<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, 1999
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, 1999
--------------------- --------------------------------
$.001 Par Value 8,893,250 Shares
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY
Index
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements (Unaudited) Page Number
<S> <C>
Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Operations
Three months and Nine Months ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders. 20
Item 6. Exhibits and Reports on Form 8-K 20
</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 1998 Form 10-K of TIS Mortgage Investment
Company (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, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
3
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in Thousands except Share Data)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Mortgage Related Assets
Residual Interests $ 238 $ 284
Interest Only (IO) Bonds -- 840
Commercial Securitizations -- 184
-------- --------
Total Mortgage Related Assets 238 1,308
-------- --------
Operating Real Estate Assets, net 27,902 20,172
-------- --------
Other Assets
Cash and Cash Equivalents 91 2,767
Restricted Cash 601 140
Accrued Interest and Accounts Receivable, Net 190 33
Amortizable Costs, Net 346 351
Prepaid Expenses 361 285
-------- --------
Total Other Assets 1,589 3,576
-------- --------
Total Assets $ 29,729 $ 25,056
======== ========
- -------------------------------------------------------------------------------------------------------
LIABILITIES
Accounts Payable and Accrued Liabilities $ 1,993 $ 473
Due to Trustee -- 1,218
Accrued Interest Payable 43 116
Revolving Line of Credit 375 --
Notes Payable on Real Estate 19,792 13,794
Short-term Debt -- 667
-------- --------
Total Liabilities 22,203 16,268
-------- --------
SHAREHOLDERS' EQUITY
Common Stock, par value $.001 per share;
100,000,000 shares authorized; 8,893,250 and
8,105,880 shares issued and outstanding on
September 30, 1999 and December 31, 1998,
respectively. 9 8
Additional Paid-in Capital 76,467 74,696
Accumulated Other Comprehensive Loss (54) (11)
Retained Deficit (68,896) (65,905)
-------- --------
Total Shareholders' Equity 7,526 8,788
-------- --------
Total Liabilities and Shareholders' Equity $ 29,729 $ 25,056
======== ========
- -------------------------------------------------------------------------------------------------------
</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
--------------------------------- -----------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MORTGAGE RELATED ASSETS
Interest
Mortgage Certificates, net $ -- $ -- $ -- $ 2,606
Short-term Investments 1 1 7 2
Residual Interests 9 5 25 111
Interest Only (IO) Bonds 32 38 86 137
Valuation Reserve Reduction -- (21) -- 210
Gain (Loss) on Retirement of Investment 449 -- 449 (198)
Gain (Loss) on Sales of Investments -- (247) 8 (268)
-------------- -------------- --------------- ---------------
Income from Mortgage Related Assets 491 (224) 575 2,600
-------------- -------------- --------------- ---------------
INTEREST AND CMO RELATED EXPENSES
Collateralized Mortgage Obligations
Interest -- -- -- 3,010
Administration Fees -- -- -- 34
Deferred Bond Issuance Costs -- -- -- 79
Short-term Debt 16 15 67 85
Total Interest and CMO Related Expenses 16 15 67 3,208
-------------- -------------- --------------- ---------------
REAL ESTATE OPERATIONS
Rental and Other Income 944 1,024 2725 3,066
Operating and Maintenance Expenses (298) (362) (868) (1,079)
Depreciation and Amortization (173) (189) (501) (569)
Interest on Real Estate Notes Payable (507) (440) (1,489) (1,314)
Property Taxes (83) (78) (237) (241)
Loss from Real Estate Operations (117) (45) (370) (137)
-------------- -------------- --------------- ---------------
OTHER EXPENSES
General and Administrative 257 229 823 763
Legal Expense 69 28 926 167
Repurchase of Common Stock in Excess of Market
-- -- 1,377 --
-------------- -------------- --------------- ---------------
Total Other Expenses 326 257 3,126 930
Income (Loss) Before Minority Interest $ 32 ($ 541) ($ 2,988) ($ 1,675)
Minority Interest -- -- -- 256
-------------- -------------- --------------- ---------------
Net Income (Loss) $ 32 ($ 541) ($ 2,988) ($ 1,419)
============== ============== =============== ===============
- ----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) per Share $0.003 ($0.07) ($0.34) ($0.18)
Weighted Average Shares Outstanding 9,235 8,106 8,806 8,106
