Capital Alliance Income Trust Ltd.,
A Real Estate Investment Trust
- --------------------------------------------------------------------------------
August 14, 1997
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, 1997. 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.
<PAGE>
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, 1997
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 June 30, 1997, there were no shares of common stock outstanding.
<PAGE>
PART I
ITEM 1.
FINANCIAL STATEMENTS
2
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
Balance Sheets
(Unaudited) (Audited)
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents .............................. $ 672,871 $ 66,798
Restricted cash ........................................ 80,685 65,109
Accounts receivable .................................... 259,591 110,006
Investments ............................................ 489,114 200,000
Mortgage notes receivable .............................. 4,243,018 4,696,238
Real estate held for sale .............................. 279,206 1,312,520
Organization costs (net of accumulated amortization
of $5,375 at June 30, 1997 and $3,216 at
December 31, 1996) ............................... 16,651 18,459
Deferred offering costs ................................ 367,550 233,131
------- -------
Total assets ........................................... $6,408,686 $6,702,261
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Mortgage note holdbacks ........................... $ 80,566 $ 64,991
Due to affiliates ................................. 46,237 21,294
Other liabilities ................................. 192,420 91,393
Mortgage notes payable ............................ 191,775 578,395
------- -------
Total liabilities ...................................... 510,998 756,073
------- -------
Stockholder's Equity
Preferred stock, $.01 par value (liquidation value
$9.50 per share), 675,000 shares authorized;
641,283 and 641,283 shares issued and
outstanding at June 30, 1997 and
December 31, 1996, respectively ............ 6,413 6,413
Common stock, $.01 par value, 2 million
shares authorized; none issued and ......... -- --
Additional paid in capital (Preferred sto ........ 5,891,275 5,939,775
--------- ---------
Total stockholders' equity ............................. 5,897,688 5,946,188
--------- ---------
Total liabilities and stockholder's equity ............. $6,408,686 $6,702,261
========== ==========
</TABLE>
3
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Interest income ....................... $ 145,269 $ 153,448 $ 328,050 $ 330,566
Origination income .................... 8,348 -- 32,956 --
Other income .......................... 21,050 17,664 46,917 53,594
Total revenues .................... 174,667 171,112 407,923 384,160
EXPENSES
Loan servicing and origination fees and
other expenses to related part ...... 36,897 15,158 66,076 30,183
Interest expense ...................... (538) -- 39,421 --
Provision for loan losses ............. -- 15,000 -- 30,000
Operating expenses of real estat ...... 7,097 -- 26,244 --
General and administrative ............ 18,010 989 28,602 3,225
Total expenses .................. 61,466 31,147 160,343 63,408
NET INCOME .............................. $ 113,201 $ 139,965 $ 247,580 $ 320,752
NET INCOME PER
PREFERRED SHARE ....................... $ 0.176 $ 0.218 $ 0.386 $ 0.50
WEIGHTED AVERAGE PREFERRED
SHARES OUTSTANDING .................... 641,464 641,464 641,464 641,464
</TABLE>
4
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
Statements of Cash Flows
(Unaudited)
Combined
(Successor) (Predecessors)
Six Months Ended
June 30,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ..................................... $ 247,580 $ 320,752
Adjustments to reconcile net income
to net cash provided
by operating activities:
Amortization ................................. 2,160 --
(Increase) decrease in accounts receivabl ... (151,584) (54,742)
Accrued interest capitalized to real estat ... (13,826) --
Increase (decrease) in loan loss reserve ..... -- 30,000
Increase (decrease) in due to affiliates ..... 24,943 (48,541)
Increase (decrease) in other liabilities ..... 136,085 29,223
------- ------
Net cash provided by (used in) operating ... 245,358 276,692
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash ......... (15,575) 51,373
Increase (decrease) in mortgage note holdbac ... 15,575 (51,373)
Investments in mortgage notes receivable ....... (1,890,093) (1,612,000)
Repayments of mortgage notes receivable ........ 2,227,758 1,655,301
Net proceeds from sale of foreclosed propert ... 485,658 --
Capital costs of foreclosed property ........... (13,219) --
------- -------
Net cash provided by (used in) investing ..... 810,104 43,301
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of shares ........................... -- (68,011)
Deferred offering costs ........................ (142,530) (4,121)
Receipt of subscriptions receivable ............ -- 265,511
Payment of mortgage notes payable .............. (7,288) --
Organizational and offering costs .............. (354) (7,940)
Dividends paid ................................. (299,216) (378,106)
-------- --------
Net cash provided by (used in) financing a ... (449,388) (192,667)
-------- --------
NET INCREASE (DECREASE) IN CASH .................. 606,074 127,326
CASH AT BEGINNING OF PERIOD ...................... 66,797 829,978
------ -------
CASH AT END OF PERIOD ............................ $ 672,871 $ 957,304
=========== ===========
</TABLE>
5
<PAGE>
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, at which time the Trust (Successor) exchanged 643,730 Preferred
Shares 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 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. Listing of the shares on the
American Stock Exchange has been approved subject to official notice of
issuance, . The Trust actively commenced marketing its shares in May, 1997.
