,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 616,565 $ 516,469
Adjustments to reconcile net income to cash:
Amortization 23,647 45,853
(Gain) loss on real estate owned 22,527 --
(Increase) decrease in prepaid items (19,123) (25,568)
Provision for loan losses 42,000 75,572
(Increase) decrease in accounts receivable (111,729) 19,470
Increase (decrease) in due to affiliates (80,887) 493,235
Increase (decrease) in other liabilities 35,998 90,163
----------- -----------
Net cash provided by (used in) operating activities 528,998 1,215,194
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in warehouse lines of credit 1,306,481 (1,980,161)
(Increase) in investments (79,439) (225,593)
Increase in marketable securities (12,589) --
Investments in mortgage notes receivable (6,117,912) (6,767,785)
Repayments of mortgage notes receivable 3,740,711 6,445,604
Net proceeds from sale of real estate owned 120,000 108,250
Capital costs of real estate owned -- (4,308)
----------- -----------
Net cash provided by (used in) investing (1,042,748) (2,423,993)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans 880,745 2,256,392
Loan fees paid (19,500) --
Purchase of treasury stock (47,344) --
Sale of treasury stock 143,991 (110,794)
Preferred dividends paid (175,691) (277,534)
Common dividends paid (289,035) (237,619)
----------- -----------
Net cash provided by (used in) financing activities 493,166 1,630,445
----------- -----------
NET INCREASE (DECREASE) IN CASH (20,584) 421,646
CASH AT BEGINNING OF PERIOD 441,909 368,241
----------- -----------
CASH AT END OF PERIOD $ 421,325 $ 789,887
=========== ===========
SUPPLEMENTAL CASHFLOW INFORMATION:
Interest expense paid $ 237,649 $ 173,170
Taxes paid $ -- $ 3,665
Contribution to affiliate $ 44,362 $ 30,219
See accompanying notes to financial statements.
5
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 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 Balance Sheet
and Statement of Operations are presented in Note 11.
Capital Alliance Advisors, Inc. (the "Manager") originates, services and
sells the Trust's and CAFC's loans.
2. Basis of presentation.
---------------------
The accompanying financial statements include the accounts of the Trust.
The financial information presented has been prepared from the books and
records without audit. The accompanying financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and the footnotes required by accounting
principles generally accepted in the United States of America for
complete statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such financial statements, have been included.
These financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31,
2001 filed pursuant to 15d-2 on Form 10-K with the Securities and
Exchange Commission.
The unaudited interim financial statements for the six months ended June
30, 2002 and June 30, 2001 represent the financial statements of the
Trust.
3. Summary of significant accounting policies and nature of operations.
-------------------------------------------------------------------
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. However, if the mortgage's collateral is
considered insufficient to satisfy the outstanding balance and estimated
foreclosure and sales costs, interest is not accrued.
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
6
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
assumptions that effect the accounts reported in financial statements and
the accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents. Cash and cash equivalents include cash and
liquid investments with an original maturity of three months or less. The
Trust deposits cash in financial institutions insured by the Federal
Deposit Insurance Corporation. At times, the Trust's account balances may
exceed the insured limits.
Fair value of financial instruments. For cash and cash equivalents, the
carrying amount is a reasonable estimate of fair value. For mortgage note
receivables, fair value is estimated by discounting the future cash flows
using the current interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. It was determined that the difference between the carrying
amount and the fair value of the mortgage notes receivable is immaterial.
Marketable securities. Marketable securities are classified as either
trading, or available-for-sale. Management has not acquired any
securities positions classified as trading securities. Other securities
are classified as available-for-sale. Trading securities, if acquired,
would be reported at fair value, and changes in their fair value would be
reported as other income in the statement of operations. Available-
for-sale securities are reported at fair value with unrealized gains and
loses excluded from earnings and reported in accumulated other
comprehensive income. Realized gains and loses on sales of both trading
and available-for-sale securities are determined on an average cost
basis.
Concentration of credit risk. The Trust holds numerous mortgage notes
receivable. These notes are secured by deeds of trust on residential
properties located primarily in California, which results in a
concentration of credit risk. The value of the portfolio may be affected
by changes in the economy or other conditions of the geographic area.
Loan loss reserve. Management reviews its loan loss provision
periodically and the Trust maintains an allowance for losses from
receivables at an amount that management believes is sufficient to
protect against potential losses inherent in the loan portfolio. Accounts
receivable deemed uncollectible are written off or reserved. The Trust's
actual losses may differ from the estimate. The Trust does not accrue
interest income on impaired loans.
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. Any senior debt
to which the asset is subject is reported as mortgage payable. Subsequent
to foreclosure, the foreclosed asset value is periodically reviewed and
is adjusted to fair value. No depreciation is taken on the real estate
held for sale. Income and expenses related to real estate owned are
recorded as rental income, interest expense of real estate owned and as
operating expenses of real estate owned on the Statements of Operations.
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. Therefore,
CAFC's financial information is not reported on a consolidated basis in
the Trust's financial statements.
7
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
Origination costs. Origination costs relating to mortgage notes
receivable are capitalized and amortized over the term of the notes.
Income taxes. The Trust intends at all times to qualify as a real estate
investment trust ("REIT") for federal income tax purposes, under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended and
applicable Treasury Regulations. Therefore, the Trust will not be subject
to federal corporate income taxes, if the Trust distributes at least 90%
of its taxable income to its shareholders. To qualify as a REIT, the
trust must elect to be so treated and must meet on a continuing basis
certain requirements relating to the Trusts organization, sources of
income, nature of assets, and distribution of assets to shareholders. The
Trust must maintain certain records and request certain information from
its stockholders designed to disclose actual ownership of its stock. In
addition the Trust must satisfy certain gross income requirements and
certain asset tests at the close of each quarter of its taxable year.
