<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NO. 1-10004
TIS MORTGAGE INVESTMENT COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 94-3067889
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
655 MONTGOMERY STREET 94111
SAN FRANCISCO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415) 393-8000
______________________
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 AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES X NO
----- -----
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE.
<TABLE>
<CAPTION>
CLASS OF COMMON STOCK OUTSTANDING AT NOVEMBER 13, 1996
--------------------- --------------------------------
<S> <C>
$.001 PAR VALUE 8,105,880 SHARES
</TABLE>
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY
INDEX
Part I. Financial Information
<TABLE>
<CAPTION>
Page Number
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
Three months and nine months ended September 30, 1996 and 1995 3
Condensed Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
------ ------- ------ ------
<S> <C> <C> <C> <C>
MORTGAGE RELATED ASSETS
Interest
Mortgage Certificates, net $1,746 $ 3,615 $6,102 $11,182
Short-term Investments 1 43 15 93
Residual Interests 16 25 5 1,515
Interest Only (IO) Bonds 118 145 338 935
Commercial Securitizations 0 34 0 89
Valuation Reserve Reduction 129 158 539 381
Gain (Loss) on Sales of Investments 0 (1,267) 450 (1,241)
------ ------- ------ -------
Income from Mortgage Related Assets 2,010 2,753 7,449 12,954
------ ------- ------ -------
REAL ESTATE OPERATIONS
Rental and Other Income 1,012 631 3,018 1,396
Operating and Maintenance Expenses (401) (270) (1,045) (523)
Depreciation and Amortization (178) (150) (517) (345)
Interest on Real Estate Notes Payable (431) (254) (1,294) (537)
Property Taxes (85) (61) (264) (117)
Loss from Real Estate Operations (83) (104) (102) (126)
------ ------- ------ -------
INTEREST AND CMO RELATED EXPENSES
Collateralized Mortgage Obligations
Interest 1,862 3,686 6,549 12,093
Administration Fees 16 34 53 118
Deferred Bond Issuance Costs 26 93 124 228
Short-term Debt 37 82 118 360
Total Interest and CMO Related Expenses 1,941 3,895 6,844 12,799
------ ------- ------ -------
OTHER EXPENSES
Management and Residual
Interest Administration Fees 0 50 77 165
General and Administrative 331 323 1,068 930
Total Other Expenses 331 373 1,145 1,095
------ ------- ------ -------
Net Loss ($345) ($1,619) ($642) ($1,066)
====== ======= ====== =======
Net Loss per Share Outstanding ($0.04) ($0.20) ($0.08) ($0.13)
Dividends Declared per Share $0.02 $0.00 $0.02 $0.00
Weighted Average Shares Outstanding 8,106 8,106 8,106 8,106
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Mortgage Related Assets
Mortgage Certificates, net $ 75,432 $109,752
Residual Interests 524 725
Interest Only (IO) Bonds 3,012 3,150
Commercial Securitizations 183 191
Reserve for Loss on Investments (3,109) (4,277)
-------- --------
Total Real Estate Investments 76,042 109,541
-------- --------
Operating Real Estate Assets 29,039 29,384
-------- --------
Other Assets
Cash and Cash Equivalents 286 198
Restricted Cash 1,634 2,728
Accrued Interest and Accounts
Receivable 686 1,672
Deferred Bond Issuance Costs 620 1,414
Other Assets 679 310
-------- --------
Total Other Assets 3,905 6,322
-------- --------
Total Assets $108,986 $145,247
======== ========
LIABILITIES
Collateralized Mortgage Obligations, net $ 73,174 $108,438
Accounts Payable and Accrued Liabilities 699 593
Accrued Interest Payable 1,098 1,755
Notes Payable on Real Estate 20,399 20,362
Short-term Debt 1,960 2,118
Dividend Payable 162 0
-------- --------
Total Liabilities 97,492 133,266
-------- --------
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 (1,927) (2,244)
Retained Deficit (61,283) (60,479)
-------- --------
Total Shareholders' Equity 11,494 11,981
-------- --------
Total Liabilities and
Shareholders' Equity $108,986 $145,247
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) ($ 642) ($1,066)
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization of Operating Real Estate Assets 512 345
Other Depreciation and Amortization 647 1,219
Valuation Reserve Provision (539) 382
Gain on Sales of Investments (450) (1,241)
Increase (Decrease) in Accrued Interest and Accounts Receivable (274) (499)
Decrease (Increase) in Other Assets (375) 198
Decrease in Accounts Payable and Accrued Liabilities 105 94
Decrease in Accrued Interest Payable (261) (227)
-------- --------
Net Cash Used in Operating Activities (1,277) (795)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Short-term Debt (158) (5,343)
Increase (Decrease) in Notes Payable on Real Estate 37 14,084
Principal Payments on CMO's (14,695) (17,567)
-------- --------
Net Cash Used in Financing Activities (14,816) (8,826)
-------- --------
CASH FLOWS FROM INVESTMENT ACTIVITIES
Net Decrease in Restricted Cash 536 258
Investment in Real Estate Assets (166) (21,268)
Proceeds from Sales of Investments 450 8,904
Principal Reduction in Mortgage Certificates 14,676 16,719
Principal Reduction in Residual Interests 67 1,191
Principal Reduction in IO Bonds 610 2,159
Principal Reduction in Commercial Securitizations 8 98
-------- --------
Net Cash Provided by Investment Activities 16,181 8,061
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 88 (1,560)
Cash and Cash Equivalents at Beginning of Period 198 1,718
-------- --------
Cash and Cash Equivalents at End of Period $ 286 $ 158
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements
do not include all of the information and disclosures generally required for
annual financial statements. They include the accounts of the Company, its
wholly-owned subsidiary and its partnership interests in real estate assets.
