SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 1-10004
TIS Mortgage Investment Company
(Exact name of registrant as specified in its charter)
Maryland 94-3067889
(State of incorporation) (I.R.S. Employer Identification No.)
655 Montgomery Street, Suite 800
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 393-8000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act: None
Title of each class
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Common Stock, par value $.001 per share
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of December 14, 2000 the aggregate market value of the Registrant's voting
stock held by non-affiliates (based upon the closing price on that date of the
shares) was approximately $1,586,000.
As of December 14, 2000, there were 8,893,250 shares of Common Stock
outstanding.
Documents Incorporated by Reference
NONE.
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TIS MORTGAGE INVESTMENT COMPANY
INDEX TO ANNUAL REPORT
ON FORM 10-K
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PART I Page
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Item 1: Business 3
Item 2: Properties 19
Item 3: Legal Proceedings 20
Item 4: Submission of Matters to a Vote of Security Holders 21
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters 22
Item 6: Selected Financial Data 23
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 32
Item 8: Financial Statements and Supplementary Data 33
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 33
PART III
Item 10: Information about Directors and Executive Officers of the Registrant 34
Item 11: Executive Compensation 35
Item 12: Security Ownership of Certain Beneficial Owners and Management 37
Item 13: Certain Relationships and Related Transactions 39
PART IV
Item 14: Exhibits, Financial Statements and Reports on Form 8-K 41
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IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, BELIEFS, EXPECTATIONS AND INTENTIONS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION
ENTITLED "RISK FACTORS." THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT ARISE
AFTER THE DATE HEREOF. READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS
DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q
TO BE FILED BY THE COMPANY IN 2000 AND ANY CURRENT REPORTS ON FORM 8-K FILED BY
THE COMPANY.
PART I
Item 1. Business.
Introduction
General
TIS Mortgage Investment Company, a Maryland corporation (the "Company"
or the "Registrant") is an owner and operator of multi-family residential
properties in the Central Valley of California and family shopping centers in
the North Bay area of San Francisco. The Company is a self-managed real estate
investment trust or REIT.
Primary Business Activity
The Company operates as a real estate investment trust which invests in
multifamily real estate, family shopping centers and development projects. The
Company has, in years before 1994, primarily invested in the Residual Interests
of single-family CMOs, which are a series of fixed rate or variable rate bonds
with a wide range of maturities. CMOs are typically issued in series, which
generally consist of serially maturing classes ratably secured by a single pool
of mortgage instruments. The Company changed its investment focus from
Structured Securities to multifamily real estate in 1994.
In 1995, the Company acquired four multifamily residential properties
in California's Central Valley. These properties consisted of 539 units together
with 9.75 acres of unimproved land slated for the development of an additional
126 units. The aggregate purchase price for the properties was approximately
$29.3 million, including existing debt assumed by the Company. In the fourth
quarter of 1998, the Company sold its investment in one of these residential
properties for a sale price of $8.3 million including the assumption of
approximately $6.3 million of mortgage related debt.
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On February 2, 1999, the Company acquired all the shares of Novato
Markets, Inc. and through its subsidiary acquired a shopping center located in
Rohnert Park, California, named Mountain Shadows Plaza and a shopping center in
Petaluma, California, named Midtown Center. The shopping centers have a combined
commercial and retail space totaling approximately 76,000 square feet. Mountain
Shadows Plaza consists of three buildings and is anchored by a large grocery
store. Midtown Center consists of a single building. The Company intends to
continue operating the shopping centers.
The Company's investment policy is controlled by its Board of
Directors. The By-Laws of the Company require that a majority of the members of
the Board of Directors must be persons who are not employed by, or receiving any
compensation (except for serving as a director) from, the Company ("Unaffiliated
Directors").
The Company intends to make a substantial portion of its future
investments in multifamily real properties, family shopping centers and
potential development projects. The investment strategy of the Company is to
identify communities with an expanding employment base and demographics which
will continue to provide economic growth. After identifying communities with
strong potential economic growth, the Company attempts to seek out those areas
within a chosen community which are most likely to be positively affected by the
economic growth of the community. Finally, the property sought for purchase
within a given area is chosen because it is considered to be among the highest
quality properties in that area and can be purchased below estimated replacement
cost. Management believes that this strategy will allow income from each of the
properties to rise before the properties encounter significant competition from
new construction. Real property acquisitions will be opportunistic and will
occur from time to time if and when sufficient liquid assets are available.
Limitation on Use of Net Operating Loss Carryforwards.
As of December 31, 1999, the Company had a consolidated net operating
loss carryforward of approximately $61.2 million for Federal income tax
purposes. This number is based upon actual Federal consolidated income tax
filings for the periods through December 31, 1998 and an estimate of the 1999
taxable loss. Some or all of the carryforward may be available to the Company to
offset, for Federal income tax purposes, the future taxable income, if any, of
the Company and its wholly-owned subsidiaries, subject to the limitations and
risks discussed below.
The future ability to use these NOLs may be limited under Internal
Revenue Code (the "Code") Section 382 which provides that if a corporation
undergoes an "ownership change," its ability to use its NOLs in the future may
be limited. An ownership change occurs when the aggregate cumulative increase in
the percentage ownership of a corporation's capital stock owned by "5-percent
shareholders" within any three-year testing period is more than 50 percentage
points. A "5-percent shareholder" is defined as any person holding 5 percent or
more of the fair market value of the corporation's stock at any time during the
three-year testing period. All shareholders who are not 5-percent shareholders
individually are aggregated into one or more public groups, each of which is
considered to be a 5-percent shareholder.
If an ownership change occurs within the meaning of Section 382, the
amount of NOLs the Company may use to offset income in any future taxable year
would be limited, in general, to an amount
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determined by multiplying the fair market value of the Company's outstanding
capital stock on the ownership change date by the long-term tax-exempt rate
which is published monthly by the Internal Revenue Service.
There could be circumstances under which an issuance by the Company of
a significant number of new shares of Common Stock or other new class of equity
security having certain characteristics (for example, the right to vote or to
convert into Common Stock) might result in an ownership change under the Code.
The Company believes that it has not undergone an ownership change in
prior years. However, the Company as of December 14, 2000, does have two
5-percent or more shareholders who acquired their stock in the last three-year
period. There is no assurance that these shareholders will not make additional
changes in their holdings in any potential future three-year testing period
which could, when combined with other changes, cause an ownership change to have
occurred. In addition, if any additional shareholders become 5-percent
shareholders in the future, this could cause an ownership change to occur and
limit the Company's use of its NOLs.
The Company also has capital loss carryforwards of approximately $5.4
million at December 31, 1999. These loss carryforwards expire in the year 2000.
Risk Factors
1. Insufficient Cash and Liquidity Sources to Fund Ongoing Operations
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. However current factors as of
December 31, 1999, raised substantial doubt about the Company's ability to
continue as a going concern. Those factors as of December 31, 1999 that raised
substantial doubt about the Company's ability to continue as a going concern are
as follows:
(1) The company had a significant working capital deficit as
of December 31, 1999. The Company's liabilities that were payable in
the near term exceeded the Company's existing unrestricted cash and
cash equivalents by $2,834,000. The Company's current liabilities,
excluding portions of notes payable due within one year, included the
following:
Accounts payable and accrued liabilities $ 2,547,000
Accrued interest payable 42,000
Short-term debt, Due to affiliate 300,000
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$ 2,889,000
(2) One of the Company's lenders had filed a notice of default
and was requesting immediate payment of approximately $6,418,000 as of
February 29, 2000 reflecting unpaid principal and interest and
including certain other penalties and charges triggered by the
default. As described more fully in Note 22 of the accompanying
Financial Statements, the Company believes that the lender's notice of
default was improper and together with its legal counsel has taken
actions to request the lender to rescind its notice of default. The
Company and the Lender reached a settlement in September of 2000. See
Note 22 to the Company's financial statements.
Management has evaluated the Company's alternatives to enable it to pay
its liabilities as they become due and payable in the current year and to obtain
new financing to repay the loan currently declared
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in default. Alternatives evaluated by management included, among other things,
consideration of (i) the sale of its Four Creeks Village property and other real
property as necessary, (ii) reducing general and administrative expenses, (iii)
obtaining financing from a new lender in order to repay the existing debt
currently declared in default, (iv) sale of Novato Markets property in order
to repay the existing debt currently declared in default, and (v) entering into
joint venture arrangements with third parties.
The Company believes that the proceeds from the sale of real estate and
debt refinancing will provide liquidity for it to continue as a going concern
throughout 2000, 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. See Note 22 to the Company's financial
statements.
2. Risks Associated with Refinancing Real Estate
The Company, through its wholly owned subsidiary P-SUB I, Inc.
("Borrower"), have a loan with Ocwen Federal Bank, FSB ("Ocwen") secured by its
two shopping centers comprising Novato Markets. P-SUB I and its lender have
disagreed about the maturity of the loan. P-SUB I believed that the maturity was
June 1, 2000 and Ocwen asserted that the loan matured in January 2000 and is
therefore in default. The two parties were unable to reach agreement on this
matter. On May 1, 2000, the Company announced that P-SUB I, Inc. filed on Friday
April 28, 2000, a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code. This action was taken by Borrower in order to protect
the shareholders equity pending a resolution of the Company's differences with
Ocwen. The Company and Ocwen have reached a court approved settlement in
September, 2000 and the Company is in the process of finalizing a new
collateralized loan for the amount of the $5,700,000 which is payable to Ocwen
on December 28, 2000. We expect this financing to be completed in January, 2001.
See Note 22 of the Accompanying Financial Statements for a discussion of the
terms of the settlement. If the Company were unable to secure this financing and
under a worst case be obliged to sell the property, the Company believes that
based upon recent appraisals there would be sufficient proceeds to retire the
Ocwen loan
3. Risks Associated with Investments in Real Estate
The returns available from equity investments in real estate depend on
the amount of income earned and appreciation generated by the related properties
as well as the expenses incurred. Income from the properties may be adversely
affected by, among other things, increasing unemployment rates, oversupply of
competing properties, reduction in demand for properties in the area, increasing
affordability of single family homes, and adverse real estate, zoning and tax
laws. Certain significant expenditures associated with an investment in real
estate (such as mortgage payments, real estate taxes and maintenance costs)
constitute fixed costs and do not decrease when circumstances cause a reduction
in income from the investment. Furthermore, real estate investments are
relatively illiquid and therefore, will tend to limit the Company's ability to
vary its portfolio promptly in response to changes in economic or other
conditions.
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Potential Environmental Liability
The Company could be held liable for the costs of removal or
remediation of any hazardous or toxic substances located on or in its
properties. These laws often impose such liability without regard to whether the
owner knew of, or was responsible for, the presence of the hazardous or toxic
substances. The presence of such substances, or the failure to remediate such
substances properly, may adversely affect the owner's ability to sell or rent
the property or to borrow using the property as collateral. Other Federal and
state laws require the removal of damaged material containing asbestos in the
event of remodeling or renovation.
Uninsured Loss
The Company carries several types of insurance. There are, however,
certain types of extraordinary losses (such as losses resulting from
earthquakes) that may be either uninsurable or not economically insurable.
Should an uninsured loss occur, the Company could lose its investment in and
anticipated profits and cash flow from a property and would continue to be
obligated on any mortgage indebtedness on the property.
Americans with Disabilities Act
The Company's properties must comply with Title III of the Americans
with Disabilities Act (the "ADA") to the extent that the properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA. Compliance
with the ADA requirements could require removal of structural barriers to
handicapped access in certain public access areas of the Company's properties,
where such removal is readily achievable. The ADA does not, however, consider
residential properties, such as apartment communities, to be public
accommodation or commercial facilities, except portions of such facilities, such
as a leasing office which is open to the public. Noncompliance with the ADA
could result in imposition of fines or an award of damages to private litigants.
If required changes involve a greater expenditure than the Company currently
anticipates or if the changes must be made on a more accelerated basis than it
anticipates, the Company's operations could be adversely affected.
Fair Housing Amendments Act of 1988
The Fair Housing Amendments Act of 1988 (the "FHA") requires
multifamily residential properties first occupied after March 13, 1991 to be
accessible to the handicapped. Noncompliance with the FHA could result in the
imposition of fines or an award of damages to private litigants. If required
changes involve a greater expenditure than the Company currently anticipates or
if the changes must be made on a more accelerated basis than it anticipates, the
Company's operations could be adversely affected.
Risk of Real Estate Development
The Company plans to seek selective opportunities for development. The
real estate development business involves significant risks in addition to those
involved in the acquisition, ownership and operation of established apartment
communities and shopping centers. The development risks include, among other
things, lack of construction financing on favorable terms and adverse changes in
rental rates and occupancy rates in the market.
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4. Market Risks Relating to Mortgage Assets
The results of the Company's operations are influenced, among other
things, by the level of net cash flows generated by the Company's mortgage
assets. The net cash flows vary primarily as a result of changes in mortgage
prepayment rates, interest rates, reinvestment income and borrowing costs, all
of which involve various risks and uncertainties as set forth below. Prepayment
rates, interest rates, reinvestment income and borrowing costs depend upon the
nature and terms of the mortgage assets, the geographic location of the
properties securing the Mortgage Loans included in or underlying the mortgage
assets, conditions in financial markets, the fiscal and monetary policies of the
United States Government and the Board of Governors of the Federal Reserve
System, international economic and financial conditions, competition and other
factors, none of which can be predicted with any certainty.
Prepayment Risks
Mortgage prepayments shorten the life of the mortgage instruments
underlying the Company's mortgage assets, thereby reducing the overall net cash
flows in the long term and causing an inherent decline in the Company's income.
Prepayments of mortgage instruments generally increase when then current
mortgage interest rates fall below the interest rates on the fixed-rate Mortgage
Loans included in such mortgage instruments. Conversely, prepayments decrease
when then current mortgage interest rates exceed the interest rates on the
Mortgage Loans included in such mortgage instruments. Prepayment experience also
may be affected by the geographic location of the Mortgage Loans included in
mortgage instruments, the types (whether fixed or adjustable rate) and
assumability of such Mortgage Loans, conditions in the Mortgage Loan, housing
and financial markets, and general economic conditions.
Interest Rate Fluctuation Risks
Changes in interest rates affect the performance of the Company and its
mortgage assets.
Risks of Decline in Net Cash Flows and Income from Mortgage Assets
The Company's income from mortgage assets derives primarily from the
net cash flows received on its mortgage assets which decline over time. For both
tax and accounting purposes, the Company's net cash flows consist of two
components - one representing return of a portion of the purchase price of the
mortgage asset (the "Cost Component") and one representing income on the
investment (the "Income Component"). The Income Component is highest in years
immediately following the purchase of the mortgage asset and declines over time.
In addition, to the extent that actual mortgage prepayments or variable interest
rates experienced exceed those assumed, this inherent decline in net cash flows
and income is accelerated.
Inability to Predict Effects of Market Risks
Because none of the above factors, including changes in prepayment
rates, interest rates, reinvestment income and expenses are susceptible to
accurate projection, the net cash flows generated by the Company's mortgage
assets, and thus distributions to the Company's shareholders, cannot be
predicted. The Company's borrowings may bear fixed or variable interest rates,
may require additional collateral if the value of existing collateral declines
on a market value basis and may be due on demand or upon the occurrence of
certain events. To the extent that the Company's borrowings bear variable
interest rates, changes in short term interest rates will significantly
influence the cost of such borrowings and can result in losses in certain
circumstances. The Company also may increase the amount of its available funds
through the issuance of debt securities.
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5. General Risks
Competition
There are numerous real estate companies, insurance companies,
financial institutions, pension funds and other property owners that compete
with the Company in seeking properties for acquisition and in attracting and
retaining tenants. The affordability of ownership of single family housing can
influence the level of occupancy of multi-family units.
Market Price of Common Stock
The market price of the Company's Common Stock has been very volatile
due to a wide variety of factors including the Company's operating results,
distributions (if any), actual or perceived changes in short-term and mortgage
interest rates and their relationship to each other, actual or perceived changes
in mortgage prepayment rates, and any variation between the net yield on the
Company's assets and prevailing market interest rates. Additionally, the
performance of the Company's income-producing properties has an effect on the
market price of the Company's Common Stock. Any actual or perceived unfavorable
changes in the real estate market and other factors may adversely affect the
market price of the Company's Common Stock.
Future Offerings of Common Stock
The Company in the future may increase its capital resources by making
additional offerings of its Common Stock or securities convertible into its
Common Stock. The actual or perceived effect of such offerings may be the
dilution of the book value or earnings per share of the Company's Common Stock
which may result in a reduction of the market price of the Company's Common
Stock. The Company is unable to estimate the amount, timing or nature of future
sales of its Common Stock, as such sales will depend upon market conditions and
other factors such as the Company's need for additional equity.
Certain Consequences of and Failure to Maintain REIT Status
In order to maintain its qualification as a REIT for Federal income tax
purposes, the Company must continually satisfy certain tests with respect to the
sources of its income, the nature and diversification of its assets and the
amount of its distributions to shareholders. See "Business -- Federal Income Tax
Considerations -- Qualification of the Company as a REIT." Among other things,
these restrictions may limit the Company's ability to acquire certain types of
assets that it otherwise would consider desirable, limit the ability of the
Company to dispose of assets that it has held for less than four years if the
disposition would result in gains exceeding specified amounts, limit the ability
of the Company to engage in hedging transactions that could result in income
exceeding specified amounts and require the Company to make distributions to its
shareholders at times that the Company may deem it more advantageous to utilize
the funds available for distribution for other corporate purposes (such as the
purchase of additional assets or the repayment of debt) or at times that the
Company may not have funds readily available for distribution.
The Company's operations from time to time may generate taxable income
in excess of its net income for financial reporting purposes. The Company also
may experience a situation in which its taxable income is in excess of the
actual cash receipts. See "Business -- Federal Income Tax Considerations." To
the extent that the Company does not otherwise have funds available, either
situation may result in the Company's inability to distribute substantially all
of its taxable income as required to maintain its REIT status. Alternatively,
the Company may be required to borrow funds to make the required distributions
which could have the effect of reducing the yield to its shareholders, to sell a
portion of its assets at times or for amounts that are not advantageous, or to
distribute amounts that represent a return of capital which would reduce the
equity of the Company. In evaluating assets for acquisition, the Company
considers the
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anticipated tax effects of the acquisition, including the possibility of any
excess of taxable income over projected cash receipts.
If the Company should not qualify as a REIT in any tax year, it would
be taxed as a regular domestic corporation and, among other consequences,
distributions to the Company's shareholders would not be deductible by the
Company in computing its taxable income. Any such tax liability could be
substantial and would reduce the amount of cash available for distributions to
the Company's shareholders. See "Business -- Federal Income Tax Considerations."
In addition, the unremedied failure of the Company to be treated as a REIT for
any one year would disqualify the Company from being treated as a REIT for the
four subsequent years.
Excess Inclusion Income
A portion of the distributions paid by the Company constitutes
unrelated business taxable income to certain otherwise tax-exempt shareholders
which will constitute a floor for the taxable income of shareholders not exempt
from tax and will not be eligible for any reduction (by treaty or otherwise) in
the rate of income tax withholding in the case of nonresident alien
shareholders.
