-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hn+cwS0U9RR6xm0PHZgsrZv7BshfSMJp3U/9obMSzpqYFcDMmeGRfbxjmy2uZOrR 4AUNaLFtt61gzF6MIGgp7Q== 0000833088-96-000004.txt : 19960405 0000833088-96-000004.hdr.sgml : 19960405 ACCESSION NUMBER: 0000833088-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 DATE AS OF CHANGE: 19960403 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIS MORTGAGE INVESTMENT CO CENTRAL INDEX KEY: 0000833088 STANDARD INDUSTRIAL CLASSIFICATION: 6798 IRS NUMBER: 943067889 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10004 FILM NUMBER: 96543560 BUSINESS ADDRESS: STREET 1: 655 MONTGOMERY ST STE 800 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4153938000 10-K 1 12/31/95 10-K 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, 1995 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: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, New York Stock Exchange par value $.001 per share Pacific Stock Exchange ------------------------------ Securities registered pursuant to Section 12 (g) of the Act: None 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 X No ----- ----- Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K is not contained here, 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. Yes No X ----- ----- On March 14, 1996, there were 8,105,880 shares of Common Stock outstanding and 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 on the New York Stock Exchange as reported on the Composite Tape) was approximately $10,132,000. Documents Incorporated by Reference Part III of this Form 10-K is incorporated by reference to the Registrant's 1996 definitive proxy statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant's fiscal year. TIS MORTGAGE INVESTMENT COMPANY INDEX TO ANNUAL REPORT ON FORM 10-K PART I Page Item 1: Business 3 Item 2: Properties 17 Item 3: Legal Proceedings 17 Item 4: Submission of Matters to a Vote of Security Holders 17 PART II Item 5: Market for the Registrant's Common Equity and Related Shareholder Matters 18 Item 6: Selected Financial Data 20 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 8: Financial Statements and Supplementary Data 27 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27 PART III Item 10: Information about Directors and Executive Officers of the Registrant 27 Item 11: Executive Compensation 27 Item 12: Security Ownership of Certain Beneficial Owners and Management 27 Item 13: Certain Relationship and Related Transactions 27 PART IV Item 14: Exhibits, Financial Statements and Reports on Form 8-K 28 PART I Item 1. Business. Introduction General TIS Mortgage Investment Company, a Maryland corporation (the "Company" or the "Registrant" which, unless otherwise indicated refers to the Company, its interests in certain real estate partnerships, and its subsidiary, TIS Mortgage Acceptance Corporation, a Delaware corporation ("TISMAC"), was incorporated on May 11, 1988. In 1995 the Company sold the residual interest certificate and optional redemption rights related to the trust representing its economic interest in TISMAC with the result that the accounts of that company are no longer included in the consolidated financial statements at December 31, 1995. The Company has retained its legal ownership of TISMAC. Until 1994 the Company sought to generate income for distribution to its stockholders primarily through acquisition of Structured Securities (as hereinafter defined) and direct fee ownership of real estate. "Structured Securities" include (i) residual interests ("Residual Interests"), principal only bonds ("PO Bonds") and interest only bonds ("IO Bonds") in collateralized mortgage obligations ("CMOs"), which entitle the Company to certain cash flows from collateral pledged to secure such securities; (ii) "Mortgage Certificates", which include securities collateralized by or representing equity interests in mortgage loans secured by first liens on single family residences, multiple family residences or commercial real estate ("Mortgage Loans"); (iii) CMOs; and (iv) "Commercial Securitizations", which include debt obligations which 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, accounts and other collateral. 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, during 1995 the Company sold a majority of its investments in Structured Securities and acquired a portfolio of four income-producing residential real estate properties. As the Company continues to dispose of its Structured Securities, the Company expects that increasing portions of its assets and revenues will be related to its investments in multifamily real estate. The Company may experience losses on its remaining Structured Securities during periods of high prepayment rates on mortgages, as previously experienced in 1992 and 1993. Monthly cash flows on the Company's Structured Securities are comprised of both interest income and a partial return of principal. The Company's investment policy is controlled by its Board of Directors (the "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 (i) are not "Affiliates" of TIS Financial Services, Inc., a Delaware corporation (the "Manager"), as that term is defined in the By-Laws, or Affiliates of persons who are Affiliates of the Manager and (ii) are not employed by, or receiving any compensation (except for serving as a director) from, the Company ("Unaffiliated Directors"). The Company has entered into an agreement (the "Management Agreement") with the Manager to manage the Company's day-to-day operations, subject to the supervision of the Board of Directors. The Manager will continue to identify real estate for possible acquisition by the Company, advise the Company with respect to various aspects of its business and administer the Company's day-to-day operations, including cash flow management. For additional information concerning the management of the Company, see "Management of Operations - The Management Agreement" below. The Company intends, for all taxable years since inception, to qualify for the tax treatment accorded to real estate investment trusts ("REITs") under the Internal Revenue Code of 1986, as amended, (the "Code") and to make quarterly distributions to its stockholders which, in the aggregate, annually will equal at least 95% of its real estate investment trust taxable income (as defined in Section 857(b)(2) of the Code) (hereafter "REIT Taxable Income"). As a result, the Company expects that, with limited exceptions, its REIT Taxable Income distributed to its stockholders will not be subject to Federal income tax at the corporate level. See "Federal Income Tax Considerations" below. See Item 7 below, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information on the general development of the Company's business. See "Risk Factors" below for a discussion of certain risks to which holders of the Company's Common Stock may be subject. The Company normally borrows funds to purchase and carry assets expecting that the cost of such borrowings will be less than the net cash flow on the assets purchased with such funds. The Company, on the one hand, and the Manager and its affiliates, on the other hand, may enter into a number of relationships other than those governed by the management agreement, some of which may give rise to conflicts of interest between the Manager and its affiliates and the Company. Because taxable income may exceed cash flow from certain Mortgage Assets in the early years after such an asset is created, the Company may realize taxable income in excess of its net cash flow in a taxable year. Since the Company must distribute substantially all of its net taxable income annually in order to maintain its status as a REIT, the Company might, in such circumstances, have to borrow funds to enable it to make such distributions. In evaluating Structured Securities for purchase, the Company considers the effect of any excess of taxable income over projected cash receipts of net cash flows. For the fiscal year ended December 31, 1995, the Company's taxable income did not exceed the cash flows from Structured Securities. Primary Business Activity The Company has determined to make a substantial portion of its future investments in multifamily residential properties. 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. Real property acquisitions will be opportunistic and will occur from time to time only when sufficient liquid assets are available, and when the potential for appreciation in value together with current cash flow yield is expected to provide a total return better than or equal to the Company's existing Structured Securities. On December 29, 1994 the Company entered into a definitive agreement to acquire four multifamily housing properties in California's Central Valley. These properties consist of 539 units together with 9.75 acres of unimproved land slated for development of an additional 126 units. The properties were purchased in a series of closings occurring between mid- January and mid-November 1995. The aggregate purchase price for the properties was $29,305,000, including existing debt to be assumed by the Company. The Company has, in prior years, 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. Generally, principal payments received on the mortgage instruments securing a series of CMOs, including prepayments on such mortgage instruments, are applied to principal payments on one or more classes of the CMOs of such series on each principal payment date for such CMOs. Scheduled payments of principal and interest on the collateral securing a series of CMOs are intended to be sufficient to make timely payments of interest on such CMOs and to retire each class of such CMO by its stated maturity. In most CMOs, there are excess cash flows after bond payments and administrative expenses. The excess cash flows, called residuals, arise primarily from the difference between the interest received from the mortgage obligations and the interest paid on the bonds. These CMO residuals have been the primary focus of the Company. However, the Company has invested in other parts of the CMO such as PO Bonds, IO Bonds and inverse IO Bonds. Single-family CMOs are collateralized by residential mortgages, most often in the form of mortgage-backed securities or certificates, and the bond interest and principal payments, as well as administrative costs, are covered by the interest and principal payments of the underlying mortgages. The mortgage collateral underlying the single- family CMOs in the Company's portfolio of Residual Interests, PO Bonds and some of the IO Bonds are mortgage-backed certificates issued by the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). Some of the IO Bonds are backed by single-family loans which are not included in mortgage-backed certificates issued by these agencies. Monthly cash flows on the Company's Mortgage Assets have two components: income from the investment and a partial return of investment principal. The investment income forms the basis for payment of expenses and any dividends paid to shareholders. In most cases cash flows and income tend to be higher in early periods of ownership and lower in the later periods. The principal which is repaid to reduce debt or to acquire new assets. The rate of return on such new assets may be lower than the rate of return on the repaid assets. Risk Factors Ownership of the Company's Common Stock is subject to certain risks. The Company's earnings from its acquisitions of multifamily residential properties 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, rates of occupancy and defaults by tenants. Long- term profits will depend upon an appreciation in the value of the 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. The amount of income that may be generated from Structured Securities is dependent upon the rate of principal prepayments on the underlying mortgages. Lower rates of prepayments means a longer life for Residual Interests and IO Bonds and thus higher income. Similarly, faster rates of prepayments mean a shorter life and lower income. The rate of prepayments on mortgages is influenced by a variety of economic, geographic, social and other factors, but probably the most important factor is the level of prevailing mortgage rates. In general, prepayments of mortgage loans are faster during periods of substantially declining interest rates and slower during periods of substantially increasing interest rates. The income from Residual Interests in CMOs which include one or more bond classes which bear interest based on specified margins in relation to either the London Interbank Offered Rate for Eurodollars on U.S. dollar deposits ("LIBOR") and income on Inverse IO Bonds which bear an interest rate which is inversely related to LIBOR, may fluctuate widely depending upon changes in the LIBOR rates, which affect the amount of interest payable on such LIBOR bonds and on Inverse IO Bonds. In general, income on these Residual Interests and Inverse IO Bonds will decrease when LIBOR rates increase, and will increase when LIBOR rates decrease. Income on these Residual Interests and Inverse IO Bonds will also be affected by the relationship between changes in these rates and prepayments on mortgages. Under certain extended high interest rate periods or in the event of extremely high prepayment rates on mortgages, the return on a Residual Interest, on an IO Bond or on an Inverse IO Bond could be zero or negative and may require the Company to effect significant reductions in the carrying value of these assets. Such reductions are recorded as operating losses in the year in which the reduction is taken. The Company has purchased Residual Interests, IO Bonds and PO Bonds of CMOs only if the Structured Securities relating to such CMOs were rated in one of the two highest categories by a nationally recognized rating agency. Certain Residual Interests, IO and PO Bonds themselves are rated. The risks of ownership of such assets, however, are substantially the same as those associated with ownership of unrated Residual Interests, IO and PO Bonds because the rating would not address the possibility that the Company might have a lower than anticipated yield or, in the case of Residual Interests and IO Bonds, fail to recover its initial investment. A substantial portion of the Company's assets directly or indirectly consists of mortgage instruments pledged to secure debt securities and, accordingly, would not be available to stockholders in the event of liquidation of the Company. There are varying degrees of risk incident to the ownership of real estate. There are many factors which can impact upon the performance of real estate including economic events or governmental regulations which are out of the control of the Company, all of which can impact upon real estate assets whose values are supporting the Mortgage Loans. The Company is subject to potential conflicts of interest arising from its relationship with its Manager. Transactions which present potential conflicts of interest will be approved by the Board of Directors, including a majority of the Unaffiliated Directors, or will be carried out in accordance with guidelines which the Board has adopted. 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 stockholders 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 stockholders. 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. Because of these and other factors, future distributions to stockholders cannot be predicted. The Company has the right, but not the obligation, to refrain from making distributions to stockholders until the tax loss carryforward is fully utilized. 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. Acquisition and Disposition of Structured Securities The Company is not in the business of trading its Structured Securities. However, from time to time the Company may dispose of them. During 1993 the Company reinvested $4,069,000 in inverse IO bonds and $340,000 in equity residuals. In 1994 the Company purchased two Commercial Securitizations for $1,232,000. In 1995 the Company sold a majority of its Structured Securities with a carrying value at date of sale of $13,102,000 and reinvested the proceeds in operating real estate. See Item 7 below, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 14 below, "Exhibits, Financial Statements and Reports on Form 8-K" for details on assets acquired. On May 31, 1990, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus for a uniform method of accounting for Residual Interests in CMOs (Issue 89-4). The consensus, among other things, required Residual Interests to be classified either as "equity" (and be accounted for under the Equity Method) or as "nonequity" (and be accounted for under a level yield method referred to as the Prospective Method). The methods described in Issue 89-4 are essentially the same as those used by the Company. As of December 31, 1993 the Company adopted the accounting method for impairment of mortgage-backed derivative investments prescribed by Statement of Financial Accounting Standards No. 115 and presented its 1993 and later financial statements in accordance therewith. See Item 7 below, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 14 below, "Exhibits, Financial Statements and Reports on Form 8-K" for information as to the effect of adoption of this change in accounting method. Fair Value of Residual Interests and IO Bonds In General - Substantially all revenue to the Company is currently derived from the cash flows on the Company's Residual Interests and IO Bonds. In future years, it is anticipated that most of the taxable income of the Company will be derived from its operating real estate assets. The fair value of Residual Interests and IO Bonds is the net present value of the projected future cash flows. The amount of cash flows that may be generated from these assets is uncertain and may be subject to wide variations depending primarily upon the rate and timing of prepayments on the underlying mortgage collateral and, for Residual Interests with variable rate Bond Classes and IO Bonds with variable interest rates, changes in LIBOR The following information sets forth assumptions used to calculate the projected cash flows on the Company's Nonequity Residual Interests and IO Bonds, and the resulting net present value of these assets, at December 31, 1995 based on various assumptions and discount factors. Assumptions - For purposes of the presentations on the following tables, the Nonequity Residual Interests are shown as a group. IO Bonds have been separated into two groups: IO Bonds with a fixed interest rate and Inverse IO Bonds. For purposes of projecting future cash flows, the Company has used the following one-month LIBOR rates: INTEREST RATE ASSUMPTIONS -------------------------
Interest Rates (%) ------------------------------------------------------------ Case I Case II Case III* Case IV Case V ------ ------- --------- ------- ------ One Month LIBOR 4.0625 4.0625 5.5625 5.5625 7.0625 * One-month LIBOR on December 31, 1995.