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($ 2,988) ($ 1,419)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation of Operating Real Estate Assets 501 618
Depreciation and Amortization 95 849
Valuation Reserve Provision -- (956)
Gain on Sales of Investments 8 268
Loss on Retirement of Investment -- 198
Decrease (Increase) in Accrued Interest and Accounts Receivable (170) 49
Decrease (Increase) in Prepaid Expenses (66) 93
Increase (Decrease) in Accounts Payable and Accrued Liabilities 419 (289)
Increase (Decrease) in Accrued Interest Payable 23 (138)
----------------- -------------------
Net Cash Used in Operating Activities (2,178) (727)
----------------- -------------------
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTMENT ACTIVITIES
Net Increase in Restricted Cash (170) (288)
Investment in Real Estate Assets -- (295)
Additions to Real Estate Assets (95) --
Proceeds from Sale of Investments -- 1,884
Principal Reduction in Mortgage Certificates -- 9,888
Principal Reduction in Residual Interests 47 84
Principal Reduction in IO Bonds 840 444
Principal Reduction in Commercial Securitization 184 --
Purchase of TISMIC Shares (671) --
Net Cash Received in Purchase of Novato Markets 16 --
----------------- -------------------
Net Cash Provided by Investment Activities 151 11,717
----------------- -------------------
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Due to Trustee (371) --
Decrease in Short-term Debt (667) (1,293)
Increase in Notes Payable on Real Estate 183 --
Increase in Revolving Line of Credit 375 --
Principal Payments on Notes Payable on Real Estate (169) (212)
Principal Payments on CMO's -- (9,619)
----------------- -------------------
Net Cash Used in Financing Activities (649) (11,124)
----------------- -------------------
Net Decrease in Cash and Cash Equivalents (2,676) (134)
Cash and Cash Equivalents at Beginning of Period 2,767 185
----------------- -------------------
Cash and Cash Equivalents at End of Period $ 91 $ 51
================= ===================
- --------------------------------------------------------------------------------------------------------------------------
</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, 1999 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, 1998 and the Company's Form
10-Q's for the respective periods ended March 31, 1999 and June 30, 1999.
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. In addition to the TIS Line (see
Note 7), management is currently evaluating the Company's alternatives to fund
its on-going cash requirements. Such alternatives include, among other
things, consideration of (i) the sale of real property, (ii) the sale of
Structured Securities, (iii) reducing general and administrative expenses, (iv)
refinancing existing debt, and (v) entering into joint venture arrangements with
third parties. Management can provide no assurances as to the timing or ultimate
closure of any of these alternatives. These strategies are dependant on the
economic operating environment including volatility of interest rates and the
ability for the California Central Valley apartment rental market to absorb
rental increases. The Company believes that the proceeds from the TIS Line,
together with its on-going real estate operations and mortgage related
investment portfolio will provide sufficient liquidity for it to continue as a
going concern for the next twelve 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.
Note 2 - Summary of Significant Accounting Policies
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.
7
<PAGE>
Basic Net Income (Loss) Per Share - Basic net income (loss) per share is
based upon the weighted average number of shares of Common Stock outstanding.
For those periods where the Company incurred a loss, 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.
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. During the nine months ended
September 30, 1999, the Company acquired real estate and assumed the underlying
debt by issuing shares of the Company's common stock in a non-cash transaction.
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.
New Accounting Pronouncement - Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" is
expected to be adopted by the Company effective January 1, 2000. This statement
establishes standards for accounting for derivative instruments and requires
that an entity recognize derivatives as assets or liabilities in the statement
of financial position and measure those assets and liabilities at fair value.
