<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 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 November 12, 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
September 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Operations
Three and Nine Months ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 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 13
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 nine months ended September 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 SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in Thousands except Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Mortgage Related Assets
Mortgage Certificates, net $ -- $ 60,433
Residual Interests 276 384
Interest Only (IO) Bonds 952 1,875
Commercial Securitizations 184 184
Reserve for Loss on Investments -- (1,523)
---------------------- ----------------------
Total Mortgage Related Assets 1,412 61,353
---------------------- ----------------------
Operating Real Estate Assets, net 28,301 28,697
---------------------- ----------------------
Other Assets
Cash and Cash Equivalents 51 185
Restricted Cash 274 1,800
Accrued Interest and Accounts Receivable 70 484
Deferred Bond Issuance Costs, net -- 497
Other Assets 720 738
---------------------- ----------------------
Total Other Assets 1,115 3,704
---------------------- ----------------------
Total Assets $ 30,828 $ 93,754
====================== ======================
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES
Collateralized Mortgage Obligations, net $ -- $ 59,008
Accounts Payable and Accrued Liabilities 548 870
Accrued Interest Payable 4 887
Notes Payable on Real Estate 20,139 20,350
Short-term Debt 717 2,010
---------------------- ----------------------
Total Liabilities 21,408 83,125
---------------------- ----------------------
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 (2,112) (2,322)
Retained Deficit (63,172) (61,753)
---------------------- ----------------------
Total Shareholders' Equity 9,420 10,629
---------------------- ----------------------
Total Liabilities and Shareholders' Equity $ 30,828 $ 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 Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------- -----------------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MORTGAGE RELATED ASSETS
Interest
Mortgage Certificates, net $ -- $ 1,484 $ 2,606 $ 4,636
Short-term Investments 1 1 2 1
Residual Interests 5 7 111 16
Interest Only (IO) Bonds 38 85 137 260
Valuation Reserve Adjustments (21) 100 210 335
Loss on Redemption of Investment -- -- (198) --
Gain (Loss) on Sales of Investments (247) -- (268) 442
--------------- -------------- --------------- ---------------
Income from Mortgage Related Assets (224) 1,677 2,600 5,690
--------------- -------------- --------------- ---------------
Collateralized Mortgage Obligations
Interest -- 1,574 3,010 4,945
Administration Fees -- 17 34 51
Deferred Bond Issuance Costs -- 20 79 67
Short-term Debt 15 43 85 134
--------------- -------------- --------------- ---------------
Total Interest and CMO Related Expenses 15 1,654 3,208 5,197
--------------- -------------- --------------- ---------------
REAL ESTATE OPERATIONS
Rental and Other Income 1,024 1,020 3,066 3,027
Operating and Maintenance Expenses (362) (351) (1,079) (1,047)
Depreciation and Amortization (189) (200) (569) (643)
Interest on Real Estate Notes Payable (440) (424) (1,314) (1,290)
Property Taxes (78) (88) (241) (252)
--------------- -------------- --------------- ---------------
Loss from Real Estate Operations (45) (43) (137) (205)
--------------- -------------- --------------- ---------------
OTHER EXPENSES
General and Administrative 257 287 930 1,116
--------------- -------------- --------------- ---------------
Loss Before Minority Interest (541) (307) (1,675) (828)
Minority Interest -- -- 256 --
--------------- -------------- --------------- ---------------
Net Loss ($541) ($307) ($1,419) ($828)
=============== ============== =============== ===============
- ----------------------------------------------------------------------------------------------------------------------------
Net Loss per Share ($0.07) ($0.04) ($0.18) ($0.10)
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>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,419) $(828)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation of Operating Real Estate Assets 618 555
Other Depreciation and Amortization 849 507
Valuation Reserve Provision (956) (335)
Gain (Loss) on Sales of Investments 268 (442)
Loss on Redemption of Investment 198 --
Decrease in Accrued Interest and Accounts Receivable 49 142
Decrease in Prepaid Expenses 93 --
Decrease in Other Assets -- 246
Increase (Decrease) in Accounts Payable and Accrued Liabilities (289) 111
Decrease in Accrued Interest Payable (138) (115)
----------------- ------------------
Net Cash Used in Operating Activities (727) (159)
----------------- ------------------
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTMENT ACTIVITIES
Net Decrease (Increase) in Restricted Cash (288) (160)
Investment in Real Estate Assets (295) (421)
Proceeds from Sales of Investments 1,884 442
Principal Reduction in Mortgage Certificates 9,888 8,278
Principal Reduction in Residual Interests 84 55
Principal Reduction in IO Bonds 444 511
Principal Additions to Commercial Securitizations -- (1)
----------------- ------------------
Net Cash Provided by Investment Activities 11,717 8,704
----------------- ------------------
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Short-term Debt (1,293) (376)
Increase in Notes Payable on Real Estate -- 17,400
Notes Payable on Real Estate -- (17,201)
Principal Payments on Notes Payable on Real Estate (212) (155)
Principal Payments on CMO's (9,619) (8,187)
----------------- ------------------
Net Cash Used in Financing Activities (11,124) (8,519)
----------------- ------------------
Net (Decrease) Increase in Cash and Cash Equivalents (134) 26
Cash and Cash Equivalents at Beginning of Period 185 82
----------------- ------------------
Cash and Cash Equivalents at End of Period $ 51 $ 108
================= ==================
- -------------------------------------------------------------------------------------------------------------------------
</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 nine months ended September 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 September 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 principal 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 loss
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 available-for-sale investments as a component of comprehensive
income.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- -----------------------------------
(in thousands) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Loss $(541) $(307) $(1,419) $(828)
Net change in unrealized gains (losses)
available for sale investments 302 (10) 210 (58)
-------------- -------------- -------------- ----------------
Comprehensive Income (Loss) $(239) $(317) $(1,209) $(886)
============== ============== ============== ================
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company is assessing the impact that
the adoption of SFAS No. 133 will have on its consolidated financial statements.