Principal payments on mortgage loans may be in the form of scheduled amortization or prepayments (for this purpose, "prepayments" include principal prepayments and liquidations due to default or other dispositions). The prepayment assumptions used herein are based on an assumed rate of prepayment each month of the unpaid principal balance on a pool of mortgage loans. A 100% prepayment assumption assumes prepayment rates of 0.2% per annum of the then outstanding principal balance of such mortgage loans in the first month of the life of such mortgage and an additional 0.2% per annum in each month thereafter (for example, 0.4% per annum in the second month) until the 30th month. Beginning with the 30th month and in each month thereafter during the life of such mortgage loans, 100% prepayment assumption assumes a constant prepayment rate of 6% per annum. The prepayment assumptions used in Case III to estimate the fair value of the Company's Nonequity Residual Interests and IO Bonds are the Bloomberg Financial Markets ("Bloomberg") Dealer Prepayment Estimates Average as estimated by several dealers in mortgage-related assets and compiled by Bloomberg as of December 29, 1995. Bloomberg has obtained this information from sources it believes to be reliable but has not verified such information and assumes no responsibility for the accuracy of such information. The prepayment assumptions used in Case I reflect a decline in short-term interest rates accompanied by a decline in mortgage loan interest rates. The prepayment assumptions used in Case II (which also are used in Case III) reflect a decline in short-term rates not accompanied by a decline in mortgage loan interest rates. The prepayment assumptions used in Case IV (which also are used in Case V) reflect an increase in mortgage loan interest rates not accompanied by an increase in short-term interest rates. The prepayment assumptions used in Case V reflect an increase in short-term interest rates accompanied by an increase in mortgage loan interest rates. The table below shows the prepayment assumptions used to project cash flows in order to calculate the present value of the Company's Nonequity Residual Interests and IO Bonds: PREPAYMENT ASSUMPTIONS ----------------------
Percent of the Prepayment Assumption (%) Mortgage Pass Through ------------------------------------------------ Collateral Rate (%) Case I Case II Case III* Case IV Case V - - ---------- ------------ ------ ------- --------- ------- ------ GNMA 9.0 252 279 279 159 159 Certificates 10.0 300 306 306 252 252 FNMA/FHLMC 8.5 334 295 295 183 183 Certificates 9.0 338 311 311 261 261 9.5 323 322 322 279 279 10.0 330 334 334 295 295 * Bloomberg Financial Markets Dealer Prepayment Estimates Average as of December 29, 1995. Neither the interest rates nor the prepayment assumptions used herein purports to be a historical description of interest rates or prepayment experiences or a prediction of future interest rates or prepayments of any pool of mortgage loans. The fair value of these assets can vary dramatically depending on future interest rates, prepayment speeds and the discount factor used.
Present Value of Projected Cash Flows - The tables which follow set forth the present value at December 31, 1995 of the projected cash flows discounted at the indicated discounted rates subject to the assumptions described above. For example, if cash flows are projected using the assumptions in Case III and Nonequity Residuals Interests in CMOs with fixed rate Bond Classes are discounted at 14%, the present value of the projected cash flows of the Company's Nonequity Residual Interests would equal approximately $725,000. This is the Company's estimate of the fair value of these assets. In addition, if cash flows on the Company's regular IO Bonds are discounted at 14% and the cash flows on its Inverse IO Bonds are discounted at 30%, the present value of the projected cash flows on the IO Bonds would equal $3,150,000. The book value is the Company's estimate of the fair value of these IO Bonds. There will be differences between the projected cash flows used to calculate the present value of these assets and the actual cash flows received by the Company, and such differences may be material. PRESENT VALUE OF NONEQUITY RESIDUAL INTERESTS --------------------------------------------- (In thousands)
Nonequity Residual Interest in CMOs Discount with Fixed Rate Bond Classes Rate (%) Case I Case II Case III Case IV Case V -------- ------ ------- --------- ------- ------ 10 841 843 844 847 848 12 774 778 780 770 771 14 717 723 725 706 708 16 668 676 677 653 654 18 626 634 636 608 609
PRESENT VALUE OF INTEREST ONLY BONDS ------------------------------------ (In thousands)
Discount Regular Interest Only Bonds Rate (%) Case I Case II Case III Case IV Case V -------- ------ ------- --------- ------- ------ 10 1,156 1,161 1,161 1,597 1,597 12 1,093 1,097 1,097 1,480 1,480 14 1,036 1,039 1,039 1,379 1,379 16 984 988 988 1,290 1,290 18 938 941 941 1,211 1,211
Discount Inverse Interest Only Bonds Rate (%) Case I Case II Case III Case IV Case V -------- ------ ------- --------- ------- ------ 22 2,985 3,780 2,570 2,655 1,406 26 2,750 3,411 2,319 2,388 1,264 30 2,549 3,106 2,111 2,169 1,148 34 2,375 2,851 1,939 1,987 1,052 38 2,223 2,634 1,791 1,832 970 - - ------------------------------------------------------------------
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 agreements pursuant to which the Company would sell Structured Securities for cash and simultaneously agree to repurchase them at a specified date for the same amount of cash plus an interest component ("Reverse Repurchase Agreements"), and 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. In connection with the 1995 acquisition of four multifamily housing projects in California's Central Valley, the Company incurred mortgage obligations totaling $20,490,000 secured by such properties. Any other indebtedness incurred by the Company may be secured by the assets of the Company, including its Structured Securities. As of December 31, 1994 the Company's borrowings were solely under a repurchase agreement with Bear, Stearns & Co. and had been reduced to $8,325,000. The debt is collateralized by some of the Company's Residual Interests and IO Bonds. The weighted average interest rate on such borrowings at December 31, 1994 was 6.9776%. At December 31, 1995 the Company's short-term borrowings had been reduced to $2,117,500 under repurchase agreements with Bear Stearns & Co. and Paine Webber. These borrowings had a weighted average interest rate of 7.4335% 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 such sales will depend on general market conditions and other factors. On December 5, 1991 the Board of Directors approved a Dividend Reinvestment and Share Purchase Plan which became effective on January 2, 1992. 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 would be increased. During 1992, 5,780 shares were issued under the Plan resulting in an increase to capital of $39,000. No new shares were issued under the Plan thereafter as all required shares were purchased in the open market. 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 stockholders. Formation of Subsidiary On October 21, 1988 TISMAC was incorporated for the purpose of issuing CMOs directly. TISMAC is a wholly-owned subsidiary of the Company. On June 29, 1989, TISMAC issued $199,400,000 original aggregate principal amount of its Collateralized Mortgage Obligations, Series 1989-1, Classes A- F. All of the Bond Classes in the CMO have 10% bond coupons and mature serially from March 2016 through July 1, 2019. The bonds are secured by $200,000,000 of GNMA I collateral with a stated pass through rate of 10%. The assets of TISMAC are not available to pay creditors of the Company. The Company has undertaken to indemnify certain parties who have contracted with TISMAC against certain losses which they might sustain in carrying out their obligations. In November 1995 the Company sold the residual interest certificate and optional redemption rights related to the trust representing its economic interest in TISMAC, with the result that the accounts of TISMAC are no longer included in the consolidated financial statements of the Company at December 31, 1995. Competition The Company's multifamily real estate properties face the normal competitive pressure of most urban rental real estate projects. However, the real property acquisitions have been and will continue to be opportunistic and will occur from time to time only when sufficient liquid assets are available, and when the potential for appreciation in value together with current cash flow yield is expected to provide a total return equal to the Company's Structures Securities. Employees The Company currently has no full time salaried employees who are employed directly by the Company. However, the Company reimburses the Manager for employment expenses of personnel performing certain functions as specified in the Management Agreement. The Manager currently employs seven employees who perform these specified functions on behalf of the Company. See "Management of Operations - Expenses". Management of Operations The Management Agreement The Company has entered into a Management Agreement with the Manager which is renewable annually. In June 1995 the Board of Directors of the Company and the Manager entered into a new Management Agreement through June 30, 1996. In March 1995 the Board of Directors had authorized a committee composed of four Unaffiliated Directors to consider proposed revisions to the Management Agreement in light of the Company's acquisition of multifamily residential properties and recent waivers by the Unaffiliated Directors of the requirement in the Management Agreement that the Manager reimburse the Company for Excess Expenses (as defined below; see "Expenses"). As a result, the Management Agreement approved in June 1995 increased the base management fee from .375% per annum of average invested assets to .65% thereof, changed the incentive compensation, eliminated an expense reimbursement provision, and discontinued the payment of a Residual Interest Administration Fee. These changes in the management fee became effective October 1, 1995. However, the Manager has voluntarily waived the increase in base management fee for the fourth quarter of 1995 and first quarter of 1996. Under the Management Agreement, the Manager, in accordance with criteria established by the Company's Board of Directors, including a majority of the Unaffiliated Directors, arranges for the acquisition, management and financing of real estate, monitors the performance of the Company's assets and provides certain administrative and overall managerial services necessary for the operation of the Company. Through September 30, 1995, the Manager was entitled to receive (i) a base management fee, payable quarterly, in an amount equal to 3/8 of 1% per annum of the Company's Average Invested Assets and (ii) incentive compensation, payable quarterly, in an amount equal to 25% of the amount by which the Company's annualized Return on Equity for the quarter exceeds the Ten Year U.S. Treasury Rate for the quarter plus one percentage point. Effective October 1, 1995, the base management fee was increased to .65% per annum of the Company's Average Invested Assets and incentive compensation for any calendar year will be an amount equal to 10% of the amount by which the total return for the year exceeds 12%. In order to compensate the Manager for certain administrative functions that the Manager has performed with respect to each Residual Interest projected to have cash flows in excess of $40,000 in the following year purchased by the Company for which neither the Manager nor an Affiliate acted as bond administrator, the Company paid the Manager a fee equal to $10,000 for each year or fraction thereof that the Company holds such Residual Interest. Effective October 1, 1995, this Residual Interest Administration fee was discontinued. Expenses The Company reimburses the Manager for certain expenses incurred by the Manager on the Company's behalf, including rent, telephone, utilities, office furniture, equipment and machinery, computers, and computer services, as well as expenses relating to accounting, bookkeeping and related administrative functions (including the employment expenses of any persons performing these functions), and fees and expenses of agents and employees employed directly by the Company or by the Manager at the Company's expense. The Company also reimburses the Manager for its costs in providing off-side operating, management and supervisory services with respect to multifamily properties and other real estate up to 5% of gross rents received by the Company from such properties. Unless waived by the Unaffiliated Directors, the Management Agreement required prior to October 1, 1995 that the Manager reimburse the Company, up to the amount of the base management fee, to the extent that certain of such expenses exceed the greater of 2% of the Average Invested Assets of the Company or 25% of the Company's Net Income for the year ("Excess Expenses"). The Company experienced Excess Expenses in 1993, 1994 and 1995, and the Unaffiliated Directors waived the reimbursements that would otherwise have been required by the Management Agreement. Under the renewed Management Agreement, the Manager is no longer required to reimburse the Company for Excess Expenses. Except as set forth above, the Manager is required to pay employment expenses of its personnel, rent, telephone, utilities, other office expenses, certain travel and miscellaneous administrative expenses of the Manager and, if the Manager or an affiliate of the Manager serves as bond administrator for a series of Structured Securities issued by or on behalf of the Company, all expenses incurred by the Manager in performing administrative services in connection with the issuance and administration of such series of Structured Securities. If the Company participates in programs operated by the Manager for the pricing and acquisition of Mortgage Loans, the Company will pay the Manager fees in an amount which shall be determined by a majority of the Unaffiliated Directors. The Board of Directors has adopted a policy that, unless the Company is self-administered, (I) prior to entering into, renewing or extending any management or administrative agreement (including the Management Agreement), competitive bids from three or more persons will be secured and (ii) prior to entering into, renewing or extending any management or administrative agreement with any person who, directly or indirectly, beneficially owns or controls 5% or more of the Common Stock, such agreement will be submitted for approval by a majority of the Company's disinterested stockholders. In light of this policy, the Board is examining its current management arrangements and intends to comply with this policy. 