Management has not fully assessed the impact of adoption of the statement but
does not anticipate it will have a significant impact on the presentation of the
Company's statements of financial position.
Reclassification - Certain fiscal 1988 items have been
reclassified to conform to the current period presentation.
Note 3 - Residual Interests
Presented below is a schedule of the residual interests owned by the
Company.
RESIDUAL INTERESTS
- ------------------
(In thousands)
<TABLE>
<CAPTION>
Book Value
-------------------------------
Purchase September 30, December 31,
Residual Series Price 1999 1998
- --------------------------------------------------------------------------------------
Nonequity Residual Interests
- ----------------------------
<S> <C> <C> <C>
BT 88-1 $1,537 $ 151 $ 176
LFR-9 2,589 68 89
CMSC I 8,642 14 14
FHLMC 25 4,934 2 3
FHLMC 21 5,361 2 2
- --------------------------------------------------------------------------------------
Total Residual Interests $ 237 $ 284
======================================================================================
</TABLE>
8
<PAGE>
CMO Bonds in Residual Interests - Certain characteristics of the CMO Bonds
in the Company's Residual Interests are on the following tables:
RESIDUAL INTERESTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CMO Bond Data (100% of Issue)
-----------------------------------------------------------------------
Name of Issuer TIS Initial Sept. 30, 1999
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 8,158 8.75% Apr 1, 2018
Feb 16, 1988 1-D 47,492 3,422 8.63% Apr 1, 2018
---------------------------
$ 100,000 $11,580
- ----------------------------------------------------------------------------------------------------------------------------------
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 4,388 Zero Coupon Jan 1, 2019
Dec 2, 1988 D 32,850 0 Zero Coupon Jan 1, 2019
E 30,000 0 Zero Coupon Jan 1, 2019
R 150 150 Residual Bond Jan 1, 2019
---------------------------
$ 150,000 $ 4,538
- ----------------------------------------------------------------------------------------------------------------------------------
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 16,997 9.45% Feb 1, 2017
====== ======
Series I (CMSC I) $ 500,000 $16,997
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 16,839 9.50% Feb 15, 2020
25-H 72,490 0 7.90% Feb 15, 2020
R 100 3 Residual Bond Feb 15, 2020
---------------------------
$ 500,000 $16,842
- ----------------------------------------------------------------------------------------------------------------------------------
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 31,547 9.50% Jan 15, 2020
R 100 4 Residual Bond Jan 15, 2020
---------------------------
$1,000,000 $31,551
==================================================================================================================================
</TABLE>
9
<PAGE>
CMO Collateral - The table below sets forth certain characteristics of the
mortgage collateral pledged to secure each CMO in which the Company holds a
Residual Interest.
<TABLE>
<CAPTION>
CMO COLLATERAL
- -------------------------------------------------------------------------------------------------------------------
CMO Collateral Data (100% of Issue)
------------------------------------------------
Weighted Sept. 30, 1999 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% 10,688 9.50% 190
LFR-9 Fixed FNMA 9.50% 4,423 10.21% 209
CMSC I Fixed FNMA 9.50% 16,365 10.134 182
FHLMC 25 Fixed FHLMC 9.50% 16,532 10.34% 206
FHLMC 21 Fixed FHLMC 9.50% 30,209 10.22% 210
===================================================================================================================
</TABLE>
Note 4 - Interest Only (IO) Bonds
On March 4, 1999, the Company sold its interest in its IO Bond, FNMA Series
1992-123 S for $782,879. This sale generated a gain of approximately $8,000.
The Company's investment in Prudential Home Mortgage Corp Series 1992-7 is past
its expected redemption date and is therefore carried at a zero value.
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 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
FNMA Series 1992-123 Class S $8,203 $ 0 $ 809
Pru Home Mtg Corp Series 1992-7 4,776 0 31
- --------------------------------------------------------------------------------
$ 0 $ 840
================================================================================
</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 Sept. 30, 1999 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) Prudential Mar 27, 1992 $ 4,776 NON 0.5652% $ 14,296 9.04% 258
Home Mortgage AGENCY
Corporation
Series 1992-7
March 1, 1992
- --------------------------------------------------------------------------------------------------------------
==============================================================================================================
</TABLE>
10
<PAGE>
Note 5 - 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. During 1998, one property was sold.
