CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
May 15, 1998
SECURITIES & EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Capital Alliance Income Trust Ltd., A Real Estate Investment Trust
SEC File No. 333-11625
Our File No. 76021.0002
Dear Sir/Madam:
Pursuant to Sections 13 and 15(d) of the Securities Exchange Act of 1934,
enclosed for filing via EDGAR please find a Form 10-Q for the quarter ended
March 31, 1998. If you have any questions, please do not hesitate to call.
Very truly yours,
/s/ Richard J. Wrensen
----------------------
Richard J. Wrensen
Chief Financial Officer
Enclosures
cc: Stephen C. Ryan, Esq.
50 California Street, Suite 2020 o San Francisco, CA 94111 o (415) 288-9575 o
fax (415) 288-9590
<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 March 31, 1998
Commission File Number: 333-11625
-------------------
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3240473
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
50 California Street
Suite 2020
San Francisco, California 94111
------------------------- -----
(Address of principal executive office) (zip code)
(415) 288-9575
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 30, 1998, the aggregate market value of the registrant's shares of
Common Stock, $.01 par value, held by non affiliates of the registrant was
approximtely $7,949,393. At that date 993,674 shares of common stock were
outstanding outstanding. The shares are approved for listing on the American
Stock Exchange upon notice of issuance, but will not trade publicly until the
conclusion of the Registrant's current "best efforts" public offering.
<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)
March 31, 1998 December 31, 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................................. $ 1,197,327 $ 1,748,485
Restricted cash ....................................................... 376,871 205,356
Warehouse lines of credit to related parties .......................... 1,923,699 2,185,957
Accounts receivable ................................................... 124,809 95,207
Investments in affiliates ............................................. 650,355 469,150
Mortgage notes receivable ............................................. 7,393,227 4,915,186
Real estate held for sale ............................................. 322,550 322,550
Organization costs (net of accumulated amortization of $8,652 at
March 31, 1998 and $7,551 at December 31, 1997) .................. 13,377 14,478
Deferred offering costs ............................................... 126,434 176,050
----------- -----------
Total assets .......................................................... $12,128,649 $10,132,419
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks .......................................... $ 376,871 $ 205,356
Due to affiliates ................................................ 8,842 82,966
Other liabilities ................................................ 77,374 22,774
Mortgage notes payable ........................................... 0 0
----------- -----------
Total liabilities ..................................................... 463,087 311,096
----------- -----------
Stockholders' Equity
Preferred stock, $.01 par value (liquidation value $9.50 ......... 6,413 6,413
per share); 675,000 shares authorized; 641,283 shares
issued andoutstanding at March 31, 1998 and
December 31, 1998 respectively ...............................
Additional paid in capital -preferred stock ..................... 5,868,711 5,868,711
Common stock, $.01 par value; 5,000,000 ......................... 8,273 5,628
shares authorized ; 827,300 and 562,760 shares issued and
outstanding at March 31, 1998 and December
31, 1998 ,respectively
Additional paid in capital - common stock ....................... 5,782,165 3,940,571
----------- -----------
Total stockholders' equity ............................................ 11,665,562 9,821,323
----------- -----------
Total liabilities and stockholders' equity ............................ $12,128,649 $10,132,419
=========== ===========
</TABLE>
3
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
Statements of Operations
(Unaudited)
Three Months Ended
March 30,
1998 1997
<S> <C> <C>
REVENUES
Interest income ..................................... $258,560 $182,781
Origination income .................................. 25,172 24,608
Other income ........................................ 8,772 25,867
-------- --------
Total revenues .................................. 292,504 233,256
-------- --------
EXPENSES
Loan servicing and other expenses to related party .. 73,992 29,179
Interest expense .................................... -- 39,959
Provision for loan losses ........................... -- --
Operating expenses of real estate owned ............. 2,890 19,147
General and administrative .......................... 36,488 10,592
-------- --------
Total expenses ................................ 113,370 98,877
-------- --------
NET INCOME ............................................... $179,134 $134,379