2. Basis of presentation
------------------------
The accompanying financial statements include the accounts of the Trust and
the Predecessors. The financial information presented as of any date other
than December 31 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, 1996 contained
in the Trust s 1996 Annual Report to Stockholders.
6
<PAGE>
2. Basis of presentation (continued)
---------------------------------
The unaudited interim financial statements for the six months ended June
30, 1996 represent the combined financial statements of the Predecessors
(prior to the merger). The unaudited interim financial statements for the
six months ended June 30, 1997 represent the financial statements of the
Trust (Successor) after the merger described in Note 1.
The operations of the Predecessors have been combined with the Trust due to
their 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.
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 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
7
<PAGE>
3. Summary of significant accounting policies (continued)
------------------------------------------------------
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 guaranteed payments
equal 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.
On April 15, 1997 the Trust formed its non-qualified REIT subsidiary
Capital Alliance Funding Corporation ( CAFC ) to conduct its planned
Mortgage Conduit Business. On June 27, 1997 the Trust capitalized CAFC with
real estate assets carried by the Trust at a book value $304,550 in
exchange for 2,000 shares of Series A Preferred Stock having a 99% economic
interest in CAFC. The Trust s Manager invested $1,000 for 1,000 Common
Shares of CAFC having a 1% economic interest in CAFC. On June 30, 1997,
CAFC declared a dividend of $5,564 to the Trust. CAFC has applied to the
California Department of Corporations for a Consumer Finance Lender s
License and the California Department of Real Estate for a Corporate Real
Estate Broker s License. Pending receipt of such licenses, CAFC s mortgage
banking activities are being conducted under the Manager s Real Estate
Broker s License.
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
8
<PAGE>
3. Summary of significant accounting policies (continued)
---------------------------------------------------------
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.
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.
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.
9
<PAGE>
3. Summary of significant accounting policies (continued)
------------------------------------------------------
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 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 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. Prior to the merger of the Predecessors, the
Preferred Shares received 100% of the Trust s net income. The Preferred
Shares currently receive an annual preferred allocation of income and
distributions. After completion of the current offering of common shares
and after meeting such preference, 100% 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). No common
shares were outstanding in prior periods.
4. 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
1996, mortgage note holdbacks from the consummation of mortgage loans made
amounted to $80,566 and $64,991, 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.
10
<PAGE>
5. Mortgage notes receivable (continued)
-------------------------------------
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, 1997 the Trust held two mortgage notes payable totaling
$191,775. 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
$1,582 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 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% 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, 1996, the Predecessors paid $29,178 to the Manager under contracts
with different compensation arrangements. During the six months ended June
30, 1997, the Trust paid $55,099 to the Manager.
11
<PAGE>
8. Related party transactions (continued)
--------------------------------------
As described in Note 3, the Trust holds an investment in Sierra Capital
Acceptance and receives a 15% guaranteed return per annum. For the six
months ended June 30, 1996, the Predecessors received distributions of
$12,500 from this investment. For the six months ended June 30, 1997, the
Trust received distributions of $15,000 from this investment.
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, 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: 2% of redemption amount in
1997, 1% of redemption amount in 1998, and none thereafter.