If the Trust fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Trust will be subject to tax
on its taxable income at regular corporate rates. Distributions to
stockholders in any year in which the Trust fails to qualify will not be
deductible by the Trust nor will they be required to be made. Unless
entitled to relief under specific statutory provisions, the Trust will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost.
Based on the Trust's belief that it has operated in a manner so as to
allow it to elect to be taxed as a REIT since inception, no provision for
federal income taxes has been made in the financial statements.
For the three-month and six-month periods ended June 30, 2002 and June
30, 2001, the distributions per preferred and common share are allocated
100% as ordinary income for tax purposes. As of December 31, 2001 the
Trust had undistributed taxable income of $20,401 which was fully
distributed during the first quarter of 2002 to comply with the
applicable Internal Revenue Code requirements.
Earnings per share. Earnings per share and shares outstanding have been
adjusted on the Statement of Operations for the three to one reverse
stock split made May 11, 2001.
Reclassifications. Certain 2001 amounts may have been reclassified to
conform to 2002 classifications. Such reclassifications had no effect on
reported net income.
4. Restricted cash and mortgage note holdbacks.
-------------------------------------------
Pursuant to mortgage loan agreements between the Trust and certain of its
borrowers, a portion of the loan proceeds are held by the Trust in
segregated accounts to be disbursed to borrowers upon completion of
improvements on the secured property. As of June 30, 2002 and December
31, 2001, mortgage note holdbacks from the consummation of mortgage loans
made amounted to $681,059 and $1,285,382 respectively.
5. Marketable securities.
---------------------
As of June 30, 2002 the market value of the Trusts available-for-sale
securities totaled $12,971 which includes an unrealized gain of $382.
Unrealized gains and losses are excluded from earnings and reported in
accumulated other comprehensive income. During the six months ended June
30, 2002, the Trust realized net gain of $1,208 from the sale of equity
securities, classified as available-for-sale.
8
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
Realized gains and losses on sales of both trading and available-for-sale
securities are included in other income.
6. Accounts receivable.
-------------------
Accounts receivable consists of accrued interest on mortgage notes
receivable and other amounts due from borrowers.
7. 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 June 30, 2002 and December
31, 2001, the Trust advanced to CAFC $2,910,927 and $4,217,408. The
interest rate on this line of credit varies with market conditions and is
payable monthly. As of June 30, 2002 and December 31, 2001, the
applicable interest rate was 7.0%.
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. Annual interest on
this line of credit is between 7.0% and 12.0%, varies with market
conditions and is payable monthly. As of June 30, 2002 and December 31,
2001, no borrowings from the Trust were outstanding.
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 June
30, 2002 and December 31, 2001, the Trust had repaid all borrowings from
CRF.
8. Mortgage notes receivable.
-------------------------
Mortgage notes receivable represent home equity loans secured by
residential real estate. At their original origination, all loans have a
combined loan-to-value of not more than 75% of the underlying
collateral's appraisal. 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 usually due monthly and principal is usually
due as a balloon payment at loan maturity. The balances as of June 30,
2002 and December 31, 2001, were $20,057,716 and $17,738,923,
respectively.
9. 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 $222,000 loan loss reserve is adequate
to protect against potential losses inherent in all receivables as of
June 30, 2002. The Trust's loan loss reserve as of December 31, 2001 was
$180,000. The Trust's actual losses may differ from the estimate.
9
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
10. Real estate owned.
-----------------
As of June 30, 2002, the Trust owned one property with a balance of
$92,000. As of December 31, 2001, the Trust owned two properties with a
balance of $234,527.
11. 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. CAFC's
financial information is not reported on a consolidated basis in the
Trust's financial statements.
[Remainder of page intentionally left blank.]
10
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
CAPITAL ALLIANCE FUNDING CORPORATION
BALANCE SHEET
As of As of
June 30, December 31,
(Unaudited) (Audited)
2002 2001
---- ----
ASSETS
Cash and cash equivalents $ 165,677 $ 338,146
Restricted cash 520,788 517,655
Accounts receivable 91,983 164,261
Mortgage notes receivable 4,657,904 8,631,751
Allowance for loan losses (80,000) (118,000)
------------ ------------
Net receivable 4,577,904 8,513,751
Real estate owned 147,500 567,000
Investment in affiliate 5,000 5,000
Other assets 29,810 45,934
------------ ------------
Total assets $ 5,538,662 $ 10,151,747
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks $ 520,788 $ 517,655
Warehouse lines of credit 861,396 4,205,695
Warehouse lines of credit from affiliates 2,910,927 4,217,408
Due to affiliates 71,896 12,283
Other liabilities 40,138 144,984
------------ ------------
Total liabilities 4,405,145 9,098,025
------------ ------------
Stockholders' equity
Preferred shares, no par value, 2,000 shares -- --
authorized, 2,000 shares issues and outstanding
Common shares, no par value, 1,000 shares -- --
authorized, 1,000 shares issued and outstanding
Additional paid in capital 1,970,092 1,925,730
Accumulated deficit (836,575) (872,008)
------------ ------------
Total stockholders' equity 1,133,517 1,053,722
------------ ------------
Total liabilities and stockholders' equity $ 5,538,662 $ 10,151,747
============ ============
11
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
CAPITAL ALLIANCE FUNDING CORPORATION
STATEMENT OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Interest income $ 166,241 $ 207,020 $ 375,685 $ 367,565
Loan origination income 152,072 223,506 234,827 405,315
Service release premium (3,930) 13,454 (2,695) 21,625
Other Income 8,478 1,954 24,883 6,307
--------- --------- --------- ---------
Total revenues 322,861 445,934 632,700 800,812
EXPENSES
Management fees to related party 13,752 17,289 18,710 29,800
Interest expense on
warehouse lines of credit 20,618 16,761 48,438 39,646
Interest expense on warehouse
lines of credit from affiliate 59,414 95,699 118,619 188,861
Loan origination costs 31,671 19,507 73,961 31,329
Provision for loan losses 22,687 16,689 24,145 28,355
Wages and salaries 123,990 109,457 248,216 211,224
General and administrative 32,163 30,510 62,898 62,002
Taxes 1,959 3,516 11,014 10,365
--------- --------- --------- ---------
Total expense 306,254 309,428 606,001 601,582
--------- --------- --------- ---------
INCOME BEFORE GAIN (LOSS)
ON REAL ESTATE OWNED 16,607 136,506 26,699 199,230
Gain on real estate owned 21,317 -- 21,317 9,900
Property holding costs on real (3,554) (8,349) (12,584) (11,777)
--------- --------- --------- ---------
estate owned
NET INCOME $ 34,370 $ 128,157 $ 35,432 $ 197,353
========= ========= ========= =========
12
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
The following are selected footnote disclosures to CAFC's financial
statements:
Accounts receivable.