All significant intercompany balances and transactions have been eliminated. In
the opinion of the Company's management, all material adjustments of a normal
and recurring nature considered necessary for a fair presentation of results of
operations for the interim periods have been included. The results of
consolidated operations for the three and nine month periods ended September 30,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. These condensed consolidated financial
statements should be read in conjunction with the December 31, 1995 consolidated
financial statements and notes thereto.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OVERALL METHODS OF ACCOUNTING - On May 31, 1990, the Emerging Issues
Task Force of the Financial Accounting Standards Board reached a consensus
(issue 89-4) for a uniform method of accounting for Residual Interests in
collateralized mortgage obligations ("CMOs"). The consensus, among other
things, required Residual Interests to be classified either as "equity" (and be
accounted for under the Equity Method) or as "nonequity" (and be accounted for
under a level yield method referred to as the Prospective Method). The methods
described in issue 89-4 are essentially the same as those used by the Company.
ACCOUNTING CHANGE - On December 31, 1993 the Company adopted Financial
Accounting Standards Board Standard No. 115 ("SFAS 115") - Accounting for
Certain Investments in Debt and Equity Securities. In accordance with this new
standard, the Company is required to classify its investments as either trading
investments, available-for-sale investments or held-to-maturity investments.
The Company is not in the business of trading its real estate investments,
however, from time to time the Company may sell an investment as part of its
efforts to adjust its portfolio composition to reflect changes in economic
conditions. Therefore, the Company has classified all its real estate
investments as available-for-sale investments, carried at fair value in the
financial statements. Unrealized holding gains and losses for unimpaired
available-for-sale investments are excluded from earnings and reported as a net
amount in shareholders' equity until realized.
All of the Company's investments are subject to write down whenever
the yield on the projected cash flows is less than a risk free rate. If the
yield on the projected cash flows is less than a risk free rate, the decline in
value is considered to be "other than temporary" and the investment is written
down to its fair value as the new cost basis. The amount of the write down is
included in the Company's current earnings (i.e. accounted for as a realized
loss). The Emerging Issues Task Force of the Financial Accounting Standards
Board reached a consensus (EITF 93-18) as to the definition of "other than
temporary" impairment. The Company's accounting policy is consistent with this
consensus.
For purposes of applying the impairment provisions of SFAS 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.
PRINCIPLES OF CONSOLIDATION - In 1995 the Company sold its economic
interest in TIS Mortgage Acceptance Corporation ("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 this
6
<PAGE>
transaction, 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. 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.
In 1996 the Company sold its economic interest in TMAC CMO Trust 1986-
1 through the sale of the residual interest certificate and optional redemption
rights in the underlying trust. As a result, the accounts of TMAC CMO Trust
1986-1 are not included in the consolidated balance sheet at September 30, 1996
and the results of operations of the trust are included in the 1996 consolidated
statement of operations only through the date of sale.
MORTGAGE CERTIFICATES AND CMOS - Mortgage certificates and CMO bonds
of consolidated Owner Trusts are carried at their outstanding principal balance
plus or minus any premium or discount, respectively.