Marketability of Shares of Common Stock and Restrictions on Ownership
The Company's Articles of Incorporation prohibit ownership of its
Common Stock by tax-exempt entities that are not subject to tax on unrelated
business taxable income and by certain other persons (collectively "Disqualified
Organizations"). Such restrictions on ownership exist so as to avoid imposition
of a tax on a portion of the Company's income from excess inclusions.
Provisions of the Company's Articles of Incorporation also are designed
to prevent concentrated ownership of the Company which might jeopardize its
qualification as a REIT under the Code. Among other things, these provisions
provide (i) that any acquisition of shares that would result in the
disqualification of the Company as a REIT under the Code will be void, and (ii)
that in the event any person acquires, owns or is deemed by operation of certain
attribution rules set out in the Code, to own a number of shares in excess of
9.8% of the outstanding shares of the Company's Common Stock ("Excess Shares"),
the Board of Directors, at its discretion, may redeem the Excess Shares. In
addition, the Company may refuse to effectuate any transfer of Excess Shares,
and certain shareholders and proposed transferees of shares may be required to
file an affidavit with the Company setting forth certain information relating
generally to their ownership of the Company's Common Stock. These provisions may
inhibit market activity and the resulting opportunity for the Company's
shareholders to receive a premium for their shares that might otherwise exist if
any person were to attempt to assemble a block of shares of the Company's Common
Stock in excess of the number of shares permitted under the Articles of
Incorporation. Such provisions also may make the Company an unsuitable
investment vehicle for any person seeking to obtain (either alone or with others
as a group) ownership of more than 9.8% of the outstanding shares of Common
Stock. Investors seeking to acquire substantial holdings in the Company should
be aware that this ownership limitation may be exceeded by a shareholder without
any action on such shareholder's part in the event of a reduction in the number
of outstanding shares of the Company's Common Stock.
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Exchange of Shares for Novato Markets.
On February 2, 1999, the Company acquired all the shares of Novato
Markets, Inc. ("Novato") from Pacific Securitization, Inc., ("Pacific") in
exchange for 1,613,070 shares of Common Stock ("Shares") of the Company pursuant
to an Agreement and Plan of Reorganization dated as of February 1, 1999, between
the Company and Pacific. Pacific is indirectly principally owned by Lorraine O.
Legg, the President and Chief Executive Officer and a director of the Company,
and Patricia M. Howe, a director of the Company. The Company's acquisition of
Novato was approved by the Company's Board of Directors. Through its
wholly-owned subsidiary, PSUB-I, Novato owns a shopping center located in
Rohnert Park, California, named Mountain Shadows Plaza, and a shopping center
subject to a ground lease in Petaluma, California, named Midtown Center. The
Company intends to continue operating the shopping centers.
The Shares were issued to Pacific under an exemption to the
registration requirements of the Securities Act of 1933, as amended.
Accordingly, the Shares are "restricted securities," as defined in Rule 144 of
the Securities Act, and are not freely transferable. The Company granted Pacific
one-time demand registration rights with respect to the Shares for the period
beginning June 30, 1999 and ending February 2, 2001. It also granted Pacific
piggy-back registration rights in the event that the Company files a
registration statement under the Securities Act in connection with the proposed
offer and sale for cash of shares of Common Stock by it or by any of its
shareholders. The share exchange is intended to be a tax free reorganization
within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as
amended. Prior to the closing of the share exchange, Novato caused its
wholly-owned subsidiary to transfer to Pacific all its rights under a lease,
with option to purchase, with Ignacio Properties, LLC, relating to the Ignacio
Center in Novato, California, and Pacific agreed to assume all the obligations
of the subsidiary under the lease and option. The Company, Novato, Novato's
wholly-owned subsidiary and Pacific then entered into an agreement dated as of
February 1, 1999, whereby the parties clarified their respective rights and
obligations relating to the Ignacio Property and the Company's rights to an
escrow established when Pacific originally acquired Novato. See Part III, Item
13, Certain Relationships and Related Transactions.
Share Purchase from Turkey Vulture Fund XIII, Ltd.
On February 2, 1999, the Company acquired 793,700 shares of its Common
Stock from Turkey Vulture Fund XIII, Ltd. for $1,984,250, 20,000 shares of its
Common Stock from Christopher L. Jarratt for $40,000 and 12,000 shares of its
Common Stock from James G. Lewis for $24,000, pursuant to an Agreement dated as
of February 1, 1999, among the Company, Turkey Vulture Fund, Richard M. Osborne,
Third Capital, LLC, Mr. Jarratt and Mr. Lewis. Turkey Vulture Fund, Third
Capital and Messrs. Osborne, Jarratt and Lewis agreed that, for a period of
seven years, they will not directly or indirectly, among other things, (i)
effect or participate in or in any way assist any other person in effecting or
participating in (a) any acquisition of securities or rights to acquire
securities or assets of the Company or its subsidiaries, (b) any tender or
exchange offer, merger or other business combination involving the Company or
its subsidiaries, (c) any liquidation or other extraordinary transaction with
respect to the Company or its subsidiaries, or (d) any solicitation of proxies
or consents to vote any voting securities of the Company; (ii) form or in anyway
participate in a "group" with respect to the Company; (iii) otherwise act, alone
or in concert with others, to seek to control or influence the management, Board
of Directors or policies of the Company or its subsidiaries; (iv) take any
action to compel the holding of an annual or special meeting of stockholders; or
(v) enter into any discussions or arrangements with any person relating to the
foregoing. The parties also agreed to a mutual general release of all claims
arising out of or relating to the business or affairs of the
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Company or the ownership of its stock. Messrs. Osborne, Jarratt and Lewis
resigned from the Company's Board of Directors, effective February 2, 1999. This
share purchase and the acquisition of Novato were approved by the Company's
Board of Directors and, specifically, by directors with no financial interest in
either transaction. The disinterested directors required that the share exchange
transaction be closed as a condition to closing the share purchase transaction.
Operating Restrictions
The Company intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act of 1940 (the
"1940 Act"). Accordingly, the Company does not expect to be subject to the
provisions of the 1940 Act, including those that prohibit certain transactions
among affiliated parties. The 1940 Act exempts entities that are primarily
engaged in the business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate. Under current interpretations of the
staff of the Securities and Exchange Commission, in order to qualify for this
exemption, the Company must maintain at least 55% of its assets directly in
Mortgage Loans, certain Mortgage Certificates and certain other qualifying
interests in real estate. The Company's ownership of Residual Interests may
therefore be limited by the 1940 Act. In addition, certain Mortgage Certificates
may be treated as securities separate from the underlying Mortgage Loans and,
thus, may not qualify as "mortgages and other liens on and interests in real
estate" for purposes of the 55% requirement, unless such Mortgage Certificates
represent all the certificates issued with respect to an underlying pool of
mortgages. The Company's investment policies prohibit it from making any
investments that would cause the Company to be an investment company within the
meaning of the 1940 Act.
Although the Company has no present intention to seek modification of
its operating policies described herein, a majority of the Unaffiliated
Directors may in the future conclude that it would be advantageous for the
Company to do so and may modify such operating policies accordingly, without the
consent of the shareholders.
Subsidiaries
TIS Property Acquisition Company ("TISPAC"), a Maryland corporation, is
a wholly-owned subsidiary of the Company, and was incorporated on September 8,
1995, for the purpose of owning and financing real property. In March 1997, as
part of the refinancing of two of the Company's multifamily residential
properties and a portion of the Four Creeks property, title to those properties
was vested in TISPAC. Simultaneously, TISPAC entered into notes secured by
mortgages on those properties. TISPAC is a Qualified REIT Subsidiary.
Accordingly, the accounts of TISPAC are consolidated with those of the Company.
Novato Markets, Inc. is a wholly-owned subsidiary of the Company,
incorporated on July 26, 1956, and acquired on February 2, 1999. It has one
wholly-owned subsidiary, P-SUB I, Inc. incorporated on June 4, 1997. P-SUB I
owns a shopping center located in Rohnert Park, California, named Mountain
Shadows Plaza, and owns a shopping center subject to a ground lease in Petaluma,
California, named Midtown Center. The accounts of Novato Markets, Inc. and P-SUB
I, Inc. are consolidated with those of the Company.
12
<PAGE>
Competition
The Company's real estate properties face the normal competitive
pressure of most rental real estate projects. However, the Company's real
property acquisitions have been and will continue to be opportunistic and may
occur from time to time only when sufficient liquid assets are available.
Employees
Until July 1, 1996, the Company had no full-time salaried employees. On
that date, the Company became a self-administered REIT. As a result, the Company
now directly employs three individuals, two of whom receive only a portion of
their total compensation from the Company. The balance of their compensation is
paid by the Company's former manager. In addition, the Company reimburses the
Former Manager for employment expenses of personnel performing certain functions
which are deemed applicable to the affairs of the Company.
Management of Operations
Self Management
In connection with becoming self-managed on July 1, 1996, the
Company entered into a Facilities and Expense Sharing Agreement ("Expense
Sharing Agreement") with TIS Financial Services Inc., (the "Former Manager")
providing for the sharing of office space, office equipment and the expenses of
certain administrative and other personnel and ancillary services. In addition,
the Board approved employment contracts with Lorraine O. Legg, Chairman and
President of the Company, for a term of three years and John E. Castello, as
Executive Vice President and Chief Financial Officer, for a term of two years.
Both agreements have evergreen renewal provisions that automatically extend the
term of the agreements for one year, unless either party provides prior written
notice to terminate during the periods provided by the agreement. The Expense
Sharing Agreement provides for certain office space and expense sharing
arrangements, whereby the Company and the Former Manager share on a prorata
basis all fees and expenses incurred in connection with rent, telephone charges,
utilities and other office expenses, bookkeeping fees and expenses and
miscellaneous administrative and other expenses, including certain personnel
expenses, as described in the Expense Sharing Agreement. The prorata sharing of
such expenses is determined based upon the relative benefit received by each
party in accordance with the amount of space utilized or the relative amount of
time each such resource is used, or such other allocation method as may be
reasonable and agreed to by the parties. The Expense Sharing Agreement continues
in effect until terminated by either party on 30 days prior written notice or at
such time as the parties no longer continue to share office space. The Company
incurred expenses of $48,000, $28,000 and $38,000 for the years ended December
31, 1999, 1998, and 1997, respectively under the expense sharing agreement with
the Former Manager.
13
<PAGE>
Federal Income Tax Considerations
General
If the Company satisfies certain tests with respect to the nature of
its income, assets, management, share ownership and the amount of its
distributions, and elects to be so treated, it will qualify as a real estate
investment trust ("REIT") for Federal income tax purposes. The Company satisfied
such tests and elected to be treated as a REIT on its tax return for the year
ended December 31, 1988. The Company has satisfied such tests in all subsequent
years. As a REIT, the Company generally will not be subject to tax at the
corporate level on its taxable income to the extent that it distributes at lease
95% of such taxable income to its shareholders. See "Taxation of the Company."
Generally, those distributions will constitute distributions to the shareholders
and will be taxable as ordinary income to the extent of the Company's earnings
and profits. It is expected that distributions made by the Company will be made
out of earnings and profits.
The failure of the Company to be treated as a REIT for any taxable year
could materially and adversely affect the shareholders, since the Company would
be taxed as a corporation. Accordingly, the taxable income of the Company
(computed without any deduction for distributions to shareholders) would be
taxed to the Company at corporate rates (currently up to 35% for Federal
purposes), and the Company would be subject to any applicable minimum tax.
However, the Company has $61.2 million of net operating loss carryforwards to
offset taxable income. Additionally, distributions to the shareholders would be
treated as ordinary income to the extent of the Company's earnings and profits.
As a result of the "double taxation" (i.e. taxation at the corporate level and
subsequently at the shareholder level when earnings are distributed) the
distributions to the shareholders would decrease substantially, because a large
portion of the cash otherwise available for distribution to shareholders would
be used to pay taxes. Further, the failure of the Company to be treated as a
REIT for any one year would disqualify the Company from being treated as a REIT
for four subsequent years.
Qualification of the Company as a REIT
General
In order to qualify as a REIT for Federal income tax purposes, the
Company must elect to be so treated and must satisfy certain tests with respect
to the sources of its income, the nature and diversification of its assets, the
amount of its distributions, and the ownership of the Company. The following is
a discussion of those tests.
Sources of Income
The Company must satisfy income tests for each taxable year with
respect to which it intends to qualify as a REIT: (i) the 75% income test, and
(ii) the 95% income test. Under the first test, at least 75% of the Company's
gross income for the taxable year must be derived from certain qualifying real
estate related sources. Income that qualifies under the 75% test includes (a)
interest on obligations secured by mortgages on real property or on interests in
real property (including, generally, income from regular and residual interests
in REMICs), (b) rents from real property, (c) distributions from other REITs,
(d) gain from the sale or other disposition of real property (including
interests in real property and interests in mortgages on real property) that is
not "dealer property" (i.e. property that is stock in trade, inventory, or
property held primarily for sale to customers in the ordinary course of
business), (e) income from the operation, and gain from the sale, of property
acquired at or in lieu of a foreclosure of a mortgage ("foreclosure property") ,
(f) commitment fees related to Mortgage Loans, and (g) income attributable to
the
14
<PAGE>
temporary investment of the Company's capital proceeds (excluding amounts
received pursuant to a dividend reinvestment program) in stock or debt
instruments, if such income is received or accrued during the one-year period
beginning on the date of receipt of the capital proceeds ("qualified temporary
investment income").
In addition to meeting the 75% income test, at least 95% of the
Company's gross income for the taxable year must be derived from items of income
that either qualify under the 75% test or are from certain other types of
passive investments. This is referred to as the 95% income test. Income that
satisfies the 95% income test includes income from distributions, interest and
gains from the sale or disposition of stock or other securities, other than
stock or other securities that are dealer property.
If the Company inadvertently fails to satisfy either the 75% income
test or the 95% income test, or both, and if the Company's failure to satisfy
either or both tests is due to reasonable cause and not willful neglect, the
Company may avoid loss of REIT status by satisfying certain reporting
requirements and paying a tax generally equal to 100% of any excess
nonqualifying income.
The Company anticipates that its gross income will continue to include
a component from interest and gains on mortgage assets and income from
short-term reinvestments, but will consist principally of rents from its real
estate assets. The composition and sources of the Company's income allowed the
Company to satisfy the income tests for all fiscal years through December 31,
1999 and should allow the Company to satisfy the income tests during each year
of its existence. If, however, the Company causes issuances of interests in real
estate mortgage investment conduits ("REMICs") or issuances of certificates
representing certain equity interests in mortgage instruments (such as
pass-through certificates), the Company could recognize income or gain that, if
from transactions in which the Company is deemed to be a dealer, could be
subject to the 100% tax on prohibited transactions. See "Taxation of the
Company" below. This effectively limits both the Company's ability to issue
REMIC securities directly or through wholly owned subsidiaries and its ability
to issue such securities indirectly through issuance of funding notes to
affiliated issuers. Further, certain short-term reinvestments may generate
qualifying income for purposes of the 95% income test but nonqualifying income
for purposes of the 75% income test. In addition, income from Structured
Securities which do not represent equity interests in Mortgage Loans and with
respect to which a REMIC election has not been made (e.g. CMOs) may not qualify
under the 75% income test. The Company intends to monitor its reinvestments and
hedging transactions closely to avoid disqualification as a REIT.
Nature and Diversification of Assets
At the end of each quarter of the Company's taxable year, at least 75%
of the value of the Company's assets must be cash and cash items (including
receivables), "government securities" and "real estate assets." Real estate
assets include real property, Mortgage Loans, Mortgage Certificates, equity
interest in other REITs, any stock or debt instrument for so long as the income
therefrom is qualified temporary investment income and, subject to certain
limitations, interests in REMICs. Structured Securities that do not represent
equity interests in Mortgage Loans and with respect to which a REMIC election
has not been made may not qualify as real estate assets. The balance of the
Company's assets may be invested without restriction, except that holdings of
the securities of any non-governmental issuer (other than a REIT or qualified
REIT subsidiary) may not exceed 5% of the value of the Company's assets or 10%
of the outstanding voting securities of that issuer. Securities that are
qualifying assets for purposes of the 75% asset test will not be treated as
securities for purposes of the 5% and 10% asset tests.
If a REIT receives "new capital," stock or debt instruments purchased
with such new capital are treated as real estate assets for purposes of the 75%
asset test (described above) during the one-year period
15
<PAGE>
beginning on the date the REIT receives such new capital. New capital is
defined as any amount received by a REIT in exchange for its stock (other than
amounts received pursuant to a dividend reinvestment plan) or received in a
public offering of its debt obligations having maturities of at least five
years.
The Company anticipates that its assets will consist of (i) ownership
interests in mortgage assets (including undivided ownership interests in
mortgage instruments), (ii) interests in REMICs, (iii) interests in real estate,
(iv) interests in other REITs, (v) stock or debt instruments that generate
qualified temporary investment income, (vi) cash and (vii) certain short-term
investments and reinvestments. The Company believes that such asset holdings
will allow it to satisfy the assets tests necessary to qualify as a REIT, and
the Company intends to monitor its activities to attempt to assure satisfaction
of such tests.
If the Company fails to satisfy the 75% asset test at the end of any
quarter of its taxable year as a result of its acquisition of securities or
other property during that quarter, the failure can be cured by a disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
The Company intends to maintain adequate records of the value of its assets and
take such action as may be required to cure any failure to satisfy the 75% asset
test within 30 days after the close of any quarter. The Company may not be able
to cure any failure to satisfy the 75% asset test, however, if assets that the
Company believes are qualifying assets for purposes of the 75% asset test are
later determined to be nonqualifying assets.
REITs are permitted to hold assets in wholly owned subsidiaries
("Qualified REIT Subsidiaries"). A subsidiary of a REIT is a Qualified REIT
Subsidiary if 100% of its stock is owned by the REIT at all times during the
period such subsidiary is in existence. A Qualified REIT Subsidiary is not
treated as a separate corporate entity for Federal income tax purposes, but
rather, together with its parent REIT, is treated as a single taxpayer.
Accordingly, all of the assets, liabilities and items of income, deduction and
credit of a Qualified REIT Subsidiary are treated as the assets, liabilities,
and items of income, deduction and credit of the parent REIT for Federal income
tax purposes and, in particular, for purposes of satisfying the applicable Code
provisions for qualification as a REIT. The Company's wholly owned subsidiary,
TISPAC, is a Qualified REIT Subsidiaries.
Distributions
The Company must distribute as distributions to its shareholders for
each taxable year an amount at least equal to (i) 95% of its "REIT taxable
income" as defined below (determined before the deduction of dividends paid and
excluding any net capital gain) plus (ii) 95% of the excess of its net income
from foreclosure property over the tax imposed on such income by the Code, less
(iii) any excess non-cash income (as determined under the Code).
