UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
(Mark One)
(X) Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30,
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
(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 October 31, 2002, the registrant's common shares closed at $18.75 per
share and the aggregate market value of the registrant's common shares held by
non-affiliates of the registrant was approximately $6,305,044. At that date
approximately 336,269 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 nine-month period ended September 30, 2002 and 2001
Balance Sheet
(Unaudited) (Audited)
September 30, 2002 December 31, 2001
------------------ -----------------
ASSETS
Cash and cash equivalents $ 222,911 $ 441,909
Restricted cash 836,399 1,285,382
Marketable Securities 8,959 --
Accounts receivable 544,254 292,588
Due from affiliates 14,770 890
Notes receivable:
Warehousing facilities to related parties 3,045,697 4,217,408
Mortgage notes recievable 18,960,365 17,738,923
Allowance for loan losses (275,000) (180,000)
------------ ------------
Net Receivable 21,731,062 21,776,331
Real estate owned 92,000 234,527
Investments in affiliates 1,071,652 1,062,210
Origination costs (net) 239,594 227,392
Prepaid items (net) 21,861 23,062
------------ ------------
Total assets $ 24,783,462 $ 25,344,291
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks $ 836,399 $ 1,285,382
Loans payable 9,453,697 9,613,292
Due to affiliate 39,572 127,874
Other liabilities 173,384 223,202
------------ ------------
Total liabilities 10,503,052 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 September 30, 2002
Additional paid in capital - preferred stock 5,669,123 5,669,123
Less: 3,176 preferred shares held in treasury at cost (2001) -- (86,944)
Less: 3,176 preferred shares held in treasury at cost (2002) (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 September 30, 2002
Additional paid in capital - common stock 9,370,895 9,370,895
Less: 81,479 common shares held in treasury at cost (2001) -- (1,041,812)
Less: 70,392 common shares held in treasury at cost (2002) (939,515) --
Accumulated other comprehensive income (980) --
Retained Earnings 260,741 176,189
------------ ------------
Total stockholders' equity 14,280,410 14,094,541
------------ ------------
Total liabilities and stockholders' equity $ 24,783,462 $ 25,344,291
============ ============
3
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine-month period ended September 30, 2002 and 2001
Statement of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Interest income $ 660,673 $ 501,539 $ 1,992,938 $ 1,333,186
Interest income from affiliates 46,258 176,504 164,877 428,354
Investment income from affiliates (69,998) 135,872 (34,920) 331,248
Other income 2,175 15,727 15,965 34,140
----------- ----------- ----------- -----------
Total revenues 639,108 829,642 2,138,860 2,126,928
----------- ----------- ----------- -----------
EXPENSES
Loan servicing fees to related parties 124,492 110,960 354,529 311,107
Management fees to related parties 62,690 73,001 211,587 187,951
Interest expense on loans 106,703 143,010 334,690 337,637
Interest expense on loans from related parties 9,208 15,375 18,869 17,045
Provision for loan losses 53,000 67,816 95,000 143,387
Amortization 9,816 19,313 33,463 57,938
General and administrative 57,630 61,266 216,555 194,946
Taxes 5,700 10,100 23,691 21,765
----------- ----------- ----------- -----------
Total expenses 429,239 500,841 1,288,384 1,271,776
----------- ----------- ----------- -----------
INCOME BEFORE GAIN (LOSS) ON REO $ 209,869 $ 328,801 $ 850,476 $ 855,152
----------- ----------- ----------- -----------
Operating expenses of REO (1,184) (3,139) (2,699) (13,021)
Gain (Loss) on Real Estate Owned -- -- (22,527) --
----------- ----------- ----------- -----------
NET INCOME $ 208,685 $ 325,662 $ 825,250 $ 842,131
=========== =========== =========== ===========
PREFERRED DIVIDENDS $ 87,257 $ 116,364 $ 262,948 $ 393,898
----------- ----------- ----------- -----------
NET INCOME AVAILABLE TO COMMON $ 121,428 $ 209,298 $ 562,302 $ 448,233
=========== =========== =========== ===========
BASIC EARNINGS PER
COMMON SHARE $ 0.29 $ 0.48 $ 1.35 $ 0.97
DILUTED EARNINGS PER
COMMON SHARE $ 0.23 $ 0.43 $ 1.12 $ 0.88
DIVIDENDS PAID PER
COMMON SHARE $ 0.45 $ 0.26 $ 1.15 $ 0.77
WEIGHTED AVERAGE COMMON
