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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, 1997
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 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
$13,006,459.
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 Page
<S> <C>
Item 1: Business 3
Item 2: Properties 18
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 32
Item 11: Executive Compensation 32
Item 12: Security Ownership of Certain Beneficial Owners and Management 32
Item 13: Certain Relationships and Related Transactions 32
PART IV
Item 14: Exhibits, Financial Statements and Reports on Form 8-K 33
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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 "RISK FACTORS." 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 1998 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 subsidiaries, TIS
Mortgage Acceptance Corporation, a Delaware corporation ("TISMAC"), incorporated
on May 11, 1988, and TIS Property Acquisition Company ("TISPAC"), a Maryland
corporation, incorporated on September 8, 1995. TISPAC is a wholly-owned
subsidiary of the Company for the purpose of owning and financing real property.
In March 1997, as part of the refinancing of two of the Company's multifamily
residential properties and a portion of the Four Creeks property, title to those
properties was vested in TISPAC. Simultaneously, in March 1997, TISPAC entered
into notes secured by mortgages on those properties. TISPAC is a wholly owned
subsidiary of TISMIC and as such is a Qualified REIT Subsidiary. Accordingly,
the accounts of TISPAC are consolidated with those of the Company.
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 thereafter. 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 large portion 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
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Securities, the Company expects that an increasing proportion of its assets and
revenues will be related to its investments in multifamily real estate.
Additionally, the Company plans to seek selective opportunities for development.
The Company may experience losses on its remaining Structured Securities
during periods of high prepayment rates on mortgages, as previously experienced
in 1992 and 1993. Monthly cash flows on the Company's Structured Securities are
comprised of both interest income and a partial return of principal.
The Company's financial statements have been presented on the going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. At December 31, 1997, the Company
had a deficit in working capital of approximately $700,000. The Company has
been able to meet its cash flow requirements primarily from the proceeds of the
sale of certain mortgage related investments (classified as available for sale
under SFAS No. 115) and its ability to enter into short-term repurchase
agreements. The Company anticipates satisfying its 1998 cash requirements
through increased rental revenues from real estate assets, a reduction in
general and administrative expenses and the sale of certain mortgage related
investments. These strategies are dependant on the economic operating
environment including volatility of interest rates and the ability for the
California Central Valley apartment rental market to absorb rental increases.
The Company believes that its on-going real estate operations and mortgage
related investment portfolio will provide sufficient liquidity for it to
continue as a going concern throughout 1998, however, management can provide no
assurance with regard thereto. The Company's financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities or any
other adjustments that might result from these uncertainties.
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 operated under 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.
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, 1997, the Company's taxable income did not exceed the cash flows
from Structured Securities.
See Item 7 below, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information on the general
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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.
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 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 if and when sufficient liquid
assets are available and if 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.
In 1995, the Company acquired 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 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. Prior to 1994, these CMO
residuals were the primary focus of the Company's Structured Securities
business. 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
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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, 1997, the Company had a consolidated net operating loss
carryforward of approximately $51 million for Federal income tax purposes. This
number is based upon actual Federal consolidated income tax filings for the
periods through December 31, 1996 and an estimate of the 1997 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 future ability to use these NOLs may be limited under Internal Revenue
Code (the "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 50 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 March 26, 1998, does have three 5-percent
shareholders who acquired their stock in the last three-year period. There is
no assurance that these shareholders will not make additional changes in their
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 limit the Company's
use of its NOLs.
The Company also has capital loss carryforwards of approximately $5.8
million. These loss carryforwards expire in the year 2000.
RISK FACTORS
1. Risks Associated with Investments in Real Estate
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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, among other things, 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
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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
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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.
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
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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. 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.
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, among other things, 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
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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,
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
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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.
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 in the long term and causing an inherent decline in the 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
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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 is highest in years
immediately following the purchase of the mortgage asset and declines 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 if 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.
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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 a reduction of the market price of the Company's Common
Stock. The Company is 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
- -----------------------------------------------------------
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 may 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.
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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
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 may 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 Structured Securities. In
1995, the Company sold a large portion 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. In
1997, the Company sold its interests in TMAC CMO Trust 1986-2 and TMAC CMO Trust
1987-3. 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.
The Company has adopted the accounting method for impairment of mortgage-backed
derivative investments prescribed by Statement of Financial Accounting Standards
No. 115 and presents its financial statements in accordance therewith.
FAIR VALUE OF RESIDUAL INTERESTS AND IO BONDS
Historically, a significant portion of the Company's revenue has been
derived from the cash flows on the Company's Residual Interests and IO Bonds.
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
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Bonds with variable interest rates, changes in LIBOR. Information regarding the
fair value of Residual Interests and IO Bonds is presented in the notes to the
consolidated financial statements.
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, 1997 and 1996 the
mortgage obligation balances were $20,350,379 and $20,373,236.
At December 31, 1997 and 1996, the Company had short-term borrowings of
$2,009,500 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.
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 any such sales would depend on general
market conditions and other factors.
The Company has a Dividend Reinvestment and Share Purchase Plan (the
"Plan"). 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
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Company must maintain at least 55% of its assets directly in Mortgage Loans,
certain Mortgage Certificates and certain other qualifying interests in real
estate. The Company's ownership of Residual Interests may therefore be limited
by the 1940 Act. In addition, certain Mortgage Certificates may be treated as
securities separate from the underlying Mortgage Loans and, thus, may not
qualify as "mortgages and other liens on and interests in real estate" for
purposes of the 55% requirement, unless such Mortgage Certificates represent all
the certificates issued with respect to an underlying pool of mortgages. The
Company's investment policies prohibit it from making any investments that would
cause the Company to be an investment company within the meaning of the 1940
Act.
Although the Company has no present intention to seek modification of its
operating policies described herein, a majority of the Unaffiliated Directors
may in the future conclude that it would be advantageous for the Company to do
so and may modify such operating policies accordingly, without the consent of
the shareholders.
SUBSIDIARIES
TISMAC is a wholly-owned subsidiary of the Company formed for the purpose
of issuing collateralized mortgage obligations directly. 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
thereafter.
TISPAC is a wholly-owned subsidiary of the Company incorporated on
September 8, 1995, for the purpose of owning and financing real property. In
March 1997, as part of the refinancing of two of the Company's multifamily
residential properties and a portion of the Four Creeks property, title to those
properties was vested in TISPAC. Simultaneously, TISPAC entered into notes
secured by mortgages on those properties. TISPAC is a wholly owned subsidiary
of TISMIC and as such is a Qualified REIT Subsidiary. Accordingly, the accounts
of TISPAC are consolidated with those of the Company.
COMPETITION
The Company's multifamily real estate properties face the normal
competitive pressure of most 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
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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 Company and the Former Manager entered into the Expense 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 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 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
- ---------------------
Prior to July 1, 1996, the Company operated under 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.
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
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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% for Federal
purposes), 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").
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.
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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,
1997 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 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
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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 Subsidiaries, TISPAC and
TISMAC, are a qualified REIT Subsidiaries.
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
Internal Revenue Service (the "IRS"), the Company may, if the deficiency is not
due to fraud with intent to evade tax or a willful failure to file a timely tax
return, retroactively cure the failure by paying a deficiency dividend (plus
interest).
