74
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: December 31, 1993
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 1-10004
TIS Mortgage Investment Company
(Exact name of registrant as specified in its charter)
Maryland 94-3067889
(State of incorporation) (I.R.S. Employer Identification No.)
655 Montgomery Street, Suite 800
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 393-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, New York Stock Exchange
par value $.001 per share Pacific Stock Exchange
------------------------------
Securities registered pursuant to Section 12 (g) of the Act: None
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 by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K is not contained here, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No
----- -----
On March 28, 1994, there were 8,105,880 shares of Common Stock outstanding
and the aggregate market value of the Registrant's voting stock held by non-
affiliates (based upon the closing price on that date of the shares on the
New York Stock Exchange as reported on the Composite Tape) was
approximately $13,170,000.
Documents Incorporated by Reference
Part III of this Form 10-K is incorporated by reference to the Registrant's
1994 definitive proxy statement to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the
Registrant's fiscal year.
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY
INDEX TO ANNUAL REPORT
ON FORM 10-K
PART I Page
Item 1: Business 3
Item 2: Properties 21
Item 3: Legal Proceedings 21
Item 4: Submission of Matters to a Vote of Security Holders 21
PART II
Item 5: Market for the Registrant's Common Equity and
Related Shareholder Matters 22
Item 6: Selected Financial Data 24
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations 25
Item 8: Financial Statements and Supplementary Data 33
Item 9: Disagreements on Accounting and Financial Disclosure 55
PART III
Item 10: Directors and Executive Officers of the Registrant 55
Item 11: Executive Compensation 55
Item 12: Security Ownership of Certain Beneficial Owners and
Management 55
Item 13: Certain Relationship and Related Transactions 55
PART IV
Item 14: Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 55
<PAGE>
PART I
Item 1. Business.
Introduction
General
TIS Mortgage Investment Company, a Maryland corporation (the "Company"
or the "Registrant" which, unless otherwise indicated refers to the Company
and its subsidiary, TIS Mortgage Acceptance Corporation, a Delaware
corporation ("TISMAC")), was incorporated on May 11, 1988. The Company
seeks to generate income for distribution to its stockholders primarily
through investment in mortgage-related assets which include (i) residual
interests ("Residual Interests"), principal only bonds ("PO Bonds") and
interest only bonds ("IO Bonds") in collateralized mortgage obligations
("CMOs"), which entitle the Company to certain cash flows from collateral
pledged to secure such securities; (ii) mortgage certificates and other
securities collateralized by or representing equity interests in certain
mortgage loans ("Mortgage Certificates") and mortgage loans secured by
first liens on Single-Family Residences, multi-family residences or other
commercial real estate ("Mortgage Loans" and together with Mortgage
Certificates, "Mortgage Instruments"); and (iii) CMOs and other mortgage-
backed securities (collectively, "Structured Securities"). Mortgage-backed
assets may include debt obligations which are issued in multi-classes and
are funded as to the payment of interest and principal by a specific group
of Mortgage Loans on multi-family or other commercial real estate, accounts
and other collateral ("Commercial Securitizations"). Monthly cash flows on
the Company's assets are comprised of both interest income and a partial
return of principal. The Company may experience losses during periods of
high prepayment rates on mortgages as occurred in 1992 and 1993.
The Company's investment policy is controlled by its Board of
Directors (the "Board of Directors"). The By-Laws of the Company require
that a majority of the members of the Board of Directors must be persons
who (i) are not "Affiliates" of TIS Financial Services, Inc., a Delaware
corporation, (the "Manager"), as that term is defined in the By-Laws, or
Affiliates of persons who are Affiliates of the Manager and (ii) are not
employed by, or receiving any compensation (except for serving as a
director) from, the Company ("Unaffiliated Directors").
The Company has entered into an agreement (the "Management Agreement")
with the Manager to manage the Company's day-to-day operations, subject to
the supervision of the Board of Directors. The Manager will continue to
attempt to obtain for the Company mortgage loans and other real estate-
related investments meeting the investment criteria and policies set by the
Board of Directors, advise the Company with respect to various aspects of
its business and administer the Company's day-to-day operations, including
cash flow management. For additional details concerning the management of
the Company, see "Management of Operations - The Management Agreement"
below.
The Company intends, for all taxable years since inception, to qualify
for the tax treatment accorded to real estate investment trusts ("REITs")
under the Internal Revenue Code of 1986, as amended, (the "Code") and to
make quarterly distributions to its stockholders which, in the aggregate,
annually will equal at least 95% of its real estate investment trust
taxable income (as defined in Section 857(b)(2) of the Code) (hereafter
"REIT Taxable Income"). As a result, the Company expects that, with
limited exceptions, its REIT Taxable Income distributed to its stockholders
will not be subject to Federal income tax at the corporate level. See
"Federal Income Tax Considerations" below.
See Item 7 below, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information on the
general development of the Company's business. See "Risk Factors" below
for a discussion of certain risks to which holders of the Company's Common
Stock may be subject.
The Company may borrow funds when it believes that the cost of such
borrowings will be less than the net cash flow on the mortgage-related
assets purchased with such funds.
The Company, on the one hand, and the Manager and its Affiliates, on
the other hand, may enter into a number of relationships other than those
governed by the Management Agreement, some of which may give rise to
conflicts of interest between the Manager and its Affiliates and the
Company.
Because taxable income may exceed cash flow from certain mortgage-
related assets in the early years after such an asset is created, the
Company may realize taxable income in excess of its net cash flow in a
taxable year. Since the Company must distribute substantially all of its
net taxable income annually in order to maintain its status as a REIT, the
Company might, in such circumstances, have to borrow funds to enable it to
make such distributions. In evaluating mortgage-related assets for
purchase, the Company considers the effect of any excess of taxable income
over projected cash receipts of net cash flows. For the fiscal year ended
December 31, 1993, the Company's taxable income did not exceed the cash
flows from mortgage-related assets.
Primary Business Activity
The Company primarily invests in the Residual Interests of single-
family CMOs, which are a series of fixed rate or variable rate bonds with a
wide range of maturities. CMOs are typically issued in series, which
generally consist of serially maturing classes ratably secured by a single
pool of Mortgage Instruments. Generally, principal payments received on
the Mortgage Instruments securing a series of CMOs, including prepayments
on such Mortgage Instruments, are applied to principal payments on one or
more classes of the CMOs of such series on each principal payment date for
such CMOs. Scheduled payments of principal and interest on the Mortgage
Instruments and other collateral securing a series of CMOs are intended to
be sufficient to make timely payments of interest on such CMOs and to
retire each class of such CMO by its stated maturity. The Company may also
purchase Residual Interests in real estate mortgage investment conduits
("REMICs").
The Company also invests in PO Bonds and some of the IO Bonds of
single-family CMOs. Single-family CMOs are collateralized by residential
mortgages, most often in the form of mortgage-backed securities or
certificates, and the bond interest and principal payments, as well as
administrative costs, are covered by the interest and principal payments of
the underlying mortgages. The mortgage collateral underlying the single-
family CMOs in the Company's portfolio of Residual Interests, PO Bonds and
some of the IO Bonds are mortgage-backed certificates issued by the
Government National Mortgage Association (GNMA), the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC). Some of the IO Bonds are backed by single-family loans which are
not included in mortgage-backed certificates issued by these agencies.
In most CMOs, there are excess cash flows after bond payments and
administrative expenses. The excess cash flows, called residuals, arise
primarily from the difference between the interest received from the
mortgage obligations and the interest paid on the bonds. These CMO
residuals have been the primary focus of the Company. However, beginning
in the last quarter of 1991, the Company began to invest in other parts of
the CMO such as PO Bonds, IO Bonds and inverse IO Bonds. From a multitude
of potential Residual Interests, PO Bonds, IO bonds and other mortgage-
related assets, the Company uses sophisticated analytical methods to
assemble various mortgage-related assets into a balanced portfolio that is
designed to provide consistent returns in most interest rate environments.
Monthly cash flows on the Company's mortgage-related assets have two
components: income from the investment and a partial return of investment
principal. The investment income forms the basis for payment of expenses
and dividends paid to shareholders, and the return of principal portion is
reinvested in other mortgage-related assets. Due to the structural nature
of most mortgage-related assets, cash flows and income tend to be higher in
early periods of ownership and lower in the later periods. It will be
necessary for the Company to reinvest the principal which is repaid at an
undiminished rate of return in order to maintain its net income and
dividends.
Residual Interests. Because of almost infinite differences in
composition and structure, each individual CMO, and thus Residual Interest,
is unique. Nonetheless, there are generally two very broad categories of
CMO residuals. "Bullish" residuals are associated with CMOs partially
composed of variable rate bonds. The yields on bullish residuals tend to
increase when short-term interest rates decline, and decrease when short-
term rates rise. Although the mortgage collateral on bullish residuals
provides a fixed interest rate, the interest payable on the variable bonds
declines as short-term rates decline, thus increasing the amount of cash
flow to the residual. Correspondingly, higher short-term interest rates
will make variable rate bonds more expensive and thus the spread will
narrow.
Residual Interests with only fixed rate CMO bonds, on the other hand,
fall into a category called "Bearish" residuals. The yields on bearish
residuals tend to increase when long-term interest rates rise, and decrease
when long-term rates decline. The interest spread on bearish residuals is
not impacted by changes in interest rates. However, in an environment of
rising interest rates, the pace of mortgage prepayments slows and the
positive spread remains in effect for a longer period of time. Falling
interest rates provide consumers with incentives to refinance, prepaying
the original mortgage and, overall, this tends to reduce the amount of time
the positive spread is outstanding.
CMO cash flows, and therefore residual income and value, are
significantly affected by changes in short-term interest rates and mortgage
prepayment rates. The Company diversifies its portfolio by investing in
both Residual Interests of CMOs having fixed rate and variable rate Bond
Classes. This balance helps to provide total portfolio yield protection
whether interest rates rise or fall. The Company has selected bullish
residuals which use indices with different sensitivities to interest rate
changes. LIBOR reacts very quickly to factors affecting interest rates and
tends to fluctuate significantly. COFI tends to adjust more slowly and is
comparatively stable over time.
PO Bonds. A PO Bond is a bond which passes through only the principal
portion of a mortgage-backed security. All such bonds are created by
stripping the coupon interest from the underlying mortgages to create the
PO Bond and an associated IO Bond. PO Bonds can represent the principal
from an entire pool of mortgages, or they can be tranches within a CMO. PO
Bonds are sold at a deep discount to face value. They pay no periodic
coupon interest. Principal is returned in the form of scheduled
amortization and prepayments. Ultimately, the entire face amount of a PO
Bond is repaid to the investor.
Because there is no coupon, the financial performance of a PO Bond is
extremely sensitive to mortgage prepayment rates. Higher prepayments lead
to a more rapid return of principal and a higher yield. Because faster
prepayments are usually associated with lower market interest rates, the
price of a PO Bond is further enhanced by the lower discount rate.
Conversely, lower prepayments lead to a slower return of principal and a
lower yield. However, since PO Bonds are sold at a discount to their face
value, and the total face value is ultimately received, the total yield on
a PO Bond cannot drop below zero if it is held to maturity.
IO Bonds. IO Bonds pass through a specified interest portion of a
mortgage-backed security. The interest due on an IO Bond is calculated by
multiplying this interest rate times the outstanding balance of the
underlying mortgage pools. As the balance of the underlying mortgages
decline to zero, payments on the IO Bond also decline to zero. Usually the
interest rate applied to the underlying mortgages is fixed. If the
interest rate is variable, it is called a Floating Rate IO Bond. If the
variable rate of interest is inversely related to an index, it is called an
Inverse IO Bond. A regular IO Bond is similar to a Bearish Residual
Interest, in general its yield will increase as interest rates increase and
decrease an interest rates decline. An Inverse IO Bond is similar to a
Bullish Residual Interest. In general, its yield will decrease as interest
rates increase and increase as interest rates decline. If prepayments
increase significantly over the level at which the IO Bond was purchased,
it is possible to receive less cash flow over the life of the asset than
was initially invested.
Commercial Securitizations. Commercial Securitizations are multi-
class issuances of debt securities which are funded as to the payment of
interest and principal by a specific group of mortgage loans on multi-
family residences or other commercial property. Generally, a Commercial
Securitization will consist of some senior debt securities rated investment
grade, "AAA", "AA" and "A" and other lower-rated "BBB" and "BB" bonds, and
unrated bonds. Generally the credit quality of any bond relates to the
subordination level of the bond or its priority to receive principal and
interest from the mortgage collateral. A First Loss security is the most
subordinated class of a multi-class issuance of debt securities and is the
first to bear the risk of default on the underlying collateral. To the
extent that the Commercial Securitization is a REMIC, there will be a
residual interest investment involved. Since many of the Commercial
Securitizations are backed by mortgage loans which have prepayment penalty
or lock-out provisions, the risk of loss from prepayments may be
significantly less than securitizations backed by single-family loans. On
the other hand, since there are generally fewer loans involved in the
securitization and since the loans usually do not have any guarantee of
payment of principal, the risk of loss on foreclosure is much greater.
Therefore, the credit quality of the underlying loans is a primary
consideration in the risk and reward evaluation of the investment.
Risk Factors
Ownership of the Company's Common Stock is subject to certain risks.
The ability of the Company to generate income from the cash flows relating
to Residual Interests and other mortgage-related assets, or to minimize
losses, will depend, in large part, upon the ability of the Company to
acquire suitable mortgage-related assets, respond to fluctuations in market
interest rates, and utilize appropriate strategies.
The amount of income that may be generated from mortgage-related
assets is dependent upon the rate of principal prepayments on the
underlying mortgages. Lower rates of prepayments means a longer life for
Residual Interests and IO Bonds and thus higher income. Similarly, faster
rates of prepayments mean a shorter life and lower income. The rate of
prepayments on mortgages is influenced by a variety of economic,
geographic, social and other factors, but probably the most important
factor is the level of prevailing mortgage rates. In general, prepayments
of mortgage loans are faster during periods of substantially declining
interest rates and slower during periods of substantially increasing
interest rates.
The income from Residual Interests in CMOs which include one or more
bond classes which bear interest based on specified margins in relation to
either the London Interbank Offered Rate for Eurodollars on U.S. dollar
deposits ("LIBOR") or on the Eleventh District Cost of Funds Index
("COFI"), and income on Inverse IO Bonds which bear an interest rate which
is inversely related to LIBOR, may fluctuate widely depending upon changes
in the LIBOR or COFI rates, which affect the amount of interest payable on
such LIBOR or COFI bonds and on Inverse IO Bonds. In general, income on
these Residual Interests and Inverse IO Bonds will decrease when LIBOR or
COFI rates increase, and will increase when LIBOR or COFI rates decrease.
Income on these Residual Interests and Inverse IO Bonds will also be
affected by the relationship between changes in these rates and prepayments
on mortgages. Under certain extended high interest rate periods or in the
event of extremely high prepayment rates on mortgages, the return on a
Residual Interest, on an IO Bond or on an Inverse IO Bond could be zero or
negative and may require the Company to effect significant reductions in
the carrying value of these assets. Such reductions are recorded as
operating losses in the year in which the reduction is taken.
Due to the structural nature of most mortgage-related assets, cash
flows and income tend to be higher in the early periods of ownership and
lower in the later periods. The cash flows from such assets consist of
both return of principal and income during ownership thereof. It is
necessary for the Company to reinvest the principal which is repaid.
The Company only purchases Residual Interests, IO Bonds and PO Bonds
of CMOs if the Structured Securities relating to such CMOs are rated in one
of the two highest categories by a nationally recognized rating agency.
Certain Residual Interests, IO and PO Bonds themselves are rated. The
risks of ownership of such assets, however, will be substantially the same
as those associated with ownership of unrated Residual Interests, IO and PO
Bonds because the rating would not address the possibility that the Company
might have a lower than anticipated yield or, in the case of Residual
Interests and IO Bonds, fail to recover its initial investment.
A substantial portion of the Company's assets directly or indirectly
consists of mortgage instruments pledged to secure debt securities and,
accordingly, would not be available to stockholders in the event of
liquidation of the Company. In purchasing mortgage-related assets and in
issuing debt securities, the Company competes with investment banking
firms, savings and loan associations, banks, mortgage bankers, insurance
companies, federal agencies and other entities, many of which have greater
financial resources than the Company.
To the extent the Company acquires Commercial Securitizations or other
interests in real estate, the Company will be subject to varying degrees of
risk incident to the ownership of real estate. There are many factors
which can impact upon the performance of real estate including economic
events or governmental regulations which are out of the control of the
Company, all of which can impact upon real estate assets whose values are
supporting the Mortgage Loans.
The Company may acquire non-rated investments in Commercial
Securitizations, including first loss positions and other subordinated
positions, which are entitled to receive repayment of principal only after
all required principal payments have been made to more senior instruments
in the Securitization. A First Loss security ("First Loss") is the most
subordinated class of a multi-class issuance of debt securities and is the
first to bear the risk of default on the underlying collateral. These
investments are generally less marketable than other classes and are
illiquid assets.
The Company may in the future increase its capital resources by making
additional offerings of its Common Stock. Such offerings could dilute the
equity of stockholders of the Company or reduce the market price of shares
of the Common Stock, or both.
The Company is subject to potential conflicts of interest arising from
its relationship with its Manager. Transactions which present potential
conflicts of interest will be approved by the Board of Directors, including
a majority of the Unaffiliated Directors, or will be carried out in
accordance with guidelines which the Board has adopted. In the latter
case, the specific transactions generally will not be subject to the
approval of the Board of Directors.
In order to maintain its status as a REIT, the Company is required to
comply with certain restrictions imposed by the Code with respect to the
nature of its assets and income, which could prevent it from making
investments or from making dispositions of investments otherwise considered
desirable. The REIT provisions of the Code require the Company to
distribute substantially all of its net taxable income on an annual basis.
If the Company should not qualify as a REIT in any tax year, it would be
taxed as a regular domestic corporation, and distributions to the Company's
stockholders would not be deductible by the Company in computing its
taxable income. Any resulting tax liability could be substantial and would
reduce the amount of cash available for distributions to stockholders.
Further, the failure of the Company to be treated as a REIT for any one
year would disqualify the Company from being treated as a REIT for four
subsequent years.
Because of these and other factors, future distributions to
stockholders cannot be predicted with certainty. It is likely that the
market price of the shares of the Company's Common Stock would be affected
by any decline in the spread between the Company's net yield on its assets
and prevailing interest rates.
Acquisition and Disposition of Mortgage-Related Assets
The Company purchases mortgage-related assets from investment banking
firms and other Mortgage Suppliers, some of which may be Affiliates of the
Manager. The Company does not intend to purchase assets that would
disqualify it as a REIT or subject it to regulation as an investment
company under the Investment Company Act of 1940.
