CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
November 3, 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
September 30, 1998. If you have any questions, please do not hesitate to call.
Very truly yours,
/s/ Richard J. Wrensen
Richard J. Wrensen
Senior Vice President and
Chief Financial Officer
Enclosures
cc: Stephen C. Ryan, Esq.
50 California Street, Suite 2020 o San Francisco, CA 94111
(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 September 30, 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
incorporation or organization) Identification Number)
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 October 29, 1998, the aggregate market value of the registrant's shares of
Common Stock, $.01 par value, held by non affiliates of the registrant was
approximately $7,794,890. At that date 1,484,741 shares were outstanding and
listed on the American Stock Exchange
<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)
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................... $ 799,733 $ 1,748,485
Restricted cash ..................................................... 492,362 205,356
Warehouse lines of credit to related parties ........................ 4,448,996 2,185,957
Accounts receivable ................................................. 187,276 95,207
Investments in affiliates ........................................... 665,946 469,150
Net mortgage notes receivable (net of a loss reserve of $14,000
at September 30, 1998 and $0 at December 31, 1997) ........... 9,709,308 4,915,186
Real estate held for sale ........................................... 749,525 322,550
Organization costs (net of accumulated amortization of $10,854 at
September 30, 1998 and $7,551 at December 31, 1997) ........ 11,175 14,478
Deferred offering costs ............................................. -- 176,050
------------ ------------
Total assets ........................................................ $ 17,064,321 $ 10,132,419
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks ........................................ $ 492,362 $ 205,356
Due to affiliates .............................................. 219,404 82,966
Other liabilities .............................................. 73,518 22,774
Mortgage notes payable ......................................... 253,329 0
------------ ------------
Total liabilities ................................................... 1,038,613 311,096
------------ ------------
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 and outstanding at September 30, 1998 and
December 31, 1997 respectively ......................
Additional paid in capital -preferred stock ................... 5,868,711 5,868,711
Less 25,526 preferred shares held in treasury ................. (238,944) --
Common stock, $.01 par value; 5,000,000 ....................... 14,847 5,628
shares authorized ; 1,484,741 and 562,760 shares
issued and outstanding at September 30, 1998 and
December 31, 1997 , respectively
Additional paid in capital - common stock ..................... 10,374,682 3,940,571
------------ ------------
Total stockholders' equity .......................................... 16,025,709 9,821,323
------------ ------------
Total liabilities and stockholders' equity .......................... $ 17,064,321 $ 10,132,419
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Interest income ........... $ 399,270 $ 110,844 $ 983,259 $ 438,893
Origination income ........ 86,262 39,673 147,301 72,628
Other income .............. 9,587 37,827 21,510 84,745
---------- ---------- ---------- ----------
Total revenues ........ 495,119 188,344 1,152,070 596,266
---------- ---------- ---------- ----------
EXPENSES
Loan servicing and other
expenses to related party 114,355 38,258 277,502 104,334
Interest expense .......... 17,173 4,183 17,811 43,604
Provision for loan losses . 14,000 -- 14,000 --
Operating expenses of
real estate owned ....... 14,761 7,646 31,325 33,890
General and administrative 18,783 4,893 77,173 27,103
---------- ---------- ---------- ----------
Total expenses ...... 179,072 54,980 417,811 208,931
---------- ---------- ---------- ----------
Net Income Before Gain on
Real Estate Held for Sale . 316,047 133,364 734,259 387,335
Gain / (Loss) on Real Estate
Held for Sale ............. -- 23,063 -- 16,670
========== ========== ========== ==========
NET INCOME .................... $ 316,047 $ 156,427 $ 734,259 $ 404,005
========== ========== ========== ==========
BASIC EARNINGS PER
COMMON SHARE .............. $ 0.130 -- $ 0.270 --
DILUTED EARNINGS PER
COMMON SHARE .............. $ 0.106 -- $ 0.176 --
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ............................................. $ 734,259 $ 404,005
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization ......................................... 3,303 3,240
(Increase) decrease in accounts receivable .......... (92,069) (55,483)
Increase (decrease) in loan loss reserve ............. 14,000 --
Increase (decrease) in due to affiliates ............. 136,438 25,300
Increase (decrease) in other liabilities ............. 50,744 57,155
----------- -----------
Net cash provided by (used in) operating activities 846,675 434,217
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash ................. (287,006) (106,850)
Increase (decrease) in mortgage note holdbacks ......... 287,006 106,850
(Increase) decrease in warehouse lines of credit ....... (2,263,039) --
(Increase) in investments .............................. (196,796) --
Investments in mortgage notes receivable ............... (8,670,450) (3,664,006)
Repayments of mortgage notes receivable ................ 3,862,328 3,295,791
Net proceeds from sale of real estate held ............. (426,975) 597,398
Capital costs of real estate held ...................... -- (16,807)
----------- -----------
Net cash provided by (used in) investing ............. (7,694,932) 212,376
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of shares ................................... (238,944) --
Proceeds from issuance of shares ....................... 6,479,545 --
Payment of mortgage notes payable ...................... 253,329 (7,542)
Organizational and offering costs ...................... 176,050 (214,287)
Dividends paid ......................................... (770,475) (447,908)
----------- -----------
Net cash provided by (used in) financing activities .. 5,899,505 (669,737)
----------- -----------
NET INCREASE (DECREASE) IN CASH .............................. (948,752) (23,144)
CASH AT BEGINNING OF PERIOD .................................. 1,748,485 66,797
----------- -----------
CASH AT END OF PERIOD ........................................ $ 799,733 $ 43,653
=========== ===========
SUPPLEMENTAL CASHFLOW INFORMATION:
Interest expense paid .................................. $ 17,811 43,604
Taxes paid ............................................. $ 23,942 --
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 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. The offering was
completed on September 30, 1998 with the sale of 1,484,741 common shares
for $11,877,928. The common shares commenced trading on the American Stock
Exchange ("CAA") on October 1, 1998.
