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, 1995
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 No X
----- -----
On March 14, 1996, 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 $10,132,000.
Documents Incorporated by Reference
Part III of this Form 10-K is incorporated by reference to the Registrant's
1996 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 17
Item 3: Legal Proceedings 17
Item 4: Submission of Matters to a Vote of Security Holders 17
PART II
Item 5: Market for the Registrant's Common Equity and
Related Shareholder Matters 18
Item 6: Selected Financial Data 20
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 8: Financial Statements and Supplementary Data 27
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
PART III
Item 10: Information about Directors and Executive Officers
of the Registrant 27
Item 11: Executive Compensation 27
Item 12: Security Ownership of Certain Beneficial Owners
and Management 27
Item 13: Certain Relationship and Related Transactions 27
PART IV
Item 14: Exhibits, Financial Statements and Reports on Form 8-K 28
<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, its interests in certain real estate partnerships, and its
subsidiary, TIS Mortgage Acceptance Corporation, a Delaware corporation
("TISMAC"), was incorporated on May 11, 1988. In 1995 the Company sold the
residual interest certificate and optional redemption rights related to the
trust representing its economic interest in TISMAC with the result that the
accounts of that company are no longer included in the consolidated
financial statements at December 31, 1995. The Company has retained its
legal ownership of TISMAC. Until 1994 the Company sought to generate
income for distribution to its stockholders primarily through acquisition
of Structured Securities (as hereinafter defined) and direct fee ownership
of real estate. "Structured Securities" 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", which include securities
collateralized by or representing equity interests in mortgage loans
secured by first liens on single family residences, multiple family
residences or commercial real estate ("Mortgage Loans"); (iii) CMOs; and
(iv) "Commercial Securitizations", which include debt obligations which are
issued in multiple classes and are funded as to the payment of interest and
principal by a specific group of Mortgage Loans on multiple family or
commercial real estate, accounts and other collateral. Beginning in 1994
the Company changed its investment focus from investments in Structured
Securities to multifamily real estate located in California's Central
Valley. Accordingly, during 1995 the Company sold a majority of its
investments in Structured Securities and acquired a portfolio of four
income-producing residential real estate properties. As the Company
continues to dispose of its Structured Securities, the Company expects that
increasing portions of its assets and revenues will be related to its
investments in multifamily real estate.
The Company may experience losses on its remaining Structured
Securities during periods of high prepayment rates on mortgages, as
previously experienced in 1992 and 1993. Monthly cash flows on the
Company's Structured Securities are comprised of both interest income and a
partial return of principal.
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
identify real estate for possible acquisition by the Company, 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 information 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 normally borrows funds to purchase and carry assets
expecting that the cost of such borrowings will be less than the net cash
flow on the 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
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 Structured Securities 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,
1995, the Company's taxable income did not exceed the cash flows from
Structured Securities.
Primary Business Activity
The Company has determined to make a substantial portion of its future
investments in multifamily residential properties. The acquisition
strategy of the Company is to identify communities with an expanding
employment base and demographics which will continue to provide economic
growth. After identifying communities with a strong potential economic
growth, the Company attempts to seek out those areas within a chosen
community which are most likely to be positively affected by the economic
growth of the community. Finally, the property sought for purchase within
a given area is chosen because it is considered to be among the highest
quality properties in that area and can be purchased below replacement
cost. Management believes that this strategy will allow income from each
of the properties to rise before the properties encounter significant
competition from new construction. Real property acquisitions will be
opportunistic and will occur from time to time only when sufficient liquid
assets are available, and when the potential for appreciation in value
together with current cash flow yield is expected to provide a total return
better than or equal to the Company's existing Structured Securities.
On December 29, 1994 the Company entered into a definitive agreement
to acquire four multifamily housing properties in California's Central
Valley. These properties consist of 539 units together with 9.75 acres of
unimproved land slated for development of an additional 126 units. The
properties were purchased in a series of closings occurring between mid-
January and mid-November 1995. The aggregate purchase price for the
properties was $29,305,000, including existing debt to be assumed by the
Company.
The Company has, in prior years, primarily invested 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 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.
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, the Company
has invested in other parts of the CMO such as PO Bonds, IO Bonds and
inverse IO Bonds. 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.
Monthly cash flows on the Company's Mortgage 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 any dividends paid to shareholders. In most cases cash flows and
income tend to be higher in early periods of ownership and lower in the
later periods. The principal which is repaid to reduce debt or to acquire
new assets. The rate of return on such new assets may be lower than the
rate of return on the repaid assets.
Risk Factors
Ownership of the Company's Common Stock is subject to certain risks.
The Company's earnings from its acquisitions of multifamily residential
properties will depend upon maintaining rental income that exceeds the
Company's interest and other costs. Rental income, in turn, will depend
upon the rental market, rates of occupancy and defaults by tenants. Long-
term profits will depend upon an appreciation in the value of the
properties. The ability of the Company to generate income from the cash
flows relating to Structured Securities, or to minimize losses, depends, in
large part, upon whether the Company is able to respond to fluctuations in
market interest rates, and utilize appropriate strategies.
The amount of income that may be generated from Structured Securities
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") 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 rates, which affect the amount of interest
payable on such LIBOR bonds and on Inverse IO Bonds. In general, income on
these Residual Interests and Inverse IO Bonds will decrease when LIBOR
rates increase, and will increase when LIBOR 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.
The Company has purchased Residual Interests, IO Bonds and PO Bonds of
CMOs only if the Structured Securities relating to such CMOs were 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, are 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.
There are 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 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 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. The Company has the right, but not the
obligation, to refrain from making distributions to stockholders until the
tax loss carryforward is fully utilized. 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 Structured Securities
The Company is not in the business of trading its Structured
Securities. However, from time to time the Company may dispose of them.
During 1993 the Company reinvested $4,069,000 in inverse IO bonds and
$340,000 in equity residuals. In 1994 the Company purchased two Commercial
Securitizations for $1,232,000. In 1995 the Company sold a majority of its
Structured Securities with a carrying value at date of sale of $13,102,000
and reinvested the proceeds in operating real estate. See Item 7 below,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 14 below, "Exhibits, Financial Statements and Reports
on Form 8-K" for details on assets acquired.
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. As of December 31, 1993 the Company
adopted the accounting method for impairment of mortgage-backed derivative
investments prescribed by Statement of Financial Accounting Standards No.
115 and presented its 1993 and later financial statements in accordance
therewith. See Item 7 below, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 14 below,
"Exhibits, Financial Statements and Reports on Form 8-K" 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 revenue to the Company is currently
derived from the cash flows on the Company's Residual Interests and IO
Bonds. In future years, it is anticipated that most of the taxable income
of the Company will be derived from its operating real estate assets. The
fair value of Residual Interests and IO Bonds is the net present value of
the projected future cash flows. The amount of cash flows that may be
generated from these 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 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, 1995 based on various assumptions and discount
factors.
Assumptions - For purposes of the presentations on the following
tables, the Nonequity Residual Interests are shown as a group. 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 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 4.0625 4.0625 5.5625 5.5625 7.0625
<FN>
* One-month LIBOR on December 31, 1995.
</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 December 29, 1995. 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>
Percent of the Prepayment Assumption (%)
Mortgage Pass Through ------------------------------------------------
Collateral Rate (%) Case I Case II Case III* Case IV Case V
- - ---------- ------------ ------ ------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
GNMA 9.0 252 279 279 159 159
Certificates 10.0 300 306 306 252 252
FNMA/FHLMC 8.5 334 295 295 183 183
Certificates 9.0 338 311 311 261 261
9.5 323 322 322 279 279
10.0 330 334 334 295 295
<FN>
* Bloomberg Financial Markets Dealer Prepayment Estimates Average as of
December 29, 1995.
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 these 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, 1995 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 in Case III and Nonequity Residuals Interests in CMOs with
fixed rate Bond Classes are discounted at 14%, the present value of the
projected cash flows of the Company's Nonequity Residual Interests would
equal approximately $725,000. 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 $3,150,000. 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>
10 841 843 844 847 848
12 774 778 780 770 771
14 717 723 725 706 708
16 668 676 677 653 654
18 626 634 636 608 609
</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 1,156 1,161 1,161 1,597 1,597
12 1,093 1,097 1,097 1,480 1,480
14 1,036 1,039 1,039 1,379 1,379
16 984 988 988 1,290 1,290
18 938 941 941 1,211 1,211
</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 2,985 3,780 2,570 2,655 1,406
26 2,750 3,411 2,319 2,388 1,264
30 2,549 3,106 2,111 2,169 1,148
34 2,375 2,851 1,939 1,987 1,052
38 2,223 2,634 1,791 1,832 970
- - ------------------------------------------------------------------
</TABLE>
Capital Resources
When feasible the Company may seek to increase the amount of funds
available for its activities through various types of debt financing. The
Company may seek to obtain lines of credit from independent financial
institutions. The Company may also seek to raise funds through agreements
pursuant to which the Company would sell Structured Securities 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. Short-term indebtedness would be expected to bear interest at
variable rates. There can be no assurance that the Company will be able to
finance assets that it wishes to acquire.
In connection with the 1995 acquisition of four multifamily housing
projects in California's Central Valley, the Company incurred mortgage
obligations totaling $20,490,000 secured by such properties. Any other
indebtedness incurred by the Company may be secured by the assets of the
Company, including its Structured Securities.
As of December 31, 1994 the Company's borrowings were solely under a
repurchase agreement with Bear, Stearns & Co. and had been reduced to
$8,325,000. 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, 1994 was 6.9776%. At December 31, 1995 the
Company's short-term borrowings had been reduced to $2,117,500 under
repurchase agreements with Bear Stearns & Co. and Paine Webber. These
borrowings had a weighted average interest rate of 7.4335%
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 thereafter 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.
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. In November 1995 the Company sold the residual interest
certificate and optional redemption rights related to the trust
representing its economic interest in TISMAC, with the result that the
accounts of TISMAC are no longer included in the consolidated financial
statements of the Company at December 31, 1995.
Competition
The Company's multifamily real estate properties face the normal
competitive pressure of most urban rental real estate projects. However,
the real property acquisitions have been and will continue to be
opportunistic and will occur from time to time only when sufficient liquid
assets are available, and when the potential for appreciation in value
together with current cash flow yield is expected to provide a total return
equal to the Company's Structures Securities.
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 1995 the Board of Directors of the
Company and the Manager entered into a new Management Agreement through
June 30, 1996. In March 1995 the Board of Directors had authorized a
committee composed of four Unaffiliated Directors to consider proposed
revisions to the Management Agreement in light of the Company's acquisition
of multifamily residential properties and recent waivers by the
Unaffiliated Directors of the requirement in the Management Agreement that
the Manager reimburse the Company for Excess Expenses (as defined below;
see "Expenses"). As a result, the Management Agreement approved in June
1995 increased the base management fee from .375% per annum of average
invested assets to .65% thereof, changed the incentive compensation,
eliminated an expense reimbursement provision, and discontinued the payment
of a Residual Interest Administration Fee. These changes in the management
fee became effective October 1, 1995. However, the Manager has
voluntarily waived the increase in base management fee for the fourth
quarter of 1995 and first quarter of 1996.
Under the Management Agreement, the Manager, in accordance with
criteria established by the Company's Board of Directors, including a
majority of the Unaffiliated Directors, arranges for the acquisition,
management and financing of real estate, monitors the performance of the
Company's assets and provides certain administrative and overall managerial
services necessary for the operation of the Company. Through September 30,
1995, the Manager was entitled to receive (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. Effective October
1, 1995, the base management fee was increased to .65% per annum of the
Company's Average Invested Assets and incentive compensation for any
calendar year will be an amount equal to 10% of the amount by which the
total return for the year exceeds 12%.
In order to compensate the Manager for certain administrative
functions that the Manager has performed with respect to each Residual
Interest 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 acted as bond administrator, the Company paid the Manager a fee
equal to $10,000 for each year or fraction thereof that the Company holds
such Residual Interest. Effective October 1, 1995, this Residual Interest
Administration fee was discontinued.
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 Company also reimburses the Manager for its costs
in providing off-side operating, management and supervisory services with
respect to multifamily properties and other real estate up to 5% of gross
rents received by the Company from such properties.
Unless waived by the Unaffiliated Directors, the Management Agreement
required prior to October 1, 1995 that the Manager reimburse the Company,
up to the amount of the base management fee, 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"). The Company experienced Excess Expenses in 1993, 1994 and
1995, and the Unaffiliated Directors waived the reimbursements that would
otherwise have been required by the Management Agreement. Under the
renewed Management Agreement, the Manager is no longer required to
reimburse the Company for Excess Expenses.
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 fees in an amount which shall be determined by a majority of the
Unaffiliated Directors.
The Board of Directors has adopted a policy that, unless the Company
is self-administered, (I) prior to entering into, renewing or extending any
management or administrative agreement (including the Management
Agreement), competitive bids from three or more persons will be secured and
(ii) prior to entering into, renewing or extending any management or
administrative agreement with any person who, directly or indirectly,
beneficially owns or controls 5% or more of the Common Stock, such
agreement will be submitted for approval by a majority of the Company's
disinterested stockholders. In light of this policy, the Board is
examining its current management arrangements and intends to comply with
this policy.
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 these tests 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 35%), 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) rents from real property, (c) dividends from other REITs,
(d) 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), (e) income from the operation, and gain from the sale,
of property acquired at or in lieu of a foreclosure of a mortgage
("foreclosure property") , (f) commitment fees related to mortgage loans,
and (g) 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 although, in future years, it is anticipated that gross
income of the Company will consist principally of rents from its real
estate assets. The composition and sources of the Company's income allowed
the Company to satisfy the income tests for all fiscal years through
December 31, 1995 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 real estate mortgage investment conduits
("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" below. 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 assets (including
undivided ownership interests in Mortgage Instruments), (ii) interests in
REMICs, (iii) interests in real estate, (iv) interests in other REITs, (v)
stock or debt instruments that generate qualified temporary investment
income, (vi) cash and (vii) 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
Subsidiaries.
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 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.
<PAGE>
Item 2. Properties.
The Company's operating real estate assets consist of four multifamily
apartment complexes located in California's Central Valley. All of these
properties were acquired in 1995. In two cases, the properties were
purchased outright and in two cases the Company purchased operating real
estate partnerships. It is anticipated that the two partnership will be
liquidated into the Company in 1996 upon obtaining appropriate refinancing
of existing debt. Information regarding these properties is shown in the
table below:
<TABLE>
<CAPTION>
Villa Four Creeks
Shady Lane River Oaks San Marcos Village
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Location Visalia, CA Hanford, CA Fresno, CA Visalia, CA
Date of Construction 1985 1984 1991 1986-1991
Purchase Price $2,105,000 $8,200,000 $9,000,000* $9,000,000
Purchase Price per Square Foot $40.44 $41.59 $62.44 $48.27
Debt Assumed $1,416,000 $6,673,000 $6,086,000 $4,500,000
Debt Acquired 0 0 0 1,815,000
Number of Units 54 219 120 146
Rentable Square Feet 52,056 197,186 144,140 186,439
Average Monthly Rent per Unit $490 $502 $805 $711
Monthly Rent per Square Foot $0.51 $0.56 $0.67 $0.56
Improved Land Area 2.77 acres 11.57 acres 9.77 acres 13.34 acres
Unimproved Land Area 9.75 acres
Occupancy at December 31, 1995 92% 96% 98% 96%
<FN>
* In addition to acquiring the currently existing building, the Company purchased the
adjoining 9.75 acres of unimproved land for $1,000,000. An additional 126 rentable units
are expected to be constructed on this parcel. At the time of purchase, all requisite
entitlements were in place.
</TABLE>
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
one year, ending on February 28, 1997, by the Manager of the Company. The
Manager is reimbursed by the Company for a portion of the rent based on the
percentage of space used by personnel who provide accounting and
administration services to the Company.
Item 3. Legal Proceedings.
At March 15, 1996, 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.
<PAGE>
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>
1994
First Quarter 2-1/8 1-1/2
Second Quarter 2-1/4 1-1/2
Third Quarter 2-1/4 1-3/4
Fourth Quarter 2-1/8 1-5/8
1995
First Quarter 2-3/8 1-3/4
Second Quarter 2-1/4 1-7/8
Third Quarter 2-1/2 1-3/4
Fourth Quarter 2-1/8 1-3/8
1996
First Quarter (through March 14, 1996) 1-3/4 1-1/8
</TABLE>
____________________
On March 14, 1996, the closing sales price of the shares of Common
Stock on the New York Stock Exchange was $1.25. On that date the Company
had outstanding 8,105,880 shares of Common Stock which were held by
approximately 845 stockholders of record and the total number of beneficial
shareholders was approximately 6,000.
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 three most recent fiscal years.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------
Applicable Date Amount Record Payable
Quarter Declared Declared Date Date
- - ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
December 31, 1994 September 7, 1994 $0.02 December 15, 1994 December 30, 1994
- - ----------------------------------------------------------------------------------------
</TABLE>
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.
During 1995 no dividends were declared by the Company.
Subject to the distribution requirements to maintain REIT
qualification, the Company intends, to the extent practicable, to utilize
substantially all of the principal from repayments, sales and refinancings
of the Company's Structured Securities to reduce debt or to acquire new
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 has been
derived from the Company's Structured Securities although, in future years,
it is anticipated that increasing portions of the taxable income of the
Company will be derived from its operating real estate assets. Taxable
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, 1995, 1994 and 1993 and for the years ended December 31,
1995, 1994 and 1993 have 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,
----------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Income
Interest Income on Mortgage Certificates $13,735 $18,298 $36,873 $54,337 $64,307
Interest Income on Residual Interests 1,483 3,650 186 2,001 10,248
Income from PO Bonds 0 0 0 107 15
Income from IO Bonds 1,128 2,208 1,997 1,983 0
Income from Commercial
Securitizations 89 51 0 0 0
Interest on Short-term Investments 115 126 179 400 539
Gain (Loss) on Sales of
Mortgage Related Assets (2,385) 0 0 1,391 0
Valuation Reserve Reduction (Provision) 541 (398) 0 0 0
Loss from Real Estate Operations (289) 0 0 0 0
Other Income 30 60 89 123 154
Total Income 14,447 23,995 39,324 60,342 75,263
Expenses
Interest Expense on CMOs 14,749 18,987 38,323 52,747 61,909
Interest Expense on Short-term Debt 429 509 568 781 284
Write-downs of Mortgage Assets 0 0 12,388 25,047 0
Amortization of Deferred Bond
Issuance Costs 276 351 1,857 1,638 741
Administrative and
Management Expenses 1,572 1,611 1,920 1,624 2,949
Total Expenses 17,026 21,458 55,056 81,837 65,883
Minority Interest 0 0 172 108 (215)
Income (Loss) Before Cumulative Effect
of Change in Accounting for Real
Estate Investments (2,579) 2,537 (15,560) (21,387) 9,165
Cumulative Effect of Change in
Accounting for Real Estate Investments 0 0 (9,879) 0 0
Net Income (Loss) ($2,579) $2,537 ($25,439) ($21,387) $9,165
Net Income (Loss) per Share
Before Cumulative Effect of Change in
Accounting for Real Estate Investments ($0.32) $0.31 ($1.92) ($2.64) $1.13
Cumulative Effect of Change in
Accounting for Real Estate Investments 0.00 0.00 (1.22) 0.00 0.00
Net Income (Loss) ($0.32) $0.31 ($3.14) ($2.64) $1.13
Dividends Declared per Share $0.00 $0.02 $0.20 $0.61 $1.34
Weighted Average Shares Outstanding 8,106 8,106 8,106 8,103 8,100
- - -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
Selected Financial Data (Continued)
<CAPTION>
(In thousands) December 31
----------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Mortgage Certificates, net $109,752 $163,817 $250,015 $460,438 $643,176
Residual Interests 725 8,675 11,919 22,648 59,646
PO Bonds 0 0 0 0 4,796
IO Bonds 3,150 9,794 12,212 26,614 0
Commercial Securitizations 191 1,194 0 0 0
Reserve for Loss on Investments (4,277) (4,818) (3,852) 0 0
Operating Real Estate Assets 29,384 395 0 0 0
Total Assets 145,247 188,957 300,190 545,645 735,835
Total Liabilities 133,266 172,864 284,410 502,881 666,628
Minority Interest 0 0 0 1,275 1,428
Total Shareholders' Equity 11,981 16,093 15,780 41,489 67,779
- - --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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
In 1994 the Company announced that it was changing its investment
focus from investments in Structured Securities to multifamily real estate
located in California's Central Valley. As a result, during 1995 the
Company sold a majority of its investments in Structured Securities and
acquired a portfolio of four income-producing residential real estate
properties. In the future, the Company expects that increasing portions of
its assets and operating income (loss) will be related to investments in
multifamily real estate. Sales of investments in 1995 generated
$10,751,000 of proceeds, essentially all of which was reinvested in
multifamily properties. Net losses related to these sales totaled
$2,385,000. The total cost of such properties was $29,305,000 which was
partially offset by the assumption of existing secured debt and new debt
totaling $20,490,000. Additionally, short-term debt was reduced by
$6,207,000 to $2,118,000 at the end of 1995.
During 1994 the Company reinvested $1,232,000 in Commercial
Securitizations and reduced its short-term borrowings by $3,420,000. In
addition, the Company incurred costs of $395,000 related to the 1995
purchase of multifamily residential properties. At December 31, 1994,
these costs were included in other assets. 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 following table illustrates the Company's cash receipts,
disbursements and reinvestments for the last four years.
<TABLE>
<CAPTION>
CASH FLOW ANALYSIS
(In thousands) 1995 1994 1993 1992
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Cash Balance $1,718 $ 680 $ 903 $ 1,902
Cash Received:
Mortgage Related Assets 6,412 10,926 16,111 20,949
Short-term Investments 0 0 0 1,835
Sale of Mortgage Related Assets 10,751 0 0 6,008
Increase to Short-term Debt 0 0 0 10,826
Increase in Real Estate Notes 20,362 0 0 0
Cash Disbursements:
Cash Expenses (3,348) (5,074) (3,687) (2,566)
Real Estate Assets (29,490) 0 0 0
Dividends 0 (162) (2,026) (7,291)
Reinvestments 0 (1,232) (4,409) (30,760)
Decrease to Short-term Debt (6,207) (3,420) (6,212) 0
- - --------------------------------------------------------------------------------------
Ending Cash Balance $ 198 $1,718 $ 680 $ 903
======================================================================================
</TABLE>
<PAGE>
The Company decreased the level of reinvestments in 1994 over the two
prior years because the cash flows from investments did not provide cash at
prior year's levels.
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. In
1994 the Company purchased two Commercial Securitizations for $1,232,000.
Accounting Change
On December 31, 1993 the Company adopted Statement of Financial
Accounting Standards 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 in mortgage
related assets as either trading investments, available-for-sale
investments or held-to-maturity investments. The Company is not in the
business of trading its investments in mortgage related assets. 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 investments in
mortgage related assets as available-for-sale investments, carried at fair
value in the financial statements. Unrealized holding gains and losses for
available-for-sale investments are excluded from earnings and reported as a
net amount in shareholders' equity until realized.
SFAS No. 115 became effective for years beginning after December 15,
1993; however an enterprise was permitted to apply this statement effective
in the fourth quarter of 1993. Prior years' financial statements were not
permitted to be restated. The Company elected to adopt SFAS No. 115 in the
fourth quarter of 1993.
The Company is not in the business of trading its Structured
Securities. 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. 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 as a separate component of 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 of $2,579,000, or $0.32 per share, for the
year ended December 31, 1995. For the year ended December 31, 1994 it had
net income of $2,537,000, or $0.31 per share. For the year ended December
31, 1993 it had a net loss of $25,439,000, or $3.14 per share. The 1993
loss included $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 included write-downs of
Structured Securities of $12,388,000. No dividends were declared for 1995.
The Company declared dividends totaling $162,000 for 1994, or $0.02 per
share as compared with $1,621,000 for 1993, or $0.20 per share. The 1994
dividend of $0.02 per share was declared to minimize the Company's
corporate income taxes.