The Company is not in the business of trading its mortgage-related
assets. However, from time to time the Company may sell an asset as part
of the Company's ongoing effort to adjust its portfolio composition to
reflect changes in economic conditions. In the fourth quarter of 1989, the
Company sold a Residual Interest it had acquired in 1988. In 1992, the
Company sold for a total of $6,008,000 both of the PO Bonds it had acquired
in 1991. There have been no other dispositions of mortgage-related assets
since the Company's inception. See Item 7 below, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Item 8
below, "Financial Statements and Supplementary Data" for further details.
During 1992 the Company reinvested approximately $30,760,000. Of this
amount, $22,557,000 was invested in IO Bonds and the remaining $8,203,000
was invested in an Inverse IO Bond. In 1993 the Company reinvested
$4,069,000 in inverse IO bonds and $340,000 in equity residuals. See Item
7 below, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8 below, "Financial Statements and
Supplementary Data" for details on assets acquired. The funds for
reinvestment came from cash balances, borrowings, proceeds from the sale of
PO Bonds and principal returned to the Company from its investments.
Based on current projections of return of investment from its
portfolio, the Company expects to generate cash flows of $600,000 to
$1,000,000 after expenses in each month of 1994 for reinvestment or to be
used to reduce borrowings. Although the Company continually reviews
mortgage-related assets available for purchase, the Company will acquire
additional mortgage-related assets when they complement the current
portfolio.
On May 31, 1990, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus for a uniform method of
accounting for Residual Interests in CMOs (Issue 89-4). The consensus,
among other things, required Residual Interests to be classified either as
"equity" (and be accounted for under the Equity Method) or as "nonequity"
(and be accounted for under a level yield method referred to as the
Prospective Method). The methods described in Issue 89-4 are essentially
the same as those used by the Company until December 31, 1993. As of
December 31, 1993 the Company adopted the accounting method for impairment
of mortgage-backed derivative investments prescribed by FASB Statement No.
115 and has presented its 1993 financial statements in accordance
therewith. See Item 7 below, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 8 below, "Financial
Statements and Supplementary Data" for information as to the effect of
adoption of this change in accounting method.
Fair Value of Residual Interests and IO Bonds
In General - Substantially all income to the Company is derived from
the cash flows on the Company's Residual Interests, IO Bonds and PO Bonds.
The fair value of these mortgage-related assets is the net present value of
the projected future cash flows. The amount of cash flows that may be
generated from the Company's mortgage-related assets is uncertain and may
be subject to wide variations depending primarily upon the rate and timing
of prepayments on the underlying mortgage collateral and, for Residual
Interests with variable rate Bond Classes and IO Bonds with variable
interest rates, changes in LIBOR and COFI. The following information sets
forth assumptions used to calculate the projected cash flows on the
Company's Nonequity Residual Interests and IO Bonds, and the resulting net
present value of these assets, at December 31, 1993 based on various
assumptions and discount factors.
Assumptions - For purposes of the presentations on the following
tables, the Nonequity Residual Interests have been separated into three
groups: Residual Interests in CMOs with fixed rate Bond Classes, Residual
Interests in CMOs with one or more LIBOR Bond Classes and Residual
Interests in CMOs with one or more COFI Bond Classes. The IO Bonds have
been separated into two groups: IO Bonds with a fixed interest rate and
Inverse IO Bonds. For purposes of projecting future cash flows, the
Company has used the following one-month LIBOR and 11th District COFI
rates:
<TABLE>
INTEREST RATE ASSUMPTIONS
<CAPTION>
Interest Rates (%)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Case I Case II Case III* Case IV Case V
------ ------- --------- ------- ------
One Month LIBOR 1.750 1.750 3.250 3.250 4.750
11th District COFI 2.322 2.322 3.822 3.822 5.322
<FN>
* One-month LIBOR on December 31, 1993 and the 11th District
COFI for November released on December 31, 1993.
</TABLE>
Principal payments on mortgage loans may be in the form of scheduled
amortization or prepayments (for this purpose, "prepayments" include
principal prepayments and liquidations due to default or other
dispositions). The prepayment assumptions used herein are based on an
assumed rate of prepayment each month of the unpaid principal balance on a
pool of mortgage loans. A 100% prepayment assumption assumes prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of such mortgage and an
additional 0.2% per annum in each month thereafter (for example, 0.4% per
annum in the second month) until the 30th month. Beginning with the 30th
month and in each month thereafter during the life of such mortgage loans,
100% prepayment assumption assumes a constant prepayment rate of 6% per
annum.
The prepayment assumptions used in Case III to estimate the fair value
of the Company's Nonequity Residual Interests and IO Bonds are the
Bloomberg Financial Markets ("Bloomberg") Dealer Prepayment Estimates
Average as estimated by several dealers in mortgage-related assets and
compiled by Bloomberg as of January 4, 1994. Bloomberg has obtained this
information from sources it believes to be reliable but has not verified
such information and assumes no responsibility for the accuracy of such
information. The prepayment assumptions used in Case I reflect a decline
in short-term interest rates accompanied by a decline in mortgage loan
interest rates. The prepayment assumptions used in Case II (which also are
used in Case III) reflect a decline in short-term rates not accompanied by
a decline in mortgage loan interest rates. The prepayment assumptions used
in Case IV (which also are used in Case V) reflect an increase in mortgage
loan interest rates not accompanied by an increase in short-term interest
rates. The prepayment assumptions used in Case V reflect an increase in
short-term interest rates accompanied by an increase in mortgage loan
interest rates. The table below shows the prepayment assumptions used to
project cash flows in order to calculate the present value of the Company's
Nonequity Residual Interests and IO Bonds:
<TABLE>
PREPAYMENT ASSUMPTIONS
<CAPTION>
Mortgage Pass Through
Collateral Rate (%) Percent of the Prepayment Assumption (%)
- ---------- ------------ ------------------------------------------------
Case I Case II Case III* Case IV Case V
------ ------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
GNMA 7.0 368 150 150 100 100
Certificates 9.0 385 394 394 206 206
10.0 314 430 430 351 351
FNMA/FHLMC 8.0 535 417 417 200 200
Certificates 8.5 495-529 467-480 467-480 213 213
9.0 496 502 502 379 379
9.5 422-474 518-535 518-535 416 416
10.0 415 529 529 467-502 467-502
10.5 366 496 496 502 502
<FN>
* Bloomberg Financial Markets Dealer Prepayment Estimates Average as of
December 31, 1993.
Neither the interest rates nor the prepayment assumptions used herein
purports to be a historical description of interest rates or prepayment
experiences or a prediction of future interest rates or prepayments of any
pool of mortgage loans. The fair value of the Company's mortgage-related
assets can vary dramatically depending on future interest rates, prepayment
speeds and the discount factor used.
</TABLE>
Present Value of Projected Cash Flows - The tables which follow set
forth the present value at December 31, 1993 of the projected cash flows
discounted at the indicated discounted rates subject to the assumptions
described above. For example, if cash flows are projected using the
assumptions above and Nonequity Residuals Interests in CMOs with fixed rate
Bond Classes are discounted at 14% and the Nonequity Residual Interests in
CMOs with variable rate Bond Classes are discounted at 18%, the present
value of the projected cash flows of the Company's Nonequity Residual
Interests would equal approximately $11,919,000. This is the Company's
estimate of the fair value of these assets. In addition, if cash flows on
the Company's regular IO Bonds are discounted at 14% and the cash flows on
its Inverse IO Bonds are discounted at 30%, the present value of the
projected cash flows on the IO Bonds would equal $12,144,000. This
represents an decrease of $68,000 over the $12,212,000 book value of these
assets. The difference of $68,000 is the difference between the present
value of cash flows and the actual market values as of December 31, 1993 of
FNMA SMBS Trust 7 Class 2 IO and FNMA SMBS Trust 4 Class 2 IO. The book
value is the Company's estimate of the fair value of these IO Bonds. There
will be differences between the projected cash flows used to calculate the
present value of these assets and the actual cash flows received by the
Company, and such differences may be material.
<TABLE>
PRESENT VALUE OF NONEQUITY RESIDUAL INTERESTS
---------------------------------------------
(In thousands)
<CAPTION>
Nonequity Residual Interest in CMOs
Discount with Fixed Rate Bond Classes
Rate (%) Case I Case II Case III Case IV Case V
-------- ------ ------- --------- ------- ------
<S> <C> <C> <C> <C> <C>
10 $8,327 $7,974 $8,015 $8,073 $8,129
12 7,933 7,664 7,703 7,690 7,742
14 7,570 7,374 7,412 7,338 7,388
16 7,234 7,103 7,139 7,015 7,062
18 6,921 6,848 6,883 6,716 6,761
</TABLE>
<TABLE>
<CAPTION>
Nonequity Residual Interest in CMOs
Discount with Variable Rate Bond Classes
Rate (%) Case I Case II Case III Case IV Case V
-------- ------ ------- --------- ------- ------
<S> <C> <C> <C> <C> <C>
14 $6,939 $5,725 $4,875 $5,667 $4,668
16 6,606 5,498 4,684 5,410 4,458
18 6,304 5,288 4,507 5,175 4,267
20 6,030 5,094 4,344 4,959 4,092
22 5,778 4,914 4,192 4,762 3,931
- ------------------------------------------------------------------
</TABLE>
<TABLE>
PRESENT VALUE OF INTEREST ONLY BONDS
(In thousands)
<CAPTION>
Discount Regular Interest Only Bonds
Rate (%) Case I Case II Case III Case IV Case V
-------- ------ ------- --------- ------- ------
<S> <C> <C> <C> <C> <C>
10 $5,006 5,007 5,007 8,093 8,093
12 4,802 4,802 4,802 7,570 7,570
14 4,613 4,613 4,613 7,110 7,110
16 4,439 4,439 4,439 6,701 6,701
18 4,277 4,277 4,277 6,336 6,336
</TABLE>
<TABLE>
<CAPTION>
Discount Inverse Interest Only Bonds
Rate (%) Case I Case II Case III Case IV Case V
-------- ------ ------- --------- ------- ------
<S> <C> <C> <C> <C> <C>
22 $9,434 $10,743 $8,521 $11,943 $8,782
26 8,917 10,074 7,995 10,875 8,008
30 8,454 9,479 7,531 9,982 7,362
34 8,036 8,950 7,115 9,225 6,811
38 7,658 8,477 6,744 8,575 6,342
- ------------------------------------------------------------------
</TABLE>
Acquisition of Mortgage Instruments
The Company has the power to purchase Mortgage Instruments from
Mortgage Suppliers. Mortgage Instruments may be acquired subject to the
liability represented by Structured Securities. In addition, Mortgage
Instruments may be acquired with the intention of arranging for the
subsequent issuance of Structured Securities secured thereby. Through
December 31, 1993, the Company had not purchased Mortgage Instruments.
The Mortgage Certificates acquired by the Company may consist of GNMA
Certificates, FHLMC Certificates, FNMA Certificates and Other Mortgage
Certificates. The Mortgage Loans including multi-family loans acquired by
the Company may be originated by various lenders throughout the United
States. Originators may include savings and loan associations, banks,
mortgage bankers and other mortgage lenders. There are no limits upon the
geographic concentration of Mortgage Loans to be acquired by the Company.
The Company has the power to enter into commitments to purchase
Mortgage Loans but has not done so. Such commitments would obligate the
Company to purchase Mortgage Loans and the holder to sell such Mortgage
Loans at a future date for a specific period of time at an established
price, in a specific aggregate principal amount and bearing a specified
interest rate. However, all loans would be fully funded prior to their
acquisition by the Company. Following the issuance of commitments, the
Company would be exposed to risks of interest rate fluctuations.
The Company, with the approval of the Unaffiliated Directors, may
enter into an agreement with the Manager, whereby the Company may
participate in programs operated by the Manager for the pricing and
acquisition of Mortgage Loans. If implemented, such a program is expected
to enable the Manager to provide Mortgage Suppliers with periodic
information concerning the prices and other characteristics, such as loan-
to-value ratios, insurance features and the like, of Mortgage Loans that
entities such as the Company are willing to acquire. The Company has not
as of yet entered into such an agreement. The Company would not expect to
purchase the servicing or excess servicing rights to any Mortgage Loans it
acquires.
Issuance of Structured Securities
CMOs. To the extent consistent with its objective of generating
income from the net cash flows on its Mortgage Assets, the Company may
issue, itself or through one or more Affiliated Issuers, various series of
CMOs secured by collateral which may include Mortgage Instruments, debt
service funds and reserve funds, insurance policies, servicing agreements
and a master servicing agreement
In June of 1989, the wholly-owned subsidiary of the Company issued a
series of CMOs. See "Formation of Subsidiary" below. This was the only
CMO that has been issued by the Company or an Affiliated Issuer.
Other Mortgage-Backed Securities. Although the Company has not done
so, it may cause to be issued directly or through trusts or corporate
subsidiaries, other mortgage-backed securities if, in the determination of
its Board of Directors, the issuance of such other securities is
advantageous. In particular, mortgage pass-through certificates
representing undivided interests in pools of Mortgage Loans formed by the
Company could be utilized as a vehicle for raising funds. The issuance of
mortgage pass-through certificates would be undertaken, however, only if
the Board of Directors received an opinion of counsel or other satisfactory
evidence that the issuance and sale of such securities would not cause the
Company to fail to qualify for treatment as a REIT under the Code and that
the income, if any, realized by the Company in connection with the
issuance, sale, and holding of such securities would not constitute income
from a prohibited transaction under the Code.
Commercial Securitizations. The Company may issue Structured
Securities which will be Commercial Securitizations. The general structure
of these securities would be in what is normally called a
senior/subordinated structure consisting of some senior debt securities
rated investment grade, "AAA," "AA" and "A" and other lower-rated "BBB" and
"BB" bonds, and unrated bonds. Generally the credit quality of any of
these bonds relates to the subordination level of the bond or its priority
to receive principal and interest from the mortgage collateral. Any such
securitizations would be issued as REMIC Securities which will also involve
a residual interest security. The Company might or might not retain an
investment in any of the bonds or the residual interest security, however
the Company expects to normally retain a first loss security from the
issuance. The first loss bond is the most subordinated class of the multi-
class issuance and is the first to bear the risk of default on the
underlying collateral. Since there are generally fewer loans involved in
the securitization and since the loans usually do not have any guarantee of
payment of principal, the risk of loss on foreclosure is much greater. The
Company believes that careful credit underwriting would help manage credit
risk, although there can be no assurances in this regard.
The Company may also acquire fee interest in or acquire or originate
mortgage loans on, commercial real estate which, among other things, may be
used as collateral for future securitizations.
Master Servicing. In the event that an Affiliated Issuer issued a
series of Structured Securities secured by Mortgage Instruments owned or
financed by the Company (other than Mortgage Certificates issued or
guaranteed by a governmental entity), the Company or such Affiliated Issuer
generally would be required to enter into a master servicing agreement (the
"Master Servicing Agreement") with respect to such series of Structured
Securities with an entity acceptable to the rating agency that is rating
such series of Structured Securities (the "Master Servicer"). The Master
Servicer would receive for a series of Structured Securities a monthly
administrative services fee which would be in an amount negotiated between
the Company and the Master Servicer. Although it currently is not expected
that the Manager or any of its Affiliates will act as Master Servicer for a
series of Structured Securities, the Manager will work closely with the
Master Servicer to ensure proper supervision of the services and to aid the
Board of Directors in evaluating the performance of the Master Servicer and
the servicers.
Costs. Various expenses would be incurred in connection with
issuances of Structured Securities, including legal and accounting fees,
printing expenses, underwriters' compensation or other sales commissions,
and expenses of registration or qualification under state and federal
securities laws. If the Company did not issue the Structured Securities
through a subsidiary or trust established by it, it is anticipated that the
Company would not pay such costs directly, but would pay to the Affiliated
Issuer an amount which would include such costs as well as any applicable
fees.
The possible strategy described above of issuing Structured Securities
would be based upon the Company's current assessment of the demand for
these securities, the cost of issuing the securities, the relative strength
of issuers and other market participants active in such securities, rating
agency requirements and other factors affecting the structure, cost, rating
and benefits of such securities relative to each other and to other
investment alternatives. The market for Structured Securities, and CMOs in
particular, has developed rapidly within the past few years and continues
to generate new structures, issuers, buyers and products. Developments in
the market that affect the factors mentioned or that change the Company's
assessment of the market for such securities may cause the Company to
revise the financing strategy described herein. Any such revision in
strategy would require the approval of the Board of Directors of the
Company, including a majority of the Unaffiliated Directors.
Capital Resources
The Company may seek to increase the amount of funds available for its
activities through various types of debt financing. The Company may from
time to time seek to obtain lines of credit from independent financial
institutions. The Company also may raise funds through agreements pursuant
to which the Company would sell Mortgage Assets for cash and simultaneously
agree to repurchase them at a specified date for the same amount of cash
plus an interest component ("Reverse Repurchase Agreements"), and through
the issuance of commercial paper and other debt securities, other forms of
borrowings and the issuance of additional equity securities. In general,
the Company intends to make use of short-term borrowings to acquire funds
for the purchase of Mortgage Assets when it is able to borrow at interest
rates lower than the yields on the Mortgage Assets to be purchased with
such funds. The Company anticipates that it may incur short-term
borrowings in accumulating sufficient Mortgage Instruments to support the
periodic issuance of Structured Securities. In such cases, the proceeds
received from the issuance of any Structured Securities may be used to pay
all or a portion of the Company's short-term borrowings. Short-term
indebtedness would be expected to bear interest at variable rates.
As of December 31, 1992 the Company had total borrowings of
$17,957,000. Of these borrowings $2,551,000 was borrowed under two one
year repurchase agreements with Kidder, Peabody & Co. The remaining
$15,406,000 was borrowed under three different monthly repurchase
agreements, $2,841,000 with The First Boston Corporation, $515,000 with
Lehman Brothers Inc. and $12,050,000 with Bear, Stearns & Co., Inc. As of
December 31, 1993 the Company's borrowings were reduced to $11,745,000. Of
this amount, $696,000 was under a repurchase agreement with Kidder, Peabody
& Co. and $11,049,000 under a repurchase agreement with Bear, Stearns &
Co., Inc. The debt is collateralized by some of the Company's Residual
Interests and IO Bonds. The weighted average interest rate on such
borrowings at December 31, 1993 was 3.652%.
Although the Company has no immediate plans for incurring intermediate-
term or long-term borrowings, the Company may do so in the future. Any
indebtedness incurred by the Company may be secured by the assets of the
Company, including its Mortgage Assets.
The Company's By-Laws provide that it may not incur indebtedness if,
after giving effect to the incurrence thereof, the Company's aggregate
indebtedness (other than liability represented by Structured Securities and
any loans between the Company and its trusts or corporate subsidiaries),
secured and unsecured, would exceed 100% of the Company's Average Invested
Assets in the preceding calendar quarter, as calculated in accordance with
generally accepted accounting principles, unless approved by a majority of
the Unaffiliated Directors.
