CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
November 15, 1999
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
September 30, 1999. 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 o San Francisco, CA 94111
(415) 288-9575 o 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 September 30,
1999
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 November 15, 1999, the aggregate market value of the registrant's shares
of Common Stock, $.01 par value, held by non affiliates of the registrant was
approximately $4,639,813. At that date 1,484,740 shares of common stock were
outstanding. The shares are listed and publicly traded on the American Stock
Exchange.
PART I
ITEM 1.
FINANCIAL STATEMENTS
2
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Balance Sheets
(unaudited) (audited)
September 30, 1999 December 31, 1998
ASSETS
Cash and cash equivalents ........................................... $ 433,257 $ 570,710
Restricted cash ..................................................... 405,767 594,693
Accounts receivable ................................................. 260,552 193,241
Due from affiliates ................................................. 348,811 103,301
Notes receivable:
Note receivable to related party ............................... -- 225,000
Warehouse lines of credit to related parties ................... 2,447,926 5,157,098
Mortgage notes receivable ...................................... 11,041,994 8,986,645
Allowance for loan losses ...................................... (15,000) (170,000)
--------------------------
Net receivable ............................................ 13,474,920 14,198,743
Real estate owned ................................................... 305,626 149,663
Security deposits ................................................... 37,859 32,133
Investments in affiliates ........................................... 633,915 831,936
Origination costs ................................................... 120,217 120,217
Organization costs (net of accumulated amortization of $15,258
at September 30, 1999 and $11,955 at December 31, 1998) ..... 7,043 10,346
--------------------------
Total assets ........................................................ $ 16,027,967 $ 16,804,983
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks ........................................ $ 405,767 $ 594,693
Other liabilities .............................................. 126,747 162,839
--------------------------
Total liabilities ................................................... 532,514 757,532
--------------------------
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 631,757 outstanding at September 30, 1999
and December 31, 1999
Additional paid in capital -preferred stock ................... 5,868,711 5,868,711
Less: 9,526 preferred shares held in treasury ................. (86,944) (86,944)
Common stock, $.01 par value; 5,000,000 shares ................ 14,847 14,847
authorized ; 1,484,740 shares issued and outstanding
at September 30, 1999 and December 31,1998
Additional paid in capital - common stock ..................... 9,692,426 10,244,424
--------------------------
Total stockholders' equity .......................................... 15,495,453 16,047,451
--------------------------
Total liabilities and stockholders' equity .......................... $ 16,027,967 $ 16,804,983
==========================
See accompanying notes to financial statements.
3
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
Interest income ....................... $ 383,943 $ 447,295 $ 1,216,954 $ 1,137,826
Interest income from affiliates ....... 40,387 -- 252,777 --
Investment income from affiliates ..... (183,501) 39,799 (599,735) (5,703)
Other income .......................... 1,884 8,025 7,320 19,947
----------- ----------- ----------- -----------
Total revenues .................... 242,713 495,119 877,316 1,152,070
----------- ----------- ----------- -----------
EXPENSES
Loan servicing fees to related party .. 69,676 70,406 220,029 176,250
Management fees to related party ...... 35,638 43,949 111,646 101,252
Interest expense ...................... 3,304 17,173 87,424 17,811
Provision for loan losses ............. 15,000 14,000 92,500 14,000
Operating expenses of real estate owned 2,743 14,761 13,577 31,325
Taxes ................................. 6,000 10,571 16,300 23,942
General and administrative ............ 11,526 8,212 88,582 53,231
----------- ----------- ----------- -----------
Total expenses .................. 143,887 179,072 630,058 417,811
----------- ----------- ----------- -----------
Income Before Loss on Real Estate Owned ..... 98,826 316,047 247,258 734,259
Loss on Real Estate Owned ............. -- (1,779)
NET INCOME .................................. $ 98,826 $ 316,047 $ 245,479 $ 734,259
=========== =========== =========== ===========
PREFERRED DIVIDENDS ......................... $ 141,290 $ 142,898 $ 418,866 $ 447,508
BASIC EARNINGS PER
COMMON SHARE ........................ $ 0.03 $ 0.13 $ 0.12 $ 0.27
DILUTED EARNINGS PER
COMMON SHARE ........................ $ 0.03 $ 0.11 $ 0.12 $ 0.18
See accompanying notes to financial statements.