1995 Compared to 1994
The nature of the Company's operations changed radically in 1995
because of the change in investment focus from investments in Structured
Securities to multifamily real estate located in California's Central
Valley. As a result, during 1995 the Company sold a majority of its
investments in Structured Securities and acquired a portfolio of four
income-producing residential real estate properties. Income from Residual
Interests and Interest Only Bonds declined by more than half because these
investments were included in the Company's portfolio for only a portion of
the year. Sales of these investments resulted in a loss of $2,385,000
although $1,048,000 of this loss had been previously recognized as a
reduction of shareholders' equity.
Net interest margin (interest income from Mortgage Certificates net of
interest expense on CMOs) declined in 1995 to a net interest expense of
$1,014,000 from net interest expense of $689,000 in 1994 as shown in the
following table. The primary cause of the decline was a change in the
method of amortization of original issue discount on CMOT 28 to a method
that better relates amortization to principal reductions.
<TABLE>
(In thousands) 1995 1994 Change
--------- --------- ---------
<S> <C> <C> <C>
Interest Income from Mortgage Certificates $13,313 $17,518 ($4,205)
Amortization of Market Discount 522 780 (258)
--------- --------- ---------
Net Interest Income 13,735 18,298 (4,563)
--------- --------- ---------
Interest Expense on CMOs 13,086 17,528 (4,442)
Amortization of Original Issue Discount 1,663 1,459 204
--------- --------- ---------
Net Interest Expense 14,749 18,987 (4,328)
--------- --------- ---------
Net Interest Margin ($1,014) ($ 689) ($325)
========= ========= =========
</TABLE>
Net interest margin continues to be negative 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.
The reserve for loss on investments was reduced by $541,000 in 1995 in
relation to the decline in the amounts of principal outstanding in the
underlying residual series.
In the first partial year of real estate operations, the Company's
income from real estate operations before depreciation and amortization
("Funds from Operations") was $88,000. However, real estate operations
after depreciation and amortization showed a loss of $289,000. The first
year of real estate operations relates to properties acquired in a series
of four closings throughout 1995 and therefore does not constitute a full
year of operations. During the year, the Company made some needed
improvements to the properties. The Company anticipates improved results
from real estate operations in future years as much of the secured real
estate debt is expected to be refinanced in 1996 at lower interest rates.
Interest expense on repurchase agreements decreased from $509,000 in
1994 to $429,000 in 1995. This is the result of a decrease in the average
amount of debt outstanding from $10,020,000 in 1994 to $5,676,000 in 1995.
However, this reduction was offset by an increase in the weighted average
interest rate from 5.08% in 1994 to 7.56% in 1995. Management and residual
interest administration fees remained essentially constant in 1995 because
of the somewhat increased level of average invested assets related to real
estate acquisitions offset by a $10,000 decline in the 1995 residual
interest administration fee. In 1995 the Company incurred management fees
of $130,000 and residual interest administration fees of $90,000 as
compared to fees of $121,000 and $100,000, respectively, in 1994. General
and administrative expense declined from $1,229,000 in 1994 to $1,212,000
in 1995 because of overall economies on the part of the Company and the
Manager in 1995.
1994 Compared to 1993
As a result of the accounting change described above which adjusted
the carrying value of the Company's Structured Securities to fair value,
1994 operating results were likely to be favorable in most stable interest
rate environments. As shown in the Net Interest Income Analysis below, the
average yield from residual interests and IO bonds was 35.65% and 18.77%,
respectively.
Net interest margin (interest income from Mortgage Certificates net of
interest expense on CMOs) improved to a net interest expense of $689,000 in
1994 from a net interest expense of $1,450,000 in 1993 as shown in the
following table.
<TABLE>
(In thousands) 1994 1993 Change
--------- --------- ---------
<S> <C> <C> <C>
Interest Income from Mortgage Certificates $17,518 $33,160 ($15,642)
Amortization of Market Discount 780 3,713 (2,933)
--------- --------- ---------
Net Interest Income 18,298 36,873 (18,575)
--------- --------- ---------
Interest Expense on CMOs 17,528 33,302 (15,774)
Amortization of Original Issue Discount 1,459 5,021 (3,562)
--------- --------- ---------
Net Interest Expense 18,987 38,323 (19,336)
--------- --------- ---------
Net Interest Margin ($ 689) ($ 1,450) $ 761
========= ========= =========
</TABLE>
Net interest margin continues to be negative 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.
Interest expense on repurchase agreements decreased from $568,000 in
1993 to $509,000 in 1994. This is the result of a decrease in the average
amount of debt outstanding from $15,371,000 in 1993 to $10,020,000 in 1994.
However, this reduction was offset by an increase in the weighted average
interest rate from 3.70% in 1993 to 5.08% in 1994. Management and residual
interest administration fees declined in 1994 because of the lower level of
average invested assets which arose from the 1993 write downs of Structured
Securities. In 1994 the Company incurred management fees of $121,000 and
residual interest administration fees of $100,000 as compared to fees of
$179,000 and $110,000, respectively, in 1993. General and administrative
expense declined from $1,430,000 in 1993 to $1,229,000 in 1994 because of
lower costs of stockholder communications and the capitalization in 1994 of
certain consulting fees.
Outlook
The Company has determined that it will direct its future investments
principally to multifamily residential properties. With regard to real
estate investments, the acquisition strategy of the Company is to identify
communities with an expanding employment base and demographics which will
continue to provide economic growth. After identifying communities with a
strong potential economic growth, the Company attempts to seek out those
areas within a chosen community which are most likely to be positively
affected by the economic growth of the community. Finally, the property
sought for purchase within a given area is chosen because it is considered
to be among the highest quality properties in that area and can be
purchased below replacement cost. Management believes that this strategy
will allow income from each of the properties to rise before the properties
encounter significant competition from new construction.
On December 29, 1994 the Company entered into a definitive agreement
to acquire four multifamily housing properties in California's Central
Valley. These properties consist of 539 units together with 9.75 acres of
unimproved land slated for development of an additional 126 units. The
properties were purchased in a series of closings occurring between mid-
January and mid-November, 1995. The aggregate purchase price for the
properties was be $29,305,000, including existing debt to be assumed by the
Company.
Prior to 1995, the Company's primary business was the ownership of
Structured Securities. Because mortgage interest rates increased in 1994,
the high level of prepayments experienced in 1992 and 1993 subsided. If
mortgage rates decline sufficiently to cause prepayments to increase, the
Company will again have write downs on certain of its single family
Structured Securities.
The Company has generated significant tax loss carryforwards from
losses experienced over the last several years. Should the Company's real
estate acquisitions be successful, the Company would be in a tax position
to have the right, but not the obligation, to continue to use cash flows to
rebuild its investment portfolio prior to resuming taxable dividend
payments.
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. In 1995 the
Company's operations generated cash flow of $1,635,000 as compared to
$7,914,000 in 1994 and $4,342,000 in 1993.
At December 31, 1995 the Company had outstanding short-term borrowings
with two investment banking firms under repurchase agreements totaling
$2,117,500 at a weighted average interest rate of 7.4335%. 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. At December 31, 1994 the Company had outstanding borrowings
with one investment banking firm under repurchase agreements totaling
$8,325,000. The weighted average interest rate of these borrowings at that
date was 6.9776%. In addition, at December 31, 1995 the Company had
outstanding borrowings secured by multifamily real estate totaling
$20,362,000. Approximately 85% of this debt has variable interest rates
and 15% is at fixed rates. The weighted average interest rate at December
31, 1995 was 8.494%. The Company intends to refinance approximately
$17,000,000 of the notes payable on real estate during 1996 at more
favorable terms and rates. At December 31, 1995, 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 required 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>
1995 1994 1993
------------------------------ ------------------------------ -------------------------------
Average Average Average Average Average Average
(In thousands) Interest Balance Rate Interest Balance Rate Interest Balance Rate
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Mortgage Certificates $13,735 $147,131 9.34% $18,298 $194,679 9.40% $36,873 $361,602 10.20%
Residual Interests 1,483 4,644 31.93% 3,650 10,239 35.65% 186 16,411 1.13%
Interest Only Bonds 1,128 6,781 16.64% 2,208 11,762 18.77% 1,997 21,078 9.47%
Other 204 4,060 5.02% 177 9,840 1.80% 179 16,372 1.09%
- - ---------------------------------------------------------------------------------------------------------------------------
Interest Income 16,550 162,616 10.18% 24,333 226,520 10.74% 39,235 415,463 9.44%
Interest Expense
Collateralized Mortgage
Obligations 14,749 145,017 10.17% 18,987 199,572 9.51% 38,323 376,933 10.17%
Short-term Debt 429 5,676 7.56% 509 10,020 5.08% 568 15,371 3.70%
- - ---------------------------------------------------------------------------------------------------------------------------
Interest Expense 15,178 150,693 10.07% 19,496 209,592 9.30% 38,891 392,304 9.91%
Net Interest Income $1,372 0.84% $4,837 2.14% $344 0.08%
- - ---------------------------------------------------------------------------------------------------------------------------
<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>
1995 - 1994 1994 - 1993 1993 - 1992
------------- ------------- -------------
(In thousands) Rate Volume Total Rate Volume Total Rate Volume Total
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Mortgage Certificates ($124) ($4,439) ($4,563) ($2,693) ($15,882) ($18,575) $2,837 ($20,301) ($17,464)
Residual Interests (347) (1,820) (2,167) 3,507 (43) 3,464 (1,023) (792) (1,815)
Interest Only Bonds (229) (851) (1,080) 384 (173) 211 (74) 88 14
Other 40 (13) 27 (5) 3 (2) (362) 34 (328)
- - --------------------------------------------------------------------------------------------------------------------------
Interest Income (660) (7,123) (7,783) 1,193 (16,095) (14,902) 1,378 (20,971) (19,593)
Interest Expense
CMOs 1,430 (5,668) (4,238) (2,323) (17,013) (19,336) 6,081 (20,505) (14,424)
Short-term Debt (715) 635 (80) (832) 773 (59) (132) (81) (213)
- - --------------------------------------------------------------------------------------------------------------------------
Interest Expense (307) (5,033) (4,318) (3,155) (16,240) (19,395) 5,949 (20,586) (14,637)
Net Interest Income ($1,375) ($2,090) ($3,465) $4,348 $145 4,493 ($4,571) ($385) ($4,956)
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this
Form 10-K. See Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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 1996 Annual Meeting of Stockholders.
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 1996 Annual Meeting of Stockholders.
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 1996 Annual Meeting of Stockholders.
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 1996 Annual Meeting of Stockholders.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K.
(a) 1. Financial Statements and Report of Arthur Andersen LLP, Independent
Public Accountants
Report of Independent Public Accountants 30
Consolidated Balance Sheets - December 31, 1995 and 1994 31
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 32
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1995, 1994 and 1993 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 34
Notes to the Consolidated Financial Statements 35
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 1995 51
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or notes
thereto.
3. Exhibits
The following exhibits in the accompanying index to exhibits are
filed herewith or are incorporated by reference to exhibits
previously filed.
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 TIS Financial
Services, Inc.
10(b) Bonus Program***
10(c) Custody Agreement between Registrant and Mellon Bank N.A.****
10(d) Transfer Agency Agreement between Registrant and Mellon
Securities Trust Company****
10(e) Reverse Repurchase Agreement between Registrant and Bear, Stearns
Securities Corp.*****
10(f) Loan and Security Agreement dated July 19, 1995 between TIS
Mortgage Investment Company and Paine Webber Real Estate
Securities, Inc.
10(g) Nonqualified Stock Option Agreement with John D. Boyce and
Schedule of Omitted Contracts
10(h) Nonqualified Stock Option Agreement with John E. Castello and
Schedule of Omitted Contracts
21 Subsidiaries of the Registrant*****
24 Consent of Arthur Andersen LLP
___________________________________
* 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.
****** 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 31, 1995.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
<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, 1995 and 1994, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1995. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the schedule 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in
1993 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 audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying
Schedule III - Real Estate and Accumulated Depreciation as of December 31,
1995 - is presented for the purposes of complying with the Securities and
Exchange Commission rules and is not part of the basic consolidated
financial statements. This information has been subjected to the audit
procedures applied in our audit of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects
in relation to the basic consolidated financial statements taken as a
whole.
San Francisco, California,
March 4, 1996
<PAGE>
<TABLE>
TIS Mortgage Investment Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
<CAPTION>
- - ----------------------------------------------------------------------------------------
(In thousands except share data) December 31, 1995 December 31, 1994
- - ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Mortgage Related Assets
Mortgage Certificates, net $109,752 $163,817
Residual Interests 725 8,675
Interest Only (IO) Bonds 3,150 9,794
Commercial Securitizations 191 1,194
Reserve for Loss on Investments (4,277) (4,818)
-------- --------
Total Mortgage Related Assets 109,541 178,662
-------- --------
Operating Real Estate Assets, net 29,384 395
-------- --------
Other Assets
Cash and Cash Equivalents 198 1,718
Restricted Cash 2,728 2,920
Accrued Interest and Accounts Receivable 1,672 2,658
Deferred Bond Issuance Costs 1,414 2,317
Amortizable Costs 310 287
-------- --------
Total Other Assets 6,322 9,900
-------- --------
Total Assets $145,247 $188,957
======== ========
- - ----------------------------------------------------------------------------------------
LIABILITIES
Collateralized Mortgage Obligations, net $108,438 $161,894
Accounts Payable and Accrued Liabilities 593 282
Accrued Interest Payable 1,755 2,363
Notes Payable on Real Estate 20,362 0
Short-term Debt 2,118 8,325
-------- --------
Total Liabilities 133,266 172,864
-------- --------
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 Loss on Investments (2,244) (711)
Retained Deficit (60,479) (57,900)
-------- --------
Total Shareholders' Equity 11,981 16,093
-------- --------
Total Liabilities and Shareholders' Equity $145,247 $188,957
======== ========
- - ----------------------------------------------------------------------------------------
<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,
-------------------------------------------
1995 1994 1993
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MORTGAGE RELATED ASSETS
Interest $16,550 $24,333 $39,235
Write-downs of Mortgage Related Assets 0 0 (12,388)
Valuation Reserve Reduction (Provision) 541 (398) 0
Loss on Sales of Mortgage Related Assets (2,385) 0 0
Other 30 60 89
------- ------- -------
Income from Mortgage Related Assets 14,736 23,995 26,936
------- ------- -------
INTEREST AND CMO RELATED EXPENSES
Collateralized Mortgage Obligations
Interest 14,749 18,987 38,323
Administration Fees 140 161 201
Amortization of Deferred Bond Issuance Costs 276 351 1,857
Short-term Debt 429 509 568
------- ------- -------
Total Interest and CMO Related Expenses 15,594 20,008 40,949
------- ------- -------
REAL ESTATE OPERATIONS
Rental and Other Income 2,206
Operating and Maintenance Expenses (984)
Interest on Real Estate Notes Payable (945)
Property Taxes (189)
Depreciation and Amortization (377)
-------
Loss from Real Estate Operations (289)
-------
OTHER EXPENSES
Management Fees 220 221 289
General and Administrative 1,212 1,229 1,430
------- ------- -------
Total Other Expenses 1,432 1,450 1,719
Income (Loss) Before Minority Interest and
Cumulative Effect of Change in Accounting
for Real Estate Investments (2,579) 2,537 (15,732)
Minority Interest 0 0 172
Cumulative Effect of Change in Accounting
for Real Estate Investments 0 0 (9,879)
------- ------- -------
Net Income (Loss) ($2,579) $2,537 ($25,439)
------- ------- -------
- - --------------------------------------------------------------------------------------------
Income (Loss) per Share
Before Cumulative Effect of Change in
Accounting for Real Estate Investments ($0.32) $0.31 ($1.92)
Cumulative Effect of Change in Accounting
for Real Estate Investments 0.00 0.00 (1.22)
------ ------- -------
Net Income (Loss) ($0.32) $0.31 ($3.14)
------ ------- -------
Dividends Declared per Share $0.00 $0.02 $0.20
Weighted Average Number of Shares Outstanding 8,106 8,106 8,106
- - --------------------------------------------------------------------------------------------
<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, 1995, 1994 and 1993
- - ------------------------------------------------------------------------------------------------------------
(In thousands) Unrealized
Common Stock Additional Gain
----------------------- Paid-in (Loss) on Retained
Shares Amount Capital Investments Deficit Total
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1993 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
Net Income 2,537 2,537
Dividends Declared (162) (162)
Unrealized Loss
on Investments (2,062) (2,062)
- - ------------------------------------------------------------------------------------------------------------
Balance - December 31, 1994 8,106 $8 $74,696 (711) (57,900) 16,093
Net Loss (2,579) (2,579)
Decrease in Unrealized Loss
on Investments due to
Sales of Investments 1,048
Unrealized Loss
on Investments (2,581) (1,533)
- - ------------------------------------------------------------------------------------------------------------
Balance - December 31, 1995 8,106 $8 $74,696 ($2,244) ($60,479) $11,981
============================================================================================================
<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) 1995 1994 1993
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) ($2,579) $2,537 ($25,439)
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 1,800 1,035 2,838
Write-downs of Mortgage Assets 0 0 12,388
Cumulative Effect of Change in Accounting
for Real Estate Investments 0 0 9,879
Loss on Sales of Mortgage Related Assets 2,385 0 0
Valuation Reserve Provision (Reduction) (541) 398 0
Decrease in Accrued Interest Receivable 273 6,161 7,562
Decrease (Increase) in Accounts Receivable 435 (530) 0
Decrease (Increase) in Prepaid Expenses (13) (409) (51)
Increase in Other Assets (101) 0 0
Increase (Decrease) in Accounts Payable
and Accrued Liabilities 311 61 74
Decrease in Accrued Interest Payable (335) (1,339) (2,909)
------- ------- -------
Net Cash Provided by (Used in) Operating Activities 1,635 7,914 4,342
------- ------- -------
- - ---------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Short-term Debt (6,207) (3,420) (6,212)
Principal Payments on CMOs (22,627) (108,308) (213,672)
Proceeds from Notes Payable on Real Estate 1,815 0 0
Payments on Notes Payable on Real Estate (128) 0 0
Net Decrease in Minority Interest
in Owner Trust Residuals 0 0 (1,275)
Cash Dividends Paid on Common Stock 0 (162) (2,026)
-------- -------- --------
Net Cash Used in Financing Activities (27,147) (111,890) (223,185)
-------- -------- --------
- - ---------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net Decrease (Increase) in Restricted Cash 1 15,062 (3,614)
Acquisition of Real Estate Assets (10,592) 0 0
Additions to Real Estate Assets (97)
Principal Reduction in Mortgage Certificates 21,885 86,978 214,136
Proceeds from Sales of Mortgage Related Assets 10,751 0 0
Principal Reduction in Residual Interests 450 1,582 6,336
Purchase of Commercial Securitizations 0 (1,232) 0
Principal Reduction in Commercial Securitizations 104 38 0
Purchase of Interest Only (IO) Bonds 0 0 (4,069)
Investment in Equity Residuals 0 0 (340)
Principal Reduction in IO Bonds 1,490 2,586 6,171
-------- -------- --------
Net Cash Provided by Investing Activities 23,992 105,014 218,620
-------- -------- --------
Net Change in Cash and Cash Equivalents (1,520) 1,038 (223)
Cash and Cash Equivalents at Beginning of Period 1,718 680 903
-------- -------- --------
Cash and Cash Equivalents at End of Period $ 198 $ 1,718 $ 680
-------- -------- --------
- - ---------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash Paid for CMO Interest Expense $13,509 $20,315 $ 41,206
Cash Paid for Other Interest Expense $ 1,376 $ 520 $ 595
- - ---------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
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.
The Company operates as a real estate investment trust (REIT) and has,
in prior years, primarily invested in structured securities (mortgage
related assets) including residual interests, principal only bonds,
interest only bonds and collateralized mortgage obligations. Beginning in
1994, the Company changed its investment focus from investments in
structured securities to multifamily real estate located in California's
Central Valley. Accordingly, during 1995 the Company sold a majority of
its investments in structured securities and acquired a portfolio of four
income-producing residential real estate properties. In the future, the
Company expects that increasing amounts of its assets and operating income
(loss) will be related to investments in multifamily real estate.
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 Statement
of Financial Accounting Standards 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 in
mortgage related assets as either trading investments, available-for-sale
investments or held-to-maturity investments. The Company is not in the
business of trading its investments in mortgage related assets. 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 investments in
mortgage related assets as available-for-sale investments, carried at fair
value in the financial statements. Unrealized holding gains and losses for
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 in mortgage related assets 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 loss of $2,244,000 directly to equity as prescribed by SFAS
No. 115 for mortgage related assets classified as available-for-sale.
Prior years' consolidated financial statements were not permitted to be
restated.
The change in accounting principle significantly reduced the amortized
cost of many of the Company's CMO Ownership Interests. As a result, it was
anticipated that there would be earnings from these assets 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 - In 1995 the Company sold its economic
interest in TISMAC through the sale of the residual interest certificate
and optional redemption rights in the underlying trust. The Company has
retained its legal ownership of TISMAC. As a result of these transactions,
the Company no longer has risk or reward of ownership and therefore the
accounts of TISMAC are not included in the consolidated balance sheet at
December 31, 1995 and the results of operations of that company are
included in the 1995 consolidated statement of operations only through the
date of sale. The 1994 and 1993 consolidated financial statements
presented 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. Additionally, the consolidated financial statements
include the accounts underlying its interest in real estate partnerships.
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
book value 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.
Operating Real Estate Assets - In accordance with Statement of
Financial Accounting No. 121 ("SFAS 121") - Accounting for Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of, the Company
values operating real estate assets at cost unless circumstances indicate
that cost cannot be recovered, in which case carrying value is reduced to
estimated fair value.
Operating real estate assets are depreciated using the straight-line
method over the estimated useful lives of the real estate assets. The
Company uses a 40 year estimated life for buildings and improvements and
either a 5 or 12 year life for furniture, fixtures and equipment depending
on the nature of the asset. Significant expenditures that improve or
extend the useful life of the asset are capitalized and depreciated over
their estimated useful lives.
All leases of real estate assets are classified as operating leases.
Rental income is recognized when contractually due based on the terms of
signed lease agreements which range in duration from month-to-month to one
year.
Restricted Cash - Restricted cash represents cash balances totaling
$2,649,000 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. Additionally,
restricted cash includes $79,000 in property tax impound accounts.
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
1995, 1994, and 1993, respectively. The common equivalent shares related
to the 1995 Stock Option Plan (see Note 12) are antidilutive in 1995 and
therefore are not included in the weighted average number of shares
outstanding.
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.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
<PAGE>
3. Taxation of Dividends Declared
There were no dividends paid by the Company in 1995. The dividends
paid by the Company of $0.02 and $0.25 per share in the years 1994 and
1993, 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, 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 1994 and 1993 dividends paid are 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.
<PAGE>
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, 1995.