The Company has 100,000,000 authorized shares of Common Stock. The
Company may increase its capital resources by making additional offerings
of Common Stock. Such offerings may result in a reduction of the net
tangible book value per outstanding share and a reduction in the market
price of the Company's Common Stock. The Company is unable to estimate the
amount, timing or nature of such future sales of its Common Stock as such
sales will depend on general market conditions and other factors.
On December 5, 1991 the Board of Directors approved a Dividend
Reinvestment and Share Purchase Plan which became effective on January 2,
1992. The Plan provides, at the Company's option, for shares purchased
under the Plan to either be issued by the Company, or be purchased on the
open market. The Plan prospectus provides for up to 1,000,000 new shares
to be issued. To the extent new shares are issued, the Company's capital
would be increased. During 1992 5,780 shares were issued under the Plan
resulting in an increase to capital of $39,000. No new shares were issued
under the Plan in 1993 as all required shares were purchased in the open
market.
Operating Restrictions
The Company intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act of 1940
(the "1940 Act"). Accordingly, the Company does not expect to be subject
to the provisions of the 1940 Act, including those that prohibit certain
transactions among affiliated parties. The 1940 Act exempts entities that
are primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate. Under current
interpretations of the staff of the Securities and Exchange Commission, in
order to qualify for this exemption, the Company must maintain at least 55%
of its assets directly in Mortgage Loans, certain Mortgage Certificates and
certain other qualifying interests in real estate. The Company's ownership
of Residual Interests may therefore be limited by the 1940 Act. In
addition, certain Mortgage Certificates may be treated as securities
separate from the underlying Mortgage Loans and, thus, may not qualify as
"mortgages and other liens on and interests in real estate" for purposes of
the 55% requirement, unless such Mortgage Certificates represent all the
certificates issued with respect to an underlying pool of mortgages. The
Company's investment policies prohibit it from making any investments that
would cause the Company to be an investment company within the meaning of
the 1940 Act.
Although the Company has no present intention to seek modification of
its operating policies described herein, a majority of the Unaffiliated
Directors may in the future conclude that it would be advantageous for the
Company to do so and may modify such operating policies accordingly,
without the consent of the stockholders.
Other Operating Strategies
The Company has the power to originate Mortgage Loans, retain or
purchase servicing or excess servicing rights or engage in other similar
activities, but only to the extent consistent with its qualification as a
REIT. The Company does not currently engage, nor does it expect to engage,
in any such activities.
The Company also has the power to acquire equity interests in improved
real property. Although it does not presently own real property, the
Company intends to acquire multi-family properties in the Western states
with the approval of a majority of the Unaffiliated Directors. Acquisition
of real property will only be incremental to the ownership of mortgage
securities. Real property acquisitions will be opportunistic and will
occur from time to time only when the potential for appreciation in value
together with current cash flow yield provides a total return equal to the
Company's investment in mortgage securities.
To the extent consistent with the Company's qualification as a REIT,
any Mortgage Assets held by the Company may be partially hedged so as to
protect such funds from interest rate fluctuations. Generally, hedging is
a technique used either to increase the liquidity or decrease the risk of
an asset by guaranteeing, wholly or partially, the price at which the asset
may be disposed of prior to its maturity. Certain of the tests that the
Company must satisfy to qualify as a REIT, however, may significantly limit
the Company's ability to hedge. See "Federal Income Tax Considerations".
In times of volatile interest rates, the Company may be prevented from
hedging its Mortgage Assets. The Company currently has no hedging
agreements in place.
Formation of Subsidiary
On October 21, 1988 TISMAC was incorporated for the purpose of issuing
CMOs directly. TISMAC is a wholly-owned subsidiary of the Company. On
June 29, 1989, TISMAC issued $199,400,000 original aggregate principal
amount of its Collateralized Mortgage Obligations, Series 1989-1, Classes A-
F. All of the Bond Classes in the CMO have 10% bond coupons and mature
serially from March 2016 through July 1, 2019. The bonds are secured by
$200,000,000 of GNMA I collateral with a stated pass through rate of 10%.
The assets of TISMAC are not available to pay creditors of the Company.
The Company has undertaken to indemnify certain parties who have contracted
with TISMAC against certain losses which they might sustain in carrying out
their obligations.
Competition
In purchasing Mortgage Assets, in acquiring and accumulating Mortgage
Instruments and in issuing Structured Securities, the Company competes with
investment banking firms, savings and loan associations, banks, mortgage
bankers, insurance companies, other lenders, GNMA, FHLMC and FNMA and other
entities purchasing Residual Interests, Mortgage Instruments and issuing
Structured Securities, many of which have greater financial resources than
the Company. Additionally, Structured Securities issued by the Company or
any Affiliated Issuers will face competition from other investment
opportunities available to prospective purchasers.
Employees
The Company currently has no full time salaried employees who are
employed directly by the Company. However, the Company reimburses the
Manager for employment expenses of personnel performing certain functions
as specified in the Management Agreement. The Manager currently employs
seven employees who perform these specified functions on behalf of the
Company. See "Management of Operations - Expenses".
Management of Operations
The Management Agreement
The Company has entered into a Management Agreement with the Manager
which is renewable annually. In June 1993 the Board of Directors renewed
the Management Agreement through June 30, 1994. The Management Agreement
may be terminated by the Company without cause at any time upon 60 days
written notice by a majority vote of its Unaffiliated Directors or by a
vote of the holders of a majority of the outstanding shares of Common Stock
and by the Manager upon 60 days' written notice.
Under the Management Agreement the Manager, in accordance with
investment criteria established by the Company's Board of Directors,
including a majority of the Unaffiliated Directors, arranges for the
acquisition of Mortgage Assets for the Company, arranges for the issuance
and administration of Structured Securities, monitors the performance of
the Company's Mortgage Assets and provides certain administrative and
overall managerial services necessary for the operation of the Company.
For performing these services, the Manager receives (i) a base management
fee, payable quarterly, in an amount equal to 3/8 of 1% per annum of the
Company's Average Invested Assets and (ii) incentive compensation, payable
quarterly, in an amount equal to 25% of the amount by which the Company's
annualized Return on Equity for the quarter exceeds the Ten Year U.S.
Treasury Rate for the quarter plus one percentage point. The base
management fee may be deferred in any year if certain expenses of the
Company exceed specified percentages of the Company's Average Invested
Assets or Net Income for that year.
In order to compensate the Manager for certain administrative
functions that the Manager performs with respect to each Residual Interest
which is projected to have cash flows in excess of $40,000 in the following
year purchased by the Company for which neither the Manager nor an
Affiliate acts as bond administrator, the Company pays the Manager a fee
equal to $10,000 for each year or fraction thereof that the Company holds
such Residual Interest. The Company also pays the Manager certain bond
issuance and administration fees when it acts in the capacity of bond
administrator in connection with the issuance and administration of
Structured Securities issued by or on behalf of the Company. Such fees are
comparable to those that the Company would pay unrelated entities.
Expenses
The Company reimburses the Manager for certain expenses incurred by
the Manager on the Company's behalf, including rent, telephone, utilities,
office furniture, equipment and machinery, computers, and computer
services, as well as expenses relating to accounting, bookkeeping and
related administrative functions (including the employment expenses of any
persons performing these functions), and fees and expenses of agents and
employees employed directly by the Company or by the Manager at the
Company's expense.
The Manager is required to reimburse the Company to the extent that
certain of such expenses exceed the greater of 2% of the Average Invested
Assets of the Company or 25% of the Company's Net Income for the year
("Excess Expenses"). Excess Expenses are paid by the Manager up to the
amount of the base fee, unless the Unaffiliated Directors determine that,
based upon unusual or non-recurring factors, a higher level of expenses is
justified for such fiscal year. Excess Expenses paid by the Manager may be
recovered by the Manager, without interest, in succeeding years to the
extent that expenses in succeeding years are below the limitation of
expenses. Expense reimbursement is made quarterly, subject to adjustment
at the end of each year. Except as set forth above, the Manager is
required to pay employment expenses of its personnel, rent, telephone,
utilities, other office expenses, certain travel and miscellaneous
administrative expenses of the Manager and, if the Manager or an affiliate
of the Manager serves as bond administrator for a series of Structured
Securities issued by or on behalf of the Company, all expenses incurred by
the Manager in performing administrative services in connection with the
issuance and administration of such series of Structured Securities.
If the Company participates in programs operated by the Manager for
the pricing and acquisition of Mortgage Loans, the Company will pay the
Manager a fixed expense allowance in an amount which shall be determined by
a majority of the Unaffiliated Directors, and which shall be subject to
adjustment every six months upon approval by a majority of such
Unaffiliated Directors. The amount of such allowance would not be subject
to the expense limitation described above.
Federal Income Tax Considerations
General
If the Company satisfies certain tests with respect to the nature of
its income, assets, management, share ownership and the amount of its
distributions, and elects to be so treated, it will qualify as a real
estate investment trust ("REIT") for federal income tax purposes. The
Company satisfied such tests and elected to be treated as a REIT on its tax
return for the year ended December 31, 1988. The Company has satisfied such
tests in all subsequent years and intends to satisfy this test in future
years. As a REIT, the Company generally will not be subject to tax at the
corporate level on its net income to the extent that it distributes cash in
the amount of such net income to its stockholders. See "Taxation of the
Company." Generally, those distributions will constitute dividends to the
stockholders and will be taxable as ordinary income to the extent of the
Company's earnings and profits. It is expected that distributions made by
the Company will be made out of earnings and profits.
The failure of the Company to be treated as a REIT for any taxable
year would materially and adversely affect the stockholders since the
Company would be taxed as a corporation. Accordingly, the taxable income
of the Company (computed without any deduction for distributions to
stockholders) would be taxed to the Company at corporate rates (currently
up to 34%), and the Company would be subject to any applicable minimum tax.
Additionally, dividends to the stockholders would be treated as ordinary
income to the extent of the Company's earnings and profits. As a result of
the "double taxation" (i.e. taxation at the corporate level and
subsequently at the stockholder level when earnings are distributed) the
dividends to the stockholders would decrease substantially, because a large
portion of the cash otherwise available for distribution to stockholders
would be used to pay taxes. Further, the failure of the Company to be
treated as a REIT for any one year would disqualify the Company from being
treated as a REIT for four subsequent years.
Qualification of the Company as a REIT
General
In order to qualify as a REIT for federal income tax purposes, the
Company must elect to be so treated and must satisfy certain tests with
respect to the sources of its income, the nature and diversification of its
assets, the amount of its distributions, and the ownership of the Company.
The following is a discussion of those tests.
Sources of Income
The Company must satisfy three separate income tests for each taxable
year with respect to which it intends to qualify as a REIT: (i) the 75%
income test, (ii) the 95% income test, and (iii) the 30% income test.
Under the first test, at least 75% of the Company's gross income for the
taxable year must be derived from certain qualifying real estate related
sources. Income that qualifies under the 75% test includes (a) interest on
obligations secured by mortgages on real property or on interests in real
property (including, generally, income from regular and residual interests
in REMICs), (b) dividends from other REITs, and (c) gain from the sale or
other disposition of real property (including interests in real property
and interests in mortgages on real property) that is not "dealer property"
(i.e. property that is stock in trade, inventory, or property held
primarily for sale to customers in the ordinary course of business), (d)
income from the operation, and gain from the sale, of property acquired at
or in lieu of a foreclosure of a mortgage ("foreclosure property") , (e)
commitment fees related to mortgage loans, and (f) income attributable to
the temporary investment of the Company's capital proceeds (excluding
amounts received pursuant to a dividend reinvestment program) in stock or
debt instruments, if such income is received or accrued during the one-year
period beginning on the date of receipt of the capital proceeds ("qualified
temporary investment income").
In addition to meeting the 75% income test, at least 95% of the
Company's gross income for the taxable year must be derived from items of
income that either qualify under the 75% test or are from certain other
types of passive investments. This is referred to as the 95% income test.
Income that satisfies the 95% income test includes income from dividends,
interest and gains from the sale or disposition of stock or other
securities, other than stock or other securities that are dealer property.
Finally, the 30% income test requires that the Company derive less
than 30% of its gross income for the taxable year from the sale or other
disposition of (1) real property, including interests in real property and
interests in mortgages on real property, held for less than four years,
other than foreclosure property or property involuntarily converted through
destruction, condemnation or similar events, (2) stock or securities held
for less than one year, and (3) property in "prohibited transactions." A
prohibited transaction is a sale or other disposition of property that is
stock in trade, inventory, or property held for sale to customers in the
ordinary course of business, other than foreclosure property or a real
estate asset held for at least four years, if certain other conditions are
satisfied.
If the Company inadvertently fails to satisfy either the 75% income
test or the 95% income test, or both, and if the Company's failure to
satisfy either or both tests is due to reasonable cause and not willful
neglect, the Company may avoid loss of REIT status by satisfying certain
reporting requirements and paying a tax generally equal to 100% of any
excess nonqualifying income. There is no comparable safeguard that could
protect against REIT disqualification as result of the Company's failure to
satisfy the 30% income test.
The Company anticipates that its gross income will continue to consist
principally of interest and gains on Mortgage Assets and income from short-
term reinvestments and hedging transactions. The composition and sources
of the Company's income allowed the Company to satisfy the income tests for
all fiscal years through December 31, 1993 and should allow the Company to
satisfy the income tests during each year of its existence. If, however,
the Company causes issuances of interests in REMICs or issuances of
certificates representing certain equity interests in Mortgage Instruments
(such as pass-through certificates), the Company could recognize income or
gain that, if excessive, could result in the Company's failure to meet the
30% income test or, if from transactions in which the Company is deemed to
be a dealer, could be subject to the 100% tax on prohibited transactions.
See "Taxation of the Company." This effectively limits both the Company's
ability to issue REMIC securities directly or through wholly owned
subsidiaries and its ability to issue such securities indirectly through
issuance of Funding Notes to Affiliated Issuers. See " Issuance of
Structured Securities - CMOs." Further, certain short-term reinvestments
may generate qualifying income for purposes of the 95% income test but
nonqualifying income for purposes of the 75% income test, and certain
hedging transactions could give rise to income that, if excessive, could
result in the Company's disqualification as a REIT for failing to satisfy
the 30% income test. In addition, income from Structured Securities which
do not represent equity interests in Mortgage Loans and with respect to
which a REMIC election has not been made (e.g. CMOs) may not qualify under
the 75% income test. The Company intends to monitor its reinvestments and
hedging transactions closely to avoid disqualification as a REIT.
Nature and Diversification of Assets
At the end of each quarter of the Company's taxable year, at least 75%
of the value of the Company's assets must be cash and cash items (including
receivables), "government securities" and "real estate assets." Real
estate assets include real property, Mortgage Loans, Mortgage Certificates,
equity interest in other REITs, any stock or debt instrument for so long as
the income therefrom is qualified temporary investment income (as described
below) and, subject to certain limitations, interests in REMICs.
Structured Securities that do not represent equity interests in Mortgage
Loans and with respect to which a REMIC election has not been made may not
qualify as real estate assets. The balance of the Company's assets may be
invested without restriction, except that holdings of the securities of any
non-governmental issuer (other than a REIT or qualified REIT subsidiary)
may not exceed 5% of the value of the Company's assets or 10% of the
outstanding voting securities of that issuer. Securities that are
qualifying assets for purposes of the 75% asset test will not be treated as
securities for purposes of the 5% and 10% asset tests.
If a REIT receives "new capital," stock or debt instruments purchased
with such new capital are treated as real estate assets for purposes of the
75% asset test (described above) during the one-year period beginning on
the date the REIT receives such new capital. New capital is defined as any
amount received by a REIT in exchange for its stock (other than amounts
received pursuant to a dividend reinvestment plan) or received in a public
offering of its debt obligations having maturities of at least five years.
The Company anticipates that its assets will continue to consist
principally of (i) ownership interests in Mortgage Instruments (including
undivided ownership interests in Mortgage Instruments), (ii) interests in
REMICs, (iii) interests in other REITs, (iv) stock or debt instruments that
generate qualified temporary investment income, (v) cash and (vi) certain
short-term investments and reinvestments. The Company believes that such
asset holdings will allow it to satisfy the assets tests necessary to
qualify as a REIT, and the Company intends to monitor its activities to
attempt to assure satisfaction of such tests.
If the Company fails to satisfy the 75% asset test at the end of any
quarter of its taxable year as a result of its acquisition of securities or
other property during that quarter, the failure can be cured by a
disposition of sufficient nonqualifying assets within 30 days after the
close of that quarter. The Company intends to maintain adequate records of
the value of its assets and take such action as may be required to cure any
failure to satisfy the 75% asset test within 30 days after the close of any
quarter. The Company may not be able to cure any failure to satisfy the
75% asset test, however, if assets that the Company believes are qualifying
assets for purposes of the 75% asset test are later determined to be
nonqualifying assets.
REITs are permitted to hold assets in wholly owned subsidiaries
("Qualified REIT Subsidiaries"). A subsidiary of a REIT is a Qualified
REIT Subsidiary if 100% of its stock is owned by the REIT at all times
during the period such subsidiary is in existence. A Qualified REIT
Subsidiary is not treated as a separate corporate entity for federal income
tax purposes, but rather, together with its parent REIT, is treated as a
single taxpayer. Accordingly, all of the assets, liabilities and items of
income, deduction and credit of a Qualified REIT Subsidiary are treated as
the assets, liabilities, and items of income, deduction and credit of the
parent REIT for federal income tax purposes and, in particular, for
purposes of satisfying the applicable Code provisions for qualification as
a REIT. The Company's wholly owned subsidiary, TISMAC, is a Qualified REIT
Subsidiary.
Distributions
The Company must distribute as dividends to its stockholders for each
taxable year an amount at least equal to (i) 95% of its "REIT taxable
income" as defined below (determined before the deduction of dividends paid
and excluding any net capital gain) plus (ii) 95% of the excess of its net
income from foreclosure property over the tax imposed on such income by the
Code, less (iii) any excess non-cash income (as determined under the Code).
Generally, a distribution must be made in the taxable year to which it
relates. A portion of the required distribution, however, may be made in
the following year (i) if the dividend is declared in October, November or
December of any year, is payable to shareholders of record on a specified
date in such a month, and is actually paid before February 1 of the
following year; or (ii) if the dividend is declared before the date on
which the Company's tax return for the taxable year is due to be filed
(including extensions) and is paid on or before the first regular dividend
payment date after such declaration. Further, if the Company fails to meet
the 95% distribution requirement as a result of an adjustment to the
Company's tax returns by the IRS, the Company may, if the deficiency is not
due to fraud with intent to evade tax or a willful failure to file a timely
tax return, retroactively cure the failure by paying a deficiency dividend
(plus interest).