NOTE 3 - RESIDUAL INTERESTS
Residual Interests are classified as either equity or nonequity.
Presented below is a schedule of the nonequity residual interests and
unconsolidated equity residual interests.
NONEQUITY RESIDUAL INTERESTS
- ----------------------------
(In thousands)
<TABLE>
<CAPTION>
Book Value
-------------------------------------------
Purchase September 30, December 31,
Residual Series Price 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonequity Residual Interests
- ----------------------------
BT 88-1 $1,537 $ 110 $ 179
LFR-9 2,589 57 94
CMSC I 8,642 104 104
FHLMC 25 4,934 3 4
FHLMC 21 5,361 2 3
- -------------------------------------------------------------------------------------------------------------------
Total Residual Interests $ 276 $ 384
===================================================================================================================
</TABLE>
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:
9
<PAGE>
<TABLE>
<CAPTION>
FIXED RATE RESIDUALS
- ------------------------------------------------------------------------------------------------------------------------------
CMO Bond Data (100% of Issue)
----------------------------------------------------------------------
Name of Issuer TIS INITIAL SEP. 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 10,718 8.75% Apr 1, 2018
Feb 16, 1988 1-D 47,492 5,909 8.63% Apr 1, 2018
-------------------------------
$ 100,000 $16,627
- ------------------------------------------------------------------------------------------------------------------------------
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 6,012 Zero Coupon Jan 1, 2019
Dec 2, 1988 D 32,850 780 Zero Coupon Jan 1, 2019
E 30,000 0 Zero Coupon Jan 1, 2019
R 150 150 Residual Bond Jan 1, 2019
-------------------------------
$ 150,000 $ 6,942
- ------------------------------------------------------------------------------------------------------------------------------
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. --------- --------
Series I (CMSC I) Subtotal 88.000% $8,642 I-3(Z) 15,000 25,805 9.45% Feb 1, 2017
Jan 28, 1987 ========= ======== -------------------------------
$ 500,000 $25,805
- ------------------------------------------------------------------------------------------------------------------------------
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 26,623 9.50% Feb 15, 2020
25-H 72,490 0 7.90% Feb 15, 2020
R 100 5 Residual Bond Feb 15, 2020
-------------------------------
$ 500,000 $26,628
- ------------------------------------------------------------------------------------------------------------------------------
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 47,883 9.50% Jan 15, 2020
R 100 5 Residual Bond Jan 15, 2020
-------------------------------
$1,000,000 $47,888
==============================================================================================================================
</TABLE>
EQUITY RESIDUAL INTERESTS - As of December 31, 1997, the Company owned
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
consolidated the assets and liabilities of the equity residual interests when
over 50% equity interest in the trust is held by the Company.
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.
10
<PAGE>
On July 1, 1998, the Company sold the remaining 51% of its ownership
in CMOT-28 for $1,120,000, which resulted in a loss on sale of $247,000. The
net effect on Shareholder's Equity, however, was an increase of $298,000, as a
result of recognizing unrealized losses of $567,000 previously taken on this
investment. The proceeds were used to reduce short-term debt and to provide
operating funds for the Company. As a result of the sale, the assets and
liabilities of CMOT 28 have been eliminated from the consolidated balance
sheet.
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 as of September 30, 1998.