-------------------
Accounts receivable consists primarily of amounts due from borrowers for
items such as interest, 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 June 30, 2002 and December 31, 2001,
amounts due from borrowers were $91,983 and $164,261, respectively.
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 mortgage lending including the risk of
borrower default and bankruptcy. The balances as of June 30, 2002 and
December 31, 2001 were $4,657,904 and $8,631,751, respectively.
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 an $80,000 loan loss reserve is adequate
to protect against potential losses inherent in all receivables as of
June 30, 2002. CAFC's loan loss reserve as of December 31, 2001 was
$118,000. CAFC's actual losses may differ from the estimate.
Real estate owned.
-----------------
As of June 30, 2002, CAFC held two properties with a balance of $147,500.
As of December 31, 2001, CAFC held one property with a balance of
$567,000.
Warehouse lines of credit.
-------------------------
As of June 30, 2002, CAFC had sold three mortgages for $749,000 under a
$5,000,000 funding agreement. If the note is resold under the agreement,
CAFC receives 100% of the interest earned on the note and the resale
premium. The implicit interest rate due on resold notes is Prime plus
1.00% with a floor of 6.00%. As of June 30, 2002 the Prime rate was
4.75%. The facility is cancellable by either party upon 30 days notice.
As of June 30, 2002, CAFC had borrowed $861,396 from a mortgage secured
credit facility. The facility provides a 100% advance rate on the notes
outstanding balance at an interest rate of 10.75%. Interest is payable
monthly. As the mortgage notes outstanding balance is reduced, CAFC's
borrowings are repaid. CAFC may prepay the outstanding balance without
penalty, until November 2002. As of June 30, 2002, the borrowings had
accrued interest of $7,532. The Trust has guaranteed the repayment of
both principal and interest. The facility matures October 2003.
13
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
As of June 30, 2002 and December 31, 2001, CAFC had borrowed $2,910,927
and $4,217,408 respectively, 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 7% per annum. The CAIT warehouse line of credit is
a revolving line that is paid down as the mortgage loans, held as
collateral, are sold.
During the second quarter of 2002, CAFC repaid, on schedule, a warehouse
line of credit. CAFC had received advances under the facility, up to a
maximum of $5,000,000, with mortgage loans pledged as collateral against
the advances received and with a permissible warehouse period of ninety
(90) days. Interest was LIBOR (London Interbank Offered Rate for U.S.
dollar deposits) plus 1.50% during the permissible warehouse period and
was payable monthly. Interest on loans that are held for more than 90
days was LIBOR plus 3.00%. This line of credit expired May 2002.
Related party transactions.
--------------------------
The Manager earns an administration fee equal to 25 basis points on loans
funded for the benefit of CAFC as defined in the First Amended
Residential Mortgage Loan Services Agreement. For the six months ending
June 30, 2002, and the six months ending 2001, the Manager earned
administrative fees of $16,710 and $28,355 respectively.
As described in Note 7, CAFC received an advance of $2,910,927 under a
warehouse line of credit from CAIT, and accrued interest of $17,702
related to this line of credit as of June 30, 2002 and reported on the
Balance Sheet as Due to Affiliates. 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 June 30, 2002 and
December 31, 2001 was 7.0% per annum.
On occasion CAFC and its affiliates had related receivables and payables
arising from ordinary business transactions. As of June 30, 2002, CAFC
had a payable of $3,873 to the Manager and $17,702 to CAIT and $50,321 to
CRF. This account is shown on the balance sheet as part of Due To
Affiliates. No interest is charged on these inter-company accounts.
CAFC paid $5,000 in 2001 for an interest in Sierra Capital Corporate
Advisors (SCCA), an entity owned by some of the owners of the Manger.
12. Notes payable.
-------------
As of June 30, 2002 and December 31, 2001, the Trust had borrowed
$6,296,311 and $6,964,300, with outstanding accrued interest of $21,870
and $23,668, respectively. 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 June 30, 2002 was 1.86 %)
plus 2.00% and is payable monthly. Maturity date for this line of credit
is September 2002.