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 and intends to satisfy these tests in future years. As a REIT, the Company generally will not be subject to tax at the corporate level on its net income to the extent that it distributes cash in the amount of such net income to its stockholders. See "Taxation of the Company." Generally, those distributions will constitute dividends to the stockholders 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 would materially and adversely affect the stockholders since the Company would be taxed as a corporation. Accordingly, the taxable income of the Company (computed without any deduction for distributions to stockholders) would be taxed to the Company at corporate rates (currently up to 35%), and the Company would be subject to any applicable minimum tax. Additionally, dividends to the stockholders 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 stockholder level when earnings are distributed) the dividends to the stockholders would decrease substantially, because a large portion of the cash otherwise available for distribution to stockholders 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 three separate income tests for each taxable year with respect to which it intends to qualify as a REIT: (i) the 75% income test, (ii) the 95% income test, and (iii) the 30% 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) dividends 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 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 dividends, interest and gains from the sale or disposition of stock or other securities, other than stock or other securities that are dealer property. Finally, the 30% income test requires that the Company derive less than 30% of its gross income for the taxable year from the sale or other disposition of (1) real property, including interests in real property and interests in mortgages on real property, held for less than four years, other than foreclosure property or property involuntarily converted through destruction, condemnation or similar events, (2) stock or securities held for less than one year, and (3) property in "prohibited transactions." A prohibited transaction is a sale or other disposition of property that is stock in trade, inventory, or property held for sale to customers in the ordinary course of business, other than foreclosure property or a real estate asset held for at least four years, if certain other conditions are satisfied. 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. There is no comparable safeguard that could protect against REIT disqualification as result of the Company's failure to satisfy the 30% income test. The Company anticipates that its gross income will continue to consist principally of interest and gains on Mortgage Assets and income from short- term reinvestments although, in future years, it is anticipated that gross income of the Company 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, 1995 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 excessive, could result in the Company's failure to meet the 30% income test or, 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. See "Issuance of Structured Securities - CMOs." 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, and certain hedging transactions could give rise to income that, if excessive, could result in the Company's disqualification as a REIT for failing to satisfy the 30% 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 (as described below) 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 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 continue to consist principally 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, TISMAC, is a Qualified REIT Subsidiaries. Distributions The Company must distribute as dividends to its stockholders 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 dividend 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 dividend 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 dividend 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 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). 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 REITs 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 dividends 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 stockholders 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 requirement. 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, dividends paid by a REIT to its stockholders with respect to a taxable year are deducted to the extent such dividends 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 stockholders 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) excluding the net income from foreclosure property, (iv) deducting any tax resulting from the REIT's failure to satisfy either of the 75% of 95% income tests, and (v) excluding net income from prohibited transactions. Regardless of distributions to stockholders, 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. See "Qualification of the Company as a REIT." 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. See "Qualification of the Company as a REIT - Distributions" above. 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. Item 2. Properties. The Company's operating real estate assets consist of four multifamily apartment complexes located in California's Central Valley. All of these properties were acquired in 1995. In two cases, the properties were purchased outright and in two cases the Company purchased operating real estate partnerships. It is anticipated that the two partnership will be liquidated into the Company in 1996 upon obtaining appropriate refinancing of existing debt. Information regarding these properties is shown in the table below:
Villa Four Creeks Shady Lane River Oaks San Marcos Village - - -------------------------------------------------------------------------------------------- Location Visalia, CA Hanford, CA Fresno, CA Visalia, CA Date of Construction 1985 1984 1991 1986-1991 Purchase Price $2,105,000 $8,200,000 $9,000,000* $9,000,000 Purchase Price per Square Foot $40.44 $41.59 $62.44 $48.27 Debt Assumed $1,416,000 $6,673,000 $6,086,000 $4,500,000 Debt Acquired 0 0 0 1,815,000 Number of Units 54 219 120 146 Rentable Square Feet 52,056 197,186 144,140 186,439 Average Monthly Rent per Unit $490 $502 $805 $711 Monthly Rent per Square Foot $0.51 $0.56 $0.67 $0.56 Improved Land Area 2.77 acres 11.57 acres 9.77 acres 13.34 acres Unimproved Land Area 9.75 acres Occupancy at December 31, 1995 92% 96% 98% 96% * In addition to acquiring the currently existing building, the Company purchased the adjoining 9.75 acres of unimproved land for $1,000,000. An additional 126 rentable units are expected to be constructed on this parcel. At the time of purchase, all requisite entitlements were in place.
The principal executive offices of the Company and the Manager are located at 655 Montgomery Street, Suite 800, San Francisco, California 94111, telephone (415) 393-8000. The offices are leased for a period of one year, ending on February 28, 1997, by the Manager of the Company. The Manager is reimbursed by the Company for a portion of the rent based on the percentage of space used by personnel who provide accounting and administration services to the Company. Item 3. Legal Proceedings. At March 15, 1996, there were no material pending legal proceedings (within the meaning of the Form 10-K instructions) to which the Company or its subsidiary is a party or to which any of their respective property was subject. 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. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. The Company's Common Stock is listed on both the New York Stock Exchange and the Pacific Stock Exchange under the symbol "TIS." The high and low closing sales prices of shares of the Common Stock on the New York Stock Exchange for the periods indicated were as follows:
High Low ---- ---- 1994 First Quarter 2-1/8 1-1/2 Second Quarter 2-1/4 1-1/2 Third Quarter 2-1/4 1-3/4 Fourth Quarter 2-1/8 1-5/8 1995 First Quarter 2-3/8 1-3/4 Second Quarter 2-1/4 1-7/8 Third Quarter 2-1/2 1-3/4 Fourth Quarter 2-1/8 1-3/8 1996 First Quarter (through March 14, 1996) 1-3/4 1-1/8
____________________ On March 14, 1996, the closing sales price of the shares of Common Stock on the New York Stock Exchange was $1.25. On that date the Company had outstanding 8,105,880 shares of Common Stock which were held by approximately 845 stockholders of record and the total number of beneficial shareholders was approximately 6,000. In order to maintain its qualification as a REIT under the Code for any taxable year, the Company, among other things, must distribute as dividends to its stockholders an amount at least equal to (i) 95% of its REIT taxable income (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). The Company intends that the cash dividends paid each year to its stockholders will equal or exceed the Company's taxable income generated from operations. The following table details the dividends declared and/or paid for the Company's three most recent fiscal years.
- - ---------------------------------------------------------------------------------------- Applicable Date Amount Record Payable Quarter Declared Declared Date Date - - ---------------------------------------------------------------------------------------- March 31, 1993 March 2, 1993 $0.05 March 31, 1993 April 15, 1993 June 30, 1993 June 8, 1993 $0.05 June 30, 1993 July 15, 1993 September 30, 1993 August 31, 1993 $0.05 September 30, 1993 October 15, 1993 December 31, 1993 September 15, 1993 $0.05 December 15, 1993 December 31, 1993 December 31, 1994 September 7, 1994 $0.02 December 15, 1994 December 30, 1994 - - ----------------------------------------------------------------------------------------
The actual amount and timing of 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. During 1995 no dividends were declared by the Company. Subject to the distribution requirements to maintain REIT qualification, the Company intends, to the extent practicable, to utilize substantially all of the principal from repayments, sales and refinancings of the Company's Structured Securities to reduce debt or to acquire new assets. The Company may, however, under extraordinary circumstances, make a distribution of principal. Such distributions, if any, will be made at the discretion of the Company's Board of Directors. It is anticipated that dividends generally will be taxable as ordinary income to stockholders of the Company (including, in some cases, stockholders that would otherwise be exempt from tax under the Code), although a portion of such dividends may be designated by the Company as capital gain or may constitute a return of capital. Such dividends received by stockholders of the Company will not be eligible for the dividends-received deduction so long as the Company qualifies as a REIT. The Company will furnish annually to each of its stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital or capital gain. Substantially all 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 of bonds. 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 stockholders 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 stockholders 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. In the event that the Company is unable to pay dividends 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 is qualified in its entirety by, and should be read in conjunction with, the financial statements and notes thereto appearing in sections of this Annual Report on Form 10-K. The data as of December 31, 1995, 1994 and 1993 and for the years ended December 31, 1995, 1994 and 1993 have been derived from the Company's financial statements which are included elsewhere in this Annual Report on Form 10-K.
(In thousands, except per share data) - - ------------------------------------------------------------------------------------------------------- Years Ended December 31, ---------------------------------------------------------- 1995 1994 1993 1992 1991 ---------------------------------------------------------- Statement of Operations Data Income Interest Income on Mortgage Certificates $13,735 $18,298 $36,873 $54,337 $64,307 Interest Income on Residual Interests 1,483 3,650 186 2,001 10,248 Income from PO Bonds 0 0 0 107 15 Income from IO Bonds 1,128 2,208 1,997 1,983 0 Income from Commercial Securitizations 89 51 0 0 0 Interest on Short-term Investments 115 126 179 400 539 Gain (Loss) on Sales of Mortgage Related Assets (2,385) 0 0 1,391 0 Valuation Reserve Reduction (Provision) 541 (398) 0 0 0 Loss from Real Estate Operations (289) 0 0 0 0 Other Income 30 60 89 123 154 Total Income 14,447 23,995 39,324 60,342 75,263 Expenses Interest Expense on CMOs 14,749 18,987 38,323 52,747 61,909 Interest Expense on Short-term Debt 429 509 568 781 284 Write-downs of Mortgage Assets 0 0 12,388 25,047 0 Amortization of Deferred Bond Issuance Costs 276 351 1,857 1,638 741 Administrative and Management Expenses 1,572 1,611 1,920 1,624 2,949 Total Expenses 17,026 21,458 55,056 81,837 65,883 Minority Interest 0 0 172 108 (215) Income (Loss) Before Cumulative Effect of Change in Accounting for Real Estate Investments (2,579) 2,537 (15,560) (21,387) 9,165 Cumulative Effect of Change in Accounting for Real Estate Investments 0 0 (9,879) 0 0 Net Income (Loss) ($2,579) $2,537 ($25,439) ($21,387) $9,165 Net Income (Loss) per Share Before Cumulative Effect of Change in Accounting for Real Estate Investments ($0.32) $0.31 ($1.92) ($2.64) $1.13 Cumulative Effect of Change in Accounting for Real Estate Investments 0.00 0.00 (1.22) 0.00 0.00 Net Income (Loss) ($0.32) $0.31 ($3.14) ($2.64) $1.13 Dividends Declared per Share $0.00 $0.02 $0.20 $0.61 $1.34 Weighted Average Shares Outstanding 8,106 8,106 8,106 8,103 8,100 - - -------------------------------------------------------------------------------------------------------
Selected Financial Data (Continued)
(In thousands) December 31 ---------------------------------------------------------- 1995 1994 1993 1992 1991 ---------------------------------------------------------- Balance Sheet Data Mortgage Certificates, net $109,752 $163,817 $250,015 $460,438 $643,176 Residual Interests 725 8,675 11,919 22,648 59,646 PO Bonds 0 0 0 0 4,796 IO Bonds 3,150 9,794 12,212 26,614 0 Commercial Securitizations 191 1,194 0 0 0 Reserve for Loss on Investments (4,277) (4,818) (3,852) 0 0 Operating Real Estate Assets 29,384 395 0 0 0 Total Assets 145,247 188,957 300,190 545,645 735,835 Total Liabilities 133,266 172,864 284,410 502,881 666,628 Minority Interest 0 0 0 1,275 1,428 Total Shareholders' Equity 11,981 16,093 15,780 41,489 67,779 - - --------------------------------------------------------------------------------------------------
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. Investment Activities In 1994 the Company announced that it was changing its investment focus from investments in Structured Securities to multifamily real estate located in California's Central Valley. As a result, during 1995 the Company sold a majority of its investments in Structured Securities and acquired a portfolio of four income-producing residential real estate properties. In the future, the Company expects that increasing portions of its assets and operating income (loss) will be related to investments in multifamily real estate. Sales of investments in 1995 generated $10,751,000 of proceeds, essentially all of which was reinvested in multifamily properties. Net losses related to these sales totaled $2,385,000. The total cost of such properties was $29,305,000 which was partially offset by the assumption of existing secured debt and new debt totaling $20,490,000. Additionally, short-term debt was reduced by $6,207,000 to $2,118,000 at the end of 1995. During 1994 the Company reinvested $1,232,000 in Commercial Securitizations and reduced its short-term borrowings by $3,420,000. In addition, the Company incurred costs of $395,000 related to the 1995 purchase of multifamily residential properties. At December 31, 1994, these costs were included in other assets. During 1993 the Company reinvested $4,069,000 in IO Bonds and $340,000 in Residual Interests and reduced its short-term borrowing by $6,212,000. The funds came from operating activities and the principal returned to the Company from its investments. The following table illustrates the Company's cash receipts, disbursements and reinvestments for the last four years.
