<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NO. 1-10004
TIS MORTGAGE INVESTMENT COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 94-3067889
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
655 Montgomery Street 94111
SAN FRANCISCO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code (415) 393-8000
______________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X NO
------- -------
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date.
CLASS OF COMMON STOCK OUTSTANDING AT MAY 14, 1998
--------------------- ---------------------------
$.001 PAR VALUE 8,105,880 SHARES
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY
INDEX
Part I. Financial Information
Item 1. Financial Statements (Unaudited) Page Number
Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Operations
Three and Six months ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
2
<PAGE>
- --------------------------------------------------------------------------------
PART 1: FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the 1997 Form 10-K of the registrant (the
"Company"). These statements have been prepared in accordance with the
instructions of the Securities and Exchange Commission Form 10-Q and do not
include all the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements.
In the opinion of the Company's management, all material adjustments
of a normal and recurring nature considered necessary for a fair presentation of
results of operations for the interim periods have been included. The results
of consolidated operations for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
3
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Mortgage Related Assets
Mortgage Certificates, net $ 50,714 $ 60,433
Residual Interests 433 384
Interest Only (IO) Bonds 1,252 1,875
Commercial Securitizations 184 184
Reserve for Loss on Investments (546) (1,523)
-------------------- --------------------
Total Mortgage Related Assets 52,037 61,353
-------------------- --------------------
Operating Real Estate Assets, net 28,398 28,697
-------------------- --------------------
Other Assets
Cash and Cash Equivalents 198 185
Restricted Cash 1,992 1,800
Accrued Interest and Accounts Receivable 420 484
Deferred Bond Issuance Costs, net 417 497
Other Assets 783 738
-------------------- --------------------
Total Other Assets 3,810 3,704
-------------------- --------------------
Total Assets $ 84,245 $ 93,754
==================== ====================
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES
Collateralized Mortgage Obligations, net $ 49,979 $ 59,008
Accounts Payable and Accrued Liabilities 795 870
Accrued Interest Payable 750 887
Notes Payable on Real Estate 20,213 20,350
Short-term Debt 1,598 2,010
-------------------- --------------------
Total Liabilities 73,335 83,125
-------------------- --------------------
Minority Interest 1,251 --
-------------------- --------------------
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 (2,414) (2,322)
Retained Deficit (62,631) (61,753)
-------------------- --------------------
Total Shareholders' Equity 9,659 10,629
-------------------- --------------------
Total Liabilities and Shareholders' Equity $ 84,245 $ 93,754
==================== ====================
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- ----------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MORTGAGE RELATED ASSETS
Interest
Mortgage Certificates, net $1,258 $1,552 $2,606 $3,153
Short-term Investments -- -- 1 --
Residual Interests 71 -- 106 9
Interest Only (IO) Bonds 44 101 99 175
Valuation Reserve Reduction 121 131 231 235
Loss on Retirement of Investment (198) -- (198) --
Gain (Loss) on Sales of Investments -- 441 (21) 441
------------- ------------ ------------ ------------
Income from Mortgage Related Assets 1,296 2,225 2,824 4,013
------------- ------------ ------------ ------------
INTEREST AND CMO RELATED EXPENSES
Collateralized Mortgage Obligations
Interest 1,500 1,676 3,010 3,371
Administration Fees 17 17 34 34
Deferred Bond Issuance Costs 46 26 79 47
Short-term Debt 32 44 70 91
------------- ------------ ------------ ------------
Total Interest and CMO Related Expenses 1,595 1,763 3,193 3,543
------------- ------------ ------------ ------------
REAL ESTATE OPERATIONS
Rental and Other Income 1,025 1,021 2,042 2,007
Operating and Maintenance Expenses (350) (374) (717) (696)
Depreciation and Amortization (225) (202) (368) (443)
Interest on Real Estate Notes Payable (422) (428) (885) (866)
Property Taxes (82) (81) (164) (164)
------------- ------------ ------------ ------------
Loss from Real Estate Operations (54) (64) (92) (162)
------------- ------------ ------------ ------------
OTHER EXPENSES
General and Administrative 407 501 673 829
------------- ------------ ------------ ------------
Loss Before Minority Interest ($ 760) ($ 103) ($1,134) ($ 521)
Minority Interest 151 -- 256 --
------------- ------------ ------------ ------------
Net Loss ($ 609) ($ 103) ($ 878) ($ 521)
============= ============ ============ ============
- ------------------------------------------------------------------------------------------------------------------