SHARES - BASIC EARNINGS 423,036 438,936 417,226 460,913
WEIGHTED AVERAGE COMMON
SHARES - DILUTED EARNINGS 525,023 489,304 502,641 511,281
4
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine-month period ended September 30, 2002 and 2001
Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 825,250 $ 842,131
Adjustments to reconcile net income to net cash:
Amortization (net) 33,463 44,391
(Gain) loss on real estate owned 22,257 --
(Income) loss from investment in affiliate 34,920 (331,248)
(Increase) decrease in prepaid items (560) --
Provision for loan losses 95,000 70,056
(Increase) decrease in accounts receivable (251,666) (5,366)
Increase (decrease) in due to / due from affiliates (102,182) 2,591
Increase (decrease) in other liabilities (49,818) 62,893
------------ ------------
Net cash provided by (used in) operating activities 606,664 685,448
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in warehousing facilities 1,171,711 (1,438,448)
(Increase) in investments (44,362) (30,218)
Increase in marketable securities (9,939) --
Investments in mortgage notes receivable (7,580,115) (12,901,385)
Repayments of mortgage notes receivable 6,275,446 9,380,496
Net proceeds from sale of real estate owned -- 108,250
Capital costs of real estate owned -- (2,438)
------------ ------------
Net cash provided by (used in) investing (187,259) (4,883,743)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans (159,595) 5,614,340
Loan fees paid (19,500) --
Purchase of treasury stock (71,924) (845,808)
Sale of treasury stock 174,221 --
Preferred dividends paid (262,948) (393,898)
Common dividends paid (477,752) (370,541)
------------ ------------
Net cash provided by (used in) financing activities (638,403) 4,004,093
------------ ------------
NET INCREASE (DECREASE) IN CASH (218,998) (194,202)
CASH AT BEGINNING OF PERIOD 441,909 368,241
------------ ------------
CASH AT END OF PERIOD $ 222,911 $ 174,039
============ ============
SUPPLEMENTAL CASHFLOW INFORMATION:
Interest expense paid $ 364,191 $ 354,682
Taxes paid $ 33,978 $ 15,865
Contribution to affiliate $ 44,362 $ 30,218
5
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine-month period ended September 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 Real Estate 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 "Investment income from
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 nine months ended
September 30, 2002 and September 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 nine-month period ended September 30, 2002 and 2001
assumptions that affect 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 nine-month period ended September 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 nine-month periods ended September 30, 2002 and
September 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 September 30, 2002 and
December 31, 2001, mortgage note holdbacks from the consummation of
mortgage loans made amounted to $836,399 and $1,285,382 respectively.
5. Marketable securities.
------------------------
As of September 30, 2002 the market value of the Trusts
available-for-sale securities totaled $8,959 which includes an unrealized
loss of $980. Unrealized gains and losses are excluded from earnings and
reported in accumulated other comprehensive income. During the nine
8
months ended September 30, 2002, the Trust realized net gain of $1,573
from the sale of equity securities, classified as available-for-sale.
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 September 30, 2002 and
December 31, 2001, the Trust advanced to CAFC $3,045,697 and $4,217,408.
The interest rate on this warehousing facility varies with market
conditions and is payable monthly. As of September 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. The interest rate
on this warehousing facility is between 7.0% and 12.0%, varies with
market conditions and is payable monthly. As of September 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
September 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
mortgage 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 September
30, 2002 and December 31, 2001, were $18,960,365 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 $275,000 loan loss reserve is adequate
to protect against potential losses inherent in all receivables as of
9
September 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.