Generally, a distribution must be made in the taxable year to which it
relates. A portion of the required distribution, however, may be made in the
following year (i) if the distribution is declared in October, November or
December of any year, is payable to shareholders of record on a specified date
in such a month, and is actually paid before February 1 of the following year;
or (ii) if the distribution is declared before the date on which the Company's
tax return for the taxable year is due to be filed (including extensions) and is
paid on or before the first regular distribution payment date after such
declaration. Further, if the Company fails to meet the 95% distribution
requirement as a result of an adjustment to the Company's tax returns by the
Internal Revenue Service (the "IRS"), the Company may, if the deficiency is not
due to fraud with intent to evade tax or a willful failure to file a timely tax
return, retroactively cure the failure by paying a deficiency dividend (plus
interest).
16
<PAGE>
The Code imposes a non-deductible 4% excise tax on REITs to the extent
that the "distributed amount" with respect to a particular calendar year is less
than the sum of (i) 85% of the REIT's taxable income (computed pursuant to
Section 857(b)(2) of the Code, but before the dividends paid deduction and
excluding capital gain or loss) for such calendar year, (ii) 95% of the REIT's
capital gain net income (i.e. the excess of capital gains over capital losses)
for such calendar year, and (iii) the excess, if any, of the "grossed up
required distribution" (as defined in Section 4981(b)(3) of the Code) for the
preceding calendar year over the distributed amount for such preceding year. For
purposes of the excise tax provision, the "distributed amount" with respect to
any calendar year is the sum of (i) the deduction for dividends paid during such
calendar year (excluding dividends paid after the close of the taxable year
under Section 858 of the Code but including distributions declared in October,
November or December and paid in January, as described above), (ii) amounts on
which the REIT is required to pay corporate tax and (iii) the excess, if any, of
the distributed amount for the preceding year over the "grossed up required
distribution" for such preceding taxable year.
The Company intends to make distributions to its shareholders on a
basis that will allow the Company to satisfy both the 95% distribution
requirement and the excise tax distribution requirement. Certain factors
inherent in the structure of certain mortgage-backed securities (particularly
CMOs) and the Federal income tax rules for calculating income of Mortgage assets
may cause the Company to realize taxable income in excess of net cash flows in
certain years. The Company intends to monitor closely the interrelationship
between its pre-distribution taxable income and its cash flow and intends to
borrow funds or liquidate investments in order to overcome any cash flow
shortfalls if necessary to satisfy the distribution requirements.
Ownership of the Company
Shares of the Company's Common Stock must be beneficially owned by a
minimum of 100 persons for at least 335 days in each full taxable year (or a
proportionate part of any short taxable year) after the Company's first taxable
year. Further, at no time during the second half of any taxable year after the
Company's first taxable year may more than 50% of the Company's shares be owned,
actually or constructively, by five or fewer individuals (including pension
funds except under certain circumstances, and certain other types of tax exempt
entities). The Company's Articles of Incorporation contain repurchase provisions
and transfer restrictions designed to prevent violation of the latter
requirement. To evidence compliance with these requirements, the Company is
required to maintain records that disclose the actual ownership of its
outstanding shares. Each year, in order to satisfy that requirement, the Company
will demand written statements from record holders owning designated percentages
of Common Stock disclosing, among other things, the identities of the actual
owners of such shares.
Taxation of the Company
For any taxable year in which the Company qualifies and elects to be
treated as a REIT under the Code, the Company will be taxed at regular corporate
rates (or, if less, at alternative rates in any taxable year in which the
Company has an undistributed net capital gain) on its real estate investment
trust taxable income ("REIT Taxable Income"). REIT Taxable Income is computed by
making certain adjustments to a REIT's taxable income as computed for regular
corporations. Significantly, distributions paid by a REIT to its shareholders
with respect to a taxable year are deducted to the extent such distributions are
not attributable to net income from foreclosure property. Thus, in any year in
which the Company qualifies and elects to be treated as a REIT, it generally
will not be subject to Federal income tax on that portion of its taxable income
that is distributed to its shareholders in or with respect to that year. In
computing REIT Taxable Income, taxable income also is adjusted by (i)
disallowing any corporate deduction for dividends received, (ii) disregarding
any tax otherwise applicable as a result of a change of accounting period, (iii)
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<PAGE>
excluding the net income from foreclosure property, (iv) deducting any tax
resulting from the REIT's failure to satisfy either of the 75% or 95% income
tests, and (v) excluding net income from prohibited transactions.
Regardless of distributions to shareholders, the Company will be
subject to a tax at the highest corporate rate on its net income from
foreclosure property, a 100% tax on its net income from prohibited transactions,
and a 100% tax on the greater of the amount by which it fails either the 75%
income test or the 95% income test, less associated expenses, if the failure to
satisfy either or both of such tests does not cause the REIT to fail to qualify
as such. In addition, as described above, the Company will be subject to a 4%
excise tax for any taxable year in which, and on the amount by which,
distributions made by the Company fail to equal or exceed a certain amount
determined with reference to its REIT Taxable Income. The Company is also
subject to the alternative minimum tax, which is determined for REITs with
reference to REIT Taxable Income as increased by tax preferences. The Company
does not expect to have significant amounts of tax preference items.
Accordingly, the Company anticipates that its Federal tax liabilities, if any,
will be minimal.
California Franchise tax regulations regarding REIT qualification
currently conform to Federal income tax regulations. There is no assurance that
this will continue in the future and, if state regulations do not conform to
Federal regulations in the future, there is a possibility that the Company might
be liable for state income taxes.
The Company uses the calendar year both for tax and financial reporting
purposes. Due to the differences between tax accounting rules and generally
accepted accounting principles, the Company's REIT Taxable Income may vary from
its net income for financial reporting purposes.
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<PAGE>
Item 2. Properties.
At December 31, 1999, the Company's operating real estate assets
consisted of three multifamily apartment complexes located in California's
Central Valley and two shopping centers in Northern California. All of the
multifamily properties were acquired in 1995 either in the form of direct
ownership of the real property or in the form of an interest in a partnership
that directly owns the real property. As part of a refinancing, title to Villa
San Marcos and a portion of the Four Creeks Property were vested in TISPAC. The
multifamily residential properties Shady Lane and Four Creeks Phase I are held
directly by the Company at December 31, 1999. Information regarding these
properties is shown in the table below:
<TABLE>
<CAPTION>
Villa Four Creeks
Shady Lane San Marcos Village
--------------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Location Visalia, CA Fresno, CA Visalia, CA
Date of Construction 1985 1991 1986-1991
Purchase Price $2,105,000 $9,000,000* $9,000,000
Purchase Price per Square Foot $40.44 $62.44 $48.27
Notes Payable Secured by
Real Estate at December 31, 1999 $1,259,019 $6,717,604 $5,593,062
Number of Units 54 120 146
Rentable Square Feet 52,056 144,140 186,439
Average Monthly Rent per Unit in 1999 $433 $841 $763
Monthly Rent per Square Foot in 1999 $0.45 $0.70 $0.60
Improved Land Area 2.77 acres 9.77 acres 13.34 acres
Unimproved Land Area -- 9.75 acres --
Occupancy at December 31, 1999 89% 98% 100%
</TABLE>
* In addition to acquiring the currently existing building, the Company
purchased the adjoining 9.75 acres of unimproved land for $1,000,000 for
possible future developments. At the time of purchase, all requisite
entitlements were in place.
On February 2, 1999, the Company acquired Novato Markets and through
its subsidiary acquired a shopping center located in Rohnert Park, California,
named Mountain Shadows Plaza and a shopping center in Petaluma, California,
named Midtown Center. The shopping centers have a combined commercial and retail
space totaling approximately 76,000 square feet. Mountain Shadows Plaza consists
of three buildings and is anchored by a large grocery store. Midtown Center
consists of a single building. As of December 31, 1999, the shopping centers had
two vacancies.
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<PAGE>
Information on these shopping center properties is shown in the table
below:
<TABLE>
<CAPTION>
Mountain
Shadows Midtown
Plaza Center
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Location Rohnert Park, Petaluma, CA
CA
Date of Construction 1986 - 1991 1962
Notes Payable Secured by Combined
Real Estate at December 31, 1999 $6,237,010 na na
Rentable Square Feet 68,699 7,200
Monthly Rent per Square Foot in 1999 $1.02 $.95
Improved Land Area 7.04 Acres 0.39 Acres (leased)
Occupancy at December 31, 1999 96% 100%
</TABLE>
The principal executive offices of the Company and the Former Manager
are located at 655 Montgomery Street, Suite 800, San Francisco, California
94111, telephone (415) 393-8000. The Company leases its office space under a
lease expiring February 28, 2002 and subleases space to the Former Manager.
Item 3. Legal Proceedings.
On March 11, 1999, The Bank of New York ("BNY") filed an action against
the Company in the United States District Court for the Northern District of
California, Case No. C.99-1130 MJJ. The complaint alleged, among other things,
that BNY erroneously paid $1.2 million to the Company and that the Company had
failed to repay approximately $600,000. On May 11, 1999, the parties reached
settlement and agreed on a plan of repayment. As a result, the Company paid
$250,000 on settlement and the remaining 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.
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<PAGE>
On January 27, 1999, Henry G. Elkins, Jr. brought an action against the
Company in the California Superior Court, San Francisco, Case No. 300 825, to
compel the Company to hold an annual meeting. Because the Company was intending
to have a meeting anyway, it voluntarily agreed to a stipulated order without
contesting the issue. The order required the Company to hold its meeting by June
11, 1999, subject to there being a quorum, and to mail notice of the meeting by
April 26, 1999. After the Company brought its Rhode Island action against Mr.
Tobin (as described in the following paragraph), Mr. Elkins filed a motion
requesting the court to hold the Company in contempt or sanction it for failing
to mail the notice of meeting by April 26, 1999. The court denied this motion.
The Company mailed the notice of meeting on May 22, 1999 and initially convened
the meeting on June 11, 1999. The June 11 session of the meeting was adjourned
to July 2, 1999, as a quorum was not present. Mr. Elkins then asked the court to
postpone the meeting to July 15, 1999. Under another stipulated court order, the
meeting was postponed until July 15, 1999. To implement the order, the Company
convened the meeting on July 2, 1999 and, without taking any other action,
immediately adjourned to July 15, 1999. Under the terms of the order, the
Company also accepted Mr. Tobin's nominations as valid for the 1999 annual
meeting. The 1999 annual meeting was held on July 15, 1999.
On May 18, 1999, the Company brought an action (which was amended on
May 21, 1999) against Fredrick G. Tobin (a Rhode Island resident) in federal
District Court for the District of Rhode Island, Case No. CA 99 250L, seeking
among other things a determination that Mr. Tobin's nominations for directors
were invalid and to enjoin him from soliciting proxies from the Company's
stockholders. The court denied the Company's motion for preliminary injunction
against the solicitation of proxies by Mr. Tobin without ruling on the Company's
position that the nominations were invalid. However, because the court indicated
that it did not find the Company's position to be compelling, the Company
voluntarily dismissed this action.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter of the fiscal year covered by this report.
21
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock trades in the over the counter market under
the symbol TISM The Stock was also listed on the Pacific Exchange under the
symbol "TIS" until May 11, 2000 when trading in the stock was suspended from
that exchange. The Company was also listed on the New York Stock Exchange until
August 19, 1998, when the stock was delisted from that exchange. The high and
low closing sales prices of shares of the Common Stock on the New York Stock
Exchange and subsequently on the over the counter market for the periods
indicated were as follows:
High Low
1998
First Quarter $ 2-3/8 $ 1-3/16
Second Quarter 2-3/16 1-9/16
Third Quarter 1-7/8 9/16
Fourth Quarter 7/8 3/8
1999
First Quarter 1-3/8 1/2
Second Quarter 1-3/8 3/4
Third Quarter 1 13/16
Fourth Quarter 7/8 9/16
2000
First Quarter 11/16 1/2
Second Quarter 9/16 1/4
Third Quarter 7/8 1/4
Fourth Quarter 3/4 1/4
--------------------------------------------------------------------------------
On December 14, 2000, the closing sales price of the shares of Common
Stock as reported in the over the counter market was $0.25. On that date the
Company had outstanding 8,893,250 shares of Common Stock which were held by
approximately 500 shareholders of record.
The following table details distributions paid during the Company's
three most recent fiscal years. No distributions were paid in 1997 or 1999.
<TABLE>
<CAPTION>
Date Amount Record Payment
Quarter Ended Declared Declared Date Date
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998 September 15, 1998 $0.002 December 1, 1998 December 18, 1998
--------------------------------------------------------------------------------------------------
</TABLE>
The actual amount and timing of any future dividend payments will be at
the discretion of the Board of Directors and will depend upon the financial
condition of the Company in addition to the requirements of the Code.
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<PAGE>
It is anticipated that distributions generally will be taxable as
ordinary income to shareholders of the Company (including, in some cases,
shareholders that would otherwise be exempt from tax under the Code), although a
portion of such distributions may be designated by the Company as capital gain
or may constitute a return of capital. Such distributions received by
shareholders of the Company will not be eligible for the dividends-received
deduction so long as the Company qualifies as a REIT. The Company furnishes
annually to each of its shareholders a statement setting forth distributions
paid during the preceding year and their characterization as ordinary income,
return of capital or capital gain.
In prior years, a significant portion of the REIT Taxable Income of the
Company has been derived from the Company's Structured Securities although, in
future years, it is anticipated that increasing portions of the taxable income
of the Company will be derived from its operating real estate assets. Taxable
income is increased by non-cash credits from, among other things, the accretion
of market discount on the Mortgage Certificates pledged as collateral for bonds
and is decreased by non-cash expenses, including, among other things, the
amortization of the issuance costs of bonds, market premium on the Mortgage
Certificates pledged as collateral for bonds and the accretion of original issue
discount on certain bond classes. In certain instances, the REIT Taxable Income
of the Company for Federal income tax purposes may differ from its net income
for financial reporting purposes principally as a result of the different
methods used to determine the effect and timing of recognition of such non-cash
credits and expenses.
As a result of the requirement that the Company distribute to its
shareholders an amount equal to substantially all of its REIT Taxable Income in
order to qualify as a REIT, the Company may be required to distribute a portion
of its working capital to its shareholders or borrow funds to make required
distributions in years in which on a tax basis the "non-cash" items of income
(such as those resulting from the accretion of market discount on the assets
owned by the Company) exceed the Company's "non-cash" expenses. If the Company
is unable to pay distributions equal to substantially all of its REIT Taxable
Income, it will not continue to qualify as a REIT.
Item 6. Selected Financial Data
The following selected financial data are qualified in their entirety
by, and should be read in conjunction with, the financial statements and notes
thereto appearing elsewhere in this Annual Report on Form 10-K. The data as of
and for the years ended December 31, 1999, 1998 and 1997 have been derived from
the Company's financial statements which are included elsewhere in this Annual
Report on Form 10-K.
23
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except per share data)
----------------------------------------------- -------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------------
Statement of Operations Data 1999 1998 1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income
Interest Income on Mortgage Certificates $ -- $2,602 $6,059 $7,748 $13,735
Interest Income on Residual Interests 27 22 39 52 1,483
Income from IO Bonds 80 171 360 455 1,128
Income from Commercial
Securitizations -- -- -- -- 89
Interest on Short-term Investments 16 8 2 16 115
Gain (Loss) on Sales of
Mortgage Related Assets 549 (216) 442 450 (2,385)
Loss on Redemption of Investment -- (198) -- -- --
Valuation Reserve Reduction -- 210 1,474 651 541
Loss from Real Estate Operations (636) (269) (261) (171) (289)
Loss on Sales of Real Property -- (157) -- -- --
Writedown of Novato Markets (300) -- -- -- --
Other Income 8 4 11 21 30
------ ------ ------ ------ -------
Total Income (Loss) (256) 2,177 8,126 9,222 14,447
Expenses
Interest Expense on CMOs -- 3,010 6,549 8,317 14,749
Interest Expense on Short-term Debt 53 125 174 159 429
Loss on Other than Temporary
Impairment of Assets -- 2,073 -- -- --
Amortization of Deferred Bond
Issuance Costs -- 80 101 146 276
Administrative and
Management Expenses 2,228 1,323 1,511 1,503 1,572
Repurchase of Stock in Excess of 1,377 -- --
------ ------ ------ ------ -------
Market -- --
-- --
Total Expenses 3,658 6,611 8,335 10,125 17,026
Minority Interest Share of Loss -- (298) -- -- --
------ ------- ------ ------
Net Loss ($3,914) ($4,136) ($209) ($903) ($2,579)
Basic Net Income (Loss) Per Share ($0.44) ($0.51) ($0.03) ($0.11) $0.32
======= ======= ======= ======= =====
Distributions Declared per Share -- $0.002 -- $0.020 --
Weighted Average Shares Outstanding 8,828 8,106 8,106 8,106 8,106
-------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
Selected Financial Data (Continued)
<TABLE>
<CAPTION>
(In thousands) December 31
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Mortgage Certificates, net $ $ -- $ 60,433 $ 72,703 $109,752
--
Residual Interests 83 284 384 436 725
IO Bonds -- 840 1,875 2,695 3,150
Commercial Securitizations -- 184 184 183 191
Reserve for Loss on Investments -- -- (1,523) (2,997) (4,277)
Operating Real Estate Assets, Net 27,447 20,172 28,697 28,945 29,384
Total Assets 29,337 25,056 93,754 105,573 145,247
Accounts Payable and Accrued
Liabilities 2,589 1,807 870 448 561
Notes Payable on Real Estate 19,807 13,794 20,350 20,373 20,362
Short-term Debt 300 667 2,010 2,418 2,118
Total Liabilities 22,696 16,268 83,125 94,555 133,266
Total Shareholders' Equity 6,641 8,788 10,629 11,018 11,981
--------------------------------------------------------------------------------------------------------------
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company commenced operations on August 26, 1988 in connection with
its initial public offering of 8,100,000 shares of Common Stock.
Since 1994, the Company has sold the majority of its investments in
Structured Securities and, during 1995, acquired a portfolio of four
income-producing residential real estate properties of which one was sold during
1998. In February of 1999, the Company acquired two shopping centers in Northern
California. The Company expects that the majority of its ongoing assets and
operating results will be related to its investments in real estate and
selective development opportunities. However, there can be no assurance that
this will occur.
The following table illustrates the Company's cash receipts,
disbursements and reinvestments for the last three years.
<TABLE>
<CAPTION>
CASH FLOW ANALYSIS
(In thousands) 1999 1998 1997
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning Cash Balance $ 2,767 $ 185 $ 82
Cash Received:
Mortgage Related Assets 35 1,124 1,633
Sale of Mortgage Related Assets 1,716 1,888 442
Sale of Real Estate Assets -- 1,584 --
Deposit from Trustee (1,218) 1,218 --
Increase in Short-term Debt 300 -- --
Increase in Real Estate Notes 252 -- 17,400
Decrease in Other Assets -- -- 115
Cash Disbursements:
Cash Expenses (2,777) (1,191) (1,173)
Additions to Real Estate Assets (129) (426) (483)
Increase in Other Assets -- -- --
Distributions -- (16) --
Decrease to Short-term Debt (667) (1,343) (408)
Decrease in Real Estate Notes (224) (256) (17,423)
-------------------------------------------------------------------------------------------------------------
Ending Cash Balance $ 55 $ 2,767 $ 185
-------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Results of Operations
The Company had a net loss of approximately $3,914,000, or $0.44 per
share, for the year ended December 31, 1999. For the year ended December 31,
1998 it had a net loss of $4,136,000, or $0.51 per share. For the year ended
December 31, 1997, it had a net loss of $209,000, or $0.03 per share. The
Company declared distributions totaling $16,000, or $.002 per share for the year
1998. No distributions were declared for 1999 or 1997. The year of 1999
reflected the first full year without the River Oaks Apartments and nearly a
full year with the Novato Markets shopping centers. The year was also impacted
by certain transactions related to repurchase of common stock.