======== ========
BASIC EARNINGS PER COMMON SHARE ......................... $ 0.039 --
DILUTED EARNINGS PER COMMON SHARE ....................... $ 0.029 --
</TABLE>
4
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ............................................. $ 179,134 $ 134,378
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization ......................................... 1,101 1,080
(Increase) decrease in accounts receivable .......... (29,602) (4,737)
Accrued interest capitalized to real estate owned .... -- (13,826)
Increase (decrease) in loan loss reserve ............. -- --
Increase (decrease) in due to affiliates ............. (74,124) 32,258
Increase (decrease) in other liabilities ............. 54,600 (8,196)
----------- -----------
Net cash provided by (used in) operating activities 131,109 140,957
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash ................. (171,515) (54,207)
Increase (decrease) in mortgage note holdbacks ......... 171,515 54,207
(Increase) decrease in warehouse lines of credit ....... 262,258 --
(Increase) in investments .............................. (181,205) --
Investments in mortgage notes receivable ............... (3,191,883) (1,345,000)
Repayments of mortgage notes receivable ................ 713,842 963,946
Net proceeds from sale of foreclosed property .......... -- 485,658
Capital costs of foreclosed property ................... -- (11,922)
----------- -----------
Net cash provided by (used in) investing ............. (2,396,988) 92,682
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of shares ................................... -- --
Proceeds from issuance of shares ....................... 2,116,320 --
Deferred offering costs ................................ (53,474)
Payment of mortgage notes payable ...................... -- (6,642)
Organizational and offering costs ...................... (218,802) (354)
Dividends paid ......................................... (182,797) (150,026)
----------- -----------
Net cash provided by (used in) financing activities .. 1,714,721 (210,496)
----------- -----------
NET INCREASE (DECREASE) IN CASH ............................. (551,158) 23,143
CASH AT BEGINNING OF PERIOD ................................. 1,748,485 66,798
----------- -----------
CASH AT END OF PERIOD ....................................... $ 1,197,327 $ 89,941
=========== ===========
SUPPLEMENTAL CASHFLOW INFORMATION:
Interest expense paid .................................. -- --
Taxes paid ............................................. -- --
</TABLE>
5
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three months ended March 31, 1998 and 1997
(Unaudited)
1. Organization
------------
Capital Alliance Income Trust Ltd., A Real Estate Investment Trust (the
"Trust"), a Delaware corporation, primarily invests in mortgage loans
secured by real estate. The Trust was formed December 12, 1995 to
facilitate the combination of the mortgage investment operations of
Capital Alliance Income Trust I, a Delaware business trust, and Capital
Alliance Income Trust II, a Delaware business trust, (collectively
referred to as the "Predecessors", individually referred to as "CAIT I"
and "CAIT II", respectively). CAIT I and CAIT II were both privately-held
mortgage investment trusts which invested primarily in loans secured by
deeds of trust on one-to-four unit residential properties. The Manager,
Capital Alliance Advisors, Inc. (the "Manager") originates, services and
sells the Trust's loans.
Effective February 12, 1997, the Trust registered its common shares with
the Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended in connection with a"best efforts" offering of up to
1,500,000 common shares at $8.00 per share and warrants to purchase an
additional 150,000 common shares at $5.60 per share.
2. Basis of presentation
---------------------
The accompanying financial statements include the accounts of the Trust.
The financial information presented has been prepared from the books and
records without audit. The accompanying financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and the footnotes required by generally
accepted accounting principles for complete statements. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such financial
statements, have been included.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
These financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31,
1997 filed pursuant to 15d-2 on Form 10-K with the Securities and Exchange
Commission.
The unaudited interim financial statements for the three months ended
March 31, 1997 and March 31, 1998 represent the the financial statements
of the Trust.
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
6
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three months ended March 31, 1998 and 1997
(Unaudited)
insured limits. Restricted cash represents segregated cash and is to be
disbursed only to mortgage loan borrowers upon completion of certain
improvements to the secured property (see Note 4).
