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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, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10004
TIS MORTGAGE INVESTMENT COMPANY
(Exact name of registrant as specified in its charter)
MARYLAND 94-3067889
(State of incorporation) (I.R.S. Employer Identification No.)
655 MONTGOMERY STREET, SUITE 800
SAN FRANCISCO, CALIFORNIA 94111
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 393-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK, NEW YORK STOCK EXCHANGE
PAR VALUE $.001 PER SHARE PACIFIC STOCK EXCHANGE
______________________________
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosures of delinquent filers pursuant to Item 405
of Regulation S-K is not contained here, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No
----- -----
As of March 26, 1997, 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
$9,119,000.
Documents Incorporated by Reference
Specifically identified portions of the Registrant's 1997 definitive proxy
statement to be filed with the Securities and Exchange Commission are
incorporated by reference to Part III of this Annual Report on Form 10-K.
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TIS MORTGAGE INVESTMENT COMPANY
INDEX TO ANNUAL REPORT
ON FORM 10-K
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PART I
Item 1: Business 3
Item 2: Properties 19
Item 3: Legal Proceedings 19
Item 4: Submission of Matters to a Vote of Security Holders 19
PART II
Item 5: Market for the Registrant's Common Equity and Related Shareholder Matters 20
Item 6: Selected Financial Data 22
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 23
Item 8: Financial Statements and Supplementary Data 31
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 31
PART III
Item 10: Information about Directors and Executive Officers of the Registrant 31
Item 11: Executive Compensation 31
Item 12: Security Ownership of Certain Beneficial Owners and Management 31
Item 13: Certain Relationships and Related Transactions 31
PART IV
Item 14: Exhibits, Financial Statements and Reports on Form 8-K 32
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IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, BELIEFS, EXPECTATIONS AND INTENTIONS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION
ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS." THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS
OR CIRCUMSTANCES THAT ARISE AFTER THE DATE HEREOF. READERS SHOULD CAREFULLY
REVIEW THE RISK FACTORS DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM TIME
TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE QUARTERLY
REPORTS ON FORM 10-Q TO BE FILED BY THE COMPANY IN 1997 AND ANY CURRENT REPORTS
ON FORM 8-K FILED BY THE COMPANY.
PART I
ITEM 1. BUSINESS.
INTRODUCTION
GENERAL
TIS Mortgage Investment Company, a Maryland corporation (the "Company"
or the "Registrant") which, unless otherwise indicated, refers to the Company
and its 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. The accounting for this transaction had the effect
of deconsolidating TISMAC from the consolidated financial statements of the
Company at December 31, 1995 and 1996. The Company has retained its legal
ownership of TISMAC. Until 1994, the Company sought to generate income for
distribution to its shareholders primarily through acquisition of Structured
Securities (as hereinafter defined). "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 ("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 ("Commercial
Securitizations"), which include debt obligations that 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 an increasing proportion 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.
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The Company's investment policy is controlled by its 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 are not employed by, or receiving any
compensation (except for serving as a director) from, the Company ("Unaffiliated
Directors").
On July 1, 1996 the Company became a self-administered Real Estate
Investment Trust ("REIT"). Prior to that date, the Company had entered into an
agreement (the "Management Agreement") with TIS Financial Services, Inc., a
Delaware corporation (the "Former Manager"), to manage the Company's day-to-day
operations, subject to the supervision of the Board of Directors. 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 REITs under the Internal Revenue Code of 1986,
as amended, (the "Code") and to make quarterly distributions to its shareholders
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 shareholders 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.
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.
For the fiscal year ended December 31, 1996, 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 real 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 estimated 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
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 residential properties in California's Central
Valley. These properties consist of 539 units together with 9.75 acres of
unimproved land slated for the development of an additional 126 units. The
properties were purchased in a series of closings occurring between mid-January
and mid-November
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1995. The aggregate purchase price for the properties was approximately $29.3
million, including existing debt assumed by the Company.
The Company has, in years before 1994, 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 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 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 distributions 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 is used 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.
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS.
As of December 31, 1996, the Company had a consolidated net operating
loss carryforward of approximately $46 million for Federal income tax purposes.
This number is based upon actual Federal consolidated income tax filings for the
periods through December 31, 1995 and an estimate of the 1996 taxable loss.
Some or all of the carryforward may be available to the Company to offset, for
Federal income tax purposes, the future taxable income, if any, of the Company
and its wholly-owned subsidiaries, subject to the limitations and risks
discussed below.
The Company's net operating tax loss ("NOL") carryforwards will
expire, if not used, in the following approximate amounts in the following years
(dollars in thousands):
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Year Ending Amount of Carryforward
December 31, Expiring
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2007 $21,626
2008 12,971
2009 9,327
2010 1,365
2011 1,000
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The future ability to use these NOLs may be limited under Internal
Revenue Code Section 382 which provides that if a corporation undergoes an
"ownership change," its ability to use its NOLs in the future may be limited.
An ownership change occurs when the aggregate cumulative increase in the
percentage ownership of a corporation's capital stock owned by "5-percent
shareholders" within any three-year testing period is more than fifty percentage
points. A "5-percent shareholder" is defined as any person holding 5% or more
of the fair market value of the corporation's stock at any time during the
three-year testing period. All shareholders who are not 5-percent shareholders
individually are aggregated into one or more public groups, each of which is
considered to be a 5-percent shareholder.
If an ownership change occurs within the meaning of Section 382, the
amount of NOLs the Company may use to offset income in any future taxable year
would be limited, in general, to an amount determined by multiplying the fair
market value of the Company's outstanding capital stock on the ownership change
date by the long-term tax-exempt rate (currently 5.5%), which is published
monthly by the Internal Revenue Service.
There could be circumstances under which an issuance by the Company of
a significant number of new shares of Common Stock or other new class of equity
security having certain characteristics (for example, the right to vote or to
convert into Common Stock) might result in an ownership change under the Code.
The Company believes that it has not undergone an ownership change in
prior years, however, the Company as of December 31, 1996, does have one 5-
percent shareholder who has made changes in his stock ownership in the last
three-year period. There is no assurance that this shareholder will not make
additional changes in his holdings in any potential future three-year testing
period which could, when combined with other changes, cause an ownership change
to have occurred. In addition, if any additional shareholders become 5-percent
shareholders in the future, this could cause an ownership change to occur and
cause limitations to the Company on the use of its NOLs.
RISK FACTORS
1. Risks Associated with Investments in Real Estate:
- ----------------------------------------------------
The yields available from equity investments in real estate depend on
the amount of income earned and capital appreciation generated by the related
properties as well as the expenses incurred. Income from the properties may be
adversely affected by increasing unemployment rates, oversupply of competing
properties, reduction in demand for properties in the area, increasing
affordability of single family homes, and adverse real estate, zoning and tax
laws. Certain significant expenditures associated with an investment in real
estate (such as mortgage payments, real estate taxes and maintenance costs)
constitute fixed costs and do not decrease when circumstances cause a reduction
in income from the investment. Furthermore, real estate investments are
relatively illiquid and therefore, will tend to limit the Company's ability to
vary its portfolio promptly in response to changes in economic or other
conditions.
Potential Environmental Liability
- ---------------------------------
The Company could be held liable for the costs of removal or
remediation of any hazardous or toxic substances located on or in its
properties. These laws often impose such liability without regard to whether
the owner knew of, or was responsible for, the presence of the hazardous or
toxic substances. The presence of such substances, or the failure to remediate
such substances properly may adversely affect the owner's ability to sell or
rent the property or to borrow using the property as collateral. Other federal
and state laws require the removal of damaged material containing asbestos in
the event of remodeling or renovation.
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Uninsured Loss
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The Company carries several types of insurance. There are, however,
certain types of extraordinary losses (such as losses resulting from
earthquakes) that may be either uninsurable or not economically insurable.
Should an uninsured loss occur, the Company could lose its investment in and
anticipated profits and cash flow from a property and would continue to be
obligated on any mortgage indebtedness on the property.
Americans with Disabilities Act
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The Company's properties must comply with Title III of the Americans
with Disabilities Act (the "ADA") to the extent that the properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA.
Compliance with the ADA requirements could require removal of structural
barriers to handicapped access in certain public access areas of the Company's
properties, where such removal is readily achievable. The ADA does not,
however, consider residential properties, such as apartment communities to be
public accommodation or commercial facilities, except portions of such
facilities, such as a leasing office which is open to the public. Noncompliance
with the ADA could result in imposition of fines or an award of damages to
private litigants. If required changes involve a greater expenditure than the
Company currently anticipates or if the changes must be made on a more
accelerated basis than it anticipates, the Company's operations could be
adversely affected.
Fair Housing Amendments Act of 1988
- -----------------------------------
The Fair Housing Amendments Act of 1988 (the "FHA") requires
multifamily residential properties first occupied after March 13, 1991 to be
accessible to the handicapped. Noncompliance with the FHA could result in the
imposition of fines or an award of damages to private litigants.
Risk of Real Estate Development
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The Company plans to seek selective opportunities for development.
The real estate development business involves significant risks in addition to
those involved in the acquisition, ownership and operation of established
apartment communities. The development risks include: lack of construction
financing on favorable terms and adverse changes in rental rates and occupancy
rates in the market.
2. Market Risks Relating To Mortgage Assets
- --------------------------------------------
The results of the Company's operations depend, among other things on
the level of Net Cash Flows generated by the Company's Mortgage Assets. The Net
Cash Flows vary primarily as a result of changes in mortgage prepayment rates,
short-term interest rates, reinvestment income and borrowing costs, all of which
involve various risks and uncertainties as set forth below. Prepayment rates,
interest rates, reinvestment income and borrowing costs depend upon the nature
and terms of the Mortgage Assets, the geographic location of the properties
securing the mortgage loans included in or underlying the Mortgage Assets,
conditions in financial markets, the fiscal and monetary policies of the United
States Government and the Board of Governors of the Federal Reserve System,
international economic and financial conditions, competition and other factors,
none of which can be predicted with any certainty. The projected rate of
return to the Company on its Mortgage Assets will be based upon assumed levels
of prepayments on the underlying Mortgage Instruments, assumed rates of interest
or pass-through rates on the Structured Financing that bear variable interest
rates, and assumed rates of reinvestment income and expenses with respect to
such Structured Financing bearing variable interest rates. Prepayment rates,
reinvestment income and administration expenses will affect the level of the
Company's Net Cash Flows. To the extent that the assumptions employed by the
Company vary from actual experience, the actual Net Cash Flows received by the
Company may vary significantly from those projected by the Company as to timing
and amount over the lives of such Structured Financing and from one period to
another, and such returns could be negative under certain circumstances.
Prepayment Risks
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Mortgage prepayments shorten the life of the Mortgage Instruments
underlying the Company's Mortgage Assets, thereby reducing the overall Net Cash
Flows and causing an inherent decline in the
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Company's income. Prepayments of Mortgage Instruments generally increase when
then current mortgage interest rates fall below the interest rates on the fixed-
rate mortgage loans included in such Mortgage Instruments. Conversely,
prepayments decrease when then current mortgage interest rates exceed the
interest rates on the mortgage loans included in such Mortgage Instruments.
Prepayment experience also may be affected by the geographic location of the
mortgage loans included in Mortgage Instruments, the types (whether fixed or
adjustable rate) and assumability of such mortgage loans, conditions in the
mortgage loan, housing and financial markets, and general economic conditions.
Interest Rate Fluctuation Risks
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Changes in interest rates affect the performance of the Company and
its Mortgage Assets.
Risks of Decline in Net Cash Flows and Income from Mortgage Assets
- ------------------------------------------------------------------
The Company's income from Mortgage assets derives primarily from the
Net Cash Flows received on its Mortgage Assets which decline over time. For
both tax and accounting purposes, the Company's Net Cash Flows consist of two
components - one representing return of a portion of the purchase price of the
Mortgage Asset (the "Cost Component") and one representing income on the
investment (the "Income Component"). The Income Component will be highest in
years immediately following the purchase of the Mortgage Asset and will decline
over time. In addition, to the extent that actual mortgage prepayments or
variable interest rates experienced exceed those assumed, this inherent decline
in Net Cash Flows and income is accelerated.
Inability to Predict Effects of Market Risks
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Because none of the above factors including changes in prepayment
rates, interest rates reinvestment income, expenses and borrowing costs are
susceptible to accurate projection, the Net Cash Flows generated by the
Company's Mortgage Assets, and thus distributions to the Company's shareholders,
cannot be predicted. The Company's borrowings may bear fixed or variable
interest rates, may require additional collateral in the event that the value of
existing collateral declines on a market value basis and may be due on demand or
upon the occurrence of certain events. To the extent that the Company's
borrowings bear variable interest rates, changes in short term interest rates
will significantly influence the cost of such borrowings and can result in
losses in certain circumstances. The Company also may increase the amount of
its available funds through the issuance of debt securities.
3. General Risks
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Competition
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There are numerous real estate companies, insurance companies,
financial institutions, pension funds and other property owners that compete
with the Company in seeking properties for acquisition and in attracting and
retaining tenants.
Market Price of Common Stock
- ----------------------------
The market price of the Company's Common Stock has been extremely
sensitive to a wide variety of factors including the Company's operating
results, distributions (if any), actual or perceived changes in short-term and
mortgage interest rates and their relationship to each other, actual or
perceived changes in mortgage prepayment rates, and any variation between the
net yield on the Company's assets and prevailing market interest rates. It can
be expected that the performance of the Company's income-producing properties
will have an increasingly important effect on the market price of the Company's
Common Stock. Any actual or perceived unfavorable changes in the real estate
market and other factors may adversely affect the market price of the Company's
Common Stock.
Future Offerings of Common Stock
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The Company in the future may increase its capital resources by making
additional offerings of its Common Stock or securities convertible into its
Common Stock. The actual or perceived effect of such offerings may be the
dilution of the book value or earnings per share of the Company's Common Stock
which may result in the reduction of the market price of the Company's Common
Stock. The Company is
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unable to estimate the amount, timing or nature of future sales of its Common
Stock, as such sales will depend upon market conditions and other factors such
as the Company's need for additional equity.