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 nine months ended
September 30, 1997 and September 30, 1998 represent the the financial
statements of the Trust.
6
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 1998 and 1997
(Unaudited)
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 may continue to record interest income. A loan loss reserve is
provided 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 a separate operating
division of SCF. The Trust owns 99% of the non-voting Sierra preferred
shares of SCF. SCF-Sierra Preferred shares receive 15% interest per annum.
Sierra Capital Services, Inc., a related party, owns 99% of the Sierra
common shares of SCF and maintains voting control. 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 the investment income as
interest.
On April 11, 1997 the Trust formed its non-qualified REIT subsidiary
Capital Alliance Funding Corporation ("CAFC") to conduct its mortgage
conduit business. The Trust owns 100% of the outstanding Series "A"
Preferred stock (2,000 shares of non-voting stock) in CAFC, which has a
preferential right to receive 99% of all distributions by CAFC.. The
Trust's Manager owns 100% 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 sale and services 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 separate
operating division of SCF that originates on a retail basis 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
investment 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,
7
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 1998 and 1997
(Unaudited)
as amended and applicable Treasury Regulations. Therefore, the Trust will
not be subject to federal corporate income taxes, if the Trust distributes
at least 95% of its taxable income to its shareholders. To qualify as a
REIT, the trust must elect to be so treated and must meet on a continuing
basis certain requirements relating to the Trusts organization, sources of
income, nature of assets, and distribution of assets to shareholders. The
Trust must maintain certain records and request certain information from
its stockholders designed to disclose actual ownership of its stock. In
addition the Trust must satisfy certain gross income requirements and
certain asset tests at the close of each quarter of its taxable year.
If the Trust fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Trust will be subject to tax
on its taxable income at regular corporate rates. Distributions to
stockholders in any year in which the Trust fails to qualify will not be
deductible by the Trust nor will they be required to be made. Unless
entitled to relief under specific statutory provisions, the Trust will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost.
Based on the Trust's belief that it has operated in a manner so as to
allow it to elect to be taxed as a REIT since inception, no provision for
federal income taxes has been made in the financial statements.
For the nine month period ended September 30, 1997, the distributions per
preferred share are allocated 90% as ordinary income and 10% as a return
of capital for tax purposes. For the nine month period ended September 30,
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 other income, interest expense and general and
administrative expenses on the Statements of Operations.
8
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 1998 and 1997
(Unaudited)
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).
4. Restricted cash and mortgage note holdbacks
--------------------------------------------
Pursuant to mortgage loan agreements between the Trust and certain of its
borrowers, a portion of the loan proceeds are held by the Trust in
segregated accounts to be disbursed only to such borrowers upon completion
of certain improvements on the secured property. As of September 30, 1997
and September 30, 1998, mortgage note holdbacks from the consummation of
mortgage loans made amounted to $205,356 and $492,362, 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.
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 September 30, 1998 the Trust held a mortgage notes payable of
$253,329.
9
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 1998 and 1997
(Unaudited)
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 nine months
ended September 30, 1997 and September 30, 1998, the Trust respectively
paid $104,334 and $277,502 to the Manager.