Net Loss per Share ($0.08) ($0.01) ($0.11) ($0.06)
Weighted Average Shares Outstanding 8,106 8,106 8,106 8,106
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($878) ($521)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation of Operating Real Estate Assets 368 369
Other Depreciation and Amortization 545 366
Valuation Reserve Provision (977) (235)
Gain (Loss) on Sales of Investments 21 (441)
Loss on Retirement of Investment 198 --
Decrease (Increase) in Accrued Interest and Accounts Receivable 64 (356)
Decrease in Prepaid Expenses 27 111
Decrease (Increase) in Other Assets -- 125
Increase (Decrease) in Accounts Payable and Accrued Liabilities (75) 455
Decrease in Accrued Interest Payable (137) (80)
------------ ------------
Net Cash Used in Operating Activities (844) (207)
------------ ------------
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTMENT ACTIVITIES
Net Increase in Restricted Cash (192) (226)
Investment in Real Estate Assets (181) (356)
Proceeds from Sales of Investments (21) 441
Principal Reduction in Mortgage Certificates 9,888 5,793
Principal Reduction in Residual Interests (168) 31
Principal Reduction in IO Bonds 316 343
Principal Reduction in (Additions to) Commercial Securitizations -- (1)
Net Increase in Minority Interest in CMO 1,384 --
------------ ------------
Net Cash Provided by Investment Activities 11,026 6,025
------------ ------------
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Short-term Debt (412) (245)
Increase in Notes Payable on Real Estate -- 17,400
Notes Payable on Real Estate Retired -- (17,201)
Principal Payments on Notes Payable on Real Estate (137) (88)
Principal Payments on CMO's (9,619) (5,582)
------------ ------------
Net Cash Used in Financing Activities (10,168) (5,716)
------------ ------------
Net Increase in Cash and Cash Equivalents 14 102
Cash and Cash Equivalents at Beginning of Period 184 82
------------ ------------
Cash and Cash Equivalents at End of Period $198 $184
============ ============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements
do not include all of the information and disclosures generally required for
annual financial statements. They include the accounts of the Company, its
wholly-owned subsidiaries and its partnership interests in real estate assets.
All significant intercompany balances and transactions have been eliminated. In
the opinion of management all adjustments of a normal recurring nature
considered necessary for a fair presentation have been made. Operating results
for the quarter and six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the entire year. These
condensed consolidated financial statements should be read in conjunction with
the Company's Form 10-K for the year ended December 31, 1997.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overall Method of Accounting - On May 31, 1990, the Emerging Issues
Task Force of the Financial Accounting Standards Board reached a consensus
(Issue 89-4) for a uniform method of accounting for Residual Interests in
collateralized mortgage obligations ("CMOs"). The consensus, among other
things, required Residual Interests to be classified either as "equity" (and be
accounted for under the Equity Method) or as "nonequity" (and be accounted for
under a level yield method referred to as the Prospective Method). The methods
described in Issue 89-4 are essentially the same as those used by the Company.
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 mortgage related
investments, however, from time to time the Company may sell an investment as
part of its efforts to adjust its portfolio composition to reflect changes in
economic conditions. Therefore, the Company has classified all its mortgage
related investments 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 mortgage related investments are subject to write
down whenever the yield on the projected cash flows is less than a risk free
rate. If the yield on the projected cash flows is less than a risk free rate,
the decline in value is considered to be "other than temporary" and the
investment is written down to its fair value as the new cost basis. The amount
of the write down is included in the Company's current earnings (i.e. accounted
for as a realized loss).
For purposes of applying the impairment provisions, the Company
considers its investment in its Equity Residual to be a net cash flow investment
(net of CMO Bond interest payments and related CMO Bond administrative
expenses). The Company measures other than temporary impairment by comparing
the yield on the projected net cash flows from the Equity Residual, (i.e.
Mortgage Certificates net of discounts and CMO Bond Liabilities) to a risk free
rate. If the yield on the projected cash flows from the Equity Residual is less
than a risk free rate, the Company records a reserve to reduce the carrying
value to fair value. The fair value is calculated using the forecasted net cash
flows discounted at a risk adjusted rate. The risk adjusted rate is determined
by the Company using established market transactions for securities having
similar characteristics and backed by collateral of similar rate and term.