10. Real estate owned.
-----------------
As of September 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 nine-month period ended September 30, 2002 and 2001
CAPITAL ALLIANCE FUNDING CORPORATION
BALANCE SHEET
(Unaudited) (Audited)
September 30, 2002 December 31, 2001
------------------ -----------------
ASSETS
Cash and cash equivalents $ 381,427 $ 338,146
Restricted cash 343,142 517,655
Accounts receivable 105,974 164,261
Note receivable:
Mortgage notes receivable 6,352,355 8,631,751
Allowance for loan losses (215,000) (118,000)
------------ ------------
Net Receivable 6,137,355 8,513,751
Real estate owned 119,493 567,000
Investment in affiliate 5,000 5,000
Other assets 40,525 45,934
------------ ------------
Total assets $ 7,132,916 $ 10,151,747
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks $ 343,142 $ 517,655
Warehousing facilities 2,577,011 4,205,695
Warehousing facilities from related parties 3,045,697 4,217,408
Due to affiliate 19,694 12,283
Other liabilities 84,560 144,984
------------ ------------
Total liabilities 6,070,104 9,098,025
------------ ------------
Stockholders' Equity
Preferred shares, no par value -- --
2,000 shares authorized, issued and outstanding
Common shares, no par value -- --
1,000 shares authorized, issued and outstanding
Additional paid in capital 1,970,092 1,925,730
Accumulated deficit (907,280) (872,008)
------------ ------------
Total stockholders' equity 1,062,812 1,053,722
------------ ------------
Total liabilities and stockholders' equity $ 7,132,916 $ 10,151,747
============ ============
11
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine-month period ended September 30, 2002 and 2001
CAPITAL ALLIANCE FUNDING CORPORATION
STATEMENT OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Interest income $ 164,459 $ 277,569 $ 540,144 $ 645,134
Loan origination income 206,498 317,132 441,325 722,447
Service release premium 17,173 43,356 14,478 64,982
Other income 3,600 17,849 28,483 24,156
----------- ----------- ----------- -----------
Total revenues 391,730 655,906 1,024,430 1,456,719
----------- ----------- ----------- -----------
EXPENSES
Management fees to related parties 14,028 22,604 32,738 52,404
Interest expense on loans 48,025 24,466 96,463 64,000
Interest expense on loans from related parties 46,258 176,804 164,877 365,665
Loan origination costs 17,142 29,790 91,103 61,118
Provision for loan losses 155,643 101,736 179,788 130,092
Wages and salaries 119,279 126,102 367,495 337,951
General and administrative 60,513 30,770 123,411 90,765
Taxes 3,500 380 14,514 10,745
----------- ----------- ----------- -----------
Total expenses 464,388 512,652 1,070,389 1,112,740
----------- ----------- ----------- -----------
INCOME BEFORE GAIN (LOSS) ON REO $ (72,658) $ 143,254 $ (45,959) $ 343,979
----------- ----------- ----------- -----------
Operating expenses of REO 1,953 (16,320) (10,631) (28,097)
Gain (Loss) on Real Estate Owned -- 10,306 21,317 20,207
----------- ----------- ----------- -----------
NET INCOME $ (70,705) $ 137,240 $ (35,273) $ 336,089
=========== =========== =========== ===========
12
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine-month period ended September 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 September 30, 2002 and December 31,
2001, amounts due from borrowers were $105,974 and $164,261,
respectively.
Mortgage notes receivable.
--------------------------
Mortgage notes receivable are stated at the principal outstanding.
Interest on the loans is usually 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 September 30,
2002 and December 31, 2001 were $6,352,355 and $8,631,751, respectively.
Some of the mortgage loans originated and purchased by CAFC are held for
sale to the Trust. The remaining originations and purchases are
designated for sale to independent third parties. The Trust'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 $215,000 loan loss reserve is adequate
to protect against potential losses inherent in all receivables as of
September 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 September 30, 2002, CAFC held two properties with a balance of
$119,493. As of December 31, 2001, CAFC held one property with a balance
of $567,000.
Warehouse lines of credit.