The Code imposes a non-deductible 4% excise tax on REITs to the extent
that the "distributed amount" with respect to a particular calendar year is
less than the sum of (i) 85% of the REITs taxable income (computed pursuant
to Section 857(b)(2) of the Code, but before the dividends paid deduction
and excluding capital gain or loss) for such calendar year, (ii) 95% of the
REIT's capital gain net income (i.e. the excess of capital gains over
capital losses) for such calendar year, and (iii) the excess, if any, of
the "grossed up required distribution" (as defined in Section 4981(b)(3) of
the Code) for the preceding calendar year over the distributed amount for
such preceding year. For purposes of the excise tax provision, the
"distributed amount" with respect to any calendar year is the sum of (i)
the deduction for dividends paid during such calendar year (excluding
dividends paid after the close of the taxable year under Section 858 of the
Code but including dividends declared in October, November or December and
paid in January, as described above), (ii) amounts on which the REIT is
required to pay corporate tax and (iii) the excess, if any, of the
distributed amount for the preceding year over the "grossed up required
distribution" for such preceding taxable year. The paid excise tax of
$38,051 for calendar year 1992 and $2,009 for 1993.
The Company intends to make distributions to its stockholders on a
basis that will allow the Company to satisfy both the 95% distribution
requirement and the excise tax distribution requirement. Certain factors
inherent in the structure of certain mortgage-backed securities
(particularly CMOs) and the federal income tax rules for calculating income
of Mortgage Assets may cause the Company to realize taxable income in
excess of net cash flows in certain years. The Company intends to monitor
closely the interrelationship between its pre-distribution taxable income
and its cash flow and intends to borrow funds or liquidate investments in
order to overcome any cash flow shortfalls if necessary to satisfy the
distribution requirement.
Ownership of the Company
Shares of the Company's Common Stock must be beneficially owned by a
minimum of 100 persons for at least 335 days in each full taxable year (or
a proportionate part of any short taxable year) after the Company's first
taxable year. Further, at no time during the second half of any taxable
year after the Company's first taxable year may more than 50% of the
Company's shares be owned, actually or constructively, by five or fewer
individuals (including pension funds except under certain circumstances,
and certain other types of tax exempt entities). The Company's Articles of
Incorporation contain repurchase provisions and transfer restrictions
designed to prevent violation of the latter requirement. To evidence
compliance with these requirements, the Company is required to maintain
records that disclose the actual ownership of its outstanding shares. Each
year, in order to satisfy that requirement, the Company will demand written
statements from record holders owning designated percentages of Common
Stock disclosing, among other things, the identities of the actual owners
of such shares.
Taxation of the Company
For any taxable year in which the Company qualifies and elects to be
treated as a REIT under the Code, the Company will be taxed at regular
corporate rates (or, if less, at alternative rates in any taxable year in
which the Company has an undistributed net capital gain) on its real estate
investment trust taxable income ("REIT Taxable Income"). REIT Taxable
Income is computed by making certain adjustments to a REIT's taxable income
as computed for regular corporations. Significantly, dividends paid by a
REIT to its stockholders with respect to a taxable year are deducted to the
extent such dividends are not attributable to net income from foreclosure
property. Thus, in any year in which the Company qualifies and elects to
be treated as a REIT, it generally will not be subject to federal income
tax on that portion of its taxable income that is distributed to its
stockholders in or with respect to that year. In computing REIT Taxable
Income, taxable income also is adjusted by (i) disallowing any corporate
deduction for dividends received, (ii) disregarding any tax otherwise
applicable as a result of a change of accounting period, (iii) excluding
the net income from foreclosure property, (iv) deducting any tax resulting
from the REIT's failure to satisfy either of the 75% of 95% income tests,
and (v) excluding net income from prohibited transactions.
Regardless of distributions to stockholders, the Company will be
subject to a tax at the highest corporate rate on its net income from
foreclosure property, a 100% tax on its net income from prohibited
transactions, and a 100% tax on the greater of the amount by which it fails
either the 75% income test or the 95% income test, less associated
expenses, if the failure to satisfy either or both of such tests does not
cause the REIT to fail to qualify as such. See "Qualification of the
Company as a REIT." In addition, as described above, the Company will be
subject to a 4% excise tax for any taxable year in which, and on the amount
by which, distributions made by the Company fail to equal or exceed a
certain amount determined with reference to its REIT Taxable Income. See
"Qualification of the Company as a REIT - Distributions" above. The
Company is also subject to the alternative minimum tax, which is determined
for REITs with reference to REIT Taxable Income as increased by tax
preferences. The Company does not expect to have significant amounts of
tax preference items. Accordingly, the Company anticipates that its
federal tax liabilities, if any, will be minimal.
California Franchise tax regulations regarding REIT qualification
currently conform to Federal income tax regulations. There is no assurance
that this will continue in the future and, if state regulations do not
conform to Federal regulations in the future, there is a possibility that
the Company might be liable for state income taxes.
The Company uses the calendar year both for tax and financial
reporting purposes. Due to the differences between tax accounting rules
and generally accepted accounting principles, the Company's REIT Taxable
Income may vary from its net income for financial reporting purposes.
Item 2. Properties.
The principal executive offices of the Company and the Manager are
located at 655 Montgomery Street, Suite 800, San Francisco, California
94111, telephone (415) 393-8000. The offices are leased for a period of
three years, ending on February 28, 1996, by the Manager of the Company.
The Manager is reimbursed by the Company for a portion of the rent based on
the percentage of spaced used by personnel who provide accounting and
administration services to the Company.
Item 3. Legal Proceedings.
At March 31, 1994, there were no material pending legal proceedings
(within the meaning of the Form 10-K instructions) to which the Company or
its subsidiary is a party or to which any of their respective property was
subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter of the fiscal year covered by this
report.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters.
The Company's Common Stock is listed on both the New York Stock
Exchange and the Pacific Stock Exchange under the symbol "TIS." The high
and low closing sales prices of shares of the Common Stock on the New York
Stock Exchange for the periods indicated were as follows:
<TABLE>
<CAPTION>
High Low
---- ----
<S> <C> <C>
1992
First Quarter 8-1/2 7
Second Quarter 7-5/8 6-5/8
Third Quarter 6-7/8 3-1/4
Fourth Quarter 4-1/4 2-7/8
1993
First Quarter 3-3/4 2-3/4
Second Quarter 3-3/8 2-3/8
Third Quarter 2-5/8 2
Fourth Quarter 2-1/8 1-1/2
1994
First Quarter (through March 22, 1994) 2 1-1/2
- ----------------------------------------------------------------------
</TABLE>
On March 22, 1994, the closing sales price of the shares of Common
Stock on the New York Stock Exchange was 1-5/8. On that date the Company
had outstanding 8,105,880 shares of Common Stock which were held by 1,026
stockholders of record and the total number of beneficial shareholders was
approximately 8,000.
In order to maintain its qualification as a REIT under the Code for
any taxable year, the Company, among other things, must distribute as
dividends to its stockholders an amount at least equal to (i) 95% of its
REIT taxable income (determined before the deduction of dividends paid and
excluding any net capital gain) plus (ii) 95% of the excess of its net
income from foreclosure property over the tax imposed on such income by the
Code less (iii) any excess non-cash income (as determined under the Code).
The Company intends that the cash dividends paid each year to its
stockholders will equal or exceed the Company's taxable income generated
from operations. The following table details the dividends declared and/or
paid for the Company's two most recent fiscal years.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Applicable Date Amount Record Payable
Quarter Declared Declared Date Date
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, 1992 March 4, 1992 $0.28 March 31, 1992 April 15, 1992
June 30, 1992 June 4, 1992 $0.23 June 30, 1992 July 15, 1992
September 30, 1992 September 3, 1992 $0.05 September 30, 1992 October 15, 1992
December 31, 1992 December 3, 1992 $0.05 January 4, 1993 January 18, 1993
March 31, 1993 March 2, 1993 $0.05 March 31, 1993 April 15, 1993
June 30, 1993 June 8, 1993 $0.05 June 30, 1993 July 15, 1993
September 30, 1993 August 31, 1993 $0.05 September 30, 1993 October 15, 1993
December 31, 1993 September 15, 1993 $0.05 December 15, 1993 December 31, 1993
- ----------------------------------------------------------------------------------------
</TABLE>
The Board of Directors, at its regular meeting on March 1, 1994,
suspended the regular quarterly dividend payment for the first quarter of
1994. The actual amount and timing of future dividend payments will be at
the discretion of the Board of Directors and will depend upon the financial
condition of the Company in addition to the requirements of the Code.
Subject to the distribution requirements to maintain REIT
qualification, the Company intends, to the extent practicable, to invest
substantially all of the principal from repayments, sales and refinancings
of the Company's Mortgage Instruments in other Mortgage Assets. The
Company may, however, under extraordinary circumstances, make a
distribution of principal. Such distributions, if any, will be made at the
discretion of the Company's Board of Directors.
It is anticipated that dividends generally will be taxable as ordinary
income to stockholders of the Company (including, in some cases,
stockholders that would otherwise be exempt from tax under the Code),
although a portion of such dividends may be designated by the Company as
capital gain or may constitute a return of capital. Such dividends
received by stockholders of the Company will not be eligible for the
dividends-received deduction so long as the Company qualifies as a REIT.
The Company will furnish annually to each of its stockholders a statement
setting forth distributions paid during the preceding year and their
characterization as ordinary income, return of capital or capital gain.
Substantially all of the REIT Taxable Income of the Company is, and is
expected to continue to be, derived from the Company's Mortgage Assets.
Such income is increased by non-cash credits from, among other things, the
accretion of market discount on the Mortgage Certificates pledged as
collateral for Bonds and is decreased by non-cash expenses, including,
among other things, the amortization of the issuance costs of Bonds, market
premium on the Mortgage Certificates pledged as collateral for Bonds and
the accretion of original issue discount on certain Bond Classes of Bonds.
In certain instances, the REIT Taxable Income of the Company for federal
income tax purposes may differ from its net income for financial reporting
purposes principally as a result of the different methods used to determine
the effect and timing of recognition of such non-cash credits and expenses.
As a result of the requirement that the Company distribute to its
stockholders an amount equal to substantially all of its REIT Taxable
Income in order to qualify as a REIT, the Company may be required to
distribute a portion of its working capital to its stockholders or borrow
funds to make required distributions in years in which on a tax basis the
"non-cash" items of income (such as those resulting from the accretion of
market discount on the assets owned by the Company) exceed the Company's
"non-cash" expenses. In the event that the Company is unable to pay
dividends equal to substantially all of its REIT Taxable Income, it will
not continue to qualify as a REIT.
<PAGE>
Item 6. Selected Financial Data
The following selected financial data is qualified in its entirety by,
and should be read in conjunction with, the financial statements and notes
thereto appearing in sections of this Annual Report on Form 10-K. The data
as of December 31, 1993, 1992 and 1991 and for the years ended December 31,
1993, 1992 and 1991 has been derived from the Company's financial
statements which are included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
(In thousands, except per share data)
- -------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------
1993 1992 1991 1990 1989
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data
Income
Interest Income on Mortgage Certificates $36,873 $54,337 $64,307 $69,467 $64,475
Interest Income on Residual Interests 186 2,001 10,248 7,924 7,404
Income from PO Bonds 0 107 15 0 0
Income from IO Bonds 1,997 1,983 0 0 0
Interest on Short-term Investments 179 400 539 872 737
Gain on Sales of Assets 0 1,391 0 0 451
Other Income 89 123 154 177 201
Total Income 39,324 60,342 75,263 78,440 73,268
Expenses
Interest Expense on CMOs 38,323 52,747 61,909 66,540 60,881
Interest Expense on Short-term Debt 568 781 284 163 316
Write-downs of Mortgage Assets 12,388 25,047 0 0 0
Amortization of Deferred Bond
Issuance Costs 1,857 1,638 741 455 650
Operating and Management Expenses 1,920 1,624 2,949 3,189 2,978
Total Expenses 55,056 81,837 65,883 70,347 64,825
Minority Interest (172) (108) 215 329 440
Income (Loss) Before Cumulative Effect
of Change in Accounting for Real
Estate Investments (15,560) (21,387) 9,165 7,764 8,003
Cumulative Effect of Change in
Accounting for Real Estate Investments (9,879) 0 0 0 0
Net Income (Loss) ($25,439) ($21,387) $9,165 $7,764 $8,003
Net Income (Loss) per Share
Before Cumulative Effect of Change in
Accounting for Real Estate Investments ($1.92) ($2.64) $1.13 $0.96 $0.99
Cumulative Effect of Change in
Accounting for Real Estate Investments (1.22) 0.00 0.00 0.00 0.00
Net Income (Loss) ($3.14) ($2.64) $1.13 $0.96 $0.99
Dividends Declared per Share $0.20 $0.61 $1.34 $1.28 $1.22
Weighted Average Shares Outstanding 8,106 8,103 8,100 8,100 8,100
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
Selected Financial Data (Continued)
<CAPTION>
(In thousands) December 31
----------------------------------------------------------
1993 1992 1991 1990 1989
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Mortgage Certificates, net $250,015 $460,438 $643,176 $712,158 $766,084
Residual Interests 11,919 22,648 59,646 56,950 60,737
PO Bonds 0 0 4,796 0 0
IO Bonds 12,212 26,614 0 0 0
Total Assets 300,190 545,645 735,835 797,892 862,908
Total Liabilities 284,410 502,881 666,628 727,009 789,344
Minority Interest 0 1,275 1,428 1,415 1,492
Total Shareholders' Equity 15,780 41,489 67,779 69,468 72,072
- --------------------------------------------------------------------------------------------------
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company commenced operations on August 26, 1988 in connection with
its initial public offering of 8,100,000 shares of Common Stock.
Investment Activities
During 1993 the Company reinvested $4,069,000 in IO Bonds and $340,000
in Residual Interests and reduced its short-term borrowing by $6,212,000.
The funds came from operating activities and the principal returned to the
Company from its investments. The Company continually reviews the
composition of its portfolio and analyzes potential investments as
additions to the portfolio. The Company reinvests the principal portion of
its cash flow as soon as it finds suitable investments. The following
table illustrates the Company's cash receipts, disbursements and
reinvestments for the last four years.
<TABLE>
<CAPTION>
CASH FLOW ANALYSIS
(In thousands) 1993 1992 1991 1990
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Cash Balance $903 $1,902 $5,892 $10,659
Cash Received:
Investments 16,111 20,949 18,365 15,362
Short-term Investments 0 1,835 0 0
Sale of Investment 0 6,008 0 0
Increase to Borrowings 0 10,826 7,131 0
Cash Disbursements:
Cash Expenses (3,687) (2,566) (2,609) (2,125)
Dividends (2,026) (7,291) (10,692) (10,368)
Short-term Investments 0 0 (1,835) 0
Reinvestments (4,409) (30,760) (14,350) (2,626)
Decrease to Borrowings (6,212) 0 0 (5,000)
- --------------------------------------------------------------------------------------
Ending Cash Balance $680 $903 $1,902 $5,892
- --------------------------------------------------------------------------------------
</TABLE>
The Company increased the level of reinvestments substantially in 1992
over 1991 and 1990 levels due to a combination of the following: (1) the
higher prepayments did not reduce the 1992 cash flows but instead caused
most of the $20,949,000 cash flows from investments to be considered a
return of investment - therefore, the Company had more cash to reinvest,
(2) the drop in short term rates, and the resulting difference between long
and short term rates, made it prudent for the Company to be as fully
invested in longer term assets as was practical, (3) the funds from the
sale of PO Bonds were available for reinvestment and (4) the Company wanted
to replace some of the assets which had been written down.
Since the middle of 1991 the Company has reinvested its cash flows
into PO and IO Bonds, including Inverse IO Bonds. This is because issuers
of CMOs have been able to reallocate the economics formerly found only in
Residual Interests to some of the other CMO tranches. In addition, most
new Residual Interests are noneconomic and would not provide the investment
attributes previously found in Residual Interests and now found in a
variety of PO and IO Bonds. See "Effect of Interest and Prepayment Rates
on Net Income" below for further detail on the investment characteristics
of PO and IO Bonds as compared to Residual Interests.
In 1993 the Company purchased two Inverse IO Bonds for $4,069,000 and
purchased for $340,000 all of the outstanding minority interest in an
Equity Residual and minority interests in two other Equity Residuals.
Based on current projections of return of investment from its portfolio,
the Company expects to generate cash flows of $600,000 to $1,000,000 in
each month of 1994 either for reinvestment or to be used to reduce
borrowings. The Company continually reviews mortgage-related assets
available for purchase and plans to acquire additional mortgage-related
assets when they complement the current portfolio.
Accounting Change
In May 1993 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 115 - Accounting for
Certain Investments in Debt and Equity Securities ("SFAS No. 115"). SFAS
No. 115 requires the Company to classify its investments into one of three
categories: held-to-maturity, available-for-sale, or trading. Investments
in debt securities shall be classified as held-to-maturity and measured at
amortized cost only if the Company has the positive intent and ability to
hold those securities to maturity.
SFAS No. 115 requires certain investments in debt and equity
securities that are classified as available-for-sale to be carried at fair
value with any net unrealized gain or less excluded from earnings and
reported as a separate component of shareholders' equity.
Furthermore SFAS No. 115 requires that investments classified as held-
to-maturity or available-for-sale be written down to fair value as a
realized loss if the fair value of an investment is less than its carrying
value and the decline is determined to be "other than temporary". The
Emerging Issues Task Force ("EITF") of the FASB reached a consensus (EITF
93-18) in March 1994 as to the definition of "other than temporary". The
EITF concluded that if the projected yield on the carrying value of an
investment is less than a risk free rate, the decline in value is
considered to be other than temporary and the investment is written down to
its fair value as the new cost basis. The amount of the write down, if
any, is included in current earnings (i.e. accounted for as a realized
loss). Prior to SFAS No. 115 and EITF 93-18 the Company wrote down its
mortgage related assets only when the undiscounted future estimated cash
flows were less than the carrying value in accordance with EITF 89-4.
SFAS No. 115 is effective for years beginning after December 15, 1993,
however an enterprise is permitted to apply this statement effective in the
fourth quarter of 1993. Prior years' financial statements are not
permitted to be restated. The Company has elected to adopt SFAS No. 115 in
the fourth quarter of 1993.
The Company is not in the business of trading its real estate
investments, however, from time to time the Company may sell an investment
as part of its efforts to adjust its portfolio composition to reflect
changes in economic conditions. As such, the Company does not meet the
stringent requirements of SFAS No. 115 related to classifying its real
estate investments as held-to-maturity and, therefore, has classified all
of its real estate investments as available-for-sale.
The Company recognized a $9,879,000 charge to earnings in 1993 from
the cumulative effect at December 31, 1993 of adopting the new standard for
assets which meet the definition of other than temporary impairment. For
assets which do not meet the definition of other than temporary impairment
and for assets where the fair value exceeds amortized cost, the Company has
recorded, as a cumulative effect of change in accounting for investments, a
net unrealized gain of $1,351,000 directly to equity as prescribed by SFAS
No. 115 for assets classified as available-for-sale. Prior years'
consolidated financial statements were not permitted to be restated.