<PAGE>
<TABLE>
NONEQUITY RESIDUAL INTERESTS
- - ----------------------------
(Dollars in thousands)
<CAPTION>
Book Value
December 31 Prospective
Residual Purchase ---------------------- Method
Series Price 1995 1994 Yield
- - ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonequity Residual Interests
- - ----------------------------
BT 88-1 $ 1,537 $461 $ 382 14.0%
LFR-9 2,589 149 187 14.0%
CMSC I 8,642 104 104 14.0%
FHLMC 25 4,934 6 6 14.0%
FHLMC 21 5,361 5 6 14.0%
CMSC 88-2 2,554 - 525 -
DBLS 2,424 - 482 -
DBLU 5,169 - 65 -
FNMA 88-22 10,387 - 1,753 -
ML-38 1,306 - 478 -
OXFORD 3-F 1,382 - 0 -
PB-4 10,523 - 2,593 -
PB-5 16,112 - 1,034 -
PB-7 3,994 - 487 -
RYLAND 62 3,039 - 573 -
- - ---------------------------------------------------------------------------------
725 8,675
- - ---------------------------------------------------------------------------------
Unconsolidated Equity Residual Interests
- - ----------------------------------------
TMAC 1986-2 67 0 0 N/A
TMAC 1987-3 165 0 0 N/A
- - ---------------------------------------------------------------------------------
Total Residual Interests $ 725 $8,675
=================================================================================
</TABLE>
In the year ended December 31, 1995 the Company sold certain Nonequity
Residual Interests as follows (in thousands):
<TABLE>
<CAPTION>
Residual Series Sales Price Amortized Cost Gain (Loss)
- - ---------------------------------------------------------------------------
<S> <C> <C> <C>
CMSC 88-2 $ 395 $ 375 $ 20
DBLS 300 305 (5)
DBLU 50 57 (7)
FNMA 88-22 925 1,088 (163)
ML-38 500 498 2
OXFORD 3-F 301 0 301
PB-4 1,335 1,992 (657)
PB-5 775 1,161 (386)
PB-7 341 343 (2)
RYLAND 62 325 458 (133)
- - ---------------------------------------------------------------------------
Total $5,247 $6,277 ($1,030)
===========================================================================
</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 Note 2. Certain characteristics of
the CMO Bonds in the Company's Residual Interests held in these forms are
on the following tables:
<PAGE>
<TABLE>
FIXED RATE RESIDUALS
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
CMO Bond Data (100% of Issue)
-----------------------------------------------------------------
Name of Issuer TIS Initial Dec. 31, 1995
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) 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 15,430 8.75% Apr 1, 2018
Feb 16, 1988 1-D 47,492 15,643 8.63% Apr 1, 2018
-------- -------
$100,000 $31,073
- - -------------------------------------------------------------------------------------------------------------------------
2) 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 10,078 Zero Coupon Jan 1, 2019
Dec 2, 1988 D 32,850 4,831 Zero Coupon Jan 1, 2019
E 30,000 0 Zero Coupon Jan 1, 2019
R 150 150 Residual Bond Jan 1, 2019
-------- -------
$150,000 $15,059
- - -------------------------------------------------------------------------------------------------------------------------
3) 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 16,721 9.45% May 1, 2013
Securities Corp. Subtotal 88.000% $8,642 I-3(Z) 15,000 33,964 9.45% Feb 1, 2017
-------- -------
Series I (CMSC I) $500,000 $50,685
Jan 28, 1987
- - -------------------------------------------------------------------------------------------------------------------------
4) 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 13,398 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 11 Residual Bond Feb 15, 2020
-------- --------
$500,000 $57,349
- - -------------------------------------------------------------------------------------------------------------------------
5) 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 0 9.45% Sep 15, 2011
21-Z 84,750 100,668 9.50% Jan 15, 2020
R 100 10 Residual Bond Jan 15, 2020
---------- --------
$1,000,000 $100,678
=========================================================================================================================
</TABLE>
<PAGE>
Equity Residual Interests - The Company currently holds interests in
two Owner Trust Residuals. It also previously held the Residual Interest
in TISMAC 1989-1, the CMO issued by the Company's wholly-owned subsidiary,
TISMAC. However, this Residual Interest was sold in 1995 (see Notes 2 and
15). 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
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 at December 31, 1995 are set forth below:
<TABLE>
EQUITY RESIDUAL INTERESTS
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
CMO Bond Data (100% of Issue)
-----------------------------------------------------------------
Name of Issuer TIS Initial Dec. 31, 1995
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 10,871 8.50% Dec 1, 2010
(CMOT 28) 100.000% $4,857 Z 39,500 80,404 8.45% Jun 1, 2017
May 29, 1987 -------- ------ -------- --------
$500,000 $91,275
- - -------------------------------------------------------------------------------------------------------------------------
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 20,264 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 2,163 8.95% Feb 20, 2018
-------- ------ -------- --------
100.000% $1,695 $200,000 $22,427
- - -------------------------------------------------------------------------------------------------------------------------
3) TMAC 1986-2 Jun 18, 1993 44.990% $67 2-A $ 72,600 $ 7,187 LIBOR+.60% Mar 20, 2018
Dec 10, 1986 2-B 27,400 2,712 25.11987% - Mar 20, 2018
-------- --------
$100,000 $ 9,899 (2.00959) x LIBOR
- - -------------------------------------------------------------------------------------------------------------------------
4) TMAC 1987-3 Jun 18, 1993 44.767% $165 3-A $ 55,070 $ 430 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 2,547 8.58% Jul 20, 2013
3-E(Z) 9,495 20,688 9.00% Apr 20, 2018
-------- --------
$195,000 $23,655
- - -------------------------------------------------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $147,266
=========================================================================================================================
</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, 1995 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% $ 90,046 9.10% 253.4
TMAC 1986-1 Fixed FHLMC 9.00% 21,260 10.00% 242.0
TMAC 1986-2 Fixed FHLMC 9.50% 9,899 10.10% 230.0
TMAC 1987-3 Fixed FHLMC 9.08% 23,664 9.80% 234.0
Nonequity Residual Interests
- - ----------------------------
BT 88-1 Fixed GNMA 9.00% 29,622 9.50% 255.0
LFR-9 Fixed FNMA 9.50% 14,696 10.20% 269.0
CMSC I Fixed FNMA 9.50% 48,359 10.10% 237.2
FHLMC 25 Fixed FHLMC 9.50% 57,350 10.30% 265.8
FHLMC 21 Fixed FHLMC 9.50% 100,678 10.20% 267.8
=================================================================================================================
</TABLE>
<PAGE>
5. Interest Only (IO) Bonds
IO Bonds include both regular IO Bonds and Inverse IO Bonds. No IO
Bonds were purchased in 1995 or in 1994; however, during 1993, the Company
invested $4,069,000 in IO Bonds. Presented below is a schedule of the
Company's IO Bonds and the Prospective yield at December 31, 1995.
<TABLE>
INTEREST ONLY (IO) BONDS
- - ------------------------
(Dollars in thousands)
<CAPTION>
Book Value
December 31 Prospective
Purchase -------------------------- Method
Interest Only Bond Price 1995 1994 Yield
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FNMA Series 1992-123 Class S $8,203 $2,112 $2,221 12.16%
Pru Home Mtg Corp Series 1992-7 4,776 796 1,350 14.00%
Bear Stearns Mtg Sec Series 1992-1 2,720 242 363 14.00%
FHLMC Series 1993-1483 Class SA 3,071 - 1,407 -
FHLMC-G Series 24 Class SK 998 - 500 -
FNMA SMBS Trust 4 Class 2 IO 2,909 - 738 -
FNMA SMBS Trust 7 Class 2 IO 9,541 - 2,564 -
Sears Mtg Sec Corp Series 1992-6 2,611 - 651 -
- - ---------------------------------------------------------------------------------------------
$3,150 $9,794
- - ---------------------------------------------------------------------------------------------
</TABLE>
In the year ended December 31, 1995 the Company sold certain Interest Only
bonds as follows (in thousands):
<TABLE>
<CAPTION>
Interest Only Bond Sales Price Amortized Cost Gain (Loss)
- - ----------------------------------------------------------------------------
<S> <C> <C> <C>
FHLMC Series 1993-1483 Class SA $1,063 $1,877 ($ 814)
FHLMC-G Series 24 Class SK 256 773 (517)
FNMA SMBS Trust 4 Class 2 IO 1,709 418 1,291
FNMA SMBS Trust 7 Class 2 IO 475 1,366 (891)
Sears Mtg Sec Corp Series 1992-6 200 411 (211)
- - ----------------------------------------------------------------------------
Total $3,703 $4,845 ($1,142)
============================================================================
</TABLE>
<PAGE>
Certain characteristics of the Company's IO Bonds held at December 31, 1995
are on the following table:
<TABLE>
INTEREST ONLY BONDS
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Collateral Data (% of IO held by TIS)
---------------------------------------------------------------
Weighted Dec. 31, 1995 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 July 30, 1992 $8,203 FNMA 49.58 - $5,171 8.95% 307.0
Series 1992-123 (5.67 x
Class S LIBOR)
July 25, 1992
- - -------------------------------------------------------------------------------------------------------------
2) Prudential Mar 27, 1992 $4,776 NON 0.5652% $59,859 8.81% 305.0
Home Mortgage AGENCY
Corporation
Series 1992-7
March 1, 1992
- - -------------------------------------------------------------------------------------------------------------
3) Bear Stearns May 28, 1992 $2,720 NON 0.3714% $7,299 9.47% 237.0
Mortgage AGENCY
Securities, Inc.
Series 1992-1
May 1, 1992
=============================================================================================================
</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, 1995:
<TABLE>
<CAPTION>
Equity Residual Collateral PSA Fair Value
- - ---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CMOT 28 FNMA 8.50% 295% $885
TMAC 1986-1 FHLMC 9.00% 311% 0
- - ---------------------------------------------------------------
Total Fair Value of Equity Residuals $885
===============================================================
</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, 1995. 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 $ 90,046 $ 93,958 $ 88,501
TMAC 1986-1 21,260 22,230 21,251
- - ---------------------------------------------------------------------------------------------
$111,306 $116,188 $109,752
=============================================================================================
</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 although, in
future years, it is anticipated that most of the taxable income of the
Company will be derived from its operating real estate assets. 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 Inverse IO Bonds,
changes in LIBOR. 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, 1995 based
on various assumptions and discount factors.
Assumptions - For purposes of the presentations below, the Nonequity
Residual Interests are shown as a group and 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, 1995
one-month LIBOR rate is used:
INTEREST RATE ASSUMPTIONS
-------------------------------------------
One Month LIBOR 5.5625%
-------------------------------------------
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 29, 1995. 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 9.0% 279%
GNMA Certificates 10.0% 306%
FNMA/FHLMC Certificates 8.5% 295%
FNMA/FHLMC Certificates 9.0% 311%
FNMA/FHLMC Certificates 9.5% 322%
FNMA/FHLMC Certificates 10.0% 334%
- - ----------------------------------------------------------
</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 these assets can vary
dramatically depending on future interest rates, prepayment speeds and the
discount factor used.
<PAGE>
Present Value of Projected Cash Flows - The tables which follow set
forth the present value at December 31, 1995 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
Bloomberg Financial Markets ("Bloomberg") Dealer Prepayment Estimates
Average, as estimated by several dealers in mortgage-related assets and
compiled by Bloomberg as of December 29, 1995, and Nonequity Residuals
Interests in CMOs with fixed rate Bond Classes are discounted at 14%, the
present value of the projected cash flows of the Company's Nonequity
Residual Interests would equal approximately $725,000. 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 $3,150,000. 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 $844 $780 $725 $677 $636
- - ----------------------------------------------------------------------------
</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 $1,161 $1,097 $1,039 $988 $941
Inverse Interest Only Bonds
----------------------------------------------------------
Discount Rate 22% 26% 30% 34% 38%
Present Value $2,570 $2,319 $2,111 $1,939 $1,791
- - ----------------------------------------------------------------------------
</TABLE>
<PAGE>
8 . Other Fair Value Disclosure
In addition to the Residual Interests and IO Bonds discussed above,
the Company has the following other financial instruments: cash and cash
equivalents, accrued interest and accounts 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.
9. Commercial Securitizations
Presented below is a schedule of commercial securitizations owned by
the Company:
(In thousands) Book Value
-------------------------
Purchase December 31, December 31,
Issuer and Series Price 1995 1994
- - --------------------------------------------------------------------------
CS First Boston 1994-CFB1 $975 $ 0 $ 944
Prudential Securities Series 1993-6 250 191 250
-------------------------
Total $191 $1,194
=========================
During the year ended December 31, 1995, the CS First Boston bond was
sold for $1,017,216 at a gain of $117,898.
10. Operating Real Estate Assets
During the year ended December 31, 1995, the Company acquired four
multifamily housing properties in California's Central Valley. The
purchase price of these properties was $29,305,000. Capitalized costs
differ from the purchase price due to capitalization of acquisition costs.
At December 31, 1995, the carrying value of operating real estate assets
(in thousands) consisted of:
Land $ 4,990
Buildings and Improvements 24,036
Personal Property 735
---------
Total 29,761
Less Accumulated (377)
Depreciation
---------
Net $29,384
=========
Cash disbursements in 1995 to acquire real estate assets totaled
$29,267,000 offset by the assumption of currently existing notes payable on
real estate of $18,675,000. Therefore, the net cash paid in 1995 for the
acquisition of real estate assets was $10,592,000.
11. Notes Payable on Real Estate
As part of the 1995 acquisition of multifamily residential properties,
existing secured debt totaling $18,675,000 was assumed. Some of the
assumed debt remains in the name of the seller, but the Company is
servicing the debt and receives all of the economic benefits from the
properties. In addition, new secured debt of $1,815,000 was obtained.
During 1995, principal payments on this debt were $127,900. As of December
31, 1995, notes payable on real estate consisted of:
<TABLE>
Principal Monthly
Balance Basis of Current Principal
December 31, Interest Interest Due and Interest
Property 1995 Rate Rate Date Payment
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shady Lane $1,387,088 Fixed 7.844% Dec. 1, 2014 $11,967
River Oaks 6,605,419 11th District 7.976% May 1, 1996 46,151
COFI + 3%
Villa San Marcos 6,055,762 1 year Treasury 8.375% Jan. 1, 1999 49,304
Bill + 3%
Four Creeks - I 1,813,821 Fixed 8.160% Dec. 1, 2005 13,521
Four Creeks - II 4,500,000 Prime Rate 9.750% June 30, 1996 36,562
+ 1.25%
- - -----------------------------------------------------------------------------------------------
Total $20,362,090 $157,505
===============================================================================================
</TABLE>
The scheduled principal payments to be made on notes payable on real
estate are as follows (in thousands):
Year Amount
---------------------------
1996 $11,244
1997 151
1998 163
1999 5,833
2000 70
Thereafter 2,901
---------------------------
Total $20,362
===========================
The Company intends to refinance approximately $17,000,000 of the
notes payable on real estate during 1996 at terms and rates more favorable
than currently exist.
12. Short-term Debt
At December 31, 1995 the Company owed $2,117,500 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, 1995 was 7.4335%. At December 31,
1994 short-term borrowings totaled $8,325,000 and had a weighted average
interest rate of 6.9776%. The Company has no committed lines of credit.
13. Stock Options
During 1995 the shareholders approved the 1995 Stock Option Plan (the
"Plan") covering 400,000 shares of the Company's common stock. The Plan
provides for the granting of non-qualified stock options to officers and
unaffiliated directors of the Company. Under the terms of the Plan, the
purchase price of shares subject to each option granted to officers will
not be less than 100% and options granted to unaffiliated directors will
not be less than 110% of their fair market value at the date of grant
reduced by the aggregate amount of dividends declared. Options granted are
exerciseable for no more than 10 years from the date of grant. During 1995
options covering 330,000 shares of the Company's common stock were issued
to officers of the Company and options covering 6,000 shares were issued to
non-affiliated directors. No expense was recorded related to the Plan in
1995.
At December 31, 1995, 64,000 shares were available for granting
further options. Options for 330,000 shares were outstanding at $2.25 per
share and options for 6,000 shares were outstanding at $2.26 per share, of
which all options outstanding were exerciseable. During 1995 no options
were exercised.
Options outstanding under the Plan are included in the weighted
average number of common shares outstanding if dilutive for purposes of
computing primary earnings per share.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
"Accounting for Stock Based Compensation", is effective for transactions
entered into for fiscal years beginning after December 15, 1995. As
permitted by SFAS 123, the Company will not change its method of accounting
for stock options but will provide the additional required disclosures
beginning in fiscal 1996.
14. Related Party Transactions
The Company has entered into an agreement (the "Management Agreement")
with the Manager which is renewable annually. In June 1995 the Board of
Directors approved a new Management Agreement through June 30, 1996 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 received a base
management fee of 3/8 of 1% per annum of the Company's average invested
assets. Effective October 1, 1995, the base management fee is .65% per
annum of the Company's average invested assets. However, the Manager has
voluntarily waived the increase in base management fee for the fourth
quarter of 1995 and first quarter of 1996. Additionally, the Manager
receives incentive compensation of 10% of the amount by which the total
return for any calendar year exceeds 12%. Management fees of $130,000,
$121,000 and $179,000 were earned in 1995, 1994 and 1993, respectively.
Within two months of the applicable year end, $32,000 of the 1995 and 1994
fees and $31,000 of the 1993 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 $90,000 of these Residual Interest Administration
fees were earned by the Manager and paid in 1995 as compared to $100,000 in
1994 and $110,000 in 1993. Effective October 1, 1995, the Residual
Interest Administration fee was discontinued. For 1995, 1994 and 1993, the
Manager did not charge a Residual Interest Administration Fee on those
Residual Interests for which it projected total 1996, 1995 and 1994 income
of less than $40,000. In addition, the Manager is reimbursed for certain
direct expenses incurred on behalf of the Company. At December 31, 1995,
1994 and 1993, all of these reimbursable expenses were paid to the Manager.
15. 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.
During the year ended December 31, 1995 the Company sold the residual
interest certificate and optional redemption rights related to the trust
representing its economic interest in TISMAC for $785,000 and recognized a
loss on disposition of $331,000. As a result of this transaction, the
Company no longer has the risk or reward of ownership and therefore the
accounts of TISMAC are no longer included in the consolidated financial
statements at December 31, 1995. The net assets of TISMAC (in thousands)
at the date of sale were:
Mortgage Certificates, net $ 32,690
Restricted Cash 191
Accrued Interest Receivable 278
Deferred Bond Issuance Costs 627
Other Assets 95
Collateralized Mortgage Obligations, net (32,492)
Accrued Interest Payable (273)
--------
Net Assets $ 1,116
========
16. Interest Income
Interest income from Mortgage Related Assets consisted of:
<TABLE>
Years Ended December 31,
-------------------------------------
(In thousands) 1995 1994 1993
- - ---------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Certificates, net $13,735 $18,298 $36,873
Short-term Investments 115 126 179
Residual Interests 1,483 3,650 186
Interest Only (IO) Bonds 1,128 2,208 1,997
Commercial Securitizations 89 51 0
- - ---------------------------------------------------------------------
Total $16,550 $24,333 $39,235
=====================================================================
=
</TABLE>
17. Pro Forma Data (Unaudited)
All acquisitions, consisting only of operating real estate assets in
1995, have been accounted for as purchases. Operations of the businesses
acquired have been included in the accompanying consolidated financial
statements from their respective dates of acquisition (ranging from January
to November 1995). The consolidated results of operations on a pro forma
basis as though these acquisitions had been made as of the beginning of the
Company's fiscal years 1994 to 1995 are as follows:
<TABLE>
Years Ended December 31,
---------------------------
(in thousands except per share data) 1995 1994
- - ---------------------------------------------------------------------
<S> <C> <C>
Income from Mortgage Related Assets $14,736 $23,995
Rental and Other Income 3,844 3,803
Net Income (Loss) (2,786) 2,573
Income (Loss) per share ($0.34) $0.32
</TABLE>
<TABLE>
18. Quarterly Financial Data (Unaudited)
- - ---------------------------------------------------------------------------------------------
(In thousands, First Second Third Fourth
except per share data) Quarter Quarter Quarter Quarter Total
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995
Interest Income
from Mortgage Related Assets $5,407 $4,794 $2,753 $1,782 $14,736
Income (Loss) from
Real Estate Operations 134 (21) (104) (298) (289)
Net Income (Loss) 363 190 (1,619) (1,513) (2,579)
Net Income (Loss) per Share $0.04 $0.03 ($0.20) ($0.19) ($0.32)
- - ---------------------------------------------------------------------------------------------
1994
Interest Income
from Mortgage Related Assets $6,484 $6,227 $5,877 $5,407 $23,995
Net Income 693 979 494 371 2,537
Net Income per Share $0.09 $0.12 $0.06 $0.04 $0.31
Dividends Declared per Share 0.00 0.00 0.02 0.00 0.02
- - ---------------------------------------------------------------------------------------------
</TABLE>
<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: March 27, 1996 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 March 27, 1996
- - ----------------------- Principal Executive Officer
Lorraine O. Legg
/s/ John E. Castello Executive Vice President March 27, 1996
- - ----------------------- (Principal Financial Officer)
John E. Castello
/s/ Michael J. Stone Controller March 27, 1996
- - -----------------------
Michael J. Stone
/s/ Patricia M. Howe Director, March 27, 1996
- - ----------------------- Chairman of the Board
Patricia M. Howe
/s/ John D. Boyce Director March 27, 1996
- - -----------------------
John D. Boyce
/s/ Robert H. Edelstein Director March 27, 1996
- - -----------------------
Robert H. Edelstein
/s/ Douglas B. Fletcher Director March 27, 1996
- - -----------------------
Douglas B. Fletcher
/s/ Robert W. Ledoux Director March 27, 1996
- - -----------------------
Robert W. Ledoux
/s/ Melvin W. Petersen Director March 27, 1996
- - -----------------------
Melvin W. Petersen
/s/ Will M. Storey Director March 27, 1996
- - -----------------------
Will M. Storey
<TABLE>
SCHEDULE III
TIS MORTGAGE INVESTMENT COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<CAPTION>
Column A Column B Column C Column D
Cost
Initial Cost to Company Subsequently
----------------------- Capitalized
Buildings and --------------
Description Encumbrances Land Improvements Improvements
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shady Lane Village
Visalia, CA $1,387 $379 $1,725 $38
River Oaks
Hanford, CA 6,605 905 7,096 20
Villa San Marcos
Fresno, CA 6,056 2,549 7,459
Four Creeks Village
Visalia, CA 6,314 1,157 7,698
- - ---------------------------------------------------------------------------------------
$20,362 $4,990 $23,978 $58
=======================================================================================
</TABLE>
<TABLE>
SCHEDULE III cont.
TIS MORTGAGE INVESTMENT COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<CAPTION>
Column E Column F Column G Column H Column I
Gross Amount at which Carried
at Close of Period Life on
------------------------ which
Building & Accumulated Date of Date Depreciation
Description Land Improvements Total Depreciation Construction Acquired is Computed
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shady Lane Village
Visalia, CA $379 $1,763 $2,142 $42 1985 1995 40 years
River Oaks
Hanford, CA 905 $7,116 $8,021 148 1984 1995 40 years
Villa San Marcos
Fresno, CA 2,549 7,459 10,008 93 1991 1995 40 years
Four Creeks Village
Visalia, CA 1,157 7,698 8,855 56 1986-91 1995 40 years
- - -------------------------------------------------------------------------------------------------------------------------
$4,990 $24,036 $29,026 $339
==============================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,926
<SECURITIES> 113,818
<RECEIVABLES> 1,672
<ALLOWANCES> 4,277
<INVENTORY> 0
<CURRENT-ASSETS> 115,139
<PP&E> 29,761
<DEPRECIATION> 377
<TOTAL-ASSETS> 145,247
<CURRENT-LIABILITIES> 133,266
<BONDS> 0
<COMMON> 8
0
0
<OTHER-SE> 11,973
<TOTAL-LIABILITY-AND-EQUITY> 145,247
<SALES> 0
<TOTAL-REVENUES> 16,942
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,398
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,123
<INCOME-PRETAX> (2,579)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,579)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,579)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report dated March 4, 1996, included in the Form 10-K,
into the Corporation's previously filed Registration Statements on Form S-3
(File No. 33-44526) and Form S-8 (File No. 33-96960).
/s/ Arthur Andersen LLP
-----------------------
San Francisco, California
March 25, 1996
TIS MORTGAGE INVESTMENT COMPANY
1995 STOCK OPTION PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
-----------------------------------
This NONQUALIFIED STOCK OPTION AGREEMENT, dated as of June 21, 1995
(the "Grant Date"), is between TIS Mortgage Investment Company (the
"Company"), and John D. Boyce (the "Optionee"), an Unaffiliated Director
(as defined in the Company's By-Laws) of the Company.