As described in Note 3, the Trust holds an investment in Sierra Capital
Acceptance, a division of Sierra Capital Funding, and receives a 15%
guaranteed return per annum. For each nine months ended September 30, 1997,
and September 30, 1998 the Trust earned interest of $22,500 from this
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 nine months ended September 30, 1998, the
Trust was allocated a loss of $28,203 from this investment. Capital
Alliance Funding Corporation is managed by Capital Alliance Advisors Inc.,
which is owned by several of the Trust's trustees.
As described in Note 3, the Trust holds an investment in Equity 123, a
division of Sierra Capital Funding and receives a 15% guaranteed return per
annum. Since the investment date through September 30, 1998 the Trust has
earned interest of $22,500 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
10
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the nine months ended September 30, 1998 and 1997
(Unaudited)
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: 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 OPERATION
12
<PAGE>
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 or C
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 or C 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 September 30, 1998, the Trust's loan
portfolio included total loans of $9,723,308 of which $634,214 representing 6.5%
of the loans were delinquent (over 60 days). There were two delinquent loans
which were in the process of foreclosure at September 30, 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 loan and
accrued interest receivable. The Trust generally issues loan commitments only on
a conditional basis and generally funds such loans promptly upon removal of any
conditions. Accordingly, the Trust did not have any commitments to fund loans as
of September 30, 1998 and September 30, 1997.
13
<PAGE>
Results of Operations
The results of operations of the Trust for nine months ended September 30,
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 and nine months ended September 30, 1998 and 1997. Revenues
for the third quarter increased to $495,119 as compared to $188,344 for the same
period in the previous year. Revenues for the nine months of 1998 increased to
$1,152,070 as compared to $596,266 for the same period of the previous year. The
1998 interest income and origination income increased for the quarter and nine
months, compared to the same period in the previous year. The 1998 other income,
however, was lower for both the quarter and the nine month period, compared to
the same period in the previous year.
Expenses for the third quarter 1998 increased to $197,072 compared to
$54,980 for the same period in the previous year. For the nine month period,
expenses increased to $417,811 compared to $208,931 for the previous year. The
increase in the third quarter 1998 compared to third quarter 1997 is primarily
due to the greater management and servicing fees of administering a larger
mortgage portfolio. The increase in the nine months of 1998 compared to 1997 is
similarly explained.
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 just
completed Offering will be used to fund future investments in mortgage loans by
the Trust's Mortgage Investment Business. 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 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. Restrictions on cash attributed to holdbacks do not
significantly impact the Trust's liquidity.
Net cash provided by operating activities during the nine months ended
September 30, 1998 and 1997 was $846,675 and $434,217, respectively. Net cash
for all periods was positively affected by the improved volume of loan activity
in 1998.
Net cash provided by (used in) investing activities for the nine months
ended September 30, 1998 and 1997 was $(7,694,932) and $212,376, respectively.
The change in 1998 compared to the prior year is due to the larger volume of
mortgage loans and expanded demand for warehouse lines of credit.
Net cash (used in) provided by financing activities during the nine months
ended September 30, 1998 and 1997 was $5,899,505 and $(669,737), respectively.
The change in 1998 is primarily due to issuance of common shares. The decrease
in 1997 is primarily due to the offering costs related and dividend payments.
The Trust will use the net proceeds of its current public offering to
provide additional funding for the Trust's Mortgage Investment Business.
Management believes that cash flow from operations and the net proceeds of the
public offering and of loans that are paid off 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 September 30, 1998 the number of common
shares outstanding increased from 1,180,800 to 1,484,741. On June 29,
1998 the Trust acquired 47,761 preferred shares as treasury stock and
during the three month period ended September 30, 1998 resold 22,235
preferred shares.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Trust held its postponed 1998 annual meeting on July 17, 1998.
Messrs. Dennis R. Konczal and Stanley C. Brooks were elected to new
terms as Class II directors. Messrs. Thomas B. Swartz and Harvey
Bloomberg continue as Class I directors. Douglas A. Thompson continues
as a Class III director.
Novogradac & Company LLP was approved as independent auditors for
1998. 389,076 shares voted in favor ot their appointment, 10,000
shares against and 7,025 shares abstained.
The Trust's incentive stock option plan was approved. 301,884 shares
voted in favor of the plan, 70,817 shares against and 34,400 shares
abstained.
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 September September 30, 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: November 3, 1998 By: /s/ Richard J. Wrensen
------------------------
Richard J. Wrensen
Senior Vice President and
Chief Financial Officer
16
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<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 799,733
<SECURITIES> 0
<RECEIVABLES> 9,910,584
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<PP&E> 749,525
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0
615,757
<COMMON> 1,484,741
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<INTEREST-EXPENSE> 17,811
<INCOME-PRETAX> 734,259
<INCOME-TAX> 0
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