AMORTIZATION OF PREMIUMS AND DISCOUNTS - Premiums and discounts
related to mortgage certificates and CMOs are amortized to income using the
interest method over the stated maturity of the mortgage certificates or CMOs.
RESIDUAL INTERESTS AND INTEREST ONLY (IO) BONDS - Residual Interests
held in bond form and Corporate Real Estate Mortgage Investment Conduit
("REMIC") Residual Interests, regardless of percentage ownership, are Nonequity
Residual Interests and, along with IO Bonds, are accounted for under the
Prospective method. Under this method, assets are carried at cost and income is
amortized over their estimated lives based on a method which provides a constant
yield. At the end of each quarter, the yield over the remaining life of the
asset is recalculated based on expected future cash flows using current interest
rates and mortgage prepayment speeds. This new yield is then used to calculate
the subsequent quarter's financial statement income. Owner Trust Residuals are
accounted for under the equity method.
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 the cash balances of CMOs
in which the Company holds a Residual Interest and whose assets and liabilities
are consolidated with those of the Company. This cash is not available to the
Company or its creditors. Additionally, restricted cash includes $80,861 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.
7
<PAGE>
NET INCOME (LOSS) PER SHARE - Net income (loss) per share is based
upon the weighted average number of shares of Common Stock outstanding. The
common equivalent shares related to the 1995 Stock Option Plan are antidilutive
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.
NOTE 3 - MORTGAGE CERTIFICATES
Information is presented in the table below as of September 30, 1996
and December 31, 1995 with respect to the fair value of the mortgage
certificates collateralizing those CMO Bonds where the residual interests are
accounted for under the equity method and the Company owns more than a 50%
interest in the trust. See the CMO Collateral chart in note 4 for additional
information on the mortgage collateral. 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.
MORTGAGE CERTIFICATES
- ---------------------
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 Principal Amount of Fair Value of Cost Less
Residual Series Mortgage Certificates Mortgage Certificates Unamortized Discount
- ------------------ --------------------- --------------------- --------------------
<S> <C> <C> <C>
CMOT 28 $ 76,749 $ 78,740 $ 75,432
======== ======== ========
DECEMBER 31, 1995
CMOT 28 $ 90,046 $ 93,958 $ 88,501
TMAC 1986-1 21,260 22,230 21,251
-------- -------- --------
$111,306 $116,188 $109,752
======== ======== ========
</TABLE>
NOTE 4 - RESIDUAL INTERESTS
Residual Interests are classified as either equity or nonequity.
Presented below is a schedule of the nonequity residual interests and
unconsolidated equity residual interests.
NONEQUITY RESIDUAL INTERESTS
- ----------------------------
(In thousands)
<TABLE>
<CAPTION>
Book Value
----------------------------
Purchase September 30, December 31,
Residual Series Price 1996 1995
- --------------- -------- ------------- ------------
<S> <C> <C> <C>
Nonequity Residual Interests
- ----------------------------
BT 88-1 $1,537 $280 $461
LFR-9 2,589 131 149
CMSC I 8,642 104 104
FHLMC 25 4,934 5 6
FHLMC 21 5,361 4 5
------ ---- ----
524 725
---- ----
Unconsolidated Equity Residual Interests
- ----------------------------------------
TMAC 1986-2 67 0 0
TMAC 1987-3 165 0 0
------ ---- ----
Total Residual Interests $524 $725
==== ====
</TABLE>
8
<PAGE>
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:
FIXED RATE RESIDUALS
<TABLE>
<CAPTION>
CMO BOND DATA (100% OF ISSUE)
----------------------------------------------------------------------
NAME OF ISSUER TIS INITIAL SEPT. 30, 1996
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 14,060 8.75% Apr 1, 2018
Feb 16, 1988 1-D 47,492 12,692 8.63% Apr 1, 2018
---------- -------
$ 100,000 $26,752
---------- -------
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 8,527 Zero Coupon Jan 1, 2019
Dec 2, 1988 D 32,850 3,424 Zero Coupon Jan 1, 2019
E 30,000 0 Zero Coupon Jan 1, 2019
R 150 150 Residual Bond Jan 1, 2019
---------- -------
$ 150,000 $11,951
---------- -------
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 6,325 9.45% May 1, 2013
------- ------
Securities Corp. Subtotal 88.000% $8,642 I-3(Z) 15,000 36,429 9.45% Feb 1, 2017
======= ====== ---------- -------
Series I (CMSC I) $ 500,000 $42,754
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 2,883 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 10 Residual Bond Feb 15, 2020
---------- -------
$ 500,000 $46,833
---------- -------
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 82,397 9.50% Jan 15, 2020
R 100 8 Residual Bond Jan 15, 2020
---------- -------
$1,000,000 $82,405
---------- -------
</TABLE>
EQUITY RESIDUAL INTERESTS - The Company currently holds interests in
two Owner Trust Residuals. 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.