CASH FLOW ANALYSIS (In thousands) 1995 1994 1993 1992 - - -------------------------------------------------------------------------------------- Beginning Cash Balance $1,718 $ 680 $ 903 $ 1,902 Cash Received: Mortgage Related Assets 6,412 10,926 16,111 20,949 Short-term Investments 0 0 0 1,835 Sale of Mortgage Related Assets 10,751 0 0 6,008 Increase to Short-term Debt 0 0 0 10,826 Increase in Real Estate Notes 20,362 0 0 0 Cash Disbursements: Cash Expenses (3,348) (5,074) (3,687) (2,566) Real Estate Assets (29,490) 0 0 0 Dividends 0 (162) (2,026) (7,291) Reinvestments 0 (1,232) (4,409) (30,760) Decrease to Short-term Debt (6,207) (3,420) (6,212) 0 - - -------------------------------------------------------------------------------------- Ending Cash Balance $ 198 $1,718 $ 680 $ 903 ======================================================================================
The Company decreased the level of reinvestments in 1994 over the two prior years because the cash flows from investments did not provide cash at prior year's levels. In 1993 the Company purchased two Inverse IO Bonds for $4,069,000 and purchased for $340,000 all of the outstanding minority interest in an equity residual and minority interests in two other Equity Residuals. In 1994 the Company purchased two Commercial Securitizations for $1,232,000. Accounting Change On December 31, 1993 the Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115") - Accounting for Certain Investments in Debt and Equity Securities. In accordance with this new Standard, the Company is required to classify its investments in mortgage related assets as either trading investments, available-for-sale investments or held-to-maturity investments. The Company is not in the business of trading its investments in mortgage related assets. However, from time to time the Company may sell an investment as part of its efforts to adjust its portfolio composition to reflect changes in economic conditions. Therefore, the Company has classified all its investments in mortgage related assets as available-for-sale investments, carried at fair value in the financial statements. Unrealized holding gains and losses for available-for-sale investments are excluded from earnings and reported as a net amount in shareholders' equity until realized. SFAS No. 115 became effective for years beginning after December 15, 1993; however an enterprise was permitted to apply this statement effective in the fourth quarter of 1993. Prior years' financial statements were not permitted to be restated. The Company elected to adopt SFAS No. 115 in the fourth quarter of 1993. The Company is not in the business of trading its Structured Securities. However, from time to time the Company may sell an asset as part of the Company's ongoing effort to adjust its portfolio composition to reflect changes in economic conditions. As such, the Company does not meet the stringent requirements of SFAS No. 115 related to classifying its real estate investments as held-to-maturity and, therefore, has classified all of its real estate investments as available-for-sale. The Company recognized a $9,879,000 charge to earnings in 1993 from the cumulative effect at December 31, 1993 of adopting the new standard for assets which meet the definition of other than temporary impairment. For assets which do not meet the definition of other than temporary impairment and for assets where the fair value exceeds amortized cost, the Company has recorded, as a cumulative effect of change in accounting for investments, a net unrealized gain of $1,351,000 as a separate component of equity as prescribed by SFAS No. 115 for assets classified as available-for-sale. Prior years' consolidated financial statements were not permitted to be restated. Results of Operations The Company had a net loss of $2,579,000, or $0.32 per share, for the year ended December 31, 1995. For the year ended December 31, 1994 it had net income of $2,537,000, or $0.31 per share. For the year ended December 31, 1993 it had a net loss of $25,439,000, or $3.14 per share. The 1993 loss included $9,879,000, or $1.22 per share, as the cumulative effect of a change in accounting for real estate investments occasioned by the Company's decision to adopt SFAS No. 115 as of its fiscal year ended December 31, 1993. Additionally, the 1993 net loss included write-downs of Structured Securities of $12,388,000. No dividends were declared for 1995. The Company declared dividends totaling $162,000 for 1994, or $0.02 per share as compared with $1,621,000 for 1993, or $0.20 per share. The 1994 dividend of $0.02 per share was declared to minimize the Company's corporate income taxes. 1995 Compared to 1994 The nature of the Company's operations changed radically in 1995 because of the change in investment focus from investments in Structured Securities to multifamily real estate located in California's Central Valley. As a result, during 1995 the Company sold a majority of its investments in Structured Securities and acquired a portfolio of four income-producing residential real estate properties. Income from Residual Interests and Interest Only Bonds declined by more than half because these investments were included in the Company's portfolio for only a portion of the year. Sales of these investments resulted in a loss of $2,385,000 although $1,048,000 of this loss had been previously recognized as a reduction of shareholders' equity. Net interest margin (interest income from Mortgage Certificates net of interest expense on CMOs) declined in 1995 to a net interest expense of $1,014,000 from net interest expense of $689,000 in 1994 as shown in the following table. The primary cause of the decline was a change in the method of amortization of original issue discount on CMOT 28 to a method that better relates amortization to principal reductions. (In thousands) 1995 1994 Change --------- --------- --------- Interest Income from Mortgage Certificates $13,313 $17,518 ($4,205) Amortization of Market Discount 522 780 (258) --------- --------- --------- Net Interest Income 13,735 18,298 (4,563) --------- --------- --------- Interest Expense on CMOs 13,086 17,528 (4,442) Amortization of Original Issue Discount 1,663 1,459 204 --------- --------- --------- Net Interest Expense 14,749 18,987 (4,328) --------- --------- --------- Net Interest Margin ($1,014) ($ 689) ($325) ========= ========= =========
Net interest margin continues to be negative because of the retirement of some of the lower coupon bonds leaving primarily bonds which bear an interest rate equal to or close to the mortgage rate. The reserve for loss on investments was reduced by $541,000 in 1995 in relation to the decline in the amounts of principal outstanding in the underlying residual series. In the first partial year of real estate operations, the Company's income from real estate operations before depreciation and amortization ("Funds from Operations") was $88,000. However, real estate operations after depreciation and amortization showed a loss of $289,000. The first year of real estate operations relates to properties acquired in a series of four closings throughout 1995 and therefore does not constitute a full year of operations. During the year, the Company made some needed improvements to the properties. The Company anticipates improved results from real estate operations in future years as much of the secured real estate debt is expected to be refinanced in 1996 at lower interest rates. Interest expense on repurchase agreements decreased from $509,000 in 1994 to $429,000 in 1995. This is the result of a decrease in the average amount of debt outstanding from $10,020,000 in 1994 to $5,676,000 in 1995. However, this reduction was offset by an increase in the weighted average interest rate from 5.08% in 1994 to 7.56% in 1995. Management and residual interest administration fees remained essentially constant in 1995 because of the somewhat increased level of average invested assets related to real estate acquisitions offset by a $10,000 decline in the 1995 residual interest administration fee. In 1995 the Company incurred management fees of $130,000 and residual interest administration fees of $90,000 as compared to fees of $121,000 and $100,000, respectively, in 1994. General and administrative expense declined from $1,229,000 in 1994 to $1,212,000 in 1995 because of overall economies on the part of the Company and the Manager in 1995. 1994 Compared to 1993 As a result of the accounting change described above which adjusted the carrying value of the Company's Structured Securities to fair value, 1994 operating results were likely to be favorable in most stable interest rate environments. As shown in the Net Interest Income Analysis below, the average yield from residual interests and IO bonds was 35.65% and 18.77%, respectively. Net interest margin (interest income from Mortgage Certificates net of interest expense on CMOs) improved to a net interest expense of $689,000 in 1994 from a net interest expense of $1,450,000 in 1993 as shown in the following table. (In thousands) 1994 1993 Change --------- --------- --------- Interest Income from Mortgage Certificates $17,518 $33,160 ($15,642) Amortization of Market Discount 780 3,713 (2,933) --------- --------- --------- Net Interest Income 18,298 36,873 (18,575) --------- --------- --------- Interest Expense on CMOs 17,528 33,302 (15,774) Amortization of Original Issue Discount 1,459 5,021 (3,562) --------- --------- --------- Net Interest Expense 18,987 38,323 (19,336) --------- --------- --------- Net Interest Margin ($ 689) ($ 1,450) $ 761 ========= ========= =========
Net interest margin continues to be negative because of the retirement of some of the lower coupon bonds leaving primarily bonds which bear an interest rate equal to or close to the mortgage rate. Interest expense on repurchase agreements decreased from $568,000 in 1993 to $509,000 in 1994. This is the result of a decrease in the average amount of debt outstanding from $15,371,000 in 1993 to $10,020,000 in 1994. However, this reduction was offset by an increase in the weighted average interest rate from 3.70% in 1993 to 5.08% in 1994. Management and residual interest administration fees declined in 1994 because of the lower level of average invested assets which arose from the 1993 write downs of Structured Securities. In 1994 the Company incurred management fees of $121,000 and residual interest administration fees of $100,000 as compared to fees of $179,000 and $110,000, respectively, in 1993. General and administrative expense declined from $1,430,000 in 1993 to $1,229,000 in 1994 because of lower costs of stockholder communications and the capitalization in 1994 of certain consulting fees. Outlook The Company has determined that it will direct its future investments principally to multifamily residential properties. 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. On December 29, 1994 the Company entered into a definitive agreement to acquire four multifamily housing properties in California's Central Valley. These properties consist of 539 units together with 9.75 acres of unimproved land slated for development of an additional 126 units. The properties were purchased in a series of closings occurring between mid- January and mid-November, 1995. The aggregate purchase price for the properties was be $29,305,000, including existing debt to be assumed by the Company. Prior to 1995, the Company's primary business was the ownership of Structured Securities. Because mortgage interest rates increased in 1994, the high level of prepayments experienced in 1992 and 1993 subsided. If mortgage rates decline sufficiently to cause prepayments to increase, the Company will again have write downs on certain of its single family Structured Securities. 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. Liquidity and Capital Resources 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 dividends to its shareholders. In 1995 the Company's operations generated cash flow of $1,635,000 as compared to $7,914,000 in 1994 and $4,342,000 in 1993. At December 31, 1995 the Company had outstanding short-term borrowings with two investment banking firms under repurchase agreements totaling $2,117,500 at a weighted average interest rate of 7.4335%. All of the borrowing had initial terms of one month, are renewed on a month-to-month basis and have a floating rate of interest which is tied to the one month LIBOR rate. At December 31, 1994 the Company had outstanding borrowings with one investment banking firm under repurchase agreements totaling $8,325,000. The weighted average interest rate of these borrowings at that date was 6.9776%. In addition, at December 31, 1995 the Company had outstanding borrowings secured by multifamily real estate totaling $20,362,000. Approximately 85% of this debt has variable interest rates and 15% is at fixed rates. The weighted average interest rate at December 31, 1995 was 8.494%. The Company intends to refinance approximately $17,000,000 of the notes payable on real estate during 1996 at more favorable terms and rates. At December 31, 1995, the Company had no other borrowings or committed lines of credit. Management of the Company believes that the cash flow from operations and availability of repurchase agreements are sufficient to enable the Company to meet its current and anticipated future liquidity requirements including required payment of dividends to its shareholders, which must equal at least 95% of the Company's taxable income in order for the Company to qualify as a REIT. Net Interest Income Analysis
1995 1994 1993 ------------------------------ ------------------------------ ------------------------------- Average Average Average Average Average Average (In thousands) Interest Balance Rate Interest Balance Rate Interest Balance Rate - - --------------------------------------------------------------------------------------------------------------------------- Interest Income Mortgage Certificates $13,735 $147,131 9.34% $18,298 $194,679 9.40% $36,873 $361,602 10.20% Residual Interests 1,483 4,644 31.93% 3,650 10,239 35.65% 186 16,411 1.13% Interest Only Bonds 1,128 6,781 16.64% 2,208 11,762 18.77% 1,997 21,078 9.47% Other 204 4,060 5.02% 177 9,840 1.80% 179 16,372 1.09% - - --------------------------------------------------------------------------------------------------------------------------- Interest Income 16,550 162,616 10.18% 24,333 226,520 10.74% 39,235 415,463 9.44% Interest Expense Collateralized Mortgage Obligations 14,749 145,017 10.17% 18,987 199,572 9.51% 38,323 376,933 10.17% Short-term Debt 429 5,676 7.56% 509 10,020 5.08% 568 15,371 3.70% - - --------------------------------------------------------------------------------------------------------------------------- Interest Expense 15,178 150,693 10.07% 19,496 209,592 9.30% 38,891 392,304 9.91% Net Interest Income $1,372 0.84% $4,837 2.14% $344 0.08% - - --------------------------------------------------------------------------------------------------------------------------- The above tables summarize the amount of interest expense, the average amounts outstanding of interest-bearing assets and liabilities, and the average effective interest rates.
