1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] CONTAINS ONLY SPECIAL FINANCIAL REPORT PURSUANT TO 15d-2
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
------------------------ ---------------------
Commission file number 333-11625
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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 No.)
50 California Street, Suite 2020, San Francisco, California 94111
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 288-9575
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Shares of Common Stock American Stock Exchange
- ------------------------------- -----------------------------------
Warrants to Issue Common Stock
- ------------------------------- -----------------------------------
Securities registered pursuant to section 12(g) of the Act:
Shares of Common Stock
- --------------------------------------------------------------------------------
(Title of class)
Warrants to Issue Common Stock
- --------------------------------------------------------------------------------
(Title of class)
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a
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2
specified date within 60 days prior to the date of filing. (See definition of
affiliate in Rule 405, 17 CFR 230.405.)
NOTE.-If a determination as to whether a particular person or entity is
an affiliate cannot be made without involving unreasonable effort and expense,
the aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this Form.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. No common stock
outstanding as of April 30, 1996
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the
document is incorporated: (1) Any annual report to security holders; (2) Any
proxy or information statement; and (3) Any prospectus filed pursuant to Rule
424(b) or (c) under the Securities Act of 1933. The listed documents should be
clearly described for identification purposes (e.g., annual report to security
holders for fiscal year ended December 24, 1980).
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3
AUDITED BALANCE SHEET OF
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
AS OF DECEMBER 31, 1996
AND
THE RELATED STATEMENTS OF OPERATIONS, CHANGES IN STOCKHOLDERS'
EQUITY AND CASH FLOWS FOR THE FOUR MONTHS ENDED APRIL 30,1996
(PREDECESSOR ENTITIES) AND THE EIGHT MONTHS ENDED
DECEMBER 31, 1996
4
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
FINANCIAL STATEMENTS
with
Independent Auditors' Report
December 31, 1996
5
[NOVOGRADAC & COMPANY LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Capital Alliance Income Trust Ltd., A Real Estate Investment Trust:
We have audited the accompanying balance sheet of Capital Alliance Income Trust
Ltd., A Real Estate Investment Trust (see Note 1 to the financial statements) as
of December 31, 1996 and the related statements of operations, changes in
stockholders' equity and cash flows for the four months ended April 30, 1996
(predecessor entities - see Note 1 to the financial statements) and the eight
months ended December 31, 1996. These financial statements are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Alliance Income Trust
Ltd., A Real Estate Investment Trust as of December 31, 1996, and the results of
its operations and its cash flows for the four months ended April 30, 1996
(predecessors - see Note 1 to the financial statements) and the eight months
ended December 31, 1996 in conformity with generally accepted accounting
principles.
NOVOGRADAC & COMPANY LLP
San Francisco, California
March 14, 1997
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CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
BALANCE SHEET
December 31, 1996
ASSETS
Cash and cash equivalents $ 66,798
Restricted cash 65,109
Accounts receivable 110,006
Investment 200,000
Mortgage notes receivable 4,696,238
Real estate held for sale 1,312,520
Organization costs (net of accumulated amortization of $3,216) 18,459
Deferred offering costs 233,131
----------
Total assets $6,702,261
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks $ 64,991
Due to affiliates 21,294
Other liabilities 91,393
Mortgage notes payable 578,395
----------
Total liabilities 756,073
Stockholders' Equity
Preferred stock, $.01 par value (liquidation value $9.50 per share)
675,000 shares authorized; 641,283 shares issued and outstanding 6,413
Common stock, $.01 par value, 2 million shares authorized;
none issued and outstanding ---
Additional paid in capital (Preferred stock) 5,939,775
Total stockholders' equity 5,946,188
Total liabilities and stockholders' equity $6,702,261
==========
See accompanying notes to financial statements.
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CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
STATEMENTS OF OPERATIONS
For the four months ended April 30, 1996 and
the eight months ended December 31, 1996
Combined
(Predecessors) (Successor)
Four Months Eight Months
Ended Ended
April 30, 1996 December 31, 1996
-------------- -----------------
REVENUES
Interest income $249,636 $462,564
Other income 24,073 27,736
-------- --------
Total revenues 273,709 490,300
-------- --------
EXPENSES
Loan servicing fees and other expenses to related party 20,107 40,244
Interest expense --- 23,932
Provision for loan loss 20,000 26,448
General and administrative 6,959 26,544
-------- --------
Total expenses 47,066 117,168
-------- --------
NET INCOME $226,643 $373,132
======== ========
NET INCOME PER PREFERRED SHARE $ 0.350 $ 0.582
WEIGHTED AVERAGE PREFERRED SHARES OUTSTANDING 646,971 641,464
PRO-FORMA NET INCOME PER COMMON SHARE (Note 3) --- ---
See accompanying notes to financial statements.
