<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 MARCH 31, 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
<TABLE>
<CAPTION>
Item 1. Financial Statements (Unaudited) Page Number
<S> <C>
Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Operations
Three months ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 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
</TABLE>
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 three months ended March 31, 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>
MARCH 31, DECEMBER 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Mortgage Related Assets
Mortgage Certificates, net $ 56,467 $ 60,433
Residual Interests 376 384
Interest Only (IO) Bonds 1,691 1,875
Commercial Securitizations 184 184
Reserve for Loss on Investments (667) (1,523)
-------------------- --------------------
Total Mortgage Related Assets 58,051 61,353
-------------------- --------------------
Operating Real Estate Assets, net 28,544 28,697
-------------------- --------------------
Other Assets
Cash and Cash Equivalents 115 185
Restricted Cash 2,149 1,800
Accrued Interest and Accounts Receivable 587 484
Deferred Bond Issuance Costs, net 464 497
Other Assets 754 738
-------------------- --------------------
Total Other Assets 4,069 3,704
-------------------- --------------------
Total Assets $90,664 $93,754
==================== ====================
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES
Collateralized Mortgage Obligations, net $ 55,570 $ 59,008
Accounts Payable and Accrued Liabilities 511 870
Accrued Interest Payable 831 887
Notes Payable on Real Estate 20,282 20,350
Short-term Debt 1,742 2,010
-------------------- --------------------
Total Liabilities 78,936 83,125
-------------------- --------------------
Minority Interest 1,399 --
-------------------- --------------------
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 (2,353) (2,322)
Retained Deficit (62,022) (61,753)
-------------------- --------------------
Total Shareholders' Equity 10,329 10,629
-------------------- --------------------
Total Liabilities and Shareholders' Equity $90,664 $93,754
==================== ====================
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE RELATED ASSETS
Interest Income
Mortgage Certificates, net $1,348 $1,601
Short-term Investments 1 0
Residual Interests 35 9
Interest Only (IO) Bonds 55 74
Valuation Reserve Reduction 110 104
Loss on Sale of Mortgage Related Assets (21) --
-------------------- --------------------
Income from Mortgage Related Assets 1,528 1,788
-------------------- --------------------
INTEREST AND CMO RELATED EXPENSES
Collateralized Mortgage Obligations
Interest 1,510 1,695
Administration Fees 17 17
Amortization of Deferred Bond Issuance Costs 33 21
Short-term Debt 38 47
-------------------- --------------------
Total Interest and CMO Related Expenses 1,598 1,780
-------------------- --------------------
REAL ESTATE OPERATIONS
Rental and Other Income 1,017 986
Operating and Maintenance Expenses (367) (322)
Interest on Real Estate Notes Payable (423) (438)
Depreciation and Amortization (183) (241)
Property Taxes (82) (83)
-------------------- --------------------
Loss from Real Estate Operations (38) (98)
-------------------- --------------------
OTHER EXPENSES
General and Administrative Expense 266 328
-------------------- --------------------
Loss Before Minority Interest (374) (418)
Minority Interest 105 --
-------------------- --------------------
Net Loss ($269) ($418)
- ------------------------------------------------------------------------------------------------------------------
Basic Loss per Share ($0.03) ($0.05)
Weighted Average Shares Outstanding 8,106 8,106
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($ 269) ($ 418)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 204 134
Depreciation of Operating Real Estate Assets 183 181
Valuation Reserve Provision (856) (104)
Increase in Accrued Interest and Accounts Receivable (103) (11)
Decrease (Increase) in Other Assets (25) 191
Decrease in Accounts Payable and Accrued Liabilities (359) (55)
Decrease in Accrued Interest Payable (56) (38)
------------ ------------
Net Cash Used in Operating Activities (1,281) (120)
------------ ------------
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTMENT ACTIVITIES
Net Decrease (Increase) in Restricted Cash (349) 137
Investment in Real Estate Assets (19) (242)
Principal Reduction in Mortgage Certificates 4,035 2,561
Principal Reduction (Increase) in Residual Interests (118) 36
Principal Reduction in IO Bonds 145 184
Principal Reduction in (Additions to) Commercial Securitizations -- (1)
Net Increase in Minority Interest in CMO 1,531 --
------------ ------------
Net Cash Provided by Investment Activities 5,225 2,675
------------ ------------
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Short-term Debt (267) (137)
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 (68) (25)
Principal Payments on CMO's (3,679) (2,627)
------------ ------------
Net Cash Used in Financing Activities (4,014) (2,590)
------------ ------------
Net Decrease in Cash and Cash Equivalents (70) (35)
Cash and Cash Equivalents at Beginning of Period 185 82
------------ ------------
Cash and Cash Equivalents at End of Period $ 115 $ 47
============ ============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements do
not include all of the information and disclosures generally required for annual
financial statements. They include the accounts of the Company, its wholly-owned
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 ended March 31, 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 METHODS OF ACCOUNTING - On May 31, 1990, the Emerging Issues
Task Force of the Financial Accounting Standards Board reached a consensus
(Issue 89-4) for a uniform method of accounting for Residual Interests in
collateralized mortgage obligations ("CMOs"). The consensus, among other things,
required Residual Interests to be classified either as "equity" (and be
accounted for under the Equity Method) or as "nonequity" (and be accounted for
under a level yield method referred to as the Prospective Method). The methods
described in Issue 89-4 are essentially the same as those used by the Company.