The table below summarizes the amount of change in interest income and interest expense due to changes in interest rates versus changes in volume.
1995 - 1994 1994 - 1993 1993 - 1992 ------------- ------------- ------------- (In thousands) Rate Volume Total Rate Volume Total Rate Volume Total - - -------------------------------------------------------------------------------------------------------------------------- Interest Income Mortgage Certificates ($124) ($4,439) ($4,563) ($2,693) ($15,882) ($18,575) $2,837 ($20,301) ($17,464) Residual Interests (347) (1,820) (2,167) 3,507 (43) 3,464 (1,023) (792) (1,815) Interest Only Bonds (229) (851) (1,080) 384 (173) 211 (74) 88 14 Other 40 (13) 27 (5) 3 (2) (362) 34 (328) - - -------------------------------------------------------------------------------------------------------------------------- Interest Income (660) (7,123) (7,783) 1,193 (16,095) (14,902) 1,378 (20,971) (19,593) Interest Expense CMOs 1,430 (5,668) (4,238) (2,323) (17,013) (19,336) 6,081 (20,505) (14,424) Short-term Debt (715) 635 (80) (832) 773 (59) (132) (81) (213) - - -------------------------------------------------------------------------------------------------------------------------- Interest Expense (307) (5,033) (4,318) (3,155) (16,240) (19,395) 5,949 (20,586) (14,637) Net Interest Income ($1,375) ($2,090) ($3,465) $4,348 $145 4,493 ($4,571) ($385) ($4,956) - - --------------------------------------------------------------------------------------------------------------------------
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. PART III Item 10. Information about Directors and Executive Officers of the Registrant. Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, to the company's Proxy Statement for its 1996 Annual Meeting of Stockholders. Item 11. Executive Compensation. Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, to the company's Proxy Statement for its 1996 Annual Meeting of Stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, to the company's Proxy Statement for its 1996 Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions. Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, to the company's Proxy Statement for its 1996 Annual Meeting of Stockholders. 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 30 Consolidated Balance Sheets - December 31, 1995 and 1994 31 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 32 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993 33 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 34 Notes to the Consolidated Financial Statements 35 2. Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1995 51 All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto. 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* 3(b) Amended Bylaws of the Registrant****** 4(a) Specimen Certificate representing $.001 par value Common Stock* 4(b) Dividend Reinvestment and Share Purchase Plan** 10(a) Management Agreement between the Registrant and TIS Financial Services, Inc. 10(b) Bonus Program*** 10(c) Custody Agreement between Registrant and Mellon Bank N.A.**** 10(d) Transfer Agency Agreement between Registrant and Mellon Securities Trust Company**** 10(e) Reverse Repurchase Agreement between Registrant and Bear, Stearns Securities Corp.***** 10(f) Loan and Security Agreement dated July 19, 1995 between TIS Mortgage Investment Company and Paine Webber Real Estate Securities, Inc. 10(g) Nonqualified Stock Option Agreement with John D. Boyce and Schedule of Omitted Contracts 10(h) Nonqualified Stock Option Agreement with John E. Castello and Schedule of Omitted Contracts 21 Subsidiaries of the Registrant***** 24 Consent of Arthur Andersen LLP ___________________________________ * Incorporated herein by reference to Registrant's Registration Statement on Form S-11 (No. 33-22182) declared effective August 19, 1988. ** 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. *** 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 2, 1990. **** 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. ***** 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. ****** 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 31, 1995. (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. 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 Subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These consolidated 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 consolidated financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 Subsidiary as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, in 1993 the Company changed its method of accounting for its investments to adopt the provisions of Statement of Financial Accounting Standards No. 115 - - - Accounting for Certain Investments in Debt and Equity Securities. Our audit was 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, 1995 - is presented for the purposes of complying with the Securities and Exchange Commission rules and is not part of the basic consolidated financial statements. This information has been subjected to the audit procedures applied in our audit 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. San Francisco, California, March 4, 1996 TIS Mortgage Investment Company and Subsidiary CONSOLIDATED BALANCE SHEETS
- - ---------------------------------------------------------------------------------------- (In thousands except share data) December 31, 1995 December 31, 1994 - - ---------------------------------------------------------------------------------------- ASSETS Mortgage Related Assets Mortgage Certificates, net $109,752 $163,817 Residual Interests 725 8,675 Interest Only (IO) Bonds 3,150 9,794 Commercial Securitizations 191 1,194 Reserve for Loss on Investments (4,277) (4,818) -------- -------- Total Mortgage Related Assets 109,541 178,662 -------- -------- Operating Real Estate Assets, net 29,384 395 -------- -------- Other Assets Cash and Cash Equivalents 198 1,718 Restricted Cash 2,728 2,920 Accrued Interest and Accounts Receivable 1,672 2,658 Deferred Bond Issuance Costs 1,414 2,317 Amortizable Costs 310 287 -------- -------- Total Other Assets 6,322 9,900 -------- -------- Total Assets $145,247 $188,957 ======== ======== - - ---------------------------------------------------------------------------------------- LIABILITIES Collateralized Mortgage Obligations, net $108,438 $161,894 Accounts Payable and Accrued Liabilities 593 282 Accrued Interest Payable 1,755 2,363 Notes Payable on Real Estate 20,362 0 Short-term Debt 2,118 8,325 -------- -------- Total Liabilities 133,266 172,864 -------- -------- SHAREHOLDERS' EQUITY Common Stock, par value $.001 per share; 100,000,000 Shares Authorized; 8,105,880 Shares Issued and Outstanding 8 8 Additional Paid-in Capital 74,696 74,696 Unrealized Loss on Investments (2,244) (711) Retained Deficit (60,479) (57,900) -------- -------- Total Shareholders' Equity 11,981 16,093 -------- -------- Total Liabilities and Shareholders' Equity $145,247 $188,957 ======== ======== - - ---------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
TIS Mortgage Investment Company and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data) Years Ended December 31, ------------------------------------------- 1995 1994 1993 - - ------------------------------------------------------------------------------------------------ MORTGAGE RELATED ASSETS Interest $16,550 $24,333 $39,235 Write-downs of Mortgage Related Assets 0 0 (12,388) Valuation Reserve Reduction (Provision) 541 (398) 0 Loss on Sales of Mortgage Related Assets (2,385) 0 0 Other 30 60 89 ------- ------- ------- Income from Mortgage Related Assets 14,736 23,995 26,936 ------- ------- ------- INTEREST AND CMO RELATED EXPENSES Collateralized Mortgage Obligations Interest 14,749 18,987 38,323 Administration Fees 140 161 201 Amortization of Deferred Bond Issuance Costs 276 351 1,857 Short-term Debt 429 509 568 ------- ------- ------- Total Interest and CMO Related Expenses 15,594 20,008 40,949 ------- ------- ------- REAL ESTATE OPERATIONS Rental and Other Income 2,206 Operating and Maintenance Expenses (984) Interest on Real Estate Notes Payable (945) Property Taxes (189) Depreciation and Amortization (377) ------- Loss from Real Estate Operations (289) ------- OTHER EXPENSES Management Fees 220 221 289 General and Administrative 1,212 1,229 1,430 ------- ------- ------- Total Other Expenses 1,432 1,450 1,719 Income (Loss) Before Minority Interest and Cumulative Effect of Change in Accounting for Real Estate Investments (2,579) 2,537 (15,732) Minority Interest 0 0 172 Cumulative Effect of Change in Accounting for Real Estate Investments 0 0 (9,879) ------- ------- ------- Net Income (Loss) ($2,579) $2,537 ($25,439) ------- ------- ------- - - -------------------------------------------------------------------------------------------- Income (Loss) per Share Before Cumulative Effect of Change in Accounting for Real Estate Investments ($0.32) $0.31 ($1.92) Cumulative Effect of Change in Accounting for Real Estate Investments 0.00 0.00 (1.22) ------ ------- ------- Net Income (Loss) ($0.32) $0.31 ($3.14) ------ ------- ------- Dividends Declared per Share $0.00 $0.02 $0.20 Weighted Average Number of Shares Outstanding 8,106 8,106 8,106 - - -------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
TIS Mortgage Investment Company and Subsidiary
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - - ------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, 1995, 1994 and 1993 - - ------------------------------------------------------------------------------------------------------------ (In thousands) Unrealized Common Stock Additional Gain ----------------------- Paid-in (Loss) on Retained Shares Amount Capital Investments Deficit Total - - ------------------------------------------------------------------------------------------------------------ Balance - January 1, 1993 8,106 $8 $74,696 $0 ($33,215) $41,489 Net Loss (25,439) (25,439) Dividends Declared (1,621) (1,621) Unrealized Gain on Investments - Cumulative Effect of Change in Accounting for Real Estate Investments (Note 2) 1,351 1,351 - - ------------------------------------------------------------------------------------------------------------ Balance - December 31, 1993 8,106 $8 74,696 1,351 (60,275) 15,780 Net Income 2,537 2,537 Dividends Declared (162) (162) Unrealized Loss on Investments (2,062) (2,062) - - ------------------------------------------------------------------------------------------------------------ Balance - December 31, 1994 8,106 $8 $74,696 (711) (57,900) 16,093 Net Loss (2,579) (2,579) Decrease in Unrealized Loss on Investments due to Sales of Investments 1,048 Unrealized Loss on Investments (2,581) (1,533) - - ------------------------------------------------------------------------------------------------------------ Balance - December 31, 1995 8,106 $8 $74,696 ($2,244) ($60,479) $11,981 ============================================================================================================ The accompanying notes are an integral part of these consolidated financial statements.