Certain Consequences of and Failure to Maintain REIT Status
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In order to maintain its qualification as a REIT for federal income
tax purposes, the Company must continually satisfy certain tests with respect to
the sources of its income, the nature and diversification of its assets and the
amount of its distributions to shareholders. See "Business -- Federal Income
Tax Considerations -- Qualifications of the Company as a REIT." Among other
things, these restrictions may limit the Company's ability to acquire certain
types of assets that it otherwise would consider desirable, limit the ability of
the Company to dispose of assets that it has held for less than four years if
the disposition would result in gains exceeding specified amounts, limit the
ability of the Company to engage in hedging transactions that could result in
income exceeding specified amounts and require the Company to make distributions
to its shareholders at times that the Company may deem it more advantageous to
utilize the funds available for distribution for other corporate purposes (such
as the purchase of additional assets or the repayment of debt) or at times that
the Company may not have funds readily available for distribution.
The Company's operations from time to time generate taxable income in
excess of its net income for financial reporting purposes. The Company also may
experience a situation in which its taxable income is in excess of the actual
cash receipts. See "Business -- Federal Income Tax Considerations -- Activities
of the Company." To the extent that the Company does not otherwise have funds
available, either situation may result in the Company's inability to distribute
substantially all of its taxable income as required to maintain its REIT status.
See "Business - Federal Income Tax Considerations." Alternatively, the Company
may be required to borrow funds to make the required distributions which could
have the effect of reducing the yield to its shareholders, to sell a portion of
its assets at times or for amounts that are not advantageous, or to distribute
amounts that represent a return of capital which would reduce the equity of the
Company. In evaluating assets for acquisition, the Company considers the
anticipated tax effects of the acquisition including the possibility of any
excess of taxable income over projected cash receipts.
If the Company should not qualify as a REIT in any tax year, it would
be taxed as a regular domestic corporation and, among other consequences,
distributions to the Company's shareholders would not be deductible by the
Company in computing its taxable income. Any such tax liability could be
substantial and would reduce the amount of cash available for distributions to
the Company's shareholders. See "Business -- Federal Income Tax
Considerations." In addition, the unremedied 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 the four subsequent years.
Excess Inclusion Income
- -----------------------
A portion of the distributions paid by the Company constitutes
unrelated business taxable income to certain otherwise tax-exempt shareholders
which will constitute a floor for the taxable income of shareholders not exempt
from tax and will not be eligible for any reduction (by treaty or otherwise) in
the rate of income tax withholding in the case of nonresident alien
shareholders. For 1996, 47.19% of the $0.02 per share distribution declared and
paid in 1996 was excess inclusion income.
Marketability of Shares of Common Stock and Restrictions on Ownership
- ---------------------------------------------------------------------
The Company's Articles of Incorporation prohibit ownership of its
Common Stock by tax-exempt entities that are not subject to tax on unrelated
business taxable income and by certain other persons (collectively Disqualified
Organizations). Such restrictions on ownership exist so as to avoid imposition
of a tax on a portion of the Company's income from excess inclusions.
Provisions of the Company's Articles of Incorporation also are
designed to prevent concentrated ownership of the Company which might jeopardize
its qualification as a REIT under the Code. Among other things, these
provisions provide (i) that any acquisition of shares that would result in the
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disqualification of the Company as a REIT under the Code will be void, and (ii)
that in the event any person acquires, owns or is deemed by operation of certain
attribution rules set out in the Code, to own a number of shares in excess of
9.8% of the outstanding shares of the Company's Common Stock ("Excess Shares"),
the Board of Directors, at its discretion, may redeem the Excess Shares. In
addition, the Company my refuse to effectuate any transfer of Excess Shares and
certain shareholders and proposed transferees of shares, may be required to file
an affidavit with the Company setting forth certain information relating
generally to their ownership of the Company's Common Stock. These provisions
may inhibit market activity and the resulting opportunity for the Company's
shareholders to receive a premium for their shares that might otherwise exist if
any person were to attempt to assemble a block of shares of the Company's Common
Stock in excess of the number of shares permitted under the Articles of
Incorporation. Such provisions also may make the Company an unsuitable
investment vehicle for any person seeking to obtain (either alone or with others
as a group) ownership of more than 9.8% of the outstanding shares of Common
Stock. Investors seeking to acquire substantial holdings in the Company should
be aware that this ownership limitation may be exceeded by a shareholder without
any action on such shareholder's part in the event of a reduction in the number
of outstanding shares of the Company's Common Stock.
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. 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. The Company's only Structured Securities transaction in 1996 was
the sale of its equity residual interest in TMAC CMO Trust 1986-1. 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.
FAIR VALUE OF RESIDUAL INTERESTS AND IO BONDS
A significant portion of the Company's revenue is currently derived
from the cash flows on the Company's Residual Interests and IO Bonds. In the
future, 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. Information regarding the fair value of
Residual Interests and IO Bonds is presented in notes to the consolidated
financial statements.
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<PAGE>
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
residential properties in California's Central Valley, the Company assumed and
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.
At December 31, 1995 and 1996, the Company had short-term borrowings
of $2,117,500 and $2,067,500, respectively, in the form of repurchase agreements
with Bear Stearns & Co. and Paine Webber. The weighted average interest rates
on these instruments as of these dates were 7.4335% and 7.2715%, respectively.
In addition, at December 31, 1996, the Company had outstanding $350,000 of
interim financing at 9.75% which was provided by its principal banker.
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.
The Board of Directors has 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 will 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 have been
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
11
<PAGE>
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 shareholders.
FORMATION OF SUBSIDIARY
On October 21, 1988, TISMAC was incorporated for the purpose of
issuing CMOs directly and on June 29, 1989, issued $199,400,000 original
aggregate principal amount of its Collateralized Mortgage Obligations, Series
1989-1, Classes A-F secured by $200,000,000 of GNMA I collateral. TISMAC is a
wholly-owned subsidiary of the Company. In November 1995, the Company sold the
residual interest certificate and optional redemption rights related to the
trust representing its economic interest in TISMAC. The accounting for this
transaction had the effect of deconsolidating TISMAC from the consolidated
financial statements of the Company at December 31, 1995 and 1996.
COMPETITION
The Company's multifamily real estate properties face the normal
competitive pressure of most urban rental real estate projects. However, the
Company's real property acquisitions have been and will continue to be
opportunistic and may 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 or
better than the Company's Structured Securities.
EMPLOYEES
Until July 1, 1996, the Company had no full-time salaried employees.
On that date, the Company became a self-administered REIT. As a result, the
Company now directly employs three individuals, two of whom receive only a
portion of their total compensation from the Company. The balance of their
compensation is paid by the Company's Former Manager. In addition, the Company
reimburses the Former Manager for employment expenses of personnel performing
certain functions which are deemed applicable to the affairs of the Company.
See "Management of Operations - Expenses".
MANAGEMENT OF OPERATIONS
SELF MANAGEMENT
JULY 1, 1996 AND THEREAFTER
- ---------------------------
At a special meeting of the Board of Directors on June 27, 1996, the
Board resolved to let the Management Agreement expire on June 30, 1996 and to
have the Company become a self-administered REIT. In connection therewith, the
Company entered into a Facilities and Expense Sharing Agreement ("Expense
Sharing Agreement") with the Former Manager providing for the sharing of office
space, office equipment and the expenses of certain administrative and other
personnel and ancillary services. In addition, the Board approved employment
contracts with Lorraine O. Legg, Chairman and President of the Company, for a
term of three years and John E. Castello, as Executive Vice President and Chief
Financial Officer, for a term of two years.
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<PAGE>
The Company and the Former Manager entered into the Facilities and
Expense Sharing Agreement (the "Expenses Sharing Agreement") on July 1, 1996.
The Expense Sharing Agreement provides for certain office space and expense
sharing arrangements, whereby the Company and the Former Manager share on a
prorata basis all fees and expenses incurred in connection with rent, telephone
charges, utilities and other office expenses, bookkeeping fees and expenses and
miscellaneous administrative and other expenses, including certain personnel
expenses, as described in the Expense Sharing Agreement. The prorata sharing of
such expenses is determined based upon the relative benefit received by each
party in accordance with he amount of space utilized or the relative amount of
time each such resource is used, or such other allocation method as may be
reasonable and agreed to by the parties. The Expense Sharing Agreement
continues in effect until terminated by either party on 30 days' prior written
notice by either party or at such time as the parties no longer continue to
share office space or other resources.
PRIOR TO JULY 1, 1996
- ---------------------
The Company had entered into a Management Agreement with the Former
Manager which was renewable annually. In June 1995 the Board of Directors of
the Company and the Former Manager entered into a new Management Agreement
through June 30, 1996. In March 1995 the Board of Directors 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 Former Manager reimburse the
Company for Excess Expenses (as defined). 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 Former Manager voluntarily
waived the increase in base management fee for the fourth quarter of 1995 and
first two quarters of 1996.
Prior to becoming self managed on July 1, 1996, the Company reimbursed
the Former Manager for certain expenses incurred by the Former 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 Former
Manager at the Company's expense.
Except as set forth above, the Former Manager was required to pay
employment expenses of its personnel, rent, telephone, utilities, other office
expenses, certain travel and miscellaneous administrative expenses of the Former
Manager and, if the Former Manager or an affiliate of the Former Manager served
as bond administrator for a series of Structured Securities issued by or on
behalf of the Company, all expenses incurred by the Former Manager in performing
administrative services in connection with the issuance and administration of
such series of Structured Securities.
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<PAGE>
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
taxable income to the extent that it distributes at lease 95% of such taxable
income to its shareholders. See "Taxation of the Company." Generally, those
distributions will constitute distributions to the shareholders 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 shareholders, since the Company
would be taxed as a corporation. Accordingly, the taxable income of the Company
(computed without any deduction for distributions to shareholders) 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, distributions to
the shareholders 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 shareholder level when
earnings are distributed) the distributions to the shareholders would decrease
substantially, because a large portion of the cash otherwise available for
distribution to shareholders 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) distributions 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").
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<PAGE>
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 distributions, 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 include
a significant component from 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,
1996 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. 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 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
15
<PAGE>
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 Subsidiary.
Distributions
The Company must distribute as distributions to its shareholders 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 distribution 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 distribution 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 distribution 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).
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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 REIT's 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 distributions 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 shareholders 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 requirements.
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, distributions paid by a REIT to its shareholders
with respect to a taxable year are deducted to the extent such distributions 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 shareholders 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% or 95% income
tests, and (v) excluding net income from prohibited transactions.
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Regardless of distributions to shareholders, 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. 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. 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.
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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 either in the form of direct ownership of the
real property or in the form of an interest in a partnership that directly owns
the real property. 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
Notes Payable Secured by
Real Estate $1,358,576 $6,665,796 $5,980,626 $6,368,238
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, 1996 92% 96% 98% 96%
</TABLE>
* 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.
The principal executive offices of the Company and the Former Manager
are located at 655 Montgomery Street, Suite 800, San Francisco, California
94111, telephone (415) 393-8000. The Company leases its office space under a
lease expiring February 28, 2002 and subleases space to the Former Manager.
ITEM 3. LEGAL PROCEEDINGS.
At March 26, 1997, 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.
19
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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>
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 1-3/4 1-1/8
Second Quarter 1-5/8 7/8
Third Quarter 1-1/8 3/4
Fourth Quarter 15/16 5/8
1997
First Quarter (through March 26, 1997) 1-3/8 11/16
</TABLE>
- --------------------
On March 26, 1997, the closing sales price of the shares of Common
Stock on the New York Stock Exchange was $1.125. On that date the Company had
outstanding 8,105,880 shares of Common Stock which were held by approximately
680 shareholders of record and the total number of shareholders was
approximately 6,000.
The following table details the distributions 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>
December 31, 1994 September 7, 1994 $0.02 December 15, 1994 December 30, 1994
December 31, 1996 September 10, 1996 $0.02 December 13, 1996 December 31, 1996
- -------------------------------------------------------------------------------------------------------
</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.
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 distributions generally will be taxable as
ordinary income to shareholders of the Company (including, in some cases,
shareholders that would otherwise be exempt from tax under the Code), although a
portion of such distributions may be designated by the Company as capital gain
or may constitute a return of capital. Such distributions received by
shareholders of the Company will not be eligible for the dividends-received
deduction so long as the Company qualifies as a REIT. The Company
20
<PAGE>
will furnish annually to each of its shareholders a statement setting forth
distributions paid during the preceding year and their characterization as
ordinary income, return of capital or capital gain.
A significant portion 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. 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
shareholders 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 shareholders 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 distributions equal to substantially all of
its REIT Taxable Income, it will not continue to qualify as a REIT.