Results of Operations
The Company had a net loss for the year ended December 31, 1993 of
$25,439,000, or $3.14 per share. This loss includes $9,879,000, or $1.22
per share, as the cumulative effect of a change in accounting for real
estate investments occasioned by the Company's decision to adopt SFAS No.
115 as of its fiscal year ended December 31, 1993. Additionally, the 1993
net loss includes write-downs of mortgage assets of $12,388,000. This
compares to a net loss for the year ended December 31, 1992 of $21,387,000,
or $2.64 per share. The 1992 net loss included write-downs of mortgage
assets of $25,047,000. For the year ended December 31, 1991 the Company
had a net profit of $9,165,000. There were no write-downs of mortgage
assets in 1991. The Company declared dividends totaling $1,621,000 for
1993, or $0.20 per share as compared to $4,942,000 for 1992, or $0.61 per
share. 1991 dividends declared totaled $10,854,000, or $1.34 per share.
The Company's 1991 dividends were based on the estimated taxable income for
that years. The Company's first and second quarter 1992 dividends were
based on the Company's best estimate of taxable income for 1992 at the time
the dividends were declared. When it became apparent that the Company
might have a taxable loss for the year, the dividend was lowered to $0.05
per share. The Company also anticipated a taxable loss for 1993 and
retained its quarterly dividend policy of $0.05 per share throughout the
year.
1993 Compared to 1992
The increases in both actual mortgage prepayments and the forecasted
level of future prepayments which gave rise to substantial write downs of
mortgage-related assets commencing in mid-1992 continued throughout 1993.
As a result, the Company sustained a net loss before the cumulative effect
of the change in accounting for real estate investments of $15,560,000 or
$1.92 per share. This compares to a net loss of $21,387,000 or $2.64 per
share in 1992. Write downs in 1993 totaled $12,388,000 as compared to
$25,047,000 in 1992. The carrying values of these assets were adjusted so
that their book values at the end of each quarter equaled the sum of their
projected future cash flows based on an assumed continuation of the high
prepayment speeds. The projected increase in future prepayments shortened
the anticipated future life of the investments and therefore reduced their
existing values. The higher prepayments also caused lower income on some
of the Company's mortgage-related assets which did not require downward
adjustments.
Net interest margin (interest income from mortgage certificates net of
interest expense on CMOs) declined from $1,590,000 in 1992 to a net
interest expense of $1,450,000 in 1993 because of the retirement of some of
the lower coupon bonds leaving primarily bonds which bear an interest rate
equal to or close to the mortgage rate. Net interest margin was also
adversely impacted by changes in non-cash expenses related to the mortgages
and bonds such as an increase in total amortization of bond issuance costs
and discount on mortgage certificates and CMOs from $1,566,000 in 1992 to
$3,016,000 in 1993.
Interest expense on repurchase agreements decreased from $781,000 in
1992 to $568,000 in 1993 because of the lower average interest rate in 1993
as well as the decreased level of short-term borrowings. Management and
residual interest administration fees declined in 1993 because of the
decreased level of average invested assets arising from the write downs of
mortgage-related assets. In 1993 the Company incurred management fees of
$179,000 and Residual Interest Administration Fees of $110,000 as compared
to management fees of $276,000 and Residual Interest Administration Fees of
$100,000 in 1992. General and administrative expense in 1993 was $431,000
greater than in 1992 because of increased accounting fees related to tax
matters, the employment of outside consultants to aid in the development of
future investment strategies for the Company, increased franchise and
excise taxes and increases in overhead expenses..
1992 Compared to 1991
There was a large net loss in 1992 as compared to net income in 1991
due to substantial increases in both actual mortgage prepayments and the
forecast level of future prepayments. This resulted in downward
adjustments in the carrying value on some of the Company's mortgage-related
assets totaling $25,047,000.
The downward adjustments were partially offset by gains of $1,391,000
on the sale of PO Bonds. The Company is normally not in the business of
selling its mortgage-related assets and purchases its assets with the
intention of holding them to term. However, due to a significant rise in
estimated future prepayment speeds early in 1992, the Company decided to
sell its PO Bonds, which trade on a discounted basis, at prices which were
close to par. The Company felt it was prudent to lock in these cash flows
which, if prepayments speeds stayed high, would have been received anyway
in the near future but which, if prepayment speeds had dropped, would have
taken a number of years to receive.
Interest expense on repurchase agreements increased from $284,000 in
1991 to $781,000 in 1992 due to the increased level of short-term
borrowings. The Company's other expenses, including management fees,
declined in 1992 because the Company had no 1992 taxable income. A major
portion of the management fee is an incentive fee which is based on the
Company's taxable earnings. The Company reimburses the Manager for
compensation paid to employees who perform certain services for the
Company. The Company also pays a bonus to these employees based on the
Company's taxable earnings. Since the Company had no taxable income in
1992 it incurred neither management incentive fees nor bonuses. In 1992,
the Company incurred management fees of $276,000 and Residual Interest
Administration Fees of $100,000 as compared to management fees of
$1,180,000 and Residual Interest Administration Fees of $160,000 in 1991.
The Company incurred $129,000 in bonuses in 1991.
Outlook
The high level of prepayments resulted from a significant decline in
mortgage interest rates throughout 1992 and 1993. The Company used the
Dealer Prepayment Estimates Average ("DPEA") as estimated by several
dealers in mortgage-related assets as of the end of each quarter to
estimate future prepayments. The Company's write downs have been caused by
an increase in the level of actual and projected future prepayments. These
write downs reflect a reduction in the expected return over time from the
Company's assets. If mortgage rates continue to decline, and this causes
prepayments to increase over 1992 and 1993 levels, the Company will
continue to have additional write downs. Mortgage rates have increased in
the first three months of 1994 and it is not known if they will continue to
increase. If prepayments stabilize or decline, the Company's income should
begin to recover, in part from elimination of or decreases in write downs
as well as from additional revenue from new assets.
The Company has generated significant tax loss carryforwards from
losses experienced over the last two years. The Company has continued to
generate cash flows from its mortgage assets and it is expected that in the
future, to a large degree, these cash flows will represent a return of
investment principal to the Company and not taxable income required to be
distributed as dividends to stockholders. The Company has been seeking
suitable new investments in Commercial Securitizations which would generate
cash flows for additional reinvestment. Should these investment activities
be successful, the Company would be in a tax position to continue to use
cash flows to rebuild its investment portfolio prior to resuming taxable
dividend payments.
Effect of Interest and Prepayment Rates on Net Income
The Company's income from its investments in Residual Interests is
attributable to its share of the Residual Cash Flow. "Residual Cash Flow"
is the difference between (i) the cash flow from the collateral pledged to
secure a CMO together with reinvestment income and (ii) the amount required
for debt service payments on the CMO bonds together with related
administrative expenses. Residual Cash Flow results from the positive
interest rate spread between the collateral pledged to secure a CMO and the
outstanding CMO bonds of the CMO, and other factors inherent in the CMO
structure.
Income from Residual Cash Flow on an individual Residual Interest is
highest in the earlier years of a CMO since the CMO bonds having earlier
stated maturities generally have lower interest rates. Such income will
decline (and eventually terminate) over the life of the CMO since (i)
progressively higher interest rates on later maturing CMO bonds reduce the
positive spread between the weighted average interest rate on the CMO bonds
and the weighted average pass-through rate on the collateral and (ii) the
administrative expenses of the CMO as a percentage of the spread will
increase as the outstanding principal balance of the collateral declines.
The amount of income that may be generated from the Company's
ownership in Residual Interests is dependent upon the rate of principal
prepayments on mortgage loans which underlie the CMO bonds. Lower rates of
prepayment mean a longer life for the Residual and thus higher income.
Similarly, faster rates of prepayment mean a shorter life for the Residual
and lower income. The rate of principal payments on mortgage loans is
influenced by a variety of economic, geographic, social and other factors,
but probably the most important factor is the level of prevailing mortgage
rates. In general, if prevailing mortgage interest rates rise
significantly above the interest rates on the collateral pledged to secure
the CMOs, such collateral is likely to experience lower prepayment rates
and hence the Residual would have higher income. Conversely, if mortgage
interest rates fall significantly, prepayments increase and Residual income
would be less.
A PO Bond is a bond which passes through only the principal portion of
a mortgage-backed security. PO Bonds are created by splitting the
principal cash flows from the coupon interest on a CMO Bond to create the
PO Bond and an associated IO Bond. PO Bonds are sold at a deep discount to
face value. They pay no periodic coupon interest. Principal is returned
in the form of scheduled amortization and mortgage prepayments.
Ultimately, the entire face amount of a PO Bond is repaid to the investor.
Because there is no coupon, the income performance of a PO Bond is
extremely sensitive to prepayments. Higher prepayments lead to a more
rapid return of principal and a higher yield and lower prepayments lead to
a slower return of principal and a lower yield. However, since PO Bonds
are sold at a discount to their face value, and the total face value is
ultimately received, the total yield on a PO Bond cannot drop below zero.
IO Bonds pass through a specified interest portion of a mortgage-
backed security. The interest due on an IO Bond is calculated by
multiplying this interest rate times the outstanding balance of the
underlying mortgage pools. As the balance of the underlying mortgages
decline to zero, payments on the IO Bond also decline to zero. Usually the
interest on the underlying mortgages is fixed. If the interest rate is
variable, it is called a Floating Rate IO Bond. If the variable rate of
interest is inversely related to an index, it is called an Inverse IO Bond.
A regular IO Bond is similar to a Fixed Rate Residual, in general its yield
will increase as interest rates increase and decrease as interest rates
decline. An Inverse IO is similar to a LIBOR or COFI indexed Residual. In
general its yield will decrease as interest rates increase and increase as
interest rates decline. The Company purchased both regular IO Bonds and an
Inverse IO Bond in 1992 as part of its attempt to diversify its portfolio
and to maintain a balance of bearish and bullish assets.
The Company's income from Residual Interests in CMOs which includes
one or more LIBOR or COFI Bond Classes and from Inverse IO Bonds may
fluctuate widely depending upon changes in the LIBOR or COFI rates, which
will affect the amount of interest payable on such LIBOR or COFI bonds and
on the Inverse IO Bond. The Company's income also will be affected by the
relationship between changes in these rates and mortgage prepayments. At
December 31, 1992, approximately 1% of the CMOs in which the Company
purchased Residual Interests contained one or more LIBOR-based Bond
Classes, approximately 20% contained one or more COFI-based Bond Classes,
approximately 33% of CMOs were entirely comprised of fixed rate Bond
Classes, approximately 33% in IO Bonds and 13% in inverse IO Bonds. As a
result of 1993 reinvestments, write downs, return of principal and
disposition of assets, the composition of the Company's portfolio was
approximately 40% fixed rate, 0% LIBOR, 16% COFI, 17% IO Bonds and 27%
Inverse IO Bonds at December 31, 1993. Because of this balance, the cash
flow characteristics of the Company's assets are intended to complement
each other in a way that, to some extent, hedges the portfolio internally.
The goals are to avoid undue interest rate risk and to obtain greater
ability to produce steady cash flow levels.
Under certain extended high interest rate periods or in the event of
extremely high prepayment rates on the Collateral, the return on the
Company's investment in a Residual Interest or IO Bond could be
significantly reduced. In the event that the projected return on a
mortgage-related asset falls below a risk free rate, the Company would be
required to write down the asset to a fair value.
Liquidity and Capital Resources
The Company uses its cash flow to provide working capital to pay its
expenses and debt service, acquire other assets and, at the discretion of
the Board of Directors, to pay dividends to its shareholders. It uses the
portion of cash flows on its mortgage-related assets which represent a
return of investment, calculated on a tax basis, and its other capital
resources for the purchase of mortgage-related assets. In 1993 the Company
generated cash flow of $4,342,000 from its assets whereas in 1992 the
Company used $5,934,000 of cash to support operations. 1991 operations
generated $6,014,000.
At December 31, 1993 the Company had outstanding borrowings with two
investment banking firms under repurchase agreements. At that date the
Company owed $11,745,000. All of the borrowing had initial terms of one
month, are renewed on a month-to-month basis and have a floating rate of
interest which is tied to the one month LIBOR rate. The weighted average
interest rate of these borrowings was 3.65%. During 1992 the Company had
increased its level of borrowings from the 1991 level to a maximum of
$26,261,000, which it reduced to $17,957,000 as of December 31, 1992. Of
these borrowings, $2,551,000 had terms of one year, the remaining
$15,406,000 was borrowed under three different monthly repurchase
agreements. The weighted average interest rate on such borrowings at
December 31, 1992 was 4%. At December 31, 1993, the Company had no other
borrowings or committed lines of credit.
Management of the Company believes that the cash flow from operations
and availability of repurchase agreements are sufficient to enable the
Company to meet its current and anticipated future liquidity requirements
including payment of dividends to its shareholders, which must equal at
least 95% of the Company's taxable income in order for the Company to
qualify as a REIT.
<PAGE>
<TABLE>
Net Interest Income Analysis
<CAPTION>
1993 1992
---------------------------------- ----------------------------------
Average Average Average Average
(In thousands) Interest Balance Rate Interest Balance Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Mortgage Certificates $36,873 $361,602 10.20% $54,337 $559,175 9.72%
Residual Interests 186 16,411 1.13% 2,001 40,635 4.92%
Interest Only Bonds 1,997 21,078 9.47% 1,983 18,822 10.54%
Other 268 16,372 1.64% 627 15,407 4.07%
- -------------------------------------------------------------------------------------------------------------------
Interest Income 39,324 415,463 9.47% 58,948 634,039 9.43%
Interest Expense
Collateralized Mortgage Obligations
40,381 376,933 10.71% 54,634 571,111 9.57%
Short-term Debt 568 15,371 3.70% 781 17,301 4.50%
- -------------------------------------------------------------------------------------------------------------------
Interest Expense 40,949 392,304 10.44% 55,415 588,412 9.42%
Net Interest
Income (Expense) ($1,625) (0.39%) $3,533 0.59%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1991 1990
---------------------------------- ----------------------------------
Average Average Average Average
(In thousands) Interest Balance Rate Interest Balance Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Mortgage Certificates $64,307 $680,202 9.45% $69,467 $739,556 9.39%
Residual Interests 10,248 59,504 17.22% 7,924 57,963 13.67%
Interest Only Bonds 0 0 0.00% 0 0 0.00%
Other 708 12,015 5.89% 1,049 12,805 8.19%
- -------------------------------------------------------------------------------------------------------------------
Interest Income 75,263 751,721 10.01% 78,440 810,324 9.68%
Interest Expense
Collateralized Mortgage Obligations 62,920 683,820 9.20% 67,283 743,440 9.05%
Short-term Debt 284 4,192 6.77% 163 1,675 9.72%
- -------------------------------------------------------------------------------------------------------------------
Interest Expense 63,204 688,012 9.19% 67,446 745,115 9.05%
Net Interest Income $12,059 1.60% $10,994 1.36%
- -------------------------------------------------------------------------------------------------------------------
<FN>
The above tables summarize the amount of interest expense, the average amounts outstanding of interest-bearing
assets and liabilities, and the average effective interest rates.
</TABLE>
<PAGE>
<TABLE>
The table below summarizes the amount of change in interest income and interest expense due to changes in interest
rates versus changes in volume.