<TABLE>
<CAPTION>
CMO COLLATERAL
- ---------------------------------------------------------------------------------------------------------------
CMO Collateral Data (100% of Issue)
-------------------------------------------------
Weighted Sep. 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>
Nonequity Residual Interests
- ----------------------------
BT 88-1 Fixed GNMA 9.00% $15,442 9.50% 202
LFR-9 Fixed FNMA 9.50% 6,702 10.21% 224
CMSC I Fixed FNMA 9.50% 24,299 10.13% 195
FHLMC 25 Fixed FHLMC 9.50% 25,919 10.32% 221
FHLMC 21 Fixed FHLMC 9.50% 46,464 10.22% 223
===============================================================================================================
</TABLE>
NOTE 4 - INTEREST ONLY (IO) BONDS
IO Bonds include both regular IO Bonds and Inverse IO Bonds. Presented
below is a schedule of the Company's IO Bonds.
INTEREST ONLY (IO) BONDS
- ------------------------
(In thousands)
<TABLE>
<CAPTION>
Book Value
------------------------------------------------
Name and Issuer Purchase September 30, December 31,
and Series Price 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FNMA Series 1992-123 Class S $8,203 $ 819 $1,303
Pru Home Mtg Corp Series 1992-7 4,776 133 426
------------------------------------------------
$ 952 $1,729
===================================================================================================================
</TABLE>
11
<PAGE>
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 Sep. 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 - $ 2,614 8.94% 271
Series 1992-123 (5.67 x
Class S LIBOR)
July 25, 1992
- ------------------------------------------------------------------------------------------------------------
2) Prudential Mar 27, 1992 $4,776 NON 0.5652% $26,304 8.81% 271
Home Mortgage AGENCY
Corporation
Series 1992-7
March 1, 1992
============================================================================================================
</TABLE>
NOTE 5 - SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
The following items were non-cash transactions with regard to the sale
and subsequent de-consolidation of CMOT-28 for the nine months ended September
30:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reduction of Mortgage Certificates $ 51,600 $ --
Reduction of Unamortized Discount on Mortgage Certificates (855) --
Reduction of Mortgage Certificate Reserve for Loss (546) --
Reduction of Restricted Cash on Mortgage Certificates 1,814 --
Reduction of Accrued Interest on CMOs 365 --
Reduction of CMOs (53,103) --
Reduction of Unamortized Discount on CMOs 3,125 --
Reduction of Accrued Interest Payable on CMOs (745) --
Reduction of Minority Interest (1,352) --
</TABLE>
NOTE 6 - OPERATING REAL ESTATE ASSETS
During the year ended December 31, 1995, the Company acquired four
multifamily housing properties in California's Central Valley. The 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
September 30, 1998 and December 31, 1997 is presented in the following table:
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1998 1997
--------------------------------------------------------------------------
<S> <C> <C>
Land $ 5,024 $ 5,024
Buildings and improvements 24,186 24,186
Personal property 1,473 1,300
----------------------------------
Total 30,683 30,510
Less accumulated depreciation
and amortization (2,382) (1,813)
Net $28,301 $28,697
==================================
</TABLE>
At September 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 September 30, 1998 and
December 31, 1997. The Shady Lane loan remains in the name of the seller of the
property and will
12
[CAPTION]
<PAGE>
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 September 30, 1998 was 8.317%.
<TABLE>
<CAPTION>
Principal Balance Interest Monthly
------------------------------------ Basis of Rate Principal
September 30, December 31, Interest Sep. 30, Due and Interest
Property 1998 1997 Rate 1998 Date Payment
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shady Lane $ 1,300,469 $ 1,327,859 Floating 8.375% Dec. 1, 2004 $ 12,063
River Oaks 6,309,418 6,372,237 Fixed 8.36% Apr. 1, 2007 61,862
Villa San Marcos 6,841,828 6,910,481 Fixed 8.31% Apr. 1, 2007 70,597
Four Creeks - I 1,770,108 1,782,994 Fixed 8.16% Dec. 1, 2005 13,521
Four Creeks - II 3,917,498 3,956,808 Fixed 8.31% Apr. 1, 2007 31,649
- ----------------------------------------------------------------------------------------------------------------------------
Total $20,139,321 $20,350,379 $189,692
============================================================================================================================
</TABLE>
NOTE 8 - SHORT-TERM DEBT
At September 30, 1998 the Company's short-term borrowings totaled
$717,000. Short-term borrowings consisted of a repurchase agreement with Bear
Stearns & Co. The repurchase agreement borrowing had a weighted average interest
rate of 7.15%. The repurchase agreement had an initial term of one month,
renewed on a month-to-month basis, and is collateralized by some of the
Company's Residual Interests and IO Bonds whose fair values approximated
$952,000 and have a floating rate of interest which is tied to the one month
LIBOR rate. The Company has no committed lines of credit.