9
<PAGE>
On April 22, 1996, the Company sold its 100% equity residual interest
in TMAC CMO Trust 1986-1 for $450,000. This investment had been carried at zero
so that the entire amount of the sales proceeds is reflected as a gain on
disposition of investments in the second quarter of 1996 and the assets and
liabilities of this Owner Trust Residual are no longer included in the
consolidated financial statements.
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 September 30, 1996 are set forth below:
EQUITY RESIDUAL INTERESTS
<TABLE>
<CAPTION>
CMO BOND DATA (100% OF ISSUE)
----------------------------------------------------------------------
NAME OF ISSUER TIS INITIAL SEPT. 30, 1996
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 ------- ------
(CMOT 28) 100.000% $4,857 C 108,300 0 8.50% Dec 1, 2010
May 29, 1987 ======= ======
Z 39,500 77,748 8.45% Jun 1, 2017
-------- --------
$500,000 $ 77,748
-------- --------
2) TMAC 1986-2 Jun 18, 1993 44.990% $ 67 2-A $ 72,600 $ 6,008 LIBOR+.60% Mar 20, 2018
Dec 10, 1986 2-B 27,400 2,267 25.11987% - Mar 20, 2018
-------- -------- (2.00959) x LIBOR
$100,000 $ 8,275
-------- --------
3) TMAC 1987-3 Jun 18, 1993 44.767% $ 165 3-A $ 55,070 $ 0 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 0 8.58% Jul 20, 2013
3-E(Z) 9,495 19,891 9.00% Apr 20, 2018
-------- --------
$195,000 $ 17,891
-------- --------
Total Collateralized Mortgage Obligations $105,914
========
</TABLE>
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.
CMO COLLATERAL
<TABLE>
<CAPTION>
CMO COLLATERAL DATA (100% OF ISSUE)
---------------------------------------------------------
WEIGHTED SEP.T 30, 1996 CURRENT WEIGHTED
AVERAGE COLLATERAL WEIGHTED AVERAGE
RESIDUAL PASS- PRINCIPAL AVERAGE REMAINING
RESIDUAL INTEREST TYPE OF THROUGH BALANCE COUPON MONTHS TO
SERIES TYPE COLLATERAL RA ($000) RATE MATURITY
- -------- ---------- ---------- ---------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Equity Residual Interests
- -------------------------
CMOT 28 Fixed FNMA 8.50% $76,749 9.10% 236.0
TMAC 1986-2 Fixed FHLMC 9.50% 8,275 10.10% 226.0
TMAC 1987-3 Fixed FHLMC 9.08% 18,891 9.80% 222.0
Nonequity Residual Interests
- ----------------------------
BT 88-1 Fixed GNMA 9.00% 25,553 9.50% 229.0
LFR-9 Fixed FNMA 9.50% 11,875 10.20% 248.0
CMSC I Fixed FNMA 9.50% 40,313 10.10% 218.0
FHLMC 25 Fixed FHLMC 9.50% 46,833 10.30% 244.0
FHLMC 21 Fixed FHLMC 9.50% 82,405 10.20% 245.0
</TABLE>
10
<PAGE>
NOTE 5 - INTEREST ONLY (IO) BONDS
IO Bonds include both regular IO Bonds and Inverse IO Bonds. Presented
below is a schedule of the Company's IO Bonds.
INTEREST ONLY (IO) BONDS
- ------------------------
(In thousands)
<TABLE>
<CAPTION>
Book Value
--------------------------
Name and Issuer Purchase September 30, December 31,
and Series Price 1996 1995
- --------------- -------- ------------- -----------
<S> <C> <C> <C>
FNMA Series 1992-123 Class S $8,203 $1,850 $2,112
Pru Home Mtg Corp Series 1992-7 4,776 906 796
Bear Stearns Mtg Sec Series 1992-1 2,720 256 242
------ ------ ------
$3,012 $3,150
</TABLE>
Certain characteristics of the Company's IO Bonds are on the following
table:
INTEREST ONLY BONDS
<TABLE>
<CAPTION>
COLLATERAL DATA (% OF IO HELD BY TIS)
------------------------------------------------------------------
WEIGHTED SEPT. 30, 1996 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 - $ 4,520 8.95% 297.0
Series 1992-123 (5.67 x
Class S LIBOR)
July 25, 1992
2) Prudential Mar 27, 1992 $4,776 NON 0.5693% $51,724 8.81% 296.0
Home Mortgage AGENCY
Corporation
Series 1992-7
March 1, 1992
3) Bear Stearns May 28, 1992 $2,720 NON 0.3174% $ 5,323 9.41% 238.0
Mortgage AGENCY
Securities, Inc.