<CAPTION>
1993 - 1992 1992 - 1991 1991 - 1990
------------- ------------- -------------
(In thousands) Rate Volume Total Rate Volume Total Rate Volume Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Mortgage $2,837 ($20,301) ($17,464) $1,850 ($11,820) ($9,970) $455 ($5,615) ($5,160)
Certificates
Residual Interests (1,023) (792) (1,815) (5,711) (2,536) (8,247) 2,108 216 2,324
Interest Only (74) 88 14 0 1,983 1,983 0 0 0
Bonds
Other (401) 42 (359) (926) 845 (81) (280) (61) (341)
- --------------------------------------------------------------------------------------------------------------------------
Interest Income 1,339 (20,963) (19,624) (4,787) (11,528) (16,315) 2,293 (5,460) (3,177)
Interest Expense
CMOs 7,762 (22,015) (14,253) 2,626 (10,912) (8,286) 1,146 (5,509) (4,363)
Short-term Debt (132) (81) (213) (50) 556 497 (30) 151 121
- --------------------------------------------------------------------------------------------------------------------------
Interest Expense 7,630 (22,096) (14,466) 2,567 (10,356) (7,789) 1,116 (5,358) (4,242)
Net Interest Income (6,291) 1,133 (5,158) ($7,354) ($1,172) ($8,526) $1,167 ($102) $1,065
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Item 8. Financial Statements and Supplementary Data
TIS Mortgage Investment Company
and Subsidiary
Index to Financial Statements
Report of Independent Public Accountants ........................... 34
Consolidated Balance Sheets - December 31, 1993 and 1992 ........... 35
Consolidated Statements of Operations for the years ended
December 31, 1993, 1992 and 1991 ................................ 36
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1993, 1992 and 1991 .................... 37
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1992 and 1991 ................................ 38
Notes to the Consolidated Financial Statements ..................... 39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
TIS Mortgage Investment Company:
We have audited the accompanying consolidated balance sheets of TIS
Mortgage Investment Company (a Maryland corporation) and Subsidiary as of
December 31, 1993 and 1992, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of TIS Mortgage
Investment Company and Subsidiary as of December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in Note 2, the Company changed its method of accounting
for its investments to adopt the provisions of Statement of Financial
Accounting Standards No. 115 - Accounting for Certain Investments in Debt
and Equity Securities.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the
index of financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
San Francisco, California,
April 7, 1994
<PAGE>
<TABLE>
TIS Mortgage Investment Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
<CAPTION>
- ----------------------------------------------------------------------------------------
(In thousands) December 31, 1993 December 31, 1992
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real Estate Investments (available
for sale in 1993)
Mortgage Certificates, gross $254,657 $468,793
Less Unamortized Discount (4,642) (8,355)
-------- --------
Mortgage Certificates, net 250,015 460,438
Residual Interests 11,919 22,648
Interest Only (IO) Bonds 12,212 26,614
Reserve for Loss on Investments (3,852) 0
-------- --------
Total Real Estate Investments 270,294 509,700
Cash and Cash Equivalents 680 903
Restricted Cash 17,982 14,368
Accrued Interest Receivable 8,289 15,851
Deferred Bond Issuance Costs 2,667 4,524
Other Assets 278 299
-------- --------
Total Assets $300,190 $545,645
======== ========
- ----------------------------------------------------------------------------------------
LIABILITIES
Collateralized Mortgage Obligations, gross $277,612 $491,284
Less Unamortized Discount (8,870) (13,523)
-------- --------
Collateralized Mortgage Obligations, net 268,742 477,761
Payable to Affiliate 31 88
Accounts Payable and Accrued Liabilities 190 59
Accrued Interest Payable 3,702 6,611
Short-term Debt 11,745 17,957
Dividend Payable 0 405
-------- --------
Total Liabilities 284,410 502,881
-------- --------
- ----------------------------------------------------------------------------------------
Minority Interest 0 1,275
- ----------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common Stock, par value $.001 per share;
100,000,000 Shares Authorized; 8,105,880
Shares Issued and Outstanding 8 8
Additional Paid-in Capital 74,696 74,696
Unrealized Gain on Investments 1,351 0
Retained Earnings (60,275) (33,215)
-------- --------
Total Shareholders' Equity 15,780 41,489
-------- --------
- ----------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $300,190 $545,645
======== ========
- ----------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
TIS Mortgage Investment Company and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(In thousands except per share data) Years Ended December 31,
-------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Mortgage Certificates, net $ 36,873 $ 54,337 $ 64,307
Short-term Investments 179 400 539
Residual Interests 186 2,001 10,248
Principal Only (PO) Bonds 0 107 15
Interest Only (IO) Bonds 1,997 1,983 0
Other 89 120 154
39,324 58,948 75,263
INTEREST AND CMO RELATED EXPENSES
Collateralized Mortgage Obligations
Interest 38,323 52,747 61,909
Administration Fees 201 249 270
Amortization of Deferred Bond Issuance Costs 1,857 1,638 741
Short-term Debt 568 781 284
40,949 55,415 63,204
Net Interest Income (Loss) (1,625) 3,533 12,059
Other Income 0 3 0
Gain on Sale of PO Bonds 0 1,391 0
Write-downs of Mortgage Assets (12,388) (25,047) 0
Management and Residual Interest
Administration Fees (Note 10) (289) (376) (1,340)
General and Administrative Expense (Note 10) (1,430) (999) (1,339)
Income (Loss) Before Minority Interest and
Cumulative Effect of Change in Accounting
for Real Estate Investments (15,732) (21,495) 9,380
Minority Interest 172 108 (215)
Income (Loss) Before Cumulative Effect of Change
in Accounting for Real Estate Investments (15,560) (21,387) 9,165
Cumulative Effect of Change in Accounting
for Real Estate Investments (Note 2) (9,879) 0 0
Net Income (Loss) ($25,439) ($21,387) $ 9,165
Income (Loss) per Share
Before Cumulative Effect of Change in
Accounting for Real Estate Investments ($1.92) ($2.64) $1.13
Cumulative Effect of Change in Accounting
for Real Estate Investments (1.22) 0.00 0.00
Net Income (Loss) ($3.14) ($2.64) $1.13
Dividends Declared per Share $0.20 $0.61 $1.34
Weighted Average Number of Shares Outstanding 8,106 8,103 8,100
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
TIS Mortgage Investment Company and Subsidiary
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1993, 1992 and 1991
- ------------------------------------------------------------------------------------------------------------
(In thousands) Common Stock Additional Unrealized
----------------------- Paid-in Gain on Retained
Shares Amount Capital Investments Earnings Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1991 8,100 $8 $74,657 $ 0 ($ 5,197) $ 69,468
Net Income 9,165 9,165
Dividends Declared (10,854) (10,854)
- ------------------------------------------------------------------------------------------------------------
Balance - December 31, 1991 8,100 8 74,657 0 (6,886) 67,779
Net Loss (21,387) (21,387)
Dividends Declared (4,942) (4,942)
Shares Issued Under Dividend
Reinvestment Plan 6 -- 39 39
- ------------------------------------------------------------------------------------------------------------
Balance - December 31, 1992 8,106 8 74,696 0 (33,215) 41,489
Net Loss (25,439) (25,439)
Dividends Declared (1,621) (1,621)
Unrealized Gain on
Investments - Cumulative
Effect of Change in
Accounting for Real Estate
Investments (Note 2) 1,351 1,351
- ------------------------------------------------------------------------------------------------------------
Balance - December 31, 1993 8,106 $8 $74,696 $1,351 ($60,275) $15,780
============================================================================================================
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
TIS Mortgage Investment Company and Subsidiary
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------
(In thousands) 1993 1992 1991
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) ($25,439) ($21,387) $ 9,165
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 2,838 (13) (433)
Write-downs of Mortgage Assets 12,388 25,047 0
Cumulative Effect of Change in Accounting
for Real Estate Investments 9,879 0 0
Gain on Sales of Assets 0 (1,391) 0
Decrease (Increase) in Accrued Interest Receivable 7,562 (5,633) (1,955)
Decrease (Increase) in Prepaid Expenses (51) 26 42
Decrease in Payable to Affiliate (57) (164) (130)
Increase (Decrease) in Accounts Payable
and Accrued Liabilities 131 (211) (28)
Decrease in Accrued Interest Payable (2,909) (2,208) (647)
------- ------- -------
Net Cash Provided by (Used in) Operating Activities 4,342 (5,934) 6,014
------- ------- -------
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Short-term Debt (6,212) 10,826 7,131
Principal Payments on CMOs (213,672) (170,619) (67,162)
Net Increase (Decrease) in Minority Interest
in Owner Trust Residuals (1,275) (153) 13
Common Stock Issued Under Dividend Reinvestment Plan 0 39 0
Cash Dividends Paid on Common Stock (2,026) (7,291) (10,692)
-------- -------- --------
Net Cash Used in Financing Activities (223,185) (167,198) (70,710)
-------- -------- --------
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Short-term Investments 0 0 (1,835)
Principal Reduction in Short-term Investments 0 1,835 0
Net Increase in Restricted Cash (3,614) (6,657) (494)
Principal Reduction in Mortgage Certificates 214,136 185,431 70,554
Principal Reduction in Residual Interests 6,336 12,576 6,858
Purchase of Principal Only (PO) Bonds 0 0 (4,796)
Principal Reduction in PO Bonds 0 179 0
Net Proceeds from Sale of PO Bonds 0 6,008 0
Purchase of Residual Interests 0 0 (9,554)
Purchase of Interest Only (IO) Bonds (4,069) (30,760) 0
Investment in Equity Residuals (340) 0 0
Principal Reduction in IO Bonds 6,171 3,521 0
Capital Expenditures 0 0 (27)
-------- -------- --------
Net Cash Provided by Investing Activities 218,620 172,133 60,706
-------- -------- --------
Net Change in Cash and Cash Equivalents (223) (999) (3,990)
Cash and Cash Equivalents at Beginning of Period 903 1,902 5,892
Cash and Cash Equivalents at End of Period $ 680 $ 903 $ 1,902
-------- -------- --------
- ---------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash Paid for CMO Interest Expense $41,206 $ 54,810 $62,752
Cash Paid for Other Interest Expense $ 595 $ 925 $ 88
- ---------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
TIS Mortgage Investment Company (the "Company") was incorporated on
May 11, 1988. At incorporation 100 shares of the Company's Common Stock
were issued to TIS Financial Services, Inc., formerly Thrift Investment
Services (the "Manager") at $10 per share. During the period from the
Company's incorporation until August 26, 1988, the Company's activities
consisted solely of preparations for its initial public offering. On
August 26, 1988, the Company completed its initial public offering of
7,600,000 shares of Common Stock at a price to the public of $10 per share
and commenced operations. On October 11, 1988, as part of the initial
public offering, the Company issued an additional 500,000 shares of its
Common Stock at $10 per share in connection with the exercise of an over-
allotment option by the underwriters. In 1992, 5,780 shares were issued
under the Company's Dividend Reinvestment and Share Purchase Plan (the
"Plan"). No additional shares were issued in 1993 as shares required for
the Plan were purchased on the open market.
2. Summary of Significant Accounting Policies
Overall Methods of Accounting - On May 31, 1990, the Emerging Issues
Task Force of the Financial Accounting Standards Board reached a consensus
(Issue 89-4) for a uniform method of accounting for Residual Interests in
collateralized mortgage obligations ("CMOs"). The consensus, among other
things, required Residual Interests to be classified either as "equity"
(and be accounted for under the Equity Method) or as "nonequity" (and be
accounted for under a level yield method referred to as the Prospective
Method). The methods described in Issue 89-4 are essentially the same as
those used by the Company.
Accounting Change - On December 31, 1993 the Company adopted Financial
Accounting Standards Board Standard No. 115 ("SFAS 115") - Accounting for
Certain Investments in Debt and Equity Securities. In accordance with this
new Standard, the Company is required to classify its investments as either
trading investments, available-for-sale investments or held-to-maturity
investments. The Company is not in the business of trading its real estate
investments, however, from time to time the Company may sell an investment
as part of its efforts to adjust its portfolio composition to reflect
changes in economic conditions. Therefore, the Company has classified all
its real estate investments as available-for-sale investments, carried at
fair value in the financial statements. Unrealized holding gains and
losses for unimpaired available-for-sale investments are excluded from
earnings and reported as a net amount in shareholders' equity until
realized.
All of the Company's investments are subject to write down whenever
the yield on the projected cash flows is less than a risk free rate. If
the yield on the projected cash flows is less than a risk free rate, the
decline in value is considered to be "other than temporary" and the
investment is written down to its fair value as the new cost basis. The
amount of the write down is included in the Company's current earnings
(i.e. accounted for as a realized loss). The Emerging Issues Task Force of
the Financial Accounting Standards Board reached a consensus (EITF 93-18)
as to the definition of "other than temporary" impairment. The Company's
accounting policy is consistent with this consensus.
For purposes of applying the impairment provisions of SFAS No. 115,
the Company considers its investment in each of its Equity Residuals to be
a net cash flow investment (net of CMO Bond interest payments and related
CMO Bond administrative expenses). The Company measures other than
temporary impairment by comparing the yield on the projected net cash flows
from the Equity Residual, (i.e. Mortgage Certificates net of discounts and
CMO Bond Liabilities) to a risk free rate. If the yield on the projected
cash flows from the Equity Residual is less than a risk free rate, the
Company records a reserve to reduce the carrying value to fair value. The
fair value is calculated using the forecasted net cash flows discounted at
a risk adjusted rate. The risk adjusted rate is determined by the Company
using established market transactions for securities having similar
characteristics and backed by collateral of similar rate and term.
The Company recognized a $9,879,000 charge to earnings in 1993 from
the cumulative effect at December 31, 1993 of adopting the new standard for
assets which meet the definition of other than temporary impairment. For
assets which do not meet the definition of other than temporary impairment
and for assets where the fair value exceeds amortized cost, the Company has
recorded, as a cumulative effect of change in accounting for investments, a
net unrealized gain of $1,351,000 directly to equity as prescribed by SFAS
No. 115 for assets classified as available-for-sale. Prior years'
consolidated financial statements were not permitted to be restated.
The change in accounting principle has significantly reduced the
amortized cost of many of the Company's CMO Ownership Interests. As a
result, it is anticipated that earnings from these assets will improve in
future periods. However, faster prepayment speeds and lower estimates of
cash flow from call rights may cause the fair value of CMO Ownership
Interests and Acquired CMO Classes to decline further and may require
additional write downs in the future.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary,
TISMAC. The assets of TISMAC are not available to pay creditors of the
Company. The Company has undertaken to indemnify certain parties who have
contracted with TISMAC against certain losses which they might sustain in
carrying out their obligations. In addition, under generally accepted
accounting principles, the Company consolidates assets and liabilities of
Owner Trust Residuals when over 50% equity interest in the trust is held by
the Company. The portion of equity interest of each such Owner Trust
Residual not owned by the Company is accounted for as minority interest.
Mortgage Certificates and CMOs - Mortgage certificates and CMO bonds
of consolidated Owner Trusts are carried at their outstanding principal
balance plus or minus any premium or discount, respectively.
Amortization of Premiums and Discounts - Premiums and discounts
related to mortgage certificates and CMOs are amortized to income using the
interest method over the stated maturity of the mortgage certificates or
CMOs.
Residual Interests and Interest Only (IO) Bonds - Residual Interests
held in bond form and Corporate Real Estate Mortgage Investment Conduit
("REMIC") Residual Interests, regardless of percentage ownership, are
Nonequity Residual Interests and, along with IO Bonds, are accounted for
under the Prospective method. Under this method, assets are carried at
cost and income is amortized over their estimated lives based on a method
which provides a constant yield. At the end of each quarter, the yield
over the remaining life of the asset is recalculated based on expected
future cash flows using current interest rates and mortgage prepayment
speeds. This new yield is then used to calculate the subsequent quarter's
financial statement income. Owner Trust Residuals are accounted for under
the equity method.
Restricted Cash - Restricted cash represents the cash balances of CMOs
in which the Company holds a Residual Interest and whose assets and
liabilities are consolidated with those of the Company. This cash is not
available to the Company or its creditors.
Income Taxes - The Company has elected to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended. As a REIT, the Company must
distribute at least 95% of its taxable income to its shareholders. No
provision has been made for income taxes in the accompanying consolidated
financial statements as the Company is not subject to federal income taxes.
The loss reported in the accompanying financial statements may be greater
or less than the taxable loss because some income and expense items are
reported in different periods for income tax purposes. Over the life of a
Residual Interest or IO Bond, total taxable income will equal total
financial statement income. However, the timing of income recognition may
differ between the two from year to year.
Net Income (Loss) Per Share - Net income (loss) per share is based
upon the weighted average number of shares of Common Stock outstanding for
1993, 1992, and 1991, respectively.
Statement of Cash Flows - For purposes of the statement of cash flows,
the Company considers only highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Reclassifications - Certain reclassifications have been made in the
1991 financial statements to conform to the classifications used in the
current year.
3. Taxation of Dividends Declared
The dividends paid by the Company of $0.25, $0.56 and $1.34 per share
in the years 1993, 1992 and 1991, respectively, were fully taxable as
ordinary income.
Under the Internal Revenue Code of 1986, a dividend declared by a REIT
in December of a calendar year, which is payable to shareholders of record
as of a specified date in December, will be deemed to have been paid by the
Company and received by the shareholders on that record date if the
dividend is actually paid before February 1st of the following calendar
year. Therefore, the $0.34 dividend declared in December 1991 to
shareholders of record at December 31, 1991 and paid in January 1992 was
taxable income in 1991. However, since the $0.05 dividend declared in
December 1992 and paid in January 1993 had a record date of January 4,
1993, it is considered 1993 income and its taxability is based on the
REIT's 1993 taxable income. The Company's dividends are not eligible for
the dividends-received deduction for corporations.
All of the 1993 and 1992 dividends paid are considered "excess
inclusion" income. Of the dividends paid in 1991, 80.01% is considered
excess inclusion income. Excess inclusion income is attributable to
Residual Interests for which an election has been made to be treated as a
REMIC for federal income tax purposes. The portion of the Company's
dividends determined to be excess inclusion income is taxable to certain
otherwise tax-exempt shareholders as unrelated business income. Except for
certain entities such as savings and loan associations, the portion of the
dividend considered excess inclusion income may not be offset by any
deductions or losses, including net operating losses.
4. Residual Interests
General - Each CMO in which the Company has purchased a Residual
Interest was rated at the time of its issuance "AAA" by Standard & Poor's
Corporation or "Aaa" by Moody's Investors Service, Inc. Each such CMO is
comprised of one or more classes of bonds (each, a "Bond Class") and was
issued pursuant to an Indenture between the CMO issuer and a specified
trustee. Each CMO is structured so that the principal and interest
payments received from the collateral pledged to secure such CMO, together
with reinvestment income thereon, will be sufficient, irrespective of the
rate of prepayments on the collateral, to make timely payments of interest
on each Bond Class, to begin the payment of principal on each Bond Class
not later than its "first mandatory principal date" and to retire each Bond
Class not later than its "stated maturity."
Interest on Bond Classes is payable on specified payment dates
(quarterly or monthly), except with respect to "compound interest bonds" on
which interest accrues and is added to the principal amount thereof on each
payment date until the conditions set forth in the related Indenture have
been satisfied, and with respect to "principal only bonds" which do not
bear interest at a stated rate. Each other Bond Class provides for payment
of interest at a fixed or variable rate for the life of such Bond Class.
The interest rate on variable rate Bond Classes resets monthly based on
specified margins in relation to LIBOR or COFI.
Principal payments on Bond Classes are made on specified payment dates
(quarterly or monthly) or in full at maturity in accordance with the terms
of the related Indenture. Generally, payments of principal are allocated
to the earlier maturing Bond Classes until such Bond Classes are paid in
full. Payments of principal on certain Bond Classes occur pursuant to a
specified repayment schedule or formula (to the extent funds are available
therefore), regardless of which other Bond Classes are outstanding.
Residual Interests are classified as either equity or nonequity.
Presented on the following table is a schedule of the Nonequity Residual
Interests and the Prospective Yield at December 31, 1993.