Revenue recognition. Interest income is recorded on the accrual basis of
accounting in accordance with the terms of the loans. When the payment of
principal or interest is 90 or more days past due, management reviews the
likelihood that the loan will be repaid. For these delinquent loans,
management continues to record interest income and establishes a loan loss
reserve as necessary to protect against losses in the loan portfolio
including accrued interest.
Loan loss reserve. Management reviews its loan loss provision periodically
and the Trust maintains an allowance for losses on mortgage notes
receivable at an amount that management believes is sufficient to protect
against losses in the loan portfolio given the individual loan to value of
the Trust's loan portfolio based on the latest independent appraisals.
Accounts receivable deemed uncollectible are written off or reserved. The
Trust does not accrue interest income on impaired loans (Note 5).
Investments. The Trust previously held an investment in Sierra Capital
Acceptance ("SCA"). On December 31, 1997 SCA completed a tax free-merger
with Sierra Capital Funding, LLC ("SCF"), a Delaware Limited Liability
Company which originates and sells residential mortgages, by exchanging
all the Class A and Class B shares of SCA for the Sierra common and
preferred shares of SCF. SCA will continue operations as as a seperate
operating division of SCF. The Trust ownes 99% of the non-voting Sierra
Preferred shares of SCF. SCF-Sierra Preferred shares receive a 15%
interest per annum. Sierra Capital Services, Inc., a related party, owns
99% of the Sierra common shares of SCF and maintains voting control. The
SCF-Sierra common shareholders are allocated all net profits and losses
and are required to contribute or loan additional capital to cover any
operating losses. SCF is taxed as a partnership. The Trust accounts for
its investment in SCF under the equity method.
On April 11, 1997 the Trust formed its non-qualified REIT subsidiary
Capital Alliance Funding Corporation ("CAFC") to conduct its mortgage
conduit business. The Trust ownes 99% of the outstanding Series "A"
Preferred stock (2,000 shares of non-voting stock) in CAFC. The Trust's
Manager ownes 1% of the Common Shares (1,000 shares) of CAFC and has 100%
voting control. The Trust's Manager also manages CAFC and provides
mortgage origination and loan sale and servicing for CAFC. The Trust
accounts for its investment in CAFC under the equity method.
On January 30, 1998 the Trust invested $225,000 in Equity 123, a seperate
operating division of SCF, that originates and sells residential
mortgages. In exchange for the investment, the Trust received a
subordinate debenture that earns 15% per annum. The Trust accounts for the
income as interest.
Income taxes. The Trust intends at all times to qualify as a real estate
investment trust ("REIT") for federal income tax purposes , under Sections
856 through 860 of the Internal revenue Code of 1986, as amended and
applicable Treasury Regulations. Therefore, the Trust will not be subject
to federal corporate income taxes, if the Trust distributes at least 95%
of its taxable income to its shareholders. To qualify as a REIT, the trust
must elect to be so treated and must meet on a continuing basis certain
requirements relating to the Trusts organization, sources of income,
nature of assets, and distribution of assets to shareholders. The Trust
must maintain certain records and request certain information from its
stockholders designed to disclose actual ownership of its stock. In
addition the Trust must must satisfy certain gross income requirements and
certain asset tests at the close of each quarter of its taxable year.
7
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three months ended March 31, 1998 and 1997
(Unaudited)
If the Trust fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Trust will be subject to tax
on its taxable income at regular corporate rates. Distributions to
stockholders in any year in which the Trust fails to qualify will not be
deductible by the Trust nor will they be required to be made. Unless
entitled to relief under specific statutory provisions, the Trust will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost.
Based on the Trust's belief that it has operated in a manner so as to
allow it to elect to be taxed as a REIT since inception, no provision for
federal income taxes has been made in the financial statements.
For the three-month period ended March 31, 1997, the distributions per
preferred share are allocated 100% as ordinary income and 100% as a return
of capital for tax purposes. For the year ended March 31, 1998, the
distributions per preferred share are allocated 100% ordinary income and
the common share distribution is allocated 88 % ordinary income and a 12%
return of capital for tax purposes.