PRINCIPLES OF CONSOLIDATION - Under generally accepted accounting
principles, the Company consolidates assets and liabilities of Owner Trust
Residuals when over 50% equity interest in the trust is held by the Company.
The portion of equity interest of each such Owner Trust Residual not owned by
the Company is accounted for as minority interest. Additionally, the condensed
consolidated financial statements include the accounts underlying its interest
in real estate partnerships.
MORTGAGE CERTIFICATES AND CMOS - Mortgage certificates and CMO bonds
of consolidated Owner Trusts are carried at their outstanding principal balance
plus or minus any premium or discount, respectively.
7
<PAGE>
AMORTIZATION OF PREMIUMS AND DISCOUNTS - Premiums and discounts
related to mortgage certificates and CMOs are amortized to income using the
interest method over the stated maturity of the mortgage certificates or CMOs.
RESIDUAL INTERESTS AND INTEREST ONLY (IO) BONDS - Residual Interests
held in bond form and Corporate Real Estate Mortgage Investment Conduit
("REMIC") Residual Interests, regardless of percentage ownership, are Nonequity
Residual Interests and, along with IO Bonds, are accounted for under the
Prospective method. Under this method, assets are carried at cost and income is
amortized over their estimated lives based on a method which provides a constant
yield. At the end of each quarter, the yield over the remaining life of the
asset is recalculated based on expected future cash flows using current interest
rates and mortgage prepayment speeds. This new yield is then used to calculate
the subsequent quarter's financial statement income. Owner Trust Residuals are
accounted for under the equity method.
OPERATING REAL ESTATE ASSETS - In accordance with Statement of
Financial Accounting No. 121 ("SFAS 121") - Accounting for Impairment of Long-
lived Assets and for Long-lived Assets to be Disposed Of, the Company values
operating real estate assets at cost unless circumstances indicate that cost
cannot be recovered, in which case carrying value is reduced to estimated fair
value. In management's opinion, as of June 30, 1998, 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 furniture, fixtures and equipment depending on the nature of
the asset. Significant expenditures that improve or extend the useful life of
the asset are capitalized and depreciated over their estimated useful lives.
All leases of real estate assets are classified as operating leases.
Rental income is recognized when contractually due based on the terms of signed
lease agreements which range in duration from month-to-month to one year.
RESTRICTED CASH - Restricted cash represents the cash balances of CMOs
in which the Company holds a Residual Interest and whose assets and liabilities
are consolidated with those of the Company. This cash is not available to the
Company or its creditors.
INCOME TAXES - The Company has elected to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended. As a REIT, the Company must
distribute at least 95% of its taxable income to its shareholders. No provision
has been made for income taxes in the accompanying consolidated financial
statements as the Company is not subject to federal income taxes. The loss
reported in the accompanying financial statements may be greater or less than
the taxable loss because some income and expense items are reported in different
periods for income tax purposes. Over the life of a Residual Interest or IO
Bond, total taxable income will equal total financial statement income.
However, the timing of income recognition may differ between the two from year
to year.
NET LOSS PER SHARE - Net loss per share is based upon the weighted
average number of shares of Common Stock outstanding. The common equivalent
shares related to the 1995 Stock Option Plan are antidilutive and therefore are
not included in the weighted average number of shares outstanding. The Company
adopted SFAS No. 128 during the year ended December 31, 1997. 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 principle payments of mortgage loans and
interest rates. Actual results could differ from those estimates.
8
<PAGE>
REPORTING COMPREHENSIVE INCOME - As of January 1, 1998, the Company
adopted FASB Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, (SFAS 130). This statement established standards for the
reporting and disclosure of comprehensive income and its components in the
financial statements. For the Company, comprehensive income includes net income
reported on the statement of operations and changes in the fair value of its
available-for-sale investments reported as a component of shareholder's equity.
The following table presents net loss adjusted by the change in unrealized
gains or losses on the available-for-sale investments as a component of
comprehensive income.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- ------------------------------
(in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Loss ($ 609) ($ 103) ($ 878) ($ 521)
Net change in unrealized gains (losses)
available for sale investments (61) (161) (92) (8)
------------- ------------ ------------ --------------
Comprehensive Income (loss) ($ 670) ($ 264) ($ 970) ($ 529)
============= ============ ============ ==============
</TABLE>
NOTE 3 - MORTGAGE CERTIFICATES
Information is presented in the table below as of June 30, 1998 and
December 31, 1997 with respect to the fair value of the mortgage certificates
collateralizing those CMO Bonds where the residual interests are accounted for
under the equity method and the Company owns more than a 50% interest in the
trust. See the CMO Collateral chart in Note 4 for additional information on the
mortgage collateral. The Company is not able to sell the mortgage collateral,
and therefore realize any gain until the CMO Bonds which are collateralized by
the mortgages mature or are called in accordance with the underlying bond
indenture.