As of June 30, 2002 and December 31, 2001, the Trust had borrowed
$4,000,000 and $2,250,000, with accrued interest of $8,875 and $11,301,
respectively under a second term loan. The Trust receives advances under
the agreement up to a maximum of $4,000,000, with the mortgage loans
pledged as collateral against the advances received. Annual interest is
the applicable prime rate (4.75% as of June 30, 2002) plus 0.50% and is
payable monthly. The maturity date for this line of credit is April 2003.
Both term loans are revolving lines that are paid down as the mortgage
loans, held as collateral, are sold. The accrued interest liability is
reported as a part of Other Liabilities.
14
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
The Trust has financed a portion of its stock repurchases by borrowing on
margin from a brokerage. The amount borrowed on margin is charged at the
broker call rate (3.5% as of June 30, 2002) plus 0.75%. Margin debt is
callable at the discretion of the lender. As of June 30, 2002 and
December 31, 2001, the Trust owed $197,727 and $398,991 in margin debt.
13. 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 earned by the Manager were $126,892 and $101,450 for the six months
ended June 30, 2002 and 2001, respectively.
The Manager's REO fee for management and administration of the properties
obtained through foreclosure of mortgage notes held is $500 per month for
each property held by the Trust and CAFC. The Manager earned $8,500 and
$13,500 in REO management fees for the six months ended June 30, 2002 and
2001, respectively.
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 the six months
ended June 30, 2002 was $13,505. No incentive compensation was earned
during the six months ended June 30, 2001. 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% of the Gross Mortgage Assets of the Trust
computed at the end of each month. During 2001, the Trust capitalized 55%
of this fee as loan origination costs and amortized them over the average
life of the loans originated in the month. The remaining 45% of the fee
was expensed as the portion attributed for servicing. During 2002 the
Trust has capitalized 50% of this fee as loan origination costs and
amortizes them over the adjusted weighted average maturity of the
portfolio. The remaining 50% of the fee is expensed as the portion
attributed to servicing. For the six months ended June 30, 2002 and 2001
the Trust incurred loan servicing expenses of $230,036 and $200,147,
respectively.
On occasions the Trust and its affiliates had related receivables and
payables arising from ordinary business transactions. As of June 30,
2002, the Trust had a receivable of $17,702 from CAFC, a payable of
$29,675 to the Manager and a payable of $500 to CRF. 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. These accounts are reported on the balance sheet as Due From
Affiliates of $17,702 and $890 and Due To Affiliates of $30,175 and
$127,874 as of June 30, 2002, and December 31, 2001, respectively. No
interest is charged on these inter-company accounts.
15
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
As described in Note 7 and the related party section of Note 11, as of
June 30, 2002 and December 31, 2001 the Trust advanced $2,910,927 and
$4,217,408 to CAFC under lines of credit to affiliates.
14. 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. As of June 30, 2002 and 2001, each
Series "A" Preferred Share has a book value of approximately $26.51 and
accrued interest, payable monthly at the annualized rate of 6.25% and
8.50% respectively.
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 distribution
preference and 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 written
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. On April 28, 2001 all issued
warrants expired unexercised.
16
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
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 exer- cise price of $13.50 per new Common Share (as adjusted for the 1
for 3 reverse stock split on May 11, 2001). 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. 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. The exercise of common stock options reduced
the number and cost of shares held in the Trust's treasury. As of June
30, 2002, options for the purchase of 20,724 shares of common stock were
exercised and there are 226,776 fully vested outstanding options to
purchase common stock at exercise prices between $9.00 to $13.50 per
share that expire between April 1, 2009 and February 8, 2011.
Options Options Total
Exercise Exercised Exercised Options Outstanding
Price in 2001 in 2002 Exercised Options
----- ------- ------- --------- -------
9.00 (a) 6,000 8,474 14,474 95,276
9.06 (b) --- 3,750 3,750 65,125
13.50 (c) --- 2,500 2,500 66,375
------ ------ ------- --------
Total 6,000 14,724 20,724 226,776
(a) exercise period ends February 8, 2011
(b) exercise period ends April 1, 2009
(c) exercise period ends May 2, 2011
On June 19, 2001 the Board of Directors increased the Common Stock
repurchase authorization to $550,000. On March 10, 2002, the repurchase
authorization was increased to $695,000. As of June 30, 2002, the Trust's
public Common Stock purchases reached 46,466 and the remaining repurchase
authorization is $204,878. Separately, in a September 3, 2001 private
transaction, the Trust purchased 47,500 Common Shares at $13.50. As of
June 30, 2002, the cumulation number of Common Stock purchased was 93,966
shares and exercised Common Stock options reduced the treasury's Common
Stock balance to 73,242 shares.
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 213,820 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
17
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six-month period ended June 30, 2002 and 2001
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 June 30, 2001. The authorized capital of the
Trust remained unchanged with 5,000,000 Common Shares and 675,000 Series
"A" Preferred Shares authorized. At the 2002 annual meeting, held on June
14, 2002, the amendment to the corporation's Certificate of
Incorporation, allowing a decrease in authorized capital to 2,130,000
shares, 1,700,000 being Common Stock and 430,000 being Preferred Stock,
each with a par value of $0.01 was approved.
15. Earnings per share.
------------------
The following table is a reconciliation of the numerator and denominators
of the basic and diluted earnings per common share.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net income $309,585 $251,976 $616,565 $516,469
Less: Preferred Dividend 87,269 133,362 175,691 277,534
-------- -------- -------- --------
Numerator for basic and diluted
earnings per share $222,316 $118,614 $440,873 $238,935
Denominator:
Basic weighted average shares 418,186 459,931 414,523 462,925
Effect of dilutive options (a) 95,391 52,706 80,106 36,108
-------- -------- -------- --------
Diluted weighted average shares 513,577 512,637 494,629 499,033
Basic earnings per common share $ 0.53 $ 0.26 $ 1.06 $ 0.52
Diluted earnings per common share $ 0.43 $ 0.23 $ 0.89 $ 0.48
(a) Treasury share method used to determine dilutive effect.