--------------------------
As of September 30, 2002, CAFC had borrowed $1,923,725 under a $5,000,000
funding agreement. The agreement provides a 100% advance rate on the
notes outstanding balance at an interest rate of Prime plus 1.00% with a
floor of 6.00%. Interest is payable monthly. As of September 30, 2002 the
Prime rate was 4.75% and the funding agreement had accrued interest of
$11,385. The facility is cancellable by either party upon 30 days written
notice.
As of September 30, 2002, CAFC had borrowed $653,286 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 September 30, 2002, the
borrowings had accrued interest of $5,856. 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 nine-month period ended September 30, 2002 and 2001
As of September 30, 2002 and December 31, 2001, CAFC had borrowed
$3,045,697 and $4,217,408 respectively, under a loan sale agreement with
the Trust. Under the terms of the agreement, the Trust advances funds to
CAFC to acquire mortgage loans secured by real estate. CAFC then
surrenders all rights of title and interest on such loans. CAFC is
obligated to reacquire the loans from the Trust at a preset price. The
interest rate on this facility varies with market conditions and is
payable monthly. As of September 30, 2002 and December 31, 2001, the
applicable interest rate was 7.0%
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%.
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 three months ending
September 30, 2002 and 2001, the Manager earned administrative fees of
$14,028 and $22,604, respectively. For the nine months ending September
30, 2002 and 2001, the Manager earned administrative fees of $32,738 and
$52,404, respectively.
As described in Note 7, CAFC received an advance of $3,045,697 under a
warehousing facility from the Trust, and accrued interest of $14,770
related to this line of credit as of September 30, 2002 and reported on
the Balance Sheet as part of Due to Affiliates. The Trust charges a
variable interest rate on this warehouse line of credit determined by
current market rates. The rate charged to CAFC on the warehousing
facility as of September 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 September 30, 2002,
CAFC had a payable of $4,925 to the Manager. This account is shown on the
balance sheet as part of Due To Affiliates. No interest is charged on the
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 Manager.
12. Notes payable.
-------------
As of September 30, 2002 and December 31, 2001, the Trust had borrowed
$6,740,850 and $6,964,300, with outstanding accrued interest of $18,705
and $23,668, respectively. The Trust receives advances under a term loan
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 September 30, 2002 was
1.82 %) plus 2.00% and is payable monthly. Maturity date for this line of
credit is November 2002.
As of September 30, 2002 and December 31, 2001, the Trust had borrowed
$2,550,000 and $2,250,000, with accrued interest of $8,750 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
14
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine-month period ended September 30, 2002 and 2001
the applicable prime rate (4.75% as ofSeptember 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.
The Trust has financed a portion of its stock repurchases by borrowing on
margin from a brokerage company. The amount borrowed on margin is charged
at the broker call rate (3.5% as of September 30, 2002) plus 0.75%.
Margin debt is callable at the discretion of the lender. As of September
30, 2002 and December 31, 2001, the Trust owed $162,847 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 $62,690 and $73,001 for the three months
ended September 30, 2002 and 2001, respectively, and $211,587 and
$187,951 for the nine months ended September 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 $4,000 and
$4,500 in REO management fees for the three months ended September 30,
2002 and 2001, respectively, and $12,500 and $13,500 in REO management
fees for the nine months ended September 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. No incentive compensation was earned during the
third quarter of 2002. For the three months ending September 30, 2001,
the incentive compensation was $12,000. The incentive compensation for
the nine months ended September 30, 2002 and 2001 was $13,466 and
$12,000, respectively. 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 2002, the Trust has capitalized
50% of this fee as loan origination costs and amortizes loan origination
costs over the adjusted weighted average maturity of the portfolio. The
remaining 50% of the fee is expensed as the portion attributed to
servicing. During 2001, the Trust capitalized 55% of this fee as loan
15
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine-month period ended September 30, 2002 and 2001
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. For the three months ended September
30, 2002 and 2001, the Trust incurred loan servicing expenses of $124,492
and $110,960, respectively. For the nine months ended September 30, 2002
and 2001, the Trust incurred loan servicing expenses of $354,529 and
$311,107, respectively.