MORTGAGE CERTIFICATES
- ---------------------
(In thousands)
<TABLE>
<CAPTION>
Principal Amount of Fair Value of Cost Less
Residual Series Mortgage Certificates Mortgage Certificates Unamortized Discount
- ----------------------------- ---------------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
JUNE 30, 1998
CMOT 28 $51,600 $53,857 $50,714
DECEMBER 31, 1997
CMOT 28 $61,488 $64,197 $60,433
</TABLE>
NOTE 4 - RESIDUAL INTERESTS
Residual Interests are classified as either equity or nonequity.
Presented below is a schedule of the nonequity residual interests and
unconsolidated equity residual interests.
NONEQUITY RESIDUAL INTERESTS
- ----------------------------
(In thousands)
<TABLE>
<CAPTION>
Book Value
--------------------------------------------
Purchase June 30, December 31,
Residual Series Price 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonequity Residual Interests
- ----------------------------
BT 88-1 $1,537 $171 $179
LFR-9 2,589 88 94
CMSC I 8,642 104 104
FHLMC 25 4,934 3 4
FHLMC 21 5,361 2 3
- ------------------------------------------------------------------------------------------------------------------
Total Residual Interests $368 $384
==================================================================================================================
</TABLE>
9
<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:
<TABLE>
<CAPTION>
FIXED RATE RESIDUALS
- ------------------------------------------------------------------------------------------------------------------------------
CMO BOND DATA (100% OF ISSUE)
-------------------------------------------------------------------
NAME OF ISSUER TIS INITIAL JUNE 30, 1998
AND SERIES/ TIS PURCHASE PRINCIPAL PRINCIPAL
CMO ISSUE PURCHASE TIS % PRICE BOND BALANCE BALANCE BOND STATED
DATE DATE OWNERSHIP ($000) CLASS ($000) ($000) COUPON MATURITY
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1) Bankers Trust May 29, 1991 99.990% $1,537 1-A $ 9,722 $ 0 7.35% Jan 1, 2013
Series 1988-1 1-B 8,017 0 8.50% Apr 1, 2014
(BT 88-1) 1-C 34,769 11,930 8.75% Apr 1, 2018
Feb 16, 1988 1-D 47,492 6,616 8.63% Apr 1, 2018
-------------------------
$100,000 $ 18,546
- ------------------------------------------------------------------------------------------------------------------------------
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 6,354 Zero Coupon Jan 1, 2019
Dec 2, 1988 D 32,850 1,132 Zero Coupon Jan 1, 2019
E 30,000 0 Zero Coupon Jan 1, 2019
R 150 150 Residual Bond Jan 1, 2019
-------------------------
$150,000 $ 7,636
- ------------------------------------------------------------------------------------------------------------------------------
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 27,959 9.45% Feb 1, 2017
======= ======
-------------------------
Series I (CMSC I) $500,000 $27,959
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 30,483 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 $ 30,490
- ------------------------------------------------------------------------------------------------------------------------------
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 53,575 9.50% Jan 15, 2020
R 100 5 Residual Bond Jan 15, 2020
------------------------
$1,000,000 $ 53,580
===============================================================================================================================
</TABLE>
EQUITY RESIDUAL INTERESTS - The Company currently holds ownership in one
equity residual interest, CMOT 28 REMIC Residual Interest. Although the
underlying CMOs in this residual interest are not liabilities of the Company,
under the requirements of generally accepted accounting principles, the Company
consolidates assets and liabilities of the equity residual interests when over
50% equity interest in the trust is held by the Company.
10
<PAGE>
On January 30, 1998, the Company sold 49% of its ownership in its equity
residual interest, CMOT-28 REMIC Residual Interest for $764,400 which resulted
in a loss on sale of $21,000. The proceeds were used to reduce short-term debt
and to provide operating funds for the Company. The Company retains a 51%
equity interest in this equity residual interest.