18
PART I
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The financial statements of Capital Alliance Income Trust Ltd., A Real Estate
Investment Trust (the "Trust") dated herein were prepared from the unaudited
books and ledgers of the Trust.
General
Recent Trends. The Trust invests in non-conforming mortgage loans on
one-to-four unit residential properties because management believes that there
is a large demand for non-conforming mortgage loans on these kinds of properties
which produce higher yields without comparably higher credit risks when compared
with conforming mortgage loans. Management invests primarily in A-, B/C
credit-rated home equity loans secured by deeds of trust. In general, B and C
credit-rated home equity loans are made to borrowers with lower credit ratings
than borrowers of higher credit quality, such as A credit-rated home equity
loans. Home equity loans rated A-, B/C tend to have higher rates of loss and
delinquency, but higher rates of interest than borrowers of higher credit
quality. Management believes there is continued strong demand for non-
conforming mortgage loans by borrowers and strong demand by investors for high
yielding, non-conforming mortgages for securitization.
Increasing in the Trust's mortgage notes receivable is a trend that
management actively seeks to continue. For the six months ended June 30, 2002,
the Trust achieved an increase in mortgage notes receivable. During the same
period, however, CAFC's notes receivable balance declined. This decline is
attributable to the Trust's accelerated purchase of mortgage notes receivable
from CAFC and a temporary delay in CAFC's origination of new loans, while a
replacement funding facility was introduced. CAFC's replacement funding facility
also requires the immediate sale of a funded loan. Although CAFC maintains a
repurchase option on these loans for acquisition by the Trust or for sale into
the secondary mortgage market, sales with a repurchase option reduced CAFC's
reported mortgage notes receivable balance. Future notes receivable balances
will continue to be strongly influenced by the level of originations and the
availability and mix of term financing, warehouse lines of credit and other
funding facilities.
During the recent economic downturn, the delinquencies for non-conforming
mortgage loans on one-to- four unit residential properties has increased.
Although the Trust's mortgage loan portfolio may prospectively continue to incur
increased delinquencies, Management believes the underwriting criteria that
limits the Trust's lending to not more than 75% of the collaterals value at the
time of the initial advance will significantly offset the risk of increased
foreclosures and potentially greater loan losses.
Loan Origination and Loan Servicing. Mortgage loan origination consists of
establishing a relationship with a borrower or his broker, obtaining and
reviewing documentation concerning the credit rating and net worth of borrowers,
inspecting and appraising properties that are proposed as the subject of a home
equity loan, processing such information and underwriting and funding the
mortgage loan. Mortgage loan servicing consists of collecting payments from
borrowers, accounting for interest payments, holding escrow funds until
fulfillment of mortgage loan requirements, contacting delinquent borrowers,
foreclosing in the event of unremedied defaults and performing other
administrative duties. Mortgage loan origination and loan servicing were
overseen and provided to the Trust by CAAI, its Manager.
Commitments and Contingencies. As of June 30, 2002, the Trust's loan
portfolio included 104 loans totaling $20,057,717 of which 17 loans totaling
$3,385,422 and representing 17% of the loan portfolio were delinquent over two
months. Seven delinquent loans totaling $1,437,819 and representing 7% were
brought current by July 31, 2002. After reducing the June 30, 2002 delinquent
balances for these adjustments, 10 loans totaling $1,947,603 or 10% of the loan
portfolio are delinquent over two months. In assessing the collectibility of
these delinquent mortgage loans, management has established a loan loss reserve
of $222,000, if it is necessary to foreclose upon the mortgage loans.
19
The Trust generally issues loan commitments only on a conditional basis
and generally funds such loans promptly upon removal of any conditions.
Accordingly, the Trust did not have any commitments to fund loans as of June 30,
2002 and June 30, 2001.
Results of Operations
The historical information presented herein is not necessarily indicative
of future operations.
Three months and six months ended June 30, 2002 and 2001. Revenues for the
second quarter 2002 increased to $758,274 as compared to $659,844 for the same
period in the prior year. The increase in revenue, during the second quarter of
2002 was due to a larger portfolio at a higher interest rate that provided
additional
revenue of $248,241. The investment income from CAFC declined to $34,026 from
$126,872 for the same period in the prior year primarily due to decreased
originations secondary market sales and lower mortgage portfolio balances. The
interest income from CAFC declined from $119,757 to $59,414 due to reduced
borrowings from the Trust.
Expenses for the second quarter 2002 increased to $432,600 as compared to
$403,696 for the same period in the prior year. The increased expenses during
the second quarter of 2002 were primarily due to $28,704 of increased fees
earned by the Manager and increased interest expenses of $42,232 from higher
bank borrowings. These expenses were partially offset by a reduced provision for
loan losses of $27,718 and reduced amortization expenses of $12,881.
Revenues for the six months ended June 30, 2002 increased to $1,499,752 as
compared to $1,279,995 for the same period in the prior year. The increase in
revenue, during the second half of 2002 was due to CAIT's larger portfolio at a
higher interest rate that provided additional revenue of $517,907. The
investment income from CAFC declined to $35,077 from $195,375 for the same
period in the prior year primarily due to decreased originations, secondary
market sales and lower mortgage portfolio balances. The interest income from
CAFC declined from $251,850 to $118,619 due to reduced borrowings from the
Trust.