Series 1992-1
May 1, 1992
</TABLE>
NOTE 6 - 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 September 30,
1996, the carrying value of operating real estate assets (in thousands)
consisted of:
<TABLE>
<S> <C>
Land $ 4,989
Buildings and Improvements 24,036
Personal Property 902
-------
Total 29,927
Less Accumulated Depreciation (888)
-------
Net $29,039
=======
</TABLE>
11
<PAGE>
NOTE 7 - 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. In August 1996, the River Oaks and
Four Creeks - II loans were retired and replaced with interim financing totaling
$11,235,000. This interim financing, as well as the Villa San Marcos loan, are
expected to be refinanced on a long-term basis in the fourth quarter of 1996.
As of September 30, 1996, notes payable on real estate consisted of:
<TABLE>
<CAPTION>
Principal Monthly
Balance Basis of Current Principal
September 30, Interest Interest Due and Interest
Property 1996 Rate Rate Date Payment
- ---------- ------------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Shady Lane $ 1,365,845 Fixed 7.844% Dec. 1, 2014 $ 11,967
River Oaks 6,665,796 Fixed 7.93% Interim 44,050
COFI + 3%
Villa San Marcos 5,995,024 1 year Treasury 8.375% Jan. 1, 1999 49,304
Bill + 3%
Four Creeks - I 1,802,444 Fixed 8.160% Dec. 1, 2005 13,521
Four Creeks - II 4,569,204 Fixed 7.93% Interim 30,194
------------ --------
Total $20,398,313 $149,036
============ ========
</TABLE>
NOTE 8 - SHORT-TERM DEBT
Short-term debt is due within 360 days after the end of the quarter. At
September 30, 1996 the Company owed $1,959,500 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 these borrowings at September
30, 1996 was 6.991%. The debt was collateralized by some of the Company's
Nonequity Residual Interests and IO Bonds whose fair values approximated
$2,760,000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The Company historically invested in the Residual Interests of CMOs and
other mortgage-related assets ("Structured Securities"). The mortgage
collateral underlying the CMOs in the Company's portfolio of Residual Interests
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). 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 is not in the business of selling its real estate investments
and therefore purchases these assets with the intention of holding them to term.
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. The Company may also occasionally acquire real estate
assets which are available for sale before their term. It may also utilize
hedging strategies with certain mortgage-related assets and other instruments
which would not be held to term.
12
<PAGE>
The Company's net income from Residual Interests of CMOs and other
mortgage-related assets is sensitive to changes in mortgage prepayments and
interest rates. The Company attempts to reduce the prepayment and interest rate
risks by purchasing mortgage-related assets which have characteristics and
yields that complement the characteristics and yields of existing assets. The
Company's net income from multifamily real estate is sensitive to local real
estate market conditions, cost of maintenance of its properties and interest
rates on its secured debt.
RESULTS OF OPERATIONS
The Company had a net loss of $345,000, or $0.04 per share, for the quarter
ended September 30, 1996. This compares to a net loss of $1,619,000 or $0.20
per share, for the quarter ended September 30, 1995. For the nine months ended
September 30, 1996, the Company had a net loss of $642,000, or $0.08 per share.
This compares to a net loss of $1,066,000, or $0.13 per share, for the nine
months ended September 30, 1995. The Company did not pay a dividend in the nine
months ended September 30 of either year. However, at its meeting of September
10, 1996, the Board of Directors declared a dividend of $0.02 per share payable
December 31, 1996 to shareholders of record on December 13, 1996.