12
<PAGE>
PART I
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
13
<PAGE>
MANAGEMENT S 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 ) included herein were prepared based upon
the combined historical operations of Capital Alliance Income Trust I ( CAIT I )
and Capital Alliance Income Trust II( CAIT II ) (CAIT I and CAIT II are
collectively referred to as the Predecessors ). The operations of the
Predecessors have been combined due to the common management and directors. The
unaudited interim financial statements subsequent to the merger represent the
operations of the Trust (Successor). (See Note 2 to the financial statements).
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, 1997, the Trust s loan
portfolio included total loans of $4,243,018 of which $401,450 representing 9.0%
of the loans were delinquent. The balance of delinquent loans which were in the
process of foreclosure at June 30, 1997 totaled $294,450 or 6.9% of the loan
portfolio. In assessing the collectibility of these delinquent mortgage loans,
management estimates a net gain will be realized upon sale of the properties
14
<PAGE>
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 15%
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, 1996 and June 30, 1997.
Results of Operations
The results of operations of the Trust for all periods through December 31,
1996 were prepared based upon the combined historical operations of the
Predecessors through April 30, 1996 and of the Trust for subsequent periods. In
the comparison that follows references to the year ended December 31, 1996 refer
to the four months ended April 30, 1996 (predecessor) and the eight months ended
December 31, 1996 (Successor) added together. The operations of the Predecessors
have been combined due to the common management and directors. The historical
information presented herein is not necessarily indicative of future operations.
Three months and Six months ended June 30, 1997 and 1996. Revenues for the
second quarter 1997 increased to $174,667 as compared to $171,112 for the same
period in the previous year. Revenues for the six months of 1997 increased to
$407,923 as compared to $384,160 the same period of the previous year. The
revenue increase in both the three and six month period was primarily due to
loan points received in 1997 compared to none in the same period in the previous
year when such points were retained by the Manager under different compensation
arrangements.
Expenses for the second quarter 1997 increased to $61,466 compared to
$31,147 for the same period in the previous year. For the six month period,
expenses increased to $160,343 compared to $63,407 for the Predecessors from the
previous year. The increase in both periods is primarily due to loan servicing,
origination fees and management fees resulting from the increase in the Trust s
Asset Value from the Combination in April 30, 1996 and from different
compensation arrangements with the Manager prior to the commencement of the
Trust s current offering. In addition, general and administrative expenses
increased due to professional fees and state franchise taxes resulting from the
Combination.
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
15
<PAGE>
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, 1997 and 1996 was $245,348 and $276,692, respectively. Net cash for all
periods was positively affected by improved marketing conditions and the volume
of loan activity in 1997.
Net cash used in investing activities for the six months ended June 30,
1997 and 1996 was $810,104 and $43,301 respectively. During 1997, repayments
exceeded funding of mortgage notes receivable due to some large loans repaid in
second quarter 1997 compared to the same period in the previous year. In
addition, the increase in cash was due to one real estate owned property sold in
early 1997.
Net cash (used in ) provided by financing activities during the six months
ended June 30, 1997 and 1996 was $(449,388) and $(192,667), respectively. The
increase in 1997 is primarily due to the offering costs related to the Trust s
current Offering.
The Trust will use the net proceeds of its current public offering to
provide additional funding for the Trust s Mortgage Investment Business. During
June, 1997, CAFC obtained the commitment of a $1,000,000 warehouse line of
credit from Warehouse Lending Corporation of America which is currently being
documented and which will be guaranteed by the Trust. The Trust additionally
plans to enter into a warehouse line of credit agreement with the Trust for up
to $4,000,000. 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 regardless of whether the Minimum Subscription Level (i.e.,
$4,000,000) for the public offering is achieved. It is anticipated that the two
warehouse lines of credit will be finalized in the third quarter of 1997.
16
<PAGE>
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 securities at this time.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Trust held its 1997 annual meeting on August 6, 1997. The
outstanding Series A Preferred Shares constitute the class of voting
stock outstanding and are not registered under Section 12. Messrs.
Thomas B. Swartz and Harvey Blomberg were elected to new terms as
Class I Directors. Messrs. Dennis R. Konczal, Douglas A. Thompson and
Stanley C. Brooks continue as Class II and III Directors.