Fair value of financial instruments. For cash and cash equivalents, the
carrying amount is a reasonable estimate of fair value. For mortgage note
receivables, fair value is estimated by discounting the future cash flows
using the current interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. It was determined that the difference between the carrying
amount and the fair value of the mortgage notes receivable is immaterial.
Organizational costs. Organization costs are capitalized and amortized on
a straight-line basis over five years.
Deferred offering costs. Deferred offering costs relate to an initial
public offering of common stock. While the offering is underway, these
costs will be offset pro-rata against the proceeds from the issuance of
common stock and as a reduction of stockholder's equity.
Real estate owned. Real estate owned results from foreclosure of loans and
at time of foreclosure is recorded at the lower of carrying amount or fair
value of the property minus estimated costs to sell. At this time senior
debt to which the asset is subject is reported as mortgage payable.
Subsequent to foreclosure, the foreclosed asset value is periodically
reviewed and is adjusted to fair value. No depreciation is taken on the
real estate held for sale. Income and expenses related to real estate
owned are recorded as interest income, interest expense and general and
administrative expenses on the Statements of Operations.
Earnings per share. The Preferred Shares receive an annual preferred
allocation of income and distributions. Prior to the December 4, 1997
issuance of Common Shares, the Preferred Shares received 100% of the
Trust's net income. After completion of the current offering of common
shares and after meeting such preference, at least 95% of any additional
income earned will be distributed to the Common Shares, until the
distribution on the Common Shares matches that of the Preferred Shares
(see Note 9).
8
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three months ended March 31, 1998 and 1997
(Unaudited)
4. Restricted cash and mortgage note holdbacks
-------------------------------------------
Pursuant to mortgage loan agreements between the Trust and certain of its
borrowers, a portion of the loan proceeds are held by the Trust in
segregated accounts to be disbursed only to such borrowers upon completion
of certain improvements on the secured property.
5. Mortgage notes receivable
-------------------------
Mortgage notes receivable represent transactions with customers in which
the Trust has invested in home equity loans on residential real estate.
The Trust is subject to the risks inherent in finance lending including
the risk of borrower default and bankruptcy.
Mortgage notes receivable are stated at the principal outstanding.
Interest on the mortgages is due monthly and principal is due as a balloon
payment at loan maturity. The notes are secured by deeds of trust on
residential properties located primarily in California which results in a
concentration of credit risk. The value of the loan portfolio may be
affected by changes in the economy or other conditions of the geographical
area. A portion of the notes are secured by a second position on the
underlying properties and loans are non-conforming loans to B/C-credit
borrowers.
The Trust measures impairment based on the fair value of the related
collateral since all loans subject to this measurement are collateral
dependent. There was no investment in impaired loans for all periods
presented.
6. Accounts receivable
-------------------
Accounts receivable consists of accrued interest on mortgage notes
receivable and other amounts due from borrowers.
7. Mortgage notes payable
----------------------
As of March 31, 1998 the Trust held no mortgage notes payable.
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
9
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three months ended March 31, 1998 and 1997
(Unaudited)
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, 1997 and March 31, 1998, the Trust paid $29,179 and
$73,992 respectively to the Manager.
As described in Note 3, the Trust holds an investment in Sierra Capital
Funding and receives a 15% guaranteed return per annum. For each three
months ended March 31, 1997, and March 31, 1998 the Trust earned interest
of $7,500 from the investment.
As described in Note 3, the Trust has a non-qualified REIT subsidiary,
Capital Alliance Funding Corporation, which commenced operations in the
third quarter of 1997. For the three months ended March 31, 1987, the
Trust was allocated a loss of $43,795 from this investment.
As described in Note 3, the trust holds an investment in Equity 123 and
receives a 15% return per annum. Since January 30, 1998, the date of the
investment, to March 31, 1998 the trust has earned interest of $5,625 from
this investment.