4
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ............................................ $ 245,479 $ 734,259
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization .......................................... 3,303 3,303
(Increase) decrease in accounts receivable ........... (67,312) (92,069)
Increase (decrease) in loan loss reserve ............. (155,000) 14,000
(Increase) decrease in security deposits .............. (5,726) --
Increase (decrease) in due to / due from affiliates .. (245,509) 136,438
Increase (decrease) in other liabilities ............ 3,247 50,744
----------- -----------
Net cash provided by (used in) operating activities (221,518) 846,675
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash ................ 188,926 (287,006)
Increase (decrease) in mortgage note holdbacks ........ (188,926) 287,006
(Increase) decrease in warehouse lines of credit ...... 2,709,172 (2,263,039)
(Increase) in investments ............................. 198,021 (196,796)
Increase in related party note receivable ............. 225,000 --
Net investments in mortgage notes receivable .......... (2,055,349) (4,808,122)
Capital costs of foreclosed property .................. (155,964) (426,975)
----------- -----------
Net cash provided by (used in) investing .......... 920,880 (7,694,932)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of shares .................................. -- (238,944)
Proceeds from issuance of shares ...................... -- 6,479,545
Payment of mortgage notes payable ..................... (39,339) 253,329
Organizational and offering costs ..................... -- 176,050
Preferred dividends paid .............................. (418,867) (447,508)
Common dividends paid ................................. (378,609) (322,967)
----------- -----------
Net cash provided by (used in) financing activities . (836,815) 5,899,505
----------- -----------
NET INCREASE (DECREASE) IN CASH ............................. (137,453) (948,752)
CASH AT BEGINNING OF PERIOD ................................. 570,710 1,748,485
----------- -----------
CASH AT END OF PERIOD ....................................... $ 433,257 $ 799,733
=========== ===========
SUPPLEMENTAL CASHFLOW INFORMATION:
Interest expense paid ................................. $ 94,992 $ 17,811
Taxes paid ............................................ $ 16,300 $ 23,942
See accompanying notes to financial statements.
5
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 1999 and 1998
(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. 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. On September 30, 1998
the offering closed and a total of 1,484,740 common shares were issued.
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,
1998 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, 1998 and September 30, 1999 represent the the financial
statements of the Trust.
3. Summary of significant accounting policies.
-------------------------------------------
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the accounts reported in financial
statements and the accompanying notes. Actual results could differ from
those estimates.
6
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 1999 and 1998
(Unaudited)
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.
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. A
portion of the portfolio is secured by second trust deeds on real estate.
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. Accounts receivable deemed
uncollectible are written off or reserved. The Trust does not accrue
interest income on impaired loans (Note 5). As of September 30, 1998 and
September 30, 1999 the loan loss reserves were $14,000 and $15,000,
respectively. The 1998 reserve is an estimate of outstanding loan
impairments. The 1999 reserve reflects the estimated remaining balance for
loan impairments after the Trust's recognition in September 1999 of a loss
on its loan to an affiliated retail mortgage origination company which was
applied against the loan loss reserve.
Investments. Prior to December 31, 1997 the Trust 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
Sierra common and preferred shares of SCF. SCA will continue operations as
a separate operating division of SCF. The Trust owns 100% of the
non-voting Sierra preferred shares of SCF. SCF-Sierra Preferred shares
receive 15% interest per annum. Sierra Capital Services, Inc., a related
party, owns 99% of the Sierra common shares of SCF and maintains voting
control.
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, which
constitute a 99% economic interest in CAFC. The Trust's Manager owns 100%
of the Common Shares (1,000 shares) of CAFC, which constitute a 1%
economic interest 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.
7
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 1999 and 1998
(Unaudited)
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 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 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 nine-month period ended September 30, 1998, the distributions per
preferred share are allocated 100% as ordinary income and the common share
distribution is allocated 76% ordinary income and 24% as a return of
capital for tax purposes. For the period ended September 30, 1999, the
distributions per preferred share are allocated 22% ordinary income and
78% a return of capital and the common share distribution is allocated
100% a 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.
Origination costs. Origination costs relating to mortgage notes receivable
are deferred and recognized as an adjustment to yield over the term of the
notes.
Organizational costs. Organization costs are capitalized and amortized on
a straight-line basis over five years.
8
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 1999 and 1998
(Unaudited)
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 other income, interest expense and general and
administrative expenses on the Statements of Operations.