On February 2, 1999, the Company acquired all the shares of Novato Markets,
Inc. ("Novato") from Pacific Securitization, Inc., ("Pacific"). Novato, through
its wholly owned subsidiary P-SUB I, Inc. ("PSUB-I") owns two shopping centers
in Northern California.
The carrying value of operating real estate assets at September 30, 1999
and December 31, 1998 is presented in the following table:
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1999 1998
-------------------------------------------------------------------
<S> <C> <C>
Land $ 5,985 $ 4,120
Buildings and improvements 23,204 16,920
Personal property 985 899
------------------------------
Total 30,174 21,939
Less accumulated depreciation
and amortization (2,272) (1,767)
------------------------------
Net $27,902 $20,172
==============================
</TABLE>
At September 30, 1999, the Company's three multifamily properties had an
overall occupancy of 92%. The shopping centers had one vacancy representing 2%
of the total rentable square footage.
Note 6 - Notes Payable on Real Estate
As part of the 1995 acquisition of multifamily residential properties,
existing secured debt totaling $18,675,000 was assumed. In addition, new secured
debt of $1,815,000 was obtained in 1995. In August 1996, the River Oaks and Four
Creeks - II mortgage notes payable matured and were retired using the proceeds
from a new mortgage note in the principal amount of $11,235,000 (the "Interim
Note"). On March 24, 1997, the Company obtained permanent financing with an
insurance company (the "Permanent Financing"). The total loan proceeds from the
Permanent Financing amounted to $17,400,000 and, after certain costs and fees,
were used to retire the then-outstanding principal and interest on the Interim
Note of $11,235,000 and the mortgage note on Villa San Marcos of $5,965,884. The
Permanent Financing comprises three deeds of trust and an assignment of rents on
Four Creeks - II, River Oaks and Villa San Marcos. The term of each of the
underlying Mortgage Loans is ten years with a fixed annual interest rate of
8.36% for River Oaks and 8.31% for the others. The mortgages comprising the
Permanent Financing may not be retired during the first five years and are
subject to a prepayment penalty if prepaid after the fifth year.
11
<PAGE>
On December 23, 1998 the Company sold its interest in River Oaks and the
purchaser assumed the mortgage balance of approximately $6.3 million. The Shady
Lane loan remains in the name of the seller of the property and will continue to
remain so until refinanced. The Company is servicing the debt and receives all
of the economic benefits from Shady Lane.
On February 2, 1999, the Company acquired through the purchase of stock of
Novato Markets, Inc. the ownership of a shopping center located in Rohnert Park,
California, named Mountain Shadows Plaza, and a shopping center in Petaluma,
California, named Midtown Center. These shopping centers were subject to
existing secured debt totaling $5,984,000 at acquisition. This financing is at a
rate of 15.0% of which 10% is paid each month and the remaining 5.0% accrues to
the principal balance of the loan. The maturity date of this loan is June 1,
1999 and may be extended at the option of the borrower through June 1, 2000. The
Company has extended this loan on a month-to-month basis while it is negotiating
a refinance of the loan. The Company expects this refinancing to be complete in
the fourth quarter of 1999.
The following table summarizes the debt outstanding on the properties as of
September 30, 1999 and December 31, 1998, respectively.
