CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
August 14, 1998
SECURITIES & EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Capital Alliance Income Trust Ltd., A Real Estate Investment Trust
-----------------------------------------------------------------
SEC File No. 333-11625
Our File No. 76021.0002
Dear Sir/Madam:
Pursuant to Sections 13 and 15(d) of the Securities Exchange Act of 1934,
enclosed for filing via EDGAR please find a Form 10-Q for the quarter ended June
30, 1998. If you have any questions, please do not hesitate to call.
Very truly yours,
/s/ Thomas B. Swartz
Thomas B. Swartz
Chairman
Enclosures
cc: Stephen C. Ryan, Esq.
50 California Street, Suite 2020, San Francisco, CA 94111
(415) 288-9575 fax (415) 288-9590
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, 1998
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 Identification Number)
incorporation or organization)
50 California Street
Suite 2020
San Francisco, California 94111
-------------------------------------- -----------
(Address of principal executive office) (zip code)
(415) 288-9575
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 31, 1998, the aggregate market value of the registrant's shares of
Common Stock, $.01 par value, held by non affiliates of the registrant was
approximately $10,125,526. At that date 1,265,690 shares of common stock were
outstanding. The shares are approved for listing on the American Stock Exchange
upon notice of issuance, but will not trade publicly until the conclusion of the
Registrant's current "best efforts" public offering.
PART I
ITEM 1.
FINANCIAL STATEMENTS
2
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Balance Sheets
(Unaudited) (Audited)
June 30, 1998 December 31, 1997
------------- -----------------
ASSETS
Cash and cash equivalents ........................................... $ 127,616 $ 1,748,485
Restricted cash ..................................................... 231,792 205,356
Warehouse lines of credit to related parties ........................ 4,213,750 2,185,957
Accounts receivable ................................................. 189,410 95,207
Investments in affiliates ........................................... 633,647 469,150
Mortgage notes receivable ........................................... 8,005,735 4,915,186
Real estate held for sale ........................................... 675,525 322,550
Organization costs (net of accumulated amortization of $9,753 at
June 30, 1998 and $7,551 at December 31, 1997) .............. 12,276 14,478
Deferred offering costs ............................................. 59,949 176,050
------------ ------------
Total assets ........................................................ $ 14,149,700 $ 10,132,419
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks ........................................ $ 231,792 $ 205,356
Due to affiliates .............................................. (91,895) 82,966
Other liabilities .............................................. 75,981 22,774
Mortgage notes payable ......................................... 258,671 0
------------ ------------
Total liabilities ................................................... 474,549 311,096
------------ ------------
Stockholders' Equity
Preferred stock, $.01 par value (liquidation value $9.50 ...... 6,413 6,413
per share); 675,000 shares authorized; 641,283 shares
issued and outstanding at June 30, 1998 and
December 31, 1998 respectively ......................
Additional paid in capital -preferred stock ................... 5,868,711 5,868,711
Less 47,761 preferred shares held in treasury ................. (448,953) --
Common stock, $.01 par value; 5,000,000 ....................... 11,808 5,628
shares authorized ; 1,180,800 and 562,760 shares
issued and outstanding at June 30, 1998 and
December 31, 1998 , respectively
Additional paid in capital - common stock ..................... 8,237,172 3,940,571
------------ ------------
Total stockholders' equity .......................................... 13,675,151 9,821,323
------------ ------------
Total liabilities and stockholders' equity .......................... $ 14,149,700 $ 10,132,419
============ ============
See accompanying notes to financial statements.