The other matters voted on at the meeting also included (1) the
approval of an amendment of the Trust s Certificate of Incorporation
to increase the Trust s authorized capital to 5,675,000 shares,
5,000,000 of which are common stock, $.01 par value, and 675,000
shares of Series A Preferred Stock, $.01 par value; and (2) the
approval of Novogradac & Company LLP as auditors for 1997. 402,195
shares voted in favor of both propositions with no negative votes.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. 3.1.1. Certificate of Amendment to Certificate of
Incorporation, effective July 31, 1997.
(b) Form 8-K
The Registrant has not filed any reports on Form 8-K during the
quarter ended June 30, 1997.
17
<PAGE>
Exhibit 3.1.1.
--------------
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
CAPITALALLIANCE INCOME TRUST LTD.,
A Real Estate Investment Trust,
a Delaware Corporation
Thomas B. Swartz and Linda St. John certify that:
1. They are the duly elected and acting Chairman and Secretary,
respectively, of the corporation named above (the Corporation );
2. The Certificate of Incorporation of the Corporation is amended by
amending Section 4.1 of Article IV thereof to read as follows:
"4.1 Capitalization. This Corporation is authorized to issue 5,675,000
Shares and shall have two classes of Shares designated respectively "Common
Stock" and "Preferred Stock," and referred to either as Common Stock or
Common Shares and Preferred Stock or Preferred Shares, respectively. The
number of shares of Common Stock is 5,000,000, with a par value of $.01 per
Share. Preferred Shares may be issued from time to time in one or more
series. The first series of Preferred Stock shall (a) be designated as
"Series A Preferred"; (b) consist of 675,000 Shares with a par value of
$.01 per Share; (c) be entitled to dividends as provided in Section 4.3(b);
and (e) be entitled to all other rights, preferences and privileges, and be
subject to all such restrictions, as are in this Article IV granted to, or
imposed upon, the Shares of Series A Preferred Stock in Section 4.3(d).
Except as to Series A Preferred Stock, the Board of Directors is hereby
authorized, except as to matters fixed as to Preferred Shares in this
Article IV: (a) to determine or alter the rights, preferences, privileges
and restrictions granted to or imposed upon any wholly unissued series and,
within the limitations or restrictions stated in any resolution of the
Board of Directors originally fixing the number of Shares constituting any
series; (b) to increase or decrease (but not below the number of Shares of
any such series then outstanding), the number of Shares of any such series
after the issue of Shares of that series; and (c) to determine the
designation of any series and to fix the number of Shares of any series."
3. The above amendment has been approved by the Board of Directors of the
Corporation;
4. The above amendment was approved by the required vote of the
shareholders of the corporation in accordance with Section 242 of the Delaware
General Corporation Law; the total number of outstanding shares entitled to vote
with respect to the amendment was 462,328 Series A Preferred Shares; and the
number of shares voting in favor of the amendment equaled or exceeded the vote
required, such required vote being a majority of the outstanding shares of
Series A Preferred Stock.
We further declare under penalty of perjury that the matters set forth in
this certificate are true and correct and that the execution of this certificate
is our act and deed and the act and deed of the Corporation.
Executed at San Francisco, California
on August 1, 1997
/s/ Thomas B. Swartz
--------------------
Thomas B. Swartz, Chairman
/s/ Linda St. John
------------------
Linda St. John, Secretary
18
<PAGE>
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 14, 1997 By: /s/ Thomas B. Swartz
---------------------------------
Thomas B. Swartz, Chief Executive Officer
Dated: August 14, 1997 By: /s/ Jeannette Hagey
---------------------------------
Jeannette Hagey, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 753,556
<SECURITIES> 0
<RECEIVABLES> 4,502,609
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 279,206
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,408,686
<CURRENT-LIABILITIES> 0
<BONDS> 191,775
0
5,891,275
<COMMON> 6,413
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,408,686
<SALES> 0
<TOTAL-REVENUES> 407,923
<CGS> 0
<TOTAL-COSTS> 120,922
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,421
<INCOME-PRETAX> 247,580
<INCOME-TAX> 0
<INCOME-CONTINUING> 247,580
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 247,580
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