<TABLE>
<CAPTION>
Principal Balance Interest Monthly
----------------- Basis of Rate Principal
September 30, Dec. 31, Interest Sept. 30, Due and Interest
Property 1999 1998 Rate 1999 Date Payment
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shady Lane $ 1,268,056 $ 1,292,145 Floating 8.69% Dec. 1, 2004 $ 12,063
VillaSan Marcos 6,743,512 6,825,984 Fixed 8.31% Apr. 1, 2007 70,597
Four Creeks - I 1,751,597 1,767,100 Fixed 8.16% Dec. 1, 2005 13,521
Four Creeks - II 3,861,140 3,908,426 Fixed 8.31% Apr. 1, 2007 31,649
Novato Markets 6,167,541 -- Fixed 15.00% June 1, 1999 (1)
- --------------------------------------------------------------------------------------------------------
Total $19,791,846 $13,793,655 $127,830
========================================================================================================
</TABLE>
(1) Payment on the Novato Markets Loan is interest only monthly at a pay
rate of 10% annual interest. Interest accrues to the unpaid balance at a
5% annual rate.
12
<PAGE>
Note 7 - Short-Term Debt
At September 30, 1999 the Company had no short-term borrowings. As of
December 31, 1998, short-term borrowings totaled $667,000 and consisted of a
repurchase agreement with Bear Stearns & Co. collateralized by some of the
Company's IO Bonds. The repurchase agreement had an initial term of one month,
was renewed on a month-to-month basis and was paid off on March 4, 1999 in
conjunction with the sale of FNMA 92-123.
In April of 1999, the Company entered into a financing agreement with TIS
Financial Services, Inc., (the "Former Manager"), whereby the Former Manager
extended a revolving line of credit of $1,000,000 to the Company (the "TIS
Line"). The Former Manager and the Company have common ownership and executive
officers and as such are related parties. Credit support to the Former Manager
includes guaranteed loans by a bank and a board member of the Company in support
of the TIS Line to the Company. This line is to provide working capital to the
Company. This revolving line of credit is for a term of one year, is at the rate
of prime plus one and one half percent and is partially secured by the Company's
ownership in Bankers Trust series 1988-1 Residual Interest Certificate. Payment
on the line of credit can be accelerated on certain events, including a change
in control of the Company in which certain officers of the Company are removed
or in which a majority of the Board is changed. As of September 30, 1999, the
Company had drawn down $375,000 on this line.
Note 8. Funds Due to Trustee
During the fourth quarter of 1998, the Trustee for Bankers Trust Series
1988-1 (the "Trustee"), a nonequity residual interest investment of the Company,
inadvertently deposited approximately $1.2 million in the Company's accounts.
Such amount is reflected within cash and cash equivalents and due to trustee on
the accompanying consolidated balance sheet at December 31, 1998. In March 1999,
the Company repaid $600,000 of such amount to the Trustee. On March 11, 1999,
the Trustee filed an action in the United States District against the Company
for alleged breach of contract, common count and conversion. On May 11, 1999 the
Company and the Trustee reached settlement and agreed upon a plan of repayment
whereby the Company paid $250,000 upon settlement and agreed to pay the balance
in July, 1999. This balance of approximately $371,000 was paid on July 23, 1999.
In addition, the Company paid interest at the Federal Funds rate from December
21, 1998 to May 11, 1999 and at a rate of 10% thereafter.
13
<PAGE>
Note 9. 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: Nine Months Ended:
(In thousands) September 30 September 30
1999 1998 1999 1998
------------------------- --------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 32 $ (541) $ (2,988) $ (1,419)
Net change in unrealized gains
(losses)
available for sale investments (491) (61) (65) 210
------------------------- --------------------------
Comprehensive Loss $ (459) $ (602) $ (3,053) $ (1,209)
========================= ==========================
</TABLE>
Note 10. Segment Data
The Company's operations consist of investments in structured securities
and a portfolio of multifamily residential housing. Each activity represents an
operating segment as defined by Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information and
financial results of each are reported and monitored by the Company. The
investments in structured securities are comprised primarily of mortgage related
assets consisting of both equity and non-equity residual interest instruments
and bond and REMIC based interest only strips. The real estate portfolio
consists of multifamily apartment buildings located in the California Central
Valley region and family shopping centers in Northern California. Units of each
of the apartment buildings are rented to residential tenants on either a month-
to-month basis or for terms of one year or less. The spaces in the family
shopping centers are leased to tenants over various terms.