ACCOUNTING CHANGE - The Company classifies its investments as either
trading investments, available-for-sale investments or held-to-maturity
investments. The Company is not in the business of trading its 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 unimpaired
available-for-sale investments are excluded from earnings and reported as a net
amount in shareholders' equity until realized.
All of the Company's 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 -
7
<PAGE>
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.
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 March 31, 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.
8
<PAGE>
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. Actual results
could differ from those estimates.
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 display 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 income 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:
March 31,
1998 1997
---------------------- -------------------
<S> <C> <C>
Net Loss $(269) $(418)
Net change in unrealized gains (losses)
available for sale investments (31) 154
---------------------- -------------------
Comprehensive income $(300) $(264)
====================== ===================
</TABLE>
NOTE 3 - MORTGAGE CERTIFICATES
Information is presented in the table below as of March 31, 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>
March 31, 1998
CMOT 28 $57,453 $60,056 $ 56,467
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 March 31, December 31,
Residual Series Price 1998 1997
- ---------------------------------------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C>
Nonequity Residual Interests
- ----------------------------
BT 88-1 $1,537 $177 $179
LFR-9 2,589 89 94
CMSC I 8,642 104 104
FHLMC 25 4,934 3 4
FHLMC 21 5,361 3 3
- ---------------------------------------------- ---------------------- --------------------- ----------------------
Total Residual Interests $376 $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 MAR. 31, 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 12,518 8.75% Apr 1, 2018
Feb 16, 1988 1-D 47,492 7,361 8.63% Apr 1, 2018
---------------------------
$100,000 $19,879
- ---------------------------------------------------------------------------------------------------------------------
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 6,707 Zero Coupon Jan 1, 2019
Dec 2, 1988 D 32,850 1,459 Zero Coupon Jan 1, 2019
E 30,000 0 Zero Coupon Jan 1, 2019
R 150 150 Residual Bond Jan 1, 2019
---------------------------
$150,000 $8,316
- ----------------------------------------------------------------------------------------------------------------------
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 29,965 9.45% Feb 1, 2017
======= ======
---------------------------
Series I (CMSC I) $500,000 $29,965
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 33,514 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 $33,521
- -------------------------------------------------------------------------------------------------------------------
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 58,407 9.50% Jan 15, 2020
R 100 6 Residual Bond Jan 15, 2020
---------------------------
$1,000,000 $58,413
======================================================================================================================
</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, 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 March 31,
1998 are set forth below:
<TABLE>
<CAPTION>
EQUITY RESIDUAL INTERESTS
- -------------------------------------------------------------------------------------------------------------
CMO BOND DATA (100% OF ISSUE)
----------------------------------------------------------
NAME OF ISSUER TIS INITIAL MAR. 31, 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>
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 58,994 8.45% Jun 1, 2017
======== --------------------------
May 29, 1987 $500,000 $58,994
===============================================================================================================
</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 MAR.31, 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% $57,453 9.11% 218
Nonequity Residual Interests
- ----------------------------
BT 88-1 Fixed GNMA 9.00% 18,547 9.50% 209
LFR-9 Fixed FNMA 9.50% 8,100 10.21% 230
CMSC I Fixed FNMA 9.50% 28,825 10.13% 201
FHLMC 25 Fixed FHLMC 9.50% 32,956 10.34% 228
FHLMC 21 Fixed FHLMC 9.50% 56,633 10.22% 230
============================================================================================================
</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 March 31, December 31,
and Series Price 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FNMA Series 1992-123 Class S $8,203 $ 1,198 $1,303
Pru Home Mtg Corp Series 1992-7 4,776 381 426
Bear Stearns Mtg Sec Series 1992-1 2,720 112 146
- ------------------------------------------------------------------------------------------------------------------
$ 1,691 $1,875
==================================================================================================================
</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 MAR. 31, 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 - $3,471 8.94% 277
Series 1992-123 (5.67 x
Class S LIBOR)
July 25, 1992
- -------------------------------------------------------------------------------------------------------------
2) Prudential Mar 27, 1992 $4,776 NON 0.5652% $37,382 8.79% 277
Home Mortgage AGENCY
Corporation
Series 1992-7
March 1, 1992
- -------------------------------------------------------------------------------------------------------------
3) Bear Stearns May 28, 1992 $2,720 NON 0.3714% $3,698 9.88% 237
Mortgage AGENCY
Securities, Inc.
