CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
May 20, 1999
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, 1999. 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 - San Francisco, CA 94111 - (415) 288-9575 -
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, 1999
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, 1999, the aggregate market value of the registrant's shares of
Common Stock, $.01 par value, held by non affiliates of the registrant was
approximately $5,938,960. At that date 1,484,740 shares of common stock were
outstanding. The shares are listed and publicly traded 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)
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................... $ 477,896 $ 570,710
Restricted cash ..................................................... 519,535 594,693
Accounts receivable ................................................. 178,435 193,241
Due from affiliates ................................................. 249,661 103,301
Notes receivable:
Note receivable to related party ............................... 247,500 225,000
Warehouse lines of credit to related parties ................... 4,449,564 5,157,098
Mortgage notes receivable ...................................... 10,067,464 8,986,645
Allowance for loan losses ...................................... (202,500) (170,000)
------------ ------------
Net receivable ............................................ 14,562,028 14,198,743
Real estate owned ................................................... 447,704 149,663
Security deposits ................................................... 37,990 32,133
Investments in affiliates ........................................... 674,121 831,936
Origination costs ................................................... 120,217 120,217
Organization costs (net of accumulated amortization of $13,056 at
March 31, 1999 and $11,955 at December 31, 1998) ............ 9,245 10,346
------------ ------------
Total assets ........................................................ $ 17,276,832 $ 16,804,983
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks ........................................ $ 519,935 $ 594,693
Other liabilities .............................................. 211,700 162,839
Mortgage notes payable ......................................... 745,950 0
------------ ------------
Total liabilities ................................................... 1,477,585 757,532
------------ ------------
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 631,757 outstanding at March 31, 1999 and
December 31, 1999
Additional paid in capital -preferred stock ................... 5,868,711 5,868,711
Less: treasury stock, 9,526 shares at cost .................... (86,944) (86,944)
Common stock, $.01 par value; 5,000,000 shares ................ 14,847 14,847
authorized ; 1,484,740 shares issued and outstanding
at March 31, 1999 and December 31,1998
Additional paid in capital - common stock ..................... 9,996,220 10,244,424
------------ ------------
Total stockholders' equity .......................................... 15,799,247 16,047,451
------------ ------------
Total liabilities and stockholders' equity .......................... $ 17,276,832 $ 16,804,983
============ ============
</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
March 31,
1999 1998
---- ----
<S> <C> <C>
REVENUES
Interest income ............................ $ 398,440 $ 258,560
Interest income from affiliates ............ $ 118,444 $ 61,467
Investment income from affiliates .......... $ (150,315) $ (36,295)
Other income ............................... 4,888 8,772
----------- -----------
Total revenues ......................... 371,457 292,504
----------- -----------
EXPENSES
Loan servicing fees to related party ....... 75,609 48,810
Management fees to related party ........... 38,233 25,182
Interest expense ........................... 39,950 --
Provision for loan losses .................. 32,500 --
Operating expenses of real estate owned .... 5,620 2,890
Taxes ...................................... 5,300 10,436
General and administrative ................. 30,854 26,052
----------- -----------
Total expenses ....................... 228,066 113,370
----------- -----------
NET INCOME ..................................... $ 143,391 $ 179,134
=========== ===========
PREFERRED DIVIDENDS ............................ $ 138,789 $ 152,304
BASIC EARNINGS PER COMMON SHARE ............... $ 0.003 $ 0.039
DILUTED EARNINGS PER COMMON SHARE ............. $ 0.003 $ 0.035
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC EARNINGS PER SHARE ..... 1,484,740 687,949
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED EARNINGS PER SHARE ... 1,484,740 756,744
</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)
Three Months Ended
March 31,
---------
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ............................................ $ 143,391 $ 179,134
Adjustments to reconcile net income to net cash
Amortization ........................................ 1,101 1,101
Gain (loss) on real estate owned .................... -- --
(Increase) decrease in accounts receivable ......... 14,806 (29,602)
Provisions for loan loss ............................ 32,500 --
Increase in organization costs ...................... -- --
Increase (decrease) in security deposits ............ (5,857) --
Increase (decrease) in due to affiliates ............ (146,360) (74,124)
Increase (decrease) in other liabilities ............ 48,861 54,600
----------- -----------
Net cash provided by (used in) operating activities 88,442 131,109
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash ................ 75,158 (171,515)
Increase (decrease) in mortgage note holdbacks ........ (75,158) 171,515
Increase (decrease) in origination costs .............. -- --
(Increase) decrease in warehouse lines of credit ...... 707,534 262,258
(Increase) in investments ............................. 157,815 43,795
Increase in related party note receivable ............. (22,500) (225,000)
Investments in mortgage notes receivable .............. (3,408,469) (3,191,883)
Repayments of mortgage notes receivable ............... 2,043,576 713,842
Net proceeds from sale of real estate owned ........... -- --
Capital costs of foreclosed property .................. (13,967) --
----------- -----------
Net cash provided by (used in) investing ............ (536,011) (2,396,988)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Note payable to related party ......................... -- (72,148)
Redemption of shares .................................. -- --
Proceeds from issuance of shares ...................... -- 2,116,320
Proceeds of mortgage notes payable .................... 745,950 --
Organizational and offering costs ..................... -- (218,802)
Preferred dividends paid .............................. (138,789) (152,304)
Common dividends paid ................................. (252,406) (30,492)
----------- -----------
Net cash provided by (used in) financing activities . 354,755 1,714,721
----------- -----------
NET INCREASE (DECREASE) IN CASH ............................. (92,814) (551,158)
CASH AT BEGINNING OF PERIOD ................................. 570,710 1,748,485
----------- -----------
CASH AT END OF PERIOD ....................................... $ 477,896 $ 1,197,327
=========== ===========
SUPPLEMENTAL CASHFLOW INFORMATION:
Interest expense paid ................................. $ 39,922 --
Taxes paid ............................................ $ 800 --
</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 three months ended March 31, 1999 and 1998
(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. 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. On September 30, 1998
the offering closed and a total of 1,484,700 common shares were issued.