WHEREAS, the Company desires to afford the Optionee an opportunity
to purchase shares of common stock of the Company ("Common Shares") as
hereinafter provided, in accordance with the provisions of the TIS Mortgage
Investment Company 1995 Stock Option Plan (the "Plan"), a copy of which is
attached hereto;
NOW, THEREFORE, in consideration of the mutual covenants
hereinafter set forth and for other good and valuable consideration, the
parties hereto, intending to be legally bound hereby, agree as follows:
1. Grant of Option. The Company hereby grants to the Optionee
the right and option (the "Option") to purchase all or any part of an
aggregate of 1,000 shares of the Company's common stock, par value $0.001
per share ("Common Shares"). The Option is in all respects limited and
conditioned as hereinafter provided, and is subject in all respects to the
terms and conditions of the Plan now in effect and as it may be amended
from time to time (which terms and conditions are incorporated herein by
reference, made a part hereof, and shall control in the event of any
conflict with any other terms of this Option Agreement). It is intended
that the Option granted hereunder be a nonqualified stock option ("NQSO")
and not an incentive option ("ISO") as such term is defined in section 422
of the Internal Revenue Cost of 1986, as amended (the "Code").
2. Purchase Price. The purchase price of the Common Shares
covered by this Option shall be $2.26 per Common Share, which price is 100%
of the fair market value of such Common Share. This purchase price shall
be reduced (but not below 50% of the amount in the preceding sentence) by
the amount of cash dividends per Common Share declared by the Company
between the Grant Date and the date the Option is exercised.
3. Term. Unless earlier terminated pursuant to any provision of
the Plan or of this Option Agreement, this Option shall expire on June 21,
2005 (the "Expiration Date"), which date is not more than 10 years from the
Grant Date. This Option shall not be exercisable on or after the
Expiration Date.
4. Exercise of Option. Subject to Section 6(d)(v) of the Plan
and any other applicable provisions contained in the Plan and in this
Option Agreement, this Option may be exercised at any time commencing on
the Grant Date, in whole or in part, until the expiration of the term of
this Option as set forth in Paragraph 3 or until other termination of the
Option.
<PAGE>
5. Termination of Board Membership. If such Optionee's
membership on the Board of Directors of the Company is terminated prior to
the Expiration Date, such Option may be exercised, to the extent of the
Common Shares with respect to which the Optionee could have exercised it on
the date of termination, at any time prior to the earlier of (I) the
Expiration Date, or (ii) 12 months after termination of said membership.
6. Disability. If such Optionee's membership on the Board of
Directors of the Company is terminated prior to the Expiration Date by
reason of such Optionee's disability (within the meaning of section
22(e)(3) of the Code), such Option may be exercised, to the extent of the
Common Shares with respect to which the Optionee could have exercised it on
the date of such termination, at any time prior to the earlier of (I) the
Expiration Date, or (ii) 12 months after termination of said membership by
reason of such disability.
7. Death. If such Optionee dies during his membership on the
Board of Directors of the Company and prior to the Expiration Date or if
Optionee dies after his membership on the Board is terminated but prior to
the earlier of the Expiration Date or the expiration of the period
determined under Paragraph 5 or Paragraph 6, such Option may be exercised,
to the extent of the Common Shares with respect to which the Optionee could
have exercised it on the date of his death, at any time prior to the
earlier of (I) the Expiration Date, or (ii) 12 months after the Optionee's
death.
8. Method of Exercising Option. Such to the terms and conditions
of this Option Agreement and the Plan, the Option may be exercised by
written notice to the Company at its principal office. Such notice (a
suggested form of which is attached) shall state the election to exercise
the Option and the number of Common Shares with respect to which it is
being exercised, be signed by the person or persons so exercising the
Option, and be accompanied by payment of the full Option price for such
Common Shares. The Option price shall be paid to the Company in cash, or
by certified check, bank draft or postal or express money order.
Upon receipt of such notice and payment, the Company shall deliver
a certificate or certificates representing the Common Shares with respect
to which the Option is so exercised. Such certificate(s) shall be
registered in the name of the person or persons so exercising the Option
(or, if the Option is exercised by the Optionee and if the Optionee so
requests in the notice exercising the Option, shall be registered in the
name of the Optionee and Optionee's spouse, jointly, with right of
survivorship) and shall be delivered as provided above to or upon the
written order of the person or persons exercising the Option. In the event
the Option is exercised by any person or persons after the death or
disability of the Optionee, the notice shall be accompanied by appropriate
proof of the right of such person or persons to exercise the Option.
9. Common Shares to be Purchased for Investment. The Company may
require the person or persons exercising the Option to provide satisfactory
assurances that the Common Shares acquired upon such exercise are being
acquired for investment and not with a view to distribution, and the
certificates representing such Common Shares may be legended accordingly.
<PAGE>
10. Non-Transferability of Option. This Option is not assignable
or transferable, in whole or in part, by the Optionee other than by will or
by the laws of descent and distribution. During the lifetime of the
Optionee, the Option shall be exercisable only by the Optionee or, in the
event of his disability, by his legal representative.
11. Governing Law. This Option Agreement shall be construed in
accordance with, and its interpretation shall be governed by, Maryland law.
IN WITNESS WHEREOF, TIS MORTGAGE INVESTMENT COMPANY has caused this
Nonqualified Stock Option Agreement to be duly executed by its duly
authorized officers, and the Optionee has hereunto set his hand and seal,
all on the day and year first above written.
ATTEST: TIS MORTGAGE INVESTMENT COMPANY
[SEAL]
_____________________ By:________________________________
Secretary
JOHN D. BOYCE
_____________________ ___________________________________
Witness Optionee
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY
1995 STOCK OPTION AND STOCK GRANT PLAN
Notice of Exercise of Nonqualified Stock Option
I hereby exercise the nonqualified stock option granted to me
pursuant to a Nonqualified Stock Option Agreement dated as of June 21,
1995, by TIS Mortgage Investment Company the "Company"), with respect to
the following number of shares of the Company's common stock ("Common
Shares"), par value $0.001 per Common Shares, covered by said option:
Number of Common Shares to be purchased __________
Option price per Common Share $__________
Total option price $__________
Enclosed is cash or my check, bank draft or postal or express money order
in the amount of $__________ in full payment for such Common Shares.
Please have the certificate or certificates representing the
purchased Common Shares registered in the following name or names*:
____________________; and sent to: ____________________________________.
DATED: ____________, 19___.
_______________________________
Optionee's Signature
_________________
*Certificates may be registered in the name of the Optionee alone or
in the joint names (with right of survivorship) of the Optionee and his or
her spouse.
<PAGE>
Schedule of Omitted Contracts
-----------------------------
Nonqualified Stock Option Agreements identical to the Agreement dated June
21, 1995 with John D. Boyce. The omitted agreements are between Registrant
and:
Robert H. Edelstein
Douglas B. Fletcher
Robert W. Ledoux
Harvie M. Merrill
Will M. Storey
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY
1995 STOCK OPTION PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
This NONQUALIFIED STOCK OPTION AGREEMENT, dated as of September 13,
1995 (the "Grant Date"), is between TIS Mortgage Investment Company (the
"Company"), and John E. Castello (the "Optionee"), an officer of the
Company.
WHEREAS, the Company desires to afford the Optionee an opportunity
to purchase shares of the Company's common stock, par value $0.001 per
share ("Common Shares") as hereinafter provided, in accordance with the
provisions of the TIS Mortgage Investment Company 1995 Stock Option Plan
(the "Plan"), a copy of which is attached hereto;
NOW, THEREFORE, in consideration of the mutual covenants
hereinafter set forth and for other good and valuable consideration, the
parties hereto, intending to be legally bound hereby, agree as follows:
1. Grant of Option. The Company hereby grants to the Optionee
the right and option (the "Option") to purchase all or any part of an
aggregate of 50,000 shares of the Company's common stock, par value $0.001
per share ("Common Shares"). The Option is in all respects limited and
conditioned as hereinafter provided, and is subject in all respects to the
terms and conditions of the Plan now in effect and as it may be amended
from time to time (which terms and conditions are incorporated herein by
reference, made a part hereof, and shall control in the event of any
conflict with any other terms of this Option Agreement). It is intended
that the Option granted hereunder be a nonqualified stock option ("NQSO")
and not an incentive option ("ISO") as such term is defined in section 422
of the Internal Revenue Cost of 1986, as amended (the "Code").
2. Purchase Price. The purchase price of the Common Shares
covered by this Option shall be $2.25 per Share, which price is 100% of the
fair market value of such Common Stock on the Grant Date. This exercise
price shall be reduced (but not below 50% of the amount in the preceding
sentence) by the amount of cash dividends per Common Stock declared by the
Company between the Grant Date and the date the Option is exercised.
3. Term. Unless earlier terminated pursuant to any provision of
the Plan or of this Option Agreement, this Option shall expire on September
12, 2005 (the "Expiration Date"), which date is not more than 10 years from
the Grant Date. This Option shall not be exercisable on or after the
Expiration Date.
4. Exercise of Option. Subject to Section 6(d)(v) of the Plan
and any other applicable provisions contained in the Plan and in this
Option Agreement, this Option may be exercised at any time commencing on
the Grant Date, in whole or in part, until the expiration of the term of
this Option as set forth in Paragraph 3 or until other termination of the
Option.
<PAGE>
5. Termination of Service for any Reason, Including Death and
Disability. If such Optionee's service with the Company is terminated
prior to the Expiration Date for any reason, including the Optionee's death
or disability, the Option may be exercised by the Optionee, or in the event
of the Optionee's death by the Optionee's estate, personal representative
or beneficiary, to the extent of the number of shares with respect to which
the Optionee could have exercised it on the date of termination, at any
time prior to the Expiration Date..
6. Method of Exercising Option. Such to the terms and conditions
of this Option Agreement and the Plan, the Option may be exercised by
giving written notice of exercise to the Company at its principal office.
Such notice (a suggested form of which is attached) shall state the
election to exercise the Option and the number of shares with respect to
which it is being exercised, be signed by the person or persons so
exercising the Option, and be accompanied by payment of the full Option
price for such shares. The Option price shall be paid to the Company in
cash, or by certified check, bank draft or postal or express money order.
Upon receipt of such notice and payment, the Company shall deliver
a certificate or certificates representing the Common Stock with respect to
which the Option is so exercised. Such certificate(s) shall be registered
in the name of the person or persons so exercising the Option (or, if the
Option is exercised by the Optionee and if the Optionee so requests in the
notice exercising the Option, shall be registered in the name of the
Optionee and Optionee's spouse, jointly, with right of survivorship) and
shall be delivered as provided above to or upon the written order of the
person or persons exercising the Option. In the event the Option is
exercised by any person or persons after the death or disability of the
Optionee, the notice shall be accompanied by appropriate proof of the right
of such person or persons to exercise the Option.
7. Common Shares to be Purchased for Investment. The Company may
require the person or persons exercising the Option to provide satisfactory
assurances that the Common Shares acquired upon such exercise are being
acquired for investment and not with a view to distribution, and the
certificates representing such Common Shares may be legended accordingly.
8. Non-Transferability of Option. This Option is not assignable
or transferable, in whole or in part, by the Optionee other than by will or
by the laws of descent and distribution. During the lifetime of the
Optionee, the Option shall be exercisable only by the Optionee or, in the
event of his disability, by his legal representative.
9. Governing Law. This Option Agreement shall be construed in
accordance with, and its interpretation shall be governed by, Maryland law.
<PAGE>
IN WITNESS WHEREOF, TIS MORTGAGE INVESTMENT COMPANY has caused this
Nonqualified Stock Option Agreement to be duly executed by its duly
authorized officers, and the Optionee has hereunto set his hand and seal,
all on the day and year first above written.
ATTEST: TIS MORTGAGE INVESTMENT COMPANY
[SEAL]
_____________________ By:________________________________
Secretary
JOHN E. CASTELLO
_____________________ ___________________________________
Witness Optionee
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY
1995 STOCK OPTION AND STOCK GRANT PLAN
Notice of Exercise of Nonqualified Stock Option
I hereby exercise the nonqualified stock option granted to me
pursuant to a Nonqualified Stock Option Agreement dated as of September 13,
1995, by TIS Mortgage Investment Company the "Company"), with respect to
the following number of shares of the Company's common stock ("Common
Shares"), par value $0.001 per Common Shares, covered by said option:
Number of Common Shares to be purchased __________
Option price per Common Share $__________
Total option price $__________
Enclosed is cash or my check, bank draft or postal or express money order
in the amount of $__________ in full payment for such Common Shares.
Please have the certificate or certificates representing the
purchased Common Shares registered in the following name or names*:
____________________; and sent to: ____________________________________.
DATED: ____________, 19___.
_______________________________
Optionee's Signature
_________________
*Certificates may be registered in the name of the Optionee alone or
in the joint names (with right of survivorship) of the Optionee and his or
her spouse.
<PAGE>
Schedule of Omitted Contracts
-----------------------------
Nonqualified Stock Option Agreements similar to the Agreement dated
September 13, 1995 with John E. Castello. The omitted agreements are
between Registrant and:
Patricia M. Howe for 100,000 shares
Lorraine O. Legg for 150,000 shares
Patrick Maguire for 5,000 shares
Soodabeh Shakerin for 10,000 shares
Michael J. Stone for 15,000 shares
MANAGEMENT AGREEMENT
THIS AGREEMENT, dated as of June 19, 1995, by and between TIS MORTGAGE
INVESTMENT COMPANY, a Maryland corporation (the "Company"), and TIS
FINANCIAL SERVICES, INC., a Delaware corporation (the "Manager").
W I T N E S S E T H:
WHEREAS, the Company intends to acquire and hold real estate and
Mortgage Assets and expects to qualify for the tax benefits accorded by
Sections 856 through 860 of the Internal Revenue Code of 1986; and
WHEREAS, the Company desires to retain the Manager to manage the
investments of the Company and to perform administrative services for the
Company in the manner and on the terms set forth herein;
NOW THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto agree as follows:
SECTION 1. Definitions. Capitalized terms used herein shall have the
respective meanings assigned them below,
(a) "Affiliate" means, when used with reference to a specified
Person, (i) any Person that directly or indirectly controls or is
controlled by or is under common control with the specified Person, (ii)
any Person that is an officer, director, employee, partner or trustee of,
or serves in a similar capacity with respect to, the specified Person, or
of which the specified Person is an officer, director, employee, partner or
trustee of or with respect to which the specified Person serves in a
similar capacity, (iii) any Person that, directly or indirectly, is the
beneficial owner of 5% or more of any class of equity securities issued by
the specified Person, or any Person 5% or more of whose equity securities
are, directly or indirectly, beneficially owned by such other Person, and
(iv) any Person that has a material business or professional relationship
with the specified Person, provided, however, that a Person shall not be
deemed to be an Affiliate of the Manager or of any Person which is an
Affiliate of the Manager solely by reason of serving as a director of one
or more investment companies of which the Manager or an Affiliate of the
Manager serves as investment advisor or in any other capacity;
(b) "Affiliated Issuer" means any Person that issues Structured
Securities and which is organized by or on behalf of the Company;
(c) "Average Invested Assets" for any period means the average of the
aggregate book value of the consolidated assets of the Company, its trusts
and subsidiaries, before reserves for depreciation or bad debts or other
similar non-cash reserves, less the book value of the issued and
outstanding Structured Securities of the Company, its trusts and
subsidiaries, computed by taking the average of such values at the end of
each month during such period;
(d) "Board of Directors" means the Board of Directors of the Company;
(e) "FHLMC" or "Freddie Mac" means the Federal Home Loan Mortgage
Corporation, a corporation organized and existing under the laws of the
United States, or any successor or assign or any resulting, surviving or
transferee entity;
(f) "FNMA" means the Federal National Mortgage Association, a
corporation organized and existing under the laws of the United States, or
any successor or assign or any resulting, surviving or transferee entity;
(g) "FNMA Certificate" means a FNMA mortgage pass-through
certificate;
(h) "Freddie Mac Certificate" means a Freddie Mac mortgage
participation certificate;
(i) "GNMA" means the Government National Mortgage Association or any
successor or assign or any resulting, surviving or transferee entity;
(i) "GNMA Certificate" means a fully-modified pass-through mortgage-
backed certificate guaranteed by GNMA;
(k) "Mortgage Assets" means, collectively, Mortgage Instruments,
Residual Interests and Structured Securities;
(1) "Mortgage Certificates" means, collectively (i) GNMA Certificates,
(ii) Freddie Mac Certificates, (iii) FNMA Certificates and (iv) Structured
Securities;
(m) "Mortgage Instruments" means, collectively, Mortgage Certificates
and Mortgage Loans;
(n) "Mortgage Loans" means, collectively, (i) mortgage loans which
comply with the requirements for inclusion in a guaranty program sponsored
by either FNMA, Freddie Mac or GNMA, and (ii) mortgage loans which are in
conformance with the investment criteria and policies adopted by the Board
of Directors and which meet the requirements of the guaranty programs of
any of FNMA, FHLMC or GNMA, except for the requirements with respect to the
maximum original outstanding principal amounts of such mortgage loans and
such other particular requirements of such programs identified by the Board
of Directors;
(o) "Person" means a natural person, corporation, partnership,
association, trust (including any beneficiary thereof), company, joint
venture, joint stock company, unincorporated organization or other entity;
(p) "Residual Interests" means residual interests in Structured
Securities that entitle the holder to receive net income from the
collateral pledged to secure such securities;
(q) "Securities Administration Services" means the services provided
by the Manager pursuant to Section 2 (n) hereof;
(r) "Securities Issuance Services" means the services provided by the
Manager pursuant to Section 2 (m) hereof;
(s) "Series of Structured Securities" means a separate series of
Structured Securities issued or caused to be issued by the Company or an
Affiliated Issuer pursuant to an indenture or other agreement;
(t) "Structured Securities" means, collectively, collateralized
mortgage obligations, mortgage-collateralized securities and mortgage pass-
through securities;
(u) "Total Return" means the sum of (i) the dividends and
distributions declared by the Board of Directors during a calendar year
that are payable to holders of shares of common stock of the Company plus
(ii) the total shareholders' equity as reported on the audited consolidated
balance sheet of the Company at the end of the year less the total
shareholders' equity as reported on the audited consolidated balance sheet
of the Company at the end of the preceding year, which sum shall be divided
by the weighted average number of shares of common stock of the Company
that were outstanding during the year; and
(v) "Unaffiliated Directors" means those members of the Board of
Directors who (i) are not Affiliates of the Manager or of any person that
is an Affiliate of the Manager and (ii) are not employed by, or receiving
any compensation (except for serving as a director) from, the Company.
SECTION 2. General Duties of the Manager. Subject to the supervision
and control of the Board of Directors, the Manager shall provide services
to the Company, and to the extent directed by the Board of Directors, shall
provide similar services to any Affiliated Issuer or subsidiary of the
Company as follows:
(a) serve as the Company's consultant with respect to formulation of
criteria regarding the assets to be acquired and held by the Company, and
recommend policy guidelines to the Board of Directors;
(b) issue commitments on behalf of the Company to purchase Mortgage
Instruments and Residual Interests;
(c) represent the Company in connection with the purchase and
accumulation of Mortgage Assets;
(d) furnish reports and statistical and economic research to the
Company regarding the Company's assets and activities and the services
performed for the Company by the Manager;
(e) monitor and provide to the Board of Directors on an ongoing basis
price information and other data obtained from certain nationally
recognized dealers that maintain markets in Mortgage Instruments identified
by the Board of Directors from time to time, and provide data and advice to
the Board of Directors in connection with the identification of such
dealers;
(f) provide the executive and administrative personnel, office space
and services required in rendering services to the Company;
(g) administer or supervise the administration of the day-to-day
operations of the Company and perform or supervise the performance of such
other administrative functions necessary in the management of the Company
as may be agreed upon by the Manager and the Board of Directors, including
the collection of revenues and the payment of the Company's debts and
obligations and maintenance of appropriate computer services to perform
such administrative functions;
(h) communicate or super-vise communications on behalf of the Company
with the holders of the equity and debt securities of the Company as
required to satisfy the reporting and other requirements of any
governmental bodies or agencies and to maintain effective relations with
such holders;
(i) to the extent not otherwise subject to an agreement executed by
the Company, designate a servicer for those Mortgage Loans sold to the
Company by originators that have elected not to service such loans and
arrange for the monitoring and administering of such servicer;
(j) counsel the Company in connection with policy decisions to be
made by the Board of Directors;
(k) engage in hedging activities on behalf of the Company consistent
with the Company's status as a real estate investment trust;
(1) invest or reinvest any money of the Company;
(m) provide to the Company itself or through another appropriate
party all services in connection with the issuance of each Series of
Structured Securities issued by the Company or any Affiliated Issuer
including:
(i) serving as consultant with respect to the structuring of
each such Series of Structured Securities;
(ii) negotiating the rating requirements with rating agencies
with respect to the rating of each such Series of Structured
Securities;
(iii) accumulating and reviewing all Mortgage Instruments
which may secure or constitute the mortgage pool for each such Series
of Structured Securities;
(iv) negotiating all agreements and credit enhancements with
respect to each such Series of Structured Securities;
(v) issuing commitments on behalf of the Company to purchase
Mortgage Instruments to be used to secure or constitute the mortgage
pool for each such Series of Structured Securities; and
(vi) organizing and administering all activities in connection
with the closing of each such Series of Structured Securities
including all negotiations and agreements with underwriters, trustees,
servicers, master servicers and other parties;
(n) provide to the Company itself or through another appropriate
party all services in connection with the administration of each Series of
Structured Securities issued by the Company or any Affiliated Issuer
including:
(i) communicating on behalf of the Company with the holders of
each such Series of Structured Securities as required to satisfy the
reporting and tax informational requirements of any governmental
bodies or agencies with respect to holders of each such Series of
Structured Securities and as required to satisfy the provisions of any
indenture, pooling and servicing agreement or other agreement with
respect to each such Series of Structured Securities;
(ii) determining the amount of and making all payments with
respect to each such Series of Structured Securities and, if requested
by the Company, directing investments in accordance with the terms of
any indenture, pooling and servicing agreement or other agreement
relating to each such Series of Structured Securities;
(iii) furnishing all reports and statistical information
required with respect to the administration of each such Series of
Structured Securities;
(iv) working with the Company and with accountants, counsel,
trustees, servicers, master servicers and other parties with respect
to the administration of each such Series of Structured Securities;
(v) distributing all excess or residual payments with respect to
each such Series of Structured Securities as directed by the Company
or any indenture, pooling and servicing agreement or other agreement
with respect to each such Series of Structured Securities;
(vi) monitoring and providing on an on-going basis information
with respect to each such Series of Structured Securities as is
required by the Company; and
(vii) advising the Company with respect to the administration
of each such Series of Structured Securities;
(o) pool Mortgage Loans purchased by the Company in accordance with
the requirements of FHLMC, FNMA or GNMA, as appropriate, and seek to have
Mortgage Certificates issued which are supported by Mortgage Loans, bear
all responsibilities to FHLMC, FNMA or GNMA with respect to such Mortgage
Loans and Mortgage Certificates, and service such Mortgage Loans after the
issuance of the Mortgage Certificates in accordance with the requirements
of FHLMC, FNMA or GNMA;
(p) monitor and administer the servicing of the Company's Mortgage
Loans, other than Mortgage Loans pooled to back Mortgage Certificates or
pledged to secure Structured Securities, including serving as the Company's
consultant with respect to the servicing of loans; collecting information
and submission of reports pertaining to the Mortgage Loans and to moneys
remitted to the Manager or the Company by servicers; periodically reviewing
and evaluating the performance of each servicer to determine its compliance
with the terms and conditions of the servicing agreement and, if deemed
appropriate, recommending to the Company the termination of such servicing
agreement; acting as a liaison between servicers and the Company and
working with servicers to the extent necessary to improve their servicing
performance; reviewing recommendations as to fire losses, easement problems
and condemnation, delinquency and foreclosure procedures with regard to the
Mortgage Loans; reviewing servicers, delinquency, foreclosing and other
reports on Mortgage Loans; supervising claims filed under any mortgage
insurance policies; and enforcing the obligation of any servicer to
repurchase Mortgage Loans from the Company;
(q) manage or supervise the management of multi-family properties and
other real estate directly or indirectly beneficially owned or controlled
by the Company, and provide to the Board of Directors whenever it considers
the continuation of this Agreement a survey of competitive multi-family
property management fee arrangements; and
(r) perform or supervise the performance of such other services as
may be required from time to time for management and other activities
relating to the assets of the Company as the Manager or the Board of
Directors shall deem appropriate under the particular circumstances.