TIS Mortgage Investment Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - - ---------------------------------------------------------------------------------------------- Years Ended December 31, --------------------------------- (In thousands) 1995 1994 1993 - - --------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) ($2,579) $2,537 ($25,439) Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 1,800 1,035 2,838 Write-downs of Mortgage Assets 0 0 12,388 Cumulative Effect of Change in Accounting for Real Estate Investments 0 0 9,879 Loss on Sales of Mortgage Related Assets 2,385 0 0 Valuation Reserve Provision (Reduction) (541) 398 0 Decrease in Accrued Interest Receivable 273 6,161 7,562 Decrease (Increase) in Accounts Receivable 435 (530) 0 Decrease (Increase) in Prepaid Expenses (13) (409) (51) Increase in Other Assets (101) 0 0 Increase (Decrease) in Accounts Payable and Accrued Liabilities 311 61 74 Decrease in Accrued Interest Payable (335) (1,339) (2,909) ------- ------- ------- Net Cash Provided by (Used in) Operating Activities 1,635 7,914 4,342 ------- ------- ------- - - --------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Decrease in Short-term Debt (6,207) (3,420) (6,212) Principal Payments on CMOs (22,627) (108,308) (213,672) Proceeds from Notes Payable on Real Estate 1,815 0 0 Payments on Notes Payable on Real Estate (128) 0 0 Net Decrease in Minority Interest in Owner Trust Residuals 0 0 (1,275) Cash Dividends Paid on Common Stock 0 (162) (2,026) -------- -------- -------- Net Cash Used in Financing Activities (27,147) (111,890) (223,185) -------- -------- -------- - - --------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net Decrease (Increase) in Restricted Cash 1 15,062 (3,614) Acquisition of Real Estate Assets (10,592) 0 0 Additions to Real Estate Assets (97) Principal Reduction in Mortgage Certificates 21,885 86,978 214,136 Proceeds from Sales of Mortgage Related Assets 10,751 0 0 Principal Reduction in Residual Interests 450 1,582 6,336 Purchase of Commercial Securitizations 0 (1,232) 0 Principal Reduction in Commercial Securitizations 104 38 0 Purchase of Interest Only (IO) Bonds 0 0 (4,069) Investment in Equity Residuals 0 0 (340) Principal Reduction in IO Bonds 1,490 2,586 6,171 -------- -------- -------- Net Cash Provided by Investing Activities 23,992 105,014 218,620 -------- -------- -------- Net Change in Cash and Cash Equivalents (1,520) 1,038 (223) Cash and Cash Equivalents at Beginning of Period 1,718 680 903 -------- -------- -------- Cash and Cash Equivalents at End of Period $ 198 $ 1,718 $ 680 -------- -------- -------- - - --------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW Cash Paid for CMO Interest Expense $13,509 $20,315 $ 41,206 Cash Paid for Other Interest Expense $ 1,376 $ 520 $ 595 - - --------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
TIS MORTGAGE INVESTMENT COMPANY AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 1. The Company TIS Mortgage Investment Company (the "Company") was incorporated on May 11, 1988. At incorporation 100 shares of the Company's Common Stock were issued to TIS Financial Services, Inc., formerly Thrift Investment Services (the "Manager") at $10 per share. During the period from the Company's incorporation until August 26, 1988, the Company's activities consisted solely of preparations for its initial public offering. On August 26, 1988, the Company completed its initial public offering of 7,600,000 shares of Common Stock at a price to the public of $10 per share and commenced operations. On October 11, 1988, as part of the initial public offering, the Company issued an additional 500,000 shares of its Common Stock at $10 per share in connection with the exercise of an over- allotment option by the underwriters. The Company operates as a real estate investment trust (REIT) and has, in prior years, primarily invested in structured securities (mortgage related assets) including residual interests, principal only bonds, interest only bonds and collateralized mortgage obligations. 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, during 1995 the Company sold a majority of its investments in structured securities and acquired a portfolio of four income-producing residential real estate properties. In the future, the Company expects that increasing amounts of its assets and operating income (loss) will be related to investments in multifamily real estate. 2. Summary of Significant Accounting Policies Overall Methods of Accounting - On May 31, 1990, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus (Issue 89-4) for a uniform method of accounting for Residual Interests in collateralized mortgage obligations ("CMOs"). The consensus, among other things, required Residual Interests to be classified either as "equity" (and be accounted for under the Equity Method) or as "nonequity" (and be accounted for under a level yield method referred to as the Prospective Method). The methods described in Issue 89-4 are essentially the same as those used by the Company. Accounting Change - On December 31, 1993 the Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115") - Accounting for Certain Investments in Debt and Equity Securities. In accordance with this new Standard, the Company is required to classify its investments in mortgage related assets as either trading investments, available-for-sale investments or held-to-maturity investments. The Company is not in the business of trading its investments in mortgage related assets. However, from time to time the Company may sell an investment as part of its efforts to adjust its portfolio composition to reflect changes in economic conditions. Therefore, the Company has classified all its investments in mortgage related assets as available-for-sale investments, carried at fair value in the financial statements. Unrealized holding gains and losses for available-for-sale investments are excluded from earnings and reported as a net amount in shareholders' equity until realized. All of the Company's 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). The Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus (EITF 93-18) as to the definition of "other than temporary" impairment. The Company's accounting policy is consistent with this consensus. For purposes of applying the impairment provisions of SFAS No. 115, 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. The Company recognized a $9,879,000 charge to earnings in 1993 from the cumulative effect at December 31, 1993 of adopting the new standard for assets which meet the definition of other than temporary impairment. For assets which do not meet the definition of other than temporary impairment and for assets where the fair value exceeds amortized cost, the Company has recorded, as a cumulative effect of change in accounting for investments, a net unrealized loss of $2,244,000 directly to equity as prescribed by SFAS No. 115 for mortgage related assets classified as available-for-sale. Prior years' consolidated financial statements were not permitted to be restated. The change in accounting principle significantly reduced the amortized cost of many of the Company's CMO Ownership Interests. As a result, it was anticipated that there would be earnings from these assets in future periods. However, faster prepayment speeds and lower estimates of cash flow from call rights may cause the fair value of CMO Ownership Interests and Acquired CMO Classes to decline further and may require additional write downs in the future. Principles of Consolidation - In 1995 the Company sold its economic interest in TISMAC through the sale of the residual interest certificate and optional redemption rights in the underlying trust. The Company has retained its legal ownership of TISMAC. As a result of these transactions, the Company no longer has risk or reward of ownership and therefore the accounts of TISMAC are not included in the consolidated balance sheet at December 31, 1995 and the results of operations of that company are included in the 1995 consolidated statement of operations only through the date of sale. The 1994 and 1993 consolidated financial statements presented include the accounts of the Company and its wholly-owned subsidiary, TISMAC. The assets of TISMAC are not available to pay creditors of the Company. The Company has undertaken to indemnify certain parties who have contracted with TISMAC against certain losses which they might sustain in carrying out their obligations. In addition, under generally accepted accounting principles, the Company consolidates assets and liabilities of Owner Trust Residuals when over 50% equity interest in the trust is held by the Company. The portion of equity interest of each such Owner Trust Residual not owned by the Company is accounted for as minority interest. Additionally, the consolidated financial statements include the accounts underlying its interest in real estate partnerships. Mortgage Certificates and CMOs - Mortgage certificates and CMO bonds of consolidated Owner Trusts are carried at their outstanding principal balance plus or minus any premium or discount, respectively. Amortization of Premiums and Discounts - Premiums and discounts related to mortgage certificates and CMOs are amortized to income using the interest method over the stated maturity of the mortgage certificates or CMOs. Residual Interests and Interest Only (IO) Bonds - Residual Interests held in bond form and Corporate Real Estate Mortgage Investment Conduit ("REMIC") Residual Interests, regardless of percentage ownership, are Nonequity Residual Interests and, along with IO Bonds, are accounted for under the Prospective method. Under this method, assets are carried at 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. Operating Real Estate Assets - In accordance with Statement of Financial Accounting No. 121 ("SFAS 121") - Accounting for Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of, the Company values operating real estate assets at cost unless circumstances indicate that cost cannot be recovered, in which case carrying value is reduced to estimated fair value. Operating real estate assets are depreciated using the straight-line method over the estimated useful lives of the real estate assets. The Company uses a 40 year estimated life for buildings and improvements and either a 5 or 12 year life for furniture, fixtures and equipment depending on the nature of the asset. Significant expenditures that improve or extend the useful life of the asset are capitalized and depreciated over their estimated useful lives. All leases of real estate assets are classified as operating leases. Rental income is recognized when contractually due based on the terms of signed lease agreements which range in duration from month-to-month to one year. Restricted Cash - Restricted cash represents cash balances totaling $2,649,000 of CMOs in which the Company holds a Residual Interest and whose assets and liabilities are consolidated with those of the Company. This cash is not available to the Company or its creditors. Additionally, restricted cash includes $79,000 in property tax impound accounts. Income Taxes - The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. As a REIT, the Company must distribute at least 95% of its taxable income to its shareholders. No provision has been made for income taxes in the accompanying consolidated financial statements as the Company is not subject to federal income taxes. The loss reported in the accompanying financial statements may be greater or less than the taxable loss because some income and expense items are reported in different periods for income tax purposes. Over the life of a Residual Interest or IO Bond, total taxable income will equal total financial statement income. However, the timing of income recognition may differ between the two from year to year. Net Income (Loss) Per Share - Net income (loss) per share is based upon the weighted average number of shares of Common Stock outstanding for 1995, 1994, and 1993, respectively. The common equivalent shares related to the 1995 Stock Option Plan (see Note 12) are antidilutive in 1995 and therefore are not included in the weighted average number of shares outstanding. Statement of Cash Flows - For purposes of the statement of cash flows, the Company considers only highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Taxation of Dividends Declared There were no dividends paid by the Company in 1995. The dividends paid by the Company of $0.02 and $0.25 per share in the years 1994 and 1993, respectively, were fully taxable as ordinary income. Under the Internal Revenue Code of 1986, a dividend declared by a REIT in December of a calendar year, which is payable to shareholders of record as of a specified date in December, will be deemed to have been paid by the Company and received by the shareholders on that record date if the dividend is actually paid before February 1st of the following calendar year. Therefore, since the $0.05 dividend declared in December 1992 and paid in January 1993 had a record date of January 4, 1993, it is considered 1993 income and its taxability is based on the REIT's 1993 taxable income. The Company's dividends are not eligible for the dividends-received deduction for corporations. All of the 1994 and 1993 dividends paid are 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 dividends 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 dividend considered excess inclusion income may not be offset by any deductions or losses, including net operating losses. 4. Residual Interests General - Each CMO in which the Company has purchased a Residual Interest was rated at the time of its issuance "AAA" by Standard & Poor's Corporation or "Aaa" by Moody's Investors Service, Inc. Each such CMO is comprised of one or more classes of bonds (each, a "Bond Class") and was issued pursuant to an Indenture between the CMO issuer and a specified trustee. Each CMO is structured so that the principal and interest payments received from the collateral pledged to secure such CMO, together with reinvestment income thereon, will be sufficient, irrespective of the rate of prepayments on the collateral, to make timely payments of interest on each Bond Class, to begin the payment of principal on each Bond Class not later than its "first mandatory principal date" and to retire each Bond Class not later than its "stated maturity." Interest on Bond Classes is payable on specified payment dates (quarterly or monthly), except with respect to "compound interest bonds" on which interest accrues and is added to the principal amount thereof on each payment date until the conditions set forth in the related Indenture have been satisfied, and with respect to "principal only bonds" which do not bear interest at a stated rate. Each other Bond Class provides for payment of interest at a fixed or variable rate for the life of such Bond Class. The interest rate on variable rate Bond Classes resets monthly based on specified margins in relation to LIBOR or COFI. Principal payments on Bond Classes are made on specified payment dates (quarterly or monthly) or in full at maturity in accordance with the terms of the related Indenture. Generally, payments of principal are allocated to the earlier maturing Bond Classes until such Bond Classes are paid in full. Payments of principal on certain Bond Classes occur pursuant to a specified repayment schedule or formula (to the extent funds are available therefore), regardless of which other Bond Classes are outstanding. Residual Interests are classified as either equity or nonequity. Presented on the following table is a schedule of the Nonequity Residual Interests and the Prospective Yield at December 31, 1995. NONEQUITY RESIDUAL INTERESTS - - ---------------------------- (Dollars in thousands)