1999 Compared to 1998
Income from real estate operations before depreciation, amortization
and write-off of and loss on sale of property decreased from $517,000 in 1998 to
$96,000 in 1999. The decline in Income is due to the sale of River Oaks at the
end of 1998 partially offset by the purchase of Novato Markets, Inc. in 1999.
Rental and Other Income decreased $375,000 or 9.3% from $4,051,000 in 1998 to $
3,676,000 in 1999. Operating and Maintenance Expenses declined by 15% from
$1,451,000 in 1998 to $1,230,000 in 1999. These two items resulted in a net
decline in income of $154,000 from year to year. Interest on real estate notes
payable, on the other hand, increased $283,000 from 1998 to 1999 due to the
assumption of a note payable bearing interest at 15% in the Novato Markets
purchase. In addition, occupancy at the Company's Central Valley properties
dropped from 97.5% in 1998 to 93.1% at December 31, 1999. Occupancy at the
Sonoma County properties was 96% at December 31, 1999. The decline in Central
Valley Occupancy is primarily due to increased vacancy as renters left to become
first time home buyers.
The Company had an investment in Prudential Securities Series 1993-6
which was redeemed in July 1999 for $633,209. This resulted in a realized gain
of approximately $449,000 in 1999. Also, during 1999 the Company sold its
investment in Bankers Trust Series 1988-1 for $300,000 resulting in a realized
gain of approximately $97,000.
General and Administrative expenses increased from $880,000 in 1998 to
$1,186,000 in 1999. The increase is due to increased expenses related to the
Company's contested election of directors at the Company's 1999 annual meeting
of stockholders. This contest involved multiple meetings of stockholders,
numerous vote counts and investor communications. Legal expenses increased from
$284,000 in 1998 to $1,042,000 in 1999. This increase was due primarily to
increased expenses related to the Company's contested election of directors at
the Company's 1999 annual meeting of stockholders.
The Company charged $1,377,369 to stock purchase expense during 1999
from the February 2, 1999 purchase of shares from The Turkey Vulture Fund XIII
and others. 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,
26
<PAGE>
$1,377,369, charged to stock purchase expense on the accompanying condensed
consolidated statement of operations for the year ended December 31, 1999.
1998 Compared to 1997
1998 was the third full year of the Company's real estate operations.
River Oaks was sold in the fourth quarter of 1998 to increase the Company's
liquidity. The income from operations before depreciation and amortization
decreased from $479,000 in 1997 to $360,000 in 1998. The decline in 1998 income
is due to a $157,000 loss on the sale of the River Oaks property. Rental and
other income increased $64,000 or 1.6% from $3,987,000 in 1997 to $4,051,000 in
1998. Operating and Maintenance Expenses increased $109,000 or 8.12% from
$1,342,000 in 1997 to $1,451,000 in 1998. Occupancy at the Company's properties
improved from 96% in 1997 to 97.5% in 1998.
Net interest margin (interest income from Mortgage Certificates net of
interest expense on CMOs) increased in 1998 to a net interest expense of
$408,000 from net interest expense of $490,000 in 1997. This decrease in net
interest income and expense is due primarily to the principal reductions in the
Company's investment in CMOT 28 that was ultimately sold in 1998.
Below is a summary of net interest margin for the years ended December
31, 1998 and 1997.
(In thousands) 1998 1997 Change
--------- -------- --------
Interest Income from Mortgage Certificates $1,547 $5,845 ($4,298)
Amortization of Market Discount 1,055 214 841
--------- -------- --------
Net Interest Income 2,602 6,059 ($3,457)
--------- -------- --------
Interest Expense on CMOs (713) 5,793 (6,506)
Amortization of Original Issue Discount 3,723 756 2,967
--------- -------- --------
Net Interest Expense 3,010 6,549 (3,539)
--------- -------- --------
Net Interest Margin (Deficit) ($ 408) ($ 490) $ 82
========= ======== ========
The reserve for loss on investments was reduced by $1,523,000 in 1997
as a result of the sale of CMOT 28.
General and Administrative expense decreased from $1,443,000 in 1997 to
$1,289,000 in 1998. This decrease was due primarily to decreased expenses
related to the omission of the 1998 annual meeting of stockholders.
During 1998, the Company determined that the yield on two of its
mortgage related assets was less than the risk free rate versus the amortized
cost basis of the assets. Therefore the Company recognized a loss of $2,073,000
in the income statement to bring amortized cost down to fair value. In addition,
one of the Company's mortgage investments was retired prior to its maturity as
part of an optional redemption of the entire bond series. This retirement
resulted in a loss of $198,000 which was recorded in 1998. Additionally, the
Company sold its interest in CMOT-28 during 1998 which also resulted in the
Company taking a non-cash writedown of $567,000 for recognition of previously
unrealized losses.
27
<PAGE>
Outlook
The Company has determined that it will direct its future investments
principally to multifamily residential properties, family shopping centers and
development opportunities. With regard to real estate investments, the
acquisition strategy of the Company is to identify communities with an expanding
employment base and demographics which will continue to provide economic growth.
After identifying communities with a strong potential economic growth, the
Company attempts to seek out those areas within a chosen community which are
most likely to be positively affected by the economic growth of the community.
Finally, the property sought for purchase within a given area is chosen because
it is considered to be among the highest quality properties in that area and can
be purchased below replacement cost. Management believes that this strategy will
allow income from each of the properties to rise before the properties encounter
significant competition from new construction, however, there can be no
assurance that this will happen.
The Company has generated significant tax loss carryforwards from
losses experienced over the last several years. Should the Company's real estate
acquisitions be successful, the Company would be in a tax position to have the
right, but not the obligation, to continue to use cash flows to rebuild its
investment portfolio prior to resuming taxable dividend payments.
The Company has put forth significant efforts to identify investment
initiatives that would include use of the consolidated net operating loss
carryforward. The Company has had preliminary discussions with potential
strategic partners, centering on possible new investment in the company, real
estate joint ventures or both. The Company has put forth several offers for
strategic combinations in the last year, none of which have been accepted.
Liquidity and Capital Resources
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. However current factors as of
December 31, 1999, raised substantial doubt about the Company's ability to
continue as a going concern. Those factors as of December 31, 1999 that raised
substantial doubt about the Company's ability to continue as a going concern are
as follows:
(1) The company had a significant working capital deficit as
of December 31, 1999. The Company's liabilities that were payable in
the near term exceeded the Company's existing unrestricted cash and
cash equivalents by $2,834,000. The Company's current liabilities,
excluding portions of notes payable due within one year, included the
following:
Accounts payable and accrued liabilities $ 2,547,000
Accrued interest payable 42,000
Short-term debt, Due to affiliate 300,000
-------------
$ 2,889,000
(2) One of the Company's lenders had filed a notice of default
and was requesting immediate payment of approximately $6,418,000 as of
February 29, 2000 reflecting unpaid principal and interest and
including certain other penalties and charges triggered by the
default. As described more fully in Note 22 of the accompanying
Financial Statements, the Company believes that the lender's notice of
default was improper and together with its legal counsel has
28
<PAGE>
taken actions to request the lender to rescind its notice of default.
The Company and the Lender reached a settlement in September of 2000.
See Note 22 to the Company's financial statements.
Management has evaluated the Company's alternatives to enable it to pay
its liabilities as they become due and payable in the current year and to obtain
new financing to repay the loan currently declared in default. Alternatives
evaluated by management included, among other things, consideration of (i) the
sale of its Four Creeks Village property and other real property as necessary
(see below), (ii) reducing general and administrative expenses, (iii) obtaining
financing from a new lender in order to repay the existing debt currently
declared in default, (iv) sale of Novato Markets property in order to repay the
existing debt currently declared in default, and (v) entering into joint venture
arrangements with third parties.
Subsequent Financing Events
Subsequent to year end, on February 28, 2000, the Company entered into
a secured financing agreement for $660,000 for a term of eighteen months at a
rate of twelve and one half percent. Payments were interest only of $6,875 per
month. The note was secured by a second deed of trust on Four Creeks Village
Phase I apartments. This note was retired on November 29, 2000 with the Sale of
Four Creeks Village Apartments (see below).
In May of 2000 the $1,000,000 revolving line of credit to the Company
from TIS Financial Services was renewed until January 31, 2001.
Sale of Shady Lane Apartments
On September 26, 2000, the Company sold its interest in Shady Lane
Apartments in Visalia, California. This 54 unit complex was sold for a selling
price of $1,850,000. There was approximately $1,240,000 of debt. Expenses of
sale paid at closing totaled approximately $135,000 which left approximately
$475,000 in net cash proceeds. The book value of the real estate assets sold was
approximately $1,965,000 prior to the sale, which resulted in a loss on the sale
of approximately $250,000.
Sale of Four Creeks Village Apartments
On November 29, 2000, the Company sold its interest in Four Creeks
Village Apartments in Visalia, California. This 146 unit complex was sold for a
selling price of $ 8,387,122. The company had approximately $6,237,000 of debt.
Expenses of Sale paid at closing totaled approximately $610,000 which left
approximately $1,540,000 in net cash proceeds. The book value of the real estate
assets sold was approximately $8,064,000 prior to the sale, which resulted in a
loss on the sale of approximately $287,000.
These subsequent events have improved the Company's liquidity and
allowed it to pay a substantial portion of its outstanding liabilities.
Proceeds from Financing, Four Creeks $ 660,000
Net cash proceeds, Sale of Shady Lane 475,000
Net cash proceeds, Sale of Four Creeks Village 1,540,000
---------
Total Proceeds from subsequent events $ 2,675,000
29
<PAGE>
Bankruptcy of P-SUB I, Inc. and the Refinancing of Novato Markets.
In January of 2000, the Company received notice that its loan secured
by the Novato Markets Properties of $6,237,010 had been sold to Ocwen Federal
Bank, FSB ("Lender"). In March of 2000, the Company received a Notice of
Maturity Default from Ocwen indicating that the Loan was considered by Ocwen to
have matured on January 1, 2000 and therefore the entire outstanding principal
balance was due and payable including penalties and interest triggered by the
notice of default, total amount payable to Ocwen is $6,418,032. The Company
believed that it had an extension of this loan to June 1, 2000 and was in the
process of arranging a refinance. The Company strongly disagreed with the Notice
of Default.
On May 1, 2000, the Company announced that P-SUB I, Inc. ("Borrower")
filed on Friday April 28, 2000, a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code. This action was taken by P-SUB I in order
to protect the shareholders equity pending a resolution of the Company's
differences with its major lender, Ocwen Federal Bank. The two parties had been
unable to reach agreement on this matter. P-SUB I was in discussions with
possible sources of replacement financing for the loan and in order to protect
its rights and interests it elected to seek Chapter 11 relief.
On September 29, 2000, the Company and Ocwen entered into a Forbearance
Agreement approved by the Court for settlement of this matter. The major terms
of this agreement are as follows:
(1) The amount of the secured debt was established as $6,500,000 as of
August 15, 2000, however the Lender agreed to accept payment of $6,050,000 and
$350,000, for a total of $6,400,000 in full and complete satisfaction of the
Loan and to forbear from exercising its rights and remedies under the original
documents against the Borrower and guarantors, so long as the Borrower and
guarantors timely comply with certain terms and conditions:
(2) The Lender was entitled to keep all funds which it held in suspense
and reserves. These amounts were fundamentally the normal monthly payments of
interest and reserves which the Company had continued to make to the Lender.
(3) The Lender agreed to release all liens on the funds in the
Borrower's income tax account and security deposit account and agreed that the
funds of both accounts shall remain the Borrower's property. These amounts
totaled approximately $87,000.
(4) The Borrower shall be required to pay to Lender the sum of
$350,000.00 due in 24 months. The Note will require interest only payments at
the rate of eight and one-half percent (8.5%) per annum from August 15, 2000
until maturity. The Lender insisted upon a continuing guarantee from Pacific
Securitization and Lorraine Legg, personally.
30
<PAGE>
(5) The Borrower shall be required to pay $6,050,000 as follows to the
Lender by paying $350,000 on or before November 15t 2000 and $5,700,000 on or
before December 28, 2000. This amount shall bear interest at 15% per annum and
interest payments are due on the 15th of each month.
(6) The Company agreed to keep the Chapter 11 proceedings open for 180
days from approval of the settlement, to pay the taxes, keep the property
insured and to keep the property in good condition. The Borrower agreed to
deliver to Lender an original Confidentiality Agreement and Agreement Regarding
Covenant Not to Sue Lender executed by their counsel.
The Company is in the process of finalizing a new collateralized loan
for the amount of the $5,700,000 which is payable to Ocwen on December 28, 2000.
We expect this financing to be completed in January, 2001. If the Company were
unable to secure this financing and under a worst case be obliged to sell the
property, the Company believes that based upon recent appraisals there would be
sufficient proceeds to retire the Ocwen loan.
At December 31, 1999, the Company had outstanding borrowings secured by
multifamily real estate totaling approximately $13,570,000. Approximately 90.8%
of this debt had a fixed rate of interest and 9.2% of the debt bears a variable
rate of interest. The weighted average interest rate at December 31, 1999 was
8.3%. Over the twelve months ending December 31, 2000, scheduled principal
maturities on the notes payable on multifamily real estate real estate amount to
$207,265. The notes are expected to be funded by cash flows from the Company's
multifamily residential properties.
The Company uses its cash flow to provide working capital to pay its
expenses and debt service, acquire other assets and, at the discretion of the
Board of Directors, to pay distributions to its shareholders. In 1999 the
Company's cash flows (in thousands) were used as follows:
Used in operating activities ($1,946)
Provided by investing activities 791
Used in financing activities (1,557)
----------
Net decrease in cash and cash equivalents ($ 2,712)
==========
The Company has no significant commitments for capital expenditures
relating to the real estate operations over the twelve months ended December 31,
2000 and anticipates that any capital expenditures or repair and maintenance
activities would be funded from cash generated from real estate activities. The
Company expects in the future 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.
Capital Resources
When feasible, the Company may seek to increase the amount of funds
available for its activities through various types of debt financing. The
Company may seek to obtain lines of credit from independent financial
institutions. The Company may also seek to raise funds through the issuance of
commercial paper and other debt securities, other forms of borrowings and the
issuance of additional equity securities. Short-term indebtedness would be
expected to bear interest at variable rates. There can be no assurance that the
Company will be able to finance assets that it wishes to acquire.
31
<PAGE>
At December 31, 1999, Short-term borrowing consisted of a $300,000 loan from TIS
Financial Services, Inc. with a variable interest rate commencing at 10.25%,
maturing on January 31, 2001. This line is to provide working capital to the
Company. At December 31, 1998, the Company's short-term borrowings totaled
$667,000 and consisted of a repurchase agreement with Bear Stearns & Co. This
debt was securitized by certain of the Company's mortgage related assets. The
Company's By-Laws provide that it may not incur indebtedness if, after giving
effect to the incurrence thereof, the Company's aggregate indebtedness (other
than liability represented by Structured Securities and any loans between the
Company and its trusts or corporate subsidiaries), secured and unsecured, would
exceed 100% of the Company's average invested assets in the preceding calendar
quarter, as calculated in accordance with generally accepted accounting
principles, unless approved by a majority of the Unaffiliated Directors.
The Company has 100,000,000 authorized shares of Common Stock. The
Company may increase its capital resources by making additional offerings of
Common Stock. Such offerings may result in a reduction of the net tangible book
value per outstanding share and a reduction in the market price of the Company's
Common Stock. The Company is unable to estimate the amount, timing or nature of
such future sales of its Common Stock, as any such sales would depend on general
market conditions and other factors.
The Company has a Dividend Reinvestment and Share Purchase Plan (the
"Plan"). The Plan provides, at the Company's option, for shares purchased under
the Plan to either be issued by the Company, or be purchased on the open market.
The Plan prospectus provides for up to 1,000,000 new shares to be issued. To the
extent new shares are issued, the Company's capital will be increased.
Factors that May Affect Future Results
The future performance of the Company will to some degree depend upon
the ability of the Company to find and execute transactions which will realize
significant value from the Company's tax position. There can be no assurance
that the Company will be able to generate income or cash flow from this kind of
investment.
Ownership of shares of the Company's Common Stock is subject to certain
risks. The Company's earnings from its multifamily residential properties and
shopping centers will depend upon maintaining rental income that exceeds the
Company's interest and other costs. Rental income, in turn, will depend upon the
rental market and rates of occupancy. Long-term profits will depend upon an
appreciation in the value of the residential properties. The ability of the
Company to generate income from the cash flows relating to Structured
Securities, or to minimize losses, depends, in large part, upon whether the
Company is able to respond to fluctuations in market interest rates and utilize
appropriate strategies.
There are varying degrees of risk incident to the ownership of real
estate. There are many factors which can impact the performance of real estate
including economic and demographic trends or governmental regulations which are
out of the control of the Company.
32
<PAGE>
In order to maintain its status as a REIT, the Company is required to comply
with certain restrictions imposed by the Code with respect to the nature of its
assets and income, which could prevent it from making investments or from making
dispositions of investments otherwise considered desirable. The REIT provisions
of the Code require the Company to distribute substantially all of its net
taxable income on an annual basis. If the Company should not qualify as a REIT
in any tax year, it would be taxed as a regular domestic corporation, and
distributions to the Company's shareholders would not be deductible by the
Company in computing its taxable income. Any resulting tax liability could be
substantial and would reduce the amount of cash available for distributions to
shareholders. Further, the failure of the Company to be treated as a REIT for
any one year would disqualify the Company from being treated as a REIT for four
subsequent years.
The Company's ability to use its net operating tax loss carryforwards
could be substantially reduced if the Company were to undergo an "ownership
change" within the meaning of Section 382(g)(1) of the Internal Revenue Code.
Because of these and other factors, future distributions to
shareholders cannot be predicted. The Company has the right, but not the
obligation, to refrain from making distributions to shareholders until the tax
loss carryforward is fully used. It is likely that the market price of the
shares of the Company's Common Stock would be affected by any decline in the
spread between the Company's net yield on its assets and prevailing interest
rates.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary market risk exposure is to changes in interest
rates obtainable on its secured and unsecured mortgage borrowings and to changes
in market which impact the fair value of its Structured Securities as discussed
in Note 3, 4, and 5 to the consolidated financial statements.
The Company manages its exposure to fluctuations in market interest
rates for its borrowings by obtaining fixed rate debt to the extent that rates
available on such arrangements are favorable to the Company. At December 31,
1999 and 1998, 6% and 9% of the Company's outstanding debt was subject to
variable rates respectively. See Note 9 to the consolidated financial statements
for further detail of the Company's outstanding debt.