The Code imposes a non-deductible 4% excise tax on REITs to the extent that
the "distributed amount" with respect to a particular calendar year is less than
the sum of (i) 85% of the 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
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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.
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
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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.
On August 5, 1997, the Taxpayer Relief Act of 1997 was enacted. This Act
changed a number of federal income tax provisions that affect REITs. These
changes include, but are not limited to, the repeal of the 30% income test, the
enactment of a "de minimis" rule for tenant services income, and the
liberalization of the consequences for failing to comply with the federal
regulations regarding determination of actual ownership of a REIT's outstanding
shares.
California Franchise tax regulations regarding REIT qualification currently
conform to Federal income tax regulations. There is no assurance that this will
continue in the future and, if state regulations do not conform to Federal
regulations in the future, there is a possibility that the Company might be
liable for state income taxes.
The Company uses the calendar year both for tax and financial reporting
purposes. Due to the differences between tax accounting rules and generally
accepted accounting principles, the Company's REIT Taxable Income may vary from
its net income for financial reporting purposes.
ITEM 2. PROPERTIES.
The 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. In March 1997, as part of the refinancing of two of the
Company's multifamily residential properties and a portion of the Four Creeks
property, title to the properties was vested in TISPAC. The multifamily
residential property, Shady Lane, is held by the Company at year end.
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 at December 31, 1997 $1,327,859 $6,372,237 $6,910,481 $5,739,802
Number of Units 54 219 120 146
Rentable Square Feet 52,056 197,186 144,140 186,439
Average Monthly Rent per Unit in 1997 $ 431 $ 487 $ 804 $ 692
Monthly Rent per Square Foot in 1997 $ 0.45 $ 0.54 $ 0.67 $ 0.54
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, 1997 91% 95% 98% 100%
</TABLE>
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* 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, 1998, there were no material pending legal proceedings (within
the meaning of the Form 10-K instructions) to which the Company or its
subsidiaries 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
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Common Stock is listed on both the New York Stock Exchange
and the Pacific Exchange under the symbol "TIS." However, the Company's Common
Stock no longer meets the New York Stock Exchange's continued listing criteria.
That could result in the Common Stock being delisted from the exchange. 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
---- ---
1996
<S> <C> <C>
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 1-3/8 1-1/16
Second Quarter 1-1/4 1
Third Quarter 1-5/8 1
Fourth Quarter 1-7/8 1-3/8
1998
First Quarter (through March 26, 1998) 2-3/8 1-3/16
</TABLE>
____________________
On March 26, 1998, the closing sales price of the shares of Common Stock on
the New York Stock Exchange was $2.1875. On that date the Company had
outstanding 8,105,880 shares of Common Stock which were held by approximately
563 shareholders of record and the total number of shareholders was
approximately 6,000.
No distributions were paid in 1995 or 1997. The following table details
the one distribution paid during the Company's three most recent fiscal years.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Date Amount Record Payment
Quarter Ended Declared Declared Date Date
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996 September 10, 1996 $0.02 December 13, 1996 December 31, 1996
- --------------------------------------------------------------------------------------------------
</TABLE>
The actual amount and timing of any 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 use 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
20
<PAGE>
eligible for the dividends-received deduction so long as the Company qualifies
as a REIT. The Company furnishes 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. If 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 are qualified in their 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, 1997, 1996 and 1995 have been derived from
the Company's financial statements which are included elsewhere in this Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Income
Interest Income on Mortgage Certificates $6,059 $ 7,748 $ 13,735 $18,298 $ 36,873
Interest Income on Residual Interests 39 52 1,483 3,650 186
Income from IO Bonds 360 455 1,128 2,208 1,997
Income from Commercial
Securitizations 0 0 89 51 0
Interest on Short-term Investments 2 16 115 126 179
Gain (Loss) on Sales of
Mortgage Related Assets 442 450 (2,385) 0 0
1,474 651 541 (398) 0
Valuation Reserve Reduction (Provision)
(261) (171) (289) 0 0
Loss from Real Estate Operations 11 21 30 60 89
Other Income ------ ------- -------- ------- ---------
Total Income 8,126 9,222 14,447 23,995 39,324
Expenses
Interest Expense on CMOs 6,549 8,317 14,749 18,987 38,323
Interest Expense on Short-term Debt 174 159 429 509 568
Write-downs of Mortgage assets 0 0 0 0 12,388
Amortization of Deferred Bond
Issuance Costs 101 146 276 351 1,857
Administrative and
Management Expenses 1,511 1,503 1,572 1,611 1,920
------ ------- -------- ------- ---------
Total Expenses 8,335 10,125 17,026 21,458 55,056
Minority Interest 0 0 0 0 172
------ ------- -------- ------- ---------
Income (Loss) Before Cumulative Effect
of Change in Accounting for Real
Estate Investments (209) (903) (2,579) 2,537 (15,560)
Cumulative Effect of Change in
Accounting for Real Estate Investments 0 0 0 0 (9,879)
------ ------- -------- ------- ---------
Net Income (Loss) ($209) ($903) ($2,579) $ 2,537 ($25,439)
Basic Net Income (Loss) Per Share
Before Cumulative Effect of Change in
Accounting for Real Estate Investments ($0.03) ($0.11) ($0.32) $ 0.31 ($1.92)
Cumulative Effect of Change in
Accounting for Real Estate Investments 0.00 0.00 0.00 0.00 (1.22)
------- ------- ------- ------ -------
Basic Net Income (Loss) Per Share ($0.03) ($0.11) ($0.32) $ 0.31 ($3.14)
======= ======= ======= ====== =======
Distributions Declared per Share $ 0.00 $ 0.02 $ 0.00 $ 0.02 $ 0.20
Weighted Average Shares Outstanding 8,106 8,106 8,106 8,106 8,106
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Mortgage Certificates, net $60,433 $ 72,703 $109,752 $163,817 $250,015
Residual Interests 384 436 725 8,675 11,919
IO Bonds 1,875 2,695 3,150 9,794 12,212
Commercial Securitizations 184 183 191 1,194 0
Reserve for Loss on Investments (1,523) (2,997) (4,277) (4,818) (3,852)
Operating Real Estate Assets, Net 28,697 28,945 29,384 395 0
Total Assets 93,754 105,573 145,247 188,957 300,190
Notes Payable on Real Estate 20,350 20,373 20,362 0 0
Short-term Debt 2,010 2,418 2,118 8,325 11,745
Total Liabilities 83,125 94,555 133,266 172,864 284,410
Total Shareholders' Equity 10,629 11,018 11,981 16,093 15,780
- ---------------------------------------------------------------------------------------------------------------------
</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 connection with the Company's changing investment focus from investments
in Structured Securities to multifamily real estate located in California's
Central Valley, during 1995, the Company sold a large portion 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. Additionally, the
Company plans to seek selective opportunities for development. However, there
can be no assurance that this will occur.
23
<PAGE>
The following table illustrates the Company's cash receipts, disbursements
and reinvestments for the last three years.