21
<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 elsewhere in this Annual Report on Form 10-K. The data as of
and for the years ended December 31, 1996, 1995 and 1994 has been derived from
the Company's financial statements which are included elsewhere in this Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Income
Interest Income on Mortgage Certificates $ 7,748 $13,735 $18,298 $ 36,873 $ 54,337
Interest Income on Residual Interests 52 1,483 3,650 186 2,001
Income from PO Bonds 0 0 0 0 107
Income from IO Bonds 455 1,128 2,208 1,997 1,983
Income from Commercial
Securitizations 0 89 51 0 0
Interest on Short-term Investments 16 115 126 179 400
Gain (Loss) on Sales of
Mortgage Related Assets 450 (2,385) 0 0 1,391
Valuation Reserve Reduction (Provision) 651 541 (398) 0 0
Loss from Real Estate Operations (171) (289) 0 0 0
Other Income 21 30 60 89 123
------- ------- ------- -------- --------
Total Income 9,222 14,447 23,995 39,324 60,342
Expenses
Interest Expense on CMOs 8,317 14,749 18,987 38,323 52,747
Interest Expense on Short-term Debt 159 429 509 568 781
Write-downs of Mortgage Assets 0 0 0 12,388 25,047
Amortization of Deferred Bond
Issuance Costs 146 276 351 1,857 1,638
Administrative and
Management Expenses 1,503 1,572 1,611 1,920 1,624
------- ------- ------- -------- --------
Total Expenses 10,125 17,026 21,458 55,056 81,837
Minority Interest 0 0 0 172 108
------- ------- ------- -------- --------
Income (Loss) Before Cumulative Effect
of Change in Accounting for Real
Estate Investments (903) (2,579) 2,537 (15,560) (21,387)
Cumulative Effect of Change in
Accounting for Real Estate Investments 0 0 0 (9,879) 0
------- ------- ------- -------- --------
Net Income (Loss) $ (903) $(2,579) $ 2,537 $(25,439) $ (21,387)
Net Income (Loss) per Share per Share
Before Cumulative Effect of Change in
Accounting for Real Estate Investments $ (0.11) $ (0.32) $ 0.31 $ (1.92) $ (2.64)
Cumulative Effect of Change in
Accounting for Real Estate Investments 0.00 0.00 0.00 (1.22) 0.00
------- ------- ------- -------- ---------
Net Income (Loss) $ (0.11) $ (0.32) $ 0.31 $ (3.14) $ (2.64)
Distributions Declared per Share $ 0.02 $ 0.00 $ 0.02 $ 0.20 $ 0.61
Weighted Average Shares Outstanding 8,106 8,106 8,106 8,106 8,103
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31
--------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Mortgage Certificates, net $ 72,703 $109,752 $163,817 $250,015 $460,438
Residual Interests 436 725 8,675 11,919 22,648
IO Bonds 2,695 3,150 9,794 12,212 26,614
Commercial Securitizations 183 191 1,194 0 0
Reserve for Loss on Investments (2,997) (4,277) (4,818) (3,852) 0
Operating Real Estate Assets 28,945 29,384 395 0 0
Total Assets 105,573 145,247 188,957 300,190 545,645
Total Liabilities 94,555 133,266 172,864 284,410 502,881
Notes Payable on Real Estate 20,373 20,362 0 0 0
Short-term Debt 2,418 2,118 8,325 11,745 17,957
Minority Interest 0 0 0 0 1,275
Total Shareholders' Equity 11,018 11,981 16,093 15,780 41,489
- ---------------------------------------------------------------------------------------------------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company commenced operations on August 26, 1988 in connection with
its initial public offering of 8,100,000 shares of Common Stock.
INVESTMENT ACTIVITIES
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 an increasing proportion of its assets and
operating income (loss) will be related to investments in multifamily real
estate, however, there can be no assurance that this will occur.
The following table illustrates the Company's cash receipts,
disbursements and reinvestments for the last three years.
CASH FLOW ANALYSIS
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning Cash Balance $ 198 $ 1,718 $ 680
Cash Received:
Mortgage Related Assets 2,758 6,412 10,926
Sale of Mortgage Related Assets 450 10,751 0
Increase in Short-term Debt 300 0 0
Increase in Real Estate Notes 11 20,362 0
Cash Disbursements:
Cash Expenses (2,483) (3,348) (5,074)
Real Estate Assets (258) (29,490) 0
Other Assets (732) 0 0
Distributions (162) 0 (162)
Reinvestments 0 0 (1,232)
Decrease to Short-term Debt 0 (6,207) (3,420)
- ------------------------------------------------------------------------------------
Ending Cash Balance $ 82 $ 198 $ 1,718
- ------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
RESULTS OF OPERATIONS
The Company had a net loss of $903,000, or $0.11 per share, for the
year ended December 31, 1996. For the year ended December 31, 1995 it had a net
loss of $2,579,000, or $0.32 per share. For the year ended December 31, 1994 it
had net income of $2,537,000, or $0.31 per share. The Company declared
distributions totaling $162,000 for 1996, or $0.02 per share. No distributions
were declared for 1995. The Company declared distributions totaling $162,000
for 1994, or $0.02 per share. The 1996 and 1994 distributions of $0.02 per
share were declared to minimize the Company's corporate income taxes.
1996 COMPARED TO 1995
1996 was the first full year of the Company's real estate operations
which arose from the change in the Company's investment focus from investments
in Structured Securities to multifamily real estate located in California's
Central Valley. In the first full year of real estate operations, the Company's
income from real estate operations before depreciation and amortization relating
to real properties ("Funds from Operations") was $534,000. However, real estate
operations after depreciation and amortization resulted in a loss of $171,000.
This compares to 1995 Funds from Operations of $88,000 and a loss from
operations after depreciation and amortization of $289,000. During 1995, the
Company made some needed improvements to the properties while increasing average
occupancy rates by 5%. At December 31, 1996, the Company's multifamily real
estate had an overall occupancy rate of 96%. The Company believes that the
demographics of the California Central Valley are favorable for the ownership of
apartments. The population growth rate in the San Joaquin Valley has been
higher than the California average in most years since 1970. Per capita housing
stock has declined since 1980 implying that housing stock growth has lagged
population growth over that period. Overall, the San Joaquin Valley has fewer
apartment buildings per capita, relative to the rest of the State. The Company
believes that it has acquired its properties at levels below current replacement
cost or the development cost of new competitive apartments. These factors
should all favorably influence the Company's ability to maintain adequate levels
of occupancy at attractive rental rates.
Because of the sale in 1995 of the majority of its investments in
Structured Securities, income from mortgage related assets declined from
$14,736,000 in 1995 to $9,393,000 in 1996. Interest from mortgage certificates
declined 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 declined from year to year in proportion to the
declining principal amount outstanding. 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 during the year ended
December 31, 1996 because the accounts of this Owner Trust Residual are no
longer included in the consolidated financial statements. The investment had
been carried at zero so that the entire amount of the sales proceeds of $450,000
is reflected as a gain on sale of mortgage related assets.
Net interest margin (interest income from Mortgage Certificates net of
interest expense on CMOs) increased in 1996 to a net interest expense of
$569,000 from net interest expense of $1,014,000 in 1995. The improvement is
primarily due to the sale of the Company's economic interest in TMAC CMO Trust
1986-1 which, in recent years, has had a negative net interest margin. However,
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
approximating the mortgage rate. Below is a summary of net interest margin for
the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
(In thousands) 1996 1995 Change
------ ------- --------
<S> <C> <C> <C>
Interest Income from Mortgage Certificates $7,433 $13,313 $(5,880)
Amortization of Market Discount 315 522 (207)
------ ------- -------
Net Interest Income 7,748 13,735 (5,987)
------ ------- -------
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C> <C>
Interest Expense on CMOs 7,343 13,086 (5,743)
Amortization of Original Issue Discount 974 1,663 (689)
------ ------- -------
Net Interest Expense 8,317 14,749 (6,432)
------ ------- -------
Net Interest Margin $ (569) $(1,014) $ 445
====== ======= =======
</TABLE>
The reserve for loss on investments was reduced by $1,280,000 in 1996.
Of this amount, $629,000 represents the reserve for loss on TMAC CMO Trust 1986-
1 which was reversed as a result of the sale during 1996. The remaining
reduction of $651,000 relates to the decline in the amount of principal
outstanding of CMOT 28, the Company's remaining consolidated equity residual
interest.
Interest expense on short-term debt decreased from $429,000 in 1995 to
$159,000 in 1996. This is the result of a decrease in the average amount of
short-term debt outstanding from $5,676,000 in 1995 to $2,145,000 in 1996 as
well as a decrease in the weighted average interest rate from 7.56% in 1995 to
7.44% in 1996.
Management fees declined to $77,000 in 1996 from $220,000 in 1995
because of the June 30, 1996 termination of the Management Agreement, at which
time the Company became a self-administered REIT. General and administrative
expense increased by $144,000 in 1996 to $1,356,000 primarily due to increases
in legal expenses relating to the termination of the Management Agreement and
shareholder matters.
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. Below is a summary of net
interest margin for the years ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
(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>
25
<PAGE>
Net interest margin continued to be negative because of the retirement
of some of the lower coupon bonds leaving primarily bonds which bear an interest
rate approximating 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
while increasing average occupancy rates by 5%.
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 Former Manager in 1995.
During the year ended December 31, 1995, the Company sold certain of
its Residual Interests, IO bonds, commercial securitizations and its economic
interest in TISMAC. These sales were made in order to provide funds for the
acquisition of four multifamily housing properties in California's Central
Valley. The results of these sales are summarized in the following table:
<TABLE>
<CAPTION>
(in thousands) Sales Price Amortized Cost Gain (Loss)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Residual Interests $ 5,247 $ 6,277 $(1,030)
IO Bonds 3,703 4,845 (1,142)
Commercial Securitizations 1,016 899 118
TISMAC 785 1,116 (331)
- -------------------------------------------------------------------------
Total $10,751 $13,137 $(2,385)
- -------------------------------------------------------------------------
</TABLE>
26
<PAGE>
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------ ------------------------------- ---------------------------------
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 $ 7,748 $74,316 10.43% $13,735 $147,131 9.34% $18,298 $194,679 9.40%
Residual Interests 52 575 9.03% 1,483 4,644 31.93% 3,650 10,239 35.65%
Interest Only Bonds 455 2,998 15.19% 1,128 6,781 16.64% 2,208 11,762 18.77%
Other 16 2,645 0.61% 204 4,060 5.02% 177 9,840 1.80%
- --------------------------------------------------------------------------------------------------------------------------------
Interest Income 8,271 80,534 10.27% 16,550 162,616 10.18% 24,333 226,520 10.74%
Interest Expense
Collateralized Mort-
gage Obligations 8,317 86,473 9.62% 14,749 145,017 10.17% 18,987 199,572 9.51%
Short-term Debt 159 2,145 7.44% 429 5,676 7.56% 509 10,020 5.08%
- --------------------------------------------------------------------------------------------------------------------------------
Interest Expense 8,476 88,618 9.56% 15,178 150,693 10.07% 19,496 209,592 9.30%
Net Interest Income $ (205) (0.25)% $ 1,372 0.84% $ 4,837 2.14%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
The table below summarizes the amount of change in interest income and
interest expense due to changes in interest rates versus changes in volume.
<TABLE>
<CAPTION>
1996 - 1995 1995 - 1994 1994 - 1993
----------- ----------- -----------
(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 $1,849 $(7,836) $(5,987) $ (124) $(4,439) $(4,563) $ (2,693) $ (15,882) $ (18,575)
Residual Interests (644) (787) (1,431) (347) (1,820) (2,167) 3,507 (43) 3,464
Interest Only Bonds (90) (582) (672) (229) (851) (1,080) 384 (173) 211
Other (135) (54) (189) 40 (13) 27 (5) 3 (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Income 980 (9,259) (8,279) (660) (7,123) (7,783) 1,193 (16,095) (14,902)
Interest Expense
CMOs (763) (5,669) (6,432) 1,430 (5,668) (4,238) (2,323) (17,013) (19,336)
Short-term Debt (7) (263) (270) (715) 635 (80) (832) 773 (59)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Expense (770) (5,932) (6,702) (307) (5,033) (4,318) (3,155) (16,240) (19,395)
Net Interest Income $1,750 $(3,327) $(1,577) $(1,375) $(2,090) $(3,465) $ 4,348 $ 145 $ 4,493
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
27
<PAGE>
income from each of the properties to rise before the properties encounter
significant competition from new construction, however, there can be no
assurance that this will happen.
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 distributions to its shareholders. In 1996, the
Company's cash flows (in thousands) were used as follows:
<TABLE>
<S> <C>
Used in operating activities $ (1,888)
Used in financing activities (17,626)
Provided by investing activities 19,398
--------
Net decrease in cash and cash equivalents $ (116)
========
</TABLE>
At December 31, 1996, the Company had outstanding short-term
borrowings totaling $2,417,500 which consisted of $2,067,500 under repurchase
agreements with two investment banking firms and $350,000 of interim financing
provided by its principal banker. The repurchase agreement borrowings had a
weighted average interest rate of 7.2715%; the bank borrowing had an interest
rate of 9.75%. The repurchase agreements had initial terms of one month, are
renewed on a month-to-month basis, are collateralized by some of the Company's
Nonequity Residual Interests and IO Bonds whose fair values approximated $2
million and have a floating rate of interest which is tied to the one-month
LIBOR rate. The bank interim financing is unsecured and is renewable on a
month-to-month basis.
At December 31, 1996, the Company had outstanding borrowings secured
by multifamily real estate totaling $20,373,000. Approximately 15% of this debt
had fixed rate and 85% bears a variable rate. The weighted average interest
rate at December 31, 1996 was 8.29%. Subsequent to year-end the Company
obtained permanent financing in the amount of $17,400,000 with an insurance
company. See Note 19 to the Company's consolidated financial statements.