Reclassifications. Certain 1998 amounts have been reclassified to conform
with 1999 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 only to such borrowers upon completion
of certain improvements on the secured property. As of September 30, 1998
and September 30, 1999, mortgage note holdbacks from the consummation of
mortgage loans made amounted to $594,693 and $405,767, respectively.
5. 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.
The Trust is subject to the risks inherent in finance lending including
the risk of borrower default, changes in value of the underlying
collateral 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. As of September 30, 1998 and September 30, 1999,
the Trust held mortgage notes receivable of $8,986,645 and $11,041,994,
respectively.
6. Accounts receivable.
Accounts receivable consists of accrued interest on mortgage notes
receivable and other amounts due from borrowers.
9
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 1999 and 1998
(Unaudited)
7. 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 also
entitled to reimbursement for clerical and administrative services at cost
based on relative utilization of facilities and personnel. The Manager
bears all expenses of services for which it is separately compensated. The
Manager 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 Asset") of the Trust plus one-twelfth
(1/12) of one half percent (1/2%) of the book value of the non-mortgage
assets of the Trust computed at the end of each month. The Trust paid the
Manager a management fee of $101,252 and $111,646 for the nine months
ended September 30, 1998 and September 30, 1999, respectively.
The Manager also receives a loan origination and servicing fee equal to
one-twelfth (1/12) of 2% annually of the Gross Mortgage Assets of the
trust computed at the end of each month. The Trust paid the Manager a loan
origination and servicing fee of $176,250 and $220,029 for the nine months
ended September 30, 1998 and September 30, 1999, respectively.
The Manager also receives 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% 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% after the preferred dividend
has been paid. As of September 30, 1998 and September 30, 1999 no
incentive compensation was paid.
As described in Note 3, the Trust holds an investment in Sierra Capital
Acceptance, a division of Sierra Capital Funding LLC, and receives a 15%
guaranteed return per annum. For each of the nine month periods ended
September 30, 1998, and September 30, 1999 the Trust earned interest of
$22,500 from the investment.
As described in Note 3, the Trust has a non-qualified REIT subsidiary,
Capital Alliance Funding Corporation. For the nine months ended September
30, 1998 and September 30, 1999 the Trust under the equity method of
accounting was allocated investment losses of $5,703 and $599,735,
respectively. The subsidiary's nine month 1998 loss, which resulted from
the disposition of real estate owned, was $83,663. The nine month 1999
loss is primarily attributable to expenses incurred in the Trust's planned
expansion of the subsidiary's wholesale loan origination capacity.
The Trust, on February 1, 1998 and February 10, 1999, advanced a total of
$247,500 at 15% per annum, payable quarterly, to Equity 1-2-3, a division
of Sierra Capital Funding LLC, a related party, and recorded the advances
as related party notes receivable. As of September 30, 1998, $22,500 was
earned on this note, but for the nine months ending September 30, 1999,
the Trust recognized no interest income from the note. In July 1999, the
Trust disbanded its retail mortgage origination activities conducted by
Equity 1-2-3 and in September 1999, wrote off this related party note and
applied it against the Trust's loan loss reserve. Equity 1-2-3 is
continuing the liquidation of its portfolio of home mortgages.
10
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 1999 and 1998
(Unaudited)
8. 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).
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. The distribution preference of
the Preferred Shares is not cumulative.
Preferred Shares 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 the holders
of the Common Shares and Preferred Shares pro rata.
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. No preferred shares were redeemed in 1999.
The Trust has the power to redeem or prohibit the transfer of a sufficient
number of common and/or Preferred shares or the exercise of warrants and
to prohibit the transfer of shares to persons that would result in
violation of the Trust's share holding requirements. In addition, the
Bylaws provide that no shareholder may own more than 9.8% of the total
outstanding shares after the conclusion of the initial public offering of
Common Shares.
One Shareholder Warrant was issued in the Trust's initial public offering
of Common Shares for every 10 Common Shares purchased. Each shareholder
Warrant entitles the holder to purchase one Common Share. The exercise
price for each Shareholder warrant is $5.60. The Warrants may be exercised
through April 28, 2001. In order to protect the Warrant holders against
dilution, the exercise price of the Warrants and the number of which may
be purchased upon exercise of the Warrants will be adjusted should certain
events occur (i.e., stock dividends, split-ups, combinations, and
reclassifications). Provision is also made to protect against dilution in
the event of a merger, consolidation, or disposition of all or
substantially all of the Trust's assets. Warrant holders do not have
11
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 1999 and 1998
(Unaudited)
the rights of a shareholder and they are not entitled to participate in a
distribution of the Trust's assets in a liquidation, dissolution, or
winding up of the trust, unless the Warrants have been exercised. The Trust
may refuse to allow the exercise of a warrant if the effect of such
exercise would disqualify the Trust as a REIT under the Internal Revenue
Code.