<TABLE>
NONEQUITY RESIDUAL INTERESTS
- ----------------------------
(Dollars in thousands)
<CAPTION>
Book Value
December 31 Prospective
Residual Purchase ---------------------- Method
Series Price 1993 1992 Yield
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonequity Residual Interests
DBLU $ 5,169 $ 138 $ 853 14.0%
FNMA 88-22 10,387 1,679 4,879 14.0%
PB-4 10,523 2,828 6,467 14.0%
CMSC I 8,642 105 105 14.0%
PB-7 3,994 419 1,060 14.0%
FHLMC 21 5,361 19 177 14.0%
ML-38 1,306 1,814 197 14.0%
OXFORD 3F 1,382 3 18 14.0%
FHLMC 25 4,934 11 31 14.0%
LFR-9 2,589 219 832 14.0%
DBLS 2,424 453 991 14.0%
BT 88-1 1,537 658 991 14.0%
RYLAND 62 3,039 644 1,645 14.0%
CMSC 88-2 2,554 575 1,216 14.0%
PB-5 16,112 2,354 3,186 14.0%
- ---------------------------------------------------------------------------------
11,919 22,648
- ---------------------------------------------------------------------------------
Unconsolidated Equity Residual Interests
- ----------------------------------------
TMAC 1986-2 67 0 0 N/A
TMAC 1987-3 165 0 0 N/A
- ---------------------------------------------------------------------------------
Total Residual Interests $11,919 $22,648
=================================================================================
</TABLE>
Securitized Residuals and Corporate REMIC Residual Interests - Both
Residual Interests held in bond form and Corporate REMIC Residual
Certificates are Nonequity Residual Interests and are accounted for under
the Prospective Method as described in Footnote 2. Certain characteristics
of the CMO Bonds in the Company's Residual Interests held in these forms
are on the following tables:
<PAGE>
<TABLE>
NONEQUITY RESIDUAL INTERESTS
VARIABLE RATE RESIDUALS
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CMO Bond Data (100% of Issue)
--------------------------------------------------------------------------
Name of Issuer TIS Initial Dec. 31, 1993
and Series/ TIS Purchase Principal Principal
CMO Issue Purchase TIS % Price Bond Balance Balance Bond Bond Stated
Date Date Ownership ($000) Class ($000) ($000) Coupon Cap Maturity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1) Drexel Aug 30, 1988 20.267% $5,169 U-1 $135,000 $54,356 9.3% Jun 1, 2017
Burnham U-2 40,000 40,000 10% Sep 1, 2018
Lambert CMO U-3F 87,500 0 LIBOR+.95% 14.25% Sep 1, 2018
Trust Series U U-4AV 10,000 0 Zero Coupon Jun 1, 2015
(DBLU) U-5AV 27,500 0 Zero Coupon Sep 1, 2018
Aug 30, 1988 U-6 750 236 Residual Bond Sep 1, 2018
-------- -------
$300,750 $94,592
- ----------------------------------------------------------------------------------------------------------------------------------
2) FNMA Series Aug 30, 1988 40.000% $10,387 22-A $146,140 $29,406 COFI+1.25% 13.00% Aug 25,2018
1988-22 22-B 53,820 10,829 Zero Coupon Aug 25,2018
(FNMA 88-22) 22-R 40 8 Residual Bond Aug 25,2018
-------- -------
Aug 30, 1988 $200,000 $40,243
- ----------------------------------------------------------------------------------------------------------------------------------
3) Prue Bache Aug 29, 1988 33.571% $10,523 4-A $160,440 $49,133 COFI+1.25% 13.00% Sep 1, 2018
CMO Trust 4 4-B 49,420 15,135 Zero Coupon Sep 1, 2018
(PB-4) R 140 43 Residual Bond Sep 1, 2018
-------- -------
Aug 29, 1988 $210,000 $64,311
==================================================================================================================================
</TABLE>
<TABLE>
FIXED RATE RESIDUALS
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
CMO Bond Data (100% of Issue)
-----------------------------------------------------------------
Name of Issuer TIS Initial Dec. 31, 1993
and Series/ TIS Purchase Principal Principal
CMO Issue Purchase TIS % Price Bond Balance Balance Bond Stated
Date Date Ownership ($000) Class ($000) ($000) Coupon Maturity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1) Collateralized Dec 21, 1988 44.000% $4,462 I-1 $291,000 $ 0 7.95% Feb 1, 2009
Mortgage Mar 23, 1989 44.000% 4,180 I-2 194,000 55,528 9.45% May 1, 2013
Securities Corp. Subtotal 88.000% $8,642 I-3(Z) 15,000 28,843 9.45% Feb 1, 2017
-------- -------
Series I (CMSC I) $500,000 $84,371
Jan 28, 1987
- -------------------------------------------------------------------------------------------------------------------------
2) Prue Bache Dec 29, 1988 29.000% $3,994 7-A $ 20,080 $ 0 9.75% Sep 1, 2000
CMO Trust 7 7-B 40,410 0 9.50% Mar 1, 2009
(PB-7) 7-C 19,460 0 9.60% Aug 1, 2011
Dec 29, 1988 7-D 12,000 0 Zero Coupon Mar 1, 2013
7-E 37,880 32,625 9.70% Jan 1, 2015
7-F 35,690 35,690 9.83% May 1, 2017
7-G(Z) 10,360 0 9.50% Feb 1, 2018
7-H 30,830 30,830 9.00% Jan 1, 2019
7-I 51,930 0 9.00% Jan 1, 2019
7-J 41,510 0 9.63% Jan 1, 2019
R 100 0 Residual Bond Jan 1, 2019
-------- -------
$300,250 $99,145
- -------------------------------------------------------------------------------------------------------------------------
<PAGE>
FIXED RATE RESIDUALS (Continued)
- -------------------------------------------------------------------------------------------------------------------------
3) Federal Home Jan 5, 1989 62.500% $5,361 21-A $ 140,645 $ 0 8.90% Jan 15, 1998
Loan Mortgage 21-B 216,267 0 8.90% Feb 15, 2004
Corporation 21-C 101,503 0 9.10% Jan 15, 2006
Series 21 21-D 93,376 0 9.25% Jun 15, 2007
(FHLMC 21) 21-E 122,951 0 9.35% Feb 15, 2009
Nov 30, 1988 21-F 240,408 53,999 9.45% Sep 15, 2011
21-Z 84,750 137,101 9.50% Jan 15, 2020
R 100 19 Residual Bond Jan 15, 2020
---------- --------
$1,000,000 $191,119
- -------------------------------------------------------------------------------------------------------------------------
4) Merrill Lynch Jan 6, 1989 100.000% $1,306 A $ 51,810 $ 0 9.05% Oct 27, 2012
Series 38 B 36,200 14,944 9.45% Dec 27, 2016
(ML-38) C 7,400 7,400 9.45% Aug 27, 2017
Nov 30, 1988 D 16,400 16,400 9.45% Nov 27, 2018
E 31,610 0 9.10% Mar 27, 2016
F 18,580 0 9.15% Sep 27, 2017
G 38,000 0 9.40% Nov 27, 2018
H 50 50 Residual Bond Nov 27, 2018
-------- -------
$200,050 $38,794
- -------------------------------------------------------------------------------------------------------------------------
5) Oxford Feb 29, 1989 100.000% $1,382 F-1 $ 51,600 $ 0 7.19% Nov 20, 2001
CMO Trust III F-2 112,000 0 7.98% Oct 20, 2010
Series F F-3 15,000 0 8.32% Jul 20, 2011
(OXFORD 3F) F-4 83,500 0 8.45% Oct 20, 2014
May 28, 1987 F-5 90,000 78,131 8.45% May 20, 2017
F-6 48,000 48,000 8.45% Jun 20, 2018
-------- --------
$400,100 $126,131
- -------------------------------------------------------------------------------------------------------------------------
6) Federal Home Jun 22, 1989 55.000% $4,934 25-A $105,923 $ 0 9.00% Nov 15, 2018
Loan Mortgage 25-B 51,002 0 9.50% Nov 15, 2005
Corporation 25-C 53,028 0 9.50% Mar 15, 2011
Series 25 25-D 46,414 0 9.50% Feb 15, 2014
(FHLMC 25) 25-E 50,936 0 9.50% May 15, 2016
Dec 1, 1988 25-F 76,167 61,112 9.50% Dec 15, 2018
25-G 43,940 43,940 9.50% Feb 15, 2020
25-H 72,490 0 7.90% Feb 15, 2020
R 100 21 Residual Bond Feb 15, 2020
-------- --------
$500,000 $105,073
- -------------------------------------------------------------------------------------------------------------------------
7) L F Rothschild Nov 7, 1990 100.000% $2,589 A $ 11,000 $ 0 Zero Coupon Jan 1, 2019
Trust 9 B 22,000 0 Zero Coupon Jan 1, 2019
(LFR-9) C 54,000 20,837 Zero Coupon Jan 1, 2019
Dec 2, 1988 D 32,850 10,385 Zero Coupon Jan 1, 2019
E 30,000 0 Zero Coupon Jan 1, 2019
R 150 150 Residual Bond Jan 1, 2019
-------- -------
$150,000 $31,372
- -------------------------------------------------------------------------------------------------------------------------
8) Drexel Burnham Apr 16, 1991 33.328% $2,424 S-1 $ 96,500 $ 0 8.50% Apr 1, 2011
Lambert S-2 75,000 58,378 9.00% Aug 1, 2018
Series S S-3 68,500 0 9.00% Feb 1, 2014
(DBLS) S-4(Z) 10,000 7,055 9.50% Aug 1, 2018
June 30, 1988 S-5 625 164 Residual Bond Aug 1, 2018
-------- -------
$250,625 $65,597
- -------------------------------------------------------------------------------------------------------------------------
<PAGE>
FIXED RATE RESIDUALS (Continued)
- -------------------------------------------------------------------------------------------------------------------------
9) Bankers Trust May 29, 1991 99.990% $1,537 1-A $ 9,722 $ 0 7.35% Jan 1, 2013
Series 1988-1 1-B 8,017 0 8.50% Apr 1, 2014
(BT 88-1) 1-C 34,769 29,916 8.75% Apr 1, 2018
Feb 16, 1988 1-D 47,492 23,841 8.63% Apr 1, 2018
-------- -------
$100,000 $53,757
- -------------------------------------------------------------------------------------------------------------------------
10) Ryland May 29, 1991 42.000% $3,039 62-A $ 58,355 $27,445 8.85% May 1, 2018
Acceptance 62-B 31,365 0 9.00% Jul 1, 2009
Corp 4 62-C 6,000 0 8.85% Dec 1, 2009
Series 62 62-D 12,880 0 7.50% Feb 1, 2011
(RYLAND 62) 62-E 32,000 32,000 9.05% Nov 1, 2012
Jan 28, 1988 62-F 9.400 14,967 8.00% Mar 1, 2018
62-R 200 59 Residual Bond Mar 1, 2018
-------- -------
$150,200 $74,471
- -------------------------------------------------------------------------------------------------------------------------
11) Collateralized Jun 4, 1991 46.000% $2,554 A $ 84,680 $ 0 9.15% Oct 20, 2018
Mortgage B 100,500 38,847 8.80% Apr 20, 2019
Securities Corp. C 14,820 0 9.90% Apr 20, 2019
Series 1988-2 -------- -------
(CMSC 88-2) $200,000 $38,847
March 31, 1988
- -------------------------------------------------------------------------------------------------------------------------
12) Prue Bache Sept 29, 1988 100.000% $16,112 5-A $ 30,130 $ 0 9.00% Aug 1, 2005
CMO Trust 5 5-B 45,830 0 LIBOR+0.5% Oct 1, 2012
(PB-5) 5-C 21,250 0 7.05% Oct 1, 2014
Sept 29, 1988 5-D 28,640 3,522 7.75% Nov 1, 2016
5-E 34,229 34,229 8.25% Oct 1, 2018
5-F 6,181 0 Zero Coupon Oct 1, 2018
5-G 6,980 0 Zero Coupon Oct 1, 2018
5-H 26,026 0 LIBOR+1.00% Oct 1, 2018
R 800 0 Residual Bond Oct 1, 2018
-------- -------
$200,066 $37,751
=========================================================================================================================
</TABLE>
Equity Residual Interests - The Company holds interests in two Owner
Trust Residuals. It also holds the Residual Interest in TISMAC 1989-1, the
CMO issued by the Company's wholly-owned subsidiary. Although the
underlying CMOs in these Residual Interests are not liabilities of the
Company, under the requirements of generally accepted accounting
principles, the Company consolidates assets and liabilities of TISMAC 1989-
1 and the Owner Trust Residuals when over 50% equity interest in the trust
is held by the Company.
Under the underlying bond indentures, the Company would never be
required to pay more than the outstanding principal balance to retire the
CMO Bonds. Therefore, the carrying value of these CMO Bonds are reasonable
estimates of their fair value to the Company. Certain characteristics of
the CMO Bonds in the Equity Residual Interests in which the Company holds
an interest are set forth below:
<TABLE>
EQUITY RESIDUAL INTERESTS
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
CMO Bond Data (100% of Issue)
-----------------------------------------------------------------
Name of Issuer TIS Initial Dec. 31, 1993
and Series/ TIS Purchase Principal Principal
CMO Issue Purchase TIS % Price Bond Balance Balance Bond Stated
Date Date Ownership ($000) Class ($000) ($000) Coupon Maturity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1) Collateralized Aug 31, 1988 98.000% $4,810 A $275,000 $ 0 8.00% Jun 1, 2006
Mortgage Aug 8, 1990 2.000% 47 B 77,200 0 8.50% Jun 1, 2008
Obligation -------- ------ C 108,300 100,452 8.50% Dec 1, 2010
(CMOT 28) 100.000% $4,857 Z 39,500 68,022 8.45% Jun 1, 2017
May 29, 1987 -------- ------ -------- --------
$500,000 $168,474
- -------------------------------------------------------------------------------------------------------------------------
2) TMAC 1986-1 Dec 27, 1988 16.964% $442 1-A $ 98,500 $ 0 7.92% Nov 20, 2010
Nov 6, 1986 Jan 6, 1989 23.214% 607 1-B 50,000 28,300 8.89% Feb 20, 2018
Jan 11, 1989 20.536% 538 1-C 41,750 0 8.95% Feb 20, 2013
Jun 18, 1993 39.286% 108 1-D(Z) 9,750 17,641 8.95% Feb 20, 2018
-------- ------ -------- --------
100.000% $1,695 $200,000 $45,941
- -------------------------------------------------------------------------------------------------------------------------
3) TIS Mortgage Jun 29, 1989 100.000% $1,302 1-A $ 10,100 $ 1,538 10.00% Mar 1, 2016
Acceptance Corp. 1-B 29,030 29,030 10.00% Nov 1, 2017
Series 1989-1 1-C 14,260 14,260 10.00% Aug 1, 2018
(TISMAC 89-1) 1-D 18,887 18,887 10.00% Jul 1, 2019
June 29, 1989 1-E 63,590 0 10.00% Jun 1, 2016
1-F 63,533 0 10.00% Jul 1, 2019
R 600 600 Residual Bond Jul 1, 2019
-------- --------
$200,000 $64,315
- -------------------------------------------------------------------------------------------------------------------------
4) TMAC 1986-2 Jun 18, 1993 44.990% $67 2-A $ 72,600 $13,567 LIBOR+.60% Mar 20, 2018
Dec 10, 1986 2-B 27,400 5,120 25.11987% - Mar 20, 2018
-------- --------
$100,000 $18,687 (2.00959) x LIBOR
- -------------------------------------------------------------------------------------------------------------------------
5) TMAC 1987-3 Jun 18, 1993 44.767% $165 3-A $ 55,070 $ 3,659 LIBOR+.60% Apr 20, 2013
Mar 30, 1987 3-B 72,135 0 7.50% Apr 20, 2009
3-C 18,535 0 8.31% Jan 20, 2011
3-D 39.765 21,687 8.58% Jul 20, 2013
3-E(Z) 9,495 17,314 9.00% Apr 20, 2018
-------- --------
$195,000 $42,660
- -------------------------------------------------------------------------------------------------------------------------
Total $340,077
Less Residual Bond 600
- -------------------------------------------------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $339,477
=========================================================================================================================
</TABLE>
<PAGE>
CMO Collateral - The table below sets forth certain characteristics of
the mortgage collateral pledged to secure each CMO in which the Company
holds a Residual Interest.
<TABLE>
CMO COLLATERAL
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
CMO Collateral Data (100% of Issue)
-------------------------------------------------------------------------------
Weighted Dec 31, 1993 Current Weighted
Average Collateral Weighted Average
Residual Pass- Principal Average Remaining
Residual Interest Type of Through Balance Coupon Months to
Series Type Collateral Rate ($000) Rate Maturity
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Residual Interests
- -------------------------
CMOT 28 Fixed FNMA 8.50% $153,880 9.12% 277.4
TMAC 1986-1 Fixed FHLMC 9.00% 37,471 10.09% 266.0
TISMAC 1989-1 Fixed GNMA I 10.00% 64,254 10.50% 299.9
TMAC 1986-2 Fixed FHLMC 9.50% 18,687 10.10% 254.0
TMAC 1987-3 Fixed FHLMC 9.08% 42,660 9.81% 258.0
Nonequity Residual Interests
- ----------------------------
DBLU Variable GNMA I 10.00% 94,592 10.50% 285.0
FNMA 88-22 Variable FNMA 9.50% 40,243 10.17% 293.3
PB-4 Variable GNMA I 10.00% 64,257 10.50% 290.1
CMSC I Fixed FNMA 9.50% $84,339 10.12% 261.2
PB-7 Fixed GNMA I 10.00% 99,086 10.50% 293.7
FHLMC 21 Fixed FHLMC 9.50% 191,120 10.19% 291.8
ML-38 Fixed FNMA 9.50% 38,794 10.15% 294.5
OXFORD 3F Fixed FHLMC 8.50% 126,099 9.11% 273.0
FHLMC 25 Fixed FHLMC 9.50% 105,073 10.29% 289.8
LFR-9 Fixed FNMA 9.50% 29,568 10.20% 293.0
DBLS Fixed FNMA 10.00% 62,564 10.61% 286.0
BT 88-1 Fixed GNMA 9.00% 47,398 9.50% 279.0
RYLAND-62 Fixed GNMA 10.00% 48,871 10.50% 287.4
CMSC 88-2 Fixed FHLMC 10.50% 38,847 11.33% 230.0
PB-5 Fixed FNMA 9.50% 37,738 10.12% 283.8
=================================================================================================================
</TABLE>
<PAGE>
5. Interest Only (IO) Bonds
IO Bonds include both regular IO Bonds and Inverse IO Bonds. During
1993, the Company invested $4,069,000 in IO Bonds; in 1992 the Company
invested $30,760,000 in IO Bonds. Presented below is a schedule of the
Company's IO Bonds and the Prospective yield at December 31, 1993.
<TABLE>
INTEREST ONLY (IO) BONDS
- ------------------------
(Dollars in thousands)
<CAPTION>
Book Value
Residual -------------------------- Prospective
Series Purchase December 31 Method
Price 1993 1992 Yield
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FNMA SMBS Trust 7 Class 2 IO $9,541 $1,918 $8,231 12.88%
Pru Home Mtg Corp Series 1992-7 4,776 1,135 4,241 14.00%
Sears Mtg Sec Corp Series 1992-6 2,611 568 2,297 14.00%
Bear Stearns Mtg Sec Series 1992-1 2,720 437 2,181 14.00%
FNMA SMBS Trust 4 Class 2 IO 2,909 623 1,956 14.00%
FNMA Series 1992-123 Class S 8,203 4,044 7,708 12.16%
FHLMC Series 1993-1483 Class SA 3,071 2,441 N/A 30.00%
FHLMC-G Series 24 Class SK 998 1,046 N/A 30.00%
- ---------------------------------------------------------------------------------------------
$12,212 $26,614
- ---------------------------------------------------------------------------------------------
</TABLE>
Certain characteristics of the Company's IO Bonds are on the following
table:
<TABLE>
INTEREST ONLY BONDS
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Collateral Data (% of IO held by TIS)
---------------------------------------------------------------
Weighted Dec. 31, 1993 Current Weighted
Name of Issuer TIS Average Collateral Weighted Average
and Series/ TIS Purchase Pass Principal Average Remaining
CMO Issue Purchase Price Type of Through Balance Coupon Months to
Date Date ($000) Collateral Rate to IO ($000) Rate Maturity
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1) FNMA SMBS Feb 21, 1992 $4,576 FNMA 8.500% $11,202 9.17% 267.0
Trust 7 Mar 16, 1992 4,965
Class 2 IO $9,541
April 1, 1987
- -------------------------------------------------------------------------------------------------------------
2) Prudential Mar 27, 1992 $4,776 NON 0.5722% $106,385 8.78% 338.0
Home Mortgage AGENCY
Corporation
Series 1992-7
March 1, 1992
- -------------------------------------------------------------------------------------------------------------
3) Sears Mar 30, 1992 $2,611 NON 0.0171% $109,794 8.385% 333.0
Mortgage AGENCY
Securities
Corporation
Series 1992-6
March 25, 1992
- -------------------------------------------------------------------------------------------------------------
<PAGE>
INTEREST ONLY BONDS (Continued)
- -------------------------------------------------------------------------------------------------------------
4) Bear Stearns May 28, 1992 $2,720 NON 0.5934% $17,913 9.68% 272.0
Mortgage AGENCY
Securities, Inc.