NOTE 9 - SUBSEQUENT EVENT
On October 23, 1998, the Company reached a definitive agreement to sell
the River Oaks apartment complex in Hanford, California, for a price of
$8,170,000. The final price is subject to Board approval. The expected closing
date is November 23, 1998, and the sale price is expected to be at or near book
value.
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.
13
<PAGE>
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 software 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. Furthermore, the Company
is currently reviewing the impact of Year 2000 compliance issues that outside
vendors may have on the Company's operations.
RESULTS OF OPERATIONS
The Company had a net loss of $541,000, or $0.07 per share, for the quarter
ended September 30, 1998. This compares to a net loss of $307,000, or $0.04 per
share, for the quarter ended September 30, 1997. For the nine months ended
September 30, 1998, the Company had a net loss of $1,419,000 or $0.18 per share.
This compares to a net loss of $828,000 or $0.10 per share for the nine months
ended September 30, 1997. The Company did not pay a dividend in the first nine
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. On July 1, 1998, the Company sold the remaining 51% of its ownership in
CMOT-28 REMIC, for $1,120,000, which resulted in a loss on sale of $247,000. The
net effect on Shareholder's Equity, however, was an increase of $298,000, as a
result of recognizing unrealized losses of $567,000 previously taken on this
investment. As a result of this sale, the assets and liabilities of CMOT-28 have
been eliminated from the consolidated balance sheet.
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 redemption resulted in a Loss on Redemption 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.
The Company had a net loss of $45,000 and $43,000 in Real Estate
operations for the quarters ended September 30, 1998 and 1997, respectively.
Real Estate operations showed a loss of $137,000 and $205,000 in the nine months
ended September 30, 1998 and 1997, respectively. However, operating income from
real estate operations before depreciation and amortization was $481,000 and
$438,000 in the nine months ended September 31, 1998 and 1997, respectively.
General and administrative expenses for the quarters ended September 30,
1998 and 1997 were $257,000 and $287,000, respectively. For the nine months
ended September 30, 1998, general and administrative expense totaled $930,000 as
compared to $1,116,000 in the comparable prior year period. The decrease is
primarily attributable to a reduction in legal costs and annual meeting
expenses.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has agreements with one investment banking firm to
borrow funds under repurchase agreements. At September 30, 1998 the Company had
borrowings outstanding under this agreement totaling $717,000. This debt was
collateralized by some of the Company's residual interests and IO Bonds whose
fair values approximated $952,000.
The Company's cash flows for the six months ended September 30, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
----------------------------------------------------------------------------------
<S> <C> <C>
Used in Operating Activities $ (727) $ (159)
Provided by Investment Activities 11,717 8,704
Used in Financing Activities (11,124) (8,519)
---------------------------------------------
Net Increase (Decrease) in
Cash and Cash Equivalents $ (134) $ 26
=============================================
</TABLE>
At September 30, 1998, the Company had unrestricted cash and cash equivalents of
$51,000.
Over the twelve months ending September 30, 1999, scheduled principal
maturities on the notes payable on real estate, except for the Shady Lane
property note payable, amount to $263,345 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 nine months ended September 30, 1998 and 1997, the income
from real estate operations before depreciation and amortization amounted to
$481,000 and $438,000, respectively. The Company has no significant commitments
for capital expenditures relating to the real estate operations over the twelve
months ended September 30, 1999 and anticipates that any capital expenditures or
repair and maintenance activities would be funded from cash generated from real
estate activities.
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 September 30, 1998, the
Company had a deficit in working capital of approximately $106,000. 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 cash requirements during the
next 12 months 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 during the next 12 months; 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.
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.
The Company has no committed lines of credit.
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 September
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
November 13, 1998 By: /s/ Lorraine O. Legg
-------------------------- --------------------
Date Lorraine O. Legg, President and
Chief Executive Officer
(Principal Executive Officer)
November 13, 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> SEP-30-1998
<CASH> 325
<SECURITIES> 1,412
<RECEIVABLES> 70
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 30,683
<DEPRECIATION> 2,382
<TOTAL-ASSETS> 30,828
<CURRENT-LIABILITIES> (1,269)
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 9,412
<TOTAL-LIABILITY-AND-EQUITY> 30,828
<SALES> 0
<TOTAL-REVENUES> 5,666
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,516
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,895
<INCOME-PRETAX> (1,419)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,419)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,419)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