On occasions the Trust and its affiliates had related receivables and
payables arising from ordinary business transactions. As of September 30,
2002, the Trust had a receivable of $14,770 from CAFC, a payable of
$31,811 to the Manager and a payable of $7,761 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 $14,770 and $890 and Due To Affiliates of $39,572 and
$127,874 as of September 30, 2002, and December 31, 2001, respectively.
No interest is charged on these inter-company accounts.
As described in Note 7 and the related party section of Note 11, as of
September 30, 2002 and December 31, 2001 the Trust advanced $3,045,697
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 September 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
7.50% 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
16
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine-month period ended September 30, 2002 and 2001
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.
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 Trust 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). 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
September 30, 2002, options for the purchase of 25,574 shares of common
stock were exercised and there are 221,926 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 13,324 19,324 90,426
9.06 (b) --- 3,750 3,750 65,125
13.50 (c) --- 2,500 2,500 66,375
----- ------ ------ -------
Total 6,000 19,574 25,574 221,926
(a) exercise period ends February 8, 2011
(b) exercise period ends April 1, 2009
(c) exercise period ends May 2, 2010
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 September 30, 2002, the
Trust's public Common Stock purchases reached 48,466 and the remaining
repurchase authorization is $167,608. Separately, in a September 3, 2001
private transaction, the Trust purchased 47,500 Common Shares at $13.50.
As of September 30, 2002, the cumulative number of Common Stock purchased
was 95,966 shares and exercised Common Stock options reduced the
treasury's Common Stock balance to 70,392 shares.
17
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine-month period ended September 30, 2002 and 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 213,820 issued and outstanding Preferred Shares. As a
result, the January 1, 2001 Common Share treasury balance became 27,160
post-split shares and the January 1, 2001 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 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net income $208,685 $325,662 $825,250 $842,131
Less: Preferred Dividend 87,257 116,364 262,948 393,898
-------- -------- -------- --------
Numerator for basic and diluted
earnings per share $121,428 $209,298 $562,302 $448,233
Denominator:
Basic weighted average shares 423,036 438,936 417,226 460,913
Effect of dilutive options (a) 101,997 50,368 85,415 50,368
-------- -------- -------- --------
Diluted weighted average shares 525,023 489,304 502,641 511,281
Basic earnings per common share $ 0.29 $ 0.48 $ 1.35 $ 0.97
Diluted earnings per common share $ 0.23 $ 0.43 $ 1.12 $ 0.88
(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 the Trust's non-warehouse mortgage notes receivable balance is
a trend that management actively seeks to continue. For the nine months ended
September 30, 2002, the Trust achieved a 6.9% increase in the non-warehouse
mortgage notes receivable balance. 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 during the first half of 2002 while a
replacement funding facility was introduced. 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 and foreclosures of
conforming and non-conforming mortgage loans on one-to-four unit residential
properties have 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 potential loan losses greater than
the established reserves. For the nine months ended September 30, 2002, the
Trust increased loan loss reserves by $95,000. If economic conditions continue
to deteriorate, the Trust may need to reserve for additional 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 September 30, 2002, the Trust's loan
portfolio included 98 loans totaling $18,960,365 of which 13 loans totaling
$2,844,240 and representing 16% of the loan portfolio were delinquent over two
months. One delinquent loan totaling $79,939 and representing .4% of the
portfolio was brought current by October 31, 2002. After reducing the September
30, 2002 delinquent balances for these adjustments, 12 loans totaling $2,764,301
or 15% 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 $275,000, if it is necessary to foreclose upon the mortgage
19
18 loans. For the nine months ended September 30, 2002 the Trust increased loan
loss reserves by $95,000. If economic conditions continue to deteriorate, the
Trust may need to reserve for additional loan losses.
The Trust generally issues loan commitments only on a conditional basis
and generally funds such loans promptly upon removal of any conditions.
Accordingly, the Trust did not have any commitments to fund loans as of
September 30, 2002 and September 30, 2001.