Under the 1998 Incentive Stock Option Plan, adopted by the board of
directors and approved by the stockholders, options for the purchase of a
total of 150,000 common shares of the Trust were granted effective
September 30, 1998. Since the Trust has no employees, officers and
employees of the Manager, Directors of the board and other contractors are
the eligible recipients of the options. The options have a term of 10 years
with a first exercise date six (6) months after the date of the grant. The
initial options for the purchase of 75,000 common shares are exercisable at
$8.00 per share. The options for the purchase of the remaining 75,000
common shares are exercisable at $4.50 per common share.
During 1998 the Trust's net purchase of treasury preferred stock was 9,526.
The purchases were recorded at cost and as a reduction to preferred shares
and additional paid in capital from preferred shares. No additional common
or preferred shares were purchased for the treasury as of September 30,
1999.
9. Earnings per share.
The following table is a reconciliation of the numerator and denominators
of the basic and diluted earnings per common share.
Numerator: September 30, 1998 September 30, 1999
------------------ ------------------
Net income $734,259 $245,479
Less: Preferred Dividend 447,508 (418,866)
--------- --------
Numerator for basic and diluted
earnings per share 286,751 (173,387)
--------- ---------
Denominator:
Basic weighted average shares 1,057,089 1,484,740
Effect of dilutive warrants 564,581 0
---------- ---------
Diluted weighted average shares 1,621,670 1,484,740
--------- ---------
Basic earnings per common share 0.27 (0.12)
---- ------
Diluted earnings per common share 0.18 (0.12)
---- ------
12
PART I
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Certain information contained in the following Management's Discussion
and Analysis of Financial Condition and Results of Operations constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as
amended. The Trust's actual results may differ materially from those contained
in the forward-looking statements. Factors which may cause a difference to occur
include the success of the Trust's efforts to increase its wholesale mortgage
origination capacity, the availability of suitable opportunities for the
acquisition, ownership and disposition of mortgage assets and yields available
from time to time on such mortgage assets, interest rates, changes in estimates
of book basis and tax basis earnings, the availability of suitable financing and
investments, and trends in the economy which affect the availability and
profitability of secondary marketing of mortgage assets, and confidence and
demand on the Trust's portfolio of mortgage assets.
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 and reflect 99% of earnings and losses
of its wholesale mortgage banking subsidiary, CAFC, under the equity method of
accounting.
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. The Trust's wholesale mortgage banking subsidiary
originates similar non-conforming residential mortgages for sale as whole loans
in the secondary securitization market.
However, during the latter half of 1998 and the first quarter of 1999,
a global liquidity crisis resulted in deteriorization of the mortgage-backed
securitization market and particularly that of non-conventional residential
mortgage banking firms. It also resulted in sharp declines in the profitability
of whole loan sales, a reduction in sources of liquidity and a decline in the
market performance of the shares of such firms, including the Trust and its
conduit mortgage banking subsidiary which specializes in non-conforming
residential mortgages.
Management, nevertheless, believes there will continue to be a strong
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 securitization of high-yielding non-conforming mortgage loans by the
investment banking industry. During the second and third quarters of 1999, the
mortgage-backed securitization market stabilized and the profitability of whole
loan sales has steadily improved, enabling the Trust to commence and pursue a
program to increase the wholesale mortgage origination capacity of its conduit
mortgage banking subsidiary.
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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 September 30 , 1999, the Trust's
loan portfolio included 80 loans totaling $11,041,994. As of November 15, 1999,
the loan portfolio included 89 loans totaling $11,738,544, of which $1,076472 of
the loan portfolio were delinquent over sixty days, and there were 3 delinquent
loans representing $570,777 of the portfolio which were in the process of
foreclosure. 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 upon the mortgage loans
due to the Trust. Management's estimate is based on a discounted sales price of
the property less the sum of pre-existing liens, costs of sale, the face amount
of the mortgage loan and accrued interest receivable. The Trust generally issues
loan commitments only on a conditional basis and generally funds such loans
promptly upon removal of any conditions. Accordingly, the Trust did not have any
commitments to fund loans as of September 30, 1999 and September 30, 1998.