<TABLE>
<CAPTION>
CASH FLOW ANALYSIS
(IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning Cash Balance $ 82 $ 198 $ 1,718
Cash Received:
Mortgage Related Assets 1,633 2,758 6,412
Sale of Mortgage Related Assets 442 450 10,751
Increase in Short-term Debt 0 300 0
Increase in Real Estate Notes 17,400 11 20,362
Decrease in Other Assets 115 0 0
Cash Disbursements:
Cash Expenses (1,173) (2,483) (3,348)
Additions to Real Estate Assets (483) (258) (29,490)
Decrease in Other Assets 0 (732) 0
Distributions 0 (162) 0
Reinvestments (408) 0 0
Decrease to Short-term Debt 0 0 (6,207)
Decrease in Real Estate Notes (17,423) 0 0
- ------------------------------------------------------------------------------------------------------------
Ending Cash Balance $ 185 $ 82 $ 198
- ------------------------------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
The Company had a net loss of $209,000, or $0.03 per share, for the year
ended December 31, 1997. For the year ended December 31, 1996 it had a net loss
of $903,000, or $0.11 per share. For the year ended December 31, 1995 it had a
net loss of $2,579,000, or $0.32 per share. The Company declared distributions
totaling $162,000 for 1996, or $0.02 per share. No distributions were declared
for 1997 or 1995.
1997 COMPARED TO 1996
1997 was the second full year of the Company's real estate operations. The
performance of the real estate properties was virtually flat from 1996 to 1997
with the exception of the amortization of loan costs related to the refinancing
of properties accomplished during 1997. The income from operations before
depreciation and amortization declined from $534,000 in 1996 to $479,000 in
1997. The decrease is a result of the loan amortization expense related to the
1997 refinancing. Rental and other income declined from $3,990,000 in 1996 to $
3,987,000 in 1997 while Operating and Maintenance Expenses declined from
$1,388,000 in 1996 to $1,342,000 in 1997. Occupancy at the Company's properties
was improved in 1996 over 1995 to approximately 96% and remained constant at
approximately 96% during 1997.
Net interest margin (interest income from Mortgage Certificates net of
interest expense on CMOs) increased in 1997 to a net interest expense of
$490,000 from net interest expense of $569,000 in 1996. This decrease in net
interest expense is due primarily to the principal reductions in the Company's
investment in CMOT 28. Below is a summary of net interest margin for the years
ended December 31, 1997 and 1996.
24
<PAGE>
<TABLE>
<CAPTION>
(In thousands) 1997 1996 Change
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Interest Income from Mortgage Certificates $ 5,845 $ 7,433 $ (1,588)
Amortization of Market Discount 214 315 (101)
Net Interest Income 6,059 7,748 (1,689)
-------------------- -------------------- --------------------
Interest Expense on CMOs 5,793 7,343 (1,550)
Amortization of Original Issue Discount 756 974 (218)
Net Interest Expense 6,549 8,317 (1,768)
-------------------- -------------------- --------------------
Net Interest Margin ($ 490) ($ 569) $ 79
==================== ==================== ====================
</TABLE>
The reserve for loss on investments was reduced by $1,474,000 in 1997.
This decrease in reserve primarily reflects an increase in the fair value of the
Company's investment in CMOT 28, the Company's remaining consolidated equity
residual interest.
General and Administrative expense increased from $1,356,000 in 1996 to
$1,443,000 in 1997. This increase was due primarily to increased legal and
other expenses related to the 1997 annual meeting of shareholders.
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 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%.
Because of the sale in 1995 of some 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.
25
<PAGE>
<TABLE>
<CAPTION>
(In thousands) 1996 1995 Change
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Interest Income from Mortgage Certificates $ 7,433 $ 13,313 ($5,880)
Amortization of Market Discount 315 522 (207)
Net Interest Income 7,748 13,835 (6,087)
-------------------- -------------------- --------------------
Interest Expense on CMOs 7,343 13,086 (5,743)
Amortization of Original Issue Discount 974 1,663 (689)
Net Interest Expense 8,317 14,749 (6,432)
-------------------- -------------------- --------------------
Net Interest Margin ($ 569) ($914) $ 345
==================== ==================== ====================
</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.
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ------------------------------- ----------------------------
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 $6,059 $66,568 9.10% 7,748 $74,316 10.43% $13,735 $147,131 9.34%
Residual Interests 39 410 9.51% 52 575 9.03% 1,483 4,644 31.93%
Interest Only Bonds 360 2,285 15.75% 455 2,998 15.19% 1,128 6,781 16.64%
Other 2 1,853 0.11% 16 2,645 0.61% 204 4,060 5.02%
- ---------------------------------------------------------------------------------------------------------------------
Interest Income 6,460 71,116 9.08% 8,271 80,534 10.27% 16,550 162,616 10.18%
Interest Expense
Collateralized Mort-
gage Obligations 6,549 64,634 10.13% 8,317 86,473 9.62% 14,749 145,017 10.17%
Short-term Debt 174 2,214 7,86% 159 2,145 7.44% 429 5,676 7.56%
- ---------------------------------------------------------------------------------------------------------------------
Interest Expense 6,723 66,848 10.06% 8,476 88,618 9.56% 15,178 150,693 10.07%
Net Interest Income ($263) (0.37%) (205) (0.25%) $ 1,372 0.84%
=====================================================================================================================
</TABLE>
The table above summarizes the average amounts outstanding of interest-bearing
assets and liabilities, and the average effective interest rates.
26
<PAGE>
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>
1997 - 1996 1996 - 1995 1995 - 1994
------------------- --------------------------- ---------------------------
(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($881) ($808) ($1,689)$1,849 ($7,836) ($5,987) ($124) ($4,439) ($4,563)
Residual Interests 2 (15) (13) (644) (787) (1,431) (347) (1,820) (2,167)
Interest Only Bonds 13 (108) (95) (90) (582) (672) (229) (851) (1,080)
Other (9) (5) (14) (135) (54) (189) 40 (13) 27
- -------------------------------------------------------------------------------------------------------
Interest Income (875) (936) (1,811) 980 (9,259) (8,279) (660) (7,123) (7,783)
Interest Expense
CMOs 333 (2,101) (1,768) (763) (5,669) (6,432) 1,430 (5,668) (4,238)
Short-term Debt 10 5 15 (7) (263) (270) (715) 635 (80)
- -------------------------------------------------------------------------------------------------------
Interest Expense 343 (2,096) (1,753) (770) (5,932) (6,702) 715 (5,033) (4,318)
Net Interest Income ($1,218)$1,160 ($58)$1,750 ($3,327) ($1,577) ($1,375) ($2,090) ($3,465)
=======================================================================================================
</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 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 1997, the
Company's cash flows (in thousands) were used as follows:
<TABLE>
<CAPTION>
<S> <C>
Used in operating activities $ (79)
Provided by investing activities 12,608
Used in financing activities (12,426)
------------------
Net increase in cash and cash equivalents $ 103
==================
</TABLE>
At December 31, 1997, the Company had outstanding short-term borrowings
totaling $2,009,500 which consisted of repurchase agreements with two investment
banking firms. The repurchase agreement borrowings had a weighted average
interest rate of 7.2715%. The repurchase agreements had initial terms of one
27
<PAGE>
month, are renewed on a month-to-month basis, are collateralized by some of the
Company's Residual Interests and IO Bonds whose fair values approximate $2
million and have a floating rate of interest which is tied to the one-month
LIBOR rate.