Book Value December 31 Prospective Residual Purchase ---------------------- Method Series Price 1995 1994 Yield - - --------------------------------------------------------------------------------- Nonequity Residual Interests - - ---------------------------- BT 88-1 $ 1,537 $461 $ 382 14.0% LFR-9 2,589 149 187 14.0% CMSC I 8,642 104 104 14.0% FHLMC 25 4,934 6 6 14.0% FHLMC 21 5,361 5 6 14.0% CMSC 88-2 2,554 - 525 - DBLS 2,424 - 482 - DBLU 5,169 - 65 - FNMA 88-22 10,387 - 1,753 - ML-38 1,306 - 478 - OXFORD 3-F 1,382 - 0 - PB-4 10,523 - 2,593 - PB-5 16,112 - 1,034 - PB-7 3,994 - 487 - RYLAND 62 3,039 - 573 - - - --------------------------------------------------------------------------------- 725 8,675 - - --------------------------------------------------------------------------------- Unconsolidated Equity Residual Interests - - ---------------------------------------- TMAC 1986-2 67 0 0 N/A TMAC 1987-3 165 0 0 N/A - - --------------------------------------------------------------------------------- Total Residual Interests $ 725 $8,675 =================================================================================
In the year ended December 31, 1995 the Company sold certain Nonequity Residual Interests as follows (in thousands):
Residual Series Sales Price Amortized Cost Gain (Loss) - - --------------------------------------------------------------------------- CMSC 88-2 $ 395 $ 375 $ 20 DBLS 300 305 (5) DBLU 50 57 (7) FNMA 88-22 925 1,088 (163) ML-38 500 498 2 OXFORD 3-F 301 0 301 PB-4 1,335 1,992 (657) PB-5 775 1,161 (386) PB-7 341 343 (2) RYLAND 62 325 458 (133) - - --------------------------------------------------------------------------- Total $5,247 $6,277 ($1,030) ===========================================================================
Securitized Residuals and Corporate REMIC Residual Interests - Both Residual Interests held in bond form and Corporate REMIC Residual Certificates are Nonequity Residual Interests and are accounted for under the Prospective Method as described in Note 2. Certain characteristics of the CMO Bonds in the Company's Residual Interests held in these forms are on the following tables: FIXED RATE RESIDUALS
- - ------------------------------------------------------------------------------------------------------------------------- CMO Bond Data (100% of Issue) ----------------------------------------------------------------- Name of Issuer TIS Initial Dec. 31, 1995 and Series/ TIS Purchase Principal Principal CMO Issue Purchase TIS % Price Bond Balance Balance Bond Stated Date Date Ownership ($000) Class ($000) ($000) Coupon Maturity - - ------------------------------------------------------------------------------------------------------------------------- 1) Bankers Trust May 29, 1991 99.990% $1,537 1-A $ 9,722 $ 0 7.35% Jan 1, 2013 Series 1988-1 1-B 8,017 0 8.50% Apr 1, 2014 (BT 88-1) 1-C 34,769 15,430 8.75% Apr 1, 2018 Feb 16, 1988 1-D 47,492 15,643 8.63% Apr 1, 2018 -------- ------- $100,000 $31,073 - - ------------------------------------------------------------------------------------------------------------------------- 2) L F Rothschild Nov 7, 1990 100.000% $2,589 A $ 11,000 $ 0 Zero Coupon Jan 1, 2019 Trust 9 B 22,000 0 Zero Coupon Jan 1, 2019 (LFR-9) C 54,000 10,078 Zero Coupon Jan 1, 2019 Dec 2, 1988 D 32,850 4,831 Zero Coupon Jan 1, 2019 E 30,000 0 Zero Coupon Jan 1, 2019 R 150 150 Residual Bond Jan 1, 2019 -------- ------- $150,000 $15,059 - - ------------------------------------------------------------------------------------------------------------------------- 3) Collateralized Dec 21, 1988 44.000% $4,462 I-1 $291,000 $ 0 7.95% Feb 1, 2009 Mortgage Mar 23, 1989 44.000% 4,180 I-2 194,000 16,721 9.45% May 1, 2013 Securities Corp. Subtotal 88.000% $8,642 I-3(Z) 15,000 33,964 9.45% Feb 1, 2017 -------- ------- Series I (CMSC I) $500,000 $50,685 Jan 28, 1987 - - ------------------------------------------------------------------------------------------------------------------------- 4) Federal Home Jun 22, 1989 55.000% $4,934 25-A $105,923 $ 0 9.00% Nov 15, 2018 Loan Mortgage 25-B 51,002 0 9.50% Nov 15, 2005 Corporation 25-C 53,028 0 9.50% Mar 15, 2011 Series 25 25-D 46,414 0 9.50% Feb 15, 2014 (FHLMC 25) 25-E 50,936 0 9.50% May 15, 2016 Dec 1, 1988 25-F 76,167 13,398 9.50% Dec 15, 2018 25-G 43,940 43,940 9.50% Feb 15, 2020 25-H 72,490 0 7.90% Feb 15, 2020 R 100 11 Residual Bond Feb 15, 2020 -------- -------- $500,000 $57,349 - - ------------------------------------------------------------------------------------------------------------------------- 5) Federal Home Jan 5, 1989 62.500% $5,361 21-A $ 140,645 $ 0 8.90% Jan 15, 1998 Loan Mortgage 21-B 216,267 0 8.90% Feb 15, 2004 Corporation 21-C 101,503 0 9.10% Jan 15, 2006 Series 21 21-D 93,376 0 9.25% Jun 15, 2007 (FHLMC 21) 21-E 122,951 0 9.35% Feb 15, 2009 Nov 30, 1988 21-F 240,408 0 9.45% Sep 15, 2011 21-Z 84,750 100,668 9.50% Jan 15, 2020 R 100 10 Residual Bond Jan 15, 2020 ---------- -------- $1,000,000 $100,678 =========================================================================================================================
Equity Residual Interests - The Company currently holds interests in two Owner Trust Residuals. It also previously held the Residual Interest in TISMAC 1989-1, the CMO issued by the Company's wholly-owned subsidiary, TISMAC. However, this Residual Interest was sold in 1995 (see Notes 2 and 15). Although the underlying CMOs in these Residual Interests are not liabilities of the Company, under the requirements of generally accepted accounting principles, the Company consolidates assets and liabilities of the Owner Trust Residuals when over 50% equity interest in the trust is held by the Company. Under the underlying bond indentures, the Company would never be required to pay more than the outstanding principal balance to retire the CMO Bonds. Therefore, the carrying value of these CMO Bonds are reasonable estimates of their fair value to the Company. Certain characteristics of the CMO Bonds in the Equity Residual Interests in which the Company holds an interest at December 31, 1995 are set forth below: EQUITY RESIDUAL INTERESTS
- - ------------------------------------------------------------------------------------------------------------------------- CMO Bond Data (100% of Issue) ----------------------------------------------------------------- Name of Issuer TIS Initial Dec. 31, 1995 and Series/ TIS Purchase Principal Principal CMO Issue Purchase TIS % Price Bond Balance Balance Bond Stated Date Date Ownership ($000) Class ($000) ($000) Coupon Maturity - - ------------------------------------------------------------------------------------------------------------------------- 1) Collateralized Aug 31, 1988 98.000% $4,810 A $275,000 $ 0 8.00% Jun 1, 2006 Mortgage Aug 8, 1990 2.000% 47 B 77,200 0 8.50% Jun 1, 2008 Obligation -------- ------ C 108,300 10,871 8.50% Dec 1, 2010 (CMOT 28) 100.000% $4,857 Z 39,500 80,404 8.45% Jun 1, 2017 May 29, 1987 -------- ------ -------- -------- $500,000 $91,275 - - ------------------------------------------------------------------------------------------------------------------------- 2) TMAC 1986-1 Dec 27, 1988 16.964% $442 1-A $ 98,500 $ 0 7.92% Nov 20, 2010 Nov 6, 1986 Jan 6, 1989 23.214% 607 1-B 50,000 20,264 8.89% Feb 20, 2018 Jan 11, 1989 20.536% 538 1-C 41,750 0 8.95% Feb 20, 2013 Jun 18, 1993 39.286% 108 1-D(Z) 9,750 2,163 8.95% Feb 20, 2018 -------- ------ -------- -------- 100.000% $1,695 $200,000 $22,427 - - ------------------------------------------------------------------------------------------------------------------------- 3) TMAC 1986-2 Jun 18, 1993 44.990% $67 2-A $ 72,600 $ 7,187 LIBOR+.60% Mar 20, 2018 Dec 10, 1986 2-B 27,400 2,712 25.11987% - Mar 20, 2018 -------- -------- $100,000 $ 9,899 (2.00959) x LIBOR - - ------------------------------------------------------------------------------------------------------------------------- 4) TMAC 1987-3 Jun 18, 1993 44.767% $165 3-A $ 55,070 $ 430 LIBOR+.60% Apr 20, 2013 Mar 30, 1987 3-B 72,135 0 7.50% Apr 20, 2009 3-C 18,535 0 8.31% Jan 20, 2011 3-D 39,765 2,547 8.58% Jul 20, 2013 3-E(Z) 9,495 20,688 9.00% Apr 20, 2018 -------- -------- $195,000 $23,655 - - ------------------------------------------------------------------------------------------------------------------------- Total Collateralized Mortgage Obligations $147,266 =========================================================================================================================
CMO Collateral - The table below sets forth certain characteristics of the mortgage collateral pledged to secure each CMO in which the Company holds a Residual Interest. CMO COLLATERAL
- - ----------------------------------------------------------------------------------------------------------------- CMO Collateral Data (100% of Issue) ------------------------------------------------------------------------------- Weighted Dec 31, 1995 Current Weighted Average Collateral Weighted Average Residual Pass- Principal Average Remaining Residual Interest Type of Through Balance Coupon Months to Series Type Collateral Rate ($000) Rate Maturity - - ----------------------------------------------------------------------------------------------------------------- Equity Residual Interests - - ------------------------- CMOT 28 Fixed FNMA 8.50% $ 90,046 9.10% 253.4 TMAC 1986-1 Fixed FHLMC 9.00% 21,260 10.00% 242.0 TMAC 1986-2 Fixed FHLMC 9.50% 9,899 10.10% 230.0 TMAC 1987-3 Fixed FHLMC 9.08% 23,664 9.80% 234.0 Nonequity Residual Interests - - ---------------------------- BT 88-1 Fixed GNMA 9.00% 29,622 9.50% 255.0 LFR-9 Fixed FNMA 9.50% 14,696 10.20% 269.0 CMSC I Fixed FNMA 9.50% 48,359 10.10% 237.2 FHLMC 25 Fixed FHLMC 9.50% 57,350 10.30% 265.8 FHLMC 21 Fixed FHLMC 9.50% 100,678 10.20% 267.8 =================================================================================================================
5. Interest Only (IO) Bonds IO Bonds include both regular IO Bonds and Inverse IO Bonds. No IO Bonds were purchased in 1995 or in 1994; however, during 1993, the Company invested $4,069,000 in IO Bonds. Presented below is a schedule of the Company's IO Bonds and the Prospective yield at December 31, 1995. INTEREST ONLY (IO) BONDS - - ------------------------ (Dollars in thousands)
Book Value December 31 Prospective Purchase -------------------------- Method Interest Only Bond Price 1995 1994 Yield - - --------------------------------------------------------------------------------------------- FNMA Series 1992-123 Class S $8,203 $2,112 $2,221 12.16% Pru Home Mtg Corp Series 1992-7 4,776 796 1,350 14.00% Bear Stearns Mtg Sec Series 1992-1 2,720 242 363 14.00% FHLMC Series 1993-1483 Class SA 3,071 - 1,407 - FHLMC-G Series 24 Class SK 998 - 500 - FNMA SMBS Trust 4 Class 2 IO 2,909 - 738 - FNMA SMBS Trust 7 Class 2 IO 9,541 - 2,564 - Sears Mtg Sec Corp Series 1992-6 2,611 - 651 - - - --------------------------------------------------------------------------------------------- $3,150 $9,794 - - ---------------------------------------------------------------------------------------------
In the year ended December 31, 1995 the Company sold certain Interest Only bonds as follows (in thousands):
Interest Only Bond Sales Price Amortized Cost Gain (Loss) - - ---------------------------------------------------------------------------- FHLMC Series 1993-1483 Class SA $1,063 $1,877 ($ 814) FHLMC-G Series 24 Class SK 256 773 (517) FNMA SMBS Trust 4 Class 2 IO 1,709 418 1,291 FNMA SMBS Trust 7 Class 2 IO 475 1,366 (891) Sears Mtg Sec Corp Series 1992-6 200 411 (211) - - ---------------------------------------------------------------------------- Total $3,703 $4,845 ($1,142) ============================================================================
Certain characteristics of the Company's IO Bonds held at December 31, 1995 are on the following table: INTEREST ONLY BONDS
- - ------------------------------------------------------------------------------------------------------------- Collateral Data (% of IO held by TIS) --------------------------------------------------------------- Weighted Dec. 31, 1995 Current Weighted Name of Issuer TIS Average Collateral Weighted Average and Series/ TIS Purchase Pass Principal Average Remaining CMO Issue Purchase Price Type of Through Balance Coupon Months to Date Date ($000) Collateral Rate to IO ($000) Rate Maturity - - ------------------------------------------------------------------------------------------------------------- 1) FNMA July 30, 1992 $8,203 FNMA 49.58 - $5,171 8.95% 307.0 Series 1992-123 (5.67 x Class S LIBOR) July 25, 1992 - - ------------------------------------------------------------------------------------------------------------- 2) Prudential Mar 27, 1992 $4,776 NON 0.5652% $59,859 8.81% 305.0 Home Mortgage AGENCY Corporation Series 1992-7 March 1, 1992 - - ------------------------------------------------------------------------------------------------------------- 3) Bear Stearns May 28, 1992 $2,720 NON 0.3714% $7,299 9.47% 237.0 Mortgage AGENCY Securities, Inc. Series 1992-1 May 1, 1992 =============================================================================================================
6. Fair Value of Equity Residuals and Mortgage Certificates For purposes of determining fair value of the Company's investment in Equity Residuals in applying SFAS No. 115, the Company uses the cash flows from Mortgage Certificates, net of CMO Bond interest expenses and related trustee expenses. The Company includes in its net cash flows an assumption of redemption of the Series at the earliest available stated redemption date with an assumed sale of the Mortgage Certificates at a current market price. These cash flows are discounted at a fair value rate of 14%. The following table gives the pertinent fair value assumptions used in forecasting the cash flows as of December 31, 1995:
Equity Residual Collateral PSA Fair Value - - --------------------------------------------------------------- (In thousands) CMOT 28 FNMA 8.50% 295% $885 TMAC 1986-1 FHLMC 9.00% 311% 0 - - --------------------------------------------------------------- Total Fair Value of Equity Residuals $885 ===============================================================
For purposes of SFAS No. 107, the Company is required to disclose the fair value of its Mortgage Certificates. Information with respect to the fair value of the mortgage certificates collateralizing the CMO Bonds is presented in the table below as of December 31, 1995. The Company is not able to sell the mortgage collateral, and therefore realize any gain, until the CMO Bonds which are collateralized by the mortgages mature or are called in accordance with the underlying bond indenture.