Results of Operations
The historical information presented herein is not necessarily indicative
of future operations.
Three months and nine months ended September 30, 2002 and 2001. Revenues
for the third quarter 2002 decreased to $639,108 as compared to $829,642 for the
same period in the prior year. The decrease in revenue, during the third quarter
of 2002 was due to a loss in CAFC. The investment income from CAFC declined to
$(69,998) from $135,871 for the same period in the prior year, primarily due to
CAFC's $138,594 net increase in reserves for loan losses and secondarily from
lower interest income from lower mortgage portfolio balances. The Trust's
interest income from CAFC declined from $176,504 to $46,258 due to reduced
borrowings from the Trust.
Expenses for the third quarter 2002 decreased to $429,239 as compared to
$500,841 for the same period in the prior year. The decreased expenses during
the third quarter of 2002 were primarily due to lower interest rates that
reduced interest expenses by $42,474. These expenses were further offset by a
reduced provision for loan losses of $14,816 and reduced amortization expenses
of $9,497.
Revenues for the nine months ended September 30, 2002 increased to
$2,138,860 as compared to $2,126,928 for the same period in the prior year. The
revenue increased from CAIT's larger portfolio balance at a higher interest rate
that provided additional revenue of $659,752. The Trust's investment income from
CAFC declined to $(34,920) from $331,248 for the same period in the prior year
primarily due to CAFC's lower interest income and loan origination income of
$386,112 and additional provisions for loan losses of $46,696 and higher
operating expenses of $12,342 that exceeded lower interest expenses at $168,325.
The Trust's interest income from CAFC warehouse borrowers declined from $365,665
to $164,877 due to reduced borrowings from the Trust.
Expenses for the nine months ended September 30, 2002 increased to
$1,288,384 as compared to $1,271,776 for the same period in the prior year. The
increased expenses during the same period in the prior year were primarily due
to $67,058 of increased fees earned by the Manager and a $21,609 increase in
general and administrative items. These expenses were partially offset by a
reduced provision for loan losses of $48,387 and reduced amortization expenses
of $24,475.
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 do 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 periods 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, 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
20
cash equivalents at September 30, 2002 were $222,911. 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.
Net cash provided by operating activities during the nine months ended
September 30, 2002 and 2001 was $606,664 and $685,448, respectively. During the
nine months ending September 30, 2002, Net Income provided $825,250, an increase
in accounts receivable used $251,666 and an increased due affiliates balance
used $102,182. During the nine months ending September 30, 2001, Net Income
provided $842,131, an increase in other liabilities provided $62,893 and an
increased provision for loan losses provided $70,056. CAFC, the Trust's
unconsolidated investment reduced cash from operating activities by $331,248.
Net cash used in investing activities for the nine months ended September
30, 2002 and 2001 was $187,259 and $4,883743, respectively. During the nine
months ended September 30, 2002, the use of cash is primarily due to net
increased mortgage notes receivable which used $1,304,669 and reduced affiliate
warehouse borrowing by CAFC which provided $1,171,711. During the nine months
ended September 30, 2001, cash was primarily used for a net increase in mortgage
notes receivable of $3,520,889 and secondarily from a $1,438,448 increase in
warehousing facilities to affiliates.
Net cash used by financing activities during the nine months ended
September 30, 2002 was $638,403 and for the nine months ended September 30, 2001
provided $4,004,093. The 2002 results used cash to repay borrowings of $159,595
and $740,700 for the payment of dividends. The 2001 results provided cash by
increased borrowings of $5,614,340 and reduced cash by $845,808 for the
acquisition of treasury shares and by $764,439 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 September 30, 2002, the loss
reserve totaled $275,000 or 1.45% of the loan portfolio. Based upon the
historical operating results of the Trust's core business, the established
reserve appears 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 September 30, 2002, CAFC's loss reserve totaled $215,000
or 3.38% 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 certain employees of the
Manager and to its Directors. 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 September 30, 2002 there are 221,926 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 nine months ended
September 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 affect
the Trust's net income or the earnings per common share calculations.