At December 31, 1997, the Company had outstanding borrowings secured by
multifamily real estate totaling $20,350,379. Approximately 93.5% of this debt
had a fixed rate of interest and 6.5% of the debt bears a variable rate of
interest. The weighted average interest rate at December 31, 1997 was 8.317%.
The Company completed a restructure of its permanent financing in the amount of
$17,400,000 with an insurance company during 1997.
At December 31, 1997, the Company had unrestricted cash and cash
equivalents of $185,000.
Over the twelve months ending December 31, 1998, scheduled principal
maturities on the notes payable on real estate amount to $228,526 excluding the
Shady Lane variable note, on which $144,756 is due in principal and interest in
1998. The notes are expected to be funded by cash flows from the Company's
multifamily residential properties. During the twelve months ended December 31,
1997 and 1996, the income from real estate operations before depreciation and
amortization amounted to $479,000 and $534,000, respectively. The Company has
no significant commitments for capital expenditures relating to the real estate
operations over the twelve months ended December 31, 1998 and anticipates that
any capital expenditures or repair and maintenance activities would be funded
from cash generated from real estate activities.
Over the twelve months ending December 31, 1998, the Company anticipates
that cash inflows from mortgage related assets will approximate the cash
outflows associated with the underlying collateralized mortgage obligations.
However, management can provide no assurances of such mortgage related cash
flows as such cash flows are subject to interest rate changes, prepayment risks
and other uncertainties. On January 30, 1998, the Company sold 49% of its
ownership in the CMOT 28 REMIC Residual Interest for $764,400 in cash. Of the
proceeds, $140,500 were used to retire debt and the balance was placed in the
general funds of the Company.
The Company has no committed lines of credit. Management of the Company
believes that cash flows from operations and the availability of repurchase
agreements are sufficient to enable the Company to meet its current and
anticipated future liquidity requirements including payment of dividends to its
stockholders, which must equal at least 95% of the Company's taxable income in
order for the Company to qualify as a REIT.
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 has no
access or rights to the restricted cash carried on its balance sheet as of
December 31, 1997. 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 four years ended December 31, 1994, 1995, 1996 and 1997
are shown in the table below (in thousands):
28
<PAGE>
<TABLE>
<S> <C>
MORTGAGE CERTIFICATES
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 Decmeber 31, 1996 (20,981)
Principal Outstanding - December 31, 1996 73,973
Principal Reduction - Year Ended December 31, 1997 (12,485)
Principal Amount Sold - Year Ended December 31, 1997 0
----------
Principal Outstanding - December 31, 1997 $ 61,488
==========
COLLATERALIZED MORTGAGE OBLIGATIONS
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
Principal Reduction - Year Ended December 31, 1997 (12,066)
Principal Amount Sold - Year Ended December 31, 1997 0
----------
Principal Outstanding - December 31, 1997 $ 62,673
==========
</TABLE>
Management of the Company believes that the cash flow from operations,
availability of repurchase agreements, and sales of mortgage related investments
are sufficient to enable the Company to meet its current and anticipated future
liquidity requirements including any 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.
YEAR 2000 COMPLIANCE
The Company utilizes a number of computer software programs and operating
systems across its entire organization, including applications used in financial
business systems and various administrative functions. To the extent that the
Company's software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000" and beyond, some level
of modification, or replacement of such application will be necessary. The
Company has completed its identification of applications that are not yet "Year
2000" compliant and has commenced modification or replacement of such
applications, as necessary. Given information known at this time about the
Company's systems that are non-compliant, coupled with the Company's ongoing,
normal course-of-business efforts to upgrade or replace critical systems as
necessary, management does not expect Year 2000 compliance costs to have any
material adverse impact on the Company's liquidity or ongoing results of
operations. No assurance can be given, however, that all the Company's systems
will be Year 2000 compliant or that compliance costs or the impact of the
Company's failure to achieve substantial Year 2000 compliance will not have a
material adverse impact on the Company's future liquidity or results of
operations.
29
<PAGE>
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 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 LIBOR 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 increases, 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
30
<PAGE>
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 use 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 used. 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.
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.
31
<PAGE>
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 1998, 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 1998, 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 1998, 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 1998, 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.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS AND REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT
PUBLIC ACCOUNTANTS
Report of Independent Public Accountants............................... 35
Consolidated Balance Sheets - December 31, 1997 and 1996............... 36
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.................................. 37
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995...................... 38
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.................................. 39
Notes to the Consolidated Financial Statements......................... 40
2. FINANCIAL STATEMENT SCHEDULES
Schedule III - Real Estate and Accumulated Depreciation as of December
31, 1997............................................................... 58
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or notes thereto.
33
<PAGE>
3. EXHIBITS
The following exhibits in the accompanying index to exhibits are filed
herewith or are incorporated by reference to exhibits previously filed.
NUMBER EXHIBIT
- ------ -------
3(a) Amended Articles of Incorporation of the Registrant (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
______________________________
(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.
34
<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 Subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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 Subsidiaries as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, 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, 1997 - 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.
/s/ ARTHUR ANDERSEN LLP
San Francisco, California,
March 5, 1998
35
<PAGE>
TIS Mortgage Investment Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, 1997 DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Mortgage Related Assets
Mortgage Certificates, net $ 60,433 $ 72,703
Residual Interests 384 436
Interest Only (IO) Bonds 1,875 2,695
Commercial Securitizations 184 183
Reserve for Loss on Investments (1,523) (2,997)
-------- --------
Total Mortgage Related Assets 61,353 73,020
-------- --------
Operating Real Estate Assets, net 28,697 28,945
-------- --------
Other Assets
Cash and Cash Equivalents 185 82
Restricted Cash 1,800 1,272
Accrued Interest and Accounts Receivable, Net 484 668
Deferred Bond Issuance Costs, Net 497 598
Amortizable Costs, Net 594 825
Prepaid Expenses 144 163
-------- --------
Total Other Assets 3,704 3,608
-------- --------
Total Assets $ 93,754 $105,573
======== ========
- ------------------------------------------------------------------------------------------------------------
LIABILITIES
Collateralized Mortgage Obligations, net $ 59,008 $ 70,259
Accounts Payable and Accrued Liabilities 870 449
Accrued Interest Payable 887 1,056
Notes Payable on Real Estate 20,350 20,373
Short-term Debt 2,010 2,418
-------- --------
Total Liabilities 83,125 94,555
-------- --------
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 (2,322) (2,142)
Retained Deficit (61,753) (61,544)
-------- --------
Total Shareholders' Equity 10,629 11,018
-------- --------
Total Liabilities and Shareholders' Equity $ 93,754 $105,573
======== ========
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
TIS Mortgage Investment Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MORTGAGE RELATED ASSETS
Interest $ 6,460 $ 8,271 $ 16,550
Valuation Reserve Reduction 1,474 651 541
Gain (Loss) on Sales of Mortgage Related Assets 442 450 (2,385)
Other 11 21 30
------- ------- ---------
Income from Mortgage Related Assets 8,387 9,393 14,736
------- ------- ---------
INTEREST AND CMO RELATED EXPENSES
Collateralized Mortgage Obligations
Interest 6,549 8,317 14,749
Administration Fees 68 70 140
Amortization of Deferred Bond Issuance Costs 101 146 276
Short-term Debt 174 159 429
------- ------- ---------
Total Interest and CMO Related Expenses 6,892 8,692 15,594
------- ------- ---------
REAL ESTATE OPERATIONS
Rental and Other Income 3,987 3,990 2,206
Operating and Maintenance Expenses (1,342) (1,388) (984)
Interest on Real Estate Notes Payable (1,820) (1,718) (945)
Property Taxes (346) (350) (189)
Depreciation and Amortization (740) (705) (377)
------- ------- ---------
Loss from Real Estate Operations (261) (171) (289)
------- ------- ---------
OTHER EXPENSES
Management Fee to a related party -- 77 220
General and Administrative, including amounts paid
to a related party of $37,806, $391,198
and $510,174, respectively 1,443 1,356 1,212
------- ------- ---------
Total Other Expenses 1,443 1,433 1,432
------- ------- ---------
Net Loss ($ 209) ($ 903) ($ 2,579)
======= ======= =========
- ------------------------------------------------------------------------------------------------------------------
Basic Loss per Share ($0.03) ($0.11) ($0.32)
Distributions Declared per Share $0.00 $0.02 $0.00
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.