Expenses for the six months ended June 30, 2002 increased to $859,145 as
compared to $753,644 for the same period in the prior year. The increased
expenses during the same period in the prior year were primarily due to $63,836
of increased fees earned by the Manager, and increased interest expenses of
$50,653 from higher bank borrowings. These expenses were partially offset by a
reduced provision for loan losses of $33,572 and reduced amortization expenses
of $22,206.
Inflation
The financial statements of the Trust, prepared in accordance with
accounting principles generally accepted in the United States of America, report
the Trust's financial position and operating results in terms of historical
dollars and does not consider the impact of inflation. Inflation affects the
Trust's operations primarily through its effect on interest rates, since
interest rates normally increase during period of high inflation and decrease
during periods of low inflation. When interest rates increase, the demand for
mortgage loans and a borrower's ability to qualify for mortgage financing may be
adversely affected.
Liquidity and Capital Resources
The Trust has term facilities of $7,000,000 and $4,000,000 with two
different lenders. Management believes that cash flow from operations, the
mortgage loans that are paid off, the disposition of real estate owned, existing
bank loan facilities, additional lines of credit anticipated to be acquired
during the second half of 2002, and if necessary, the limited sale of investment
mortgages will be sufficient to meet the liquidity needs of the Trust's
businesses for the next 12 months.
As of January 1, 2002, the Trust had $441,909 of cash and cash
equivalents. After taking into effect the various transactions discussed below,
cash and cash equivalents at June 30, 2002 were $421,325. 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.
20
Net cash provided by operating activities during the six months ended June
30, 2002 and 2001 was $528,998 and $1,215,194, respectively. During the six
months ending June 30, 2002, Net Income provided $616,565, an increase in
accounts receivable used $111,729 and decreased due to affiliates used $80,887.
During the first six months of 2001 Net Income provided $516,469, an increase in
other liabilities provided $90,163 and an increased due to affiliates provided
$493,235.
Net cash used in investing activities for the six months ended June 30,
2002 and 2001 was $1,042,748 and $2,423,993, respectively. During the six months
ended June 30, 2002, the use of cash is primarily due to net increased mortgage
notes receivable which used $2,377,201 and reduced affiliate warehouse borrowing
which provided $1,306,481. The use of cash in 2001 is primarily due to a
$1,980,161 increase in warehouse lines of credit to affiliates and a net
increase in mortgage notes receivable of $322,181.
Net cash provided by financing activities during the six months ended June
30, 2002 and 2001 was $493,166 and $1,630,445, respectively. The 2002 results
are increased by borrowings of $880,745 and reduced by $464,726 for the payment
of dividends. The 2001 results are increased by borrowings of $2,256,392 and
reduced by $515,153 for the payment of dividends.
Critical Accounting Policies
The Trust has several accounting policies that require significant and
critical judgements to be made by the Manager.
Loan Loss Reserves. The adequacy of loan loss reserves for inherent, but unknown
loan losses is a critical accounting issue. As of June 30, 2002, the loss
reserve totaled $222,000 or 1.11% of the loan portfolio. Based upon the
historical operating results of the Trust's core business, the established
reserve would be adequate to offset the portfolio's inherent losses.
Similarly, the adequacy of loan loss reserves for inherent, but unknown loan
losses by CAFC can significantly impact the Trust's reported Investment Income
from Affiliates. As of June 30, 2002, CAFC's loss reserve totaled $80,000 or
1.74% of CAFC's loan portfolio. Based upon the historical operation results of
CAFC, this amount appears adequate to offset the portfolio's inherent losses.
Stock Options. The Trust has issued stock options to its Directors and certain
employees of the Manager. The stock options issued are accounted for using the
intrinsic-value method. Because the options were issued with exercise prices no
less than the market price of the Trust's common stock on the dates of grant,
and because other key terms are fixed, use of the intrinsic-value method results
in the Trust not recognizing compensation expense for these options. If the
terms of these options were changed, variable accounting might need to be used,
and the Trust might then need to begin recognizing compensation expense for the
options. As of June 30, 2002 there are 226,776 fully vested outstanding options
to purchase common stock at exercise prices between $9.00 and $13.50 per share
that expire between April 1, 2009 and February 8, 2011.
Equity method of accounting. Consistent with accounting principals generally
accepted in the United States of America, the Trust's 99% economic interest in
CAFC is presented in the Trust's financial statements according to the equity
method of accounting. This presentation requires the Trust to report the CAFC
interest as an investment. As supplemental information, the Trust includes
CAFC's Balance Sheet and Statement of Operations for the six months ended June
30, 2002 and 2001 as part of the financial statements' footnotes. If required,
consolidation of CAFC's financial information into the Trust may materially
change the Trust's financial statement balances, but would not effect the
Trust's net income or the earnings per common share calculations.
Management has discussed the Trust's Critical Accounting Policies and the
development, selection and disclosure of the estimates and alternatives with the
Trust's Audit Committee prior to filing this report with the Securities and
Exchange Commission.
21
PART I
ITEM 3.
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.
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 June 30, 2002 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 the
average one month LIBOR. A portion of the Trust's liabilities are also based on
a spread over the daily Prime Rate. As the level of LIBOR and/or the Prime Rate
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 (28 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. As the level of variable rate financing increases
or the weighted average maturity of the portfolio increases, the Trust may
utilize a variety of financial instruments to limit the effects of interest rate
fluctuations.
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,
price deflation, 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 likely reduce the book value of the Trust's
assets and the Trust's earnings and cash flow available to fund operations and
pay dividends.