Results of Operations
The historical information presented herein is not necessarily
indicative of future operations.
Three months and nine months ended September 30, 1999 and 1998.
Revenues for the third quarter of 1999 decreased to $242,713 as compared to
$495,119 for the same period in the previous year. Revenues for nine months of
1999 decreased to $877,316 as compared to $1,152,070 for the same period of the
previous year.
The 1999 mortgage interest income and interest income from affiliates
for the quarter were substantially the same and for the nine months were
increased, compared to the same period in the previous year. The increase was
due to larger mortgage notes receivable and warehouse lines of credit balances
than in the same period of previous year. The interest income gains, however,
were more than offset by investment income losses incurred during the quarter
and nine months for the origination expansion costs of Capital Alliance Funding
Corporation. The reduction of revenues for the third quarter and nine month
periods of 1999 resulted from the inclusion of losses of the Trust's wholesale
mortgage banking subsidiary which reflect the expenses incurred in expanding its
loan origination capacity during the first three quarters of 1999.
The weighted average yield of the Trust's mortgage investment portfolio
was 12.13%. The portfolio consisted of 60% first deeds of trust with the balance
being second deeds of trust and had a combined loan-to-value ratio of 65.77%.
Expenses of the Trust for the third quarter 1999 decreased to $143,887
as compared to $179,072 for the same period in the previous year and for the
nine months period of 1999 increased to $630,058 as compared to $417,811 for the
same period of the previous year.
Management and loan services expenses for the quarter were comparable.
The increase for the nine months of 1999 compared to 1998 was due to $54,173 of
higher loan servicing, and management fees resulting from the increase in the
Trust's asset value, increased interest expenses of $69,613 to finance a larger
loan portfolio and an increase in loan loss reserves. Higher loan servicing and
management fees of $331,675 resulted from the increase in the Trust's asset
value, an increase in interest expenses of $87,424 to finance a larger loan
portfolio, and the reduction of loan loss reserve was reduced in September 1999
to $15,000 to reflect the inactivation of the Trust's retail loan origination
affiliate.
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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. The major portion of the proceeds from issuance
of common stock in the Trust, which was completed on September 30, 1998 was
invested in mortgage loans. The Trust's liquidity requirements will also be
funded by a secured line of credit from a bank, initiated November 10, 1999,
periodical payoffs of existing loans which are generally short term in duration
and by the sale of foreclosed properties. Restrictions on cash attributed to
holdbacks do not significantly impact the Trust's liquidity.
Net cash provided by operating activities during the nine months ended
September 30, 1999 and 1998 was $(221,518) and $846,675, respectively.
Net cash (used in) investing activities for the nine months ended
September 30, 1999 and 1998 was $920,880 and ($7,694,932) respectively. The
difference is explained primarily by increased warehouse lending to affiliates
and a reduction in the net investment in mortgage notes receivable.
Net cash provided by financing activities during the nine months ended
September 30, 1999 and 1998 was ($836,815) and $5,899,505, respectively. The
1999 results are primarily due to the payment of preferred and common dividends.
The 1998 results are primarily from the proceeds of issuing additional common
shares.
CAFC maintains a $4,000,000 and a $3,000,000 secured warehouse line of
credit from two lenders. Both warehouse lines of credit are guaranteed by the
Trust. Management believes that cash flow from operations, the proceeds of loan
repayments, the establishment of the warehouse lines of credit for the Mortgage
Conduit Business, and the Trust's bank line of credit will be sufficient to meet
the liquidity needs of the Trust's businesses for the next twelve months.
Year 2000
The Trust's primary use of software systems is for accounting and loan
documentation. The Trust's software systems, local area network, and client
server are widely used in the financial services industries and are represented
to be Year 2000 compliant. Therefore, management believes that the risk of Year
2000 compliance is not significant as it relates to its computer software
system, network and personal computers.
The Trust does not expect Year 2000 initiative costs to exceed $5,000.
At this time, no estimate can be made as to any potential adverse
impact from the failure of borrowers, third-party service providers and vendors
to prepare for the Year 2000.
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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
There have been no changes in the outstanding securities of the Trust
during the quarterly period ending September 30, 1999.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders during the third quarter
of 1999.