37
<PAGE>
TIS Mortgage Investment Company and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
ADDITIONAL UNREALIZED
COMMON STOCK PAID-IN LOSS ON RETAINED
------------------
SHARES AMOUNT CAPITAL INVESTMENTS DEFICIT TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1995 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) -- (2,581)
- -------------------------------------------------------------------------------------------------------------------
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
Net Loss -- -- -- -- (209) (209)
Change in Unrealized Loss
on Investments -- -- -- (180) -- (180)
- -------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 8,106 $8 $74,696 ($2,322) ($61,753) $10,629
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
TIS Mortgage Investment Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($ 209) ($ 903) ($2,579)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities:
Amortization 630 791 1,424
Depreciation of Operating Real Estate Assets 740 697 376
Amortization of Loan Costs 106 -- --
(Gain) Loss on Sales of Mortgage Related Assets (442) (450) 2,385
Valuation Reserve Reduction (1,474) (651) (541)
Decrease (Increase) in Accrued Interest Receivable 88 (207) 273
Decrease (Increase) in Accounts Receivable 96 (49) 435
Decrease (Increase) in Prepaid Expenses 19 47 (13)
Decrease (Increase) in Other Assets 115 (732) (101)
Increase (Decrease) in Accounts Payable
and Accrued Liabilities 421 (128) 311
Decrease in Accrued Interest Payable (169) (303) (335)
-------- -------- --------
Net Cash Provided by (Used in) Operating Activities (79) (1,888) 1,635
-------- -------- --------
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net Decrease (Increase) in Restricted Cash (528) 899 1
Acquisition of Real Estate Assets -- -- (10,592)
Additions to Real Estate Assets (483) (258) (97)
Principal Reduction in Mortgage Certificates 12,485 17,452 21,885
Proceeds from Sales of Mortgage Related Assets 442 450 10,751
Principal Reduction in Residual Interests 41 59 450
Principal (Increase) Reduction in Commercial Securitizations (1) 8 104
Principal Reduction in IO Bonds 652 788 1,490
-------- -------- --------
Net Cash Provided by Investing Activities 12,608 19,398 23,992
-------- -------- --------
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Short-term Debt (408) 300 (6,207)
Principal Payments on CMOs (11,995) (17,775) (22,627)
Proceeds from Notes Payable on Real Estate 17,400 170 1,815
Repayment of Notes Payable (17,201) -- --
Principal Payments on Notes Payable on Real Estate (222) (159) (128)
Cash Distributions Paid on Common Stock -- (162) --
-------- -------- --------
Net Cash Used in Financing Activities (12,426) (17,626) (27,147)
-------- -------- --------
- ------------------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents 103 (116) (1,520)
Cash and Cash Equivalents at Beginning of Year 82 198 1,718
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 185 $ 82 $ 198
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash Paid for CMO Interest Expense $ 6,718 $ 7,638 $ 13,509
Cash Paid for Other Interest Expense $ 1,889 $ 1,886 $ 1,376
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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 large
portion 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. Additionally, the Company
plans to seek selective opportunities for development.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OVERALL METHODS OF ACCOUNTING - Emerging Issues Task Force Issue 89-4
specifies the method of accounting for Residual Interests in collateralized
mortgage obligations ("CMOs"). Issue 89-4, 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.
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).
For purposes of evaluating impairment the Company considers its
investment in each of its equity residuals to be a net cash flow investment (net
of CMO bond interest payments and related CMO bond administrative expenses). The
Company measures other than temporary impairment by comparing the yield on the
projected net cash flows from the equity residual, (i.e. Mortgage Certificates
net of discounts and CMO bond liabilities) to a risk free rate. If the yield on
the projected cash flows from the equity residual is less than a risk free rate,
the Company records a reserve to reduce the carrying value to fair value. The
fair value is calculated using the forecasted net cash flows discounted at a
risk adjusted rate. The risk adjusted rate is determined by the Company using
established market transactions for securities having similar characteristics
and backed by collateral of similar rate and term.
For assets which do not meet the definition of other than temporary
impairment and for assets where the fair value is less than its amortized cost,
the Company has recorded a cumulative net unrealized loss of $2,321,652 as of
December 31, 1997 directly to equity.
40
<PAGE>
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 - The Company's consolidated financial
statements present the results of operations of the Company, TISPAC, and the
accounts underlying the Company's interest in real estate partnerships for the
years ended December 31, 1995 and thereafter. In March 1997, as part of the
refinancing of two of the Company's multifamily residential properties and a
portion of the Four Creeks property, title to those properties was vested in
TISPAC. Simultaneously, in March 1997, TISPAC entered into notes secured by
mortgages on those properties. TISPAC is a wholly owned subsidiary of TISMIC
and as such is a Qualified REIT Subsidiary.
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 sheets at December 31, 1996
and 1997 and the results of operations of the trust are included in the 1996
consolidated statement of operations only through the date of sale.
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, 1995 and thereafter and the results
of operations of TISMAC are included in the consolidated statements of
operations only through the date of sale in 1995.
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 - 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, 1997, the carrying value of real estate assets did
not exceed their estimated fair value.
Operating real estate assets are depreciated using the straight-line method
over the estimated useful lives of the real estate assets. The Company uses a
40 year estimated life for buildings and improvements and either a 5 or 12 year
life for personal property 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.
41
<PAGE>
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 as of December 31, 1997 and 1996 includes
cash balances totaling $1,608,558 and $1,272,000, respectively, 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 $191,538 and
$54,000, respectively, in property tax and insurance 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 loss
reported in the accompanying consolidated financial statements may be greater or
less than the taxable loss because some income and expense items are reported in
different periods for income tax purposes. Over the life of a Residual Interest
or IO Bond, total taxable income will equal total financial statement income.
However, the timing of income recognition may differ between the two from year
to year.
BASIC NET LOSS PER SHARE - Basic net loss per share is based upon the
weighted average number of shares of Common Stock outstanding for 1997, 1996,
and 1995, 8,105,880 shares each year, respectively. The common equivalent
shares related to the 1995 Stock Option Plan (see Note 12) are antidilutive in
1997, 1996 and 1995, and therefore are not included in the weighted average
number of shares outstanding. The antidilutive share amounts in 1997, 1996 and
1995 were 346,000, 342,000 and 336,000 respectively. The Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128 in the accompanying
financial statements. The adoption of SFAS No. 128 resulted in no change to
the Company's historical manner of calculating earnings per share.