3
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
Interest income ........... $325,428 $182,781 $583,988 $328,050
Origination income ........ 35,869 24,608 61,041 32,956
Other income .............. 3,150 25,867 11,922 46,917
-------- -------- -------- --------
Total revenues ........ 364,447 233,256 656,951 407,923
-------- -------- -------- --------
EXPENSES
Loan servicing and other
expenses to related party 89,155 29,179 163,147 66,076
Interest expense .......... 683 39,959 638 39,421
Provision for loan losses . -- -- -- --
Operating expenses of
real estate owned ....... 2,961 19,147 5,851 26,244
General and administrative 32,570 10,592 69,103 28,602
-------- -------- -------- --------
Total expenses ...... 125,369 98,877 238,739 160,343
-------- -------- -------- --------
NET INCOME .................... $239,078 $134,379 $418,212 $247,580
======== ======== ======== ========
BASIC EARNINGS PER
COMMON SHARE .............. $ 0.086 -- $ 0.130 --
DILUTED EARNINGS PER
COMMON SHARE .............. $ 0.067 -- $ 0.087 --
See accompanying notes to financial statements.
4
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ............................................. $ 418,212 $ 247,580
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization ......................................... 2,202 2,160
(Increase) decrease in accounts receivable .......... (94,203) (151,584)
Accrued interest capitalized to real estate owned .... -- (13,826)
Increase (decrease) in loan loss reserve ............. -- --
Increase (decrease) in due to affiliates ............. (174,861) 24,943
Increase (decrease) in other liabilities ............. 53,207 136,085
----------- -----------
Net cash provided by (used in) operating activities 204,557 245,358
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash ................. (26,436) (15,575)
Increase (decrease) in mortgage note holdbacks ......... 26,436 15,575
(Increase) decrease in warehouse lines of credit ....... (2,027,833) --
(Increase) in investments .............................. (164,493) --
Investments in mortgage notes receivable ............... (6,038,500) (1,890,093)
Repayments of mortgage notes receivable ................ 2,947,951 2,227,758
Net proceeds from sale of foreclosed property .......... -- 485,658
Capital costs of foreclosed property ................... -- (13,219)
----------- -----------
Net cash provided by (used in) investing ............. (5,282,875) 810,104
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of shares ................................... (448,953) --
Proceeds from issuance of shares ....................... 4,944,320 --
Payment of mortgage notes payable ...................... -- (7,288)
Organizational and offering costs ...................... (583,308) (142,884)
Dividends paid ......................................... (454,610) (299,216)
----------- -----------
Net cash provided by (used in) financing activities .. 3,457,449 (449,388)
----------- -----------
NET INCREASE (DECREASE) IN CASH ............................. (1,620,869) 606,074
CASH AT BEGINNING OF PERIOD ................................. 1,748,485 66,798
----------- -----------
CASH AT END OF PERIOD ....................................... $ 127,616 $ 672,872
=========== ===========
SUPPLEMENTAL CASHFLOW INFORMATION:
Interest expense paid .................................. $ 683 --
Taxes paid ............................................. $ 13,371 --
See accompanying notes to financial statements.
5
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 1998 and 1997
(Unaudited)
1. Organization
------------
Capital Alliance Income Trust Ltd., A Real Estate Investment Trust (the
"Trust"), a Delaware corporation, primarily invests in mortgage loans
secured by real estate. The Trust was formed December 12, 1995 to
facilitate the combination of the mortgage investment operations of
Capital Alliance Income Trust I, a Delaware business trust, and Capital
Alliance Income Trust II, a Delaware business trust, (collectively
referred to as the "Predecessors", individually referred to as "CAIT I"
and "CAIT II", respectively). CAIT I and CAIT II were both privately-held
mortgage investment trusts which invested primarily in loans secured by
deeds of trust on one-to-four unit residential properties. The Manager,
Capital Alliance Advisors, Inc. (the "Manager") originates, services and
sells the Trust's loans.
Effective February 12, 1997, the Trust registered its common shares with
the Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended in connection with a"best efforts" offering of up to
1,500,000 common shares at $8.00 per share and warrants to purchase an
additional 150,000 common shares at $5.60 per share.
2. Basis of presentation
---------------------
The accompanying financial statements include the accounts of the Trust.
The financial information presented has been prepared from the books and
records without audit. The accompanying financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and the footnotes required by generally
accepted accounting principles for complete statements. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such financial
statements, have been included.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
These financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31,
1997 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, 1997 and June 30, 1998 represent the the financial statements of the
Trust.