The Company does not undertake any specific actions to cover its
exposure to interest rate risk and the Company is not party to any interest rate
risk management transactions.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this
Form 10-K. See Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
33
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Biographical Information
Except as otherwise noted, the following individuals have had the
occupations indicated (other than directorships) for at least the past five
years. Officers of the Company are elected by the Board of Directors annually to
serve for one-year terms, subject to earlier termination, and until their
successors are elected. However, both of the Company's executive officers have
entered into employment agreements with the Company (see "Employment Agreements"
in Item 11 below).
Anthony H. Barash, 58, Director of the Company since February, 1999.
Senior Vice President, Corporate Affairs, and General Counsel, Bowater
Incorporated (paper and forest products company) since April 1996; and Partner
in the Los Angeles office, Seyfarth, Shaw, Fairweather & Geraldson (a national
law firm), where he was a member of the firm's Business Law and Real Estate
Group, from May 1993 to April 1996.
Douglas B. Fletcher, 75, Chairman of the Company since 1997. Chairman
and Chief Executive Officer, Fletcher Capital Advisors Incorporated (investment
advisor); Partner, Newport Partners (privately-owned venture capital firm); Vice
Chairman and Director, The Pacific Horizon Group of mutual funds managed by Bank
of America; from 1962 to 1982, Chairman and Chief Executive Officer of Angeles
Corporation (AMEX); former Allied Member, New York Stock Exchange; and Chartered
Financial Analyst.
Patricia M. Howe, 72, Director of the Company since 1988; and Chairman
of the Company from 1988 to 1997. Chairman, Pacific Securitization Inc. (asset
securitization); Chairman, Chief Financial Officer and a Director, Corporate
Capital Investment Advisors (holding company); Chairman, TIS Asset Management
since 1991; and Chairman, TIS Financial Services, Inc. (financial products)
since 1984.
Robert W. Ledoux, 59, Director of the Company since 1988. Private
venture capital investor and consultant to Bryan & Edwards (private venture
capital group) since 1998; Associate, Bryan & Edwards from 1984 to 1998; for the
prior 11 years, Vice President, BA Investment Management Co. (wholly-owned
subsidiary of Bank of America); and Chartered Financial Analyst.
Lorraine O. Legg, 61, President and Chief Executive Officer of the
Company since 1988; and Director of the Company from 1988 to May 1997 and since
September 1997. President, Chief Executive Officer and a Director, Pacific
Securitization, Inc.; President, Chief Executive Officer and a Director of
Corporate Capital Investment Advisors; President, Chief Executive Officer and
Director, TIS Asset Management since 1991; President, Chief Executive Officer
and a Director, TIS Financial Services, Inc. since 1984; Director (since 1993)
and President and Chief Executive Officer (from December 1995 to June 1998),
Meridian Point Realty Trust VIII Co.; and Director (from 1993 to September 1998)
and President and Chief Executive Officer (from February 1996 to September
1998), Meridian Point Realty Trust `83. Director, Downtown Association of San
Francisco; Chairman, Planned Giving Foundation; and Director, Concentrex Inc.
(March 1995 to August 2000).
34
<PAGE>
J. David Schemel, 45, Director of the Company since February, 1999.
Managing Member, Vista Marin, LLC (owner and manager of an office building in
Redwood City, California) since 1998; Managing Member, DSDI, LLC (owner of
apartment buildings in San Francisco and on the San Francisco Peninsula) since
1994; Managing Member, Oxford Associates, LLC (residential home developer) since
1996; and from 1988 to 1994, Vice President, TRI Commercial Real Estate, for
which he managed various workout transactions.
John E. Castello, 56, Executive Vice President and Chief Financial
Officer of the Company since 1988 and its Treasurer since June 1993. Senior Vice
President, TIS Financial Services, Inc. since 1984; Director and Senior Vice
President, TIS Asset Management since 1991; Senior Vice President and Chief
Financial Officer of Meridian Point Realty Trust `83 from February 1996 to
September 1998; Senior Vice President and Chief Financial Officer of Meridian
Point Realty Trust VIII Co. from December 1995 to June 1998; and Assistant
Secretary, INVG Mortgage Securities Corp. from 1992 to 1996.
Item 11. Executive Compensation
Compensation of Executive Officers
The following table sets forth information regarding compensation paid
or payable by the Company to the Company's executive officers for the years
indicated below.
SUMMARY COMPENSATION TABLE
Name and Principal Position Year Annual Compensation
--------------------------- ---- -------------------
Lorraine O. Legg 1999 $95,000
President and Chief Executive Officer 1998 95,000
1997 95,000
John E. Castello 1999 $80,000
Executive Vice President and Principal 1998 80,000
Financial Officer 1997 80,000
Stock Options. The following table sets forth information regarding
options held by the Company's executive officers at December 31, 1999. The
Company did not grant any options to its executive officers in 1999.
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Year-End(#)(1) at Fiscal Year-End ($)(2)
Name Exercisable/Unexercisable Exercisable/Unexercisable
----------------------- ---------------------------- ---------------------------
Lorraine O. Legg 150,000/0 $0/$0
John E. Castello 50,000/0 $0/$0
-----------
(1) All such options were granted in 1995, have a per share exercise price
of $2.23 and expire in 2005. (Subject to earlier termination in the
event of termination of employment, disability or death).
35
<PAGE>
(2) The per share exercise price of such options exceeded the $0.5625
closing price of the Common Stock on December 31, 1999, and no options
were "in-the-money."
Employment Agreements. The Company has employment agreements with Ms.
Legg and Mr. Castello. Ms. Legg's agreement provides for an initial term through
July 1, 1999, and Mr. Castello's agreement provides for an initial term through
July 1, 1998. Both agreements have evergreen renewal provisions that
automatically extend the term of the agreements for one year, unless either
party provides prior written notice to terminate during the periods provided by
the agreement. Each agreement includes (i) an annual base salary of $95,000 for
Ms. Legg and $80,000 for Mr. Castello; (ii) an annual incentive performance
bonus determined at the discretion of the Board of Directors; (iii) certain
fringe benefits; (iv) payment of 50% of the cost of certain medical and
disability insurance and (v) two weeks paid vacation per calendar year for the
first four years of service (three weeks per calendar year thereafter).
Each agreement provides for the officer to receive his or her accrued
base salary to the date of termination by reason of death or disability (as
defined in the agreements). Each agreement also provides for the officer to
receive his or her base salary, incentive bonus and fringe benefits that are
accrued and unpaid up to the date of termination for "cause" (as defined in the
agreements) or if the officer terminates the agreement without "good reason" (as
defined in the agreements). If the officer is terminated other than for cause,
or he or she quits for good reason (which includes a change of control), he or
she will receive: (i) any unpaid portion of his or her base salary and incentive
bonus accrued and unpaid through the termixnation date; (ii) a severance payment
in the amount of 299% of the higher of the officer's combined base salary and
actual incentive bonus for the preceding fiscal year and the average of the
officer's combined base salary and incentive bonus for the three preceding
years, provided that the total severance payment is not less than $283,100 for
Ms. Legg and $239,000 for Mr. Castello; (iii) immediate vesting of all stock
options held by the officer and (iv) continuation of all fringe benefits until
the earlier of the officer's securing full-time employment or completion of the
term of the agreement remaining at the time of termination. Each agreement
provides that during the term of the agreement, and for one year after
termination of the employment relationship by the Company without cause or by
the officer for good reason, the officer will not be affiliated with a
"Competing REIT" (as defined in the agreements).
Compensation of Directors
The Company pays an annual fee of $12,000 to each non-employee director
and a fee of $300 for each Board meeting and each Board committee meeting
attended by each such director (except meetings by conference telephone). The
Company reimburses directors for costs and expenses incurred in attending such
meetings.
Under the Company's 1995 Stock Option Plan, each Unaffiliated Director
in office at the close of each annual meeting is granted an option to purchase
1,000 shares of Common Stock as of the tenth business day immediately following
each such annual meeting of stockholders. Such options are exercisable on the
date of grant, and remain exercisable for ten years from the grant date, unless
the Unaffiliated Director's services to the Company terminate at an earlier
date. The exercise price is equal to 110% of the fair market value of the
optioned shares on the date the option is granted, except that the exercise
price is reduced by the amount of any dividends declared after the date the
optionee is eligible to purchase such shares. In no event, however, is the
exercise price to be less than 50% of the fair market value of the optioned
share on the date the option is granted.
36
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
ownership of shares of Common Stock as of December 14, 2000, by (i) each person
known to the Company to beneficially own more than five percent of the
outstanding Common Stock, (ii) each director and nominee for director, (iii)
each individual named in the summary compensation table below and (iv) all
directors and executive officers as a group. Except as otherwise indicated, each
stockholder has sole voting and investment power with respect to the shares
beneficially owned, subject to community property rights where applicable.
Name Number of Shares Percentage of Common
---- ---------------- --------------------
Pacific Securitization, Inc.
Lorraine O. Legg 1,613,070 (1) 18.1%
Patricia M. Howe
John V. Winfield
The Intergroup Corporation 774,200 (2) 8.7%
Santa Fe Corporation
Anthony H. Barash 8,000 (3) *
Douglas B. Fletcher 16,600 (4) *
Patricia M. Howe 155,820 (5) 1.7%
Robert W. Ledoux 10,050 (6) *
Lorraine O. Legg 206,700 (7) 2.3%
J. David Schemel 1,000 (8) *
John E. Castello 76,000 (9) *
All directors and executive 2,087,240 (10) 22.7%
officers as a group
(7 persons)
----------
*Holds less than 1%.
(1) Represents shares held of record by Pacific Securitization, Inc.
("Pacific"), a wholly-owned subsidiary of E & L Associates, Inc.
("E&L"), which is in turn a wholly-owned subsidiary of Corporate
Capital Investment Advisors ("CCIA"). CCIA is principally owned by
Lorraine O. Legg, the President, Chief Executive Officer and a director
of the Company, and Patricia M. Howe, a director of the Company. The
business address of Pacific is 615 S. W. Burlingame Terrace, Portland,
Oregon 97201 and the business address of , E&L, CCIA, Ms. Legg and Ms.
Howe is 655 Montgomery Street, Suite 800, San Francisco, California
94111. See also notes (4) and (6) below. Includes 65,000 shares that
are subject to purchase by J. David Schemel pursuant to an option
granted to Mr. Schemel.
(2) All information with respect to Mr. Winfield, The Intergroup
Corporation ("Intergroup") and Santa Fe Corporation ("Santa Fe") is
based solely on a Schedule 13D dated July 31, 1997, as amended by an
Amendment No. 2 to Schedule 13D dated February 27, 1999, filed by them
with the Securities and Exchange Commission (the "SEC"). Mr. Winfield
has sole voting and dispositive power with respect to 193,000 shares
owned by him directly. As the Chairman, President, Chief Executive
Officer and controlling shareholder of Intergroup, Mr. Winfield shares
voting and dispositive power with Intergroup with respect to 471,100
shares owned by Intergroup directly. As the Chairman, President and
Chief Executive Officer of Santa Fe, he shares voting and dispositive
power with Santa Fe with respect to 110,100 shares owned by Santa Fe
directly. The business address of Mr. Winfield and Intergroup is 2121
Avenue of the Stars, Suite 2020, Los Angeles, California 90067. The
business address of Santa Fe is 2251 San Diego Avenue, Suite A-151, San
Diego, California 92110.
(3) Includes 1,000 shares issuable under options exercisable within 60 days
of the date of this proxy statement.
37
<PAGE>
(4) Includes 4,000 shares issuable under options exercisable within 60 days
of the date of this proxy statement.
(5) Includes 50,000 shares held through an individual retirement account
and 102,000 shares issuable under options exercisable within 60 days of
the date of this proxy statement. Does not include 1,613,070 shares
held of record by Pacific (see note (1) above). Ms. Howe shares voting
and dispositive power with respect to the 1,613,070 shares held by
Pacific directly. Ms. Howe has sole voting and dispositive power over
all other shares held by her.
(6) Includes 500 shares held in an individual retirement account for the
benefit of Mr. Ledoux's wife, as to which Mr. Ledoux shares voting and
investment power, and 4,000 shares issuable under options exercisable
within 60 days of the date of this proxy statement.
(7) Includes 56,600 shares held through certain trusts or an individual
retirement account, and 150,000 shares issuable under options
exercisable within 60 days of the date of this proxy statement. Does
not include 1,613,070 shares held of record by Pacific (see note (1)
above). Ms. Legg shares voting and dispositive power with respect to
the 1,613,070 shares held by Pacific directly. Ms. Legg has sole voting
and dispositive power over all other shares held by her.
(8) Includes 1,000 shares issuable under options exercisable within 60 days
of the date of this proxy statement.
(9) Includes 2,300 shares held in an individual retirement account for the
benefit of Mr. Castello's wife, as to which Mr. Castello shares voting
and investment power, 4,000 shares held in custody for Mr. Castello's
two sons, as to which Mr. Castello shares voting and investment power,
and 50,000 shares issuable under options exercisable within 60 days of
the date of this proxy statement.
(10) Includes 1,613,070 shares held of record by Pacific (see notes (1), (4)
and (6) above) and 312,000 shares issuable under options exercisable
within 60 days of the date of this proxy statement.
Item 13. Certain Relationships and Related Transactions
TIS Financial Services, Inc. The Company has a Facilities and Expense
Sharing Agreement (the "Sharing Agreement") with TIS Financial Services, Inc.
(the "Former Manager"). The Sharing Agreement provides for the prorata sharing
of office space, office equipment and the expenses of certain administrative and
other personnel and ancillary services. The prorata sharing is determined based
upon the relative benefit received by each party in accordance with the amount
of space used or the relative amount of time each such resource is used, or such
other allocation method as may be reasonable and agreed to by the parties. The
Sharing Agreement continues in effect until terminated by one of the parties on
30 days' prior written notice or until the parties no longer share office space.
The Company paid the Former Manager $48,000 under the Sharing Agreement in 1999.
In April 1999, the Company entered into a financing agreement with the
Former Manager, whereby the Former Manager extended a revolving line of credit
of $1 million to the Company. This revolving line of credit is to provide
working capital to the Company. It is for a term of one year and has been
extended to January 31, 2001. It is at the annual rate of prime plus one and
one-half percent. Credit support to the Former Manager includes guarantee loans
by a bank supported by guarantees from employees of the Former Manager. Payment
of the line of credit can be accelerated on certain events, including a change
in control of the Company in which certain executive officers of the Company are
removed or in which a majority of the Board is changed.
The executive officers of the Former Manager include the following
persons, who also serve as directors and/or executive officers of the Company:
Patricia M. Howe, Chairman of the Board of the
38
<PAGE>
Former Manager; Lorraine O. Legg, President and Chief Executive Officer of the
Former Manager; and John E. Castello, Senior Vice President of the Former
Manager. Ms. Howe and Ms. Legg each own 38.125% of the outstanding stock of
CCIA, the parent of the Former Manager and the indirect parent of Pacific.
Management believes that the terms and conditions of the transactions with the
Former Manager described above are at least as favorable to the Company as those
that could be obtained from unaffiliated third parties.
Pacific Securitization, Inc. On February 2, 1999, the Company acquired
all the shares of Novato Markets, Inc. ("Novato") from Pacific Securitization,
Inc. ("Pacific"), in exchange for 1,613,070 shares of Common Stock (or
approximately 18.1% of its then outstanding shares). Through a wholly-owned
subsidiary, Novato owns a shopping center located in Rohnert Park, California,
named Mountain Shadows Plaza, and a shopping center subject to a ground lease in
Petaluma, California, named Midtown Center. The shopping centers have combined
commercial and retail space totaling approximately 80,000 square feet. Pacific
is indirectly principally owned by Ms. Legg, the President and Chief Executive
Officer and a director of the Company, and Ms. Howe, a director of the Company.
The Company's acquisition of Novato by virtue of the share exchange was approved
by the Company's Board of Directors and, specifically, by directors with no
financial interest in or other relationship to Pacific or its owners.
The Company determined the fair value of the underlying assets acquired
in the share exchange to be $8,527,000, on the basis of appraisals of the assets
by independent appraisers. The net asset value of $2,443,000 was then determined
by reducing the fair value of $8,527,000 by the $5,984,000 in mortgage debt
assumed and the $100,000 in current liabilities on or related to the assets. In
accordance with generally accepted accounting principles, the assets and
liabilities acquired in the share exchange were recorded at their respective
fair values, and the shares of Common Stock issued to Pacific were recorded at
the net asset value of $2,443,000 (or approximately $1.51 per share). The
closing price of the Common Stock as reported in the over-the-counter market for
February 1, 1999 (the Pacific Exchange reported no trades in the Common Stock
for February 1 or 2, 1999 and the over-the-counter market reported no trades in
the Common Stock for February 2, 1999), was $0.8125 per share.
The shares of Common Stock were issued to Pacific under an exemption to
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"). Accordingly, the shares are "restricted securities," as
defined in Rule 144 adopted under the Securities Act, and are not freely
transferable. The Company granted Pacific one-time demand registration rights
with respect to the shares for the period beginning June 30, 1999 and ending
February 2, 2001. It also granted Pacific piggy-back registration rights
exercisable if the Company files a registration statement under the Securities
Act in connection with the proposed offer and sale for cash of shares of Common
Stock by it or by any of its other stockholders.
Before the closing of the share exchange, Novato caused its
wholly-owned subsidiary to transfer to Pacific all its rights under a lease,
with option to purchase, with Ignacio Properties, LLC, relating to the Ignacio
Center in Novato, California (the "Ignacio Property"), and Pacific agreed to
assume all the obligations of the subsidiary under the lease and option. The
Company, Novato, Novato's wholly-owned subsidiary and Pacific then entered into
an agreement whereby the parties clarified their respective rights and
obligations relating to the Ignacio Property and the Company's rights to an
escrow established when Pacific originally acquired Novato. Mr. Barash controls
Ignacio Properties LLC and subsequent to this transaction became a director of
the Company.
Management believes that the terms and conditions of the Pacific
transaction described above are more favorable to the Company than those that
could be obtained from unaffiliated third parties. Additional information
concerning the Pacific transaction is contained in the Company's Current Report
on Form 8-K dated February 2, 1999, as amended by an Amendment No. 1 on Form
8-K/A filed on April 5, 1999 and an Amendment No. 2 on Form 8-K/A filed on June
1, 1999. Copies of these filings may be obtained from the Company in the same
manner as copies of the Company's Annual Report on Form 10-K may be obtained.
39
<PAGE>
During 2000, Pacific made unsecured loans totaling $146,000 to the
Company. The loans, which are represented by a promissory note, bear interest at
an annual rate of 11% and are payable on demand. Management believes that the
terms of the loans are more favorable to the Company than those that could be
obtained from unaffiliated third parties.
