CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
August 13, 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 June
30, 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 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 June 30, 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 August 6, 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 $5,196,590. 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)
June 30, 1999 December, 1998
------------- --------------
ASSETS
<S> <C> <C>
Cash and cash equivalents ........................................... $ 11,236 $ 570,710
Restricted cash ..................................................... 570,067 594,693
Accounts receivable ................................................. 244,661 193,241
Due from affiliates ................................................. 89,537 103,301
Notes receivable:
Note receivable to related party ................................. 247,500 225,000
Warehouse lines of credit to related parties ..................... 3,771,524 5,157,098
Mortgage notes recievable ........................................ 11,949,718 8,986,645
Allowance for loan losses ........................................ (247,500) (170,000)
------------ ------------
Net Receivable ................................................ 15,721,242 14,198,743
Real estate owned ................................................... 323,986 149,663
Security deposits ................................................... 17,234 32,133
Investments in affiliates ........................................... 725,702 831,936
Origination costs ................................................... 120,217 120,217
Organization costs (net of accumulated amortization of $14,157 at
June 30, 1999 and 11,955 at December 31, 1998) .............. 8,144 10,346
------------ ------------
Total assets ........................................................ $ 17,832,026 $ 16,804,983
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks .......................................... $ 570,067 $ 594,693
Other liabilities ................................................ 205,067 162,839
Notes payable .................................................... 1,392,771 --
------------ ------------
Total liabilities ................................................... 2,167,905 757,532
------------ ------------
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 outstanding at June 30, 1999 and
December 31, 1998 respectively ..............................
Additional paid in capital-preferred stock ....................... 5,868,711 5,868,711
Less 9,526 preferred shares held in treasury ................ (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
June 30, 1999 and December 31, 1998
Additional paid in capital - common stock ....................... 9,861,094 10,244,424
------------ ------------
Total stockholders' equity .......................................... 15,664,121 16,047,451
------------ ------------
Total liabilities and stockholders' equity .......................... $ 17,832,026 $ 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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Interest income ............................................ $ 434,571 $ 313,454 $ 833,011 $ 589,118
Interest income from affiliates ............................ 93,946 57,050 212,390 101,413
Investment income from affiliates .......................... (265,919) (9,207) (416,234) (45,502)
Other income ............................................... 548 3,150 5,436 11,922
----------- ----------- ----------- -----------
Total revenues ......................................... 263,146 364,447 634,603 656,951
----------- ----------- ----------- -----------
EXPENSES
Loan servicing fees to related parties ..................... 74,744 57,034 150,353 105,844
Management fees to related parties ......................... 37,775 32,121 76,008 57,303
Interest expense ........................................... 44,170 638 84,120 638
Provision for loan losses .................................. 45,000 -- 77,500 --
Operating expenses of
real estate owned ........................................ 5,213 2,961 10,833 5,851
Taxes ...................................................... 5,000 5,516 10,300 11,227
General and administrative ................................. 46,202 27,099 77,056 57,876
----------- ----------- ----------- -----------
Total expenses ....................................... 258,104 125,369 486,170 238,739
----------- ----------- ----------- -----------
Income Before Loss on Real Estate Owned ........................... $ 5,042 $ 239,078 $ 148,433 $ 418,212
Loss on Real Estate Owned .................................. (1,779) -- (1,779) --
----------- ----------- ----------- -----------
NET INCOME ........................................................ $ 3,263 $ 239,078 $ 146,654 $ 418,212
=========== =========== =========== ===========
PREFERRED DIVIDENDS ............................................... $ 138,789 $ 152,305 $ 277,577 $ 304,609
BASIC EARNINGS PER
COMMON SHARE ............................................... $ (0.09) $ 0.09 $ (0.09) $ 0.13
DILUTED EARNINGS PER
COMMON SHARE ............................................... $ (0.09) $ 0.07 $ (0.09) $ 0.12
</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)
Six Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ............................................. $ 3,263 $ 418,212