28
<PAGE>
Because of the Company's accounting policy of consolidating Owner
Trust Residuals when over 50% equity interest in the trust is held by the
Company, the consolidated balance sheet includes mortgage certificates issued by
these trusts and the collateralized mortgage obligations of the trusts. The
Company receives significant cash flows from principal payments on the mortgage
certificates. However, these inflows are essentially offset by outflows
required to pay the collateralized mortgage obligations. The amounts involved
in the three years ended December 31, 1994, 1995 and 1996 are shown in the table
below (in thousands):
<TABLE>
<CAPTION>
MORTGAGE CERTIFICATES
<S> <C>
Principal Outstanding - December 31, 1993 $254,657
Principal Reduction - Year Ended December 31, 1994 (86,978)
--------
Principal Outstanding - December 31, 1994 167,679
Principal Reduction - Year Ended December 31, 1995 (21,885)
Principal Amount Sold - Year Ended December 31, 1995 (33,388)
--------
Principal Outstanding - December 31, 1995 112,406
Principal Reduction - Year Ended December 31, 1996 (17,452)
Principal Amount Sold - Year Ended December 31, 1996 (20,981)
--------
Principal Outstanding - December 31, 1996 $ 73,973
========
</TABLE>
<TABLE>
<CAPTION>
COLLATERALIZED MORTGAGE OBLIGATIONS
<S> <C>
Principal Outstanding - December 31, 1993 $ 277,612
Principal Reduction - Year Ended December 31, 1994 (108,308)
---------
Principal Outstanding - December 31, 1994 169,304
Principal Reduction - Year Ended December 31, 1995 (22,627)
Principal Amount Sold - Year Ended December 31, 1995 (32,787)
---------
Principal Outstanding - December 31, 1995 113,890
Principal Reduction - Year Ended December 31, 1996 (17,795)
Principal Amount Sold - Year Ended December 31, 1996 (21,356)
---------
Principal Outstanding - December 31, 1996 $ 74,739
=========
</TABLE>
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 distributions 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Ownership of shares of the Company's Common Stock is subject to
certain risks. The Company's earnings from its 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 and rates of occupancy. Long-term profits will depend upon an
appreciation in the value of the residential 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
29
<PAGE>
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 and 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 shareholders 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 the performance of real estate
including economic and demographic trends or governmental regulations which are
out of the control of the Company.
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 shareholders 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
shareholders. 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.
The Company's ability to utilize its net operating tax loss
carryforwards could be substantially reduced if the Company were to undergo an
"ownership change" within the meaning of Section 382(g)(1) of the Internal
Revenue Code.
Because of these and other factors, future distributions to
shareholders cannot be predicted. The Company has the right, but not the
obligation, to refrain from making distributions to shareholders 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.
30
<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.
The information required by this Item is incorporated by reference to
the Company's definitive Proxy Statement for its Annual Meeting of Shareholders
to be held in 1997, to be filed with the Commission within 120 days after the
end of the Company's fiscal year pursuant to General Instruction G(3) to Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
the Company's definitive Proxy Statement for its Annual Meeting of Shareholders
to be held in 1997, to be filed with the Commission within 120 days after the
end of the Company's fiscal year pursuant to General Instruction G(3) to Form
10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to
the Company's definitive Proxy Statement for its Annual Meeting of Shareholders
to be held in 1997, to be filed with the Commission within 120 days after the
end of the Company's fiscal year pursuant to General Instruction G(3) to Form
10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
the Company's definitive Proxy Statement for its Annual Meeting of Shareholders
to be held in 1997, to be filed with the Commission within 120 days after the
end of the Company's fiscal year pursuant to General Instruction G(3) to Form
10-K.
31
<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
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................................... 34
Consolidated Balance Sheets - December 31, 1996 and 1995.................................... 35
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994....................................................... 36
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994........................................... 37
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................................................... 38
Notes to the Consolidated Financial Statements.............................................. 39
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1996............. 56
</TABLE>
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or notes
thereto.
32
<PAGE>
3. EXHIBITS
The following exhibits in the accompanying index to exhibits are filed
herewith or are incorporated by reference to exhibits previously filed.
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<C> <S>
3(a) Amended Articles of Incorporation of the Registrant (1)
3(b) Amended and Restated Bylaws of the Registrant
4(a) Specimen Certificate representing $.001 par value Common Stock (1)
4(b) Dividend Reinvestment and Share Purchase Plan (2)
10(a) Management Agreement between the Registrant and TIS Financial Services, Inc. (5)
10(c) Custody Agreement between Registrant and Mellon Bank N.A. (3)
10(d) Transfer Agency Agreement between Registrant and Mellon Securities Trust Company (3)
10(e) Reverse Repurchase Agreement between Registrant and Bear, Stearns Securities Corp.(4)
10(f) Loan and Security Agreement dated July 19, 1995 between TIS Mortgage Investment
Company and Paine Webber Real Estate Securities, Inc. (5)
10(g) Nonqualified Stock Option Agreement with John D. Boyce and Schedule of Omitted
Contracts (5)
10(h) Nonqualified Stock Option Agreement with John E. Castello and Schedule of Omitted
Contracts (5)
10(i) Employment Agreement between TIS and Lorraine O. Legg. (6)
10(j) Employment Agreement between TIS and John E. Castello. (6)
10(k) Facilities and Expense Sharing Agreement (6)
21 Subsidiaries of the Registrant
24 Consent of Arthur Andersen LLP
</TABLE>
- -------------------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-11 (No. 33-22182) declared effective August 19, 1988.
(2) 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.
(3) 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.
(4) 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.
(5) 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 1,
1996.
(6) Incorporated herein by reference to Registrant's Current Report on Form 8-K
(File No. 1-10004) filed with the Securities and Exchange Commission on July 9,
1996
(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.
33
<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, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. 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, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Our audit was made for purposes 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, 1996 - is
presented for the purpose 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 14, 1997
(Except for the matter discussed in Note 19,
as to which the date is March 24, 1997)
34
<PAGE>
TIS Mortgage Investment Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, 1996 DECEMBER 31, 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Mortgage Related Assets
Mortgage Certificates, net $ 72,703 $109,752
Residual Interests 436 725
Interest Only (IO) Bonds 2,695 3,150
Commercial Securitizations 183 191
Reserve for Loss on Investments (2,997) (4,277)
-------- --------
Total Mortgage Related Assets 73,020 109,541
-------- --------
Operating Real Estate Assets, net 28,945 29,384
-------- --------
Other Assets
Cash and Cash Equivalents 82 198
Restricted Cash 1,272 2,728
Accrued Interest and Accounts Receivable 668 1,672
Deferred Bond Issuance Costs 598 1,414
Amortizable Costs 825 100
Prepaid Expenses 163 210
-------- --------
Total Other Assets 3,608 6,322
-------- --------
Total Assets $105,573 $145,247
======== ========
- -----------------------------------------------------------------------------------
LIABILITIES
Collateralized Mortgage Obligations, net $ 70,259 $108,438
Accounts Payable and Accrued Liabilities 449 593
Accrued Interest Payable 1,056 1,755
Notes Payable on Real Estate 20,373 20,362
Short-term Debt 2,418 2,118
-------- --------
Total Liabilities 94,555 133,266
-------- --------
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 (2,142) (2,244)
Retained Deficit (61,544) (60,479)
-------- --------
Total Shareholders' Equity 11,018 11,981
-------- --------
Total Liabilities and Shareholders' $105,573 $145,247
======== ========
Equity
- -----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
TIS Mortgage Investment Company and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
MORTGAGE RELATED ASSETS
Interest $ 8,271 $ 16,550 $24,333
Valuation Reserve Reduction (Provision) 651 541 (398)
Gain (Loss) on Sales of Mortgage Related Assets 450 (2,385) --
Other 21 30 60
------- --------- -------
Income from Mortgage Related Assets 9,393 14,736 23,995
------- --------- -------
INTEREST AND CMO RELATED EXPENSES
Collateralized Mortgage Obligations
Interest 8,317 14,749 18,987
Administration Fees 70 140 161
Amortization of Deferred Bond Issuance Costs 146 276 351
Short-term Debt 159 429 509
------- --------- -------
Total Interest and CMO Related Expenses 8,692 15,594 20,008
------- --------- -------
REAL ESTATE OPERATIONS
Rental and Other Income 3,990 2,206 --
Operating and Maintenance Expenses (1,388) (984) --
Interest on Real Estate Notes Payable (1,718) (945) --
Property Taxes (350) (189) --
Depreciation and Amortization (705) (377) --
------- --------- -------
Loss from Real Estate Operations (171) (289) --
------- --------- -------
OTHER EXPENSES
Management Fee to a related party 77 220 221
General and Administrative, including amounts
paid to a related party of $391,198, $510,174
and $514,922, respectively 1,356 1,212 1,229
------- --------- -------
Total Other Expenses 1,433 1,432 1,450
------- --------- -------
Net Income (Loss) $ (903) $ (2,579) $ 2,537
======= ========= =======
- -----------------------------------------------------------------------------------------
Income (Loss) per Share $ (0.11) $ (0.32) $ 0.31
Distributions Declared per Share $ 0.02 $ 0.00 $ 0.02
Weighted Average Number of Shares Outstanding 8,106 8,106 8,106
- -----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
TIS Mortgage Investment Company and Subsidiary
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------------------------------------------
(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, 1994 8,106 $ 8 $74,696 $ 1,351 $(60,275) $15,780
Net Income -- -- -- -- 2,537 2,537
Distributions Declared -- -- -- -- (162) (162)
Change in 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 -- 1,048
Change in Unrealized Loss
on Investments -- -- -- (2,581) -- (1,533)
- ------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1995 8,106 8 74,696 (2,244) (60,479) 11,981
Net Loss -- -- -- -- (903) (903)
Distributions Declared -- -- -- -- (162) (162)
Change in Unrealized Loss
on Investments -- -- -- 102 -- 102
- ------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1996 8,106 $ 8 $74,696 $ (2,142) $(61,544) $11,018
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE>
TIS Mortgage Investment Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (903) $ (2,579) $ 2,537
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 791 1,424 1,035
Depreciation of Operating Real Estate Assets 697 376 --
(Gain) Loss on Sales of Mortgage Related Assets (450) 2,385 --
Valuation Reserve Provision (Reduction) (651) (541) 398
Decrease (Increase) in Accrued Interest Receivable (207) 273 6,161
Decrease (Increase) in Accounts Receivable (49) 435 (530)
Decrease (Increase) in Prepaid Expenses 47 (13) (409)
Increase in Other Assets (732) (101) --
Increase (Decrease) in Accounts Payable
and Accrued Liabilities (128) 311 61
Decrease in Accrued Interest Payable (303) (335) (1,339)
-------- -------- ---------
Net Cash Provided by (Used in) Operating Activities (1,888) 1,635 7,914
-------- -------- ---------
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Short-term Debt 300 (6,207) (3,420)
Principal Payments on CMOs (17,775) (22,627) (108,308)
Proceeds from Notes Payable on Real Estate 170 1,815 --
Payments on Notes Payable on Real Estate (159) (128) --
Cash Distributions Paid on Common Stock (162) -- (162)
-------- -------- ---------
Net Cash Used in Financing Activities (17,626) (27,147) (111,890)
-------- -------- ---------
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net Decrease in Restricted Cash 899 1 15,062
Acquisition of Real Estate Assets -- (10,592) --
Additions to Real Estate Assets (258) (97) --
Principal Reduction in Mortgage Certificates 17,452 21,885 86,978
Proceeds from Sales of Mortgage Related Assets 450 10,751 --
Principal Reduction in Residual Interests 59 450 1,582
Purchase of Commercial Securitizations -- -- (1,232)
Principal Reduction in Commercial Securitizations 8 104 38
Principal Reduction in IO Bonds 788 1,490 2,586
-------- -------- ---------
Net Cash Provided by Investing Activities 19,398 23,992 105,014
-------- -------- ---------
Net Change in Cash and Cash Equivalents (116) (1,520) 1,038
Cash and Cash Equivalents at Beginning of Year 198 1,718 680
-------- -------- ---------
Cash and Cash Equivalents at End of Year $ 82 $ 198 $ 1,718
======== ======== =========
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash Paid for CMO Interest Expense $ 7,638 $ 13,509 $ 20,315
Cash Paid for Other Interest Expense $ 1,886 $ 1,376 $ 520
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. THE COMPANY
TIS Mortgage Investment Company (the "Company") was incorporated on
May 11, 1988. The Company operates as a real estate investment trust (REIT) and
has, in years prior to 1995, primarily invested in structured securities
(mortgage related assets) including residual interests, principal only bonds (PO
Bonds), interest only bonds (IO Bonds) and collateralized mortgage obligations
(CMOs). 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 results 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.
In accordance with Statement of Financial Accounting Standards No. 115
("SFAS 115") - Accounting for Certain Investments in Debt and Equity Securities,
the Company classifies 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 of
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
39
<PAGE>
market transactions for securities having similar characteristics and backed by
collateral of similar rate and term.
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 a cumulative net unrealized loss of $2,142,000 as of
December 31, 1996 directly to equity as prescribed by SFAS No. 115 for mortgage
related assets classified as available-for-sale.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Based on the borrowing rates
currently available to the Company, the carrying amount of its debt approximates
fair value.
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 remaining mortgage
certificates and related bonds were removed from the Company's balance sheet.
The accounting for this transaction had the effect of deconsolidating TISMAC
from the Company's consolidated balance sheets at December 31, 1996 and 1995 and
the results of operations of TISMAC are included in the consolidated statements
of operations only through the date of sale in 1995. The 1994 consolidated
financial statements presented include the accounts of the Company and its
wholly-owned subsidiary, TISMAC. 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 December 31, 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 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 - 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. In
management's opinion, as of December 31, 1996, the carrying value of real estate
assets did not exceed their estimated fair value.
40
<PAGE>
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 includes cash balances totaling
$1,218,000 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 $54,000 in property tax impound accounts required under the terms of
certain notes payable on real estate.
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 income
(loss) reported in the accompanying consolidated financial statements may be
greater or less than the taxable income (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 1996,
1995, and 1994, respectively. The common equivalent shares related to the 1995
Stock Option Plan (see Note 12) are antidilutive in 1996 and 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 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. Examples of such
estimates include prepayment speeds on principal payments of mortgage loans and
interest rates. Actual results could differ from those estimates. Refer to
Notes 6 and 7 regarding assumptions related to the determination of fair value
of certain Structured Securities.
3. TAXATION OF DISTRIBUTIONS DECLARED
The Company paid distributions of $0.02 per share in each of the two
years ended December 31, 1996 and 1994. Of the distribution paid in 1996,
47.19% is taxable, while the remaining 52.81% is a nontaxable return of capital.
The distribution paid in 1994 was fully taxable. There were no distributions
paid by the Company in 1995.