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, in management's opinion, 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 interest in which the Company holds an
interest at June 30, 1998 are set forth below:
<TABLE>
<CAPTION>
EQUITY RESIDUAL INTERESTS
- ------------------------------------------------------------------------------------------------------------------------
CMO BOND DATA (100% OF ISSUE)
---------------------------------------------------------------
NAME OF ISSUER TIS INITIAL JUNE 30, 1998
AND SERIES/ TIS PURCHASE PRINCIPAL PRINCIPAL
CMO ISSUE PURCHASE AND TIS % PRICE BOND BALANCE BALANCE BOND STATED
DATE SALE DATE OWNERSHIP ($000) CLASS ($000) ($000) COUPON MATURITY
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 Jan. 30, 1998 -49.000% $4,857 C 108,300 0 8.50% Dec 1, 2010
-------- =======
(CMOT 28) 51.000% Z 39,500 53,054 8.45% Jun 1, 2017
======== --------------------------
May 29, 1987 $500,000 $ 53,054
=======================================================================================================================
</TABLE>
CMO COLLATERAL - The table below sets forth certain characteristics of
the mortgage collateral pledged to secure each CMO in which the Company holds a
Residual Interest.
<TABLE>
<CAPTION>
CMO COLLATERAL
- ------------------------------------------------------------------------------------------------------------------
CMO COLLATERAL DATA (100% OF ISSUE)
--------------------------------------------------------
WEIGHTED JUNE 30, 1998 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% $51,600 9.11% 215
Nonequity Residual Interests
- ----------------------------
BT 88-1 Fixed GNMA 9.00% 16,627 9.50% 205
LFR-9 Fixed FNMA 9.50% 7,395 10.21% 226
CMSC I Fixed FNMA 9.50% 26,679 10.13% 198
FHLMC 25 Fixed FHLMC 9.50% 28,270 10.34% 224
FHLMC 21 Fixed FHLMC 9.50% 51,618 10.22% 226
==================================================================================================================
</TABLE>
11
<PAGE>
NOTE 5 - INTEREST ONLY (IO) BONDS
IO Bonds include both regular IO Bonds and Inverse IO Bonds. Presented
below is a schedule of the Company's IO Bonds.
INTEREST ONLY (IO) BONDS
- ------------------------
(In thousands)
<TABLE>
<CAPTION>
Book Value
--------------------------------------------
Name and Issuer Purchase June 30, December 31,
and Series Price 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FNMA Series 1992-123 Class S $8,203 $ 997 $1,303
Pru Home Mtg Corp Series 1992-7 4,776 255 426
- ------------------------------------------------------------------------------------------------------------------
$1,252 $1,729
==================================================================================================================
</TABLE>
Certain characteristics of the Company's IO Bonds are on the following
table:
<TABLE>
<CAPTION>
INTEREST ONLY BONDS
- ------------------------------------------------------------------------------------------------------------------
COLLATERAL DATA (% OF IO HELD BY TIS)
-----------------------------------------------------------------
WEIGHTED JUNE 30, 1998 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 - $3,007 8.94% 274
Series 1992-123 (5.67 x
Class S LIBOR)
July 25, 1992
- -------------------------------------------------------------------------------------------------------------
2) Prudential Mar 27, 1992 $4,776 NON 0.5652% $31,686 8.81% 274
Home Mortgage AGENCY
Corporation
Series 1992-7
March 1, 1992
=============================================================================================================
</TABLE>
12
<PAGE>
NOTE 6 - OPERATING REAL ESTATE ASSETS
During the year ended December 31, 1995, the Company acquired four
multifamily housing properties in California's Central Valley. The 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 June
30, 1998 and December 31, 1997 is presented in the following table:
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1998 1997
---------------------------------------------- ----------------- ----------------
<S> <C> <C>
Land $ 5,024 $ 5,024
Buildings and improvements 24,186 24,186
Personal property 1,377 1,300
----------------- ----------------
Total 30,587 30,510
Less accumulated depreciation
and amortization (2,189) (1,813)
----------------- ----------------
Net $28,398 $28,697
================= ================
</TABLE>
At June 30, 1998, the Company's four multifamily properties had an
overall occupancy of 98%.
NOTE 7 - NOTES PAYABLE ON REAL ESTATE
As part of the 1995 acquisition of multifamily residential properties,
existing secured debt totaling $18,675,000 was assumed. In addition, new secured
debt of $1,815,000 was obtained in 1995 secured by Four Creeks - I. 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 mortgages comprising the Permanent Financing may not be retired during the
first five years and are subject to a prepayment penalty if prepaid after the
5th year. The following table summarizes the debt outstanding on the properties
as of June 30, 1998 and December 31, 1997. 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 the property. The weighted average interest rate at June 30, 1998
was 8.317%.
