CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
August 17, 2000
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, 2000. If you have any questions, please do not hesitate to call.
Very truly yours,
/s/ Richard J. Wrensen
Richard J. Wrensen
Executive Vice President
Chief Financial Officer
Enclosures
<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, 2000
Commission File Number: 333-11625
-------------------
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3240473
-------------------------------- -----------------------
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
50 California Street Suite 2020
San Francisco, California 94111
------------------------- -----
(Address of principal executive office) (zip code)
(415) 288-9575
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 6, 2000, the aggregate market value of the registrant's shares of
Common Stock, $.01 par value, held by non affiliates of the registrant was
approximately $4,401,270. At that date 1,467,090 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, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 923,651 $ 41,939
Restricted cash 491,781 487,174
Accounts receivable 220,827 233,017
Due from affiliates 717,282 637,491
Notes receivable:
Warehouse lines of credit to related parties 3,606,519 3,189,317
Mortgage notes recievable 11,216,031 10,807,664
Allowance for loan losses (35,500) (85,000)
------------ ------------
Net Receivable 14,787,050 13,911,981
Real estate owned 1,619,501 644,326
Security deposits 0
Investments in affiliates 787,958 870,466
Origination costs 163,635 163,635
Loan fee 7,917 16,667
------------ ------------
Total assets $ 19,719,604 $ 17,006,696
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage note holdbacks $ 491,781 $ 487,174
Mortgages payable 900,805 0
Notes payable 2,250,000 904,750
Other liabilities 919,924 187,938
------------ ------------
Total liabilities 4,562,510 1,579,862
------------ ------------
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 at June 30, 2000 and December 31, 1999
Additional paid in capital-preferred stock 5,752,907 5,752,907
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 1,483,040 outstanding at
June 30, 2000 and 1,484,740 shares issued and outstanding
at December 31, 1999
Additional paid in capital - common stock 9,474,922 9,739,611
Less: 1,700 common shares held in treasury (5,050) 0
------------ ------------
Total stockholders' equity 15,157,095 15,426,834
------------ ------------
Total liabilities and stockholders' equity $ 19,719,604 $ 17,006,696
============ ============
</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,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Interest income $ 385,760 $ 434,571 $ 805,950 $ 833,011
Interest income from affiliates 123,344 93,946 212,192 212,390
Investment income from affiliates (189,208) (265,919) (248,508) (416,234)
Other income 3,872 548 4,297 5,436
----------- ----------- ----------- -----------
Total revenues 323,768 263,146 773,931 634,603
----------- ----------- ----------- -----------
EXPENSES
Loan servicing fees to related parties 76,022 74,744 152,424 150,353
Management fees to related parties 37,500 37,775 75,656 76,008
Interest expense 77,866 44,170 110,154 84,120
Provision for loan losses 18,000 45,000 35,500 77,500
Operating expenses of REO (3,084) 5,213 10,736 10,833
Taxes 4,500 5,000 12,700 10,300
General and administrative 44,902 46,202 82,683 77,056
----------- ----------- ----------- -----------
Total expenses 255,706 258,104 479,853 486,170
----------- ----------- ----------- -----------
Income Before Loss on Real Estate Owned $ 68,062 $ 5,042 $ 294,078 $ 148,433
Gain (Loss) on Real Estate Owned 2,500 (1,779) (2,524) (1,779)
----------- ----------- ----------- -----------
NET INCOME $ 70,562 $ 3,263 $ 291,554 $ 146,654
=========== =========== =========== ===========
PREFERRED DIVIDENDS $ 153,793 $ 138,789 $ 303,834 $ 277,577
BASIC EARNINGS PER
COMMON SHARE $ (0.06) $ (0.09) $ (0.01) $ (0.09)
DILUTED EARNINGS PER
COMMON SHARE $ (0.06) $ (0.09) $ (0.01) $ (0.09)
WEIGHTED AVERAGE COMMON
SHARES - BASIC EARNINGS 1,484,692 1,484,740 1,484,716 1,484,740
WEIGHTED AVERAGE COMMON
SHARES - DILUTED EARNINGS 1,484,740 1,484,740 1,484,740 1,484,740
</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,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 291,554 $ 146,654
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization 8,750 2,202
(Increase) decrease in accounts receivable 12,190 (51,420)
Increase (decrease) in loan loss reserve (49,500) 77,500
(Increase) decrease in security deposits -- 14,899
Increase (decrease) in due to / due from affiliates (79,791) 13,764
Increase (decrease) in other liabilities 731,986 42,228
----------- -----------
Net cash provided by (used in) operating activities 915,189 102,436
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash (4,607) 24,626
Increase (decrease) in mortgage note holdbacks 4,607 (24,626)
(Increase) decrease in warehouse lines of credit (417,202) 1,385,574
(Increase) in investments 82,508 106,234
(Increase) in related party note receivable -- (22,500)
Investments in mortgage notes receivable (4,532,043) (5,285,459)
Repayments of mortgage notes receivable 4,123,670 2,609,167
Capital costs of real estate owned (975,175) (174,323)
----------- -----------
Net cash provided by (used in) investing (1,718,242) (1,524,698)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of shares (5,050) --
Proceeds from issuance of shares -- --
Proceeds of notes payable 2,250,000 --