SECTION 3. Additional Activities of Manager. Nothing herein shall
prevent or restrict the Manager or any of its Affiliates from engaging in
any business or rendering services of any kind to any other person or
entity, including the purchase of, or rendering advice to others
purchasing, assets or Mortgage Assets which meet the Company's policies and
criteria, except that the Manager and its Affiliates are prohibited from
providing, directly or indirectly, any such services to any residential
mortgage real estate investment trust other than the Company and its
subsidiaries, unless the provision of such services is approved by a
majority of the Unaffiliated Directors. Directors, partners, officers,
employees and agents of the Manager or Affiliates of the Manager may serve
as directors, partners, officers, employees, agents, nominees or
signatories for the Company or any subsidiary of the Company. When
executing documents or otherwise acting in such capacities for the Company,
such persons shall use their respective titles in the Company.
SECTION 4. Records; Confidentiality. The Manager shall maintain
appropriate books of account and records relating to services performed
hereunder, and such books of account and records shall be accessible for
inspection by representatives of the Company or any subsidiary of the
Company at any time during normal business hours. The Manager shall keep
confidential any and all information obtained in connection with the
services rendered hereunder and shall not disclose any such information to
nonaffiliated third parties except with the prior written consent of the
Board of Directors.
SECTION 5. Obligations of Manager. The Manager shall require each
seller or transferor of Mortgage Instruments to the Company to make such
representations and warranties regarding such mortgage Instruments as may,
in the judgment of the Manager, be necessary and appropriate. In addition,
the Manager shall take such other action as it deems necessary or
appropriate with regard to the protection of the Company's investments.
SECTION 6. Compensation.
(a) Base Fee. The Company shall pay to the Manager, for services
rendered under this Agreement, a base management fee in an amount equal to
0.65% per annum of the Average Invested Assets of the Company during each
calendar year. An amount equal to 0.1625% of the Average Invested Assets
for each calendar quarter (or in the case of a partial calendar quarter a
pro rata amount based on the number of days elapsed during such quarter),
shall be paid to the Manager within 60 days after the end of such quarter
as payment on account of the base management fee, subject to adjustment
under Section 6(c) of this Agreement.
(b) Incentive Compensation. The Company shall pay the Manager as
incentive compensation for any calendar year an amount equal to 10% of the
amount by which the Total Return for the year exceeds 0.12 (12%). Such
amount shall be paid to the manager within fifteen days after the audited
financial statements of the Company for the year have been completed.
(c) Adjustment and Payment. The Manager shall compute the estimated
compensation payable under Section 6(a) hereof within 45 days after the end
of each calendar quarter. A copy of such computations shall be thereafter
promptly submitted to each member of the Board of Directors, whereupon such
compensation shall be due and payable. The aggregate amount of the
Manager's compensation payable under Section 6(a) hereof for each calendar
year shall be determined within fifteen days after the audited financial
statements of the Company for the year have been completed, and any excess
owed to, or shortfall owed by, the Manager as a result of the payments on
account with respect to such compensation shall be promptly remitted by, or
paid to, the Company.
SECTION 7. Expenses of the Manager.
(a) Without regard to the compensation received hereunder by the
Manager, the Manager shall bear the following expenses, except to the
extent that such expenses are obligations of the Company pursuant to
Section 8 of this Agreement:
(i) Employment expenses of the personnel employed by the
Manager, including, but not limited to, salaries, wages, payroll
taxes, and the cost of employee benefit plans;
(ii) Travel and other expenses of directors, officers and
employees of the Manager, except expenses of such persons who are
directors, officers or employees of the Company or any subsidiary of
the Company incurred in connection with attending meetings,
conferences or conventions that relate solely to the business affairs
of the Company or any subsidiary of the Company;
(iii) Rent, telephone, utilities, office furniture, equipment
and machinery (including computers) incurred in connection with the
performance of the Manager's obligations hereunder;
(iv) Any cost of computer services incurred in connection with
the performance of the Manager's obligations hereunder.
(v) All expenses connected with communications to holders of
each Series of Structured Securities issued by or on behalf of the
Company or any subsidiary of the Company and with governmental
agencies and the other bookkeeping and clerical work necessary in
maintaining relations with holders of such securities and in complying
with the continuous reporting and other requirements of governmental
bodies or agencies, including, without limitation, any costs of
computer services in connection with this function, the cost of
printing and mailing certificates for such securities and reports to
third parties required under any indenture or other agreement to which
the Company or any subsidiary of the Company is a party;
(vi) If the Manager or an Affiliate acts as bond administrator
for a Series of Structured Securities, all expenses relating to the
performance of the services set forth in Sections 2(m) and 2(n) of
this Agreement for such Series of Structured Securities; and
(vii) Miscellaneous administrative expenses incurred in
supervising and monitoring the Company's investments or any
subsidiary's investments or relating to performance by the Manager of
its functions hereunder.
(b) Notwithstanding any other provisions of this Agreement, the
Company shall reimburse the Manager for its costs in providing off-site
operating, management and supervisory services with respect to the
properties referred to in Section 2(q) of this Agreement, whether such
services are provided by the Manager or on its behalf, but such
reimbursement shall not exceed 5% of gross rents received from such
properties by the Company in the aggregate.
SECTION 8. Expenses of the Company. The Company or any subsidiary of
the Company shall pay all of its expenses, except those that are the
responsibility of the Manager pursuant to Section 7 of this Agreement, and
without limiting the generality of the foregoing, the following expenses of
the Company or any subsidiary of the Company shall be paid by the Company
or such subsidiary and shall not be paid by the Manager:
(a) Expenses related to raising capital, including the cost of
borrowed money, interest payments, discounts, loan and commitment fees,
points and any other related charges;
(b) All license fees and all taxes applicable to the Company or any
subsidiary of the Company, including interest and penalties thereon;
(c) Legal, audit, accounting, underwriting, brokerage, listing,
rating agency, registration and other fees, printing, engraving and other
expenses and taxes incurred in connection with the issuance, sale,
distribution, transfer, registration and stock exchange listing of the
securities of the Company or-of any subsidiary of the Company;
(d) Fees and expenses paid to employees, agents, advisers and
independent contractors, consultants, managers, and other agents (other
than the Manager) employed directly by the Company or any subsidiary of the
Company or by the Manager at the request of the Company or such subsidiary
for the account of the Company or the subsidiary;
(e) Expenses connected with the acquisition, disposition, operation,
maintenance, management and ownership of the assets of the Company or any
subsidiary of the Company, including, without limitation, commitment,
appraisal, guaranty and hedging fees, brokerage and acquisition fees and
commissions, ad valorem taxes, costs of foreclosure, maintenance, repair
and improvement of property, maintenance and protection of the lien of
mortgages, property management fees, loan origination fees, servicing and
master servicing fees, legal fees, premiums for insurance on property owned
by the Company or any subsidiary of the Company and insurance and abstract
expenses; provided, that with regard to brokerage fees, unless approved by
a majority of the Unaffiliated Directors, neither the Manager nor any of
its Affiliates shall charge a brokerage commission or similar fee to the
Company or any subsidiary of the Company in connection with the
acquisition, disposition or ownership of the assets of the Company or the
subsidiary;
(f) Expenses of organizing, reorganizing or dissolving the Company or
any subsidiary of the Company;
(g) All insurance costs not included in paragraph (e) hereof and
incurred by the Company or any subsidiary of the Company, including without
limitation, the cost of officer and director liability insurance;
(h) Expenses connected with payments of dividends or interest or
distributions in cash or any other form made or caused to be made by the
Board of Directors to holders of the securities of the Company or any
subsidiary of the Company;
(i) All fees and expenses incurred in connection with the issuance of
Structured Securities issued or caused to be issued by the Company,
including trustee, accounting and auditing, consulting, legal, rating
agency, registration, printing and engraving, tax advisory and tax
preparation fees and expenses, underwriting discounts, issued discounts,
master servicing fees, insurance premiums and costs of credit enhancements;
(j) All expenses connected with communications to holders of equity
securities or debt securities of the Company or any -subsidiary of the
Company and with governmental agencies and the other bookkeeping and
clerical work necessary in maintaining relations with holders of such
securities and in complying with the continuous reporting and other
requirements of governmental bodies or agencies, including, without
limitation, any costs of computer services in connection with this
function, the cost of printing and mailing certificates for such securities
and proxy solicitation materials and reports to holders of the Company's or
any subsidiary's securities and reports to third parties required under any
indenture to which the Company or any subsidiary of the Company is a party,
except such expenses that are the responsibility of the Manager as set
forth in Section 7 hereof;
(k) Fees and charges of any transfer agent or registrar;
(1) Fees and expenses paid to directors of the Company or any
subsidiary of the Company, except, in each case, directors who are
Affiliates of the Manager;
(m) Legal, accounting and auditing fees, and tax advisory and tax
preparation fees, relating to the operations of the Company or any
subsidiary;
(n) Legal, accounting and auditing fees, tax advisory and tax
preparation fees, consulting fees and expenses relating to the
administration of Structured Securities issued or caused to be issued by
the Company;
(o) Any judgment rendered against the Company or any subsidiary of
the Company, or against any director of the Company or any subsidiary of
the Company in his capacity as such by any court or governmental agency;
(p) Rent, telephone, utilities, office furniture, equipment and
machinery (including computers) incurred in connection with the conduct of
the Company's business.
(q) If the Manager or an Affiliate does not act as bond administrator
for a Series of Structured Securities issued by an Affiliated Issuer by or
on behalf of the Company, all expenses relating to the performance of the
services set forth in Sections 2(m) and 2(n) of this Agreement for such
Series of Structured Securities;
(r) Fees paid to the Manager with the approval of a majority of the
Unaffiliated Directors for participation by the Company in programs
operated by the Manager for the pricing and acquisition of Mortgage Loans;
(s) Amounts payable by the Company to the Manager under Section 9
of this Agreement;
(t) Expenses relating to accounting, bookkeeping and related
administrative functions, including the employment expenses of any persons
performing these functions who are employed by the Company, or by the
Manager to the extent that such persons perform such services for the
Company; and
(u) Any cost of computer services incurred in connection with the
conduct of the Company's business.
(v) Other miscellaneous expenses of the Company or any subsidiary of
the Company which are not expenses of the Manager under Section 7 of this
Agreement.
SECTION 9. Limits of Responsibility of the Manager.
(a) The Manager assumes no responsibility under this Agreement other
than to render the services called for hereunder, and shall not be
responsible for any action of the Board of Directors in following or
declining to follow any advice or recommendations of the Manager. The
Manager, its partners, officers and employees will not be liable to the
Company, any Affiliated Issuer, any subsidiary of the Company, the
Unaffiliated Directors or the Company's or its subsidiary's stockholders
for any acts or omissions by the Manager, its partners, officers or
employees under or in connection with this Agreement, except by reason of
acts constituting bad faith, willful misconduct, gross negligence or
reckless disregard of their duties. The Company or any subsidiary shall
reimburse, indemnify and hold harmless the Manager, its partners, officers
and employees of and from any and all losses, damages, liabilities,
demands, charges and claims of any nature whatsoever (including expenses
and reasonable attorneys' fees incurred in the defense thereof) in respect
of or arising from any acts or omissions of the Manager, its partners,
officers and employees in the performance of the Manager's duties in
accordance with this Agreement and not constituting bad faith, willful
misconduct, gross negligence or reckless disregard of its or their duties.
(b) The Manager shall reimburse, indemnify and hold harmless the
Company or any of their stockholders, directors, officers and employees
from any and all losses, damages, liabilities, demands, charges and claims
(including expenses and reasonable attorneys, fees incurred in the defense
thereof) arising out of any acts or omissions by the Manager, its partners,
officers or employees under or in connection with this Agreement
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties.
SECTION 10. No Joint Venture. The Company and the Manager are not
partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any
liability as such on either of them.
SECTION 11. Term; Termination. This Agreement shall take effect on
the date first above written and shall supersede the Management Agreement
between the Company and the Manager dated as of October 31, 1992 (the "1992
Management Agreement"), except that Section 6 of the 1992 Management
Agreement (and the provisions in the 1992 Management Agreement referred to
in Section 6 thereof) shall remain in effect through September 30, 1995,
and Section 6 of this Agreement shall take effect on October 1, 1995. It
shall continue in force until June 30, 1996, and for successive annual
periods thereafter, provided that each annual continuance is consented to
by the Manager and by the affirmative vote of a majority of the Board of
Directors, including a majority of the Unaffiliated Directors. If this
Agreement terminates pursuant to this Section 11, such termination shall be
without any further liability or obligation of either party to the other,
except as provided in Section 13 of this Agreement.
SECTION 12. Assignments.
(a) Except as set forth in Section 12(b) of this Agreement, this
Agreement shall terminate automatically in the event of its assignment, in
whole or in part, by the Manager, unless such assignment is consented to in
writing by the Company with the consent of a majority of the Unaffiliated
Directors. Any such assignment shall bind the assignee hereunder in the
same manner as the Manager is bound. In addition, the assignee shall
execute and deliver to the Company a counterpart of this Agreement naming
such assignee as Manager. This Agreement shall not be assigned by the
Company without the prior written consent of the Manager, except in the
case of assignment by the Company to a REIT or other organization which is
a successor (by merger, consolidation or purchase of assets) to the
Company, in which case such successor organization shall be bound hereunder
and by the terms of such assignment in the same manner as the Company is
bound hereunder.
(b) Notwithstanding any provision of this Agreement, the Manager may
subcontract and assign any or all of its responsibilities under Sections
2(m), 2(n) and 2(q) of this Agreement to any of its Affiliates, and the
Company hereby consents to any such assignment and subcontracting.
SECTION 13. Action Upon Termination.
(a) From and after the effective date of termination of this
Agreement, pursuant to Sections 11 or 12 of this Agreement, the Manager
shall not be entitled to compensation for further services hereunder, but
shall be paid all compensation accruing to the date of termination. Upon
such termination, the Manager shall forthwith:
(i) after deducting any accrued compensation and reimbursement
for its expenses to which it is then entitled, pay over to the Company
or any subsidiary of the Company all money collected and held for the
account of the Company or any subsidiary of the Company pursuant to
this Agreement;
(ii) deliver to the Board of Directors a full accounting,
including a statement showing all payments collected by it and a
statement of all money held by it, covering the period following the
date of the last accounting furnished to the Board of Directors with
respect to the Company or any subsidiary of the Company; and
(iii) deliver to the Board of Directors all property and
documents of the Company or any subsidiary of the Company then in the
custody of the Manager.
(b) Notwithstanding any other provisions of this Agreement, if this
Agreement is terminated by the Company, including the failure of the
Company to consent to an annual continuance under Section 11 on terms at
least as favorable to the Manager as this Agreement, and such termination
occurs within three years after a Change in Control (as hereinafter
defined), the Company shall pay to the Manager, in addition to the amounts
referred to in Section 13(a)(i) hereof, the following amounts for each
fiscal quarter (or portion thereof) during the period beginning with the
date of termination (the "Termination Date") and ending on the last day of
the twelfth (12th) full fiscal quarter after the Termination Date:
(i) The compensation that would be payable by the Company to the
Manager pursuant to Section 6(a) of this Agreement for such quarter if
the Average Invested Assets of the Company were computed without
taking into account any investments made by the Company subsequent to
the Termination Date; and
(ii) the amount that would be payable by the Company to the
Manager pursuant to Section 6(b) of this Agreement for such quarter if
the total shareholders' equity were computed without taking into
account any investments made by the Company subsequent to the
Termination Date.
All amounts payable to the Manager pursuant to this Section 13(b) shall be
paid on a quarterly basis on or before the date on which the Manager would
be paid pursuant to Section 6(c) of this Agreement. The Company shall, on
or before the Termination Date, (a) deposit with an escrow agent reasonably
acceptable to the Manager an amount equal to three times the compensation
received by the Manager from the Company during the twelve months preceding
the Termination Date and shall instruct the escrow agent to pay such
amount, less any amounts previously paid to the Manager under this Section
13(b), to the Manager in the event the Company fails to make any required
payment under this Section 13(b); or (b) take such other action as shall be
approved by the Manager, which approval shall not be unreasonably withheld,
to assure the Manager that the Company will fulfill its obligations under
this Section 13(b). The Company shall allow the Manager reasonable access
to the books and records of the Company for purposes of computing the
compensation to be paid pursuant to this Section 13(b).
(c) A "Change in Control" shall be deemed to have occurred if:
(i) Any Person, or a "group" within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (other than (1) the Company and/or its wholly-owned
subsidiaries, (2) any ESOP or other employee benefit plan of the
Company, and any trustee or other fiduciary in such capacity holding
securities under such plan, or (3) any corporation owned, directly or
indirectly, by the shareholders of the Company in substantially the
same proportions as their ownership of stock of the Company) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing twenty (20) percent or more of the combined voting power
of the Company's then outstanding securities, or such lesser
percentage of voting power as a majority of the Board of Directors,
including a majority of the Unaffiliated Directors, shall determine;
(ii) Continuing Directors (as hereafter defined) shall at any
time cease to constitute a majority of the Company's Board of
Directors. "Continuing Directors" means those directors holding
office on the date first above written and those directors who were
recommended to succeed Continuing Directors by a majority of
Continuing Directors; or
(iii) The Company's shareholders or its Board of Directors
shall approve (1) any consolidation or merger of the Company in which
the Company is not the continuing or surviving corporation or pursuant
to which the Company's voting common shares (the "Common Shares")
would be converted into cash, securities and/or other property, other
than a merger of the Company in which holders of Common Shares
immediately prior to the merger have the same proportionate ownership
of common shares of the surviving corporation immediately after the
merger as they had in the Common Shares immediately before, (2) any
sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all the assets
or earning power of the Company, or (3) the liquidation or dissolution
of the Company.
Whether a Change in Control has occurred shall be determined by a
majority of the Unaffiliated Directors who were in office on the day
preceding the date of the event or events under consideration.
SECTION 14. Release of Money or Other Property Upon Written Request.
The Manager agrees that any money or other property of the Company or any
subsidiary of the Company held by the Manager under this Agreement shall be
held by the Manager as custodian for the Company or such subsidiary, and
the Manager's records shall be appropriately marked clearly to reflect the
ownership of such money or other property by the Company or such
subsidiary. Upon the receipt by the Manager of a written request signed by
a duly authorized officer of the Company requesting the Manager to release
to the Company or any subsidiary of the Company any money or other property
then held by the Manager for the account of the Company or any subsidiary
of the Company under this Agreement, the Manager shall forthwith release
such money or other property to the Company or such subsidiary. The
Manager shall not be liable to the Company, any subsidiary of the Company,
the Unaffiliated Directors, or the Company's or its subsidiary's
stockholders for any acts performed or omissions to act by the Company or
any subsidiary of the Company in connection with the money or other
property released to the Company or any subsidiary of the Company in
accordance with this Section. The Company and any subsidiary of the
Company shall indemnify the Manager, its partners, officers and employees
against any and all expenses, losses, damages, liabilities, demands,
charges and claims of any nature whatsoever, which arise in connection with
the Manager's release of such money or other property to the Company or any
subsidiary of the Company in accordance with the terms of this Section 14
of this Agreement, except insofar as such expenses, losses, damages,
liabilities, demands, charges and claims arise out of acts of the Manager,
its partners, officers and employees constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties.
Indemnification pursuant to this provision shall be in addition to any
right of the Manager to indemnification under Section 9 of this Agreement.
SECTION 15. Representations and Warranties.
(a) The Company hereby represents and warrants to the Manager as
follows:
(i) The Company is duly organized, validly existing and in good
standing under the laws of the State of Maryland, has the corporate
power to own its assets and to transact the business in which it is
now engaged and is duly qualified as a foreign corporation and in good
standing under the laws of each jurisdiction where its ownership or
lease of property or the conduct of its business requires such
qualification, except for failures to be so qualified, authorized or
licensed that could not in the aggregate have a material adverse
effect on the business operations, assets or financial condition of
the Company and its subsidiaries, taken as a whole. The Company does
not do business under any fictitious business name.
(ii) The Company has the corporate power and authority to
execute, deliver and perform this Agreement and all obligations
required hereunder and has taken all necessary corporate action to
authorize this Agreement on the terms and conditions hereof and the
execution, delivery and performance of this Agreement and all
obligations required hereunder. No consent of any other person
including, without limitation, stockholders and creditors of the
Company, and no license, permit, approval or authorization of,
exemption by, notice or report to, or registration, filing or
declaration with, any governmental authority is required by the
Company in connection with this Agreement or the execution, delivery,
performance, validity or enforceability of this Agreement and all
obligations required hereunder. This Agreement has been, and each
instrument or document required hereunder will be, executed and
delivery by a duly authorized officer of the Company; and this
Agreement constitutes, and each instrument or document required
hereunder when executed and delivered hereunder will constitute, the
legally valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
(iii) The execution, delivery and performance of this
Agreement and the documents or instruments required hereunder, will
not violate any provision of any existing law or regulation binding on
the Company, or any order, judgment, award or decree of any court,
arbitrator or governmental authority binding on the Company, or any
order, judgment, award or decree of any court, arbitrator or
governmental authority binding on the Company, or the governing
instruments of, or any securities issued by the Company or of any
mortgage, indenture, lease, contract or other agreement, instrument or
undertaking to which the Company is a party or by which the Company or
any of its assets may be bound, the violation of which would have a
material adverse effect on the business operations, assets or
financial condition of the Company and its subsidiaries, taken as a
whole, and will not result in, or require, the creation or imposition
of any lien on any of its property, assets or revenues pursuant to the
provisions of any such mortgage, indenture, lease, contract or other
agreement, instrument or undertaking.
(b) The Manager hereby represents and warrants to the Company as
follows:
(i) The Manager is duly formed, validly existing and in good
standing under the laws of the State of California, has the power to
own its assets and to transact the business in which it is now engaged
and is duly qualified to do business and is in good standing under the
laws of each jurisdiction where its ownership or lease of property or
the conduct of its business requires such qualification, except for
failures to be so qualified, authorized or licensed that could not in
the aggregate have a material adverse effect on the business
operations, assets or financial condition of the Manager and its
subsidiaries, taken as a whole. The Manager does not do business
under any fictitious business name.
(ii) The Manager has the power and authority to execute, deliver
and perform this Agreement and all obligations required hereunder and
has taken all necessary partnership action to authorize this Agreement
on the terms and conditions hereof and the execution, delivery and
performance of this Agreement and all obligations required hereunder.
No consent of any other person including, without limitation, partners
and creditors of the Manager, and no license, permit, approval or
authorization of, exemption by, notice or report to, or registration,
filing or declaration with, any governmental authority is required by
the Manager in connection with this Agreement or the execution,
delivery, performance, validity or enforceability of this Agreement
and all obligations required hereunder. This agreement has been, and
each instrument or document required hereunder will be, executed and
delivery by a duly authorized agent of the Manager, and this Agreement
constitutes, and each instrument or document required hereunder when
executed and delivered hereunder will constitute, the legally valid
and binding obligation of the Manager enforceable against the Manager
in accordance with its terms.