Series 1992-1
May 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 March
31, 1998 and December 31, 1997 is presented in the following table:
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 1998 1997
---------------------------------------------- ----------------- ----------------
<S> <C> <C>
Land $ 5,024 $ 5,024
Buildings and improvements 24,186 24,186
Personal property 1,334 1,300
----------------- ----------------
Total 30,544 30,510
Less accumulated depreciation
and amortization (2,000) (1,813)
================= ================
Net $28,544 $28,697
================= ================
</TABLE>
At March 31, 1998, the Company's four multifamily properties had an
overall occupancy of 96%.
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 March 31, 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 March 31, 1998
was 8,317%.
<TABLE>
<CAPTION>
Interest Monthly
Principal Balance Basis of Rate Principal
-----------------
March 31, December 31, Interest March 31, Due and Interest
Property 1998 1997 Rate 1998 Date Payment
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shady Lane $ 1,319,586 $ 1,327,859 Floating 8.375% Dec. 1, 2004 $ 12,063
River Oaks 6,351,732 6,372,237 Fixed 8.36% Apr. 1, 2007 61,862
Villa San Marcos 6,888,069 6,910,481 Fixed 8.31% Apr. 1, 2007 70,597
Four Creeks - I 1,778,777 1,782,994 Fixed 8.16% Dec. 1, 2005 13,521
Four Creeks - II 3,943,975 3,956,808 Fixed 8.31% Apr. 1, 2007 31,649
- ---------------------------------------------------------------------------------------------------------------------
Total $20,282,139 $20,350,379 $189,692
=====================================================================================================================
</TABLE>
13
<PAGE>
NOTE 8 - SHORT-TERM DEBT
At March 31, 1998 the Company's short-term borrowings totaled
$1,742,190. 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 $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.
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.
RESULTS OF OPERATIONS
The Company had a net loss of $269,000, or $0.03 per share, for the
quarter ended March 31, 1998. This compares to a net loss of $418,000, or $0.05
per share, for the quarter ended March 31, 1997. The Company did not pay a
dividend in the first quarter 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.
Income from Residual Interests and Interest Only bonds was $90,000 in
the three months ended March 31, 1998 as compared to $83,000 in the prior year
period as the underlying portfolios remained relatively constant between periods
except for scheduled principal reductions.
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 $38,000 and $98,000 in the
three months ended March 31, 1998 and 1997, respectively. However, operating
income from real estate operations before depreciation and amortization was
$145,000 and $143,000 in the three months ended March 31, 1998 and 1997,
respectively.
14
<PAGE>
For the three months ended March 31, 1998, general and administrative
expense totaled $266,000 as compared to $328,000 in the comparable prior year
period. The decrease is primarily attributable to a reduction in general office
expense and related 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 March 31, 1998 the Company had
borrowings outstanding under these agreements totaling $1,742,190. This debt was
collateralized by some of the Company's Residual Interests and IO Bonds whose
fair values approximated $2 million.
The Company's cash flows for the three months ended March 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
------------------------------------------ ----------------------- ----------------------
<S> <C> <C>
Used in Operating Activities $ (1,281) $ (120)
Used in Financing Activities (4,014) (2,590)
Provided by Investment Activities 5,225 2,675
----------------------- ----------------------
Net Increase in
Cash and Cash Equivalents $ (70) $ (35)
======================= ======================
</TABLE>
At March 31, 1998, the Company had unrestricted cash and cash
equivalents of $115,000.
Over the twelve months ending March 31, 1999, scheduled principal
maturities on the notes payable on real estate amount to $265,000 and are
expected to be funded by cash flow from the Company's multifamily residential
properties. During the three months ended March 31, 1998 and 1997, the income
from real estate operations before depreciation and amortization amounted to
$145,000 and $143,000, respectively. The Company has no significant commitments
for capital expenditures relating to the real estate operations over the twelve
months ended March 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 March 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.
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 March 31, 1998, the Company
had a deficit in working capital of approximately $400,000. 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 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.
15
<PAGE>
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
March 31, 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
May 14, 1998 BY: /s/ Lorraine O. Legg
- ---------------------- -----------------------
Date Lorraine O. Legg, President and
Chief Executive Officer
(Principal Executive Officer)
May 14, 1998 BY: /s/ John E. Castello
- ---------------------- -----------------------
Date John E. Castello, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
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> MAR-31-1998
<CASH> 2,264
<SECURITIES> 58,051
<RECEIVABLES> 587
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 30,544
<DEPRECIATION> 2,000
<TOTAL-ASSETS> 90,664
<CURRENT-LIABILITIES> 3,084
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 10,321
<TOTAL-LIABILITY-AND-EQUITY> 90,664
<SALES> 0
<TOTAL-REVENUES> 2,545
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,321
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,598
<INCOME-PRETAX> (269)
<INCOME-TAX> 0
<INCOME-CONTINUING> (269)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (269)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