21
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 and obtained their approval prior to filing this report
with the Securities and Exchange Commission.
PART I
ITEM 3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
Forwarding-Looking Statements
Certain statements contained herein are not based on historical
information, 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 September 30, 2002 balance sheet
at 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 is 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 (26 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 mortgage financing
of the portfolio 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.
22
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.
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 1.45% of the Trust's mortgage
portfolio balance. For purposes of illustration, a doubling of the assumed
losses in the Trust's portfolio would reduce third quarter 2002 GAAP income
available to common shareholders by an additional $275,000 or 131%.
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 (26 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%> <11%>
3Q-02
Net Income 12% 8% 4% <4%> <8%> <12%>
2Q-02
Net Income 12% 8% 4% <4%> <8%> <12%>
1Q-02
PART I
ITEM 4.
CONTROLS AND PROCEDURES
(A) Evaluation of Disclosure Controls and Procedures. The principal executive
and financial officers of the Trust have reviewed and evaluated the
effectiveness of the design and operation of the Trust's disclosure controls and
procedures within the 90 days preceding the date of this report and have
determined (i) that such controls and procedures are operating properly and
adequately to ensure that material information relating to the Trust's
operations and required to be disclosed in this report is being made known to
them by the responsible persons involved in the Trust's operations; and (ii)
that there are neither significant deficiencies in the design and operation of
such controls and procedures that could affect the Trust's ability to record,
process, summarize and report financial data nor is there any fraud that
involves management or other employees who have a significant role in the
Trust's internal controls. The results of such review and evaluation have been
disclosed to the Trust's auditors and the Trust's audit committee.
(B) Changes in Internal Controls. There have been no significant changes in the
Trust's internal controls or in other factors that could significantly affect
those controls subsequent to the date of their evaluation. Accordingly, no
corrective actions with regard to such controls or procedures have been
required.
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 third quarterly period ending September 30, 2002, the Trust
purchased 2,000 common shares. Additionally, options for 4,850 common
shares were exercised.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 OTHER INFORMATION
Press Release, Exhibit "A" attached hereto and incorporated herein,
regarding Second Quarter 2002 Earnings dated August 7, 2002.
Press Release, Exhibit "B" attached hereto and incorporated herein,
announcing Fourth Quarter Dividend of $0.45 per common share dated
October 11, 2002.
Press Release, Exhibit "C" attached hereto and incorporated herein,
announcing Third Quarter Earnings and Operating Results dated November
14, 2002.
ITEM 5 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: November 14, 2002 By: /s/ Thomas B. Swartz
---------------------
Thomas B. Swartz,
Chairman and Chief Executive Officer
Dated: November 14, 2002 By: /s/ Richard J. Wrensen
----------------------
Richard J. Wrensen,
Chief Financial Officer
Executive Vice President
25
CERTIFICATION
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 September
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, I, Richard J. Wrensen, Chief Financial
Officer of the Company, and I, Dennis R. Konczal, President and Chief
Operating Officer of the Company, certify, pursuant to 18 U.S.C.
<-1-167> 1350, as adopted pursuant to <-1-167> 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.