22
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. Currently
the Trust provides a loan loss reserve equal to 1.11% of the Trust's mortgage
portfolio balance. For purposes of illustration, a doubling of the assumed
losses in the Trust's portfolio would reduce second quarter 2002 GAAP income
available to common shareholders by an additional $222,000 or 100%.
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 (28 months).
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.
One Year - Historical
Interest Rate Adjustment in Basis Points
Borrowings <300 bp> <200 bp> <100 bp> 100 bp 200 bp <300 bp>
Net Income 12% 8% 4% <4%> <8%> <12%>
[Remainder of page intentionally left blank.]
23
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The trust is not involved in any legal proceedings at this time.
ITEM 2 CHANGES IN SECURITIES
During the second quarterly period ending June 30, 2002, the Trust
purchased 2,000 common shares. Additionally, options for 7,500 common
shares were exercised.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Trust held its 2002 Annual Meeting on June 14, 2002. At the Annual
Meeting, Directors Richard J. Wrensen and Donald R. Looper were reelected
as Class III Directors for a three-year term with 549,602 in favor, 0
against, and 7,531 abstaining for both. Directors Thomas B. Swartz, Harvey
Blomberg, Stanley C. Brooks and Dennis Konczal, whose terms continued for
one, one, two and two years, respectively, continue as Directors.
The Shareholders approved the amendment of the Corporation's Certificate
of Incorporation to decrease the Corporation's authorized capital to
2,130,000 Shares consisting of 1,700,000 authorized Shares of Common Stock
with a par value of $.01 per Share and 430,000 authorized Shares of
Preferred Stock with a par value of $.01 per Share with 375,567 shares or
59.8% of the shares issued, outstanding and entitled to vote approving the
amendment, 7,268 against, and 8,076 abstaining.
The Shareholders ratified the selection of Novogradac & Company LLP as
independent public accountants and auditors for the Trust with 475,696
shares voting in favor of such approval, 70,443 shares against and 9,994
abstaining.
ITEM 5 OTHER INFORMATION
Press Release, Exhibit "A" attached hereto and incorporated herein,
regarding CAFC's $5,000,000 funding agreement and CAIT's $4,000,000
borrowing facility.
Press Release, Exhibit "B" attached hereto and incorporated herein,
announcing the fourth consecutive increased quarterly dividend.
Press Release, Exhibit "C", regarding the second quarter's operating
results for 2002.
ITEM 6 REPORTS ON FORM 8-K
Not applicable.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CAPITAL ALLIANCE INCOME TRUST LTD.,
A Real Estate Investment Trust
Dated: August 6, 2002 By: /s/ Thomas B. Swartz
--------------------
Thomas B. Swartz,
Chairman and Chief Executive Officer
Dated: August 6, 2002 By: /s/ Richard J. Wrensen
----------------------
Richard J. Wrensen,
Executive Vice President and
Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Capital Alliance Income
Trust Ltd. (the "Company") on Form 10-Q for the period ending June 30,
2002 as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Thomas B. Swartz, Chief Executive Officer of
the Company, and I, Richard J. Wrensen, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. s 1350, as adopted
pursuant to s 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully compiles with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and result
of operations of the Company.
Dated: August 7, 2002 By: /s/ Thomas B. Swartz
--------------------
Thomas B. Swartz,
Chairman and Chief Executive Officer
Dated: August 7, 2002 By: /s/ Richard J. Wrensen
----------------------
Richard J. Wrensen,
Executive Vice President and
Chief Financial Officer
25
EXHIBIT "A"
CAPITAL ALLIANCE INCOME TRUST LTD.
ANNOUNCES EXPANDED FINANCIAL RELATIONSHIPS
IMPROVING LIQUIDITY
SAN FRANCISCO - (BUSINESS WIRE) - May 31, 2002 - Capital Alliance Income Trust
Ltd. ("CAIT") (AMEX: CAA-news) - a residential mortgage REIT operating both
mortgage investment and mortgage banking businesses, announced the successful
consummation of negotiations with a new lender and an expanded relationship with
one of its existing lenders to provide an aggregate $6.75 million in increased
funding facilities to improve CAIT's liquidity. CAIT's mortgage banking business
is conducted through Capital Alliance Funding Corporation, a subsidiary in which
it has a 99% economic interest.
Dennis R. Konczal, President and Chief Operating Officer of CAIT, stated that,
"We are pleased to add Gateway Bank F.S.B. of San Leandro, CA to the group of
financial institutions with whom we are working. Gateway Bank F.S.B. will
provide Capital Alliance Funding Corporation with a $5 million Quick$ale(R)
facility. We are equally pleased to be able to expand to $4 million our secured
line of credit with Golden Gate Bank of San Francisco, CA, a member of Greater
Bay Bancorp (NASDAQ: GBBK)." Mr. Konczal also noted that, "This added liquidity
will allow CAIT to more fully take advantage of favorable interest rate spreads
while increase its niche bridge-financing business and add to CAIT's mortgage
portfolio."
Richard J. Wrensen, CAIT's Executive Vice President and Chief Financial Officer,
reiterated that CAIT will continue to discuss increased credit commitments with
its existing lenders and will seek additional borrowing facilities and banking
relationships. Mr. Wrensen explained that, "Even with its expanded borrowing,
CAIT maintains a conservative balance sheet since CAIT and its subsidiary's
borrowings are less than 1.5 times CAIT's equity capital. Most mortgage REITs
typically borrow six to eight times capital." Mr. Wrensen stressed that CAIT's
robust growth has not compromised the quality of its loan portfolio. He said,
"Our growth is organic and the portfolio's average loan to appraised value
remains less than 70%."