ITEM 5 OTHER INFORMATION
Press Release, Exhibit "A" attached here to and incorporated herein,
regarding earnings for the second quarter of 1999 and the operations
of Registrant's mortgage banking conduit, was issued on August 18,
1999.
Press Release, Exhibit "B" attached here to and incorporated herein,
regarding the Registrant's declaration of common share dividends for
the third quarter, was issued on September 23, 1999.
ITEM 6 REPORTS ON FORM 8-K
Not applicable.
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EXHIBIT "A"
CAPITAL ALLIANCE INCOME TRUST LTD.
ANNOUNCES THAT, AS EXPECTED, THE COSTS OF
EXPANSION OF ITS WHOLESALE MORTGAGE BANKING
CONDUIT OFFSET STRONG RESULTS OF ITS MORTGAGE
PORTFOLIO IN 1999 SECOND QUARTER
SAN FRANCISCO--(Business Wire)--August 18, 1999--Capital Alliance Income Trust
Ltd. ("CAIT") (AMEX: CAA - news), a home mortgage real estate investment trust,
announced that, as expected, the costs of the expansion of loan origination
capacity in its wholesale mortgage banking subsidiary, Capital Alliance Funding
Corporation ("CAFC"), offset the strong results in CAIT's primary Mortgage
Investment Business during the 1999 second quarter, resulting in substantially
reduced earnings for the three and six month periods ended June 30, 1999. 99% of
CAFC's earnings (losses) are reflected in CAIT's financial statements under the
equity method of accounting. As a result, CAIT had earnings of $3,263 and
$146,654 for the three and six month periods ending June 30, 1999 as compared to
$239,078 and $418,212 for the same periods in 1998. Interest income in CAIT's
primary Mortgage Investment and Warehouse Lending Businesses increased to
$528,517 and $1,146,465 for the three and six month periods ending June 30, 1999
as compared to $370,504 and $690,531 for the same periods in 1998.
Thomas B. Swartz, Chairman and CEO, noted that the expansion of loan origination
capacity for CAFC was now substantially complete with the addition of qualified
account executives in northern and southern California, Arizona and Nevada and
expanded licensing, and that the lag time in realizing profits on the funding
and sale of increased loan originations should be realized starting in the third
quarter. He also noted that CAIT's interest income growth was due, in part, to
CAIT's 1998 IPO and the resulting increase in its capitalization and mortgage
notes receivable.
CAIT is a specialty residential mortgage finance company which invests primarily
in high-yielding, non-conforming residential mortgage loans on one-to-four unit
properties located primarily in California and other Western states. It also
originates similar loans for sale to investors on a whole loan basis through
CAFC, its wholesale mortgage banking subsidiary.
Certain oral and written statements of management of CAIT included in this press
release may contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934. The accuracy of such statements cannot be guaranteed, as they are subject
to a variety of risks.
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Contact: Capital Alliance Income Trust Ltd.
Thomas B. Swartz, 415/288-9575 (CEO)
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EXHIBIT "B"
CAPITAL ALLIANCE INCOME TRUST LTD.
ANNOUNCES DECLARATION OF
COMMON SHARE DIVIDEND FOR THIRD QUARTER
SAN FRANCISCO--(Business Wire)--September 23, 1999--Capital Alliance Income
Trust Ltd. ("CAIT"), a home mortgage real estate investment trust (AMEX: CAA),
announced that its Board had declared its common share dividend for the third
quarter at $.085 per share. The dividend will be payable on October 15, 1999 to
shareholders of record on October 1, 1999.
Thomas B. Swartz, CAIT's Chairman and CEO, noted that CAIT's Board will continue
to review the progress of CAIT's operating results during the fourth quarter and
will, as required by the REIT Rules, distribute 95% of CAIT's net income for the
1999 fiscal year.
Certain oral and written statements of the management of CAIT included in this
press release may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. The accuracy of such statements cannot be guaranteed, as
they are subject to a variety of risks.
- -------------------------
Contact: Capital Alliance Income Trust Ltd.
Thomas B. Swartz, 415/288-9575 (CEO)
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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: November 15, 1999 By: /s/ Thomas B. Swartz
----------------------
Thomas B. Swartz, Chairman and
Chief Executive Officer
Dated: November 15, 1999 By: /s/ Dennis R. Konczal
-----------------------
Dennis R. Konczal, President
and Chief Operating Officer
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