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization ......................................... 2,202 2,202
(Increase) decrease in accounts receivable .......... (51,420) (94,203)
Increase (decrease) in loan loss reserve ............. 77,500 --
(Increase) decrease in security deposits ............. 14,899 --
Increase (decrease) in due to / due from affiliates .. 13,764 (174,861)
Increase (decrease) in other liabilities ............. 42,228 53,207
----------- -----------
Net cash provided by (used in) operating activities 102,436 204,557
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash ................. 24,626 (26,436)
Increase (decrease) in mortgage note holdbacks ......... (24,626) 26,436
(Increase) decrease in warehouse lines of credit ....... 1,385,574 (2,027,833)
(Increase) in investments .............................. 106,234 (164,493)
(Increase) in related party note receivable ............ (22,500) (225,000)
Investments in mortgage notes receivable ............... (5,428,850) (6,038,500)
Repayments of mortgage notes receivable ................ 2,609,167 3,172,951
Capital costs of real estate owned ..................... (174,323) --
----------- -----------
Net cash provided by (used in) investing ............. (1,524,698) (5,282,875)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of shares ................................... -- (448,953)
Proceeds from issuance of shares ....................... -- 4,944,320
Proceeds of mortgage notes payable ..................... 1,392,771 --
Organizational and offering costs ...................... -- (583,308)
Preferred dividends paid ............................... (277,577) (304,609)
Common dividends paid .................................. (252,406) (150,001)
----------- -----------
Net cash provided by (used in) financing activities .. 862,788 3,457,449
----------- -----------
NET INCREASE (DECREASE) IN CASH .............................. (559,474) (1,620,869)
CASH AT BEGINNING OF PERIOD .................................. 570,710 1,748,485
----------- -----------
CASH AT END OF PERIOD ........................................ $ 11,236 $ 127,616
=========== ===========
SUPPLEMENTAL CASHFLOW INFORMATION:
Interest expense paid .................................. $ 74,255 $ 638
Taxes paid ............................................. $ 800 $ 13,371
</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 six months ended June 30, 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 six months ended June
30, 1998 and June 30, 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 six months ended June 30, 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 June 30, 1998 and June
30, 1999 the loan loss reserves were $0 and $247,500, 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 six months ended June 30, 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 six-month period ended June 30, 1998, the distributions per
preferred share are allocated 100% as ordinary income and the common share
distribution is allocated 76 % ordinary income and 24% as a return of
capital for tax purposes. For the period ended June 30, 1999, the
distributions per preferred share are allocated 81% ordinary income and
19% a return of capital and the common share distribution is allocated
100% a 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 six months ended June 30, 1999 and 1998
(Unaudited)
Real estate owned. Real estate owned results from foreclosur 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 June 30, 1998 and
June 30, 1999, mortgage note holdbacks from the consummation of mortgage
loans made amounted to $231,792 and $570,067 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 June 30, 1998 the Trust held a mortgage notes payable of $258,671.
As of June 30, 1999 the Trust, through a warehouse line of credit issued
to CAFC has borrowed $1,392,771 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 six months ended June 30, 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 $32,121 and $37,775 for the six months ended
June 30, 1998 and June 30, 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 $105,884 and $150,353 for the six
months ended June 30, 1998 and June 30, 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 June 30, 1998 and June 30, 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 six
months ended June 30, 1998, and June 30, 1999 the Trust earned interest of
$15,000 from the investment.
As described in Note 3, the Trust has a non-qualified REIT subsidiary,
Capital Alliance Funding Corporation. For the six months ended June 30,
1998 and June 30, 1999 the Trust was allocated losses of $60,502 and
$431,234, respectively. The subsidiaries six month 1998 loss on the
disposition of real estate owned. was $83,663. The six month 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 June 30, 1998 $14,062 was
earned on this note. On February 10, 1999 the Trust advanced an additional
$22,500 to Equity 1-2-3. For the six months ending June 30, 1999 the Trust
has not recognized any interest from this note.
10
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 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 for each Shareholder warrant is $5.60. The Warrants may
now be exercised through April 28, 2001. 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
distributio of the trust's assets in a liquidation, dissolution, or winding
up of the trust, unless the Warrants have been exercised.