Of the distribution paid in 1996, 47.19% is considered "excess
inclusion" income. All of the 1994 distributions 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 distributions
determined to be excess inclusion income is taxable to certain otherwise tax-
exempt shareholders as unrelated business income. Except for certain entities
41
<PAGE>
such as savings and loan associations, the portion of the distribution
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. Principal payments on Bond Classes are made on specified
payment dates (quarterly or monthly) or in full at maturity in accordance with
the terms of the related Indenture. Generally, payments of principal are
allocated to the earlier maturing Bond Classes until such Bond Classes are paid
in full. Payments of principal on certain Bond Classes occur pursuant to a
specified repayment schedule or formula (to the extent funds are available
therefore), regardless of which other Bond Classes are outstanding.
Residual Interests are classified as either equity or nonequity.
Presented in the following table is a schedule of the Nonequity Residual
Interests and the Prospective Method yield at December 31, 1996.
NONEQUITY RESIDUAL INTERESTS
- -------------------------------------------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
Book Value
December 31 Prospective
Residual Purchase -------------------- Method
Series Price 1996 1995 Yield
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonequity Residual Interests
- ----------------------------
BT 88-1 $1,537 $ 210 $ 461 14.0%
LFR-9 2,589 113 149 14.0%
CMSC I 8,642 104 104 14.0%
FHLMC 25 4,934 5 6 14.0%
FHLMC 21 5,361 4 5 14.0%
- -----------------------------------------------------------------------------------------
436 725
- -----------------------------------------------------------------------------------------
Unconsolidated Equity Residual Interests
- ----------------------------------------
TMAC 1986-2 67 0 0 N/A
TMAC 1987-3 165 0 0 N/A
- -----------------------------------------------------------------------------------------
Total Residual Interests $ 436 $ 725
=========================================================================================
</TABLE>
42
<PAGE>
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>
43
<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 DEC. 31, 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 13,831 8.75% Apr 1, 2018
Feb 16, 1988 1-D 47,492 11,723 8.63% Apr 1, 2018
---------------------------
$ 100,000 $25,554
- ------------------------------------------------------------------------------------------------------------------------------------
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 8,137 Zero Coupon Jan 1, 2019
Dec 2, 1988 D 32,850 3,026 Zero Coupon Jan 1, 2019
E 30,000 0 Zero Coupon Jan 1, 2019
R 150 150 Residual Bond Jan 1, 2019
---------------------------
$ 150,000 $11,313
- ------------------------------------------------------------------------------------------------------------------------------------
3) Collateralized Dec 21, 1998 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 3,032 9.45% May 1, 2013
------ ------
Securities Corp. Subtotal 88.000% $8,642 I-3(Z) 15,000 37,289 9.45% Feb 1, 2017
====== ====== ---------------------------
Series I (CMSC I) $ 500,000 $40,321
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 1,576 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 9 Residual Bond Feb 15, 2020
---------------------------
$ 500,000 $45,525
- ------------------------------------------------------------------------------------------------------------------------------------
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 79,210 9.50% Jan 15, 2020
R 100 8 Residual Bond Jan 15, 2020
---------------------------
$1,000,000 $79,218
====================================================================================================================================
</TABLE>
44
<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 CMOs issued by the Company's wholly-owned subsidiary, TISMAC.
However, these Residual Interests were sold in 1996 and 1995 (see Notes 2 and
14). 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.
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 and the assets and liabilities of this Owner Trust
Residual are no longer included in the consolidated financial statements. The
net assets of TMAC 1986-1 (in thousands) at the date of sale were:
<TABLE>
<S> <C>
Mortgage Certificates, net $ 19,913
Reserve for Loss on Investments (629)
Other Assets 2,486
Collateralized Mortgage Obligations, net (21,358)
Other Liabilities (412)
--------
Net Assets $ 0
========
</TABLE>
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, 1996 are set forth below:
EQUITY RESIDUAL INTERESTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CMO BOND DATA (100% OF ISSUE)
---------------------------------------------------------------------
NAME OF ISSUER TIS INITIAL DEC. 31, 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 100.000% $4,857 C 108,300 0 8.50% Dec 1, 2010
======= ======
(CMOT 28) Z 39,500 74,668 8.45% Jun 1, 2017
---------------------------
May 29, 1987 $500,000 $ 74,668
- ------------------------------------------------------------------------------------------------------------------------------------
2) TMAC 1986-2 Jun 18, 1993 44.990% $ 67 2-A $ 72,600 $ 5,838 LIBOR+.60% Mar 20, 2018
Dec 10, 1986 2-B 27,400 2,203 25.11987%- Mar 20, 2018
---------------------------
$100,000 $ 8,041 (2.00959)x LIBOR
- ------------------------------------------------------------------------------------------------------------------------------------
3) 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 0 8.58% Jul 20, 2013
3-E(Z) 9,495 19,891 9.00% Apr 20, 2018
---------------------------
$195,000 $ 20,321
- ------------------------------------------------------------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $103,030
====================================================================================================================================
</TABLE>
45
<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.
CMO COLLATERAL
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
CMO COLLATERAL DATA (100% OF ISSUE)
-------------------------------------------------------------
WEIGHTED DEC. 31, 1996 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% $73,972 9.11% 233
TMAC 1986-2 Fixed FHLMC 9.50% 7,956 10.10% 223
TMAC 1987-3 Fixed FHLMC 9.08% 18,836 9.82% 218
Nonequity Residual Interests
- ----------------------------
BT 88-1 Fixed GNMA 9.00% 24,502 9.50% 226
LFR-9 Fixed FNMA 9.50% 11,154 10.21% 246
CMSC I Fixed FNMA 9.50% 38,916 10.13% 216
FHLMC 25 Fixed FHLMC 9.50% 44,592 10.35% 241
FHLMC 21 Fixed FHLMC 9.50% 77,705 10.21% 242
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5. INTEREST ONLY (IO) BONDS
IO Bonds include both regular IO Bonds and Inverse IO Bonds. No IO
Bonds were purchased in 1996 or in 1995. Presented below is a schedule of the
Company's IO Bonds and the Prospective Method yield at December 31, 1996.
INTEREST ONLY (IO) BONDS
- ------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
Book Value Prospective
December 31 Method
Purchase --------------------
Interest Only Bond Price 1996 1995 Yield
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FNMA Series 1992-123 Class S $8,203 $1,753 $2,112 12.16%
Pru Home Mtg Corp Series 1992-7 4,776 708 796 14.00%
Bear Stearns Mtg Sec Series 1992-1 2,720 234 242 14.00%
- -------------------------------------------------------------------------------------------
$2,695 $3,150
===========================================================================================
</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>
46
<PAGE>
Certain characteristics of the Company's IO Bonds held at December 31, 1996 are
on the following table:
INTEREST ONLY BONDS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
COLLATERAL DATA (% OF IO HELD BY TIS)
--------------------------------------------------------------------------
WEIGHTED DEC. 31, 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 - $ 4,399 8.95% 294
Series 1992-123 (5.67 x
Class S LIBOR)
July 25, 1992
- ----------------------------------------------------------------------------------------------------------------------------
2) Prudential Mar 27, 1992 $4,776 NON 0.5652% $49,731 8.80% 292
Home Mortgage AGENCY
Corporation
Series 1992-7
March 1, 1992
- ----------------------------------------------------------------------------------------------------------------------------
3) Bear Stearns May 28, 1992 $2,720 NON 0.3714% $ 5,071 9.81% 234
Mortgage AGENCY
Securities, Inc.
Series 1992-1
May 1, 1992
============================================================================================================================
</TABLE>
6. FAIR VALUE OF EQUITY RESIDUALS AND MORTGAGE CERTIFICATES
For purposes of determining the fair value of the Company's investment
in Equity Residuals in applying Statement of Financial Accounting Standards 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
27%. The pertinent fair value assumption used in forecasting the cash flows from
CMOT 28 as of December 31, 1996 is a PSA of 219%. CMOT 28 is collateralized by
FNMA 8.50% and has a net fair value of $717,000.
For purposes of Statement of Financial Accounting Standards No. 107 -
Disclosure About Fair Value of Financial Instruments, 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, 1996. 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 $73,973 $76,677 $72,703
=========================================================================================
</TABLE>
47
<PAGE>
7. FAIR VALUE OF NONEQUITY RESIDUAL INTERESTS AND IO BONDS
GENERAL - A significant portion of the Company's income 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 and 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, 1996 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 one month LIBOR rate at December 31, 1996 of
5.4375% is used.
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.
The prepayment assumptions used to estimate the fair value of the
Company's Nonequity Residual Interests and IO Bonds are the Bloomberg Financial
Markets ("Bloomberg") Dealer Prepayment Estimates Average as estimated by
several dealers in mortgage-related assets and compiled by Bloomberg as of
December 31, 1996. 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:
PREPAYMENT ASSUMPTIONS
<TABLE>
<CAPTION>
-------------------------------------------------------------
Percent
Prepayment
Mortgage Collateral Pass-Through Rate Assumption
-------------------------------------------------------------
<S> <C> <C>
GNMA Certificates 9.0% 223%
FNMA/FHLMC Certificates 8.5% 233%
FNMA/FHLMC Certificates 9.0% 276%
FNMA/FHLMC Certificates 9.5% 299%
- ---------------------------------------------------------------------------
</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.
PRESENT VALUE OF PROJECTED CASH FLOWS - The tables which follow set
forth the present value at December 31, 1996 of the projected cash flows
discounted at the indicated discount 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 31, 1996, 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
$436,000. This is the Company's estimate of the fair value of these assets.
Similarly, if cash flows on the Company's
48
<PAGE>
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 and inverse IO Bonds would equal $2,695,000. 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.
PRESENT VALUE OF NONEQUITY RESIDUAL INTERESTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(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 $520 $473 $436 $405 $379
- ----------------------------------------------------------------------------------------------
</TABLE>
PRESENT VALUE OF IO BONDS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(In thousands)
Regular Interest Only Bonds
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Discount Rate 10% 12% 14% 16% 18%
Present Value $1,032 $ 985 $ 942 $ 902 $ 865
Inverse Interest Only Bonds
---------------------------------------------------------------------
Discount Rate 22% 26% 30% 34% 38%
Present Value $2,108 $1,917 $1,753 $1,616 $1,499
- ----------------------------------------------------------------------------------------------
</TABLE>
8. COMMERCIAL SECURITIZATIONS
Presented below is a schedule of commercial securitizations owned by
the Company:
<TABLE>
<CAPTION>
(In thousands) Book Value
--------------------------------
Purchase December 31, December 31,
Issuer and Series Price 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prudential Securities Series 1993-6 $ 250 $ 183 $ 191
</TABLE>
During the year ended December 31, 1995, the CS First Boston bond was
sold for $1,017,216 at a gain of $117,898.
9. OPERATING REAL ESTATE ASSETS
During the year ended December 31, 1995, the Company acquired four
multifamily housing properties in California's Central Valley. The properties
were purchased either in the form of direct ownership of the real property or in
the form of an interest in a partnership that directly owns the real property.
Capitalized costs differ from the purchase price due to capitalization of
acquisition costs. The carrying value of operating real estate assets at
December 31, 1996 and 1995 is presented in the following table:
<TABLE>
<CAPTION>
December 31
(in thousands) 1996 1995
-------------------------------------------------------
<S> <C> <C>
Land $ 4,990 $ 4,990
Buildings and improvements 24,036 24,036
Personal property 993 735
----------------------
Total 30,019 29,761
Less accumulated depreciation
and amortization (1,074) (377)
----------------------
Net $28,945 $29,384
======================
</TABLE>
49
<PAGE>
The purchase price of the 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. At December 31, 1996, the Company's four
multifamily properties had an overall occupancy of 96%.
10. NOTES PAYABLE ON REAL ESTATE
As part of the 1995 acquisition of multifamily residential properties,
existing secured debt totaling $18,675,000 was assumed. In addition, new
secured debt of $1,815,000 was obtained in 1995. In August 1996, the River Oaks
and Four Creeks - II mortgage notes payable matured and were retired using the
proceeds from a new mortgage note in the principal amount of $11,235,000 (the
"Interim Note"). The Company obtained permanent financing in March 1997 and
paid off the Interim Note (see Note 19 - Subsequent Event). The following table
summarizes the debt outstanding on the properties as of December 31, 1996 and
1995. The Shady Lane loan remains in the name of the seller of the property and
will until refinanced but the Company is servicing the debt and receives all of
the economic benefits from the property.
<TABLE>
<CAPTION>
Principal Balance Interest Monthly
December 31, Basis of Rate Principal
----------------- Interest Dec. 31, Due and Interest
Property 1996 1995 Rate 1996 Date Payment
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shady Lane $ 1,358,576 $ 1,387,088 Fixed 8.375% Dec. 1, 2004 $ 11,967
River Oaks 6,665,796 6,605,419 LIBOR + 2.5% 7.93% Callable 44,050
Villa San Marcos 5,980,626 6,055,762 1 year Treasury 9.00% Jan. 1, 1999 49,304
Bill + 3%
Four Creeks - I 1,799,034 1,813,821 Fixed 8.16% Dec. 1, 2005 13,521
Four Creeks - II 4,569,204 4,500,000 LIBOR + 2.5% 7.93% Callable 30,194
- ---------------------------------------------------------------------------------------------------------------------
Total $20,373,236 $20,362,090 $149,036
=====================================================================================================================
</TABLE>
The scheduled principal payments to be made on notes payable on real
estate outstanding at December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------
<S> <C>
1997 $11,402
1998 181
1999 196
2000 213
2001 231
Thereafter 8,150
--------------------------------
Total $20,373
================================
</TABLE>
11. SHORT-TERM DEBT
At December 31, 1996 the Company's short-term borrowings totaled
$2,417,500 which consisted of $2,067,500 under repurchase agreements with Bear
Stearns & Co. and Paine Webber and $350,000 of interim financing provided by its
principal banker. The repurchase agreement borrowings had a weighted average
interest rate of 7.2715%; the bank borrowing had an interest rate of 9.75%. The
repurchase agreements had initial terms of one month, are renewed on a month-to-
month basis, are collateralized by some of the Company's Nonequity Residual
Interests and IO Bonds whose fair values approximated $2 million and have a
floating rate of interest which is tied to the one month LIBOR rate. The bank
interim financing is unsecured and is renewable on a month-to-month basis. The
Company has no committed lines of credit.