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,
1998 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, 1998 and March 31, 1999 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 three months ended March 31, 1999 and 1998
(Unaudited)
3. Summary of significant accounting policies
------------------------------------------
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the accounts reported in financial
statements and the accompanying notes. Actual results could differ from
those estimates.
Cash and cash equivalents. Cash and cash equivalents include cash and
liquid investments with an original maturity of three months or less. The
Trust deposits cash in financial institutions insured by the Federal
Deposit Insurance Corporation. At times, the Trust's account balances may
exceed the insured limits. Restricted cash represents segregated cash and
is to be disbursed only to mortgage loan borrowers upon completion of
certain improvements to the secured property (see Note 4).
Revenue recognition. Interest income is recorded on the accrual basis of
accounting in accordance with the terms of the loans. When the payment of
principal or interest is 90 or more days past due, management reviews the
likelihood that the loan will be repaid. For these delinquent loans,
management continues to record interest income and establishes a loan loss
reserve as necessary to protect against losses in the loan portfolio
including accrued interest.
Concentration of credit risk. The Trust holds numerous mortgage notes
receivable. These 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 portfolio may be affected by
changes in the economy or other conditions of the geographic area. A
portion of the portfolio is secured by second trust deeds on real estate.
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. Accounts receivable deemed
uncollectible are written off or reserved. The Trust does not accrue
interest income on impaired loans (Note 5). As of March 31, 1998 and March
31, 1999 the loan loss reserves were $0 and $202,500, respectively.
Investments. Prior to December 31, 1997 the Trust 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 100% 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.
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
constitute a 99% economic interest in CAFC. The Trust's Manager owns 100%
of the Common Shares (1,000 shares) of CAFC, which constitute a 1% economic
interest 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. 7
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three months ended March 31, 1999 and 1998
(Unaudited)
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 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 three-month period ended March 31, 1998, the distributions per
preferred share are allocated 100% as ordinary income and the common share
distribution is allocated 95% ordinary income and 5% as a return of capital
for tax purposes. For the period ended March 31, 1999, the distributions
per preferred share are allocated 100% ordinary income and the common share
distribution is allocated 15% ordinary income and a 85% 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.
Origination costs. Origination costs relating to mortgage notes receivable
are deferred and recognized as an adjustment to yield over the term of the
notes.
Organizational costs. Organization costs are capitalized and amortized on a
straight-line basis over five years.
Deferred offering costs. Deferred offering costs relate to the "best
efforts" offering of common stock. While the offering was underway, these
costs were offset pro-rata against the proceeds from the issuance of common
stock and as a reduction of stockholder's equity.
8
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three months ended March 31, 1999 and 1998
(Unaudited)
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.
Reclassifications. Certain 1998 amounts have been reclassified to conform
with 1999 classifications.Such reclassifications had no effect on reported
net income.
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 March 31, 1998 and
March 31, 1999, mortgage note holdbacks from the consummation of mortgage
loans made amounted to $ 594,693 and $519,535 respectively.
5. Mortgage notes receivable
-------------------------
Mortgage notes receivable represent home equity loans secured by
residential real estate. At their original origination, all loans have a
combined loan-to-value of not more than 75% of the underlying collateral.
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.
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. As of March
31, 1999 the Trust, through a warehouse line of credit issued to CAFC has
borrowed $745,950 to finance a portion of its mortgage notes receivable.