Series 1992-1
May 1, 1992
- -------------------------------------------------------------------------------------------------------------
5) FNMA SMBS June 18, 1992 $2,909 FNMA 9.500% $3,207 10.09% 262.0
Trust 4
Class 2 IO
March 2, 1987
- -------------------------------------------------------------------------------------------------------------
6) FNMA July 30, 1992 $8,203 FNMA 49.58 - $7,917 8.96% 334.0
Series 1992-123 (5.67 x
Class S LIBOR)
July 25, 1992
- -------------------------------------------------------------------------------------------------------------
7) FHLMC Mar 30, 1993 $3,071 FHLMC 22.000% $5,600 8.50% 342.0
Series 1993-1483
Class S A
March 30, 1993
- -------------------------------------------------------------------------------------------------------------
8) FHLMC-G Nov 30, 1993 $998 GNMA 8.0 % - $10,000 7.0% 357.0
Series 24 LIBOR
Class S K
October 12, 1993
=============================================================================================================
</TABLE>
6. Fair Value of Equity Residuals and Mortgage Certificates
For purposes of determining fair value of the Company's investment in
Equity Residuals in applying SFAS No. 115, the Company uses the cash flows
from Mortgage Certificates, net of CMO Bond interest expenses and related
trustee expenses. The Company includes in its net cash flows an assumption
of redemption of the Series at the earliest available stated redemption
date with an assumed sale of the Mortgage Certificates at a current market
price. These cash flows are discounted at a fair value rate of 14%. The
following table gives the pertinent fair value assumptions used in
forecasting the cash flows as of December 31, 1993:
<TABLE>
<CAPTION>
Equity Residual Collateral PSA Fair Value
- ---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CMOT 28 FNMA 8.50% 468% $1,207,538
TMAC 198601 FHLMC 9.00% 500% 357,793
TISMAC 1989-1 GNMA 10.00% 430% 1,198,983
- ---------------------------------------------------------------
Total Fair Value of Equity Residuals $2,764,314
===============================================================
</TABLE>
<PAGE>
For purposes of SFAS No. 107, the Company is required to disclose the
fair value of its Mortgage Certificates. Information with respect to the
fair value of the mortgage certificates collateralizing the CMO Bonds is
presented in the table below as of December 31, 1993. The Company is not
able to sell the mortgage collateral, and therefore realize any gain, until
the CMO Bonds which are collateralized by the mortgages mature or are
called in accordance with the underlying bond indenture.
<TABLE>
<CAPTION>
Principal Amount of Fair Value of Cost Less
Residual Series Mortgage Certificates Mortgage Certificates Unamortized Discount
- ---------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CMOT 28 $153,880 $162,103 $152,080
TMAC 1986-1 36,461 39,414 34,938
TISMAC 1989-1 64,316 70,888 62,997
- ---------------------------------------------------------------------------------------------
$254,657 $272,405 $250,015
=============================================================================================
</TABLE>
7. Fair Value of Nonequity Residual Interests and IO Bonds
General - Substantially all income to the Company is derived from the
cash flows from the Company's Residual Interests and IO Bonds. The fair
value of a Residual Interest and an IO Bond is the net present value of the
projected future cash flows. The amount of cash flows that may be
generated from the Company's Residual Interests and IO Bonds are uncertain
and may be subject to wide variations depending primarily upon the rate and
timing of prepayments on the mortgage collateral and, for Residual
Interests with variable rate Bond Classes and Inverse IO Bonds, changes in
LIBOR and COFI. The following information sets forth assumptions used to
calculate the projected cash flows on the Company's Residual Interests and
IO Bonds, and the present value of these assets at December 31, 1993 based
on various assumptions and discount factors.
Assumptions - For purposes of the presentations below, the Nonequity
Residual Interests have been separated into two groups: Residual Interests
in CMOs with fixed rate Bond Classes and Residual Interests in CMOs with
one or more LIBOR or COFI Bond Classes still outstanding. The IO Bonds
have been separated into two groups: regular IO Bonds and Inverse IO Bonds.
For purposes of projecting future cash flows, the following December 31,
1993 one-month LIBOR rate and the 11th District COFI rate for November
which was released on December 31, 1993 are used:
<TABLE>
<CAPTION>
INTEREST RATE ASSUMPTIONS
-------------------------------------------
<S> <C>
One Month LIBOR 3.250%
11th District COFI 3.822%
-------------------------------------------
</TABLE>
Principal payments on mortgage loans may be in the form of scheduled
amortization or prepayments (for this purpose, "prepayments" includes
principal prepayments and liquidations due to default or other
dispositions). The prepayment assumptions used herein are based on an
assumed rate of prepayment each month of the unpaid principal balance on a
pool of mortgage loans. A 100% prepayment assumption assumes prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of such mortgage loans and an
additional 0.2% per annum in each month thereafter (for example, 0.4% per
annum in the second month) until the 30th month. Beginning with the 30th
month and in each month thereafter during the life of such mortgage loans,
a 100% prepayment assumption assumes a constant prepayment rate of 6% per
annum.
The prepayment assumptions used to estimate the fair value of the
Company's Nonequity Residual Interests and IO Bonds are the Bloomberg
Financial Markets ("Bloomberg") Dealer Prepayment Estimates Average as
estimated by several dealers in mortgage-related assets and compiled by
Bloomberg as of December 31, 1993. Bloomberg has obtained this information
from sources it believes to be reliable but has not verified such
information and assumes no responsibility for the accuracy of such
information. The following are the prepayment assumptions used to project
cash flows in order to calculate the present value of Nonequity Residual
Interests and IO Bonds:
<TABLE>
<CAPTION>
PREPAYMENT ASSUMPTIONS
- ----------------------------------------------------------
Percent
Pass-Through Prepayment
Mortgage Collateral Rate Assumption
- ----------------------------------------------------------
<S> <C> <C>
GNMA Certificates 7.0% 150%
GNMA Certificates 9.0% 394%
GNMA Certificates 10.0% 430%
FNMA/FHLMC Certificates 8.0% 417%
FNMA/FHLMC Certificates 8.5% 467-480%
FNMA/FHLMC Certificates 9.0% 502%
FNMA/FHLMC Certificates 9.5% 518-535%
FNMA/FHLMC Certificates 10.0% 529%
FNMA/FHLMC Certificates 10.5% 496%
- ----------------------------------------------------------
</TABLE>
Neither the interest rates nor the prepayment assumptions used herein
purports to be a historical description of interest rates or prepayment
experiences or a prediction of future interest rates or prepayments of any
pool of mortgage loans. The fair value of the Company's mortgage-related
assets can vary dramatically depending on future interest rates, prepayment
speeds and the discount factor used.
Present Value of Projected Cash Flows - The tables which follow set
forth the present value at December 31, 1993 of the projected cash flows
discounted at the indicated discounted rates subject to the assumptions
described above. For example, if cash flows are projected using the
assumptions above and Nonequity Residuals Interests in CMOs with fixed rate
Bond Classes are discounted at 14% and the Nonequity Residual Interests in
CMOs with variable rate Bond Classes are discounted at 18%, the present
value of the projected cash flows of the Company's Nonequity Residual
Interests would equal approximately $11,919,000. This is the Company's
estimate of the fair value of these assets. In addition, if cash flows on
the Company's regular IO Bonds are discounted at 14% and the cash flows on
its Inverse IO Bonds are discounted at 30%, the present value of the
projected cash flows on the IO Bonds would equal $12,144,000. This
represents a decrease of $68,000 over the $12,212,000 book value of these
assets. The difference of $68,000 is the difference between the present
value of cash flows and the actual market values as of December 31, 1993 of
FNMA SMBS Trust 7 Class 2 IO and FNMA SMBS Trust 4 Class 2 IO. The book
value is the Company's estimate of the fair value of these IO Bonds. There
will be differences between the projected cash flows used to calculate the
present value of these assets and the actual cash flows received by the
Company, and such differences may be material.
<TABLE>
<CAPTION>
PRESENT VALUE OF NONEQUITY RESIDUAL INTERESTS
- ----------------------------------------------------------------------------
(In thousands)
Residual Interests in CMOs with Fixed Rate Bond Classes
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Discount Rate 10% 12% 14% 16% 18%
Present Value $8,015 $7,703 7,414 7,139 6,883
Residual Interests in CMOs with Variable Rate Bond Classes
----------------------------------------------------------
Discount Rate 14% 16% 18% 20% 22%
Present Value $4,875 $4,684 $4,507 $4,344 $4,192
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRESENT VALUE OF IO BONDS
- ----------------------------------------------------------------------------
(In thousands)
Regular Interest Only Bonds
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Discount Rate 10% 12% 14% 16% 18%
Present Value $5,007 $4,802 $4,613 $4,439 $4,277
Inverse Interest Only Bonds
----------------------------------------------------------
Discount Rate 22% 26% 30% 34% 38$
Present Value $8,521 $7,995 $7,531 $7,115 $6,744
- ----------------------------------------------------------------------------
</TABLE>
8. Short Term Debt
Short term debt is debt due within 360 days after the end of the year.
At December 31, 1993 the Company owed $11,745,000 under two repurchase
agreements. All of the borrowings had initial terms of one month, are
renewed on a month-to-month basis and have a floating rate of interest
which is tied to the one month LIBOR rate. The weighted average interest
rate of such borrowings at December 31, 1993 was 3.652%. At December 31,
1992 short-term borrowings totaled $17,957,000 and had a weighted average
interest rate of 4%. The Company has no committed lines of credit.
9. Related Party Transactions
The Company has entered into an agreement (the "Management Agreement")
with the Manager which is renewable annually. In June 1993 the Board of
Directors renewed the Management Agreement through June 30, 1994 and it is
thereafter renewable annually.
The Manager advises the Company on various facets of its business and
manages its operations, subject to supervision by the Company's Board of
Directors. For performing these services, the Manager receives a base
management fee of 3/8 of 1% per annum of the Company's average invested
assets and an incentive management fee equal to 25% of the amount by which
the Company's annualized return on equity, calculated based on taxable
income, exceeds the ten-year U.S. Treasury rate plus 1%. Management fees
of $179,000, $276,000 and $1,180,000 were earned in 1993, 1992 and 1991,
respectively. Within two months of the applicable year end, $31,000 of the
1993 fees, $59,000 of the 1992 fees and $220,000 of the 1991 fees were
paid. In order to compensate the Manager for certain administrative
functions that the Manager performs with respect to each Residual Interest
purchased by the Company, for which neither the Manager nor an affiliate
acts as bond administrator, the Company pays the Manager a fee equal to
$10,000 per annum for each Residual Interest. A total of $110,000 of these
Residual Interest Administration fees were earned by the Manager and paid
in 1993 as compared to $100,000 in 1992 and $160,000 in 1991. For 1993 and
1992, the Manager did not charge a Residual Interest Administration Fee on
those Residual Interests for which it projected total 1994 and 1993 income
of less that $40,000. In addition, the Manager is reimbursed for certain
direct expenses incurred on behalf of the Company. At December 31, 1993,
all of these reimbursable expenses were paid to the Manager. At December
31, 1992, $29,000 of these reimbursable expenses were due to the Manager,
as compared to $32,000 at December 31, 1991. Both amounts were paid within
one month after the applicable year end.
10. Wholly-Owned Subsidiary
On October 21, 1988 TISMAC, the wholly-owned Subsidiary of the
Company, was incorporated for the purpose of issuing CMOs directly. At
incorporation 100 shares of TISMAC's common stock were issued to the
Company for $100. The assets of the Subsidiary are not available to pay
creditors of the Company. The Company has undertaken to indemnify certain
parties who have contracted with the Subsidiary against certain losses
which they might sustain in carrying out their obligations.
11 . Other Fair Value Disclosure
The Company has the following other financial instruments: cash and
cash equivalents, accrued interest receivable, accounts payable and accrued
liabilities, accrued interest payable, short term debt and dividends
payable. The carrying amounts of these instruments are reasonable
estimates of their fair value due to their short term nature.
12. Quarterly Financial Data (Unaudited)
<TABLE>
- ---------------------------------------------------------------------------------------------
(In thousands, First Second Third Fourth
except per share data) Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993
Interest Income $11,908 $10,812 $9,137 $7,467 $39,324
Loss before Cumulative Effect
of Change in Accounting (5,917) (2,482) (6,301) (860) (15,560)
Cumulative Effect of
Change in Accounting 0 0 0 (9,879) (9,879)
Net Income (Loss) (5,917) (2,482) (6,301) (10,739) (25,439)
Net Income (Loss) per Share (0.73) (0.31) (0.77) (1.33) (3.14)
Dividends Declared per Share 0.05 0.05 0.05 0.05 0.20
- ---------------------------------------------------------------------------------------------
1992
Interest Income $16,622 $15,119 $14,034 $13,173 $58,948
Net Income (Loss) 847 (12,753) (6,773) (2,708) (21,387)
Net Income (Loss) per Share 0.10 (1.57) (0.84) (0.33) (2.64)
Dividends Declared per Share 0.28 0.23 0.05 0.05 0.61
- ---------------------------------------------------------------------------------------------
<PAGE>
</TABLE>
<TABLE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARIES
SCHEDULE IX
SHORT-TERM BORROWINGS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(In thousands)
<CAPTION>
Maximum Average Weighted
Weighted Amount Amount Average
Category of Balance Average Outstanding Outstanding Interest Rate
Aggregate Short-term at End of Interest During the During the During the
Borrowings Period Rate Period Period Period
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Repurchase Agreements $11,745 3.65% $18,279 $15,234 3.70%
Year Ended December 31, 1992
Repurchase Agreements $17,957 4.27% $26,261 $17,301 4.50%
Year Ended December 31, 1991
Repurchase Agreements $ 7,131 6.67% $ 7,131 $ 4,192 6.77%
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Information about Directors and Executive Officers of the
Registrant.
Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the company's Proxy
Statement for its 1994 Annual Meeting of Stockholders to be held on June 8,
1994.
Item 11. Executive Compensation.
Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the company's Proxy
Statement for its 1994 Annual Meeting of Stockholders to be held on June 8,
1994.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the company's Proxy
Statement for its 1994 Annual Meeting of Stockholders to be held on June 8,
1994.
Item 13. Certain Relationships and Related Transactions.
Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the company's Proxy
Statement for its 1994 Annual Meeting of Stockholders to be held on June 8,
1994.
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K.
(a) Documents filed as part of this report:
(1) Consolidated financial statements of the Company - as listed in
the "Index to Financial
included in Part II, Item 8 of this Form 10-K.
(2) Consolidated financial statement schedules - Schedule IX -
Short-term Borrowings
All financial statement schedules not included have been omitted
because of the absence of conditions under which they are
required or because the information is given in the consolidated
financial statements and notes included in Part II, Item 8 of
this Form 10-K.
(3) Exhibits:
Number Exhibit
- ------ -------
3(a) Amended Articles of Incorporation of the Registrant*
3(b) Amended Bylaws of the Registrant*
4(a) Specimen Certificate representing $.001 par value Common Stock*
4(b) Dividend Reinvestment and Share Purchase Plan**
10(a) Management Agreement between the Registrant and Thrift
Investment Services*
10(b) Management Agreement between the Registrant and TIS Financial
Services, Inc.
10(c) Bonus Program***
10(d) Custody Agreement between Registrant and Mellon Bank N.A.****
10(e) Transfer Agency Agreement between Registrant and Mellon
Securities Trust Company****
10(f) Reverse Repurchase Agreement between Registrant and Kidder,
Peabody & Co.****
10(g) Reverse Repurchase Agreement between Registrant and The First
Boston Corporation****
10(h) Reverse Repurchase Agreement between Registrant and Bear,
Stearns Securities Corp.*****
10(i) Reverse Repurchase Agreement between Registrant and Shearson
Lehman Brothers*****
22 Subsidiaries of the Registrant*****
24 Consent of Arthur Andersen & Co.
- -------------------------------------------------------------------------
___________________________________
* Incorporated herein by reference to Registrant's Registration
Statement on Form S-11 (No. 33-22182) declared effective August 19,
1988.
** Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form S-3 (No. 33-44526) filed
with the Securities and Exchange Commission on December 30, 1991.
*** Incorporated herein by reference to Registrant's Annual Report on
Form 10-K (File No. 1-10004) filed with the Securities and Exchange
Commission on April 2, 1990.
**** Incorporated herein by reference to Registrant's Annual Report on
Form 10-K (File No. 1-10004) filed with the Securities and Exchange
Commission on March 30, 1992.
***** Incorporated herein by reference to Registrant's Annual Report on
Form 10-K (File No. 1-10004) filed with the Securities and Exchange
Commission on March 30, 1993.
(b) Reports on Form 8-K:
In a report filed on Form 8-K dated January 28, 1993, the Company
amended financial statements, exhibits or other portions of its Annual
Report for 1991 on Form 10-K.
In a report filed on Form 8-K dated January 28, 1993, the Company
amended financial statements, exhibits or other portions of its Quarterly
Report on Form 10-Q for the quarter ended March 31, 1992.
In a report filed on Form 8-K dated January 28, 1993, the Company
amended financial statements, exhibits or other portions of its Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992.
In a report filed on Form 8-K dated January 28, 1993, the Company
amended financial statements, exhibits or other portions of its Quarterly
Report on Form 10-Q for the quarter ended September 30, 1992.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TIS MORTGAGE INVESTMENT COMPANY
Date: April 15, 1994 By: /s/ Lorraine O. Legg
-------------- ----------------------
Lorraine O. Legg, Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and
on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Lorraine O. Legg Director, President and April 15, 1994
- ----------------------- Principal Executive Officer
Lorraine O. Legg
/s/ John E. Castello Executive Vice President April 15, 1994
- ----------------------- (Principal Financial Officer)
John E. Castello
/s/ Michael J. Stone Controller April 15, 1994
- -----------------------
Michael J. Stone
/s/ Patricia M. Howe Director, April 15, 1994
- ----------------------- Chairman of the Board
Patricia M. Howe
/s/ John D. Boyce Director April 15, 1994
- -----------------------
John D. Boyce
/s/ Robert H. Edelstein Director April 15, 1994
- -----------------------
Robert H. Edelstein
/s/ Douglas B. Fletcher Director April 15, 1994
- -----------------------
Douglas B. Fletcher
/s/ Robert W. Ledoux Director April 15, 1994
- -----------------------
Robert W. Ledoux
/s/ Harvie M. Merrill Director April 15, 1994
- -----------------------
Harvie M. Merrill
/s/ Will M. Storey Director April 15, 1994
- -----------------------
Will M. Storey