Turkey Vulture Fund XIII, Ltd., Third Capital LLC and Messrs. Osborne,
Jarratt and Lewis. On February 2, 1999, the Company repurchased 793,700 shares
of its Common Stock from Turkey Vulture Fund XIII, Ltd. ("TVF") for $1,984,250,
20,000 shares of its Common Stock from Mr. Jarratt for $40,000 and 12,000 shares
of its Common Stock from Mr. Lewis for $24,000, pursuant to an agreement among
the Company, TVF, Third Capital, LLC ("Third Capital") and Messrs. Osborne,
Jarratt and Lewis. The closing price of the Common Stock as reported in the
over-the-counter market for February 1, 1999 (the Pacific Exchange reported no
trades in the Common Stock for February 1 or 2, 1999 and the over-the-counter
market reported no trades in the Common Stock for February 2, 1999), was $0.8125
per share. Based upon such per share closing price, TVF received a premium of
$1,339,369, Mr. Jarratt received a premium of $23,750 and Mr. Lewis received a
premium of $14,250 for their shares.
TVF, Third Capital and Messrs. Osborne, Jarratt and Lewis agreed that,
for a period of seven years, they will not directly or indirectly, among other
things, (i) effect or participate in or in any way assist any other person in
effecting or participating in (a) any acquisition of securities or rights to
acquire securities or assets of the Company or its subsidiaries, (b) any tender
or exchange offer, merger or other business combination involving the Company or
its subsidiaries, (c) any liquidation or other extraordinary transaction with
respect to the Company or its subsidiaries or (d) any solicitation of proxies or
consents to vote any voting securities of the Company; (ii) form or in any way
participate in a "group" with respect to the Company; (iii) otherwise act, alone
or in concert with others, to seek to control or influence the management, Board
of Directors or policies of the Company or its subsidiaries; (iv) take any
action to compel the holding of an annual or special meeting of stockholders or
(v) enter into any discussions or arrangements with any person relating to the
foregoing.
The parties also agreed to a mutual general release of all claims
arising out of or relating to the business or affairs of the Company or the
ownership of its stock. Messrs. Osborne, Jarratt and Lewis resigned from the
Company's Board of Directors, effective February 2, 1999. This share repurchase
was approved by the Company's Board of Directors and, specifically, by directors
with no financial interest in the transaction or the Pacific transaction.
John E. Castello. During 2000, Mr. Castello arranged for his account in
the Company's 401(k) Plan to make unsecured loans totaling $75,000 to the
Company. The loans, which are represented by a promissory note, bear interest at
an annual rate of 11% and are payable on demand. Management believes that the
terms of the loans are more favorable to the Company than those that could be
obtained from unaffiliated third parties.
40
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K.
(a) 1. Financial Statements and Report of Arthur Andersen LLP,
Independent Public Accountants
Report of Independent Public Accountants............................44
Consolidated Balance Sheets - December 31, 1999 and 1998............45
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997...........................46
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997...............47
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997...........................48
Notes to the Consolidated Financial Statements......................49
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation as
of December 31, 1999................................................67
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or notes
thereto.
41
<PAGE>
3. Exhibits
The following exhibits in the accompanying index to exhibits are filed
herewith or are incorporated by reference to exhibits previously
filed.
Number Exhibit
------ -------
3(a) Amended Articles of Incorporation of the Registrant (1)
3(b) Amended and Restated Bylaws of the Registrant (7)
4(a) Specimen Certificate representing $.001 par value Common Stock (1)
4(b) Dividend Reinvestment and Share Purchase Plan (2)
10(c) Custody Agreement between Registrant and Mellon Bank N.A. (3)
10(d) Transfer Agency Agreement between Registrant and Mellon Securities
Trust Company (3)
10(e) Reverse Repurchase Agreement between Registrant and Bear, Stearns
Securities Corp.(4)
10(f) Loan and Security Agreement dated July 19, 1995 between TIS Mortgage
Investment Company and Paine Webber Real Estate Securities, Inc. (5)
10(g) Nonqualified Stock Option Agreement with John D. Boyce and Schedule of
Omitted Contracts (5)
10(h) Nonqualified Stock Option Agreement with John E. Castello and Schedule
of Omitted Contracts (5)
10(i) Employment Agreement between TIS and Lorraine O. Legg. (6)
10(j) Employment Agreement between TIS and John E. Castello. (6)
10(k) Facilities and Expense Sharing Agreement (6)
10(l) Agreement and Plan of Reorganization dated as of February 1, 1999,
between TIS Mortgage Investment Company and Pacific Securitization,
Inc. (8)
10(m) Agreement dated February 1, 1999, among TIS Mortgage Investment
Company, Novato Markets, Inc., P-SUB I, Inc. and Pacific
Securitization, Inc. (8)
10(n) Agreement dated as of February 1, 1999, among TIS Mortgage Investment
Company, Turkey Vulture Fund XIII, Ltd., Richard M. Osborne, Third
Capital, LLC, Christopher L. Jarratt and James G. Lewis. (8)
21 Subsidiaries of the Registrant
-----------------------------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-11 (No. 33-22182) declared effective August 19, 1988.
(2) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form S-3 (No. 33-44526) filed with the
Securities and Exchange Commission on December 30, 1991.
(3) Incorporated herein by reference to Registrant's Annual Report on Form 10-K
(File No. 1-10004) filed with the Securities and Exchange Commission on March
30, 1992.
42
<PAGE>
(4) Incorporated herein by reference to Registrant's Annual Report on Form 10-K
(File No. 1-10004) filed with the Securities and Exchange Commission on March
30, 1993.
(5) Incorporated herein by reference to Registrant's Annual Report on Form 10-K
(File No. 1-10004) filed with the Securities and Exchange Commission on April 1,
1996.
(6) Incorporated herein by reference to Registrant's Current Report on Form 8-K
(File No. 1-10004) filed with the Securities and Exchange Commission on July 9,
1996.
(7) Incorporated herein by reference to Registrant's Current Report on Form 8-K
(File No. 1-10004) filed with the Securities and Exchange Commission on May 29,
1997.
(8) Incorporated herein by reference to Registrant's Current Report on Form 8-K
(File No. 1-10004) filed with the Securities and Exchange Commission on February
17, 1999.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
TIS Mortgage Investment Company:
We have audited the accompanying consolidated balance sheets of TIS Mortgage
Investment Company (a Maryland corporation) and Subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and the schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TIS Mortgage Investment Company
and Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has a significant working capital
deficit, has suffered significant losses from operations and has debt
obligations that are immediately due and payable. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying Schedule
III- Real Estate and Accumulated Depreciation as of December 31, 1999 is
presented for the purpose of complying with the Securities and Exchange
Commission rules and is not a required part of the basic consolidated financial
statements. This information has been subjected to the audit procedures applied
in our audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
San Francisco, California
April 20, 2000 (except with respect to the matter discussed in Note 22, as to
which the date is December 27, 2000.)
44
<PAGE>
TIS Mortgage Investment Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands, except share data) December 31, 1999 December 31, 1998
-------------------------------------------------------------------------------- --------------------------
<S> <C> <C>
ASSETS
Operating Real Estate Assets, net $27,447 $20,172
Mortgage Related Assets
Residual Interests 83 284
Interest Only (IO) Bonds -- 840
Commercial Securitizations -- 184
------- -------
Total Mortgage Related Assets 83 1,308
------- -------
Other Assets
Cash and Cash Equivalents 55 2,767
Restricted Cash 390 140
Accrued Interest and Accounts Receivable, Net 35 33
Advances to Affiliates 345 --
Construction in Progress 342 133
Capitalized Loan Fees, Net 309 351
Prepaid Expenses 331 152
------- -------
Total Other Assets 1,807 3,576
------- -------
Total Assets $29,337 $25,056
======= =======
-------------------------------------------------------------------------------- --------------------------
LIABILITIES
Notes Payable on Real Estate $19,807 $13,794
Short-term Debt (including payable to affiliate of
$300 and $0, respectively) 300 667
Accounts Payable and Accrued Liabilities (including
payable to affiliate of $189 and $4, respectively) 2,547 473
Due to Trustee -- 1,218
Accrued Interest Payable 42 116
------- -------
Total Liabilities 22,696 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 ,
respectively 9 8
Additional Paid-in Capital 76,467 74,696
Retained Deficit (69,819) (65,905)
Accumulated Other Comprehensive Loss (16) (11)
------- -------
Total Shareholders' Equity 6,641 8,788
------- -------
Total Liabilities and Shareholders' Equity $29,337 $25,056
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
45
<PAGE>
TIS Mortgage Investment Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
(In thousands, except per share data) 1999 1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REAL ESTATE OPERATIONS
Rental and Other Income $ 3,676 $ 4,051 $ 3,987
Operating and Maintenance Expenses (1,230) (1,451) (1,342)
Interest on Real Estate Notes Payable (2,033) (1,750) (1,820)
Property Taxes (317) (333) (346)
Depreciation and Amortization (702) (786) (740)
Write-off of and Loss on Sale of Property (330) (157) --
------------- ----------- -----------
Loss from Real Estate Operations (936) (426) (261)
-------- --------- ---------
MORTGAGE RELATED ASSETS
Interest 123 2,803 6,460
Valuation Reserve Reduction -- 210 1,474
Loss on Redemption of Investment -- (198) --
Loss due to Other than Temporary Impairment of Assets -- (2,073) --
Gain (Loss) on Sales of Mortgage Related Assets 549 (216) 442
Other 8 4 11
---------- --------- ---------
Income from Mortgage Related Assets 680 530 8,387
------------ ------- -------
INTEREST AND CMO RELATED EXPENSES
Collateralized Mortgage Obligations
Interest -- 3,010 6,549
Administration Fees -- 34 68
Amortization of Deferred Bond Issuance Costs -- 80 101
Interest on Short-term Debt -- 125 174
--------- ------- -------
Total Interest and CMO Related Expenses -- 3,249 6,892
--------- ------- -------
OTHER EXPENSES
General and Administrative, including amounts paid
to a related party of $48, $29 and $38, respectively 1,186 1,005 1,270
Interest Expense, including amounts to related parties
of $34, $0, and $0, respectively 53 -- --
Legal Expenses 1,042 284 173
Repurchase of Common Stock in Excess of Market 1,377 -- --
------- ---------- -----------
Total Other Expenses 3,658 1,289 1,443
------- ------- --------
Loss Before Minority Interest (3,914) (4,434) (209)
Minority Interest Share of Loss -- (298) --
------- ------------ -----------
Net Loss ($ 3,914) ($ 4,136) ($ 209)
========== ========= ========
------------------------------------------------------------------------------------------------------------------
Net Loss per Share, basic and diluted ($0.44) ($0.51) ($0.03)
Distributions Declared per Share -- $0.002 --
Weighted Average Number of Shares Outstanding 8,828 8,106 8,106
------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE>
TIS Mortgage Investment Company and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999, 1998 and 1997
-----------------------------------------------------------------------------------------------------------------------
(In thousands) Accumu-
lated Compre-
Compre- hensive
Common Stock Paid-in Retained hensive Income
Shares Amount Capital Deficit Loss Total (Loss)
--------------------------------------------------------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 8,106 $8 $ 74,696 $(61,544) $(2,142) $11,018
Net Loss -- -- -- (209) -- (209) ($209)
Other Comprehensive Loss:
Net Unrealized Gain on available
for sale securities, net of
reclas-
sification adjustment -- -- -- -- (180) (180) (180)
-------
Comprehensive Loss ($389)
--------------------------------------------------------------------------------------------------------- =======
Balance - December 31, 1997 8,106 8 74,696 (61,753) (2,322) 10,629
Net Loss -- -- -- (4,136) -- (4,136) ($4,136)
Other Comprehensive Income:
Net Unrealized Gain on available
for sale securities, net of
reclas-
sification adjustment -- -- -- -- 2,311 2,311 2,311
-------
Comprehensive Loss ($1,825)
========
Distributions Declared -- -- -- (16)-- -- (16)
---------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 8,106 8 74,696 (65,905) (11) 8,788
Net Loss -- -- -- (3,914) -- (3,914) ($3,914)
Other Comprehensive Loss:
Net Unrealized Loss on available
for sale securities, net of
reclassification adjustment -- -- -- -- (5) (5) (5)
-------
Comprehensive Loss ($3,919)
=======
Issuance of Shares to acquire real
estate 1,613 2 2,441 -- -- 2,443
Redemption of Shares (826) (1) (670) -- -- (671)
---------------------------------------------------------------------------------------------------------
Balance - December 31, 1999 8,893 $ 9 $ 76,467 $ (69,819) $ (16) $ 6,641
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
47
<PAGE>
TIS Mortgage Investment Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
(In thousands) 1999 1998 1997
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($ 3,914) ($ 4,136) ($ 209)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and Amortization 822 1,503 1,476
(Gain) Loss on Sales of Mortgage Related Assets (549) 216 (442)
Loss on Redemption -- 198 --
Loss due to Other than Temporary Impairment -- 2,073 --
Write-off of and Loss on Sales of Property 330 157 --
Minority Interest Share in Net Loss -- (298) --
Valuation Reserve Reduction -- (1,523) (1,474)
Decrease (Increase) in Accrued Interest and
Accounts Receivable (5) 85 184
Decrease (Increase) in Prepaid Expenses (184) (141) 19
Decrease in Other Assets -- -- 115
Increase in Advances to Affiliates (313) -- --
Increase in Accounts Payable and
Accrued Liabilities 1,941 950 421
Decrease in Accrued Interest Payable (74) (121) (169)
--------- --------- --------
Net Cash Used in Operating Activities (1,946) (1,037) (79)
--------- --------- --------
---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net Decrease (Increase) in Restricted Cash 40 (154) (528)
Additions to Real Estate Assets (129) (426) (483)
Increase in Construction in Progress (209) -- --
Proceeds from Sale of Real Estate Assets -- 1,584 --
Principal Reduction in Mortgage Certificates -- 9,888 12,485
Proceeds from Sales of Mortgage Related Assets 1,716 1,888 442
Principal Reduction (Increase) in Residual Interests (7) 90 41
Principal Increase in Commercial Securities -- -- (1)
Principal Reduction in IO Bonds 35 765 652
Purchase of Company Shares (671) -- --
Net Cash Received in Purchase of Novato Markets 16 -- --
--------- --------- --------
Net Cash Provided by Investing Activities 791 13,635 12,608
--------- --------- --------
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Deposit from Trustee (1,218) 1,218 --
Decrease in Short-term Debt (667) (1,343) (408)
Principal Payments on CMOs -- (9,619) (11,995)
Proceeds from Notes Payable on Real Estate 252 -- 17,400
Principal Payments on Notes Payable on Real Estate (224) (256) (17,423)
Proceeds from Revolving Line of Credit 300 -- --
Cash Distributions Paid on Common Stock -- (16) --
--------- --------- --------
Net Cash Used in Financing Activities (1,557) (10,016) (12,426)
--------- --------- --------
--------------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents (2,712) 2,582 103
Cash and Cash Equivalents at Beginning of Year 2,767 185 82
--------- ---------- --------
Cash and Cash Equivalents at End of Year $ 55 $ 2,767 $ 185
========= ========== ========
--------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash Paid for CMO Interest -- $3,893 $6,718
Cash Paid for Other Interest $1,723 $1,763 $1,889
--------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE>
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. The Company
TIS Mortgage Investment Company (the "Company") was incorporated on May
11, 1988. The Company operates as a real estate investment trust (REIT) and has,
in years prior to 1995, primarily invested in structured securities (mortgage
related assets) including residual interests, principal only bonds (PO Bonds),
interest only bonds (IO Bonds) and collateralized mortgage obligations (CMOs).
Beginning in 1994, the Company changed its investment focus from investments in
structured securities to multifamily real estate located in California's Central
Valley. Accordingly, subsequent to 1994, the Company has sold the majority of
its investments in structured securities and in 1995 acquired a portfolio of
four income-producing residential real estate properties (as of December 31,
1999, three such properties remain) and in 1999 the Company acquired two
shopping centers in Northern California. See Note 22 regarding subsequent
sales of real estate. The Company expects that the majority of its ongoing
assets and operating results will be related to investments in real estate and
development related activities.
Going Concern
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. However, current factors raise
substantial doubt about the Company's ability to continue as a going concern as
follows:
(1) The company has a significant working capital deficit as of
December 31, 1999. The Company's liabilities that are payable in the
near term exceed the Company's existing unrestricted cash and cash
equivalents by approximately $9,407,000. The Company's current
liabilities include the following:
Accounts payable and accrued liabilities $ 2,547,000
Accrued interest payable 42,000
Portions of notes payable due within one year 6,573,000
Short-term debt, Due to affiliate 300,000
-----------
$ 9,462,000
(2) The Company's projection of its 2000 results of operations is
expected to be a loss and cash flow from operations is also expected to
be a deficit of approximately $2,500,000.
(3) In January of 2000, the Company was informed that the lender
holding the Novato Markets Note had sold their interest in that note to
a new owner, Ocwen Federal Savings Bank FSB ("Ocwen"). On February 29,
2000, Ocwen informed the Company that it had filed a notice of default
regarding the maturity of the note and requested immediate payment of
approximately $6,418,000 reflecting unpaid principal and interest and
including certain other penalties and charges triggered by the
default.. The company disputed the maturity default and entered into
negotiations with Ocwen to settle the matter. In March, Ocwen indicated
that it was intending to install a trustee during the period of
default. On March 29, 2000 in order to protect the interests of the
Company and its shareholders, P-Sub I, Inc. the wholly owned subsidiary
of the Company which has title to the two shopping centers in Northern
California, petitioned the court for relief
49
<PAGE>
under Chapter 11 of the United States Bankruptcy Code. See Note 22,
Subsequent Events, for a description of the settlement of this matter.
Management has evaluated the Company's alternatives to enable it to pay
its liabilities as they become due and payable in the current year, reduce or
eliminate the projected 2000 operating loss and operating cash flow deficit, and
to obtain new financing to repay the loan currently declared in default.
Alternatives being evaluated and worked on by management include, among other
things, consideration of (i) the sale of its Four Creeks Village property and
other real property as necessary (see Note 22, Subsequent Events), (ii) reducing
general and administrative expenses, (iii) obtaining financing from a new lender
in order to repay the existing debt currently declared in default, (iv) sale of
Novato Markets property in order to repay the existing debt currently declared
in default, 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 of the
Company to achieve a target sales price for its real estate and the
identification of suitable joint venture partner(s).
The Company believes that the proceeds from the sale of real estate and
debt refinancing will provide liquidity for it to continue as a going concern
throughout 2000, however, management can provide no assurance with regard
thereto. (See Note 22, Subsequent Events.)
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.
2. Summary of Significant Accounting Policies
Mortgage Related Assets - Emerging Issues Task Force Issue 89-4,
subsequently modified by issue 93-18, specifies the method of accounting for
Residual Interests in collateralized mortgage obligations ("CMOs"). Issue 89-4,
among other things, required Residual Interests to be classified either as
"equity" (and be accounted for under the Equity Method) or as "nonequity" (and
be accounted for under a level yield method referred to as the Prospective
Method). The methods described in Issue 89-4 are essentially the same as those
used by the Company.
The Company has classified all of its investments in mortgage related
assets as available-for-sale investments, carried at fair value in the financial
statements. Unrealized holding gains and losses, excluding unrealized losses
considered to be other than temporary, for available-for-sale investments are
excluded from earnings and reported as a net amount as part of comprehensive
income in shareholders' equity until realized.