9
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three months ended March 31, 1999 and 1998
(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 also entitled to
reimbursement for clerical and administrative services at cost based on
relative utilization of facilities and personnel. The Manager bears all
expenses of services for which it is separately compensated.
The Manager receives a management fee equal to one-twelfth (1/12) of 1%
annually of the book value of mortgages, mortgage-related investments and
real property ("Gross Mortgage Asset") of the Trust plus one-twelfth (1/12)
of one half percent (1/2%) of the book value of the non-mortgage assets of
the Trust computed at the end of each month. The Trust paid the Manager a
management fee of $25,182 and $38,233 for the three months ended March 31,
1998 and March 31, 1999, respectively.
The Manager also receives a loan origination and servicing fee equal to
one-twelfth (1/12) of 2% annually of the Gross Mortgage Assets of the trust
computed at the end of each month. The Trust paid the Manager a loan
origination and servicing fee of $48,810 and $75,609 for the three months
ended March 31, 1998 and March 31, 1999, respectively.
The Manager also receives 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% after the preferred dividend
has been paid. As of March 31, 1998 and March 31, 1999 no incentive
compensation was paid.
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, 1998, and March 31, 1999 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. For the three months ended March 31,
1998 and March 31, 1999 the Trust was allocated losses of $43,795 and
157,815, respectively. $25,628 of the subsidiaries 1998 loss resulted from
a loss on the disposition of real estate owned. The 1999 loss is
attributable to the expansion of the subsidiaries wholesale loan
origination capacity.
On February 1, 1998 , the Trust advanced $225,000 to Equity 1-2-3, a
division of Sierra Capital Funding LLC, a related party, and recorded it as
a related party note receivable. The note bears interest at 15% per annum
and interest is payable quarterly. As of March 31, 1998 $5,625 was earned
on this note. On February 10, 1999 the Trust advanced an additional $22,500
to Equity 1-2-3. For the period ending March 31, 1999 the Trust has not
recognized any interest from this note.
As of December 31, 1997 , the Trust had a note payable of $72,148 to a
related party that accrued interest at 11.5% per annum. The note and the
accrued interest was repaid prior to March 31, 1998.
10
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three months ended March 31, 1999 and 1998
(Unaudited)
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).
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. The distribution preference of the
Preferred Shares is not cumulative.
Preferred Shares are entitled to receive all liquidating distributions
until they have received an amount equal to their aggregate adjusted net
capital contribution. Thereafter, Common Shareholders 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.
The trust has the power to redeem or prohibit the transfer of a sufficient
number of common and/or Preferred shares or the exercise of warrants and to
prohibit the transfer of shares to persons that would result in violation
of the Trust's share holding requirements. In addition, the Bylaws provide
that no shareholder may own more than 9.8% of the total outstanding shares
after the conclusion of the initial public offering of Common Shares.
One Shareholder Warrant was issued for every 10 Common Shares purchased.
Each shareholder Warrant entitles the holder to purchase one Common Share.
The exercise price foe each Shareholder warrant is $5.60, which may be
exercised during the 25th through 48th month after April 28, 1997. In order
to protect the Warrant holders against dilution, the exercise price of the
Warrants and the number of which may be purchased upon exercise of the
Warrants will be adjusted should certain events occur (i.e. stock
dividends, split-ups, combinations, and reclassifications). Provision is
also made to protect against dilution in the event of a merger,
consolidation, or disposition of all or substantially all of the Trust's
assets. Warrant holders do not have the rights of a shareholder and they
are not entitled to participate in a distribution of the trust's
11
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the three months ended March 31, 1999 and 1998
(Unaudited)
assets in a liquidation, dissolution, or winding up of the trust, unless
the Warrants have been exercised. The Trust may refuse to allow the
exercise of a warrant if the effect of such exercise would disqualify the
Trust as a REIT under the Internal Revenue Code.
Under the 1998 Incentive Stock Option Plan, adopted by the board of
directors and approved by the stockholders, options for the purchase of a
total of 150,000 common shares of the Trust were granted effective
September 30, 1998. Officers and employees of the Manager, and Directors of
the board are the eligible recipients of the options. The options have a
term of 10 years with a first exercise date six (6) months after the date
of the grant. The initial options for the purchase of 75,000 common shares
can be exercised at $8.00 per share. The options for the purchase of the
remaining 75,000 of common shares can be exercised at the closing price of
the Trust's common shares on the American Stock Exchange on April 1, 1999,
which was $4.50 per common share..
During 1998 the Trust's net purchase of treasury preferred stock was 9,526.
The purchases were recorded at cost and as a reduction to preferred shares
and additional paid in capital from preferred shares. No additional common
or preferred shares were purchased for the treasury as of March 31, 1999.