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.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board issued Statement No. 130, "Reporting Comprehensive Income" (SFAS
No. 130). SFAS No. 130 is effective for financial statements for fiscal years
beginning after December 15, 1997. This standard defines comprehensive income
as the changes in equity of an enterprise except those resulting from
stockholder transactions. All components of comprehensive income will be
required to be reported in financial statements issued for periods beginning
after the effective date of SFAS No. 130. Management believes the adoption of
SFAS No. 130 will not have a material effect on the Company's financial
statements.
In June 1997, the Financial Accounting Standards Board also issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131). SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997. SFAS No. 131 establishes
42
<PAGE>
standards for disclosures about operating segments, products and services
geographic areas and major customers. Management believes the adoption of SFAS
No. 131 will not have a material effect on the Company's financial statements.
LIQUIDITY. The Company's financial statements have been presented on the
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. At December 31,
1997, the Company had a deficit in working capital of approximately $700,000.
The Company has been able to meet its cash flow requirements primarily from the
proceeds of the sale of certain mortgage related investments (classified as
available for sale under SFAS No. 115) and its ability to enter into short-term
repurchase agreements. The Company anticipates satisfying its 1998 cash
requirements through increased rental revenues from real estate assets, a
reduction in general and administrative expenses and the sale of certain
mortgage related investments. These strategies are dependant on the economic
operating environment including volatility of interest rates and the ability for
the California Central Valley apartment rental market to absorb rental
increases. The Company believes that its on-going real estate operations and
mortgage related investment portfolio will provide sufficient liquidity for it
to continue as a going concern throughout 1998, however, management can provide
no assurance with regard thereto. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities or any
other adjustments that might result from these uncertainties.
3. TAXATION OF DISTRIBUTIONS DECLARED
The Company paid distributions of $0.02 per share in the year ended
December 31, 1996. Of this distribution, 47.19% was taxable, while the
remaining 52.81% was a nontaxable return of capital. There were no
distributions paid by the Company in 1997 and 1995.
Of the distribution paid in 1996, 47.19% was 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 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
43
<PAGE>
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, 1997.
NONEQUITY RESIDUAL INTERESTS
- ----------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Book Value Prospective
Residual Purchase December 31, Method
--------------------------------------
Series Price 1997 1996 Yield
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonequity Residual Interests
- ----------------------------
BT 88-1 $1,537 $ 179 $ 210 14.0%
LFR-9 2,589 94 113 14.0%
CMSC I 8,642 104 104 14.0%
FHLMC 25 4,934 4 5 14.0%
FHLMC 21 5,361 3 4 14.0%
- ---------------------------------------------------------------------------------------------------------------
$ 384 $ 436
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
In the year ended December 31, 1995 the Company sold certain Nonequity
Residual Interests as follows (in thousands):
<TABLE>
<CAPTION>
Residual Series Sales Price Amortized Cost Gain (Loss)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CMSC 88-2 $ 395 $ 375 $ 20
DBLS 300 305 (5)
DBLU 50 57 (7)
FNMA 88-22 925 1,088 (163)
ML-38 500 498 2
OXFORD 3-F 301 0 301
PB-4 1,335 1,992 (657)
PB-5 775 1,161 (386)
PB-7 341 343 (2)
RYLAND 62 325 458 (133)
- -------------------------------------------------------------------------------------------------------------
Total $5,247 $6,277 $(1,030)
====== ====== =======
</TABLE>
There were no sales of non-equity residuals in 1997.
44
<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)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NAME OF ISSUER TIS INITIAL DEC. 31, 1997
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
- --------------------------------------------------------------------------------------------------------------------------------
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 12,990 8.75% Apr 1, 2018
Feb 16, 1988 1-D 47,492 8,146 8.63% Apr 1, 2018
-------------------------------
$ 100,000 $21,136
- --------------------------------------------------------------------------------------------------------------------------------
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 7,162 Zero Coupon Jan 1, 2019
Dec 2, 1988 D 32,850 1,760 Zero Coupon Jan 1, 2019
E 30,000 0 Zero Coupon Jan 1, 2019
R 150 150 Residual Bond Jan 1, 2019
-------------------------------
$ 150,000 $ 9,072
- --------------------------------------------------------------------------------------------------------------------------------
3) Collateralized Dec 21, 1988 44.000% $4,462 I-1 $ 291,000 $ 0 7.95% Feb 1, 2009
Mortgage Mar 23, 1989 44.000% 4,180 I-2 194,000 0 9.45% May 1, 2013
--------- --------
Securities Corp. Subtotal 88.000% $8,642 I-3(Z) 15,000 32,112 9.45% Feb 1, 2017
========= ========
-------------------------------
Series I (CMSC I) $ 500,000 $32,112
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 0 9.50% Dec 15, 2018
25-G 43,940 35,906 9.50% Feb 15, 2020
25-H 72,490 0 7.90% Feb 15, 2020
R 100 7 Residual Bond Feb 15, 2020
-------------------------------
$ 500,000 $35,913
- ------------------------------------------------------------------------------------------------------------------------------
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 63,003 9.50% Jan 15, 2020
R 100 6 Residual Bond Jan 15, 2020
-------------------------------
$1,000,000 $63,009
==============================================================================================================================
</TABLE>
45
<PAGE>
EQUITY RESIDUAL INTEREST - The Company currently holds interests in one
Owner Trust Residual. 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>
On June 30, 1997, the Company sold its interests in TMAC CMO Trust 1986-2
and TMAC CMO Trust 1987-3 for $128,222 and $313,367 respectively, all of which
was treated as a gain on sale in the period.
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, 1997 are set forth below:
EQUITY RESIDUAL INTERESTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CMO BOND DATA (100% OF ISSUE)
----------------------------------------------------------
NAME OF ISSUER TIS INITIAL DEC. 31, 1997
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 62,673 8.45% Jun 1, 2017
---------------------------
May 29, 1987 $500,000 $62,673
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
46
<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, 1997 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% $61,488 9.11% 221
Nonequity Residual Interests
- ----------------------------
BT 88-1 Fixed GNMA 9.00% 19,879 9.50% 213
LFR-9 Fixed FNMA 9.50% 8,947 10.21% 233
CMSC I Fixed FNMA 9.50% 30,783 10.13% 204
FHLMC 25 Fixed FHLMC 9.50% 35,205 10.34% 228
FHLMC 21 Fixed FHLMC 9.50% 61,209 10.22% 230
==============================================================================================================
</TABLE>
5. INTEREST ONLY (IO) BONDS
IO Bonds include both regular IO Bonds and Inverse IO Bonds. Presented
below is a schedule of the Company's IO Bonds and the Prospective Method yield
at December 31, 1997.
