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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ________________________
Commission File Number: 333-11625
Capital Alliance Income Trust Ltd., A Real Estate Investment Trust
(Exact name of registrant as specified in its charter)
Delaware 94-3240473
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 California Street
Suite 2020
San Francisco, California 94111
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(415) 288-9575
---------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report
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
APPLICABLE ONLY TO ISSUERS 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 Sections 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 ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of April 30, 1997, there were no shares of common stock outstanding.
<PAGE> 2
PART I
ITEM I
FINANCIAL STATEMENTS
1
<PAGE> 3
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 89,941 $ 66,798
Restricted cash 119,316 65,109
Accounts receivable 114,744 110,006
Investment 200,000 200,000
Mortgage notes receivable 4,962,226 4,696,238
Real estate held for sale 1,257,701 1,312,520
Organization costs (net of accumulated amortization
of $4,295 at March 31, 1997 and $3,216 at
December 31, 1996) 17,733 18,459
Deferred offering costs 263,580 233,131
---------- ----------
Total assets $7,025,241 $6,702,261
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks $ 119,197 $ 64,991
Due to affiliates 53,552 21,294
Other liabilities 54,198 91,393
Mortgage notes payable 867,753 578,395
---------- ----------
Total liabilities 1,094,700 756,073
---------- ----------
Stockholders' 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
March 31, 1997 and December 31, 1996, respectively 6,413 6,413
Common stock, $.01 par value, 2 million
shares authorized; none issued and outstanding -- --
Additional paid in capital (Preferred stock) 5,924,128 5,939,775
---------- ----------
Total stockholders' equity 5,930,541 5,946,188
---------- ----------
Total liabilities and stockholders' equity $7,025,241 $6,702,261
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Combined
(Successor) (Predecessors)
----------- --------------
Three Months Ended
March 31,
1997 1996
-------- --------
<S> <C> <C>
REVENUES
Interest income $182,781 $177,118
Points 24,608 --
Other income 25,867 35,930
-------- --------
Total revenues 233,256 213,048
-------- --------
EXPENSES
Loan servicing fees and other expenses to related party 29,179 15,025
Interest expense 39,959 --
Provision for loan losses -- 15,000
Operating expenses of real estate held 19,147
General and administrative 10,592 $ 2,236
-------- --------
Total expenses 98,877 32,361
-------- --------
NET INCOME $134,379 $180,687
======== ========
NET INCOME PER PREFERRED SHARE $ .282 $ .279
WEIGHTED AVERAGE PREFERRED SHARES OUTSTANDING 641,464 647,521
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Combined
(Successor) (Predecessors)
----------- --------------
Three Months Ended
March 31,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 134,378 $ 180,687
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 1,080 --
Increase (decrease) in accounts receivable (4,737) (35,190)
Accrued interest capitalized to real estate
held for sale (13,826) --
Increase (decrease) in loan loss reserve -- 15,000
Increase (decrease) in due to affiliates 32,258 (24,162)
Increase (decrease) in other liabilities (8,196) (16,424)
----------- -----------
Net cash provided by (used in) operating activities 140,957 119,911
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash (54,207) 6,026
Increase (decrease) in mortgage note holdbacks 54,207 (6,026)
Investments in mortgage notes receivable (1,345,000) (362,100)
Repayments of mortgage notes receivable 963,946 773,655
Net proceeds from sale of foreclosed property 485,658 --
Capital costs of foreclosed property (11,922) --
----------- -----------
Net cash provided by (used in) investing activities 92,682 411,555
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of shares -- (44,825)
Deferred offering costs (53,474) --
Receipt of subscriptions receivable -- 265,511
Payment of mortgage notes payable (6,642) --
Organizational and offering costs (354) --
Dividends paid (150,026) (162,987)
----------- -----------
Net cash provided by (used in) financing activities (210,496) 57,699
----------- -----------
NET INCREASE (DECREASE) IN CASH 23,143 589,165
CASH AT BEGINNING OF PERIOD 66,798 829,978
----------- -----------
CASH AT END OF PERIOD $ 89,941 $ 1,419,143
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest expense paid $ -- $ --
Taxes paid $ -- $ --
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
1. Organization
Capital Alliance Income Trust Ltd., A Real Estate Investment Trust (the
"Trust"), a Delaware corporation, primarily invests in mortgage loans
secured by real estate. The Trust was formed December 12, 1995 to
facilitate the combination of the mortgage investment operations of
Capital Alliance Income Trust I, a Delaware business trust, and Capital
Alliance Income Trust II, a Delaware business trust, (collectively
referred to as the "Predecessors", individually referred to as "CAIT I"
and "CAIT II", respectively). CAIT I and CAIT II were both privately-held
mortgage investment trusts which invested primarily in loans secured by
deeds of trust on one-to-four unit residential properties. The Manager,
Capital Alliance Advisors, Inc. (the "Manager") originates, services and
sells the Trust's loans.
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 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. Pending the official notice of
issuance, the shares will be listed on the American Stock Exchange. 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.
<PAGE> 7
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
2. Basis of presentation (continued)
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.
The unaudited interim financial statements for the three months ended
March 31, 1996 represent the combined financial statements of the
Predecessors (prior to the merger). The unaudited interim financial
statements for the three months ended March 31, 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 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.