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CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the four months ended April 30, 1996 and
the eight months ended December 31, 1996
Combined (Predecessors) (Successor)
------------------------ -----------------------------------------------------------------
(Preferred)
Class A Class B Preferred Preferred Additional Retained
Amount Amount Shares Stock Paid in Capital Earnings Total
BALANCE AS OF JANUARY 1, 1996 $ 6,087,073 $ 2,957 --- $ --- $ --- $ --- $ 6,090,030
Redemption of class "A" shares (44,825) --- --- --- --- (44,825)
Organizational and offering costs (5,625) --- --- --- --- (5,625)
Dividends (259,061) (3,227) --- --- --- (262,288)
Net income, four months ended
April 30, 1996 224,376 2,267 --- --- --- --- 226,643
----------- ------- -------- ------- ----------- --------- -----------
BALANCE AS OF APRIL 30, 1996 6,001,938 1,997 --- --- --- --- 6,003,935
Exchange to preferred shares (6,001,938) (1,997) 643,730 6,437 5,997,498 --- ---
Redemption of shares --- --- (2,447) (24) (23,162) --- (23,186)
Organizational and offering costs --- --- --- --- (2,314) --- (2,314)
Dividends --- --- --- --- (32,247) (373,132) (405,379)
Net income, eight months ended
December 31, 1996 --- --- --- --- --- 373,132 373,132
----------- ------- -------- ------- ----------- --------- -----------
BALANCE AS OF DECEMBER 31, 1996 $ --- $ --- 641,283 $ 6,413 $ 5,939,775 $ --- $ 5,946,188
=========== ======= ======== ======= =========== ========= ===========
See accompanying notes to financial statements.
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CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
STATEMENTS OF CASH FLOWS
For the four months ended April 30, 1996 and
the eight months ended December 31, 1996
Combined
(Predecessors) (Successor)
Four Months Eight Months
Ended April 30, 1996 Ended December 31, 1996
-------------------- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 226,643 $ 373,132
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 187 3,216
(Increase) decrease in accounts receivable (43,733) 7,485
Accrued interest capitalized to real estate held for sale --- (83,681)
Provision for loan loss 20,000 26,448
Increase (decrease) in due to affiliates 10,476 (40,653)
Increase (decrease) in other liabilities (3,227) 4,762
----------- -----------
Net cash provided by operating activities 210,346 290,709
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash (92,046) 121,159
Increase (decrease) in mortgage note holdbacks 92,045 (121,336)
Investments in mortgage notes receivable (1,022,056) (1,952,384)
Repayments of mortgage notes receivable 1,066,231 1,336,796
Net proceeds from sale of foreclosed property --- 229,129
Capital costs of foreclosed properties --- (50,230)
----------- -----------
Net cash provided by (used in) investing activities 44,174 (436,866)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of shares (44,825) (23,186)
Deferred offering costs --- (161,542)
Receipt of subscriptions receivable 265,511 ---
Payment of mortgage notes payable --- (210,546)
Organizational and offering costs (5,625) (23,663)
Dividends paid (262,288) (405,379)
----------- -----------
Net cash used in financing activities (47,227) (824,316)
----------- -----------
NET INCREASE (DECREASE) IN CASH 207,293 (970,473)
CASH AT BEGINNING OF PERIOD 829,978 1,037,271
----------- -----------
CASH AT END OF PERIOD $ 1,037,271 $ 66,798
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest expense paid $ --- $ 19,554
Taxes paid $ --- $ 2,814
NON-CASH ACTIVITY (Also see Note 10):
Deferred offering costs accrued $ --- $ 71,589
See accompanying notes to financial statements.
10
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the four months ended April 30, 1996 and
the eight months ended December 31, 1996
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.
The effective date of the combination (the "Combination") was midnight
April 30, 1996, pursuant to the issuance of a permit by the California
Commissioner of Corporations which qualified the issuance of the preferred
shares of the Trust issued in the Combination. Under the Agreement and
Plan of Reorganization among the Trust and the Predecessors, each
outstanding share of the Predecessors' Class "A" shares was exchanged into
one (1) share of the Trust's Series A preferred stock (the "Preferred
Shares") and the outstanding shares of the Predecessors' Class "B" shares
were exchanged into Preferred Shares equal to one percent (1%) of the
total number of Preferred Shares to be issued in the Combination of the
Predecessors.