<TABLE>
<CAPTION>
Interest Monthly
Principal Balance Basis of Rate Principal
June 30, December 31, Interest June 30, Due and Interest
Property 1998 1997 Rate 1998 Date Payment
- -------------------- ----------------- ---------------- --------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shady Lane $ 1,311,389 $ 1,327,859 Floating 8.375% Dec. 1, 2004 $ 12,063
River Oaks 6,330,795 6,372,237 Fixed 8.36% Apr. 1, 2007 61,862
Villa San Marcos 6,865,188 6,910,481 Fixed 8.31% Apr. 1, 2007 70,597
Four Creeks - I 1,774,501 1,782,994 Fixed 8.16% Dec. 1, 2005 13,521
Four Creeks - II 3,930,874 3,956,808 Fixed 8.31% Apr. 1, 2007 31,649
- -------------------- ----------------- ---------------- --------------- ------------- ---------------- --------------
Total $20,212,747 $20,350,379 $189,692
==================== ================= ================ =============== ============= ================ ==============
</TABLE>
13
<PAGE>
NOTE 8 - SHORT-TERM DEBT
At June 30, 1998 the Company's short-term borrowings totaled $1,598,000.
Short-term borrowings consisted of repurchase agreements with Bear Stearns & Co.
and Paine Webber. The repurchase agreement borrowings had a weighted average
interest rate of 7.197%. 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 Residual Interests and IO Bonds whose fair values approximated $1.7
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Prior to 1995, the Company primarily invested in the Residual Interests of
CMOs and other mortgage related assets. The mortgage collateral underlying the
CMOs in the Company's portfolio of Residual Interests are mortgage-backed
certificates issued by the Government National Mortgage Association (GNMA), the
Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage
Corporation (FHLMC). In 1995 the Company changed its investment focus from
investments in Residual Interest of CMOs and other mortgage related assets to
multifamily real estate. As a result, it sold a number of its nonequity
residual interests, interest only bonds and a commercial securitization in order
to fund the purchase of multifamily real estate projects.
The Company is not in the business of selling its mortgage related
investments and therefore purchases these assets with the intention of holding
them to term. However, from time to time the Company may sell an asset as part
of the Company's ongoing effort to adjust its portfolio composition to reflect
changes in economic conditions. The Company may also occasionally acquire
mortgage related assets which are available for sale before their term. It may
also utilize hedging strategies with certain mortgage related assets and other
instruments which would not be held to term.
The Company's income from mortgage related assets is sensitive to changes
in mortgage prepayments and interest rates. The Company attempts to reduce the
prepayment and interest rate risks by purchasing mortgage related assets which
have characteristics and yields that complement the characteristics and yields
of existing assets. The Company's income from multifamily real estate is
sensitive to local real estate market conditions, cost of maintenance of its
properties and interest rates on its secured debt.
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.
RESULTS OF OPERATIONS
The Company had a net loss of $609,000, or $0.08 per share, for the quarter
ended June 30, 1998. This compares to a net loss of $103,000, or $0.01 per
share, for the quarter ended June 30, 1997. For the six months ended June 30,
1998, the Company had a net loss of $878,000 or $0.11 per share. This compares
to a net loss of $520,000 or $0.06 per share for the six months ended June 30,
1997. The Company did not pay a dividend in the first six months of either
year.
Interest from mortgage certificates is a declining amount based on the
principal amount outstanding, which has been declining due to scheduled
amortizations and prepayments of the underlying mortgage loans. Interest
expense on CMOs also declines from year to year in proportion to the declining
principal amount outstanding. Therefore, the net interest margin (interest
income from mortgage certificates less interest expense on CMOs) remained
essentially in relation to the principal amounts outstanding between the two
years.
During the second quarter, it was determined that the Bear Stearns Mortgage
Securities Series 1992-7 Interest Only Bond Income would be retired prior to
its maturity as part of an optional redemption of the entire bond series. This
early retirement resulted in a Loss on Retirement of Investment of $198,000 in
the second quarter.