50
<PAGE>
12. STOCK OPTIONS
During 1995, the shareholders approved the 1995 Stock Option Plan (the
"Plan") covering 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
the 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 the grant reduced by the aggregate amount
of distributions declared. Options granted are exercisable for no more than 10
years from the date of grant.
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. This statement defines
a fair-value-based method of account for stock-based compensation. As permitted
by SFAS 123, the Company accounts for stock options under APB Opinion. 25, under
which no compensation cost has been recognized. The Company has provided the
following pro forma net income and earnings per share data as if compensation
cost for the Plan had been provided for consistent with SFAS 123:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C> <C>
Net Loss (in thousands): As reported ($903) ($2,579)
Pro forma ($903) ($2,693)
Earnings per share As reported ($0.11) ($0.32)
Pro forma ($0.11) ($0.32)
</TABLE>
The following table summarizes the stock option activity for the years
ended December 31, 1996 and 1995, respectively. The weighted average exercise
price has been reduced by aggregate distributions declared since the grant dates
in accordance with the Plan agreement.
<TABLE>
<CAPTION>
Number of Share
Options
Outstanding
---------------
<S> <C>
Balance, December 31, 1994 --
Granted to officers 330,000
Granted to non-affiliated directors 6,000
-------
Balance, December 31, 1995 336,000
Granted 1,000
-------
Balance, December 31, 1996 337,000
=======
</TABLE>
No options were exercised or forfeited or expired during 1996 or 1995.
As of December 31, 1996 and 1995, respectively, 337,000 and 336,000 of the
options were exercisable. As of December 31, 1996, 63,000 shares were available
under the Plan for granting further options. The weighted average fair value of
options granted in 1996 and 1995, respectively, was $0.18 and $0.34. The
options outstanding at December 31, 1996 have exercise prices of $1.20 and $2.23
with a weighted average exercise price of $2.23 and a weighted average remaining
contractual life of 8.3 years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model. Management has made the following
average assumptions for grants in 1996 and 1995, respectively: risk-free
interest rate of 6.67% and 7.02%, expected distribution yields of 0% and 0%,
expected lives of 10 and 10 years, and expected volatility of 35% and 39%.
51
<PAGE>
13. RELATED PARTY TRANSACTIONS
Prior to July 1, 1996, the Company had entered into a Management
Agreement (the "Management Agreement") with TIS Financial Services Inc., (the
"Former Manager") which was renewable annually. At a special meeting of the
Board of Directors on June 27, 1996, the Board resolved to let the Management
Agreement expire on June 30, 1996 and to have the Company become a self-
administered REIT. Management fees of $77,000 were paid for the first half of
1996; management fees of $130,000 and $121,000 were paid for 1995 and 1994,
respectively. Residual interest administration fees of $90,000 and $100,000 were
paid in 1995 and 1994, respectively. In addition, the Company reimbursed the
Former Manager in the Amount of $391,198, $510,174 and $514,922, respectively,
for 1996, 1995 and 1994 related to certain general administrative expenses
incurred by the Former Manager on the Company's behalf (see further discussion
below).
PRIOR TO JULY 1, 1996
- ---------------------
Prior to July 1, 1996, the Company operated under the Management
Agreement with the Former Manager. In June 1995 the Board of Directors of the
Company and the Former Manager entered into a new Management Agreement through
June 30, 1996. In March 1995, the Board of Directors 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 Former Manager reimburse the
Company for Excess 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 Former Manager voluntarily waived the
increase in base management fee for the fourth quarter of 1995 and first two
quarters of 1996. Prior to going self-managed on July 1, 1996, the Company
reimbursed the Former Manager for certain expenses incurred by the Former
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 Former Manager at the Company's expense.
JULY 1, 1996 AND THEREAFTER
- ---------------------------
In connection with becoming self-managed on July 1 1996, the Company
entered into a Facilities and Expense Sharing Agreement ("Expense Sharing
Agreement") with the Former Manager providing for the sharing of office space,
office equipment and the expenses of certain administrative and other personnel
and ancillary services. In addition, the Board approved employment contracts
with Lorraine O. Legg, Chairman and President of the Company, for a term of
three years and John E. Castello, as Executive Vice President and Chief
Financial Officer, for a term of two years. The Expense Sharing Agreement
provides for certain office space and expense sharing arrangements, whereby the
Company and the Former Manager share on a prorata basis all fees and expenses
incurred in connection with rent, telephone charges, utilities and other office
expenses, bookkeeping fees and expenses and miscellaneous administrative and
other expenses, including certain personnel expenses, as described in the
Expense Sharing Agreement. The prorata sharing of such expenses is determined
based upon the relative benefit received by each party in accordance with the
amount of space utilized or the relative amount of time each such resource is
used, or such other allocation method as may be reasonable and agreed to by the
parties. The Expense Sharing Agreement continues in effect until terminated by
either party on 30 days prior written notice or at such time as the parties no
longer continue to share office space.
52
<PAGE>
14. WHOLLY-OWNED SUBSIDIARY
On October 21, 1988 TISMAC, the wholly-owned Subsidiary of the
Company, was incorporated for the purpose of issuing CMOs directly.
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 these transactions, the Company no
longer has risk or reward of ownership, and therefore the remaining mortgage
certificates and related bonds were removed from the Company's balance sheet.
The accounting for this transaction had the effect of deconsolidating TISMAC
from the Company's consolidated balance sheets at December 31, 1996 and 1995 and
the results of operations of TISMAC are included in the consolidated statements
of operations only through the date of sale in 1995.
15. INTEREST INCOME
Interest income from Mortgage Related Assets consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Certificates, net $7,748 $13,735 $18,298
Short-term Investments 16 115 126
Residual Interests 52 1,483 3,650
Interest Only (IO) Bonds 455 1,128 2,208
Commercial Securitizations 0 89 51
- -------------------------------------------------------------------------------------
Total $8,271 $16,550 $24,333
=====================================================================================
</TABLE>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(IN THOUSANDS, FIRST SECOND THIRD FOURTH
EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER TOTAL
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Interest Income
from Mortgage Related Assets $ 2,748 $2,691 $ 2,010 $ 1,944 $ 9,393
Income (Loss) from
Real Estate Operations (22) 3 (83) (69) (171)
Net Income (Loss) (361) 64 (345) (261) (903)
Net Income (Loss) per Share $ (0.04) $ 0.01 $ (0.04) $ (0.04) $ (0.11)
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)
</TABLE>
53
<PAGE>
17. DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN
The Board of Directors has 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 will 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 have been
purchased in the open market.
18. RISK OF UNINSURED LOSSES
The Company's real estate properties are located in an area that is
subject to earthquake activity and the Company's comprehensive liability, fire,
flood, extended coverage and rental loss insurance does not cover damage
resulting from an earthquake and certain other losses. Accordingly, should the
Company sustain damage resulting from an earthquake or other uninsured loss, the
Company could lose its investment in, and anticipated profits and cash flows
from the properties. The accompanying financial statements do not reflect any
adjustments for these uncertainties.
19. SUBSEQUENT EVENT
On March 24, 1997, the Company obtained permanent financing with an
insurance company (the "Permanent Financing"). The total loan proceeds from the
Permanent Financing amounted to $17,400,000 and, after certain costs and fees,
were used to retire the then outstanding principal and interest on the Interim
Note of $11,296,387 and the mortgage note on Villa San Marcos of $6,009,681.
The Permanent Financing comprises three deeds of trust and an assignment of
rents on Four Creeks - II, River Oaks and Villa San Marcos. The term of each of
the underlying mortgage loans is ten years with a fixed annual interest rate of
8.36% for River Oaks and 8.31% for the others. The Permanent Financing provides
for monthly payments of principal and interest of $138,084 based on an
amortization schedule of 25 years. The mortgages comprising the Permanent
Financing may not be retired during the first five years and are subject to a
prepayment penalty if prepaid after the 5th year. At December 31, 1996, the
Company had capitalized approximately $660,000 of costs and fees associated with
the Permanent Financing, classified within amortizable costs on the accompanying
consolidated balance sheets.
54
<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, 1997 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.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------- ------------------------------------- ----
<S> <C> <C>
/s/ Lorraine O. Legg Director, President and March 27, 1997
- -------------------------- Principal Executive Officer
Lorraine O. Legg
/s/ John E. Castello Executive Vice President (Principal March 27, 1997
- -------------------------- Financial Officer)
John E. Castello
/s/ Michael J. Stone Controller March 27, 1997
- --------------------------
Michael J. Stone
/s/ Patricia M. Howe Director, Chairman of the Board March 27, 1997
- --------------------------
Patricia M. Howe
/s/ John D. Boyce Director March 27, 1997
- --------------------------
John D. Boyce
/s/ Robert H. Edelstein Director March 27, 1997
- --------------------------
Robert H. Edelstein
/s/ Douglas B. Fletcher Director March 27, 1997
- --------------------------
Douglas B. Fletcher
/s/ Robert W. Ledoux Director March 27, 1997
- --------------------------
Robert W. Ledoux
/s/ Melvin W. Petersen Director March 27, 1997
- --------------------------
Melvin W. Petersen
/s/ Will M. Storey Director March 27, 1997
- --------------------------
Will M. Storey
</TABLE>
55
<PAGE>
SCHEDULE III
TIS MORTGAGE INVESTMENT COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Costs
Subsequently Gross Amount at which Carried
Initial Cost to Company Capitalized at Close of Year
----------------------- ----------- ------------------------------
Buildings Buildings
and and
Description Encumbrances Land Improvements Improvements Land Improvements Total
----------- ------------ ------ ------------ ------------ ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Shady Lane Village
Visalia, CA $ 1,358 $ 379 $ 1,725 $38 $ 379 $ 1,763 $ 2,142
River Oaks
Hanford, CA 6,666 905 7,096 20 905 $ 7,116 $ 8,021
Villa San Marcos
Fresno, CA 5,981 2,549 7,459 -- 2,549 7,459 10,008
Four Creeks Village
Visalia, CA 6,368 1,157 7,698 -- 1,157 7,698 8,855
--------------------------------------------------------------------------------
$20,373 $4,990 $23,978 $58 $4,990 $24,036 $29,026
================================================================================
<CAPTION>
Column A Column F Column G Column H Column I
-------- -------- -------- -------- --------
Life on which
Accumulated Date of Date Depreciation
Description Depreciation Construction Acquired is Computed
----------- ------------ ------------ -------- --------------
<S> <C> <C> <C> <C>
Shady Lane Village
Visalia, CA $ 84 1985 1995 40 years
River Oaks
Hanford, CA 325 1984 1995 40 years
Villa San Marcos
Fresno, CA 280 1991 1995 40 years
Four Creeks Village
Visalia, CA 249 1986-91 1995 40 years
----
$938
====
</TABLE>
<PAGE>
EXHIBIT 3(b)
AMENDED AND RESTATED BY-LAWS
OF
TIS MORTGAGE INVESTMENT COMPANY
AS OF JUNE 27, 1996
ARTICLE I: Stockholders
SECTION 1.1. Annual Meetings. The annual meeting of the stockholders
----------------
of the Corporation shall be held on such date within the month of May and at
such place, within or without the State of Maryland, as may be determined by the
Board of Directors and as shall be designated in the notice of said meeting, for
the purpose of electing directors and for the transaction of such other business
as may properly be brought before the meeting.
SECTION 1.2. Special Meetings. Special meetings of the stockholders
---------------
for any purpose or purposes, unless otherwise prescribed by statute or by the
Articles of Incorporation, may be held at any place, within or without the State
of Maryland, and may be called at any time by the Board of Directors or by the
President, and shall be called at the request in writing of stockholders.
entitled to cast at least twenty-five (25) percent of all the votes entitled to
be cast at such meeting. Such request shall state the purpose or purposes of the
proposed meeting and the matters proposed to be acted on at it; provided,
--------
however, that unless requested by stockholders entitled to cast a majority of
- -------
all the votes entitled to be cast at the meeting, a special meeting need not be
called to consider any matter which is substantially the same as a matter voted
on at any meeting of the stockholders held during the preceding twelve (12)
months. The Secretary shall inform such stockholders of the estimated costs of
preparing and mailing the notice of the meeting and on payment of these costs to
the Corporation shall notify each stockholder entitled to notice of the meeting.
SECTION 1.3. Notice of Meetings. Written or printed notice of the time
------------------
and place of every meeting, and of the purpose of any special meeting, of the
stockholders shall be given by the Secretary of the Corporation to each
stockholder of record entitled to vote at the meeting and each other stockholder
entitled to notice of the meeting, by placing such notice in the mail at least
ten (10) days, but not more than ninety (90) days, and in any event within the
period prescribed by law, prior to the date named for the meeting addressed to
each stockholder at his address appearing on the books of the Corporation or
supplied by him to the Corporation for the purposes of notice. The notice of
every meeting of stockholders may be accompanied by a form of proxy
<PAGE>
approved by the Board of Directors in favor of such actions or persons as the
Board of Directors may select.
SECTION 1.4. Record Date. The Board of Directors may fix a date not
-----------
more than ninety (90) days preceding the date of any meeting of stockholders, or
the date fixed for the payment of any dividend, or the date of the allotment of
rights, as a record date for the determination of stockholders entitled to
notice of, or to vote at, any such meeting (or any adjournment thereof) or
entitled to receive payment of any dividend, or to receive such allotment of
rights. In such case, only stockholders of record at the time so fixed shall be
entitled to vote, to receive notice, or receive dividends or rights,
notwithstanding any subsequent transfer on the books of the Corporation. The
Board of Directors shall not close the books of the Corporation against
transfers of shares during the whole or any part of such period. In the case of
a meeting of stockholders, the record date shall be fixed not less than ten (10)
days prior to the date of the meeting.