Interest from mortgage certificates is a declining amount based on the
principal amount outstanding, which has been declining due to scheduled
amortizations and prepayments of the underlying mortgage loans. Interest
expense on CMOs also declines from year to year in proportion to the declining
principal amount outstanding. Therefore, the net interest margin (interest from
mortgage certificates less interest on CMOs) remained essentially constant
between the two years. As a result of the sale of the residual interest in TMAC
CMO Trust 1986-1 in April 1996, interest from mortgage certificates and interest
on CMOs declined significantly in the nine months ended September 30, 1996
because the accounts of this Owner Trust Residual are no longer included in the
consolidated financial statements. In the quarter ended March 31, 1996,
interest income included $518,000 and interest expense included $438,000 from
TMAC CMO Trust 1986-1.
Income from Residual Interests and Interest Only bonds declined sharply in
the three and nine months ended September 30, 1996 as compared to the prior year
because of the sales in the third and fourth quarter of 1995 of a significant
portion of the portfolio of these investments. The sale of these investments
took place in order to fund the purchase of multifamily real estate projects.
Real Estate operations showed a loss of $83,000 in the three months ended
September 30, 1996. In the nine months ended September 30, 1996 real estate
operations incurred a loss of $102,000. However, cash flow (income from real
estate operations plus depreciation and amortization) was $95,000 in the
September 1996 quarter and $415,000 in the nine months ended September 30, 1996.
The results for the three and nine months ended September 30, 1995 are not truly
comparable as the Company commenced its real estate operations the course of
1995.
On June 27, 1996, the Board of Directors announced that as of July 1, 1996
the Company will be a self-administered Real Estate Investment Trust and will no
longer be managed by TIS Financial Services, Inc. Prior to that date, the
Manager oversaw the operations of the Company pursuant to a management
agreement. As a result, for the quarter ended September 30, 1996, the Company
incurred no management fees. In the third quarter of 1995, the Company incurred
management fees of $28,134 and residual interest administrative fees of $22,500.
The Residual Interest Administrative Fee was discontinued as of January 1, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses cash flow from operations to provide working capital to
support its operations and for the payment of dividends to its stockholders, and
uses its other capital resources for the purchase of Residual Interests,
mortgage instruments, multifamily residential properties and other mortgage-
related assets.
The Company currently has agreements with two investment banking firms to
borrow funds under repurchase agreements. At September 30, 1996 the Company had
borrowings outstanding under these agreements totaling $1,959,500. This debt
was collateralized by some of the Company's Nonequity Residual Interests and IO
Bonds whose fair values approximated $2,760,000. The Company's other borrowings
are notes payable secured by multifamily housing properties as described in note
7.
13
<PAGE>
The Company has no committed lines of credit. Management of the Company
believes that cash flows from operations and the availability of repurchase
agreements are sufficient to enable the Company to meet its current and
anticipated future liquidity requirements including payment of dividends to its
stockholders, which must equal at least 95% of the Company's taxable income in
order for the Company to qualify as a REIT.
DIVIDEND REINVESTMENT PLAN
The Company has a Dividend Reinvestment and Share Purchase Plan designed to
enable shareholders to have their dividends from the Company automatically
invested in additional shares of the Company. Mellon Securities Trust Company,
which is unaffiliated with the Company, acts as the Plan Administrator. The
purpose of the Plan is to provide shareholders with a convenient and economical
way of investing dividends in additional shares of the Company's Common Stock.
These shares will be purchased on the open market or, at the direction of the
Company's Board of Directors, directly from the Company at a 3% discount from
the open market price. The company has registered 1,000,000 Common shares for
possible issuance under the Plan. The impact on liquidity from the Dividend
Reinvestment and Share Purchase Plan, if any, is expected to be immaterial.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Exhibit 27 Financial Data Schedule
No reports were filed on Form 8-k reports were filed during the
quarter ended September 30, 1996:
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIS MORTGAGE INVESTMENT COMPANY
November 13, 1996 BY: /s/ Lorraine O. Legg
------------------------- --------------------------------------
Date Lorraine O. Legg, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
November 13, 1996 BY: /s/ John E. Castello
-------------------------- --------------------------------------
Date John E. Castello, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,920
<SECURITIES> 79,151
<RECEIVABLES> 686
<ALLOWANCES> 33,109
<INVENTORY> 0
<CURRENT-ASSETS> 79,947
<PP&E> 29,927
<DEPRECIATION> 888
<TOTAL-ASSETS> 108,986
<CURRENT-LIABILITIES> 77,093
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 11,486
<TOTAL-LIABILITY-AND-EQUITY> 108,986
<SALES> 0
<TOTAL-REVENUES> 10,467
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,442
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,667
<INCOME-PRETAX> (642)
<INCOME-TAX> 0
<INCOME-CONTINUING> (642)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (642)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