6
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 1998 and 1997
(Unaudited)
3. Summary of significant accounting policies
------------------------------------------
Cash and cash equivalents. Cash and cash equivalents include cash and
liquid investments with an original maturity of three months or less. The
Trust deposits cash in financial institutions insured by the Federal
Deposit Insurance Corporation. At times, the Trust's account balances may
exceed the insured limits. Restricted cash represents segregated cash and
is to be disbursed only to mortgage loan borrowers upon completion of
certain improvements to the secured property (see Note 4).
Revenue recognition. Interest income is recorded on the accrual basis of
accounting in accordance with the terms of the loans. When the payment of
principal or interest is 90 or more days past due, management reviews the
likelihood that the loan will be repaid. For these delinquent loans,
management continues to record interest income and establishes a loan loss
reserve as necessary to protect against losses in the loan portfolio
including accrued interest.
Loan loss reserve. Management reviews its loan loss provision periodically
and the Trust maintains an allowance for losses on mortgage notes
receivable at an amount that management believes is sufficient to protect
against losses in the loan portfolio given the individual loan to value of
the Trust's loan portfolio based on the latest independent appraisals.
Accounts receivable deemed uncollectible are written off or reserved. The
Trust does not accrue interest income on impaired loans (Note 5).
Investments. The Trust previously held an investment in Sierra Capital
Acceptance ("SCA"). On December 31, 1997 SCA completed a tax free-merger
with Sierra Capital Funding, LLC ("SCF"), a Delaware Limited Liability
Company which originates and sells residential mortgages, by exchanging
all the Class A and Class B shares of SCA for the common and preferred
shares of the Sierra Division of SCF. SCA will continue operations as a
separate operating division of SCF. The Trust owns 99% of the non-voting
preferred shares of the Sierra Division of SCF. SCF-Sierra Preferred
shares receive a 15% return per annum. SCSI Corporation, a related party,
owns 99% of the common shares of the Sierra Division of SCF and maintains
voting control. The SCF-Sierra common shareholders are allocated all net
profits and losses and are required to contribute or loan additional
capital to cover any operating losses. SCF is taxed as a partnership. The
Trust accounts for its investment in SCF and its divisions under the
equity method.
On April 11, 1997 the Trust formed its non-qualified REIT subsidiary,
Capital Alliance Funding Corporation ("CAFC"), to conduct its mortgage
conduit business. The Trust owns 100% of the outstanding Series "A"
Preferred Stock (2,000 shares of non-voting stock) in CAFC. The Trust's
Manager owns 100% of the Common Shares (1,000 shares) of CAFC and has 100%
voting control. The Trust's Manager also manages CAFC and provides
mortgage origination and sale and services for CAFC. The Trust accounts
for its investment in CAFC under the equity method.
On January 30, 1998 the Trust invested $225,000 in Equity 1-2-3, which is
evidenced by a subordinated debenture that earns 15% per annum. Equity
1-2-3 is a separate operating division of SCF that originates and sells
residential mortgages on a retail basis. The Trust accounts for the
investment income from Equity 1-2-3 as interest.
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
7
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 1998 and 1997
(Unaudited)
and applicable Treasury Regulations. Therefore, the Trust will not be
subject to federal corporate income taxes, if the Trust distributes at
least 95% of its taxable income to its shareholders. To qualify as a REIT,
the Trust must elect to be so treated and must meet on a continuing basis
certain requirements relating to the Trust's 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 six-month period ended June 30, 1997, the distributions per
preferred share are allocated 83% as ordinary income and 17% as a return of
capital for tax purposes. For the six month period ended June 30, 1998, the
distributions per preferred share are allocated 100% ordinary income and
the common share distribution is allocated 76% ordinary income and a 24%
return of capital for tax purposes.
Fair value of financial instruments. For cash and cash equivalents, the
carrying amount is a reasonable estimate of fair value. For mortgage note
receivables, fair value is estimated by discounting the future cash flows
using the current interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. It was determined that the difference between the carrying
amount and the fair value of the mortgage notes receivable is immaterial.