11
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 1999 and 1998
(Unaudited)
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 June 30, 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>
June 30, 1998 June 30, 1999
-------------- -------------
<S> <C> <C>
Numerator:
Net income .............................. $ 418,212 $ 146,654
Less: Preferred Dividend ................ $ 304,609 $ 277,577
----------- -----------
Numerator for basic and diluted
earnings per share .......................... $ 113,603 $ (130,923)
----------- -----------
Denominator:
Basic weighted average shares ........... 871,780 1,484,700
Effect of dilutive warrants ............. 118,080 0
----------- -----------
Diluted weighted average shares ......... 989,860 1,484,700
----------- -----------
Basic earnings per common share ............. $ 0.13 $ (0.09)
----------- -----------
Diluted earnings per common share ........... $ 0.12 $ (0.09)
----------- -----------
</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 strong 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 June 30 , 1999, the Trust's loan
portfolio included 83 loans totaling $11,949,718 of which $1,802,906 of the loan
portfolio were delinquent over sixty days. There were eleven delinquent loans
representing $1,065,731of the portfolio were in the process of foreclosure at
June 30, 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 June 30, 1999 and June 30,
1998.
The historical information presented herein is not necessarily indicative
of future operations.
Three months and six months ended March 31, 1999 and 1998. Revenues for
the second quarterof 1999 decreased to $263,146 as compared to $364,447 for the
same period in the previous year. Revenues for six months of 1999 decreased to
$634,603 as compared to $656,951 for the same period of the previous year.
The 1999 interest income and interest income from affiliates increased
significantly for the quarter and six months, compared to the same period in the
previous year. These increases are due to larger mortgage notes receivable and
warehouse lines of credit balances than in the same period of previous year. The
interest income gains, however, were more than offset by investment income
losses incurred during the quarter and six months
14
<PAGE>
for the origination expansion costs of Capital Alliance Funding Corporation. The
origination expansion costs are the primary reason for lower quarterly and six
month revenues.
Expenses for the second quarter 1999 increased to $258,104 as compared to
$125,369 for the same period in the previous year. Expenses for the six months
period of 1999 increased to $486,170 as compared to $238,739 for the same period
of the previous year.
The increase in the second quarter of 1999 compared to 1998 is due to
$23,364 of higher loan servicing, and management fees resulting from the
increase in the Trust's asset value, increased interest expenses of $43,532 to
finance a larger loan portfolio and a $45,000 reserve for loan losses. The
increase in the six months of 1999 compared to 1998 is similarly explained.
Higher loan servicing and management fees of $63,214 resulted from the increase
in the Trust's asset value, increased interest expenses of $83,482 were incurred
to finance a larger loan portfolio and an additional $77,500 loan loss reserve
was established.
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 six months ended June
30, 1999 and 1998 was $102,436 and $204,557 respectively.
Net cash (used in) investing activities for the six months ended June 30,
1999 and 1998 was $(1,524,698) and $(5,282,875), respectively. $3,413,407 of the
difference is explained by decreased warehouse lending to affiliates.
Net cash provided by financing activities during the six months ended June
30, 1999 and 1998 was $862,788 and $3,457,449, 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.
CAFC maintains a $4,000,000 and a $3,000,000 warehouse line of credit
from two lenders. Both warehouse lines of credit are guaranteed by the Trust.
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.
15
<PAGE>
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.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The trust is not involved in any legal proceedings at this time.
ITEM 2 CHANGES IN SECURITIES
There have been no changes in the outstanding securities of the Trust
during the quarterly period ending June 30, 1999.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Trust's 1999 Annual Meeting was held on July 1, 1999. At the
annual meeting, Director Douglas A. Thompson was reelected as Class I
Director for a three year term. Directors Thomas B. Swartz, Harvey
Blomberg, Dennis R. Konczal and Stanley C. Brooks, whose term continue
for two, two, one and one years, respectfully, continue as Directors.
At, the annual meeting, the extension for two years by the Trust's
board of Directors of the Management Agreement of Capital Alliance
Advisors Inc. to manage the Trust was duly approved by the
shareholders with 1,494,702 shares voting in favor of such approval,
32,564 voting against and 11,347 abstaining.