INTEREST ONLY (IO) BONDS
- ------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Book Value Prospective
Purchase December 31, Method
------------------------------------
Interest Only Bond Price 1997 1996 Yield
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FNMA Series 1992-123 Class S $8,203 $1,303 $1,753 30.00%
Pru Home Mtg Corp Series 1992-7 4,776 426 708 14.00%
Bear Stearns Mtg Sec Series 1992-1 2,720 146 234 14.00%
- ---------------------------------------------------------------------------------------------------------------
$1,875 $2,695
===============================================================================================================
</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>
47
<PAGE>
Certain characteristics of the Company's IO Bonds held at December 31, 1997 are
on the following table:
INTEREST ONLY BONDS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLLATERAL DATA (% OF IO HELD BY TIS)
----------------------------------------------------------------
WEIGHTED DEC. 31, 1997 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 - $ 3,727 8.94% 280
Series 1992-123 (5.67 x
Class S LIBOR)
July 25, 1992
- ------------------------------------------------------------------------------------------------------------
2) Prudential Mar 27, 1992 $4,776 NON 0.5652% 41,203 8.78% 279
Home Mortgage AGENCY
Corporation
Series 1992-7
March 1, 1992
- ------------------------------------------------------------------------------------------------------------
3) Bear Stearns May 28, 1992 $2,720 NON 0.3714% 4,563 9.79% 235
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, 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 21%. The pertinent fair value assumption used in forecasting
the cash flows from CMOT 28 as of December 31, 1997 is a PSA of 286%. CMOT 28 is
collateralized by FNMA 8.50% and has a net fair value of $1,544,000.
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,
1997. 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
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
CMOT 28 $61,488 $64,197 $60,433
============================================================================================================
</TABLE>
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
48
<PAGE>
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, 1997 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, 1997 of
5.65625% 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,
1997. Bloomberg has obtained this information from sources it believes to be
reliable but has not verified such information and assumes no responsibility for
the accuracy of such information. The following are the prepayment assumptions
used to project cash flows in order to calculate the present value of Nonequity
Residual Interests and IO Bonds:
<TABLE>
<CAPTION>
PREPAYMENT ASSUMPTIONS
--------------------------------------------------------------------------------
Percent
Prepayment
Mortgage Collateral Pass-Through Rate Assumption
--------------------------------------------------------------------------------
<S> <C> <C>
GNMA Certificates 9.0% 241%
FNMA/FHLMC Certificates 8.5% 286%
FNMA/FHLMC Certificates 9.0% 330%
FNMA/FHLMC Certificates 9.5% 339%
- --------------------------------------------------------------------------------------
</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, 1997 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,
1997, and Nonequity Residual 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 $384,000. This
is the Company's estimate of the fair value of these assets. Similarly, if cash
flows on the Company's regular IO Bonds are discounted at 14% and the cash flows
on its Inverse IO Bonds are discounted at 30%, the present value of the
projected cash flows on the IO Bonds and inverse IO Bonds would equal
$1,875,000. 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.
49
<PAGE>
<TABLE>
<CAPTION>
PRESENT VALUE OF NONEQUITY RESIDUAL INTERESTS
- --------------------------------------------------------------------------------------------------------------------
(In thousands)
Residual Interests in CMOs with Fixed Rate Bond Classes
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Discount Rate 10% 12% 14% 16% 18%
Present Value $559 $458 $384 $330 $290
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRESENT VALUE OF IO BONDS
- --------------------------------------------------------------------------------------------------------------------
(In thousands)
Regular Interest Only Bonds
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Discount Rate 10% 12% 14% 16% 18%
Present Value $611 $591 $572 $553 $537
Inverse Interest Only Bonds
-----------------------------------------------------------------------------------------
Discount Rate 22% 26% 30% 34% 38%
Present Value $1,542 $1,413 $1,303 $1,209 $1,127
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
8. 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. 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 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prudential Securities Series 1993-6 $250 $ 184 $ 183
============================================================================================================
</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, 1997 and 1996 is presented in the following table:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1997 1996
--------------------------------------------------------------------------
<S> <C> <C>
Land $ 5,024 $ 4,990
Buildings and improvements 24,186 24,036
Personal property 1,300 993
----------------------------------
Total 30,510 30,019
Less accumulated depreciation
and amortization (1,813) (1,074)
----------------------------------
Net $28,697 $28,945
==================================
</TABLE>
50
<PAGE>
The purchase price of the real estate assets totaled $29,267,000 offset by
the assumption of then- 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, 1997, 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"). 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 $11,235,000 and the mortgage note on Villa San Marcos of
$5,965,884. 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 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 fifth year.
The following table summarizes the debt outstanding on the properties as of
December 31, 1997 and 1996. The Shady Lane loan remains in the name of the
seller of the property and will continue to remain so until refinanced. The
Company is servicing the debt and receives all of the economic benefits from
Shady Lane. The weighted average interest rate at December 31, 1997 was 8.317%.
<TABLE>
<CAPTION>
Interest Monthly
Principal Balance Basis of Rate Principal
December 31, Interest Dec. 31, Due and Interest
--------------------------------
Property 1997 1996 Rate 1997 Date Payment
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shady Lane $ 1,327,859 $ 1,358,576 Floating Rate 8.375% 12/1/04 12,063
River Oaks 6,372,237 6,665,796 Fixed 8.36% 4/1/07 61,862
Villa San Marcos 6,910,481 5,980,626 Fixed 8.31% 4/1/07 70,597
Four Creeks - I 1,782,994 1,799,034 Fixed 8.16% 12/1/05 13,521
Four Creeks - II 3,956,808 4,569,204 Fixed 8.31% 4/1/07 31,649
- ---------------------------------------------------------------------------------------------------------------------------
Total $20,350,379 $20,373,236 $189,692
===========================================================================================================================
</TABLE>
The scheduled principal payments to be made on notes payable on real estate
outstanding at December 31, 1997 are as follows (in thousands), except for the
Shady Lane property note payable, as discussed below:
<TABLE>
<CAPTION>
YEAR AMOUNT
-----------------------------------
<S> <C>
1998 228,526
1999 248,302
2000 269,789
2001 293,136
2002 318,504
Thereafter 17,664,263
-----------------------------------
Total $19,022,520
===================================
</TABLE>
51
<PAGE>
The variable rate loan for the Shady Lane property is payable in monthly
installments of $12,063. The floating rate of interest is adjusted every six
months, in July and December. Since the principal payments vary each month, the
scheduled principal payments are not included in the schedule above.
11. SHORT-TERM DEBT
At December 31, 1997 and 1996 the Company's short-term borrowings totaled
$2,009,500 and $2,067,500 respectively. Short-term borrowing consisted of
repurchase agreements with Bear Stearns & Co. and Paine Webber. The repurchase
agreement borrowings had a weighted average interest rate of 7.2715%. 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
Company has no committed lines of credit.
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>
1997 1996 1995
----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Net Loss (in thousands): As reported ($209) ($903) ($2,579)
Pro forma (214) (904) (2,693)
Earnings per share As reported ($0.03) ($0.11) ($0.32)
Pro forma ($0.03) ($0.11) ($0.32)
</TABLE>
The following table summarizes the stock option activity for the years
ended December 31, 1997, 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.