Proceeds of mortgage notes payable (3,945) 1,392,771
Organizational and offering costs -- --
Preferred dividends paid (303,834) (277,577)
Common dividends paid (252,406) (252,406)
----------- -----------
Net cash provided by (used in) financing activities 1,684,765 862,788
----------- -----------
NET INCREASE (DECREASE) IN CASH 881,712 (559,474)
CASH AT BEGINNING OF PERIOD 41,939 570,710
----------- -----------
CASH AT END OF PERIOD $ 923,651 $ 11,236
=========== ===========
SUPPLEMENTAL CASHFLOW INFORMATION:
Interest expense paid $ 110,154 $ 74,255
Taxes paid $ 800 $ 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 six months ended June 30, 2000 and 1999
(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 invest
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 common. On
September 30,1998 the offering closed and a total of 1,484,700 common
shares were issued at $8.00 per share with warrants to purchase an
additional 148,470 common shares at $5.60 per share.
2. Basis of presentation
---------------------
The accompanying financial statements include the accounts of the Trust.
The financial information presented has been prepared from the books and
records without audit. The accompanying financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and the footnotes required by generally
accepted accounting principles for complete statements. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such financial
statements, have been included.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. 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, 1999 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, 2000 and June 30, 1999 represent the financial statements of the Trust.
3. Summary of significant accounting policies
------------------------------------------
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principals 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
6
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 2000 and 1999
(Unaudited)
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 review 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, 2000 and June
30, 1999 the loan loss reserves were $35,500 and $247,500, respectively.
Investments. The Trust holds an investment in Sierra Capital Acceptance
("SCA") , a Delaware Limited Liability Company which originates and sells
residential mortgages. The Trust owns 100% of the non-voting Sierra
preferred shares of SCF. Sierra capital Services, Inc., a related party,
owns 99% of the Sierra common shares of SCF and maintains voting control.
As of June 30, 2000 SCA is in the process of dissolution.
During 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.
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
7
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 2000 and 1999
(Unaudited)
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, 2000, the distributions per
preferred share are allocated 100% as ordinary income and the common share
distribution is allocated 91% ordinary income and 9% as a return of capital
for tax purposes. For the period ended June 30, 1999, the distributions per
preferred share are allocated 100% ordinary income and the common share
distribution is allocated 100% ordinary income.
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.
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 1999 amounts have been reclassified to conform
with 2000 classifications. Such reclassifications had no effect on reported
net income.
8
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 2000 and 1999
(Unaudited)
4. Restricted cash and mortgage note holdbacks
-------------------------------------------
Pursuant to mortgage loan agreements between the Trust and certain of its
borrowers, a portion of the loan proceeds are held by the Trust in
segregated accounts to be disbursed only to such borrowers upon completion
of certain improvements on the secured property. As of June 30, 2000 and
December 31,1999 mortgage note holdbacks from the consummation of mortgage
loans made amounted to $491,781 and $487,174 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, 2000 the Trust held a mortgage notes payable of $900,805. As
of June 30, 1999 the Trust, through a warehouse line of credit issued to
CAFC had borrowed $1,392,771 to finance a portion of its mortgage notes
receivable.
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 $75,656 and $76,08 for the six months ended June 30, 2000
and June 30, 1999, respectively.
9
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 2000 and 1999
(Unaudited)
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 $152,424 and $150,353 for the six months
ended June 30, 2000 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, 2000 and June 30, 1999 no incentive
compensation was paid.
As described in Note 3, the Trust holds an investment in Sierra Capital
Funding. For the six months ended June 30, 2000, the interest was deferred
and for the six months ended June 30, 1999 the Trust earned interest of
$15,000.
As described in Note 3, the Trust has a non-qualified REIT subsidiary,
Capital Alliance Funding Corporation. For the six months ended June 30,
2000 and June 30, 1999 the Trust was allocated losses of $248,508 and
$431,234, respectively. Both the 2000 and 1999 losses are attributable to
the expansion of the subsidiaries wholesale loan origination capacity.
During 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 accrued interest at 15% per annum. 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. The note was written off during the second half of 1999.