SECTION 1.5. Quorum and Shareholder Action. Except as otherwise
-----------------------------
provided by statute or by the Articles of Incorporation, the presence in person
or by proxy of stockholders of the Corporation entitled to cast at least a
majority of all the votes entitled to be cast at the meeting shall constitute a
quorum and a majority of all the votes cast at a meeting at which a quorum is
present shall be sufficient to approve any matter which properly comes before
the meeting; provided, however, that a plurality of all the votes cast at a
-------- -------
meeting at which a quorum is present shall be sufficient to elect a director. In
the absence of a quorum, the stockholders present in person or by proxy, by
majority vote and without notice other than by announcement at the meeting, may
adjourn the meeting from time to time as provided in Section 1.7 of this Article
I until a quorum shall attend.
SECTION 1.6. Organization. At every meeting of the stockholders, the
------------
Chairman of the Board, if one has been selected and is present or, if not, the
President, or in the absence of the Chairman of the Board and the President, a
Vice-President, or in the absence of the Chairman of the Board, the President
and all the Vice-Presidents, a chairman chosen by the Board of Directors of the
Corporation or, in the absence of the Chairman, the President, all the Vice-
Presidents and a chairman chosen by the Board of Directors, a chairman chosen by
the stockholders, shall act as chairman; and the Secretary, or in his absence,
an Assistant Secretary, or in the absence of the Secretary and all the Assistant
Secretaries, a person appointed by the chairman, shall act as secretary of the
meeting.
SECTION 1.7. Adjournment. Any meeting of the stockholders may be
-----------
adjourned from time to time, without notice other than by announcement at the
meeting at which such adjournment is taken, and at any such adjourned meeting at
which a quorum shall be present any action may be taken that could have been
taken at the meeting originally called; provided, that the meeting may not be
adjourned to a date more than the number of days after the original record date
for the meeting permitted by law, and if after the adjournment a new record date
is fixed for
2
<PAGE>
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the adjourned meeting.
SECTION 1.8. Beneficial Owners. The Board of Directors may adopt by
-----------------
resolution a procedure by which a stockholder of the Corporation may certify in
writing to the Corporation that any shares of stock registered in the name of
the stockholder are held for the account of a specified person other than the
stockholder.
SECTION 1.9. Advance Notice Requirements for Nomination of Directors.
-------------------------------------------------------
Only persons who are nominated in accordance with the following procedures shall
be eligible for election as directors of the Corporation, except as may be
otherwise provided in the Articles of Incorporation of the Corporation with
respect to the rights of any holders of preferred stock of the Corporation to
nominate and elect a specified number of directors in certain circumstances.
Nominations of persons for election to the Board of Directors may be made at any
annual meeting of stockholders (a) by or at the direction of the Board of
Directors (or any duly authorized committee thereof) or (b) by any stockholder
of the Corporation (i) who is a stockholder of record on the date of the giving
of the notice provided for in this Section 1.9 and on the record date for the
determination of stockholders entitled to vote at such annual meeting and (ii)
who complies with the notice procedures set forth in this Section 1.9.
In addition to any other applicable requirements, for a nomination to be
made by a stockholder, such stockholder must have given timely notice thereof in
proper written form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
not less than sixty (60) days nor more than ninety (90) days prior to the date
of the annual meeting; provided, however, that in the event that less than
-------- -------
seventy (70) days' notice or prior public disclosure of the date of the annual
meeting is given or made to stockholders, notice by the stockholder in order to
be timely must be so received not later than the close of business on the tenth
(10th) day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure of the date of the annual meeting
was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as a director (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by the person and (iv) any
other information relating to the person that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder; and (b) as to the stockholder giving the
notice (i) the name and record address of such stockholder, (ii) the class or
3
<PAGE>
series and number of shares of capital stock of the Corporation which are owned
beneficially or of record by such stockholder, (iii) a description of all
arrangements or understandings between such stockholder and each proposed
nominee and any other person or persons (including their names) pursuant to
which the nomination(s) are to be made by such stockholder, (iv) a
representation that such stockholder intends to appear in person or by proxy at
the annual meeting to nominate the persons named in its notice and (v) any other
information relating to such stockholder that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder. Such notice
must be accompanied by a written consent of each proposed nominee to being named
as a nominee and to serve as a director if elected.
No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section. If the chairman of the annual meeting determines that a nomination was
not made in accordance with the foregoing procedures, the chairman shall declare
to the meeting that the nomination was defective and such defective nomination
shall be disregarded.
SECTION 1.10. Advance Notice Requirements for Proposal of Business. No
----------------------------------------------------
business may be transacted at an annual meeting of stockholders, other than
business that is either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors (or
any duly authorized committee thereof), (b) otherwise properly brought before
the annual meeting by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (c) otherwise properly brought before the
annual meeting by any stockholder of the Corporation (i) who is a stockholder of
record on the date of the giving of the notice provided for in this Section 1.10
and on the record date for the determination of stockholders entitled to vote at
such annual meeting and (ii) who complies with the notice procedures set forth
in this Section 1.10.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
not less than sixty (60) days nor more than ninety (90) days prior to the date
of the annual meeting; provided, however, that in the event that less than
-------- -------
seventy (70) days' notice or prior public disclosure of the date of the annual
meeting is given or made to stockholders, notice by the stockholder in order to
be timely must be so received not later than the close of business on the tenth
(10th) day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure of the date of the annual meeting
was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of
4
<PAGE>
the business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and record address
of such stockholder, (iii) the class or series and number of shares of capital
stock of the Corporation which are owned beneficially or of record by such
stockholder, (iv) a description of all arrangements or understandings between
such stockholder and any other person or persons (including their names) in
connection with the proposal of such business by such stockholder and any
material interest of such stockholder in such business and (v) a representation
that such stockholder intends to appear in person or by proxy at the annual
meeting to bring such business before the meeting.
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 1.10; provided, however, that, once
-------- -------
business has been properly brought before the annual meeting in accordance with
such procedures, nothing in this Section 1.10 shall be deemed to preclude
discussion by any stockholder of any such business. If the chairman of an annual
meeting determines that business was not properly brought before the annual
meeting in accordance with the foregoing procedures, the chairman shall declare
to the meeting that the business was not properly brought before the meeting and
such business shall not be transacted.
ARTICLE II: Board of Directors
SECTION 2.1. Election and Term of Office. The number of directors
---------------------------
shall be fixed from time to time by resolution adopted by a majority of the
entire Board of Directors; provided, however, that the number of directors shall
-------- -------
in no event be less than three (3) unless there are fewer than three
shareholders nor more than twelve (12). The business, affairs and property of
the Corporation shall be managed by or under the direction of the Board of
Directors, which may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by statute, the Articles of Incorporation or
these By-Laws required to be exercised or done by the stockholders. As soon as
the Corporation shall first have three directors, the Board of Directors shall
be divided into three classes: class I, class II and class III. The terms of
office of the classes of directors shall expire at the times of the annual
meetings of the stockholders as follows -- class I in 1989, class II in 1990 and
class III in 1991 -- or thereafter in each case when their respective successors
are elected and qualified. At each annual election, the directors chosen to
succeed those whose terms are expiring shall be identified as being of the same
class as the directors whom they succeed, and shall be elected for a term
expiring at the time of the third succeeding annual meeting of stockholders, or
thereafter in each case when their respective successors are elected and
qualified. The number of directorships shall be apportioned among the classes so
as to maintain the classes as nearly equal in number as possible.
SECTION 2.2. Unaffiliated Directors. During such time as the
----------------------
Corporation qualifies or seeks to qualify as a real estate investment trust,
except in the case of a vacancy, a majority of the Board of Directors shall be
composed of persons who (i) are not Affiliates (as hereinafter defined)
5
<PAGE>
of any person or entity, if any, that is responsible for directing and
performing the day-to-day business affairs of the Corporation (the "Manager") or
of any person which is an Affiliate of the Manager, and (ii) are not employed
by, or receiving any compensation (except for serving as a director) from, the
Corporation ("Unaffiliated Directors"). "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 or employee of, partner in
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 or employee of,
partner in 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. "Person" includes a natural person, corporation,
partnership, trust company or other entity for purposes of this definition.
SECTION 2.3. Regular Meetings. Regular meetings of the Board of
-----------------
Directors may be held without notice on such dates as the Board may from time to
time determine.
SECTION 2.4. Special Meetings. Special meetings of the Board of
----------------
Directors shall be held whenever called by the Chairman of the Board, the
President or by a majority of the directors either in writing or by vote at a
meeting.
SECTION 2.5. Notice of Special Meetings. Notice of the place, day and
--------------------------
hour of every special meeting shall be delivered personally to each director or
telegraphed or cabled at least one (1) day before the meeting or mailed at least
two (2) days before the meeting to his address on the books of the Corporation.
It shall not be requisite to the validity of any meeting of the Board of
Directors that notice thereof shall have been given to any director who is
present thereat, or, if absent, waives notice thereof in writing filed with the
records of the meeting either before or after the holding thereof.
SECTION 2.6. Place of Meetings. The Board of Directors may hold its
-----------------
regular and special meetings at such place or places within or without the State
of Maryland as the Board may from time to time determine.
SECTION 2.7. Quorum and Board Action. Except as otherwise provided by
-----------------------
statute or by the Articles of Incorporation: (a) one-third (1/3) of the entire
Board of Directors, but in no case less than two (2) directors, unless there is
only one (1) director, shall be necessary to constitute a quorum for the
transaction of business at each meeting of the Board; provided,
--------
6
<PAGE>
however, that a majority of the directors who constitute any quorum shall be
- -------
composed of Unaffiliated Directors; (b) the action of a majority of the
directors present at a meeting at which a quorum is present shall be the action
of the Board; and (c) if at any meeting there be less than a quorum present, a
majority of those directors present may adjourn the meeting from time to time,
but not for a period greater than thirty (30) days at any one time, without
notice other than by announcement at the meeting until a quorum shall attend. At
any such adjourned meeting at which a quorum shall be present, any business may
be transacted which might have been transacted at the meeting as originally
scheduled.
SECTION 2.8. Action without Meeting. Any action required or permitted
----------------------
to be taken at a meeting of the Board of Directors or a committee of the Board
may be taken without a meeting if an unanimous consent which sets forth the
action is signed by each member of the Board or committee and is filed with the
minutes of proceedings of the Board or committee.
SECTION 2.9. Organization. Every meeting of the Board of Directors
------------
shall be presided over by the Chairman of the Board, if one has been selected
and is present, and, if not, the President, or in the absence of the Chairman of
the Board and the President, a Vice-President, or in the absence of the Chairman
of the Board, the President, and all the Vice-Presidents, a chairman chosen by a
majority of the directors present. The Secretary, or in his absence, an
Assistant Secretary, or in the absence of the Secretary and all the Assistant
Secretaries, a person appointed by the chairman, shall act as secretary.
SECTION 2.10. Vacancies. Any vacancy on the Board of Directors
---------
occurring by reason of an increase in the number of directors may be filled by a
majority of the entire Board of Directors, including a majority of the
Unaffiliated Directors. Any vacancy on the Board of Directors occurring for any
other cause may be filled by a majority of the remaining members of the Board of
Directors, whether or not these members constitute a quorum under Section 2.7 of
this Article II; provided, however, that the remaining Unaffiliated Directors
-------- -------
shall nominate replacements for vacancies among the unaffiliated Directors,
which replacements must be elected by a majority of the Board of Directors,
including a majority of the Unaffiliated Directors. Any director so chosen to
fill a vacancy shall hold office until the next annual meeting of stockholders
and until his or her successor shall have been duly elected and qualified.
SECTION 2.11. Resignations. Any director may resign at any time by
------------
giving written notice to the Board of Directors, the President or the Secretary.
Any such resignation shall take effect at the time of the receipt of such notice
or at any later time specified therein; and unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.
SECTION 2.12. Committees. The Board of Directors may appoint from
----------
among its members an executive and other committees of the Board composed of two
(2) or more directors. A majority of the members of any committee so appointed
shall be composed of persons who are
7
<PAGE>
Unaffiliated Directors. To the extent permitted by law, the Board of Directors
may delegate to any such committee or committees any of the powers of the Board
of Directors in the management of the business, affairs and property of the
Corporation. Such committee or committees shall have such name or names as may
be determined from time to time by resolution adopted by the Board of Directors.
Each committee shall keep regular minutes of its meetings and report the same to
the Board of Directors when required. The members of a committee present at any
meeting, whether or not they constitute a quorum, may appoint a director to act
in the place of an absent member, as long as the composition of the committee
after such appointment complies with the second sentence of this Section 2.12.
SECTION 2.13. Telephone Conference. Members of the Board of Directors
--------------------
or any committee thereof may participate in a meeting of the Board or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other
at the same time and participation by such means shall constitute presence in
person at the meeting.
SECTION 2.14. Compensation of Directors. Any director, whether or not
-------------------------
he or she is a salaried officer, employee, or agent of the Corporation, may be
compensated for his or her services as director or as a member of a committee,
or as Chairman of the Board or chairman of a committee, and in addition may be
reimbursed for transportation and other expenses, all in such manner and amounts
as the directors may from time to time determine.
SECTION 2.15. Investments and Limitation of Indebtedness.
------------------------------------------
(a) Investments. The Board of Directors, including a
-----------
majority of the Unaffiliated Directors, shall (a) adopt and amend from time to
time guidelines (the "Guidelines"), which shall contain criteria and parameters
pursuant to which the investment policies, borrowings and operations of the
Corporation and transactions in which the Manager or Affiliates of the Manager
have an interest shall be implemented, (b) review the investment policies of the
Corporation and the Guidelines at least annually to determine that they continue
to be in the best interests of the stockholders of the Corporation, and (c)
approve any deviations from the Guidelines on a case-by-case basis consistent
with the continued qualification of the Corporation as a real estate investment
trust.