The accompanying condensed consolidated Balance Sheets and Statements of
Operations are segregated according to the related operating segments.
Note 11. Commercial Securitizations
On July 1, 1999 the Company received $633,209 proceeds from redemption of
its ownership of Prudential Mortgage Series 93-6, Classes, B, C and D. These
interests represent the Company's investments in Commercial Securitizations.
This redemption resulted in a gain on retirement of investment of $449,000.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
In addition to historical information, this report includes forward-looking
statements regarding management's beliefs, projections and assumptions
concerning future results and events. These forward-looking statements may also,
but do not necessarily, include words such as "believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions. Forward-
looking statements are not guarantees. They involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such factors include, among other things, results from
investments of the Company, fluctuations in interest rates, deterioration in
asset and credit quality, changes in the availability of capital leading to
among other things insufficient cash and liquidity, changes in business strategy
or development plans, general economic or business conditions and the other
factors discussed in "Risk Factors" and "Factors Which May Affect Future
Results" in the Company's Annual Report on Form 10-K for the year ended December
31, 1998. Given these risks and uncertainties, readers are cautioned not to
place undue reliance on any forward-looking statements, which speak as of the
date hereof. The Company has no intention and undertakes no obligation to update
any forward-looking statement or to publicly announce the results of any
revision of any forward-looking statement to reflect future developments or
events.
RESULTS OF OPERATIONS
The Company had net income of $32,000, or $0.003 per share and a net loss
of $2,988,000 or $0.34 per share, for the quarter and nine months ended
September 30, 1999, respectively. This compares to net losses of $541,000, or
$0.07 per share and $1,419,000 or $0.18 per share, for the quarter and nine
months ended September 30, 1998, respectively. The Company did not pay a
dividend in the first nine months of either year.
There was no interest income from mortgage certificates in the first nine
months of 1999 due to the sale of CMOT 28 during 1998. There was also no
interest expense related to Collateralized Mortgage Obligations, administration
fees or amortization of deferred bond issuance costs in the first nine months of
1999 due to this sale of CMOT-28.
Income from Residual Interests and Interest Only bonds was $111,000 in the
nine months ended September 30, 1999 as compared to $248,000 in the prior year
period. The decline is due primarily to the sale of FNMA 92-123 in the first
quarter of 1999.
15
<PAGE>
On July 1, 1999 the Company received $633,209 as redemption proceeds from
retirement of its ownership of Prudential Mortgage Series 93-6, Classes, B, C
and D. This redemption resulted in a gain on retirement of investment of
$481,000.
On March 4, 1999, the Company sold its interest in its IO Bond, FNMA Series
1992-123 S for $782,879. This sale generated a gain of approximately $8,000. The
Company used $616,000 of the proceeds to retire its short-term debt.
Real Estate operations generated a loss of $370,000 and $137,000 in the
nine months ended September 30, 1999 and 1998, respectively. The major reason
for the increased loss is the increase in interest expense from the addition of
the notes payable for the Novato Markets shopping centers.
For the nine months ended September 30, 1999, general and administrative
expense totaled $823,000 as compared to $763,000 in the comparable prior year
period. The increase is primarily attributable to costs related to the election
contest in connection with the 1999 stockholders meeting.
For the nine months ended September 30, 1999, legal expense totaled
$926,000 as compared to $167,000 in the nine months ended September 30, 1998.
The increase was primarily due to legal expenses related to the acquisition of
Novato Markets and the purchase of shares from Turkey Vulture Fund XIII, Ltd.
and its affiliates, described in the Company's Current Report on Form 8-K dated
February 2, 1999, as amended on April 5, and June 1, 1999; the election contest
in connection with the 1999 annual meeting of stockholders; and the litigation
concerning The Bank of New York, Henry G. Elkins, Jr., and Frederick G. Tobin,
described in Part II, Item 4 below.