(iii) The execution, delivery and performance of this
Agreement and the documents or instruments required hereunder, will
not violate any provision of any existing law or regulation binding on
the Manager, or any order, judgment, award or decree of any court,
arbitrator or governmental authority binding on the Manager, or the
partnership agreement of, or any securities issued by the Manager or
of any mortgage, indenture, lease, contract or other agreement,
instrument or undertaking to which the Manager is a party or by which
the Manager or any of its assets may be bound, the violation of which
would have a material adverse effect on the business operations,
assets or financial condition of the Manager and its subsidiaries,
taken as a whole, and will not result in, or require, the creation or
imposition of any lien on any of its property, assets or revenues
pursuant to the provisions of any such mortgage, indenture, lease,
contract or other agreement, instrument or undertaking.
SECTION 16. Notices. Unless expressly provided otherwise herein, all
notices, requests, demands and other communications required or permitted
under this Agreement shall be in writing.
SECTION 17. Binding Nature of Agreement; Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, personal representatives,
successors and assigns as provided herein.
SECTION 18. Entire Agreement. This Agreement contains the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of
the terms hereof. This Agreement may not be modified or amended other than
by an agreement in writing.
SECTION 19. Controlling Law. This Agreement and all questions
relating to its validity, interpretation, performance and enforcement shall
be governed by and construed, interpreted and enforced in accordance with
the laws of the State of Maryland, notwithstanding any Maryland or other
conflict-of-law provisions to the contrary.
SECTION 20. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of
which shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
TIS MORTGAGE INVESTMENT COMPANY
By: ____________________________________
Chairman of the Board
TIS FINANCIAL SERVICES, INC.
By: ____________________________________
President & CEO
LOAN AND SECURITY AGREEMENT
dated as of July 19, 1995
between
TIS MORTGAGE INVESTMENT COMPANY, as Borrower
and
PAINE WEBBER REAL ESTATE
SECURITIES INC., as Lender
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
1.1 Certain Defined Terms
1
1.2 Accounting Terms
5
1.3 Other Definitional Provisions
6
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1 Representations and Warranties Relating to Borrower
7
A. Formation, Powers, Good Standing and Subsidiaries
7
B. Authorization of Borrowing, etc.
7
C. Financial Condition
8
D. Changes, etc.
8
E. Title to Properties; Liens
8
F. Litigation; Adverse Facts
9
G. Payment of Taxes
9
H. Other Agreements; Performance
9
I. Governmental Regulation
10
J. Borrower's Securities Activities
10
K. Employee Benefit Plans
10
L. Disclosure
10
M. Compliance with State Law
10
ARTICLE III
BORROWING AND REPAYMENTS; NOTE
3.1
11
Certifications; Advances
11
A. Certifications
11
B. Initial Advance
11
C. Subsequent Advances
11
D. Netting of Payments; Advance Maturity Dates
11
3.2 Margin Maintenance
12
3.3 Note; Interest
12
A. Note
12
B. Rate of Interest
12
C. Interest Payments
12
i
<PAGE>
D. Post-Maturity Interest
12
E. Computation of Interest
12
3.4 Prepayments and Payments
13
A. Repayment
13
B. Mandatory Prepayments
13
C. Optional Prepayment
13
D. Manner and Time of Payment
13
E. Payments on Non-Business Days
13
3.5 Acceleration by Lender
13
3.6 Extension of Termination Date
13
ARTICLE IV
CONDITIONS TO THE ADVANCES
4.1 Conditions to the Effective Date and to the Initial Advance
14
4.2 Conditions to All Advances
15
ARTICLE V
SECURITY
5.1 Grant of Security Interest
17
5.2 Authority to Collect
17
5.3 Lender Appointed Attorney-in-Fact
17
5.4 Security for Obligations
17
ARTICLE VI
COVENANTS OF BORROWER
6.1 Financial Statements and Other Reports
18
6.2 Existence; Franchises
19
6.3 Payment of Taxes and Claims
19
6.4 Inspection
19
6.5 Compliance with Laws, etc.
20
6.6 Restriction on Fundamental Changes
20
6.7 Financial Covenants
20
A. Net Worth
20
B. Indebtedness Ratio
20
6.8 Notice of Changes in Articles or Bylaws
20
6.9 Further Assurances
20
6.10 Borrower's Securities Activities
20
6.11 Independence of Covenants
21
6.12 Corporate Separation and Indebtedness
21
6.13 Other Agreements
21
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<PAGE>
ARTICLE VII
EVENTS OF DEFAULT
7.1 Events of Default
22
A. Failure to Make Payments When Due
22
B. Default in Other Agreements
22
C. Breach of Covenants
22
D. Breach of Warranty
22
E. Other Defaults
22
F. Involuntary Bankruptcy: Appointment of Receiver, etc.
22
G. Voluntary Bankruptcy; Appointment of Receiver; Material Adverse
Change
23
H. Judgments and Attachments
23
I. Dissolution
23
J. Failure of Security Interest
23
7.2 Application of Proceeds
25
ARTICLE VIII
MISCELLANEOUS
8.1 Expenses
27
8.2 Indemnity by Borrower
27
A. Indemnification by Borrower
27
B. Claims
28
8.3 Set-Off
28
8.4 Amendments and Waivers
28
8.5 Notices
28
8.6 Attorneys' Fees
28
8.7 Survival of Warranties and Certain Agreements
28
A. Agreement
28
B. Termination
28
8.8 Failure or Indulgence Not Waiver; Remedies Cumulative
29
8.9 Severability
29
8.10 Headings
29
8.11 Applicable Law
29
8.12 Successors and Assigns; Subsequent Holders of Note
29
8.13 Counterparts; Effectiveness
29
iii
<PAGE>
EXHIBITS
Exhibit A Form of Compliance Certificate
Exhibit B Form of Promissory Note
Exhibit C-1 Form of Lender's Incumbency Certificate
Exhibit C-2 Form of Borrower' s Incumbency Certificate
Exhibit D Borrower' s Officer's Certificates
Exhibit E Form of Request for Advance
Exhibit F Form of Opinion of Borrower's Counsel
iv
<PAGE>
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT (the "Agreement") is dated as of
July
19, 1995 between TIS MORTGAGE INVESTMENT COMPANY, a Maryland
corporation
("Borrower"), and PAINE WEBBER REAL ESTATE SECURITIES INC., a
Delaware
corporation ("Lender").
RECITALS
A. Borrower desires to finance certain Mortgage Related
Assets (as
defined below). Lender desires to provide financing to Borrower to
enable
Borrower to finance certain Mortgage Related Assets.
B. The Mortgage Related Assets pledged by Borrower to Lender
shall be
held by Lender.
NOW, THEREFORE, in consideration of the above Recitals and for
other
good and valuable consideration, the receipt and adequacy of which are
hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
ARTICLE I
DEFINITIONS
1.1 Certain Defined Terms.
The following terms used in this Agreement shall have the
following
meanings:
"Additional Collateral" means any Mortgage Related Asset
pledged by
Borrower and accepted by Lender in connection with either (i) a
Subsequent
Advance or (ii) a Margin Deficit.
"Additional Collateral Value" means, with respect to
Additional
Collateral, the Market Value less the applicable percentage used by
Lender to
calculate the Margin Amount.
"Advance" means the Initial Advance or any Subsequent
Advance, as
applicable.
"Advance Date" means any date on which an Advance is made by
Lender to
Borrower.
"Advance Maturity Date" means, with respect to an Advance, the
date set
forth in the "Advance Maturity Date" column on the schedule attached
to the
Note.
1
<PAGE>
"Affiliate" means a Person (i) which directly or indirectly
through one
or more intermediaries controls, or is controlled by, or is under common
control
with, the Borrower; or (ii) five percent or more of the voting stock or
equity
interest of which is beneficially owned or held by the Borrower.
"Agreement" means this Loan and Security Agreement dated as of
July
19, 1995, as it may from time to time be supplemented, modified or amended.
"Business Day" means any day other than (a) a Saturday, Sunday or
other
day on which banks located in the City of New York, New York are
authorized or
obligated by law or executive order to be closed, or (b) any day on which
Paine
Webber Real Estate Securities Inc. is closed for business.
"Capital Lease" means, as applied to any Person, any lease
of any
property (whether real, personal or mixed) by that Person as lessee which
would,
in conformity with GAAP, be required to be accounted for as a capital lease
on a
balance sheet of that Person.
"Collateral" means the Initial Collateral and any Additional
Collateral
and all proceeds thereof.
"Collateral Value" means the sum of the Initial Collateral
Value and
any Additional Collateral Value.
"Compliance Certificate" means a certificate substantially in the
form
of Exhibit A hereto delivered to Lender by Borrower pursuant to subsection
(iii)
of Section 6.1.
"Contingent Obligation" means, as applied to any Person, any
liability,
contingent or otherwise, of that Person with respect to any Indebtedness,
lease,
dividend, letter of credit or other obligation of another, including,
without
limitation, any such obligation guaranteed, endorsed (otherwise than
for
collection or deposit in the ordinary course of business), co-made or
discounted
or sold with recourse by that Person, or in respect of which that
Person is
otherwise liable, including, without limitation, any such obligation for
which
that Person is in effect liable through any agreement (contingent or
otherwise)
to purchase, repurchase or otherwise acquire such obligation or any
security
therefor, or to provide funds for the payment or discharge of such
obligation
(whether in the form of loans, advances, stock purchases, capital
contributions
or otherwise), or to maintain the solvency or any balance sheet item,
level of
income or other financial condition of the obligor of such obligation,
or to
make payment for any products, materials or supplies or for any
transportation,
services or lease regardless of the non-delivery or nonfurnishing
thereof, in
any such case if the purpose or intent of such agreement is to provide
assurance
that such obligation will be paid or discharged, or that any agreements
relating
thereto will be complied with, or that the holders of such obligation
will be
protected (in whole or in part) against loss in respect thereof. The
amount of
any Contingent Obligation shall be equal to the amount of the
obligation so
guaranteed or otherwise supported.
2
<PAGE>
"Contractual Obligation" means, as applied to any Person, a
provision
of any security issued by that Person or of any material indenture,
mortgage,
deed of trust, contract, undertaking, agreement or other instrument to
which
that Person is a party or by which it is or any of its properties is bound
or to
which it or any of its properties is subject.
"Dollar" means lawful currency of the United States of America.
"Effective Date" means July 19, 1995.
"Employee Benefit Plan" means any pension plan, any employee
welfare
benefit plan, or any other employee benefit plan which is described in
Section
3(3) of ERISA and is maintained for employees of Borrower or any
ERISA
affiliate.
"ERISA" means the Employee Retirement Income Security Act of
1974, as
amended from time to time, and any successor statute.
"ERISA Affiliate" means, as applied to any Person, any
trade or
business (whether or not incorporated) which is a member of a group of
which
that Person is a member and is under common control within the meaning
of the
regulations promulgated under Section 414 of the Internal Revenue Code of
1986.
"Event of Default" means any of the events set forth in Section
7.1.
"FNMA" means the Federal National Mortgage Association and
any
successor thereto.
"GAAP" means generally accepted accounting principles set forth
in the
opinions and pronouncements of the Accounting Principles Board of the
American
Institute of Certified Public Accountants and statements and
pronouncements of
the Financial Accounting Standards Board or in such other statements by
such
other entity as may be approved by a significant segment of the
accounting
profession, which are applicable to the circumstances as of the
date of
determination. In the event of a change in GAAP, Borrower and Lender
shall
negotiate in good faith to revise any covenants of this Agreement
affected
thereby in order to make such covenants consistent with GAAP then in
effect.
"Indebtedness" means, as applied to any Person, (i) all
indebtedness
for borrowed money, (ii) that portion of obligations with respect to
Capital
Leases which is capitalized on a balance sheet in conformity with GAAP,
(iii)
notes payable and drafts accepted representing extensions of credit
whether or
not representing obligations for borrowed money, (iv) any obligation
owed for
all or any part of the deferred purchase price of property or services
which
purchase price is (a) due more than six months from the date of
incurrence of
the obligation in respect thereof or (b) evidenced by a note or similar
written
instrument, and (v) all indebtedness secured by any Lien existing
on any
property or asset owned or held by that Person regardless of whether
the
indebtedness secured thereby shall have been assumed by that Person or is
3
<PAGE>
non-recourse to the credit of that Person.
"Initial Collateral" means [CSFB 1994-CF1, Class F, CUSIP
126342BA1,
Coupon Rate 7.8751%, Legal Stated Final Maturity 1/25/2028], pledged by
Borrower
and accepted by Lender in connection with the Initial Advance.
"Initial Collateral Value" means, with respect to the
Initial
Collateral, the Market Value less the applicable percentage used by
Lender to
calculate the Margin Amount.
"Initial Advance" means the initial advance made by Lender to
Borrower
pursuant to subsection B of Section 3.1. and which is secured by the
Initial
Collateral.
"Interest Maturity Date" means, with respect to any Advance,
the
applicable date set forth in the "Interest Maturity Date" column on the
schedule
attached to the Note.
"Lien" means any lien, mortgage, pledge, security interest,
charge or
encumbrance of any kind (including any conditional sale or other title
retention
agreement, any lease in the nature thereof, and any agreement to
give any
security interest).
"LIBOR" means the London interbank offered rate for U.S.
Dollar
deposits appearing on page five of the Telerate screen at or about 9:00
a.m.
(New York City time) on the related date, having a term which most
closely
approximates the term used in connection therewith.
"Margin Amount" means the amount obtained by application
of a
percentage (as specified by Lender in the confirmation substantially in the
form
of Exhibit E) to the amount of any Advance.
"Margin Deficit" has the meaning set forth in Section 3.2.
"Margin Stock" has the meaning assigned to that term in Regulation
X of
the Board of Governors of the Federal Reserve System as in effect from
time to
time.
"Market Value" means the value of the Collateral as determined,
from
time to time, by Lender in its sole discretion.
"Mortgage Related Asset" means (i) any class of collateralized
mortgage
obligations (including but not limited to the Initial Collateral) whose
pledge
by Borrower to Lender is accepted by Lender, in Lender's sole
discretion; or
(ii) any other securities or whole loans that are pledged by Borrower to
Lender
and accepted by Lender, in Lender's sole discretion.
"Net Worth" means, as of any date of determination, the sum
of the
capital stock and additional paid-in capital of Borrower plus retained
earnings
(or minus accumulated deficits)
4
<PAGE>
of Borrower, all as determined in accordance with GAAP.
"Note" means the promissory note executed by Borrower in
favor of
Lender pursuant to Section 3.3 and substantially in the form of Exhibit B.
"Obligations" means all obligations of every nature of Borrower
from
time to time owed to Lender under this Agreement.
"Officer's Certificate" means a certificate executed on
behalf of
Borrower by the Chairman of the Board (if an officer) or President of
Borrower
or one of its Vice Presidents or by its Chief Financial Officer or its
Treasurer
or Controller.
"Person" means and includes natural persons, corporations,
limited
partnerships, general partnerships, joint stock companies, joint
ventures,
associations, companies, trusts, banks, trust companies, land trusts,
business
trusts or other organizations, whether or not legal entities, and governments
and agencies and political subdivisions thereof.
"Potential Event of Default" means a condition or event which,
after
notice or lapse of time or both, would constitute an Event of Default if
that
condition or event were not cured or removed within any applicable grace or
cure
period.
"Subsequent Advance" means any Advance made by Lender
pursuant to
subsection C of Section 3.1 and which is secured by Additional Collateral.
"Subsidiary" means any corporation, association, partnership,
trust or
other business entity in which more than 50% of the total voting power or
shares
of stock entitled to vote in the election of directors, managers or
trustees
thereof, or more than 50% of the total equity interests (including
partnership
interests) therein, is at the time owned or controlled, directly or
indirectly,
by any Person or one or more of the other Subsidiaries of that Person
or a
combination thereof.
"Termination Date" means one (1) year from the Effective Date or
such
later date as may be set pursuant to the terms of Section 3.6.
1.2 Accounting Terms.
For purposes of this Agreement, all accounting terms not
otherwise
defined herein shall have the meanings assigned to them in conformity with
GAAP.
5
<PAGE>
1.3 Other Definitional Provisions.
References to "Sections", "subsections" and "Articles" shall
be to
Sections, subsections, and Articles respectively, of this Agreement
unless
otherwise specifically provided. Any of the terms defined in Section 1.1
may,
unless the context otherwise requires, be used in the singular or the
plural
depending on the reference.
6
<PAGE>
ARTICLE II
REPRESENTATIONS WARRANTIES AND COVENANTS
2.1 Representations and Warranties Relating to Borrower.
Borrower
represents, warrants to and covenants with Lender at the time of
execution of
this Agreement and at the time any Advance is made to Borrower from Lender
that:
A. Formation, Powers, Good Standing and Subsidiaries.
(i) Formation and Powers. Borrower is a corporation
duly
organized, validly existing and in good standing under the
laws of
Maryland and has all requisite corporate power and authority to
own and
operate its properties, to carry on its business as now
conducted and
proposed to be conducted, to enter into this Agreement, to
issue the
Note and to carry out the transactions contemplated hereby and
thereby.
(ii) Good Standing. Borrower is in good standing
wherever
necessary to carry on its business and operations,
except in
jurisdictions in which the failure to be in good standing has and
will
have no material adverse effect on the business,
operations,
properties, assets or condition (financial or otherwise) of
Borrower.
(iii) Tax Status. Borrower operates in a manner
that it
believes permits it to qualify for the tax treatment accorded to a
real
estate investment trust under the Internal Revenue Code of
1986, as
amended.
(iv) Affiliate. Borrower has no Affiliates, other
than as
identified in Schedule A hereto.
B. Authorization of Borrowing, etc.
(i) Authorization of Borrowing. The execution,
delivery and
performance of this Agreement, and the issuance, delivery and
payment
of the Note, and the consummation of the transactions
contemplated
hereby and thereby, have been duly authorized by all
necessary
corporate action by Borrower.
(ii) No Conflict. The execution, delivery and
performance by
Borrower of this Agreement and the issuance, delivery and
payment of
the Note, and the consummation of the transactions contemplated
hereby
and thereby, do not and will not (a) violate any provision
of law
applicable to Borrower, the Articles of Incorporation or
Bylaws of
Borrower, or any order, judgment or decree of any court or other
agency
of government binding on Borrower, (b) conflict with, result
in a
breach of or constitute (with due notice or lapse of time or
both) a
default under any Contractual Obligation of Borrower, (c) result
in or
require the creation or imposition of any Lien, charge or
encumbrance
of any nature whatsoever upon any of its properties or assets
except
the Lien in favor of Lender pursuant to Section 5.1, or (d)
require any
approval of
7
<PAGE>
shareholders or any approval or consent of any Person under
any
Contractual Obligation of Borrower other than approvals or
consents
which have been obtained and disclosed in writing to Lender.
(iii) Governmental Consents. The execution, delivery
and
performance by Borrower of this Agreement and the issuance,
delivery
and payment of the Note, and the consummation of the
transactions
contemplated hereby and thereby, do not and will not require
any
registration with, consent or approval of, or notice to, or
other
action to, with or by, any Federal, state or other
governmental
authority or regulatory body or other Person by Borrower except
those
that have been obtained and disclosed in writing to Lender.
(iv) Binding Obligation. This Agreement is, and the Note
when
executed and delivered hereunder will be, the legally valid and
binding
obligations of Borrower, enforceable against it in accordance
with
their respective terms, except as enforcement may be
limited by
bankruptcy, insolvency, reorganization, moratorium or similar
laws or
equitable principles relating to or limiting creditors'
rights
generally.
C. Financial Condition. Borrower has heretofore delivered to
Lender a
balance sheet of Borrower as of March 31, 1995, and the related
statements of
income, shareholders' equity and statement of cash flows for the fiscal
period
then ended. All such statements were prepared in accordance with GAAP and
fairly
present the financial position of Borrower, as at the date thereof,
and the
results of operations and statement of cash flows of Borrower, for the
period
then ended. As of the Effective Date, Borrower will not have any
material
Contingent Obligation or liability for taxes, long-term lease or unusual
forward
or long-term commitment, which is not reflected in the foregoing
statements, or
in the notes thereto.
D. Changes, etc. Since the date of the most recent balance
sheet of
Borrower that has been delivered to Lender and the related statements of
income,
shareholders' equity and statement of cash flow for the period then ended,
there
has been no change in the business, operations, properties, assets or
condition
(financial or otherwise) of Borrower which has been, either in any case
or in
the aggregate, materially adverse to Borrower, other than changes
contemplated
by or disclosed in this Agreement or otherwise disclosed by Borrower to
Lender
prior to the date hereof.
E. Title to Properties; Liens. Borrower has good,
sufficient,
marketable and legal title to all the properties and assets reflected
in the
balance sheet referred to in subsection D of Section 2.1 (including
all
Collateral pledged pursuant to this Agreement and all assets held by
Borrower on
the date hereof but acquired subsequent to the date of such balance
sheet),
except for assets disposed of in the ordinary course of business. The
pledge and
assignment of the Collateral pursuant to this Agreement create a valid
security
interest in the Collateral and the Lien on the Collateral created by
this
Agreement will be a first priority Lien thereon, superior to all other
Liens.
Except for
8
<PAGE>
the due filing of any financing statement with respect to the Collateral
(and
except for delivery to Lender of any Collateral as to which possession
is the
only method of perfecting a security interest in such Collateral), no
further
action need be taken in order to establish and perfect the security
interest of
Lender in all the Collateral.
F. Litigation; Adverse Facts. There is no action, suit,
proceeding or
arbitration (whether or not purportedly on behalf of Borrower) at law
or in
equity or before or by any Federal, state, municipal or other
governmental
department, commission, board, bureau, agency or instrumentality,
domestic or
foreign, pending or, to the knowledge of Borrower, threatened
against or
affecting Borrower, or any of its properties, or any proposed tax
assessment and
there is no basis known to Borrower for any action, suit or proceeding
which
would have such an effect. Borrower is not (i) in violation of any
applicable
law which violation materially adversely affects or may materially
adversely
affect the business, operations, properties, assets or condition
(financial or
otherwise) of Borrower, or (ii) subject to or in default with respect
to any
final judgment, writ, injunction, decree, rule or regulation of any
court or
Federal, state, municipal or other governmental department, commission,
board,
bureau, agency or instrumentality, domestic or foreign, which would
have a
material adverse effect on the business, operations, properties,
assets or
condition (financial or otherwise) of Borrower. There is no action,
suit,
proceeding or investigation pending or, to the knowledge of Borrower,
threatened
against or affecting Borrower which questions the validity or the
enforceability
of this Agreement or the Note.
G. Payment of Taxes. Borrower has filed all tax returns
that are
required to be filed by Borrower, and all taxes, assessments, fees and
other
governmental charges upon Borrower as set forth in such returns and
upon its
properties and assets which are due and payable have been paid when
due and
payable, except to the extent permitted by Section 6.3.
H. Other Agreements; Performance.
(i) Agreements. Borrower is not, and on any Advance Date
will
not be, a party to or subject to any Contractual Obligation or
charter
or other internal restriction materially adversely affecting
the
business, properties, assets, operations or condition
(financial or
otherwise) of Borrower.
(ii) Performance. Borrower is not, and on any Advance
Date
will not be, in default in the performance, observance or
fulfillment
of any of the obligations, covenants or conditions contained
in any
Contractual Obligation of Borrower, and no condition exists which,
with
the giving of notice or the lapse of time or both, would
constitute
such a default, except where the consequences, direct or
indirect, of
such default or defaults, if any, would not have a material
adverse
effect on the business, properties, assets, operations or
condition
(financial or otherwise) of Borrower. To the best
knowledge of
Borrower, the other parties to each Contractual Obligation of
9
<PAGE>
Borrower are not in default thereunder, except where the consequences,
direct or
indirect, of such default or defaults, if any, would not have a material
adverse
effect on the business, properties, assets, operations or condition
(financial
or otherwise) of Borrower.
I. Governmental Regulation. Borrower is not, and at the Effective
Date
will not be, subject to regulation under the Investment Company Act of
1940 or
to any Federal or state statute or regulation limiting its ability to
incur
Indebtedness for money borrowed.