At midnight April 30, 1996, the Trust ("Successor") exchanged 347,715 and
296,015 Preferred Shares to CAIT I and CAIT II, respectively, for all
whole shares of the Predecessors' outstanding Class "A" and Class "B"
shares. Thereafter, all assets and liabilities of the Predecessors were
transferred to the Trust.
Effective February 12, 1997, the Trust became a registrant of the
Securities and Exchange Commission.
2. Basis of presentation
The operations of the Predecessors have been combined with the Trust due
to the common management and directors. The Combination has been accounted
for as a purchase. CAIT I is considered the acquiring entity and CAIT II
the acquired entity. The purchase price represents the net assets of CAIT
II as of April 30, 1996 approximating $2,771,351. This amount is the
carrying amount of assets less liabilities which approximates fair market
value. Therefore, there is no excess purchase price or Goodwill. The fair
market value of net assets acquired was used to determine the purchase
price since the value of the Trust's Preferred Shares exchanged is not
readily determinable and the fair value of net assets acquired is more
clearly evident.
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CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the four months ended April 30, 1996 and
the eight months ended December 31, 1996
3. Summary of significant accounting policies
The financial statements for the four months ended April 30, 1996
represent the combined financial statements of the Predecessors
(immediately prior to the merger). The financial statements for the eight
months ended December 31, 1996 represent the financial statements of the
Trust (Successor) after the merger described in Note 1.
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 amounts segregated
which will be disbursed to mortgage loan borrowers upon completion of
improvements on 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). At
December 31, 1996, management determined that no loan loss reserve was
necessary.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Investment. The Trust holds an interest in 99% of the outstanding Class B
preferred shares (20,000 shares of non voting stock) of beneficial
interest of Sierra Capital Acceptance ("Investee"), a Delaware business
trust which originates and sells residential mortgage loans. Sierra
Capital Services, Inc., a related party, owns 99% of the Class A common
shares of beneficial interest of the Investee and maintains voting
control. The Class B preferred shares are entitled to a 15% return per
annum. All net profits and losses are allocated to the Class A common
shares. Class A common shareholders are required to contribute or loan
additional capital to cover any operating losses. The Investee is taxed as
a partnership. The Trust accounts for its investment under the equity
method and accrues earnings as described above (15% return) in accordance
with the Investee's trust agreement. Earnings from this investment are
recorded as interest income on the Statements of Operations.
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CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the four months ended April 30, 1996 and
the eight months ended December 31, 1996
3. Summary of significant accounting policies (continued)
Income taxes. The Trust intends at all times to qualify as a real estate
investment trust ("REIT") for federal income tax purposes, under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended and
applicable Treasury Regulations. Therefore, the Trust generally will not
be subject to federal corporate income taxes on its net income that is
currently distributed to stockholders. To qualify as a REIT, the Trust
must elect to be so treated and must meet on a continuing basis certain
requirements relating to the Trust's organization, sources of income,
nature of assets, and distribution of income to shareholders. In addition,
the Trust must maintain certain records and request certain information
from its stockholders designed to disclose actual ownership of its stock.
In order to maintain its qualification as a REIT, the Trust must annually
satisfy three gross income requirements. First, at least 75% of the
Trust's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived from, among other things, interest
on obligations secured by mortgages on real property and rents from real
property. Second, at least 95% of the Trust's gross income (excluding
gross income from prohibited transactions) for each taxable year must be
derived from the sources described under the 75% gross income test,
dividends, interest, and gain from the sale or disposition of stock or
securities. Third, short-term gain from the disposition of securities,
gain from prohibited transactions, and gain on the disposition of real
property held for less than four years (apart from involuntary conversions
and disposition of foreclosure property) must represent less than 30% of
the Trust's gross income (including gross income from prohibited
transactions) for each taxable year.
The Trust, at the close of each quarter of its taxable year, must also
satisfy three tests relating to the nature of its assets. First, at least
75% of the value of the Trust's total assets must be represented by, among
other things, mortgages on real property, real property, cash, cash items
and government securities. Second, not more than 25% of the Trust's total
assets may be represented by securities other than those in the 75% asset
class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Trust may not exceed 5%
of the value of the Trust's total assets and the Trust may not own more
than 10% of any one issuer's outstanding voting securities.
The Trust, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its stockholders in an
amount at least equal to the sum of 95% of the Trust's "REIT taxable
income" (excluding the Trust's net capital gain) and 95% of the net income
(after tax), if any, from foreclosure property.
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.
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CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the four months ended April 30, 1996 and
the eight months ended December 31, 1996
3. Summary of significant accounting policies (continued)
Based on the Trust's belief that it has operated in a manner so as to
allow it to elect in its first tax return to be taxed as a REIT since
inception, no provision for federal income taxes has been made in the
financial statements.