The stock purchase expense on the accompanying condensed consolidated
statement of operations for the nine months ended September 30, 1999 relates to
the purchase of shares from Turkey Vulture Fund XIII, Ltd. In accordance with
generally accepted accounting principles, the Company recorded the share
purchase transaction by allocating the total cash purchase amount of $2,048,250
between additional paid-in capital on the accompanying condensed consolidated
balance sheet in the amount of $670,881, representing the product of the number
of shares purchased times the closing price of the Company's shares on February
1, 1999, with the balance, $1,377,369, charged to stock purchase expense.
16
<PAGE>
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, mortgage instruments,
multifamily residential properties and other real estate investments.
In April of 1999, the Company entered into a financing agreement with TIS
Financial Services, Inc., the Former Manager, whereby the Former Manager
extended a revolving line of credit of $1,000,000 to the Company. This line is
to provide working capital to the Company. This revolving line of credit is for
a term of one year, is at the rate of prime plus one and one half percent and is
partially secured by the Company's ownership in Bankers Trust series 1988-1
Residual Interest Certificate. Payment on the line of credit can be accelerated
on certain events, including a change in control of the Company in which certain
officers of the Company are removed or in which a majority of the Board is
changed. As of September 30, 1999, the Company had drawn down $375,000 on this
line.
The Company's cash flows for the nine months ended September 30, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
-------------------------------------------------------------
<S> <C> <C>
Used in Operating Activities $ (2,178) $ (727)
Used in Financing Activities (649) (11,124)
Provided by Investment Activities 151 11,717
-----------------------
Net Decrease in Cash and
Cash Equivalents ($ 2,676) ($ 134)
=======================
</TABLE>
At September 30, 1999, the Company had unrestricted cash and cash
equivalents of $91,000 and accounts payable and accrued liabilities of
approximately $1,993,000.
Over the twelve months ending December, 1999, scheduled principal
maturities on the notes payable on multifamily real estate amount to
approximately $175,000 and are expected to be funded by cash flow from the
Company's multifamily residential properties, from mortgage bond redemption
proceeds and from borrowing sources available to the Company. During the nine
months ended September 30, 1999 and 1998, the income from real estate operations
before depreciation and amortization amounted to $131,000 and $432,000,
respectively. The Company has no significant commitments for capital
expenditures relating to the real estate operations over the twelve months ended
December 31, 1999 and anticipates that any capital expenditures or repair and
maintenance activities would be funded from cash generated from real estate
activities. The Company expects to commence construction on 126 units of
apartments to be built on the ten acres of land adjacent to the Villa San Marcos
Apartments in Fresno, California. This construction is expected to be funded by
a construction loan.
17
<PAGE>
The Company expects to retire the approximately $6 million in debt assumed with
the acquisition of Novato Markets during the fourth quarter of 1999 and replace
it with permanent financing however, the Company may, at its option, extend the
current loan to June 1, 2000.
On May 11, 1999 the Company and the Trustee reached settlement and agreed
upon a plan of repayment of the funds balance due to Trustee whereby the Company
paid $250,000 upon settlement and agreed to pay the balance in July, 1999. This
balance of approximately $371,000 was paid on July 23, 1999. In addition, the
Company paid interest at the Federal Funds rate from December 21, 1998 to May
11, 1999 and at a rate of 10% thereafter.
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. In April 1999, the Company
obtained a $1,000,000 revolving line of credit from the Former Manager of the
Company for working capital purposes. In addition to the TIS Line, management is
currently evaluating the Company's alternatives to fund its on-going cash
requirements. Such alternatives include, among other things, consideration of
(i) the sale of real property, (ii) the sale of Structured Securities, (iii)
reducing general and administrative expenses, (iv) refinancing existing debt,
and (v) entering into joint venture arrangements with third parties. Management
can provide no assurances as to the timing or ultimate closure of any of these
alternatives. These strategies are dependant on the economic operating
environment including volatility of interest rates and the ability for the
California Central Valley apartment rental market to absorb rental increases.