The shareholders also ratified the selection of Novogradac & Co. LLP
as independent public accountants for the Trust with 1,518,228 shares
voting in favor of such approval, 16,500 against and 11,374
abstaining.
ITEM 5 OTHER INFORMATION
Press Release, Exhibit "A" attached here to and incorporated herein,
regarding omission of dividend to finance the ramp-up of Registrant's
mortgage banking conduit, was issued on April 2, 1999.
Press Release, Exhibit "B" attached here to and incorporated herein,
regarding the Registrant's continued strong earnings for the forth
quarter and full year 1998, was issued on April 16, 1999.
Press Release, Exhibit "C" attached here to and incorporated herein,
regarding the Registrant's resumption and declaration of common share
dividends for the second quarter, was issued on June 22, 1999.
ITEM 6 REPORTS ON FORM 8-K
Not applicable.
17
<PAGE>
EXHIBIT "A"
CAPITAL ALLIANCE INCOME TRUST LTD.
ANNOUNCES OMISSION OF DIVIDEND FOR FIRST
QUARTER TO FINANCE RAMP-UP OF ITS
WHOLESALE MORTGAGE BANKING CONDUIT
SAN FRANCISCO--(Business Wire)--April 2, 1999--Capital Alliance Income Trust
Ltd. ("CAIT") (AMEX: CAA - news) , a home mortgage real estate investment trust,
announced that it will omit the payment of its common share dividend for the
first quarter of 1999.
The cash saved by the omission of the common share dividend will be utilized to
"ramp-up" a major expansion of the wholesale loan origination capacity of CAIT's
mortgage banking conduit subsidiary, Capital Alliance Funding Corporation
("CAFC"), as part of its strategy for increasing CAIT's shareholder returns and
value. CAIT will concurrently de-emphasize and reserve for the reduction of
retail origination activities of a retail mortgage banking affiliate.
Earnings of CAFC (99% of which are reflected in CAIT's financial statements
under the equity method of accounting), should be substantially enhanced by the
wholesale origination ramp-up and should make an increased contribution to CAIT
shareholder returns in the near future according to Dennis R. Konczal, president
of CAIT and CAFC. Konczal noted that during the first quarter of 1999 there was
some recovery in the secondary market into which CAFC makes its whole loan
sales. CAFC's expansion program is designed to capitalize on that improvement
and opportunity.
He also noted that the alternative growth strategies of increasing CAIT's
capital base and/or using substantial leverage on its existing capital base,
were neither reasonably available nor desirable in the current economic
environment. Growth of the earnings contribution from CAFC is a more feasible
alternative for increasing CAIT's long-term earnings growth. The operating
results of CAIT and CAFC during the third and fourth quarters will be constantly
reviewed by CAIT's Board with a view to restoring common share dividends at the
earliest possible date, which is expected to be no later than the fourth
quarter.
Konczal also noted that CAIT's primary Mortgage Investment Business, which
invests in non-conforming 1-4 unit residential mortgages to borrowers with a
lower credit standing but with significant equity in their homes and good
repayment histories, continues to produce strong results. CAIT's portfolio of
mortgage loans is unencumbered and has no material liquidity issues. The average
weighted interest yield of the portfolio at February 28, 1999 was 12.53% with a
69.12% combined loan to value ratio. Since neither CAIT nor CAFC securitize
their loans, their financial statements do not include any "gain on sale"
accounting issues connected with the securitization of mortgages.
Certain oral and written statements of the management of CAIT and CAFC included
in this press release may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. The accuracy of such statements can not be
guaranteed, as they are subject to a variety of risks.
- ----------------------------------------------------
Contact: Capital Alliance Income Trust Ltd.
Thomas B. Swartz, CEO
(415) 288-9575
18
<PAGE>
EXHIBIT "B"
CAPITAL ALLIANCE INCOME TRUST LTD.
ANNOUNCES CONTINUED STRONG EARNINGS FOR
THE FOURTH QUARTER AND FULL YEAR 1998
SAN FRANCISCO--( BUSINESS WIRE )--April 16, 1999--Capital Alliance Income Trust,
Ltd. (AMEX: CAA - new), a home mortgage real estate investment trust, announced
continued strong earnings of $259,447 for its 1998 fourth quarter and $1,003,706
for the 1998 full year.