Organizational costs. Organization costs are capitalized and amortized on a
straight-line basis over five years.
Deferred offering costs. Deferred offering costs relate to an initial
public offering of common stock. While the offering is underway, these
costs will be offset pro-rata against the proceeds from the issuance of
common stock and as a reduction of stockholder's equity.
Real estate owned. Real estate owned results from foreclosure of loans and
at time of foreclosure is recorded at the lower of carrying amount or fair
value of the property minus estimated costs to sell. At this time senior
debt to which the asset is subject is reported as mortgage payable.
Subsequent to foreclosure, the foreclosed asset value is periodically
reviewed and is adjusted to fair value. No depreciation is taken on the
real estate held for sale. Income and expenses related to real estate owned
are recorded as interest income, interest expense and general and
administrative expenses on the Statements of Operations.
Earnings per share. The Preferred Shares receive an annual preferred
allocation of income and distributions. Prior to the December 4, 1997
issuance of Common Shares, the Preferred Shares received
8
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 1998 and 1997
(Unaudited)
100% of the Trust's net income. After completion of the current offering of
common shares and after meeting such preference, at least 95% of any
additional income earned will be distributed to the Common Shares, until
the distribution on the Common Shares matches that of the Preferred Shares
(see Note 9).
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 only to such borrowers upon completion
of certain improvements on the secured property. As of June 30, 1997 and
June 30, 1998, mortgage note holdbacks from the consummation of mortgage
loans made amounted to $ 80,566 and $231,792, respectively.
5. Mortgage notes receivable
-------------------------
Mortgage notes receivable represent transactions with customers in which
the Trust has invested in home equity loans on residential real estate.
The Trust is subject to the risks inherent in finance lending including
the risk of borrower default and bankruptcy.
Mortgage notes receivable are stated at the principal outstanding.
Interest on the mortgages is due monthly and principal is due as a balloon
payment at loan maturity. The 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 loan portfolio may be
affected by changes in the economy or other conditions of the geographical
area. A portion of the notes are secured by a second position on the
underlying properties and loans are non-conforming loans to B/C-credit
borrowers.
The Trust measures impairment based on the fair value of the related
collateral since all loans subject to this measurement are collateral
dependent. There was no investment in impaired loans for all periods
presented.
6. Accounts receivable
-------------------
Accounts receivable consists of accrued interest on mortgage notes
receivable and other amounts due from borrowers.
7. Mortgage notes payable
----------------------
As of June 30, 1998 the Trust held a mortgage notes payable of $258,671.
8. Related party transactions
--------------------------
The Manager, which is owned by several of the Trustees and their
affiliate, contracted with the Trust to provide administration services
and receives a fee for these services from the Trust. The Manager is
entitled to a per annum Base Management Fee payable monthly in arrears of
an amount equal to 1% of the Gross Mortgage Assets of the Trust (computed
monthly) plus 1/2% of cash or money-market or equivalent assets and
incentive compensation for each fiscal quarter, equal to 25% of the net
income of the Trust in excess of an annualized return on equity for such
quarter equal to the ten year U.S. Treasury Rate plus 2%,
9
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 1998 and 1997
(Unaudited)
provided that the payment of such incentive compensation does not reduce
the Trust's annualized return on equity for such quarter to less than the
ten year U.S. Treasury Rate plus 2% and amounts payable on account of the
Series A Preferred Preference Amount have been paid. The Manager is also
entitled to reimbursement for clerical and administrative services at cost
based on relative utilization of facilities and personnel. Additionally,
the Manager will receive a Loan Origination and Servicing Fee payable
monthly equal to 2% of the Gross Mortgage Assets together with certain
miscellaneous fees from borrowers customarily payable in connection with
origination and servicing of mortgages and fees for other services
requested by the Trust. The Manager bears all expenses of services for
which it is separately compensated. During the six months ended June 30,
1997 and June 30, 1998, the Trust respectfully paid $66,076 and $163,147 to
the Manager.