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 are amounts segregated and are
to be disbursed only to mortgage loan borrowers upon completion of certain
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).
<PAGE> 8
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
3. Summary of significant accounting policies (continued)
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.
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 otal assets and the Trust may not own more
than 10% of any one issuer's outstanding voting securities.
<PAGE> 9
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
3. Summary of significant accounting policies (continued)
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.
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.
<PAGE> 10
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
3. Summary of significant accounting policies (continued)
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 the
offering will be allocated to the Common Shares 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 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 March 31, 1997 and
1996, mortgage note holdbacks from the consummation of mortgage loans made
amounted to $119,197 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.
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.
<PAGE> 11
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
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 March 31, 1997 the Trust held five mortgage notes payable totaling
$867,753. 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, except one at 11.5% and principal
and interest payments of $6,857 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 three months ended March
31, 1996, the Predecessors paid $15,025 to the Manager. During the three
months ended March 31, 1997, the Trust paid $21,683 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 three months ended
March 31, 1996, the Predecessors earned interest of $5,000 from this
investment. For the three months ended March 31, 1997, the Trust earned
interest of $7,500 from this investment.
<PAGE> 12
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
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.
<PAGE> 13
ITEM II
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2
<PAGE> 14
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 I resulted from the reorganization of Capital Alliance
Managed Income Fund, L.P., a California limited partnership ("CAMIF") on March
9, 1993. CAMIF was formed July 11, 1991 and was also in the business of
investing in home equity loans. 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's mortgage loan acquisitions in the
three-month period ended March 31, 1997 increased to $4,962,226 from $4,696,238
in the same period of the previous year, primarily due to a increase in cash
available for investments in mortgage loans.
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,
<PAGE> 15
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.
Commitments and Contingencies. As of March 31, 1997, the Trust's
loan portfolio included total loans of $4,962,226 of which $283,450 representing
5.7% of the loans were delinquent. The balance of delinquent loans which were in
the process of foreclosure at March 31, 1997 totaled $294,450 or 6.3% 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 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 does not
have any commitments to fund loans as of March 31, 1996 and March 31, 1997.
RESULTS OF OPERATIONS
The following discussion relates to the Trust's Mortgage Investment
Business since its Mortgage Conduit Business was not organized or in operation
prior to March 31, 1997. 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 Ended March, 31, 1997 Compared to Three months Ended
March 31, 1996. Revenues for three months ended March 31, 1997 increased to
$233,256 as compared to $213,048 for the same period in the previous year. Such
revenues are composed primarily of interest income earned on mortgage notes
receivable and additional loan points in 1997.
Expenses for the three months ended March 31, 1997 increased to
$98,877 as compared to $32,361 for the same period of the previous year. The
increase in expense was the result of increased loan servicing fees and
management fees resulting from the combination of the Trust on April 30, 1996
and the effectiveness of this Offering. In addition, total expenses include
interest expense and operating expenses on real estate held in 1997 as compared
to no expenses on property owned for the same period of the previous year.
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.
<PAGE> 16
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. The major
portion of the proceeds from issuance of common stock in this Offering will be
used to fund future investments in mortgage loans by the Trust's Mortgage
Investment Business. The Trust's liquidity requirements will 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
this 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 is achieved in this Offering. Restrictions on cash
attributed to holdbacks do not significantly impact the Trust's liquidity.
Net cash provided by operating activities during the three months
ended March 31, 1997 and 1996 was $140,957 and $119,911, respectively. Net cash
for all periods was positively affected by improved market conditions in the
mortgage banking industry.
Net cash used in investing activities for the three months ended
March 31, 1997 and 1996 was $92,682 and $411, 555, respectively. During these
periods, funding of mortgage note receivable exceeded the repayment rate for
such receivables primarily due to higher mortgage loan acquisition volumes.
Net cash (used in ) provided by financing activities during the
three months ended March 31, 1997 and 1996 was $(210,496) and $57,699,
respectively. For the three months ended March 31, 1997, net cash was negatively
affected by dividends paid to shareholders and offering costs. For the three
months ended March 31, 1996, receipt of subscriptions exceeded dividends paid to
shareholders and redemption of shares, having a positive effect on net cash.
The Trust will use the net proceeds of its current public offering
to provide additional funding for the Trust's Mortgage Investment Business and,
to a more limited extent, the establishment of its planned Mortgage Conduit
Business. Management believes that cash flow from operations and the net
proceeds of the public offering plus the establishment of a warehouse line 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.
<PAGE> 17
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
No matters have been submitted to the vote of Security Holders.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Not applicable.
(b) Form 8-K
The Registrant has not filed any reports on Form 8-K
during the quarter ended March 31, 1997.
3
<PAGE> 18
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: 5/7/97 By: /s/ Thomas B. Swartz
- -------------------- -----------------------------------------
Thomas B. Swartz, Chief Executive Officer
Dated: 5/7/97 By: /s/ Jeannette Hagey
- -------------------- -----------------------------------------
Jeannette Hagey, Chief Financial Officer
ARK:pmm
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
FINANCIAL STATEMENTS OF CAPITAL ALLIANCE INCOME TRUST, A REAL ESTATE INVESTMENT
TRUST FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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<CASH> 209,257
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0
5,924,128
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