The earnings represent increases of 96.9% and 87.3% over the $131,778 and
$535,789 in earnings experienced for the same periods, respectively, in 1997.
Thomas B. Swartz, chairman and CEO, noted that "Capital Alliance's strong
earnings reflect not only the increased capitalization of the Company in the
1998 periods as a result of its 1997 IPO, but also the Company's ability to
maintain earnings during adverse market and industry conditions as experienced
in the fourth quarter of 1998. Those conditions specifically included the Asian
financial crisis which precipitated severe liquidity problems for many mortgage
lenders, a reduction in the premiums on whole loan sales, and substantial
write-downs of securitized mortgage assets by many firms due to `gains-on-sale'
accounting revisions.
"A broad decline in the market values of substantially all of the non-conforming
residential mortgage lenders resulted. While Capital Alliance had no liquidity
problems or any "gains-on-sale" accounting problem, its shares nevertheless
suffered -- although not to the same extent as many in the industry."
Dennis R. Konczal, the company's chief operating officer noted that "Capital
Alliance is expanding its wholesale origination capacity to capitalize on
opportunities presented by the current state of the non-conforming residential
mortgage market."
Capital Alliance is a specialty residential mortgage finance company which
invests primarily in high-yielding, non-conforming residential mortgage loans on
one-to-four unit properties located primarily in California and other Western
states. It also originates loans for sale to investors on a whole loan basis
through Capital Alliance Funding Corporation, a taxable subsidiary.
Certain oral and written statements of the management of CAIT included in this
press release may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. The accuracy of such statements cannot be guaranteed, as
they are subject to a variety of risks.
- ----------------------------------------------------
Contact: Capital Alliance Income Trust Ltd.
Thomas B. Swartz, CEO
(415) 288-9575
19
<PAGE>
EXHIBIT "C"
CAPITAL ALLIANCE INCOME TRUST LTD.
ANNOUNCES RESUMPTION AND DECLARATION OF
COMMON SHARE DIVIDENDS FOR SECOND QUARTER
SAN FRANCISCO--(Business Wire)--June 22, 1999--Capital Alliance Income Trust
Ltd. ("CAIT"), a home mortgage real estate investment trust (AMEX: CAA - news),
announced that it has reinstated the payment of its common share dividend at
$.085 per share.
The dividend will be payable on July 15, 1999 to shareholders of record on July
1, 1999. CAIT had omitted its common share dividend in April to conserve capital
for the expansion of the wholesale loan origination capacity of its mortgage
banking conduit subsidiary, Capital Alliance Funding Corporation ("CAFC").
Thomas B. Swartz, CAIT's Chairman and CEO, noted that, "as expected, the
increased costs of expanding CAFC's wholesale loan origination capacity will
adversely affect CAIT's earnings for the second quarter since 99% of CAFC's
earnings (losses) are reflected in CAIT's financial statements". Swartz noted
also that, "the positive momentum from the ramp-up of CAFC's wholesale
origination operations warranted the reinstatement of CAIT's common share
dividends at this time and should result in increased whole loan sales and a
positive effect on CAIT's earnings during the third quarter." CAIT's Board will
continue to review the progress of CAFC's and CAIT's operating results during
the third and fourth quarters and will, as required by the REIT Rules,
distribute 95% of CAIT's net income.
Certain oral and written statements of the management of CAIT included in this
press release may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. The accuracy of such statements cannot be guaranteed, as
they are subject to a variety of risks.
- ----------------------------------------------------
Contact: Capital Alliance Income Trust Ltd.
Thomas B. Swartz, CEO
(415) 288-9575
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL ALLIANCE INCOME TRUST LTD.,
A Real Estate Investment Trust
Dated: August 13, 1999 By: /s/ Thomas B. Swartz
------------------------------------
Thomas B. Swartz, Chairman and
Chief Executive Officer
Dated: August 13, 1999 By: /s/ Richard J. Wrensen
-----------------------------------
Richard J. Wrensen, Senior Vice President
and Chief Financial Officer
21
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<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<TOTAL-REVENUES> 634,603
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