The Company believes that the proceeds from the TIS Line, together with its on-
going real estate operations and mortgage related investment portfolio will
provide sufficient liquidity for it to continue as a going concern for the next
twelve 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.
YEAR 2000 READINESS DISCLOSURES
The Company's State of Readiness. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to identify a
year in the date field. Consequently, computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This issue, if not properly addressed, could cause systems to fail or
create erroneous results on or after the Year 2000.
Year 2000 issues impact both the Company's information technology ("IT")
systems, such as its computer hardware and software, and its non-IT systems,
such as its utilities, telephones, fax machines, security systems and emergency
communications. Year 2000 issues may also affect the Company's vendors,
suppliers and lessees.
18
<PAGE>
The Company uses a number of computer software programs and operating
systems, including applications used in financial business systems and various
administrative functions. The Company is in the process of identifying its
computer hardware and software applications that are not yet "Year 2000"
compliant
Costs of Addressing the Company's Year 2000 Issues. Given information known
at this time about whether the Company's systems are Year 2000 compliant,
coupled with the Company's normal course-of-business efforts to upgrade or
replace systems as necessary, management does not expect Year 2000 compliance
costs to have a material adverse effect on the Company's liquidity or ongoing
results of operations. The total cost of the Company's plan to address the Year
2000 issue, including estimates of personnel costs and hardware and software
upgrades, is currently estimated to be approximately $50,000.
Risks of the Company's Year 2000 Issues. A failure of the Company's
critical systems to be Year 2000 compliant could cause a substantial disruption
to the Company's operations, including the ability to conduct its business.
Third-party vendors and suppliers on which the Company depends, including
telecommunications and electrical power, could be interrupted if such third-
parties are not Year 2000 compliant. As a result, the Company would be unable to
operate normally, which could have a material adverse impact on the Company.
Lessees of the Company's real properties may be unable to pay their rent and
comply with their other lease obligations, if their businesses or operations are
disrupted. Such failures could impair the quality of the Company's real estate
portfolio and adversely affect its liquidity and financial condition.
Notwithstanding any efforts of the Company to address the Year 2000
problem: (1) the Company's remediation efforts may not effectively address all
Year 2000 issues or achieve complete Year 2000 compliance; (2) the actual time
and cost to prepare the Company for Year 2000 compliance may substantially
exceed estimates; and (3) the systems of vendors, suppliers and lessees on which
the Company's operations directly or indirectly rely may not be timely
converted. In any such event, the Company's financial condition, results of
operations and liquidity could be materially adversely affected.
The Company's Contingency Plan. Management has identified manual operating
procedures for certain of its critical operations, to address what it currently
believes to be most reasonably likely scenarios regarding Year 2000 compliance
issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Reference is made to Item 7A of the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 for information about market risk, which
Item 7A is incorporated herein by reference. There have been no material changes
in this information.
19
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings
-----------------
Previously reported in the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1999.
ITEM 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Previously reported in the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1999.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit No.
-----------
27 Financial Data Schedule
(b) No Reports of Form 8-K were filed during the quarter ended September
30, 1999.
20
<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 15, 1999 BY: /s/ Lorraine O. Legg
----------------- --------------------
Date Lorraine O. Legg, President and
Chief Executive Officer
(Principal Executive Officer)
November 15, 1999 BY: /s/ John E. Castello
----------------- --------------------
Date John E. Castello, Executive Vice
President and Chief Financial
Officer (Principal Financial
Officer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 91
<SECURITIES> 238
<RECEIVABLES> 190
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 30,174
<DEPRECIATION> (2,272)
<TOTAL-ASSETS> 29,729
<CURRENT-LIABILITIES> 2,411
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 19,792
<TOTAL-LIABILITY-AND-EQUITY> 29,729
<SALES> 0
<TOTAL-REVENUES> 3,300
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,126
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,556
<INCOME-PRETAX> (2,988)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,988)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,988)
<EPS-BASIC> (.34)
<EPS-DILUTED> (.34)
</TABLE>