Date: November 14, 2002
----------------------------------------------------
Thomas B. Swartz
Chairman and Chief Executive Officer
----------------------------------------------------
Richard J. Wrensen
Chief Financial Officer and Executive Vice President
----------------------------------------------------
Dennis R. Konczal
President and Chief Operating Officer
26
Certification
of Form 10Q of Capital Alliance Income Trust Ltd.,
a Real Estate Investment Trust for the
Period Ending September 30, 2002
Under Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934
The undersigned each individually certifies that:
1. I have reviewed this Form 10Q, dated November 14, 2002 of Capital
Alliance Income Trust, Ltd., A Real Estate Investment Trust:
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flow of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
o designed such disclosure controls and procedures to ensure that
material information relating to the registrant, is made known to us by
others within those entities, particularly during the period in which
this report in being prepared;
o evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date); and
o presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
o all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers have indicated in this
quarterly report, whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
[SIGNATURES ON NEXT PAGE]
27
Date: November 14, 2002
----------------------------------------------------
Thomas B. Swartz
Chairman and Chief Executive Officer
----------------------------------------------------
Richard J. Wrensen
Chief Financial Officer and Executive Vice President
----------------------------------------------------
Dennis R. Konczal
President and Chief Operating Officer
28
EXHIBIT "A"
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
rwrensen@calliance.com
www.calliance.com
29
EXHIBIT "B"
CAPITAL ALLIANCE INCOME TRUST LTD. ANNOUNCES
FOURTH QUARTER DIVIDEND AT $1.80 ANNUAL RATE
SAN FRANCISCO-- (BUSINESS WIRE)--October 11, 2002 - Capital Alliance Income
Trust Ltd. ("CAIT") (AMEX: CAA-news) announced that its Board has declared a
fourth quarter dividend of $.45 per Common Share. This is CAIT's second
consecutive quarterly dividend at an annualized rate of $1.80. Based on the
current common stock price of $18.11 per share, the annualized dividend yield is
9.94%. CAIT's total dividends of $1.60 for 2002 represent a 52.4% increase over
its total dividends paid in 2001.
The fourth quarter dividend is payable on November 15, 2002 to shareholders of
record on November 8, 2002.
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, 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, Executive Vice President and CFO, 415/288-9575
rwrensen@calliance.com
www.calliance.com
30
EXHIBIT "C"
CAPITAL ALLIANCE INCOME TRUST LTD.
ANNOUNCES RESULTS OF OPERATIONS
AND EARNINGS FOR THIRD QUARTER
SAN FRANCISCO--(BUSINESS WIRE)--November 14, 2002 - Capital Alliance Income
Trust Ltd ("CAIT") (Amex: CAA - News), a residential mortgage REIT, operating
both mortgage investment and mortgage banking businesses, announced earnings of
$208,685 ($ .29 basic and $.23 diluted) for the three months ending September
30, 2002 and $ 825,250 ($1.35 basic and $1.12 diluted) for the nine months ended
September 30, 2002, as compared to $ 325,662 ($ .48 basic and $ .43 diluted) and
$ 842,131 ($ .97 basic and $ .88 diluted) for the like periods in 2001. Revenues
were $ 639,108 and $2,138,860 for the three and nine month periods ending
September 30, 2002, compared to $829,642 and $2,126,928 for the same periods in
2001. CAIT's board of directors previously declared a cash dividend of $ .45 per
share, payable November 15, 2002 for the fourth quarter of 2002. Based on the
closing stock price on November 13, 2002, CAIT's $ 1.80 annualized common share
dividend yield is 9.9% .
Richard J. Wrensen, Executive Vice President and Chief Financial Officer of CAIT
noted that "the primary cause of the reduction in CAIT's earnings in the third
quarter was the pre-emptive establishment of larger loss reserves by CAIT and
its mortgage banking subsidiary, Capital Alliance Funding Corporation ("CAFC").
Recent macro-economic trends in the California economy including higher
unemployment, escalating bankruptcies, increased delinquencies and heightened
foreclosure rates suggest an increased reserve for potential loan losses is
prudent." During the third quarter, CAIT and CAFC increased their reserves by
$188,000 or approximately .74% of the combined loan portfolio. As of September
30, 2002, the combined loan loss reserve at $490,000 is 1.94% or 194 bps of
CAIT's and CAFC's combined loan portfolio.
Thomas B. Swartz, Chairman and Chief Executive Officer of CAIT also noted "that
both CAIT and CAFC manage risk through their underwriting and investment
process. All loans with a combined loan-to-value ratio of greater than 75% of
the collateral's appraised value at the time of funding are pre-sold into the
secondary mortgage market. Only residential loans with a combined loan-to-value
ratio of 75% or less are retained in CAIT's portfolio of mortgage investments.
On September 30, 2002, the combined loan-to-value of CAIT's portfolio was 67.4%.
The properties owner's unencumbered equity provides a significant buffer to
mitigate potential loan loss.
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, 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.
31