(b) Limitation of Indebtedness. The Corporation shall not
--------------------------
incur indebtedness if, after giving effect to the incurrence thereof, aggregate
indebtedness (other than indebtedness represented by Structured Securities and
any other loans between the Corporation and its trusts or subsidiaries), secured
and unsecured, would exceed 300% of the Corporation'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 directors
who are not Affiliates of the Manager or of any person who is an Affiliate of
the Manager. The term "Average Invested Assets" for any quarter means the
average of the aggregate book value of the consolidated assets
8
<PAGE>
of the Corporation and its trusts and subsidiaries, before reserves for
depreciation and bad debts and other similar noncash reserves, less the book
value of the issued and outstanding Structured Securities secured by Mortgage
Instruments of the Corporation, its trusts and subsidiaries, computed by taking
the average of such values at the end of each month during such quarter.
SECTION 2.16. Management Arrangements.
-----------------------
(a) The Board of Directors may delegate the duty of
management of the assets and the administration of the Corporation's day-to-day
operations to a Manager pursuant to a written contract or contracts, or any
renewal thereof, which have obtained the requisite approval of the Board of
Directors, including a majority of the Unaffiliated Directors.
(b) Each contract for the services of the Manager entered
into by the Board of Directors shall have a term, except for the initial term
commencing on the date of the closing of the Corporation's initial public
offering, of no more than one year, but may be renewed annually at or prior to
the expiration of the contract. Each contract shall be terminable without cause
by a majority of the Unaffiliated Directors or the Manager upon sixty days,
written notice-
(c) The Unaffiliated Directors shall determine at least
annually that the compensation that the Corporation contracts to pay the Manager
is reasonable in relation to the nature and quality of the services performed,
and also shall supervise the performance of the Manager and the compensation
paid to the manager by the Corporation to determine that the provisions of such
contract are being carried out.
(d) Unless consistent with the Guidelines, all transactions
involving the Corporation in which the Manager has an interest must be approved
by a majority of the Unaffiliated Directors.
ARTICLE III: Officers
SECTION 3.1. Number. The officers of the Corporation shall be a
------
President, a Secretary, and a Treasurer, and may include a Chairman of the
Board, one or more Vice-Presidents, one or more Assistant Secretaries, one or
more Assistant Treasurers, and such other officers as the Board of Directors may
from time to time determine. Any officer may hold more than one office in the
Corporation, except that an officer may not serve concurrently as both the
President and a Vice-President.
SECTION 3.2. Election and Term of Office. The officers of the
---------------------------
Corporation shall be elected by the Board of Directors and, subject to earlier
termination of office, each officer shall hold office for one year and until his
successor shall have been elected and qualified, except as otherwise provided in
any employment agreement between the Company and any officer.
9
<PAGE>
SECTION 3.3. Resignations. Any officer may resign at any time by
------------
giving written notice to the Board of Directors or to the President or the
Secretary of the Corporation. Any such resignation shall take effect at the date
of the receipt of such notice or at any later time specified therein, and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
SECTION 3.4. Removal. If the Board of Directors in its judgment finds
-------
that the best interests of the Corporation will be served, the Board may remove
any officer of the Corporation at any time.
SECTION 3.5. Chairman of the Board. The Chairman of the Board, if one
---------------------
is elected, shall preside over the meetings of the Board of Directors and of the
stockholders at which he or she is present, and shall have such other powers and
duties as from time to time may be conferred upon or assigned to him or her by
the Board.
SECTION 3.6. President. The President shall be the chief executive
---------
officer of the Corporation and shall have general supervision over the business
and operations of the Corporation, subject, however, to the control of the Board
of Directors. He or she, or such persons as he or she shall designate, shall
sign, execute, acknowledge, verify, deliver and accept, in the name of the
Corporation, deeds, mortgages, bonds, contracts and other instruments authorized
by the Board of Directors, except in the case where the signing, execution,
acknowledgment, verification, delivery or acceptance thereof shall be delegated
by the Board to some other officer or agent of the Corporation, and shall have
such other powers and duties as from time to time may be conferred upon or
assigned to him or her by the Board.
SECTION 3.7. The Vice-Presidents. In the absence or disability of the
-------------------
President, or when so directed by the President, any Vice-President designated
by the Board of Directors may perform any or all of the duties of the President,
and, when so acting, shall have all the powers of, and be subject to all the
restrictions upon, the President; provided, however, that no Vice-President
-------- -------
shall act as a member of or as chairman of any committee of which the President
is a member or chairman by designation of ex-officio, except when designated by
the Board. Each Vice-President shall perform such other duties as from time to
time may be conferred upon or assigned to him or her by the Board or the
President.
SECTION 3.8. The Secretary. The Secretary shall record all the votes of
-------------
the stockholders and of the directors and the minutes of the meetings of the
stockholders and of the Board of Directors in a book or books to be kept for
that purpose; he or she shall see that notices of meetings of the stockholders
and the Board of Directors are given and that all records and reports are
properly kept and filed by the Corporation as required by law; he or she shall
be the custodian of the seal of the Corporation and shall see that it is affixed
to all documents to be executed on behalf of the Corporation under its seal,
provided that in lieu of affixing the corporate
10
<PAGE>
seal to any document, it shall be sufficient to meet the requirements of any
law, rule or regulation, relating to a corporate seal to affix the word ("SEAL")
adjacent to the signature of the authorized officer of the Corporation; and, in
general, he or she shall perform all duties incident to the office of Secretary,
and such other duties as from time to time may be conferred upon or assigned to
him or her by the Board or the President.
SECTION 3.9. Assistant Secretaries. In the absence or disability of
---------------------
the Secretary, or when so directed by the Secretary, any Assistant Secretary may
perform any or all of the duties of the Secretary, and, when so acting, shall
have all the powers of, and be subject to all restrictions upon, the Secretary.
Each Assistant Secretary shall perform such other duties as from time to time
may be conferred upon or assigned to him or her by the Board of Directors, the
President or the Secretary.
SECTION 3.10. The Treasurer. Subject to the provisions of any contract
-------------
which may be entered into pursuant to authority granted by the Board of
Directors, the Treasurer shall have charge of all receipts and disbursements of
the Corporation and shall have or provide for the custody of its funds and
securities, he or she shall have full authority to receive and give receipts for
all money due and payable to the Corporation, and to endorse checks, drafts and
warrants, in its name and on its behalf, and to give full discharge for the
same; he or she shall deposit all funds of the Corporation, except such as may
be required for current use, in such banks or other places of deposit as the
Board of Directors may from time to time designate; and, in general, he or she
shall perform all duties incident to the office of Treasurer and such other
duties as from time to time may be conferred upon or assigned to him or her by
the Board or the President.
SECTION 3.11. Assistant Treasurers. In the absence or disability of
--------------------
the Treasurer, or when so directed by the Treasurer, any Assistant Treasurer may
perform any or all of the duties of the Treasurer and, when so acting, shall
have all the powers of, and be subject to all the restrictions upon, the
Treasurer. Each Assistant Treasurer shall perform all such other duties as from
time to time may be conferred upon or assigned to him or her by the Board of
Directors, the President or the Treasurer.
SECTION 3.12. Compensation of Officers. The compensation of all
------------------------
officers shall be fixed from time to time by the Board of Directors, or any
committee or officer authorized by the Board to do so. No officer shall be
precluded from receiving such compensation by reason of the fact that he or she
is also a director of the Corporation.
ARTICLE IV: Capital Stock
SECTION 4.1. Certificates. The Board of Directors may authorize the
------------
issuance of shares of capital stock either in certificated or in uncertificated
form. If shares are issued in uncertificated form, each stockholder of a
certificated security shall be entitled upon written
11
<PAGE>
request to a stock certificate or certificates, representing and certifying the
number and kind of full shares held by him, signed by the President, a Vice-
President or the Chairman of the Board and countersigned by the Secretary, an
Assistant Secretary, the Treasurer or an Assistant Treasurer, which signatures
may be either manual or facsimile signatures, and sealed with the seal of the
Corporation, which seal may be either facsimile or any other form of seal. Stock
certificates shall be in a form not inconsistent with law or with the Articles
of Incorporation.
SECTION 4.2. Transfer of Shares of Capital Stock. Subject to Article
-----------------------------------
VIII of the Articles of Incorporation, transfers of shares of capital stock
shall be made on the books of the Corporation at the direction of the person
named on the Corporation's books or named in the certificate or certificates for
such shares (if issued), or by his attorney lawfully constituted in writing,
upon surrender of such certificate or certificates (if issued) properly
endorsed, to the Corporation's Transfer Agent, with such evidence of the
authenticity of such transfer, authorization and such other matters as the
Corporation or its agents may reasonably require, and subject to such other
reasonable terms and conditions as may be required by the Corporation or its
agents; or, if the Board of Directors shall by resolution so provide, transfer
of shares may be made in any other manner provided by law.
SECTION 4.3. Transfer Agents and Registrars. The Corporation may have
------------------------------
one or more Transfer Agents and one or more Registrars of its stock, whose
respective duties the Board of Directors may, from time to time, define. No
certificate of stock shall be valid until countersigned by a Transfer Agent, if
the Corporation shall have a Transfer Agent, or until registered by a Registrar,
if the Corporation shall have a Registrar. One entity may serve as both Transfer
Agent and Registrar.
SECTION 4.4. Mutilated, Lost, Stolen or Destroyed Certificates. The
-------------------------------------------------
Board of Directors, by standing resolution or by resolutions with respect to
particular cases, may authorize the issuance of a new stock certificate in lieu
of any stock certificate lost, stolen, destroyed or mutilated, upon such terms
and conditions as the Board may direct. The Board may in its discretion refuse
to issue such a new certificate, unless ordered to do so by a court of competent
jurisdiction.
SECTION 4.5. Stock Ledgers. The Corporation shall not be required to
-------------
keep original or duplicate stock ledgers at its principal office in the City of
Baltimore, Maryland, but stock ledgers shall be kept at the respective offices
of the Transfer Agent of the Corporation's capital stock.
SECTION 4.6. Location of Corporate Books. So long as permitted by
----------------------------
Maryland law, the books of the Corporation may be kept outside the state of
Maryland at such place or places as may be designated from time to time by the
Board of Directors.
ARTICLE V: Seal
12
<PAGE>
SECTION 5.1. Seal. The seal of the Corporation shall be in such form
----
as is permitted by law.
ARTICLE VI: Other Provisions
SECTION 6.1. Amendments. By-Laws may be adopted, altered, amended or
----------
repealed in the manner provided in Section 1.5 of Article I hereof at any annual
or special meeting of the stockholders or in the manner provided in Section 2.7
or 2.8 of Article II hereof by the Board of Directors at any regular or special
meeting of the Board, provided, however, that after the Corporation has
-------- -------
consummated an offering of capital stock to the public, Section 2.1 and this
--------
Section 6.1 of the By-Laws may be altered, amended or repealed only by the
- -----------
affirmative vote of the holders of at least three-fourths of the shares of the
Corporation then entitled to be voted on the matter, and provided, further,
however, that Section 2.2 of the By-Laws may be altered, amended or repealed
only by the stockholders in the manner provided in Section 1.5 of the By-Laws or
by the affirmative vote of a majority of the Board of Directors, including a
majority of the Unaffiliated Directors.
SECTION 6.2. Indemnification of Directors and Officers.
-----------------------------------------
(a) Indemnification. Any person who was or is a party or is
---------------
threatened to be made a party in any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is a current or former director or officer
of the Corporation, or is or was serving while a director or officer of the
Corporation, at the request of the Corporation, as a director, officer, partner,
trustee, employee, agent or fiduciary of another corporation, partnership, joint
venture, trust, enterprise or employee benefit plan, shall be indemnified by the
Corporation against judgments, penalties, fines, excise taxes, settlements and
reasonable expenses (including attorneys' fees) actually incurred by such person
in connection with such action, suit or proceeding to the full extent
permissible under applicable state corporation law.
(b) Advances. Any current or former director or officer of
---------
the Corporation claiming indemnification within the scope of this Section 6.2
shall be entitled to advances from the Corporation for payment of the reasonable
expenses incurred by such person in connection with the proceedings to which he
or she is a party in the manner and to the full extent permissible under
applicable state corporation law.
(c) Procedures. On the request of any current or former
----------
director or officer requesting indemnification or an advance under this Section
6.2, the Board of Directors shall determine, or cause to be determined, in a
manner consistent with applicable state corporation law, whether the standards
required by this Section 6.2 have been met.
13
<PAGE>
(d) Other Rights. The indemnification provided by this
------------
Section 6.2 shall not be deemed exclusive of any other right, in respect of
indemnification or otherwise, to which those seeking such indemnification may be
entitled under any insurance or other agreement, vote of stockholders or
disinterested directors or otherwise, both as to action by a director or officer
of the Corporation in his or her official capacity and as to action by such
person in another capacity while holding such office or position, and shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
14
<PAGE>
EXHIBIT 21
TIS MORTGAGE INVESTMENT COMPANY
SUBSIDIARIES OF THE REGISTRANT
TIS Mortgage Acceptance Corporation
TIS Property Acquisition Company
<PAGE>
EXHIBIT 24
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 14, 1997 (except for the matter discussed in
Note 19, as to which the date is March 24, 1997), 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).
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,354
<SECURITIES> 73,020
<RECEIVABLES> 668
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 105,573
<CURRENT-LIABILITIES> 3,923
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 11,010
<TOTAL-LIABILITY-AND-EQUITY> 105,573
<SALES> 0
<TOTAL-REVENUES> 13,383
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,876
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,410
<INCOME-PRETAX> (903)
<INCOME-TAX> 0
<INCOME-CONTINUING> (903)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (903)
<EPS-PRIMARY> ($0.11)
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