J. Borrower's Securities Activities. Borrower is not, and
at the
Effective Date will not be, engaged in the business of extending credit
for the
purpose of purchasing or carrying any Margin Stock. Neither Borrower
nor any
agent acting on its behalf has taken any action which might cause this
Agreement
or the Note to violate Regulation X or any other regulation of the
Board of
Governors of the Federal Reserve System as in effect now or as may
hereafter be
in effect on the date of any Advance.
K. Employee Benefit Plans. Borrower is in compliance in all
material
respects with all applicable provisions of ERISA and the Internal Revenue
Code
of 1986 and the regulations and published interpretations thereunder
with
respect to all Employee Benefit Plans.
L. Disclosure. No representation or warranty of Borrower
contained in
this Agreement or any other document, certificate or written statement
furnished
to Lender by or on behalf of Borrower for use in connection with
the
transactions contemplated by this Agreement contains any untrue statement
of a
material fact or omits to state a material fact (known to Borrower in the
case
of any document not furnished by it) necessary in order to make the
statements
contained herein or therein not misleading. There is no fact known to
Borrower
(other than matters of a general economic nature) which materially
adversely
affects the business, operations, property, assets or condition
(financial or
otherwise) of Borrower, which has not been disclosed herein or in such
other
documents, certificates and statements furnished to Lender for use in
connection
with the transactions contemplated hereby.
M. Compliance with State Law. Borrower is in compliance with the
laws,
regulations and rules of each State of the United States of America, and
with
any other jurisdiction which may be applicable to Borrower, to the
extent
necessary to ensure the enforceability of the Collateral. Borrower has
obtained
all permits and licenses necessary to carry on its business and
operations
except in jurisdictions in which the failure to obtain a permit or
license has
and will have no material adverse effect on the business operations,
properties,
assets or condition (financial or otherwise) of Borrower or on the
Collateral.
10
<PAGE>
ARTICLE III
BORROWING AND REPAYMENTS; NOTE
3.1 Certifications; Advances.
A. Certifications. On each date that Lender makes an
Advance to
Borrower, Borrower shall be deemed to certify that (i) the
representations and
warranties of Borrower contained herein are accurate and complete
in all
material respects to the same extent as though made on and as of the
date of
such Advance; (ii) no Event of Default or Potential Event of Default
has
occurred and is continuing hereunder or will result from the proposed
borrowing;
(iii) Borrower has delivered or will cause to be delivered to Lender
all
documents required to be delivered to Lender pursuant to this Agreement;
and
(iv) Borrower has performed in all material respects all agreements
and
satisfied all conditions hereunder provided to be performed or satisfied
by it
on or before the date of such Advance.
B. Initial Advance. On the Advance Date for the Initial Advance,
if all
conditions set forth in Sections 4.1 and 4.2 of this Agreement have
been
satisfied, Lender shall make an Advance to Borrower by causing an
amount of
immediately available funds equal to the amount of the proposed Initial
Advance
to be paid in accordance with the Borrower's wire instructions. On the
Effective
Date, the amount of the Initial Advance shall equal the amount set forth
as the
first entry in the "Principal Amount of Advance" column on the schedule
attached
to the Note. Lender will send, via facsimile transmission, a copy
of the
schedule attached to the Note updated to reflect such Advance, the
applicable
rate of interest and other terms set forth therein.
C. Subsequent Advances. Borrower may request that Lender, upon at
least
three (3) Business Days' written notice in the form of Exhibit E hereto,
and
Lender may, in its sole discretion, agree to make Subsequent Advances to
or for
the account of Borrower, each in an amount at any time not to exceed
the
Collateral Value less the aggregate amount of any outstanding Advances.
Each
Subsequent Advance shall bear interest on the unpaid principal amount
thereof
from the date made through maturity (whether by acceleration or otherwise)
at a
rate per annum equal to the rate set forth in the respective "Interest
Rate"
column on the schedule attached to the Note. If all conditions set
forth in
Section 4.2 of this Agreement have been satisfied, Lender may, but shall
have no
obligation to, make an Advance to Borrower by causing an amount of
immediately
available funds equal to the amount of the proposed Subsequent Advance
to be
paid in accordance with Borrower's wire instructions. Lender will
send, via
facsimile transmission, a copy of the schedule attached to the Note
updated to
reflect such Advance, the applicable rate of interest and other terms set
forth
therein.
D. Netting of Payments; Advance Maturity Dates
To the extent that an Advance is made by Lender to Borrower
on an
Interest
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Maturity Date or an Advance Maturity Date, Lender shall calculate the net
amount
payable and shall send Borrower a confirmation detailing Lender' s
calculation
and setting forth the net amount to be received or paid by Borrower,
including,
without limitation, amounts payable under the Note. The Advance Maturity
Date
for an Advance shall be the applicable date set forth in the "Advance
Maturity
Date" column on the schedule attached to the Note.
3.2 Margin Maintenance.
If at any time the aggregate Collateral Value subject to
Advances is
less than the total amount outstanding under the Note (a "Margin Deficit"),
then
Lender may by notice to Borrower require Borrower, at Lender's
option, to
transfer to Lender cash or Additional Collateral reasonably
acceptable to
Lender, which is not less than the amount of the Margin Deficit.
3.3 Note; Interest.
A. Note.
(i) Borrower shall execute and deliver to Lender, not
later
than the Effective Date, the Note.
(ii) Upon repayment in full of all amounts due and
payable
under the Note, Lender shall promptly cancel the Note and
return the
cancelled Note to Borrower.
B. Rate of Interest. Subject to subsection D of Section 3.3,
each
Advance shall bear interest on the unpaid principal amount thereof from the
date
made through maturity (whether by acceleration or otherwise) at a rate per
annum
calculated on the Interest Maturity Date, equal to the rate set forth
in the
"Interest Rate" column on the schedule attached to the Note.
C Interest Payments. Subject to subsection D of Section 3.3,
interest
shall be payable on each Advance on the related Interest Maturity Date.
D. Post-Maturity Interest. Any Advance not repaid by Borrower
when due
and, to the extent permitted by applicable law, any interest payments on
such
Advance not paid when due or within any applicable grace period, in each
case
whether at stated maturity, by notice of prepayment, by
acceleration or
otherwise, shall thereafter bear interest payable on demand at a
default
interest rate equal to three percent (3%) above the rate set forth
in the
"Interest Rate" column on the schedule attached to the Note.
E. Computation of Interest. Interest on each Advance shall be
computed
on the basis of a 360-day year and the actual number of days elapsed
in the
period during which it accrues. In computing interest on each Advance, the
date
of the making of such
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<PAGE>
Advance shall be included and the date of payment shall be excluded.
3.4 Prepayments and Payments.
A. Repayment. Borrower shall repay the entire amount
outstanding of
each Advance on the related Advance Maturity Date.
B. Mandatory Prepayments. Proceeds received from the sale or
other
disposition of Collateral hereof shall be applied to repay any
outstanding
Advance. In the event that at any time the Collateral Value is less
than
the amount outstanding, Borrower shall upon receipt of written demand
from
Lender immediately prepay the amount by which the amount
outstanding
exceeds the Collateral Value.
C. Optional Prepayment. Borrower may, upon at least thirty (30)
days'
prior written notice to Lender, prepay the entire amount outstanding
of any
Advance prior to the related Advance Maturity Date; provided, however,
that
any such prepayment shall be in an amount equal to the sum of
(i) the
entire amount outstanding of the related Advance; (ii) all interest
accrued
on the Advance through and including the date of prepayment; and
(iii) any
fees or other amounts due hereunder.
D. Manner and Time of Payment. All payments of principal,
interest and
fees hereunder and under the Note shall be made in immediately
available
funds and delivered to Lender for its own account, not later than 2:00
p.m.
(New York City time) on a Business Day; funds received by Lender after
that
time shall be deemed to have been paid by Borrower on the next
succeeding
Business Day.
E. Payments on Non-Business Days. Whenever any payment to be
made
hereunder or under the Note shall be stated to be due on a day which
is not
a Business Day, such payment shall be made on the next succeeding
Business
Day and such extension of time shall be included in the computation
of the
payment of interest hereunder or under the Note.
3.5 Acceleration by Lender. Without limiting the rights and
remedies of
Lender pursuant to Articles VII and VIII herein, Lender may, in its
sole
discretion, upon at least thirty (30) days' prior written notice to
Borrower,
declare the unpaid principal amount of and accrued interest on the Note
and any
fees or other amounts due hereunder due and payable, whereupon the
unpaid
principal amount of and accrued interest on the Note and all such fees or
other
amounts shall become due and payable, without presentment, demand,
further
notice or other requirements of any kind, all of which are hereby
expressly
waived by Borrower, and any obligation of Lender to make any further
Advances
shall thereupon terminate.
3.6 Extension of Termination Date. Pursuant to Borrower's
request
received by Lender prior to April 19, 1996, the Termination Date may be
extended
by Lender.
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<PAGE>
ARTICLE IV
CONDITIONS TO THE ADVANCES
The obligation of Lender to make or maintain each Advance
hereunder is
subject to the satisfaction of all of the following conditions:
4.1 Conditions to the Effective Date and to the Initial Advance.
The
obligation of Lender to make or maintain any Advance on or after the
Effective
Date is, in addition to the conditions precedent specified in Section
4.2,
subject to prior or concurrent satisfaction of the following conditions:
A. On or before the Effective Date (unless otherwise specified
herein),
Borrower shall deliver to Lender:
(i) certified copies of its Articles of Incorporation,
with
all amendments thereto, together with a good standing certificate
from
the Secretary of State of Maryland, each to be dated as
of the
Effective Date or as soon as practicable thereafter;
(ii) copies of its Bylaws, with all amendments
thereto,
certified as of the Effective Date or as soon as practicable
thereafter
by the corporate secretary or an assistant secretary;
(iii) resolutions of its Board of Directors approving
and
authorizing the execution, delivery and performance of this
Agreement,
and approving and authorizing the execution, delivery and
payment of
the Note, certified as of the Effective Date by the corporate
secretary
or an assistant secretary;
(iv) signature and incumbency certificates of its
officers
executing this Agreement and the Note and of its
representatives
authorized to request the Advance, to transfer funds, and to
make any
payments on the Obligations hereunder;
(v) executed copies of this Agreement and the executed
Note
relating to the Advance with appropriate insertions;
(vi) such executed financing statement as Lender may
require
for filing pursuant to the Uniform Commercial Code; and
(vii) the Initial Collateral.
B. Lender and its counsel shall have received one or more
favorable
written opinions of Borrower's counsel, satisfactory to Lender
and its
counsel, dated as of the Effective Date and substantially in the
form of
Exhibit F hereto.
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<PAGE>
C. Borrower shall have performed in all material respects
all
agreements which this Agreement provides shall be performed on or
before
the Effective Date.
D. All actions and documents required to create and perfect the
first
priority security interest and Liens in the Collateral shall have been
duly
authorized and executed and delivered or taken (all in a
manner
satisfactory to Lender and its counsel) and all filings with
governmental
agencies shall have been made or taken and completed.
E. Lender shall have received written instructions from
Borrower
regarding (i) the wire instructions for the initial Advance and
(ii) the
wire instructions for all subsequent Advances.
4.2 Conditions to All Advances. At and as of each Advance Date,
the
obligation of Lender to make any Advance is subject to the following
further
conditions precedent:
(i) the representations and warranties of Borrower
contained
herein shall be accurate and complete to the same extent as though
made
on and as of that date;
(ii) no event shall have occurred and be continuing or
would
result from the consummation of the proposed Advance which
would
constitute an Event of Default or a Potential Event of Default;
(iii) Borrower shall have performed all agreements
and
satisfied all conditions which this Agreement provides
shall be
performed by it on or before such date;
(iv) no order, judgment or decree of any court,
arbitrator or
governmental authority shall purport to enjoin or restrain Lender
from
making that Advance;
(v) there shall not be pending or, to the
knowledge of
Borrower threatened, any action, suit, proceeding,
governmental
investigation or arbitration against or affecting Borrower
or any
property of Borrower, which has not been disclosed by
Borrower to
Lender in writing prior to the execution of this Agreement or
prior to
the making of the last preceding Advance, and there shall have
occurred
no development not disclosed by Borrower to Lender in writing
prior to
the execution of this Agreement or prior to the making of the
last
preceding Advance in any such action, suit, proceeding,
governmental
investigation or arbitration so disclosed, which, in either
event, in
the opinion of Lender, would reasonably be expected (a) to
materially
and adversely affect the business, operations, properties,
assets or
condition (financial or otherwise) of Borrower, or, (b) to
impair the
ability of Borrower to perform the Obligations or of Lender to
enforce
the Obligations;
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<PAGE>
(vi) Borrower shall have delivered to Lender, for its
review
and valuation, any Additional Collateral so that Lender can
determine
the related Collateral Value of such Additional Collateral;
(vii) Borrower shall have performed in all material
respects
all agreements which this Agreement provides shall be performed
on or
before the Advance Date;
(viii) all actions and documents required to create
and
perfect the first priority security interest and Liens in
the
Collateral shall have been duly authorized and executed and
delivered
(to lender, if applicable) or taken, in each case in a
manner
satisfactory to Lender and its counsel;
(ix) Borrower shall have delivered the related
Additional
Collateral to Lender on or prior to the respective Advance Date;
(x) all filings with respect to the Collateral
with
governmental agencies shall have been made or taken and completed;
and
(xi) Lender and its outside counsel shall have
received
certificates and opinions satisfactory to Lender and its
counsel and
dated as of the Advance Date, except with respect to any
Advance
secured by Collateral that is comprised of a Mortgage Related
Asset
that was issued or underwritten by Lender or an affiliate of
Lender.
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<PAGE>
ARTICLE V
SECURITY
5.1 Grant of Security Interest. To secure the payment of the
Advances
and the performance of the other Obligations, Borrower (i) pledges
and
hypothecates to Lender and grants a first priority security interest in
favor of
Lender, in all of Borrower's right, title and interest in and to the
Collateral
and (ii) pledges and hypothecates to Lender and grants a security
interest in
favor of Lender, in all of Borrower's property at any time held for any
purpose
by Lender or any affiliate of Lender, including, but not limited to,
property
held in any other accounts of Borrower with Lender or any affiliate of
Lender,
whether or not Lender has made advances in connection with such property.
Lender
may, without notice, transfer and retransfer from time to time any
money or
other property between any such accounts.
5.2 Authority to Collect. So long as no Event of Default shall
have
occurred and be continuing, Borrower shall have the right to collect for
its own
account all payments (but not proceeds of sale or other disposition
of the
Collateral) of principal, interest, penalties and other amounts due or to
become
due on the Collateral pledged and hypothecated under this Agreement.
5.3 Lender Appointed Attorney-in-Fact. Upon the occurrence
of and
during the continuance of an Event of Default, Borrower appoints
Lender, as
Borrower's attorney-in-fact, with full power of substitution, for the
purpose of
taking such action and executing such documents, in the name of
Borrower or
otherwise, as Lender may deem necessary or advisable to accomplish the
purposes
of this Agreement, which appointment is coupled with an interest
and is
irrevocable. Lender agrees promptly to notify Borrower after any such
action or
execution of instruments, provided that the failure to give such notice
shall
not affect the validity of such action or execution of instruments.
5.4 Security for Obligations. This Agreement shall create a
continuing
security interest in the Collateral and shall (i) remain in full
force and
effect until payment in full of all Obligations, (ii) be binding upon
Borrower,
its successors and assigns, and (iii) inure to the benefit of Lender
and its
successors, transferees and assigns. Upon the payment in full of
the
Obligations, Borrower shall be entitled to the return, upon its request
and at
its expense, of such of the Collateral as shall not have been sold or
otherwise
applied pursuant to the terms hereof.
17
<PAGE>
ARTICLE VI
COVENANTS OF BORROWER
Borrower covenants and agrees that until the payment in full
of all
Obligations, unless Lender shall otherwise give prior written consent,
Borrower
will perform all covenants in this Article VI.
6.1 Financial Statements and Other Reports. Borrower will
maintain a
system of accounting established and administered in accordance with
sound
business practices to permit preparation of financial statements in
conformity
with GAAP. Borrower will deliver, or cause to be delivered, to
Lender the
following:
(i) as soon as practicable and in any event within 45
days
after the end of each calendar quarter, a balance sheet of
Borrower as
at the end of such period and the related statements of
income,
shareholders' equity and statement of cash flows of Borrower for
such
quarter and for the period from the beginning of the current
fiscal
year to the end of such quarter, setting forth in each
case in
comparative form the figures for the corresponding periods
of the
previous fiscal year, all in reasonable detail and certified
by the
chief financial officer of Borrower that they fairly present
the
financial condition and results of operations of Borrower,
subject to
changes resulting from audit and normal year-end adjustments as
at the
end of and for the period covered thereby. The delivery by
Borrower to
Lender of Borrower's Form 10-Q for such period shall satisfy
the
requirements of this subdivision (i);
(ii) as soon as practicable and in any event within 90
days
after the end of each fiscal year, a balance sheet of Borrower
as at
the end of such fiscal year and the related statements of
income,
shareholders' equity and statement of cash flows of Borrower for
such
fiscal year, setting forth in each case in comparative form the
figures
for the previous year, all in reasonable detail and certified
by the
chief financial officer of Borrower and accompanied by a report
thereon
of independent certified public accountants of recognized
national
standing selected by Borrower and satisfactory to Lender which
report
shall state that such financial statements present fairly the
financial
position of Borrower as at the dates indicated and the results
of its
operations and statement of cash flows for the periods
indicated in
conformity with GAAP applied on a basis consistent with prior
years
(except as otherwise stated therein) and that the examination by
such
accountants in connection with such financial statements has been
made
in accordance with generally accepted auditing standards. The
delivery
by Borrower to Lender of Borrower's Form 10-K for such period
shall
satisfy the requirements of this subdivision (ii);
(iii) together with each delivery of financial
statements of
Borrower pursuant to subdivisions (i) and (ii) above, a
Compliance
Certificate, (a) stating that the signers of the Compliance
Certificate
have reviewed the terms of this Agreement and the Note and have
made,
or caused to be made under their supervision, a review in
18
<PAGE>
reasonable detail of the transactions and condition of Borrower
during
the accounting period covered by such financial statements and
that
such review has not disclosed the existence during or at the
end of
such accounting period, and that the signers do not have
knowledge of
the existence as at the date of the Compliance Certificate,
of any
condition or event which constitutes an Event of Default or
Potential
Event of Default, or, if any such condition or event existed or
exists,
specifying the nature and period of existence thereof and what
action
Borrower has taken, is taking and proposes to take with respect
thereto
and (b) demonstrating in reasonable detail compliance during and
at the
end of such accounting periods with the restrictions
contained in
Section 6.7;
(iv) promptly upon becoming available to Borrower,
copies of
any press releases issued by Borrower or any Affiliate; and
(v) promptly upon any officer of Borrower obtaining
knowledge
(a) of any condition or event which constitutes an Event of
Default or
Potential Event of Default, (b)that any Person has given any
notice to
Borrower or taken any other action with respect to a claimed
default or
event or condition of the type referred to in subsection B of
Section
7.1, or (c) of the institution of any litigation involving an
alleged
liability of Borrower equal to or greater than $500,000, or any
adverse
determination in any litigation involving a potential
liability of
Borrower equal to or greater than $500,000, or any
adverse
determination in any litigation which would materially adversely
affect
the business, operations, properties, assets or condition
(financial or
otherwise) or the validity or enforceability of this
Agreement or
Borrower's ability to perform the Obligations, an
Officers'
Certificate specifying the nature and period of existence of any
such
condition or event, or specifying the notice given or action
taken by
such holder or Person and the nature of such claimed default,
Event of
Default, Potential Event of Default, event or condition, and
what
action Borrower has taken, is taking and proposes to take with
respect
thereto.
6.2 Existence; Franchises. Borrower will at all times preserve and
keep
in full force and effect its corporate existence and all rights,
licenses and
franchises material to its business.
6.3 Payment of Taxes and Claims. Borrower will pay all
taxes,
assessments and other governmental charges imposed upon it or any
of its
properties or assets before any penalty or interest accrues thereon,
and all
claims (including, without limitation, claims for labor, services,
materials and
supplies) for sums which have become due and payable and which by law
have or
may become a Lien upon any of its properties or assets, prior to the time
when
any penalty or fine shall be incurred with respect thereto; provided
that no
such charge or claim need be paid if being contested in good
faith by
appropriate proceedings promptly instituted and diligently conducted and if
such
reserve or other appropriate provision, if any, as shall be
required in
conformity with GAAP shall have been made therefor.
6.4 Inspection. Borrower will permit any authorized
representatives of
Lender
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<PAGE>
to visit and inspect any of the properties of Borrower including its
financial
and accounting records, and to make copies and take extracts therefrom,
and to
discuss its affairs, finances and accounts with its officers and,
with the
permission of Borrower (which may not be unreasonably withheld), its
independent
public accountants, all upon reasonable notice and at such reasonable
times
during normal business hours and as often as may be reasonably
requested;
provided that no permission of Borrower shall be required in order to
discuss
Borrower's affairs, finances and accounts during an Event of
Default or
Potential Event of Default; provided, further, that Lender shall
use any
non-public information obtained during such visit or inspection only
for the
purposes contemplated by this Agreement and shall not disclose any
such
non-public information to any person without Borrower's prior consent.
6.5 Compliance with Laws, etc. Borrower will exercise all due
diligence
in order to comply with the requirements of all applicable laws,
rules,
regulations and orders of any governmental authority, noncompliance with
which
would materially adversely affect the business, properties, assets,
operations
or condition (financial or otherwise) of Borrower.
6.6 Restriction on Fundamental Changes. Borrower will not enter
into
any transaction of merger or consolidation, or liquidate, wind up or
dissolve
itself (or suffer any liquidation or dissolution), or, except in the
ordinary
course of business, convey, sell, lease, transfer or otherwise dispose
of, in
one transaction or a series of transactions, all or any substantial part
of its
business, property or assets, whether now owned or hereafter
acquired, or
acquire by purchase or otherwise all or substantially all the business,
property
or fixed assets of, or stock or other evidence of beneficial ownership
of, any
Person.
6.7 Financial Covenants.
A. Net Worth. Borrower will not permit its Net Worth at any time
to be
less than $10,000,000.
B. Indebtedness Ratio. Borrower will not permit the ratio of its
total
liabilities (as calculated in accordance with GAAP) to total
shareholder
equity (as calculated in accordance with GAAP) to equal or exceed
10:1.
6.8 Notice of Changes in Articles or Bylaws. Borrower shall
notify
Lender of any anticipated change in the provisions of Borrower's
Articles of
Incorporation or Bylaws.
6.9 Further Assurances. Borrower shall, at Borrower's expense,
do all
such further acts, and execute, acknowledge and deliver all such
further
documents as Lender reasonably shall require to more fully or effectively
carry
out the intention or facilitate the performance of this Agreement.
6.10 Borrower's Securities Activities. No part of the proceeds
of any
Advance made hereunder will be used for "purchasing" or "carrying" Margin
Stock
or for any purpose which violates, or would be inconsistent with, the
provisions
of the Regulations of the Board of
20
<PAGE>
Governors of the Federal Reserve System.
6.11 Independence of Covenants. All covenants hereunder shall be
given
independent effect so that if a particular action or condition is not
permitted
by any of such covenants, the fact that it would be permitted by an
exception
to, or be otherwise within the limitations of, another covenant shall not
avoid
the occurrence of an Event of Default or Potential Event of Default if
such
action is taken or condition exists.
6.12 Corporate Separation and Indebtedness.
So long as the Obligations are outstanding, Borrower
covenants and
agrees, for the benefit of Lender, that:
A. At all times, at least one member of its Board of Directors
will be
a Person (which may be the same Person) who is not a director
of any
Affiliate of Borrower.
B. It will maintain corporate records and books of account
separate
from those of any Affiliate of Borrower.
C. It will not commingle its funds or assets with those of any
Person.
D. Its Board of Directors will hold all appropriate
meetings to
authorize and approve its corporate actions.
E. It shall not be liable for or issue, incur, or assume any
other
indebtedness, or guaranty any indebtedness of any Person other
than a
Subsidiary.