All of the Company's investments in mortgage related assets are subject
to write down whenever the yield on the projected cash flows is less than a risk
free rate. If the yield on the projected cash flows is less than a risk free
rate, the decline in value is considered to be "other than temporary" and the
investment is written down to its fair value as the new cost basis. The amount
of the write down is included in the Company's current earnings (i.e. accounted
for as a realized loss).
For purposes of evaluating impairment the Company considers its
investment in each of its equity residuals to be a net cash flow investment (net
of CMO bond interest payments and related CMO bond administrative expenses). The
Company measures other than temporary impairment by comparing the yield on the
projected net cash flows from the equity residual, (i.e. Mortgage Certificates
net of discounts and CMO bond liabilities) to a risk free rate. If the yield on
the projected cash flows from the equity residual is less than a risk free rate,
the Company records a reserve to reduce the carrying value to fair value. The
fair value is calculated using the forecasted net cash flows discounted at a
risk adjusted rate. The risk adjusted rate is determined by the Company using
established market transactions for securities having similar characteristics
and backed by collateral of similar rate and term.
50
<PAGE>
For investments in mortgage assets which are temporarily impaired, the
Company has recorded cumulative net unrealized losses of approximately $16,000
and $11,000 as of December 31, 1999 and 1998, respectively, directly to
shareholders' equity.
Fair Value of Financial Instruments - Based on the borrowing rates
currently available to the Company, the carrying amount of its debt approximates
fair value.
Principles of Consolidation - The Company's consolidated financial
statements present the results of operations of the Company and its wholly-owned
subsidiaries, TIS Property Acquisition Company ("TISPAC") and Novato Markets,
Inc. ("Novato"). TISPAC, a Maryland corporation, incorporated on September 8,
1995 for the purpose of owning and financing real property, and the accounts
underlying the Company's interest in real estate partnerships. On February 2,
1999, the Company acquired 100% of the stock of Novato Markets, Inc. and its
wholly-owned subsidiary, P-SUB I, Inc., from a related party of the Company. See
Note 7 for details regarding this transaction. All significant intercompany
balances and transactions have been eliminated in the consolidated financial
statements.
In 1998, the Company sold its economic interest in CMOT-28 through the
sale of the residual interest certificate and optional redemption rights in the
underlying trust. As a result, the accounts of CMOT-28 are not included in the
consolidated balance sheets at and after December 31, 1998 and the results of
operations of the trust are included in the 1998 and 1997 consolidated
statements of operations only through the date of sale.
Amortization of Premiums and Discounts - Premiums and discounts related
to mortgage certificates and CMOs were amortized to income using the interest
method over the stated maturity of the mortgage certificates or CMOs. Residual
Interests held in bond form and Corporate Real Estate Mortgage Investment
Conduit ("REMIC") Residual Interests, regardless of percentage ownership, are
Nonequity Residual Interests and, along with IO Bonds, are accounted for under
the Prospective Method. Under this method, assets are carried at book value and
income is amortized over their estimated lives based on a method which provides
a constant yield. At the end of each quarter, the yield over the remaining life
of the asset is recalculated based on expected future cash flows using current
interest rates and mortgage prepayment speeds. This new yield is then used to
calculate the subsequent quarter's financial statement income.
Capitalized Loan Fees - Capitalized loan fees are amortized as interest
expense over the term of the related debt.
Operating Real Estate Assets - Operating real estate assets are
depreciated using the straight-line method over the estimated useful lives of
the real estate assets. The Company uses a 40 year estimated life for buildings
and improvements and either a 5 or 12 year life for personal property depending
on the nature of the asset. Significant expenditures that improve or extend the
useful life of the asset are capitalized and depreciated over their estimated
useful lives.
Investments in real estate are stated at the lower of depreciated cost
or estimated fair value. Fair value for financial reporting purposes is
evaluated periodically by the company on a property by property basis using
undiscounted cash flow. If a potential impairment is identified, it is measured
by the property's fair value based on either sales comparable or the net cash
expected to be generated by the property, less estimated carrying costs
(including interest) throughout the anticipated holding period, plus the
estimated cash proceeds from the ultimate disposition of the property. In
management's opinion, as of December 31, 1999, the carrying value of real estate
assets did not exceed their estimated fair value. To the extent that the
carrying value exceeds the estimated fair value, a provision for decrease in net
realizable value is recorded. Estimated fair value is not necessarily an
indication of a property's current value or the amount that will be realized
upon the ultimate disposition of the property. As of December 31, 1999 and 1998,
the properties are located exclusively in California. As a result of this
geographic concentration, the operations of these
51
<PAGE>
properties could be adversely affected by a recession or general economic
downturn where these properties are located.
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 for
residential properties and from month-to-month to 16 years for retail
properties.
Construction in Progress - Project costs clearly associated with the
development and construction of a real estate project are capitalized as
construction in progress. In addition, interest, real estate taxes and other
costs are capitalized during the period in which the property is under
construction and until costs related to the property's development are complete
and the property is substantially ready to be put into operation.
Restricted Cash - Restricted cash of approximately $390,000 and
$140,000 as of December 31, 1999 and 1998, respectively, represents amounts in
property tax and insurance impound accounts required under the terms of certain
notes payable on real estate.
Income Taxes - The Company has elected to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended. As a REIT, the Company must
distribute at least 95% of its taxable income to its shareholders. No provision
has been made for income taxes in the accompanying consolidated financial
statements as the Company is not subject to Federal income taxes for 1999, 1998
and 1997. The loss reported in the accompanying consolidated financial
statements may be greater or less than the taxable loss because some income and
expense items are reported in different periods for income tax purposes. Over
the life of a Residual Interest or IO Bond, total taxable income will equal
total financial statement income. However, the timing of income recognition may
differ between the two from year to year.
Net Loss Per Share - Basic net loss per share is based upon the
weighted average number of shares of Common Stock outstanding for 1999, 1998,
and 1997. These amounts were 8,827,636, 8,105,880 and, 8,105,880 shares each
year, respectively. The potential common shares related to the 1995 Stock Option
Plan (see Note 13) are antidilutive in 1999, 1998 and 1997, and therefore are
not included in the diluted weighted average number of shares outstanding. The
number of antidilutive potential common shares in 1999, 1998 and 1997 were
344,000, 342,000, and 347,000 shares, respectively.
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.
Distributions - The Company paid a distribution to shareholders of
$0.002 per share in the year ended December 31, 1998. There were no
distributions paid by the Company in 1999 or 1997. Of the 1998 distribution,
40.28% was taxable and considered "excess inclusion" income. Excess inclusion
income is attributable to Residual Interests for which an election has been made
to be treated as a REMIC for Federal income tax purposes. The portion of the
Company's distributions determined to be excess inclusion income is taxable to
certain otherwise tax-exempt shareholders as unrelated business income. Except
for certain entities such as savings and loan associations, the portion of the
distribution considered excess inclusion income may not be offset by any
deductions or losses, including net operating losses.
New Accounting Pronouncement - Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133) as amended by SFAS 137, will be adopted by the
Company effective January 1, 2001. This statement establishes standards for
52
<PAGE>
accounting for derivative instruments and requires that an entity recognize
derivatives as assets or liabilities on the balance sheet 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 Company's financial condition or results of operation.
Reclassifications - Certain items in the 1998 and 1997 financial
statements have been reclassified to conform to the 1999 presentation. Such
reclassifications had no effect on net loss and total shareholders' equity
previously reported.
3. Residual Interests
The Company has in the past invested in Residual Interests in
Collateralized Mortgage Bond issuances. During 1999 the Company sold its
investment in Bankers Trust Series 1988-1 (BT88-1) for $300,000 resulting in a
realized gain of approximately $97,000. During 1998, the Company recorded a loss
due to other than temporary impairment of its investment in Nonequity Residual
interests of $90,000 triggered by the decline in the yield on certain
investments below the risk-free rate. Presented in the following table is a
schedule of the Residual Interests owned at December 31, 1999 and 1998.
RESIDUAL INTERESTS
------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Book Value
Residual December 31, Prospective
Purchase ---------------------------------- Method
Series Price 1999 1998 Yield
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonequity Residual Interests
BT 88-1 $1,537 $-- $176 14.0%
LFR-9 2,589 66 89 14.0%
CMSC I 8,642 14 14 14.0%
FHLMC 25 4,934 2 3 14.0%
FHLMC 21 5,361 1 2 14.0%
---------------------------------------------------------------------------------------------------------------
$83 $284
---------------------------------------------------------------------------------------------------------------
</TABLE>
4. Interest Only (IO) Bonds
The Company has in the past invested in 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 and recorded a realized gain of approximately
$8,000. In conjunction with this sale, the Company retired short-term debt of
approximately $616,000. In June of 1999 Pru Home Mtg Corp Series 1992-7 reached
its maturity. In 1998, the Company recorded a loss due to other than temporary
impairment of its investment in IO Bonds of $1,983,000 triggered by the decline
in yield on certain investments below the risk-free rate. The Company no longer
has any IO Bond investments. Presented below is a schedule of the Company's IO
Bonds at December 31, 1999 and 1998.
INTEREST ONLY (IO) BONDS
------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Book Value
December 31, Prospective
Purchase --------------------------------- Method
Interest Only Bond Price 1999 1998 Yield
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FNMA Series 1992-123 Class S $8,203 $ -- $ 809 30.00%
Pru Home Mtg Corp Series 1992-7 4,776 -- 31 14.00%
-------------------------------------------------------------------------------------------------------------
$ -- $ 840
=============================================================================================================
</TABLE>
53
<PAGE>
5. Commercial Securitizations
Commercial Securitizations include debt obligations that are issued in
multiple classes and are funded as to the payment of interest and principal by a
specific group of Mortgage Loans on multiple family or commercial real estate
and other collateral.
The Company had an investment in Prudential Securities Series 1993-6
which was redeemed in July 1999 for $633,209. This resulted in a realized gain
of approximately $449,000. Presented below is a schedule of Commercial
Securitizations owned by the Company:
<TABLE>
<CAPTION>
(In thousands) Book Value
-----------------------------------------
Purchase December 31, December 31,
Issuer and Series Price 1999 1998
---------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Prudential Securities Series 1993-6 $250 $-- $184
============================================== ==================== ==================== ====================
</TABLE>
6. Operating Real Estate Assets
The carrying value of operating real estate assets at December 31, 1999
and 1998 is presented in the following table:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1999 1998
----------------------------------------------- ---------------- -----------------
<S> <C> <C>
Land $ 7,041 $ 4,120
Buildings and improvements 21,848 16,920
Personal property 1,018 899
----------------------------------
Total 29,907 21,939
Less accumulated depreciation
and amortization (2,460) (1,767)
----------------------------------
Net $27,447 $20,172
==================================
</TABLE>
On February 2, 1999, the Company acquired 100% of the stock of Novato
Markets, Inc. for 1,613,070 shares of common stock of the Company. Novato
Markets, Inc.'s only asset is 100% of the stock of P-Sub I, Inc., which owns two
shopping centers in Sonoma County, California. Novato Markets, Inc., through its
parent company, Pacific Securitization, Inc., is a related party to the Company.
See Note 7 for further details on this transaction.
In December 1998, the Company divested the River Oaks apartment
complex in Hanford, California for a selling price of $8,060,000. After closing
costs and prorated items, the Company recorded a loss on sale of approximately
$157,000 and net proceeds of approximately $1.5 million. In conjunction with the
sale, the purchaser assumed the $6.3 million mortgage obligation related to the
property.
Included in Construction in Progress is capitalized interest of $19 and
$0 at December 31, 1999 and 1998, respectively.
At December 31, 1998, the Company's three multifamily properties had an
overall occupancy of 97.5% and the Northern California Shopping Centers were 96%
occupied (unaudited).
7. Exchange of Shares for Novato Markets.
On February 2, 1999, the Company acquired all the shares of Novato
Markets, Inc. ("Novato") from Pacific Securitization, Inc., ("Pacific") in
exchange for 1,613,070 shares of Common Stock (the "Shares") of the Company
pursuant to an Agreement and Plan of Reorganization dated as of February 1,
54
<PAGE>
1999, between the Company and Pacific. Pacific is indirectly principally owned
by Lorraine O. Legg, the President and Chief Executive Officer and a director of
the Company, and Patricia M. Howe, a director of the Company. Novato owns a
shopping center located in Rohnert Park, California, named Mountain Shadows
Plaza, and owns a shopping center subject to a ground lease in Petaluma,
California, named Midtown Center. The Shares were issued to Pacific under an
exemption to the registration requirements of the Securities Act of 1933, as
amended. Accordingly, the Shares are "restricted securities," as defined in Rule
144 of the Securities Act, and are not freely transferable. The share exchange
is intended to be a tax free reorganization within the meaning of Section
368(a)(1) of the Internal Revenue Code of 1986, as amended.
At the time of the acquisition, the real estate was subject to mortgage
loans. The acquisition was valued based on the value of the assets and
liabilities acquired as follows:
Real estate
Land $ 2,916,000
Buildings and Improvements 5,055,000
Cash and other assets 559,000
Notes payable on real estate (5,985,000)
Other liabilities assumed (102,000)
-------------
Net assets acquired $ 2,443,000
===========
Subsequent to the acquisition, the company determined that certain of
Novato's assets were obsolete and recognized a charge of approximately $330,000
included in write-off of and loss on disposal of property in the accompanying
consolidated statement of operations.
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 was 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. Total interest cost
recorded under this arrangement was $11,000 in 1999.
55
<PAGE>
9. Notes Payable on Real Estate
The following table summarizes the debt outstanding on the properties
as of December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
Principal Balance Interest Monthly
December 31, Basis of Rate Principal
------------ Interest Dec. 31, Due and Interest
Property 1999 1998 Rate 1999 Date Payment
------------------------ -------------- -------------- ---------------------- ------------ --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Shady Lane $ 1,259,019 $ 1,292,145 Floating Rate 8.375% 12/1/04 $ 12,065
Villa San Marcos 6,717,604 6,825,984 Fixed 8.31% 4/1/07 70,597
Four Creeks - I 1,746,756 1,767,100 Fixed 8.16% 12/1/05 13,521
Four Creeks - II 3,846,306 3,908,426 Fixed 8.31% 4/1/07 31,649
Due and
Novato Markets 6,237,010 0 Fixed 15.00% Payable 45,729
----------------------------------------------------------------------------------------------------------------------------
Total $19,806,695 $13,793,655 $173,561
============================================================================================================================
</TABLE>
The Novato Markets note payable accrues interest 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 lender has filed a notice of default and is
requesting immediate payment of approximately $6,418,000 as of February 29, 2000
reflecting unpaid principal and interest and including certain other penalties
and charges triggered by the default. The Company believes that the lender's
notice of default is improper and together with its legal counsel has taken
actions to request the lender to rescind its notice of default. (See Note 22,
Subsequent Events.)
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 28, 2000, the Company entered into a secured financing
agreement for $660,000 for a term of eighteen months at a rate of 12.5%.
Payments are interest only of $6,875 per month. The note is secured by a second
deed of trust on Four Creeks Village Phase I apartments.
The scheduled principal payments to be made on notes payable on real
estate outstanding at December 31, 1999, giving effect to the financing obtained
in February 2000, are as follows (in thousands), except for the Shady Lane
property note payable, as discussed below:
Year Amount
--------------------------------------
2000 $ 6,427,832
2001 867,265
2002 225,124
2003 244,523
2004 265,593
Thereafter 11,177,339
--------------------------------------
Total $19,207,676
======================================
The variable rate loan for the Shady Lane property is payable in
monthly installments of $12,065. The floating rate of interest is adjusted every
six months, in July and December. Since the principal payments vary each month,
the scheduled principal payments are not included in the schedule above.
56
<PAGE>
10. Short-term Debt
At December 31, 1999, short-term borrowing consisted of a $300,000
unsecured loan from TIS Financial Services, Inc. (TISFIS) as part of a
$1,000,000 revolving line of credit to the Company. The amount outstanding at
December 31, 1999 has a variable interest rate at the rate of prime plus one and
one half percent and matures on May 15, 2000. (See Note 22 regarding the
extension of this loan.) TISFIS and the Company have common ownership and
executive officers and as such are related parties. Credit support to TISFIS
includes guaranteed loans by a bank supported by guarantees from employees of
TISFIS. This line is to provide working capital to the Company. 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
At December 31, 1998, the Company's short-term borrowings totaled
$667,000 and consisted of a repurchase agreement with Bear Stearns & Co. The
repurchase agreement borrowing had a weighted average interest rate of 7.129%,
an initial term of one month, was renewed on a month-to-month basis, and was
collateralized by FNMA Series 92-123 S, IO Bond. On March 4, 1999, the Company
sold its interest in FNMA Series 1992-123 S and in conjunction with this sale,
the Company retired short-term debt of approximately $616,000. The Company has
no other committed lines of credit.
11. Share Purchase from Turkey Vulture Fund XIII, Ltd.
On February 2, 1999, the Company acquired 793,700 shares of its Common
Stock from Turkey Vulture Fund XIII, Ltd. for $1,984,250, 20,000 shares of its
Common Stock from Christopher L. Jarratt for $40,000 and 12,000 shares of its
Common Stock from James G. Lewis for $24,000, pursuant to an Agreement dated as
of February 1, 1999, among the Company, Turkey Vulture Fund, Richard M. Osborne,
Third Capital, LLC, Mr. Jarratt and Mr. Lewis. Turkey Vulture Fund, Third
Capital and Messrs. Osborne, Jarratt and Lewis agreed that, for a period of
seven years, they will not directly or indirectly, among other things, effect or
participate in or in any way assist any other person in effecting or
participating in any acquisition of securities or rights to acquire securities
or assets of the Company or its subsidiaries. The parties also agreed to a
mutual general release of all claims arising out of or relating to the business
or affairs of the Company or the ownership of its stock. Messrs. Osborne,
Jarratt and Lewis resigned from the Company's Board of Directors, effective
February 2, 1999. This share purchase and the acquisition of Novato (See Note 7)
were approved by the Company's Board of Directors and, specifically, by
directors with no financial interest in either transaction. The disinterested
directors required that the share exchange transaction be closed as a condition
to closing the share purchase transaction. The difference between the market
value of the stock acquired by the Company ($670,881) and the amount paid for
the shares ($2,048,250) is reflected as repurchase of common stock in excess of
market (an expense) in the accompanying consolidated statements of operations.
12. Leasing Activity
Future minimum rentals due under non-cancelable operating leases in
effect at December 31, 1999 with tenants are as follows:
Year Amount
---- ------
2000 $641,000
2001 606,000
2002 464,000
2003 347,000
2004 306,000
Thereafter 2,232,000
In addition to minimum rental payments, tenants pay reimbursements for
their pro rata share of specified operating expenses, which amounted to
approximately $184,000, $0 and $0 for the years ended December 31, 1999, 1998
and 1997, respectively. These amounts are included as rental revenue and rental
expense in the accompanying statements of operations. Certain leases also
provide for the payment of
57
<PAGE>
additional rent based on a percentage of the tenant's revenues. Additional rents
under these leases were approximately $3,000, $0 and $0 for the years ended
December 31, 1999, 1998 and 1997, respectively. Certain leases contain options
to renew.