As described in Note 3, the Trust holds an investment in Sierra Capital
Funding and receives a 15% guaranteed return per annum. For each six months
ended June 30, 1997, and June 30, 1998 the Trust earned interest of $15,000
from the investment.
As described in Note 3, the Trust has a non-qualified REIT subsidiary,
Capital Alliance Funding Corporation, which commenced operations in the
third quarter of 1997. For the six months ended June 30, 1987, the Trust
was allocated a loss of $60,052 from this investment.
As described in Note 3, the Trust holds an investment in Equity 1-2-3 and
receives a 15% guaranteed return per annum. Since the investment date
through June 30, 1998 the Trust has earned interest of $14,062 from this
investment.
9. Preferred stock and common stock
--------------------------------
The Preferred Shares are entitled to a distribution preference in an amount
equal to an annualized return on the Net Capital Contribution of Preferred
Shares at each dividend record date during such year (or, if the Directors
do not set a record date, as of the first day of the month) equal to the
lesser of 10.25% or 150 basis points over the Prime Rate (determined on a
not less than quarterly basis). The distribution preference on the
Preferred Shares is not cumulative.
After declaration of dividends for a given quarter to the Preferred Shares
in the amount of the distribution preference, no further distributions may
be declared on the Preferred Shares for the quarter until the current
Distributions declared on each Common Share for that quarter equals the
distribution preference for each Preferred Share for such quarter. Any
additional distributions generally will be allocated such that the amount
of distributions per share to the holders of the Preferred Shares and
Common Shares for the quarter are equal.
Holders of Preferred Shares are entitled to receive all liquidating
distributions until the aggregate adjusted net capital contribution of all
Preferred Shares has been reduced to zero. Thereafter, holders of Common
Shares are entitled to all liquidation distributions until the aggregate
adjusted net Capital contributions of all Common Shares has been reduced to
zero. Any subsequent liquidating distributions will be allocated among the
holders of the Common Shares and Preferred Shares pro rata.
10
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 1998 and 1997
(Unaudited)
The Preferred Shares, at the option of the Board of Directors, are
redeemable by a Shareholder annually on June 30 for redemption requests
received by May 15 of such year. The Board of Directors may in their sole
discretion deny, delay, postpone or consent to any or all requests for
redemption. The redemption amount to be paid for redemption of such
Preferred Shares is the adjusted net capital contribution plus unpaid
accrued dividends, divided by the aggregate net capital contributions plus
accrued but unpaid dividends attributable to all Preferred Shares
outstanding, multiplied by the net asset value of the Trust attributable
to the Preferred Shares which shall be that percentage of the Trust's net
asset value that the aggregate adjusted net capital contributions of all
Preferred Shares bears to the adjusted net capital contributions of all
Shares outstanding. A liquidation charge is charged by the Trust in
connection with each redemption as follows: 1% of redemption amount in
1998, and none thereafter.
11
PART I
ITEM 2.
MANAGEMENT' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
12
MANAGEMENT' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial statements of Capital Alliance Income Trust Ltd., A Real
Estate Investment Trust (the "Trust") dated herein were prepared from the
unaudited books, ledgers and records of the Trust.
General
Predecessors: The Combination. The Trust resulted from the
consolidation of CAIT I and CAIT II (the "Combination") on April 30, 1996. The
Trust exchanged shares of preferred stock for all of the outstanding whole
shares of CAIT I and CAIT II at April 30, 1996. Holders of the fractional shares
of CAIT I and CAIT II received cash in lieu of fractional shares of preferred
stock of the Trust. Thereafter, all assets and liabilities of CAIT I and CAIT II
were transferred to the Trust. CAIT I and CAIT II were both privately-held
mortgage investment trusts which invested primarily in loans secured by deeds of
trust on residential property. The Trust was incorporated in Delaware on
December 12, 1995. CAIT II was formed October 18, 1994 and began its first year
of operations in 1995. CAIT I and CAIT II were formed and managed by Capital
Alliance Advisors, Inc. ("CAAI") which also manages the Trust and originates,
services and sells the Trust's mortgage loans.