9. Preferred stock and common stock
--------------------------------
The Preferred Shares are entitled to a distribution preference in an
amount equal to an annualized return on the Net Capital Contribution of
Preferred Shares at each dividend record date during such year (or, if the
Directors do not set a record date, as of the first day of the month)
equal to the lesser of 10.25% or 150 basis points over the Prime Rate
(determined on a not less than quarterly basis). The distribution
preference on the Preferred Shares is not cumulative.
After declaration of dividends for a given quarter to the Preferred Shares
in the amount of the distribution preference, no further distributions may
be declared on the Preferred Shares for the quarter until the current
Distributions declared on each Common Share for that quarter equals the
distribution preference for each Preferred Share for such quarter. Any
additional distributions generally will be allocated such that the amount
of distributions per share to the holders of the Preferred Shares and
Common Shares for the quarter are equal.
Holders of Preferred Shares are entitled to receive all liquidating
distributions until the aggregate adjusted net capital contribution of all
Preferred Shares has been reduced to zero. Thereafter, holders of Common
Shares are entitled to all liquidation distributions until the aggregate
adjusted net Capital contributions of all Common Shares has been reduced
to zero. Any subsequent liquidating distributions will be allocated among
the holders of the Common Shares and Preferred Shares pro rata.
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
10
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three months ended March 31, 1998 and 1997
(Unaudited)
accrued but unpaid dividends attributable to all Preferred Shares
outstanding, multiplied by the net asset value of the Trust attributable
to the Preferred Shares which shall be that percentage of the Trust's net
asset value that the aggregate adjusted net capital contributions of all
Preferred Shares bears to the adjusted net capital contributions of all
Shares outstanding. A liquidation charge is charged by the Trust in
connection with each redemption as follows: 1% of redemption amount in
1998, and none thereafter.
11
<PAGE>
PART I
ITEM 2.
MANAGEMENT' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial statements of Capital Alliance Income Trust Ltd., A Real
Estate Investment Trust (the"Trust") dated herein were prepared from the
unaudited books, ledgers and records of the Trust.
General
Predecessors: The Combination. The Trust resulted from the consolidation
of CAIT I and CAIT II (the "Combination") on April 30, 1996. The Trust exchanged
shares of preferred stock for all of the outstanding whole shares of CAIT I and
CAIT II at April 30, 1996. Holders of the fractional shares of CAIT I and CAIT
II received cash in lieu of fractional shares of preferred stock of the Trust.
Thereafter, all assets and liabilities of CAIT I and CAIT II were transferred to
the Trust. CAIT I and CAIT II were both privately-held mortgage investment
trusts which invested primarily in loans secured by deeds of trust on
residential property. The Trust was incorporated in Delaware on December 12,
1995. CAIT II was formed October 18, 1994 and began its first year of operations
in 1995. CAIT I and CAIT II were formed and managed by Capital Alliance
Advisors, Inc. ("CAAI") which also manages the Trust and originates, services
and sells the Trust's mortgage loans.
Recent Trends. The Trust invests in non-conforming mortgage loans on
one-to-four unit residential properties because management believes that there
is a large demand for non-conforming mortgage loans on these kinds of properties
which produce higher yields without comparably higher credit risks when compared
with conforming mortgage loans. Management invests primarily in A-, B/C (or
less) credit rated home equity loans secured by deeds of trust. In general, B
and C credit rated home equity loans are made to borrowers with lower credit
ratings than borrowers of higher credit quality, such as A credit rated home
equity loans. Home equity loans rated A-, B/C (or less) tend to have higher
rates of loss and delinquency, but higher rates of interest than borrowers of
higher credit quality.
Management believes there is increased demand for high-yielding
non-conforming mortgage loans caused by a demand by investors for higher yields
due to low interest rates over the past few years and increased securitization
of high-yielding non-conforming mortgage loans by the investment banking
industry.