For the eight-month period ended December 31, 1996, the distributions per
preferred share are allocated 87.202% as ordinary income and 12.798% as a
return of capital.
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. When the offering is completed the costs
will be offset against the proceeds and recorded as a reduction of
stockholders' equity.
Real estate held for sale. Real estate held for sale 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 that 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 held for sale are recorded as interest income, interest
expense and general and administrative expenses on the Statements of
Operations.
Pro-forma earnings per share. Historically, the Preferred Shares received
100% of the net income. The Preferred Shares will receive an annual
preferred allocation of income and distribution. After meeting this
preference, 100% of any additional income earned from the proceeds of any
offering will be allocated to the Common Shares (when issued) until the
distribution matches the Preferred Shares (see Note 9). No common shares
were outstanding in prior periods.
4. Mortgage note holdbacks
Pursuant to mortgage loan agreements between the Trust and its borrowers,
a portion of the loan proceeds are held by the Trust in segregated
accounts to be disbursed to borrowers upon completion of improvements on
the secured property. As of December 31, 1996, mortgage note holdbacks
from the consummation of mortgage loans made amounted to $64,991.
14
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the four months ended April 30, 1996 and
the eight months ended December 31, 1996
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.
The Trust measures impairment based on the fair value of the related
collateral since all loans subject to this measurement are collateral
dependent.
A reconciliation of mortgage notes receivable is as follows:
Combined
(Predecessors) (Successor)
April 30, 1996 December 31, 1996
-------------- -----------------
Balance at beginning of period $4,790,070 $4,725,895
Additions during period:
New mortgage loans 1,022,056 1,952,384
Deductions during period:
Collections of principal 1,066,231 1,336,796
Foreclosures, net of reserve --- 618,797
Provision for loan loss 20,000 26,448
---------- ----------
Balance at close of period $4,725,895 $4,696,238
========== ==========
Activity in the loan loss reserve was as follows:
Combined
(Predecessors) (Successor)
April 30, 1996 December 31, 1996
-------------- -----------------
Balance, beginning of period $12,000 $ 32,000
Provision for loan loss 20,000 26,448
Transfer to foreclosed asset --- (58,448)
------- --------
Balance, end of period $32,000 $ ---
======= ========
15
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the four months ended April 30, 1996 and
the eight months ended December 31, 1996
5. Mortgage notes receivable (continued)
The Trust's mortgage notes receivable all relate to non-conforming loans
secured by deeds of trust on single family residences. The following is a
summary of the Trust's mortgage notes receivable at December 31, 1996.
Periodic payment Face amount of
Description Interest rate Final maturity date terms Prior liens mortgages
----------- ------------- ------------------- ---------------- ----------- --------------
Individual loans greater than
$140,887 (3% of total mortgage
notes receivable of $4,696,238): 13.00% 04/01/97 $1,844 First $180,000
12.50% 11/01/97 $2,281 Second $219,000
12.50% 11/01/97 $1,625 Second $150,000
13.50% 08/01/01 $3,313 First $294,000
12.50% 08/01/97 $2,244 Second $225,000
12.50% 10/01/01 $1,822 First $175,000
8.00% 10/01/99 $1,615 First $242,250
11.50% 01/01/00 $1,862 Second $194,300
13.75% 01/01/98 $2,658 First $232,000
14.00% 04/01/97 $3,442 Second $295,000
Loans from $100,000-$140,887 12.5% to 13.5% 12 to 36 months --- --- ---
Loans from $50,000-$99,999 12.0% to 15.0% 6 to 61 months --- --- ---
Loans from $20,000-$49,999 12.5% to 16.0% 12 to 61 months --- --- ---
Principal amount of
loans subject to
Carrying amount of delinquent principal
mortgages or interest (Note A)
------------------ ---------------------
Individual loans greater than
$140,887 (3% of total mortgage
notes receivable of $4,696,238): $ 170,196 $ 0
219,000 0
150,000 0
295,159 295,159
225,000 0
175,000 0
242,250 0
194,300 0
232,000 232,000
295,000 0
Loans from $100,000-$140,887 449,600 0
Loans from $50,000-$99,999 1,693,050 254,872
Loans from $20,000-$49,999 355,683 0
--------------- -------------
Total Mortgage Notes Receivable at December 31, 1996 $ 4,696,238 $ 782,031
=============== ============
(A) Delinquent loans are loans where the monthly interest payments are 90
or more days overdue. As of December 31, 1996, there were 5 loans totaling
$698,285 of principal and $33,175 of interest that were 90 to 180 days
delinquent on interest payments. Of this principal amount, $121,127 has
been paid-off, $295,159 has been reinstated, and $282,000 is operating
under new payment terms subsequent to December 31, 1996. One loan in the
principal amount of $83,745 and $9,500 of interest has been delinquent for
over 180 days. Management has reviewed all of the delinquent loans and
believes that in all instances the fair value (estimated selling price
less cost to dispose) of the collateral is equal to or greater than the
carrying value of the loan including any accrued interest.