F. In all matters relating to the operation of Borrower
and an
Affiliate of Borrower, neither Borrower nor any agent acting on
behalf of
Borrower will hold out or represent that Borrower and any
Affiliate
constitute a single entity or that either has the authority to
act on
behalf of the other.
6.13 Other Agreements:
A. Borrower will not request or permit any Person to take any
action
which might adversely affect Lender's interest in the Collateral
or the
value of the Collateral without obtaining the prior written
consent of
Lender.
B. Borrower will not consent to any amendment to any documents
relating
to Collateral without obtaining the prior written consent of Lender.
21
<PAGE>
ARTICLE VII
EVENTS OF DEFAULT
7.1 Events of Default. If any of the following conditions or
events
("Events of Default") shall occur:
A. Failure to Make Payments When Due. Failure to pay the
principal of
an Advance when due, whether at stated maturity, by acceleration, by
notice
of prepayment or otherwise; or failure to pay any installment of
interest
on the Advance or any other amount due under this Agreement on the due
date
thereof; or
B. Default in Other Agreements. Failure of Borrower to pay
or any
default in the payment of any amount of principal of or interest
on any
other Indebtedness in the aggregate principal amount of $500,000 or
more,
or in the payment of any Contingent Obligation in the aggregate
principal
amount of $500,000 or more, beyond any period of grace provided
unless a
bond or other provision for payment thereof reasonably
satisfactory to
Lender has been made; or breach or default with respect to any
other
material term of any evidence of any other Indebtedness or of any
loan
agreement, mortgage, indenture or other agreement relating thereto,
or any
Contingent Obligation, if the effect of such default or breach is to
cause
Indebtedness of Borrower in the aggregate amount of $500,000 or
more to
become or be declared due prior to its stated maturity; or
C. Breach of Covenants. Failure of Borrower to perform or comply
with
any material term or condition applicable to it contained in
this
Agreement, provided, however, that with respect to the covenants
contained
in subsections (i), (ii) or (iv) of Section 6.1 or in Section 6.8
Lender
shall give Borrower three Business Days' notice before such failure
shall
become an Event of Default; or
D. Breach of Warranty. Any of Borrower's representations or
warranties
made or deemed made herein or in any statement, notice or
certificate at
any time given by Borrower in writing pursuant hereto or in
connection
herewith shall be incorrect, incomplete or misleading in any
material
respect on the date as of which made or deemed made; or
E. Other Defaults. Borrower shall default in the performance
of or
compliance with any term contained in this Agreement other than
those
referred to above in subsections A, C or D of this Section 7.1; or
F. Involuntary Bankruptcy; Appointment of Receiver, etc. (i) A
court
having jurisdiction in the premises shall enter a decree or
order for
relief in respect of Borrower, in an involuntary case under any
applicable
bankruptcy, insolvency or other similar law now or hereafter in
effect,
which decree or order is not stayed; or (ii) any other similar relief
shall
be granted under any applicable Federal or state law; or (iii) a
22
<PAGE>
decree or order of a court having jurisdiction in the premises
for the
appointment of a receiver, liquidator, sequestrator, trustee,
custodian or
other officer having similar powers over Borrower, or over all
or a
substantial part of their respective property, shall have been
entered; or
(iv) the involuntary appointment shall be made of an interim
receiver,
trustee or other custodian of Borrower, for all or a substantial
part of
their respective property (by petition, application, answer,
consent or
otherwise); or (v) a warrant of attachment, execution or similar
process
shall be issued against any substantial part of the property of
Borrower;
or
G. Voluntary Bankruptcy; Appointment of Receiver; Material
Adverse
Change. Borrower shall have an order for relief entered with respect
to it
or commence a voluntary case under any applicable bankruptcy,
insolvency or
other similar law now or hereafter in effect, or shall consent to the
entry
of an order for relief in an involuntary case, or to the conversion
to an
involuntary case, under any such law, or shall consent to the
appointment
of or taking possession by a receiver, trustee or other custodian
for all
or a substantial part of its or his property; the making by Borrower
of any
assignment for the benefit of creditors; the inability or
failure of
Borrower, or the admission by Borrower in writing of its or his
inability,
to pay its or his debts as such debts become due or the Board of
Directors
of Borrower (or any committee thereof) adopts any resolution or
otherwise
authorizes action to approve any of the foregoing; or Lender
determines in
its sole discretion that there has been a material adverse
change in
Borrower's financial condition; or
H. Judgments and Attachments. Any money judgment, writ or
warrant of
attachment, or similar process involving in any case an amount in
excess of
$500,000 shall be entered or filed against Borrower or any of its
assets
and shall remain undischarged, unvacated, unbonded or unstayed for a
period
of ten days or in any event later than five days prior to the date
of any
proposed sale thereunder; or
I. Dissolution. Any order, judgment or decree shall be entered
against
Borrower decreeing the dissolution or splitting up of Borrower; or
J. Failure of Security Interest. The security interest of Lender
in any
portion of the Collateral shall become impaired or unenforceable;
THEN
(i) Upon the occurrence of any Event of Default
described in
subsections F or G of Section 7.1, the unpaid principal amount
of and
accrued interest on the Note and any fees due hereunder shall
automatically
become due and payable, without presentment, demand, notice or
other
requirements of any kind, all of which are hereby expressly
waived by
Borrower, and the obligation of Lender to make any further Advances
shall
thereupon terminate.
(ii) Upon the occurrence of any Event of Default (other than those
23
<PAGE>
described in subsection F or G of Section 7.1), Lender may, by written
notice to
Borrower, declare the unpaid principal amount of and accrued interest
on the
Note and any fees or any other amounts due hereunder to be due and
payable
whereupon the same shall forthwith become due and payable, without
presentment,
demand, notice or other requirements of any kind, all of which are
hereby
expressly waived by Borrower, and the obligation of Lender to make any
further
Advances shall thereupon terminate. If Borrower learns of the occurrence
of an
Event of Default hereunder, Borrower shall promptly notify Lender; provided
that
the failure of Borrower to provide any such notice shall not limit or
otherwise
affect the Obligations or the rights of Lender hereunder.
(iii) Upon the occurrence of any Event of Default, Lender may do
any of
the following:
(a) Collect by legal proceedings all interest, principal
payments and
other sums payable with respect to any outstanding Advance.
(b) Foreclose upon or otherwise enforce its security interest
in and
Lien on the Collateral pursuant to this Agreement.
(c) Sell the Collateral in one or more lots, at one or more
times, at
public or private sales, in an established market therefor or
otherwise, as
Lender may elect, at such prices and on such terms, as to cash or
credit,
as Lender may deem proper. Any sale may be made at any place
designated by
Lender, and Lender shall have the right to become the purchaser at any
such
sale which is open to the public and, to the extent permitted by
law,
private sales. If notice is given of the sale of any Collateral,
it is
agreed that notice shall be satisfactorily given for all purposes if
Lender
sends, via facsimile transmission, a copy of such notice to
Borrower not
less than two days prior to such sale. The foregoing notice
provisions
shall not preclude Lender's rights to foreclose upon the Collateral
in any
other manner permitted under the Uniform Commercial Code of the
State of
New York; provided that a sale of the Collateral in accordance with
such
notice requirements shall be deemed a disposal of the Collateral
in a
commercially reasonable manner. Lender shall have the right in
connection
with the Collateral either to sell the same as above provided,
or to
foreclose, sue upon, or otherwise seek to enforce the same in its own
name
or in the name of Borrower as provided herein. Subject to the
foregoing
provisions of this paragraph, after an Event of Default shall occur
and be
continuing, Lender shall have the right to renew, extend the
time of
payment of, or otherwise amend, supplement, settle or compromise,
in any
manner, any obligations for the payment of money included in
the
Collateral, any security therefor and any other agreements,
instruments,
claims or chooses in action of any kind which may be included
in the
Collateral. Each purchaser at any sale or other disposition shall
hold the
Collateral free from any claim or right of whatever kind, including
any
equity or right of redemption of Borrower, and Borrower specifically
waives
(to the extent permitted by law) all rights of redemption,
stay or
appraisal which it has or may have under any rule of law or statute
now
existing or hereafter adopted.
24
<PAGE>
(d) Take possession of all or any portion of the Collateral that
is not
already in the possession of Lender, and Borrower agrees to
assemble and
make available the Collateral to Lender at a convenient location.
Lender
may manage and protect the Collateral, do any acts which Lender
deems
proper to protect the Collateral as security hereunder, and sue
upon any
contract or claim relating to the Collateral and receive any
payments due
thereon or any damages thereunder, and apply all sums received
to the
payment of the Obligations secured hereby in accordance with Section
7.2.
(e) Be entitled, without regard to the adequacy of the security
for the
Obligations secured hereby, to the appointment of a receiver by any
court
having jurisdiction, and without notice, to take possession of and
protect,
collect, manage, liquidate and sell the Collateral or any portion
thereof,
collect the payments due with respect to the Collateral or any
portion
thereof, and do anything that Lender is authorized with respect
thereto to
do.
(f) Grant extensions of time, make any compromise or
settlement it
deems desirable with respect to the Collateral, or waive or
release any
security interest in Collateral.
(g) Exercise all rights and remedies of a secured creditor
under the
Uniform Commercial Code.
(h) Require Borrower to pursue, to the extent applicable, in
its own
name but for the benefit of Lender, any one or more of the
remedies
described in (a) through (g) above.
(i) All remedies are cumulative. Any failure on the part of
Lender to
exercise or any delay in exercising any right hereunder shall not
operate
as a waiver thereof, nor shall any single or partial exercise by
Lender of
any right hereunder preclude any other exercise thereof or the
exercise of
any other right.
7.2 Application of Proceeds. Any money collected by Lender
pursuant to
this Article VII (whether upon voluntary payment, foreclosure or
otherwise)
shall be promptly applied as follows unless otherwise required by
provisions of
applicable law:
(i) first, to the payment of all expenses incurred by Lender under
this
Agreement and in enforcing its rights and the rights of Lender
hereunder,
including all costs and expenses of collection, attorneys' fees,
court
costs, and foreclosure expenses;
(ii) next, to the payment of all principal and interest due and
unpaid
on any Advance;
(iii) next, to the payment of any other Obligations owed by
Borrower to
Lender; and
25
<PAGE>
(iv) next, to Borrower or as a court of competent jurisdiction
may
direct.
26
<PAGE>
ARTICLE VIII
MISCELLANEOUS
8.1 Expenses. Whether or not the transactions contemplated hereby
shall
be consummated, Borrower agrees to pay on demand (i) all the costs of
furnishing
all opinions by counsel for Borrower (including without limitation any
opinions
requested by Lender as to any legal matters arising hereunder),
and of
Borrower's performance of and compliance with all agreements and
conditions
contained herein on its part to be performed or complied with; (ii) the
cost of
delivering to Lender the Note pursuant to the provisions of this
Agreement;
(iii) all the actual costs and expenses of creating and perfecting
Liens in
favor of Lender, pursuant to this Agreement, including filing and recording
fees
and expenses, reasonable fees and expenses of counsel for providing
such
opinions as Lender may reasonably request; (iv) all other actual and
reasonable
out-of-pocket expenses incurred by Lender in connection with the
administration
of this Agreement, and the other documents contemplated herein or
therein, and
the making of the Advances; and (v) after the occurrence of an Event of
Default,
all costs and expenses (including reasonable attorneys' fees and
costs of
settlement) incurred by Lender in enforcing any Obligations of or in
collecting
any payments due from Borrower hereunder, under the Note by reason of such
Event
of Default. Attorneys' fees, expenses and disbursements incurred in
enforcing,
or on appeal from, a judgment pursuant hereto shall be recoverable
separately
from and in addition to any other amount included in such judgment, and
this
clause is intended to be severable from the other provisions of this
Agreement
and to survive and not be merged into such judgment.
8.2 Indemnity by Borrower.
A. Indemnification by Borrower. In addition to the payment of
expenses
pursuant to Section 8.1, whether or not the transactions
contemplated
hereby shall be consummated, Borrower agrees to indemnify, pay and
hold
harmless Lender and the officers, directors, employees and agents of
Lender
(collectively called the "Indemnitees"), from and against any and all
other
liabilities, obligations, losses damages, penalties, actions,
judgments,
suits, claims, costs, expenses and disbursements (including,
without
limitation, the reasonable fees and disbursements of counsel for
such
Indemnitees in connection with any investigative,
administrative or
judicial proceeding, whether or not such Indemnitee shall be
designated a
party thereto), which may be imposed on, incurred by, or asserted
against
such Indemnitee, in any manner relating to or arising out of the
use or
intended use of the proceeds of the Advances or on account
of the
Collateral taken hereunder (the "indemnified liabilities"); provided
that
Borrower shall have no obligation hereunder with respect to
indemnified
liabilities arising from the gross negligence or willful misconduct
of any
such Indemnitee. To the extent that the undertaking to indemnify,
pay and
hold harmless set forth in the preceding sentence may be
unenforceable
because it violates any law or public policy, Borrower shall
contribute the
maximum portion which it is permitted to pay and satisfy under
applicable
law, to the payment and satisfaction of all indemnified
liabilities
incurred by the Indemnitees or any of them.
27
<PAGE>
B. Claims. If any claim is made, or any action, suit or
proceeding is
brought against any Person indemnified pursuant to this Section
8.2, the
Indemnitee shall notify Borrower of such claim or of the
commencement of
such action, suit or proceeding, and Borrower will assume the
defense of
such action, suit or proceeding, employing counsel selected by
Borrower and
reasonably satisfactory to such Indemnitee and pay the fees and
expenses of
such counsel; provided, however, that if counsel to the Indemnitee
shall
reasonably determine that, due to conflicts in the liabilities or
defenses
of Borrower and Lender, Lender should retain its own counsel, Lender
shall
have the right to retain counsel and the reasonable fees and
expenses of
such counsel shall be for the account of Borrower.
8.3 Set-Off. Borrower hereby grants to Lender a right of
set-off
against the payment of any amounts that may be due and payable to Lender
from
Borrower or any Affiliate, such right to be upon any and all monies or
other
property of Borrower or any Affiliate held or received by Lender
(or any
Affiliate of Lender) or due and owing from Lender to Borrower or any
Affiliate.
8.4 Amendments and Waivers. No amendment, modification,
termination or
waiver of any provision of this Agreement or of the Note, or consent
to any
departure by Borrower therefrom, shall in any event be effective
without the
written concurrence of Lender.
8.5 Notices. Unless otherwise specifically provided herein, any
notice
or other communication herein required or permitted to be given shall
be in
writing and may be personally served, telecopied, telexed or sent by
overnight
courier and shall be deemed to have been given when delivered in person,
upon
receipt of telecopy or telex or two Business Days after deposit
with an
overnight courier. For the purposes hereof, the addresses of the parties
hereto
(until notice of a change thereof is delivered as provided in this Section
8.5)
shall be as set forth under each party's name on the signature pages
hereof.
8.6 Attorneys' Fees. Subject to Sections 8.1, 8.2 and 8.3, if any
party
hereto commences litigation for the interpretation, enforcement,
termination,
cancellation or rescission hereof, or for damages for the breach hereof,
the
prevailing party in such action shall be entitled to its reasonable
attorneys'
fees and court and other costs incurred, to be paid by the losing party as
fixed
by the court or in a separate action brought for that purpose.
8.7 Survival of Warranties and Certain Agreements.
A. Agreement. All covenants, agreements, representations and
warranties
made herein shall survive the execution and delivery of this
Agreement, the
making of the Advances hereunder and the execution and delivery
of the
Note.
B. Termination. Notwithstanding anything in this Agreement or
implied
by law to the contrary, the agreements of Borrower set forth in
Sections
8.1, 8.2 and 8.3 shall survive the payment of the Advances and the
Note and
the termination of
28
<PAGE>
this Agreement.
8.8 Failure or Indulgence Not Waiver; Remedies Cumulative. No
failure
or delay on the part of Lender in the exercise of any power, right or
privilege
hereunder or under the Note shall impair such power, right or privilege
or be
construed to be a waiver of any default or acquiescence therein, nor
shall any
single or partial exercise of any such power, right or privilege preclude
other
or further exercise thereof or of any other right, power or privilege.
All
rights and remedies existing under this Agreement or the Note are
cumulative to
and not exclusive of, any rights or remedies otherwise available.
8.9 Severability. In case any provision in or obligation under
this
Agreement or the Note shall be invalid, illegal or unenforceable
in any
jurisdiction, the validity, legality and enforceability of the
remaining
provisions or obligations, or of such provision or obligations in any
other
jurisdiction, shall not in any way be affected or impaired thereby.
8.10 Headings. Article, section and subsection headings in
this
Agreement are included herein for convenience of reference only and
shall not
constitute a part of this Agreement for any other purpose or be given
any
substantive effect.
8.11 Applicable Law. This Agreement and the Note shall be
governed by,
and shall be construed and enforced in accordance with, the laws of the
State of
New York.
8.12 Successors and Assigns; Subsequent Holders of Note. This
Agreement
shall be binding upon the parties hereto and their respective successors
and
assigns and shall inure to the benefit of the parties hereto and the
successors
and assigns of Lender. The terms and provisions of this Agreement shall
inure to
the benefit of any assignee or transferee of the Note, and in the event of
such
transfer or assignment, the rights and privileges herein conferred upon
Lender
shall automatically extend to and be vested in such transferee or assignee,
all
subject to the terms and conditions hereof. Borrower's rights,
obligations or
any interest therein hereunder may not be assigned without the express
written
consent of Lender.
8.13 Counterparts; Effectiveness. This Agreement and any
amendments,
waivers, consents, or supplements may be executed in any number of
counterparts,
and by different parties hereto in separate counterparts, each of which
when so
executed and delivered shall be deemed an original, but all such
counterparts
together shall constitute but one and the same instrument.
29
<PAGE>
WITNESS the due execution hereof by the respective duly
authorized
officers of the undersigned as of the date first written above.
TIS MORTGAGE INVESTMENT COMPANY
By: /s/ John Costello
-----------------------------------------
Name: John Costello
-----------------------------------------
Title: Executive VP and Chief Financial Officer
-----------------------------------------
By: /s/ Lorraine O. Legg
-----------------------------------------
Name: Lorraine O. Legg
-----------------------------------------
Title: President and CEO
-----------------------------------------
Notice Address:
655 Montgomery St., Suite 800
San Francisco, California 94111
Attention: John Costello
Telephone: (415) 274-1830
Telecopier: (415) 393-8006
PAINE WEBBER REAL ESTATE
SECURITIES INC.
By
Name: Al Marrapodi
Title: Managing Director
Notice Address:
1285 Avenue of the Americas
New York, New York 10019
Attention: Al Marrapodi
Managing Director
Telephone: (212) 713-6042
Telecopier: (212) 265-3881
<PAGE>
EXHIBIT B
PROMISSORY NOTE
$10,000,000 New York, New
York
Dated: July 19,
1995
FOR VALUE RECEIVED, the undersigned TIS MORTGAGE INVESTMENT
COMPANY
having its principal place of business at 655 Montgomery St., Suite
800, San
Francisco, California 94111 ("Borrower"), promises to pay to the order of
PAINE
WEBBER REAL ESTATE SECURITIES INC., a Delaware corporation, with its
principal
office at 1285 Avenue of the Americas, New York, New York 10019
("Lender"), at
the Lender's principal office or at such other place as the holder
hereof may
designate, in lawful money of the United States of America and in
immediately
available funds, the lesser of (i) the principal sum of TEN MILLION
DOLLARS
($10,000,000) or (ii) the sum of the unpaid principal amounts of the
advances
("Advances") made by the Lender to the Borrower and recorded on the
"Advance
Schedule" attached hereto, plus interest, as provided herein.
The Borrower shall pay to the Lender interest on each Advance from
time
to time outstanding at a rate per annum equal to that rate set forth
in the
"Interest Rate" column attached to the Note. Such interest shall be
due and
payable monthly in arrears commencing on the applicable date of an
advance and
continuing on the applicable Interest Maturity Date (as defined below)
until and
including payment in full of the unpaid principal amount of such
Advance. As
used in the schedule attached to the Note, the term "LIBOR" means the
London
interbank offered rate for U.S. Dollar deposits appearing on page five
of the
Telerate screen at 9:00 a.m. (New York City time) on the related date
having a
term which most closely approximates the term used in connection therewith.
With respect to each Advance recorded on the "Advance
Schedule"
attached hereto, the "Interest Maturity Date" shall mean the applicable
date set
forth in the "Interest Maturity Date" column of such "Advance Schedule".
With respect to each Advance, the Borrower shall pay to the
Lender (i)
on the Interest Maturity Date, in full, the accrued and unpaid interest on
such
Advance and (ii) on the date set forth in the "Advance Maturity Date"
column of
the applicable schedule attached hereto (the "Advanced Maturity Date"), in
full,
the outstanding principal amount of such Advance.
All Advances made by the Lender hereunder and all payments
made on
account of the principal hereof shall be recorded by the Lender on the
schedule
attached to this Note (provided that any failure by the Lender to make any
such
notation on such schedule shall not affect the obligations of the
Borrower
hereunder).
If any amount due hereunder is not paid when due (whether at
stated
maturity,
1
<PAGE>
by acceleration or otherwise) a rate per annum during the period
commencing on
the due date until such amount is paid in full equal to 3% above the
otherwise
applicable rate, to the extent permitted by applicable law, shall be
imposed on
said amount.
Interest shall be computed for the actual number of days elapsed
on the
basis of a 360-day year. In no event shall interest be chargeable or
collectible
hereunder in excess of the maximum lawful rate under applicable law.
The Borrower promises to pay the holder hereof all costs and
expenses
of collection of this Note and to pay all attorney's fees incurred in
such
collection or in any suit or action to collect this Note and any appeal
thereof.
The provisions of this Note shall inure to the benefit of the
Lender
and its successors and assigns and be binding on the Borrower and its
successors
and assigns. This Note shall in all respects be governed by, and
construed in
accordance with, the laws of the State of New York, including all
matters of
construction, performance and validity. The Borrower waives
presentment and
demand for payment, notice of dishonor, protest and notice of protest of
this
Note. No failure or delays by the Lender in the exercise of any power or
right
under this Note shall operate as a waiver thereof, and no exercise or
waiver of
any single power or right, or the partial exercise thereof, shall
affect the
Lender's rights with respect to any and all other rights and powers.
The Borrower hereby irrevocably consents and submits to
the
nonexclusive jurisdiction and venue of any State or Federal Court sitting
in New
York County over any action or proceeding arising out of or relating to
this
Note or any document or instrument delivered in connection herewith,
and the
Borrower hereby irrevocably agrees that all claims in respect of such
action or
proceeding may be heard and determined in such State or Federal Court.
The
Borrower waives any objection to any action or proceeding in any
State or
Federal Court sitting in New York County on the basis of forum non
conveniens.
The Borrower hereby waives the right to trial by jury, rights of set-
off and
rights to interpose counterclaims of any nature, except for
compulsory
counterclaims. The Borrower agrees that a final judgment in any such
action or
proceeding shall be conclusive and may be enforced in other
jurisdictions by
suit on the judgment or in any other manner provided by law. The
Borrower
further agrees that any action or proceeding brought against the Lender
shall be
brought only in any State or Federal Court sitting in New York County.
The
Borrower further agrees that in the Lender's discretion, it may serve
legal
process in any other manner permitted by law and may bring any
action or
proceeding against the Borrower or its property in the courts of any
other
jurisdiction.
The unenforceability or invalidity of any provision or
provisions of
this Note shall not render any other provision or provisions herein
contained
unenforceable or invalid.
2
<PAGE>
This Note cannot be amended, modified or changed in any way except
by a
written instrument executed by both the Borrower and the Lender.
TIS MORTGAGE INVESTMENT COMPANY
By: /s/ Lorraine O. Legg
-----------------------------------------
Name: Lorraine O. Legg
-----------------------------------------
Title: President and CEO
-----------------------------------------
3