52
<PAGE>
<TABLE>
<CAPTION>
Number of Share
Options
Outstanding
-------------------
<S> <C> <C>
Balance, December 31, 1995 336,000
Granted to officers 6,000
Granted to non-affiliated --
directors
-------------------
Balance, December 31, 1996 342,000
Granted 5,000
Expired (1,000)
-------------------
Balance, December 31, 1997 346,000
===================
</TABLE>
During 1997, 1,000 options expired relating to an unaffiliated director who
retired in 1996. No other options were exercised, forfeited or expired during
1997, 1996 or 1995. As of December 31, 1997 and 1996, respectively, 346,000 and
342,000 of the options were exercisable. As of December 31, 1997, 54,000 shares
were available under the Plan for granting further options. The weighted average
fair value of options granted in 1997 and 1996, respectively, was $1.02 and
$0.18. The options outstanding at December 31, 1997 have exercise prices of
$1.25, $1.20 and $2.23 with a weighted average exercise price of $2.20 and a
weighted average remaining contractual life of 7.3 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 1997 and 1996, respectively: risk-free
interest rate of 6.43% and 6.67%, expected distribution yields of 0% and 0%,
expected lives of 10 and 10 years, and expected volatility of 97% and 35%.
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.
No management fees were paid in 1997; management fees of $77,000 were paid for
the first half of 1996 and management fees of $130,000 were paid for 1995.
Residual interest administration fees of $90,000 were paid in 1995. In
addition, the Company reimbursed the Former Manager in the amount of $37,806,
$391,198 and $510,174, respectively for 1997, 1996 and 1995 related to certain
general and 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 becoming self-managed on July 1, 1996, the Company
53
<PAGE>
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.
14. WHOLLY-OWNED SUBSIDIARIES
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, 1995 and
thereafter and the results of operations of TISMAC are included in the
consolidated statements of operations only through the date of sale in 1995.
TISPAC is a wholly-owned subsidiary of the Company incorporated on
September 8, 1995, for the purpose of owning and financing real property. In
March 1997, as part of the refinancing of two of the Company's multifamily
residential properties and a portion of the Four Creeks property, title to those
properties was vested in TISPAC. Simultaneously, in March 1997, TISPAC entered
into notes secured by mortgages on those properties. TISPAC is a wholly owned
subsidiary of TISMIC and as such is a Qualified REIT Subsidiary. Accordingly,
the accounts of TISPAC are consolidated with those of the Company.
54
<PAGE>
15. INTEREST INCOME
Interest income from Mortgage Related Assets consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Certificates, net $6,059 $7,748 $13,735
Short-term Investments 2 16 115
Residual Interests 39 52 1,483
Interest Only (IO) Bonds 360 455 1,128
Commercial Securitizations 0 0 89
- -------------------------------------------------------------------------------------------------------------
Total $6,460 $8,271 $16,550
=============================================================================================================
</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>
1997
Interest Income (Loss)
from Mortgage Related Assets $ 1,788 $2,225 $ 1,676 $ 2,698 $ 8,387
Loss from
Real Estate Operations (97) (65) (43) (56) (261)
Net Income (Loss) (417) (103) (307) 618 (209)
Basic Net Income (Loss) per Share ($0.04) $ 0.01 ($0.04) $ 0.08 ($0.03)
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)
Basic Net Income (Loss) per Share ($0.04) $ 0.01 ($0.04) ($0.04) ($0.11)
</TABLE>
17. DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN
The Company has a Dividend Reinvestment and Share Purchase Plan. 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. The Company's comprehensive liability, fire, flood,
extended coverage and rental loss insurance does not cover damange 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 accompany financial statements do not reflect any adjustments
for these uncertainties.
55
<PAGE>
19. SUBSEQUENT EVENT
On January 30, 1998, the Company sold 49% of its ownership in the CMOT
28 REMIC Residual Interest for $764,400 in cash. Of the proceeds, $140,500 were
used to retire debt and the balance was placed in the general funds of the
Company.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TIS MORTGAGE INVESTMENT COMPANY
Date: April 14, 1998 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 April 14, 1998
- ---------------------------------------
Lorraine O. Legg Principal Executive Officer
/s/ John E. Castello Executive Vice President (Principal April 14, 1998
- ---------------------------------------
John E. Castello Financial Officer)
/s/ Douglas B. Fletcher Director, Chairman of the Board April 14, 1998
- ---------------------------------------
Douglas B. Fletcher
/s/ John D. Boyce Director April 14, 1998
- ---------------------------------------
John D. Boyce
/s/ Patricia M. Howe Director April 14, 1998
- ---------------------------------------
Patricia M. Howe
Director April 14, 1998
- ---------------------------------------
Christopher L. Jarratt
/s/ Robert W. Ledoux Director April 14, 1998
- ---------------------------------------
Robert W. Ledoux
Director April 14, 1998
- ---------------------------------------
James G. Lewis
/s/ Richard M. Osborne Director April 14, 1998
- ---------------------------------------
Richard M. Osborne
/s/ Melvin W. Petersen Director April 14, 1998
- ---------------------------------------
Melvin W. Petersen
</TABLE>
57
<PAGE>
SCHEDULE III
TIS MORTGAGE INVESTMENT COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H Column I
-------- -------- -------- -------- -------- -------- -------- -------- --------
Costs Gross Amount at
Initial Cost Subsequently Which Carried at
to Company Capitalized Close of Year
----------------- ------------ ----------------------- Life on
Buildings Buildings which
and and Accumulated Year of Year Depreciation
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
----------- ------------ ---- ------------ ------------ ---- ------------ ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shady Lane
Village
Visalia, CA $1,328 $379 $1,725 $38 $379 $1,763 $2,142 $127 1985 1995 40 years
River Oaks
Hanford, CA 6,372 904 7,096 170 904 7,266 8,170 503 1984 1995 40 years
Villa San
Marcos
Fresno, CA 6,910 2,549 7,459 35 2,584 7,459 10,043 466 1991 1995 40 years
Four Creeks
Village
Visalia, CA 5,740 1,157 7,698 -- 1,157 7,698 8,855 441 1986-91 1995 40 years
--------------------------------------------------------------------------------
$20,350 $4,989 $23,978 $243 $5,024 $24,186 $29,210 $1,537
================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Accumulated Accumulated Accumulated
Cost Depreciation Cost Depreciation Cost Depreciation
------------------------ ------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning
of Year $29,026 $938 $29,026 $339 $0 $0
Additions during
period
Purchases 28,968
Capital Improvements 184 58
Depreciation 599 599 339
------------------------ ------------------------- ------------------------
Balance at End
of Year $29,210 $1,537 $29,026 $938 $29,026 $339
======================== ========================= ========================
</TABLE>
58
<PAGE>
EXHIBIT 21
TIS MORTGAGE INVESTMENT COMPANY
SUBSIDIARIES OF THE REGISTRANT
TIS Mortgage Acceptance Corporation
TIS Property Acquisition Company
<PAGE>
Exhibit 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included on this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (file number 333-96960) and Form S-3 (file
number 333-44526).
/s/ Arthur Andersen LLP
San Francisco, California
April 15, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,985
<SECURITIES> 61,353
<RECEIVABLES> 484
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 93,754
<CURRENT-LIABILITIES> 3,767
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 10,621
<TOTAL-LIABILITY-AND-EQUITY> 93,754
<SALES> 0
<TOTAL-REVENUES> 12,374
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,871
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,712
<INCOME-PRETAX> (209)
<INCOME-TAX> 0
<INCOME-CONTINUING> (209)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (209)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