16
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the four months ended April 30, 1996 and
the eight months ended December 31, 1996
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 December 31, 1996 the Trust held three mortgage notes payable
totaling $578,395. These notes are payable to various banks and secured by
first deeds of trust on various residential foreclosed properties, with
interest accruing at 8.25% to 8.95% per annum and principal and interest
payments of $653 to $3,123 due monthly. The maturity dates vary and the
balances outstanding are due, with any unpaid interest, on January 1, 2010
through June 1, 2025. Management believes that the loans will be paid in
full upon the sale of the foreclosed properties in 1997.
8. Related party transactions
The Manager, which is owned by several of the Trustees and their
affiliates, contracted with the Trust to provide loan administration
services and receives fees for these services from the Trust. There are no
loan origination costs paid by the Trust, since such costs are paid to the
Manager by the borrowers. 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. During the four months
ended April 30, 1996, the Predecessors paid $20,107 to the Manager. During
the eight months ended December 31, 1996, the Trust paid $40,244 to the
Manager. The loan servicing fee equals 0.083% of the monthly (1% annually)
value of all assets less liabilities and reserves.
The Trust and the Predecessors also paid the Manager $0.20 per share for
organizing the business and marketing their securities. For the four
months ended April 30, 1996, the Predecessors paid $5,625 to the Manager.
For the eight months ended December 31, 1996, the Trust paid $2,314 to the
Manager.
As described in Note 3, the Trust holds an investment in Sierra Capital
Acceptance and receives a 15% return per annum. For the four months ended
April 30, 1996, the Predecessors earned interest of $7,500 from this
investment. For the eight months ended December 31, 1996, the Trust earned
interest of $22,500 from this investment.
17
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the four months ended April 30, 1996 and
the eight months ended December 31, 1996
9. Preferred 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.
The Preferred Shares 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: 3% of
redemption amount in 1996, 2% of redemption amount in 1997, 1% of
redemption amount in 1998; and none thereafter.
18
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
For the four months ended April 30, 1996 and
the eight months ended December 31, 1996
10. Real estate held for sale
During 1996 the Trust foreclosed on five mortgage notes receivable and
sold one of the foreclosed properties in October 1996. The following table
shows the cash and non-cash activity in the real estate held for sale
account during 1996.
Foreclosed mortgage notes, net of reserve (non-cash) $ 618,797
Accrued interest capitalized (non-cash) 83,681
Mortgage notes payable (non-cash) 578,395
Mortgage notes payable (cash paid) 210,546
Capital costs of foreclosed properties (cash paid) 50,230
----------
Total 1,541,649
Less: Proceeds from sale of foreclosed property (net of
closing costs of $25,871) 229,129
----------
Real estate held for sale, balance at 12/31/96 $1,312,520
==========
A second foreclosed property was sold for $490,000 subsequent to December
31, 1996.
11. Future effect of recently issued accounting pronouncements
In March, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 128 (SFAS 128), "Earnings Per Share,"
and SFAS 129, "Disclosure of Information about Capital Structure." Based
on the Trust's current capital structure, the impact of implementation of
both of these pronouncements will not be significant.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CAPITAL ALLIANCE INCOME TRUST LTD.
A Real Estate Investment Trust
By: THOMAS B. SWARTZ
-------------------------------
Thomas B. Swartz
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements the Securities Exchange Act of 1934,
this report has been below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ THOMAS B. SWARTZ Chairman of the Board and May 8, 1997
- -------------------------- Chief Executive Officer
Thomas B. Swartz (Principal Executive Officer)
/s/ JEANNETTE HAGEY Chief Financial Officer (Principal May 8, 1997
- -------------------------- Financial and Accounting
Jeannette Hagey Officer)
/s/ DOUGLAS A. THOMPSON Director and Executive Vice May 8, 1997
- -------------------------- President
Douglas A. Thompson
/s/ DENNIS R. KONCZAL Director and Principal May 8, 1997
- --------------------------
Dennis R. Konczal
/s/ STANLEY C. BROOKS Director May 8, 1997
- --------------------------
Stanley C. Brooks
20
NAME TITLE DATE
/s/ HARVEY BLOMBERG Director May 8, 1997
- --------------------------
Harvey Blomberg