This document contains "forward-looking statements" (within the meaning of the
Private Securities Litigation Reform Act of 1995) that inherently involve risks
and uncertainty. 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 the secondary
markets and credit markets, increases in cost and other general competitive
factors.
Contact: Capital Alliance Income Trust Ltd., San Francisco
Richard J. Wrensen, CFO - 415/288-9575
www.calliance.com
26
EXHIBIT "B"
CAPITAL ALLIANCE INCOME TRUST ANNOUNCES
FOURTH CONSECUTIVE INCREASED QUARTERLY DIVIDEND
AND CONTINUED STRENGTH IN OPERATING RESULTS
SAN FRANCISCO - (BUSINESS WIRE) - June 24, 2002 - Capital Alliance Income Trust
Ltd. ("CAIT") - (AMEX: CAA-news), a residential mortgage REIT operating both
mortgage investment and mortgage banking businesses, announced the fourth
consecutive increased Common Share dividend. The dividend rate of $.45 per
Common Share is a 12.5 % increase over the prior quarter's dividend and a 76.5 %
increase over 2001's same quarter payment. Based on the closing common stock
price of $17.60 per share on June 21, 2002, the annualized dividend yield is
10.23%.
The dividend is payable on July 15, 2002 to shareholders of record on July 5,
2002.
Dennis R. Konczal, CAIT's President and Chief Operating Officer, noted that
"CAIT's increasing common dividends are indicative of underlying operating
results that have continued to improve. Even as interest rate driven
refinancings decline, the demand for our portfolio loan product continues to
increase. This is because we provide residential borrowers, with significant
equity in their properties, unique access to various "niche" bridge financing
options not available from more traditional lenders."
Richard J. Wrensen, CAIT's Executive Vice-President and Chief Financial Officer,
stated "the mortgage portfolio's growth continues to provide strong operating
results and CAIT's under leveraged balance sheet continues to provide the
capacity for growth. We are enthusiastic about our current and future
opportunities. Our people are focused and our strategy is increasing shareholder
value. The Board of Directors is delighted to approve our fourth consecutive
dividend increase."
The Board of Directors also announced that commencing in the fourth quarter
2002, CAIT's common shareholder of record and dividend payment dates will
change. Common dividends will be payable to shareholders of record one month and
six business days after the calendar quarter's end. The common share dividend
will be paid about the 15th of the month, but not later than eight (8) business
days after the record date. Therefore, the fourth quarter's dividend is now
scheduled to be announced in late October for common shareholders of record
November 8, 2002 and will be payable on November 15, 2002. The change will
provide CAIT's Board of Directors additional time to consider CAIT's dividend
requirement. As a REIT, CAIT is required to distribute 90% of its annual taxable
income.
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
27
EXHIBIT "C"
CAPITAL ALLIANCE INCOME TRUST LTD.
ANNOUNCES SIXTH STRAIGHT QUARTER OF IMPROVED
EARNINGS AS COMPARED TO PRIOR YEAR QUARTERS
SAN FRANCISCO - (BUSINESS WIRE)- August 7, 2002 - Capital Alliance Income Trust
Ltd. ("CAIT") (AMEX: CAA-news) a residential mortgage REIT, operating both
mortgage investment and mortgage banking businesses, announced an increase in
its earnings to $309,585 ($.53 basic and $ .43 diluted per share) for the three
months ending June 30, 2002 and $616,565 ($ 1.06 basic and $ .89 diluted) for
the six months ended June 30, 2002, as compared to earnings of $251,976 ($ .26
basic and $ .23 diluted per share) and $516,469 ($ .52 basic and $. 48 diluted
per share), respectively, for the like periods in 2001. Revenues also increased
to $758,274 for the three months ending June 30, 2002 and $1,499,752 for the six
month period ending June 30, 2002, as compared to $659,844 and $1,279,995 for
the same periods in 2001. The increase in quarterly earnings over the prior
year's respective quarter was the sixth straight such increase in a row for
CAIT. Based upon the closing stock price of August 6, 2002, CAIT's annualized
common share dividend yield is 9.63%.
CAIT's Form 10-Q and its financial statements included therein, to be filed by
August 14, 2002, will be duly certified pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350) by Thomas B. Swartz, Chief
Executive Officer and Richard J. Wrensen, Chief Financial Officer of CAIT.
Richard J. Wrensen, CAIT's Executive Vice-President and Chief Financial Officer
noted that the continuing improvement in CAIT's earnings is poised to continue
through the remainder of 2002 notwithstanding the uncertainty afflicting the
general economy, interest rates, and residential real estate values.
CAIT is a specialty residential lender which originates and invests as a
portfolio lender in high-yielding non- conforming residential mortgage loans on
one-to-four unit residential properties located primarily in California and
other western states. It also originates conforming and non-conforming loans on
residential properties for sale to investors in the secondary market on a whole
loan basis for cash through its mortgage banking subsidiary, Capital Alliance
Funding Corporation. CAIT's investment guidelines limit its portfolio mortgages
to 75% or less of the collateral's appraised value. As a REIT, CAIT is required
to distribute 90% of its annual taxable income.
This document contains "forward-looking" statements (within the meaning of the
Private Securities Litigation Reform Act of 1995) that inherently involve risks
and uncertainty. 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 the secondary
markets and credit markets, increases in cost and general competitive factors.
Contact: Capital Alliance Income Trust Ltd., San Francisco
Richard J. Wrensen, Executive Vice President and CFO - 415/288-9575
rjwrensen@calliance.com
www.calliance.com
28