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 (or
less) credit rated home equity loans secured by deeds of trust. In general, B
and C credit rated home equity loans are made to borrowers with lower credit
ratings than borrowers of higher credit quality, such as A credit rated home
equity loans. Home equity loans rated A-, B/C (or less) tend to have higher
rates of loss and delinquency, but higher rates of interest than borrowers of
higher credit quality.
Management believes there is increased demand for high-yielding
non-conforming mortgage loans caused by a demand by investors for higher yields
due to low interest rates over the past few years and increased securitization
of high-yielding non-conforming mortgage loans by the investment banking
industry.
Loan Origination and Loan Servicing. Mortgage loan origination consists of
establishing a relationship with a borrower or his broker, obtaining and
reviewing documentation concerning the credit rating and net worth of borrowers,
inspecting and appraising properties that are proposed as the subject of a home
equity loan, processing such information and underwriting and funding the
mortgage loan. Mortgage loan servicing consists of collecting payments from
borrowers, accounting for interest payments, holding escrow funds until
fulfillment of mortgage loan requirements, contacting delinquent borrowers,
foreclosing in the event of unremedied defaults and performing other
administrative duties. Mortgage loan origination and loan servicing were
provided to the Trust by CAAI, its Manager.
Commitments and Contingencies. As of June 30, 1998, the Trust's loan
portfolio included total loans of $8,005,735 of which $513,616 representing 6.4%
of the loans were delinquent. There were no delinquent loans which were in the
process of foreclosure at June 30, 1998. In assessing the collectibility of
these delinquent mortgage loans, management estimates a net gain will be
realized upon sale of the properties securing these loans if it is necessary to
foreclose the mortgage loans due to the Trust. Management's estimate is based on
an anticipated sales price of the property based on the latest appraised value
of the property discounted at 10% less the sum of pre-existing liens, costs of
sale, the face amount of the mortgage loan and accrued interest receivable. The
Trust generally issues loan commitments only on a conditional basis and
generally funds such loans promptly upon removal of any conditions. Accordingly,
the Trust did not have any commitments to fund loans as of June 30, 1998 and
June 30, 1997.
13
Results of Operations
The results of operations of the Trust for six months ended June 30, 1998
have been significantly impacted by the issuance of common stock and the
investment of the common stock proceeds in additional mortgage notes receivable
and warehouse lines of credit. The historical information presented herein is
not necessarily indicative of future operations.
Three months and six months ended June 30, 1998 and 1997. Revenues for the
second quarter increased to $364,447 as compared to $233,256 for the same period
in the previous year. Revenues for the six months of 1998 increased to $656,951
as compared to $407,923 for the same period of the previous year. The 1998
interest income and origination income increased for the quarter and six months,
compared to the same period in the previous year. The 1998 other income,
however, was lower for both the quarter and the six month period, compared to
the same period in the previous year.
Expenses for the second quarter 1998 increased to $125,369 compared to
$98,877 for the same period in the previous year. For the six month period,
expenses increased to $238,739 compared to $160,343 for the previous year. The
increase in the second quarter 1998 compared to second quarter 1997 is primarily
due to the greater management and servicing fees of administering a larger
mortgage portfolio. The increase in the six months of 1998 compared to 1997 is
similarly explained.
Inflation
The financial statements of the Trust, prepared in accordance with
generally accepted accounting principles, report the Trust's financial position
and operating results in terms of historical dollars and does not consider the
impact of inflation. Inflation affects the Trust's operations primarily through
its effect on interest rates, since interest rates normally increase during
period of high inflation and decrease during periods of low inflation. When
interest rates increase, the demand for mortgage loans and a borrower's ability
to qualify for mortgage financing may be adversely affected.