10. Earnings per share
------------------
The following table is a reconciliation of the numerator and denominators
of the basic and diluted earnings per common share.
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1999
---------- ----------
<S> <C> <C>
Numerator:
Net income ........................... $ 179,134 $ 143,391
Less: Preferred Dividend ............. $ 152,304 $ 138,789
---------- ----------
Numerator for basic and diluted
earnings per share ............................... $ 26,830 $ 4,602
---------- ----------
Denominator:
Basic weighted average shares ........ 687,949 1,484,700
Effect of dilutive warrants .......... 68,795 0
---------- ----------
Diluted weighted average shares ...... 756,744 1,484,700
---------- ----------
Basic earnings per common share .................. $ 0.039 $ 0.003
---------- ----------
Diluted earnings per common share ................ $ 0.035 $ 0.003
---------- ----------
</TABLE>
12
<PAGE>
PART I
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial statements of Capital Alliance Income Trust Ltd., A Real
Estate Investment Trust (the "Trust") dated herein were prepared from the
unaudited books and ledgers of the Trust.
General
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 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, 1999, the Trust's loan
portfolio included total loans of $10,067,464 of which $1,472,203 representing
14.6% of the loan portfolio were delinquent over sixty days. There were 5
delinquent loans which were in the process of foreclosure at March 31, 1999. 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 upon the mortgage loans due to the Trust.
Management's estimate is based on a discounted sales price of the property 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 March 31, 1999 and March 31, 1998.
Results of Operations
The historical information presented herein is not necessarily indicative
of future operations.
Three months ended March 31, 1999 and 1998. Revenues for the first quarter
increased to $371,457 as compared to $292,504 for the same period in the
previous year. The increase in revenue in the three month period in 1999 was
primarily due to interest income received from borrowers and affiliates due to
larger loan portfolio than in the same period of previous year. Investment
income during 1999 also declined $114,020 due to the expansion costs of Capital
Alliance Funding Corporation.
14
<PAGE>
Expenses for the first quarter 1999 increased to $228,066 as compared to
$113,370 for the same period in the previous year. The increase in the three
months of 1999 compared to 1998 is due to $39,850 of higher loan servicing,
origination and management fees resulting from the increase in the Trust's asset
value, interest expenses of $39,950 to finance a larger loan portfolio and a
$32,500 reserve for loan losses.
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. The major portion of the proceeds from issuance of common
stock in the Trust, which was completed on September 30, 1998 was invested 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
and by the sale of foreclosed properties. 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, 1999 and 1998 was $88,442 and $131,109 respectively.
Net cash provided by (used in) investing activities for the three months
ended March 31, 1999 and 1998 was $(536,011) and $(2,396,988), respectively. The
large increase in 1999 compared to the prior period is due to increased mortgage
note repayments resulting from a larger portfolio.
Net cash provided by financing activities during the three months ended
March 31, 1999 and 1998 was $354,755 and $1,714,721, respectively. The 1999
results are primarily from the proceeds of mortgage notes payable . The 1998
results are primarily from the proceeds of issuing additional common shares.
As of March 10, 1999, CAFC entered into an agreement for a $4,000,000
warehouse line of credit which is guaranteed by the Trust. CAFC also maintains a
$3,000,000 warehouse line of credit from another lender, which is also
guaranteed by the Trust. The Trust has also extended a warehouse line of credit
to CAFC. Management believes that cash flow from operations, the proceeds of
loan repayments 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.
Year 2000
The Trust's primary use of software systems is for accounting and loan
documentation. The Trust's software systems, local area network, and client
server are widely used in the financial services industries and are represented
to be Year 2000 compliant. Therefore, management believes that the risk of Year
2000 compliance is not significant as it relates to its computer software
system, network and personal computers.
The Trust does not expect Year 2000 initiative costs to exceed $5,000.
At this time, no estimate can be made as to any potential adverse impact
from the failure of borrowers , third-party service providers and vendors to
prepare for the Year 2000.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The trust is not involved in any legal proceedings at this
time.
ITEM 2 CHANGES IN SECURITIES
There have been no changes in the outstanding securities of
the Trust during the quarterly period ending March 31, 1999.
The Trust's Certificate of Incorporation was amended,
effective July 31, 1997, to increase the Trust's authorized
capital to 5,675,000 shares, 5,000,000 of which are Common
Shares, $.01 par value, and 675,000 of which are Series "A"
Preferred Shares, $.01 par value
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 REPORTS ON FORM 8-K
On March 18, 1999 the Registrant filed Form 8-K dated
February 10, 1999 and March 1, 1999 which included two (2)
press releases which are incorporated herein by reference.
16
<PAGE>
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 20, 1999 By: /s/ Richard J. Wrensen
-------------------------------
Richard J. Wrensen,
Chief Financial Officer
17
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