Loan Origination and Loan Servicing. Mortgage loan origination consists of
establishing a relationship with a borrower or his broker, obtaining and
reviewing documentation concerning the credit rating and net worth of borrowers,
inspecting and appraising properties that are proposed as the subject of a home
equity loan, processing such information and underwriting and funding the
mortgage loan. Mortgage loan servicing consists of collecting payments from
borrowers, accounting for interest payments, holding escrow funds until
fulfillment of mortgage loan requirements, contacting delinquent borrowers,
foreclosing in the event of unremedied defaults and performing other
administrative duties. Mortgage loan origination and loan servicing were
provided to the Trust by CAAI, its Manager.
Commitments and Contingencies. As of March 31, 1998, the Trust's loan
portfolio included total loans of $7,393,227 of which $374,000 representing 5%
of the loans were delinquent. There were no delinquent loans which were in the
process of foreclosure at March 31, 1998. In assessing the collectibility of
these delinquent mortgage loans, management estimates a net gain will be
realized upon sale of the properties securing these loans if it is necessary to
foreclose the mortgage loans due to the Trust. Management's estimate is based on
an anticipated sales price of the property based on the latest appraised value
of the property discounted at 10% less the sum of pre-existing liens, costs of
sale, the face amount of the mortgage
12
<PAGE>
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 March 31, 1998 and March 31, 1997.
Results of Operations
The results of operations of the Trust for the three months ended March
31, 1998 have been significantly impacted by the issuance of common stock and
the investment of the common stock proceeds in additional mortgage notes
receivable and warehouse lines of credit. The historical information presented
herein is not necessarily indicative of future operations.
Three months ended March 31, 1998 and 1997. Revenues for the first quarter
increased to $292,504 as compared to $233,256 for the same period in the
previous year. The increased was primarily due to increased interest from
mortgage notes receivable and warehouse lines of credit.
Expenses for the first quarter 1998 increased to $113,370 compared to
$98,877 for the same period in the previous year. The increase in the first
quarter 1998 compared to first quarter 1997 is primarily due to higher
management fees and general and administrative expenses. The increased
managemnet fees is primarily due to the Trust's higher asset value..
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 are being used to fund investments in mortgage loans. The
Trust's liquidity requirements will also be funded by periodical payoffs of
existing loans which are generally short term in duration, by the sale of real
estate owned 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. 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, 1998 and 1997 was $131,109 and $140,957, respectively. Net cash for
all periods was positively affected by improved marketing conditions and the
volume of loan activity in 1997.
Net cash provided by (used in) investing activities for the three months
ended March 31, 1998 and 1997 was $(2,396,988) and $92,682, respectively. The
large decrease in 1998 compared to the prior year is due to the higher volume of
mortgage loans issued .
Net cash (used in) provided by financing activities during the three
months ended March 31, 1998 and 1997 was $1,714,721 and $(210,496),
respectively. The increase in the three months ended March 31, 1998 is primarily
due to the issuance of common stock.
13
<PAGE>
The Trust will use the net proceeds of its current public offering to
provide additional funding for the Trust's Mortgage Investment Business.
Additionally, CAFC has a $3,000,000 warehouse line of credit from Warehouse
Lending Corporation of America, guaranteed by the Trust. Management believes
that cash flow from operations and the net proceeds of the public offering and
of loans that are paid off plus the establishment of the warehouse lines of
credit for the Mortgage Conduit Business will be sufficient to meet the
liquidity needs of the Trust's businesses for the next twelve months.
14
<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
During the three months ended March 31, 1998 the number of common shares
issued and outstanding increased from 562,760 to 827,300 shares.
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 REPORTS ON FORM 8-K
(a) Form 8-K
The Registrant has not filed any reports on Form 8-K during the quarter
ended March 31, 1998.
15
<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: May 14, 1998 By: /s/ Richard J. Wrensen
----------------------
Richard J. Wrensen, Chief Financial Officer
16
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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<CASH> 1,197,327
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<RECEIVABLES> 9,441,735
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0
641,283
<COMMON> 827,300
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