Liquidity and Capital Resources
The liquidity of the Trust will be based upon the need to fund investments
in mortgage loans. In previous years, the Trust's mortgage investment operations
have been funded by capital contributions and the payoff of prior loans. The
major portion of the proceeds from issuance of common stock in the Trust's
current Offering will be used to fund future investments in mortgage loans by
the Trust's Mortgage Investment Business. The Trust's liquidity requirements
will also be funded by periodical payoffs of existing loans which are generally
short term in duration, by the sale of foreclosed properties and additional
capital from the proceeds of the Trust's current Offering. Management believes
that the Trust's liquidity is sufficient to meet its cash requirements for the
next twelve months regardless of whether the Minimum Subscription Level in the
Trust's current Offering is achieved. Restrictions on cash attributed to
holdbacks do not significantly impact the Trust's liquidity.
Net cash provided by operating activities during the six months ended June
30, 1998 and 1997 was $204,557 and $245,358, respectively. Net cash for all
periods was positively affected by improved marketing conditions and the volume
of loan activity in 1997.
Net cash provided by (used in) investing activities for the six months
ended June 30, 1998 and 1997 was $(5,282,875) and $810,104, respectively. The
large increase in 1998 compared to the prior year is due to the larger volume of
mortgage loans and expanded demand for warehouse lines of credit.
Net cash (used in) provided by financing activities during the six months
ended June 30, 1998 and 1997 was $3,457,449 and $(449,388), respectively. The
increase in 1998 is primarily due to issuance of common shares. The decrease in
1997 is primarily due to the offering costs related and dividend payments.
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The Trust will use the net proceeds of its current public offering to
provide additional funding for the Trust's Mortgage Investment Business.
Additionally, CAFC has a $3,000,000 warehouse line of credit from Warehouse
Lending Corporation of America, guaranteed by the Trust. Management believes
that cash flow from operations and the net proceeds of the public offering and
of loans that are paid off plus the establishment of the warehouse lines of
credit for the Mortgage Conduit Business will be sufficient to meet the
liquidity needs of the Trust's businesses for the next twelve months.
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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 three months ended June 30, 1998 the number of common
shares outstanding increased from 827,300 to 1,180,800. On June
29, 1998 the Trust acquired 47,761 preferred shares as treasury
stock
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Trust's 1998 Annual Meeting, originally scheduled for June 24,
1998, was postponed and was held on July 10, 1998. At the annual
meeting, Directors Dennis R. Konczal and Stanley C. Brooks were
reelected as Class II Directors for a three-year term. Directors
Thomas B. Swartz, Harvey Blomberg and Douglas A. Thompson, whose
terms continue for two, two and one years, respectively, continue
as Directors.
At the annual meeting, the adoption by the Trust's Board of
Directors of the Capital Alliance Income Trust Ltd. 1998 Incentive
Stock Option Plan was duly approved by the shareholders with
664,602 shares voting in favor of such approval, 87,208 voting
against and 67,430 abstaining. The maximum number of shares of
Common Stock that may be subject to Options granted as of the date
of the closing of the Trust's initial public offering ("IPO") (the
"IPO Closing Date") is 10% of the number of shares of Common Stock
issued and outstanding on the IPO Closing Date. The maximum
aggregate number of shares of Common Stock that may be issued
pursuant to the exercise of Options granted during the term of the
Option Plan is 247,500.
The purpose of the Option Plan is to attract, retain and motivate
key employees, officers and directors of the Manager, as well as
unaffiliated directors of the Trust, by providing them with an
equity participation in the Trust. In addition, the Board believes
that the adoption of the plan will align the Manager's employees
and officers interests with those of the Trust's shareholders.
Accordingly, since the Trust has no employees, the Option Plan
provides for the grant of non-statutory incentive stock options to
the employees, officers, and directors of the Trust's Manager, to
other providers of services to the Trust, and to the Trust's
unaffiliated directors.
The shareholders also ratified the selection of Novogradac &
Company LLP as independent public accountants for the Trust with
790,182 shares voting in favor of such approval, 26,391 against
and 19,058 abstaining.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 REPORTS ON FORM 8-K
(a) Form 8-K
The Registrant has not filed any reports on Form 8-K during the
quarter ended June 30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Capital Alliance Income Trust Ltd.,
A Real Estate Investment Trust
Dated: August 13, 1998 By: /s/ Richard J. Wrensen
----------------------
Richard J. Wrensen,
Chief Financial Officer
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