13. Stock Options
The 1995 Stock Option Plan (the "Plan") provides for the granting of
non-qualified stock options to officers and unaffiliated directors of the
Company. Under the terms of the Plan, the purchase price of the shares subject
to each option granted to officers will not be less than 100% and options
granted to unaffiliated directors will not be less than 110% of their fair
market value at the date of the grant reduced by the aggregate amount of
distributions declared. Options granted are exercisable for no more than 10
years from the date of grant.
The Company accounts for stock options under APB Opinion 25 under
which no compensation cost has been recognized. The Company has provided the
following pro forma net income and earnings per share data as if compensation
cost for the Plan had been provided for consistent with Statement of Financial
Accounting Standards No. 123. The potential common shares related to the Plan
are antidilutive in 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net Loss (in thousands): As reported ($3,916) ($4,136) ($209)
Pro forma (3,921) (4,136) (214)
Earnings per share As reported ($0.44) ($0.51) ($0.03)
Pro forma ($0.44) ($0.51) ($0.03)
</TABLE>
The following table summarizes the stock option activity for the years
ended December 31, 1999, 1998, and 1997, respectively.
Number of Share
Options Outstanding
--------------------
Balance, December 31, 1996 342,000
Granted to officers 6,000
Expired (1,000)
--------------------
Balance, December 31, 1997 347,000
Granted --
Expired (5,000)
--------------------
Balance, December 31, 1998 342,000
Granted 5,000
Expired (3,000)
--------------------
Balance, December 31, 1999 344,000
====================
58
<PAGE>
During 1999, 3,000 options expired related to an unaffiliated director
who resigned in 1998. During 1998, 5,000 options expired relating to two
unaffiliated directors who were replaced in 1997. During 1997, 1,000 options
expired relating to an unaffiliated director who retired in 1996. No other
options were exercised, forfeited, or expired during 1999, 1998 or 1997. As of
December 31, 1999 and 1998, respectively, 344,000 and 342,000 of the options
were exercisable. As of December 31, 1999, 56,000 shares were available under
the Plan for granting further options. No options were granted in 1998. The
options outstanding at December 31, 1999 have exercise prices of $1.08, $1.25,
$1.22, $2.25 and $2.26 with a weighted average exercise price of $2.22 and a
weighted average remaining contractual life of 5.8 years.
The weighted average fair value of options granted in 1999 and 1997 was
$1.00 and $1.02, respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model. Management
made the following average assumptions for grants in 1999: risk-free interest
rate of 5.88%, expected distribution yield of 0%, expected life of 10 years, and
expected volatility of 112%.
14. Dividend Reinvestment and Share Purchase Plan
The Company has a Dividend Reinvestment and Share Purchase. The Plan
provides, at the Company's option, for shares purchased under the Plan to either
be issued by the Company, or be purchased on the open market. The Plan
prospectus provides for up to 1,000,000 new shares to be issued. To the extent
new shares are issued, the Company's capital will be increased.
15. Related Party Transactions
Expense Sharing Agreement
In connection with becoming self-managed on July 1, 1996, the Company
entered into a Facilities and Expense Sharing Agreement ("Expense Sharing
Agreement") with TIS Financial Services Inc., (the "Former Manager") providing
for the sharing of office space, office equipment and the expenses of certain
administrative and other personnel and ancillary services. In addition, the
Board approved employment contracts with Lorraine O. Legg, Chairman and
President of the Company, for a term of three years and John E. Castello, as
Executive Vice President and Chief Financial Officer, for a term of two years.
The Expense Sharing Agreement provides for certain office space and expense
sharing arrangements, whereby the Company and the Former Manager share on a
prorata basis all fees and expenses incurred in connection with rent, telephone
charges, utilities and other office expenses, bookkeeping fees and expenses and
miscellaneous administrative and other expenses, including certain personnel
expenses, as described in the Expense Sharing Agreement. The prorata sharing of
such expenses is determined based upon the relative benefit received by each
party in accordance with the amount of space utilized or the relative amount of
time each such resource is used, or such other allocation method as may be
reasonable and agreed to by the parties. The Expense Sharing Agreement continues
in effect until terminated by either party on 30 days prior written notice or at
such time as the parties no longer continue to share office space.
The Company incurred expenses of $48,000, $28,000 and $38,000 for the
years ended December 31, 1999, 1998, and 1997, respectively under the expense
sharing agreement with TISFIS.
Advances to affiliates
Amounts due from affiliates were $345,000 and $0 at December 31, 1999
and 1998, respectively. These amounts represent reimbursements due for payroll
and other expense advances from TIS Financial Services, Inc. (TISFIS) of $
294,000 and $0, and reimbursements for advances to Ignacio of $51,000 and $0.
Each of the above is a related party by way of common management.
59
<PAGE>
Payable to affiliates
Accounts payable to affiliates were $189,000 and $4,000 at December 31,
1999 and 1998, respectively. These amounts include expense advances from TISFIS
for $168,000 and $4,000 for 1999 and 1998, respectively, and an advance from E &
L Associates of $21,000 for 1999.
In addition, short-term debt of $300,000 and $0 at December 31, 1999
and 1998 is payable to TISFIS, a related party. (See Note 10.) The Company
incurred interest expense on this debt of $34,000 in 1999 and $0 in 1998.
Included in interest expense in 1999 is $12,500 paid to a board member
in 1999 as a loan fee.
16. Interest Income
Interest income from Mortgage Related Assets consisted of the
following:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
(In thousands) 1999 1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Certificates, net $ -- $2,602 $6,059
Short-term Investments 16 -- 2
Residual Interests 27 22 39
Interest Only (IO) Bonds 80 171 360
Commercial Securitizations -- 8 0
----------------------------------------------------------------------------------------
Total $ 123 $2,803 $6,460
========================================================================================
</TABLE>
17. Commitments and Contingencies
Risk of Uninsured Losses The Company's real estate properties are
located in areas that are subject to earthquake activity. The Company's
comprehensive liability, fire, flood, extended coverage and rental loss
insurance does not cover damage resulting from an earthquake and certain other
losses. Accordingly, should the Company sustain damage resulting from an
earthquake or other uninsured loss, the Company could lose its investment in,
and anticipated profits and cash flows from the properties. The accompany
financial statements do not reflect any adjustments for these uncertainties.
Litigation The Company is involved from time to time in legal actions
relating to the ownership and operations of its properties. In management's
opinion, the liabilities, if any, that may ultimately result from such legal
actions are not expected to have a materially adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
Environmental Matters The Company follows a policy of monitoring its
properties for the presence of hazardous or toxic substances. The Company is not
aware of any environmental liability with respect to the properties that would
have a material adverse effect on the Company's business, assets or results of
operations. There can be no assurance that such a material environmental
liability does not exist. The existence of any such environmental liability
could have an adverse effect on the Company's results of operations and cash
flow.
60
<PAGE>
Lease Commitments The Company has an operating lease on its office
space and an operating ground lease. Future minimum rental payments under
non-cancelable operating and ground leases in effect at December 31, 1999 are as
follows:
Year Amount
--------------------
2000 $278,000
2001 280,000
2002 57,000
2003 13,000
2004 13,000
Thereafter 802,000
The land on which the Midtown Shopping Center is located is owned by a
third party and is subject to a ground lease. The ground lease expires in 2067,
and unless the lease is extended, the use of the land, together with all
improvements, will revert back to the third party.
18. Segment Data
The Company's operations consist of investments in structured
securities and a portfolio of multifamily residential housing and retail
shopping centers. 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 retail shopping centers
located in Sonoma County, California. Units of each of the residential buildings
are rented to tenants on either a month-to-month basis or for terms of one year
or less. Retail Space is rented to tenants based upon lease terms of varying
lengths.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Details of the
financial results of the Company's real estate operations are segregated in the
accompanying income statement, real estate operations results for the twelve
months in each of the periods ending December 31, 1999, 1998, and 1997 amounted
to a net loss of $936,000, $426,000 and $261,000 respectively.
Net operating results of the investments in structured securities for
the years ended December 31, 1999, 1998 and 1997 were net income of $680,000, a
net loss of $2,719,000 and net income of $1,495,000 respectively as reflected in
the following table:
Financial Instruments Portfolio ($000) 1999 1998 1997
--------------------------------------- ---- ---- ----
Income from Mortgage related assets. $680 $530 $8,387
Total Interest and CMO Related Expenses -- (3,249) (6,892)
----- ------- ------
Net Income (Loss) from Financial Instruments $680 $(2,719) $1,495
The Company does not allocate overhead expenses to its segments nor does
management consider such costs in its evaluation of the results of each segment.
61
<PAGE>
19. Supplemental Disclosure of Non-Cash Transactions
The following items were non-cash transactions with regard to the sale
of CMOT-28 and the River Oaks Property for the year ended December 31, 1998 and
the acquisition of Novato Markets in the year ended December 31, 1999.
<TABLE>
<CAPTION>
CMOT-28
1998
--------------------------------------------------------------------------------------
<S> <C>
Reduction of Mortgage Certificates $51,600,000
Reduction of Unamortized Discount on Mortgage Certificates (885,000)
Reduction of Mortgage Certificate Reserve for Loss (567,000)
Reduction of Restricted Cash on Mortgage Certificates 1,814,000
Reduction of Accrued Interest on CMOs 365,000
Reduction of CMOs (53,103,000)
Reduction of Unamortized Discount on CMOs 3,125,000
Reduction of Accrued Interest Payable on CMOs (745,000)
Reduction of Minority Interest (1,352,000)
RIVER OAKS
1998
--------------------------------------------------------------------------------------
Reduction of Land ($904,244)
Reduction of Building (7,266,026)
Reduction of Plant, Property and Equipment (691,230)
Reduction of Accumulated Depreciation 848,829
Reduction of Accounts Receivable (5,462)
Reduction of Prepaid Assets (6,148)
Reduction of Amortizable Costs (180,280)
Reduction of Accounts Payable 79,133
Reduction of Notes Payable 6,294,917
NOVATO MARKETS
1999
--------------------------------------------------------------------------------------
Issuance of stock for property
Stock Issued $2,443,000
Assets acquired and Liabilities assumed
Real Estate 7,971,000
Cash and other assets 559,000
Mortgages (5,985,000)
Other liabilities assumed (102,000)
-----------------
$2,443,000
</TABLE>
62
<PAGE>
20. Comprehensive Loss
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130") Reporting Comprehensive Income. 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 the net loss as reported on the
consolidated statements of operations, and the unrealized gain (loss) due to
changes in the fair value of its available-for-sale investments that are
reported as a component of shareholders' 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 loss.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Unrealized gain (loss) arising during the year: $544 ($176) $262
Reclassification adjustments for net realized
(gains) losses on securities available for sale
included in net loss during the year: (549) 2,487 (442)
----------------------------------
($5) $2,311 ($180)
</TABLE>
21. Quarterly Information (Unaudited)
The following is quarterly information as reported during 1999 and
1998.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
(In thousands, First Second Third Fourth
Except per share data) Quarter Quarter Quarter Quarter Total
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Income from
Mortgage Related Assets $63 $19 $491 $107 $680
Loss from Real Estate Operations (85) (169) (117) (565) (936)
Net Income (Loss) (1,680) (1,343) 32 (923) (3,914)
Basic and diluted Net Income
(Loss) per Share ($0.19) ($0.16) $0.00 ($0.09) ($0.44)
1998
Income (Loss)
from Mortgage Related Assets $1,528 $1,296 ($224) ($2,070) $530
Loss from Real Estate Operations (38) (54) (45) (289) (426)
Net Loss (269) (609) (541) (2,717) (4,136)
Basic and diluted Net Loss per
Share ($0.03) ($0.08) ($0.07) ($0.33) ($0.51)
</TABLE>
63
<PAGE>
22. Subsequent Events
Financing Of Four Creeks Village Phase I.
On February 28, 2000, the Company entered into a secured financing
agreement for $660,000 for a term of eighteen months at a rate of 12.5%.
Payments are interest only of $6,875 per month. The note is secured by a second
deed of trust on Four Creeks Village Phase I Apartments. This note was retired
on November 29, 2000 with proceeds from the Sale of Four Creeks Village
Apartments.
Renewal of Line of Credit
In May of 2000 the $1,000,000 revolving line of credit to the Company
from TIS Financial Services was renewed until January 31, 2001.
Bankruptcy of P-SUB I, Inc. and the Refinancing of Novato Markets.
In January of 2000, the Company received notice that its loan secured
by the Novato Markets Properties of $6,237,010 had been sold to Ocwen Federal
Bank, FSB. In March of 2000, the Company received a Notice of Maturity Default
from Ocwen indicating that the Loan was considered by Ocwen to have matured on
January 1, 2000 and therefore the entire outstanding principal balance was due
and payable including penalties and interest triggered by the notice of default.
The total amount payable to Ocwen was $6,418,032. The Company believed that it
had an extension of this loan to June 1, 2000 and was in the process of
arranging a refinance. The Company strongly disagreed with the Notice of
Default.
On May 1, 2000, the Company announced that P-SUB I, Inc. ("Borrower")
filed on Friday April 28, 2000, a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code. This action was taken by P-SUB I in order
to protect the shareholders equity pending a resolution of the Company's
differences with its major lender, Ocwen Federal Bank FSB ("Lender"). The two
parties had been unable to reach agreement on this matter. P-SUB I was in
discussions with possible sources of replacement financing for the loan and in
order to protect its rights and interests it elected to seek Chapter 11 relief.
On September 29, 2000, the Company and Ocwen entered into a Forbearance
Agreement approved by the Court for settlement of this matter. The major terms
of this agreement are as follows:
(1) The amount of the secured debt was established as $6,500,000 as of
August 15, 2000, however the Lender agreed to accept payment of $6,050,000 and
$350,000, for a total of $6,400,000 in full and complete satisfaction of the
Loan and to forbear from exercising its rights and remedies under the original
documents against the Borrower and guarantors, so long as the Borrower and
guarantors timely comply with certain terms and conditions:
(2) The Lender was entitled to keep all funds which it held in suspense
and reserves. These amounts were fundamentally the normal monthly payments of
interest and reserves which the Company had continued to make to the Lender.
(3) The Lender agreed to release all liens on the funds in the
Borrower's income tax account and security deposit account and agreed that the
funds of both accounts shall remain the Borrower's property. These amounts
totaled approximately $87,000.
64
<PAGE>
(4) The Borrower shall be required to pay to Lender the sum of
$350,000 due in 24 months. The Note will require interest only payments at the
the rate of eight and one-half percent (8.5%) per annum from August 15, 2000
until maturity. The Lender insisted upon a continuing guarantee from Pacific
Securitization and Lorraine Legg, President and CEO of the Company, personally.
(5) The Borrower shall be required to pay $6,050,000 as follows to the
Lender by paying $350,000 on or before November 15, 2000 and $5,700,000 on or
before December 28, 2000 This amount shall bear interest at 15% per annum and
interest payments are due on the 15th of each month.
(6) The Company agreed to keep the Chapter 11 proceedings open for 180
days from approval of the settlement, to pay the taxes, keep the property
insured and to keep the property in good condition. The Borrower agreed to
deliver to Lender an original Confidentiality Agreement and Agreement Regarding
Covenant Not to Sue Lender executed by their counsel.
The Company is in the process of finalizing a new collateralized loan
for the amount of $5,700,000 which is payable to Ocwen on December 28, 2000. The
Company expects to complete this financing in January, 2001.
Sale of Shady Lane Apartments
On September 26, 2000, the Company sold its interest in Shady Lane
Apartments in Visalia, California. This 54 unit complex was sold for a selling
price of $1,850,000. There was approximately $1,240,000 of debt. Expenses of
Sale paid at closing totaled approximately $135,000 which left approximately
$475,000 in net cash proceeds. The book value of the real estate assets sold was
approximately $1,965,000 prior to the sale (unaudited).
Sale of Four Creeks Village Apartments
On November 29, 2000, the Company sold its interest in Four Creeks
Village Apartments in Visalia, California. This 146 unit complex was sold for a
selling price of $ 8,387,122. The company had approximately $6,237,000 of debt.
Expenses of Sale paid at closing totaled approximately $610,000 which left
approximately $1,540,000 in net cash proceeds. The book value of the real estate
assets sold was approximately $8,064,000 prior to the sale (unaudited).
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TIS MORTGAGE INVESTMENT COMPANY
Date: January 3, 2001 By: /s/ Lorraine O. Legg
--------------------------------
Lorraine O. Legg, Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Lorraine O. Legg Director, President and January 3, 2001
--------------------------------------- Principal Executive Officer
Lorraine O. Legg
/s/ John E. Castello Executive Vice President (Principal January 3, 2001
--------------------------------------- Financial Officer)
John E. Castello
/s/ Douglas B. Fletcher Director, Chairman of the Board January 3, 2001
---------------------------------------
Douglas B. Fletcher
/s/ Anthony H. Barash Director January 3, 2001
---------------------------------------
Anthony H. Barash
/s/ Patricia M. Howe Director January 3, 2001
---------------------------------------
Patricia M. Howe
/s/ Robert W. Ledoux Director January 3, 2001
---------------------------------------
Robert W. Ledoux
/s/ J. David Schemel Director January 3, 2001
---------------------------------------
J. David Schemel
</TABLE>
66
<PAGE>
SCHEDULE III
TIS MORTGAGE INVESTMENT COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H Column I
-------- -------- -------- -------- -------- -------- -------- --------- --------
Costs Gross Amount
Initial Cost Subsequently at which Carried
to Company Capitalized at Close of Year
--------------------- ----------- -----------------------
Buildings Buildings Life on
and and Year of which
Improve- Improve- Improve- Accumulated Construc- Year Depreciation
Description Encumbrances Land ments ments Land ments Total Depreciation tion Acquired is Computed
----------- ------------ ---- --------- -------- ---- ---------- ----- ------------ --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shady Lane
Village
Visalia, CA $1,259 $379 $1,725 $ 38 $379 $1,763 $2,142 $284 1985 1995 40 years
Villa San
Marcos
Fresno, CA 6,718 2,549 7,459 35 2,584 7,459 10,043 957 1991 1995 40 years
Four Creeks
Village
Visalia, CA 5,593 1,157 7,698 -- 1,157 7,698 8,855 1,066 1986-91 1995 40 years
Novato Markets
Rohnert Park &
Petaluma, CA 6,237 2,916 5,055 (122) 2,921 4,928 7,849 153 Various 1999 40 years
-----------------------------------------------------------------------------------
$19,807 $7,001 $21,937 $(49) $7,041 $21,848 $28,889 $2,460
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Accumulated Accumulated Accumulated
Cost Depreciation Cost Depreciation Cost Depreciation
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Year $21,040 $1,767 $29,210 $1,537 $29,026 $938
Additions (sales) during
period
Purchases 7,971
Sales (8,170) (503)
Capital 12 184
improvements
Depreciation/Writeoffs (134) 693 733 599
------------------------ ------------------------- -------------------------
Balance at End of Year $28,889 $2,460 $21,040 $1,767 $29,210 $1,537
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