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.
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 2000 and 1999
(Unaudited)
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 may be charged by the Trust in
connection with a redemption.
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
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
distribution of the Trust's 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.
11
<PAGE>
CAPITAL ALLIANCE INCOME TRUST LTD.,
A REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
For the six months ended June 30, 2000 and 1999
(Unaudited)
During 1999 the Trust did not purchase any common or preferred stock as
treasury shares. During the second quarter of 2000 the Trust purchased
1,700 common shares for the treasury. These shares are recorded at cost and
as a reduction to common shares.
10. Earnings per share
------------------
The following table is a reconciliation of the numerator and denominators
of the basic and diluted earnings per common share.
Six months ended Three months ended
Numerator: June 30, 2000 June 30, 2000
------------- -------------
Net income $ 291,554 $ 70,562
Less: Preferred Dividend $ 303,834 $ 153,793
----------- -----------
Numerator for basic and diluted
earnings per share $ (12,280) $ (83,231)
----------- -----------
Denominator:
Basic weighted average shares 1,484,716 1,484,740
Diluted weighted average shares 1,484,740 1,484,740
----------- -----------
Basic earnings per common share $ (0.01) $ (0.06)
----------- -----------
Diluted earnings per common share $ (0.01) $ (0.06)
----------- -----------
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 , 2000, the Trust's loan
portfolio included 78 loans totaling $11,949,718 of which 7 loans totaling
$1,190,250 of the loan portfolio were delinquent over sixty days. There were 5
delinquent loans representing $888,250 of the portfolio were in the process of
foreclosure at June 30, 2000. In assessing the collectibility of these
delinquent mortgage loans, management estimates the loan loss reserve is
adequate. 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, 2000 and June 30, 1999.
Results of Operations
The historical information presented herein is not necessarily indicative
of future operations.
Three months and six months ended June 30, 2000 and 1999. Revenues for the
second quarter of 2000 increased to $323,768 as compared to $263,146 for the
same period in the previous year. Revenues for six months of 2000 increased to
$773,931 as compared to $634,603 for the same period of the previous year.
The 2000 interest income and interest income from affiliates approximated
the results for the quarter and six months, compared to the same period in the
previous year. The increase is due to the improved operating results of Capital
Alliance Funding Corporation. mortgage notes receivable and warehouse
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lines of credit balances than in the same period of previous year. The
origination expansion costs of Capital Alliance Funding Corporation were $76,711
lower for the comparable quarter and $167,726 lower for the six month period.
Expenses for the second quarter 2000 decreased to $255,706 as compared to
$258,104 for the same period in the previous year. Expenses for the six months
period of 2000 decreased to $479,853 as compared to $486,170 for the same period
of the previous year.
The decrease in the second quarter of 2000 compared to 1999 is due to a
$27,000 lower reserve for loan losses which was partially offset by increased
costs of borrowing in a higher interest rate environment and the carrying costs
of real estate owned. The increase in the six months of 2000 compared to 1999 is
similarly explained. Increased interest expenses of $26,034 were incurred to
finance real estate owned and the result of a higher interest rate environment
than the comparable period and an net reduction in the allowance for loan losses
of $42,000.
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 Trust's liquidity requirements will 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, 2000 and 1999 was $915,189 and $102,436 respectively.
Net cash (used in) investing activities for he six months ended June 30,
2000 and 1999 was $(1,718,242) and $(1,524,698), respectively.
Net cash provided by financing activities during the six months ended June
30, 2000 and 1999 was $1,684,765 and $862,788, respectively. The 2000 results
are primarily from the proceeds of the $2,250,000 borrowing facility in placo of
1999's borrowing fron the warehouse line of credit.
CAIT maintains a $2,250,000 bank loan and CAFC maintains a $4,000,000
warehouse line of credit from different lenders. Both borrowings 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 has not incurred any significant costs or suffered any
operational problems from Year 2000 compliance.
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PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The trust is not involved in any legal proceedings at this time.
ITEM 2 CHANGES IN SECURITIES
During the second quarterly period ending June 30, 2000 the Trust
purchased 1,700 common shares.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Trust's 2000 Annual Meeting was held on July 7, 2000. The results
of the annual meeting will be reported in the 10-Q filing for the
quarter ending September 30, 2000.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 REPORTS ON FORM 8-K
Not applicable.
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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 21, 2000 By: /s/ Thomas B. Swartz
--------------------
Thomas B. Swartz, Chairman and
Chief Executive Officer
Dated: August 21, 2000 By: /s/ Richard J. Wrensen
----------------------
Richard J. Wrensen, Executive Vice President
and Chief Financial Officer
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