On January 30, 1998, the Company sold 49% of its ownership in its equity
residual interest, CMOT-28 REMIC Residual Interest for $764,400 which resulted
in a loss on sale of $21,000. The proceeds were used to reduce short-term debt
and to provide operating funds for the Company.
Real Estate operations showed a loss of $92,000 and $162,000 in the
six months ended June 30, 1998 and 1997, respectively. However, operating
income from real estate operations before depreciation and amortization was
$316,000 and $281,000 in the six months ended June 31, 1998 and 1997,
respectively.
14
<PAGE>
For the six months ended June 30, 1998, general and administrative expense
totaled $673,000 as compared to $829,000 in the comparable prior year period.
The decrease is primarily attributable to a reduction in legal costs and annual
meeting expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses cash flow from operations to provide working capital to
support its operations and for the payment of dividends to its stockholders, and
uses its other capital resources for the purchase of Residual Interests,
mortgage instruments, multifamily residential properties and other mortgage
related assets.
The Company currently has agreements with two investment banking firms to
borrow funds under repurchase agreements. At June 30, 1998 the Company had
borrowings outstanding under these agreements totaling $1,598,000. This debt
was collateralized by some of the Company's Residual Interests and IO Bonds
whose fair values approximated $1.8 million.
The Company's cash flows for the six months ended June 30, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
------------------------------------------ ----------------------- ----------------------
<S> <C> <C>
Used in Operating Activities ($ 844) ($ 207)
Provided by Investment Activities 11,026 6,025
Used in Financing Activities (10,169) (5,716)
----------------------- ----------------------
Net Increase in
Cash and Cash Equivalents $ 13 $ 102
======================= ======================
</TABLE>
At June 30, 1998, the Company had unrestricted cash and cash equivalents of
$197,850.
Over the twelve months ending June 30, 1999, scheduled principal maturities
on the notes payable on real estate, except for the Shady Lane property note
payable, amount to $256,300 and are expected to be funded by cash flow from the
Company's multifamily residential properties. 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. During the
six months ended June 30, 1998 and 1997, the income from real estate operations
before depreciation and amortization amounted to $316,000 and $281,000,
respectively. The Company has no significant commitments for capital
expenditures relating to the real estate operations over the twelve months ended
June 30, 1999 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 June 30, 1999, 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.
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 June 30, 1998, the Company had
a deficit in working capital of approximately $600,000. 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 and the sale of certain mortgage related
investments. These strategies are dependent 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
15
<PAGE>
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.
On August 17, 1998 the Company was delisted from the New York Stock
Exchange due to size requirements for continued listing. The Company remains
listed on the Pacific Exchange and management expects this to provide liquidity
for the Company's stock.
The Company has no committed lines of credit.
DIVIDEND REINVESTMENT PLAN
The Company has a Dividend Reinvestment and Share Purchase Plan designed to
enable shareholders to have their dividends from the Company automatically
invested in additional shares of the Company. Mellon Securities Trust Company,
which is unaffiliated with the Company, acts as the Plan Administrator. The
purpose of the Plan is to provide shareholders with a convenient and economical
way of investing dividends in additional shares of the Company's Common Stock.
These shares will be purchased on the open market or, at the direction of the
Company's Board of Directors, directly from the Company at a 3% discount from
the open market price. The Company has registered 1,000,000 Common shares for
possible issuance under the Plan. The impact on liquidity from the Dividend
Reinvestment and Share Purchase Plan, if any, is expected to be immaterial.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
No reports on Form 8-k were filed during the quarter ended June 30,
1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIS MORTGAGE INVESTMENT COMPANY
<TABLE>
<CAPTION>
<S> <C>
August 19, 1998 BY: /s/ LORRAINE O. LEGG
-------------------- -----------------------------------
Date Lorraine O. Legg, President and
Chief Executive Officer
(Principal Executive Officer)
August 19, 1998 BY: /s/ JOHN E. CASTELLO
-------------------- -----------------------------------
Date John E. Castello, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,190
<SECURITIES> 52,037
<RECEIVABLES> 420
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 30,587
<DEPRECIATION> 2,189
<TOTAL-ASSETS> 84,245
<CURRENT-LIABILITIES> 3,143
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 9,651
<TOTAL-LIABILITY-AND-EQUITY> 84,245
<SALES> 0
<TOTAL-REVENUES> 2,321
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,486
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,595
<INCOME-PRETAX> (609)
<INCOME-TAX> 0
<INCOME-CONTINUING> (609)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (609)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