Principal Amount of Fair Value of Cost Less Residual Series Mortgage Certificates Mortgage Certificates Unamortized Discount - - --------------------------------------------------------------------------------------------- (In thousands) CMOT 28 $ 90,046 $ 93,958 $ 88,501 TMAC 1986-1 21,260 22,230 21,251 - - --------------------------------------------------------------------------------------------- $111,306 $116,188 $109,752 =============================================================================================
7. Fair Value of Nonequity Residual Interests and IO Bonds General - Substantially all income to the Company is derived from the cash flows from the Company's Residual Interests and IO Bonds although, in future years, it is anticipated that most of the taxable income of the Company will be derived from its operating real estate assets. The fair value of a Residual Interest and an IO Bond is the net present value of the projected future cash flows. The amount of cash flows that may be generated from the Company's Residual Interests and IO Bonds are uncertain and may be subject to wide variations depending primarily upon the rate and timing of prepayments on the mortgage collateral and Inverse IO Bonds, changes in LIBOR. The following information sets forth assumptions used to calculate the projected cash flows on the Company's Residual Interests and IO Bonds, and the present value of these assets at December 31, 1995 based on various assumptions and discount factors. Assumptions - For purposes of the presentations below, the Nonequity Residual Interests are shown as a group and the IO Bonds have been separated into two groups: regular IO Bonds and Inverse IO Bonds. For purposes of projecting future cash flows, the following December 31, 1995 one-month LIBOR rate is used: INTEREST RATE ASSUMPTIONS ------------------------------------------- One Month LIBOR 5.5625% ------------------------------------------- Principal payments on mortgage loans may be in the form of scheduled amortization or prepayments (for this purpose, "prepayments" includes principal prepayments and liquidations due to default or other dispositions). The prepayment assumptions used herein are based on an assumed rate of prepayment each month of the unpaid principal balance on a pool of mortgage loans. A 100% prepayment assumption assumes prepayment rates of 0.2% per annum of the then outstanding principal balance of such mortgage loans in the first month of the life of such mortgage loans and an additional 0.2% per annum in each month thereafter (for example, 0.4% per annum in the second month) until the 30th month. Beginning with the 30th month and in each month thereafter during the life of such mortgage loans, a 100% prepayment assumption assumes a constant prepayment rate of 6% per annum. The prepayment assumptions used to estimate the fair value of the Company's Nonequity Residual Interests and IO Bonds are the Bloomberg Financial Markets ("Bloomberg") Dealer Prepayment Estimates Average as estimated by several dealers in mortgage-related assets and compiled by Bloomberg as of December 29, 1995. Bloomberg has obtained this information from sources it believes to be reliable but has not verified such information and assumes no responsibility for the accuracy of such information. The following are the prepayment assumptions used to project cash flows in order to calculate the present value of Nonequity Residual Interests and IO Bonds:
PREPAYMENT ASSUMPTIONS - - ---------------------------------------------------------- Percent Pass-Through Prepayment Mortgage Collateral Rate Assumption - - ---------------------------------------------------------- GNMA Certificates 9.0% 279% GNMA Certificates 10.0% 306% FNMA/FHLMC Certificates 8.5% 295% FNMA/FHLMC Certificates 9.0% 311% FNMA/FHLMC Certificates 9.5% 322% FNMA/FHLMC Certificates 10.0% 334% - - ----------------------------------------------------------
Neither the interest rates nor the prepayment assumptions used herein purports to be a historical description of interest rates or prepayment experiences or a prediction of future interest rates or prepayments of any pool of mortgage loans. The fair value of these assets can vary dramatically depending on future interest rates, prepayment speeds and the discount factor used. Present Value of Projected Cash Flows - The tables which follow set forth the present value at December 31, 1995 of the projected cash flows discounted at the indicated discounted rates subject to the assumptions described above. For example, if cash flows are projected using the Bloomberg Financial Markets ("Bloomberg") Dealer Prepayment Estimates Average, as estimated by several dealers in mortgage-related assets and compiled by Bloomberg as of December 29, 1995, and Nonequity Residuals Interests in CMOs with fixed rate Bond Classes are discounted at 14%, the present value of the projected cash flows of the Company's Nonequity Residual Interests would equal approximately $725,000. This is the Company's estimate of the fair value of these assets. In addition, if cash flows on the Company's regular IO Bonds are discounted at 14% and the cash flows on its Inverse IO Bonds are discounted at 30%, the present value of the projected cash flows on the IO Bonds would equal $3,150,000. The book value is the Company's estimate of the fair value of these IO Bonds. There will be differences between the projected cash flows used to calculate the present value of these assets and the actual cash flows received by the Company, and such differences may be material.
PRESENT VALUE OF NONEQUITY RESIDUAL INTERESTS - - ---------------------------------------------------------------------------- (In thousands) Residual Interests in CMOs with Fixed Rate Bond Classes ---------------------------------------------------------- Discount Rate 10% 12% 14% 16% 18% Present Value $844 $780 $725 $677 $636 - - ----------------------------------------------------------------------------
PRESENT VALUE OF IO BONDS - - ---------------------------------------------------------------------------- (In thousands) Regular Interest Only Bonds ---------------------------------------------------------- Discount Rate 10% 12% 14% 16% 18% Present Value $1,161 $1,097 $1,039 $988 $941 Inverse Interest Only Bonds ---------------------------------------------------------- Discount Rate 22% 26% 30% 34% 38% Present Value $2,570 $2,319 $2,111 $1,939 $1,791 - - ----------------------------------------------------------------------------
8 . Other Fair Value Disclosure In addition to the Residual Interests and IO Bonds discussed above, the Company has the following other financial instruments: cash and cash equivalents, accrued interest and accounts receivable, accounts payable and accrued liabilities, accrued interest payable, short term debt and dividends payable. The carrying amounts of these instruments are reasonable estimates of their fair value due to their short term nature. 9. Commercial Securitizations Presented below is a schedule of commercial securitizations owned by the Company: (In thousands) Book Value ------------------------- Purchase December 31, December 31, Issuer and Series Price 1995 1994 - - -------------------------------------------------------------------------- CS First Boston 1994-CFB1 $975 $ 0 $ 944 Prudential Securities Series 1993-6 250 191 250 ------------------------- Total $191 $1,194 ========================= During the year ended December 31, 1995, the CS First Boston bond was sold for $1,017,216 at a gain of $117,898. 10. Operating Real Estate Assets During the year ended December 31, 1995, the Company acquired four multifamily housing properties in California's Central Valley. The purchase price of these properties was $29,305,000. Capitalized costs differ from the purchase price due to capitalization of acquisition costs. At December 31, 1995, the carrying value of operating real estate assets (in thousands) consisted of: Land $ 4,990 Buildings and Improvements 24,036 Personal Property 735 --------- Total 29,761 Less Accumulated (377) Depreciation --------- Net $29,384 ========= Cash disbursements in 1995 to acquire real estate assets totaled $29,267,000 offset by the assumption of currently existing notes payable on real estate of $18,675,000. Therefore, the net cash paid in 1995 for the acquisition of real estate assets was $10,592,000. 11. Notes Payable on Real Estate As part of the 1995 acquisition of multifamily residential properties, existing secured debt totaling $18,675,000 was assumed. Some of the assumed debt remains in the name of the seller, but the Company is servicing the debt and receives all of the economic benefits from the properties. In addition, new secured debt of $1,815,000 was obtained. During 1995, principal payments on this debt were $127,900. As of December 31, 1995, notes payable on real estate consisted of: Principal Monthly Balance Basis of Current Principal December 31, Interest Interest Due and Interest Property 1995 Rate Rate Date Payment - - ----------------------------------------------------------------------------------------------- Shady Lane $1,387,088 Fixed 7.844% Dec. 1, 2014 $11,967 River Oaks 6,605,419 11th District 7.976% May 1, 1996 46,151 COFI + 3% Villa San Marcos 6,055,762 1 year Treasury 8.375% Jan. 1, 1999 49,304 Bill + 3% Four Creeks - I 1,813,821 Fixed 8.160% Dec. 1, 2005 13,521 Four Creeks - II 4,500,000 Prime Rate 9.750% June 30, 1996 36,562 + 1.25% - - ----------------------------------------------------------------------------------------------- Total $20,362,090 $157,505 ===============================================================================================
The scheduled principal payments to be made on notes payable on real estate are as follows (in thousands): Year Amount --------------------------- 1996 $11,244 1997 151 1998 163 1999 5,833 2000 70 Thereafter 2,901 --------------------------- Total $20,362 =========================== The Company intends to refinance approximately $17,000,000 of the notes payable on real estate during 1996 at terms and rates more favorable than currently exist. 12. Short-term Debt At December 31, 1995 the Company owed $2,117,500 under two repurchase agreements. All of the borrowings had initial terms of one month, are renewed on a month-to-month basis and have a floating rate of interest which is tied to the one month LIBOR rate. The weighted average interest rate of such borrowings at December 31, 1995 was 7.4335%. At December 31, 1994 short-term borrowings totaled $8,325,000 and had a weighted average interest rate of 6.9776%. The Company has no committed lines of credit. 13. Stock Options During 1995 the shareholders approved the 1995 Stock Option Plan (the "Plan") covering 400,000 shares of the Company's common stock. 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 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 grant reduced by the aggregate amount of dividends declared. Options granted are exerciseable for no more than 10 years from the date of grant. During 1995 options covering 330,000 shares of the Company's common stock were issued to officers of the Company and options covering 6,000 shares were issued to non-affiliated directors. No expense was recorded related to the Plan in 1995. At December 31, 1995, 64,000 shares were available for granting further options. Options for 330,000 shares were outstanding at $2.25 per share and options for 6,000 shares were outstanding at $2.26 per share, of which all options outstanding were exerciseable. During 1995 no options were exercised. Options outstanding under the Plan are included in the weighted average number of common shares outstanding if dilutive for purposes of computing primary earnings per share. Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock Based Compensation", is effective for transactions entered into for fiscal years beginning after December 15, 1995. As permitted by SFAS 123, the Company will not change its method of accounting for stock options but will provide the additional required disclosures beginning in fiscal 1996. 14. Related Party Transactions The Company has entered into an agreement (the "Management Agreement") with the Manager which is renewable annually. In June 1995 the Board of Directors approved a new Management Agreement through June 30, 1996 and it is thereafter renewable annually. The Manager advises the Company on various facets of its business and manages its operations, subject to supervision by the Company's Board of Directors. For performing these services, the Manager received a base management fee of 3/8 of 1% per annum of the Company's average invested assets. Effective October 1, 1995, the base management fee is .65% per annum of the Company's average invested assets. However, the Manager has voluntarily waived the increase in base management fee for the fourth quarter of 1995 and first quarter of 1996. Additionally, the Manager receives incentive compensation of 10% of the amount by which the total return for any calendar year exceeds 12%. Management fees of $130,000, $121,000 and $179,000 were earned in 1995, 1994 and 1993, respectively. Within two months of the applicable year end, $32,000 of the 1995 and 1994 fees and $31,000 of the 1993 fees were paid. In order to compensate the Manager for certain administrative functions that the Manager performs with respect to each Residual Interest purchased by the Company, for which neither the Manager nor an affiliate acts as bond administrator, the Company pays the Manager a fee equal to $10,000 per annum for each Residual Interest. A total of $90,000 of these Residual Interest Administration fees were earned by the Manager and paid in 1995 as compared to $100,000 in 1994 and $110,000 in 1993. Effective October 1, 1995, the Residual Interest Administration fee was discontinued. For 1995, 1994 and 1993, the Manager did not charge a Residual Interest Administration Fee on those Residual Interests for which it projected total 1996, 1995 and 1994 income of less than $40,000. In addition, the Manager is reimbursed for certain direct expenses incurred on behalf of the Company. At December 31, 1995, 1994 and 1993, all of these reimbursable expenses were paid to the Manager. 15. Wholly-Owned Subsidiary On October 21, 1988 TISMAC, the wholly-owned Subsidiary of the Company, was incorporated for the purpose of issuing CMOs directly. At incorporation 100 shares of TISMAC's common stock were issued to the Company for $100. The assets of the Subsidiary are not available to pay creditors of the Company. The Company has undertaken to indemnify certain parties who have contracted with the Subsidiary against certain losses which they might sustain in carrying out their obligations. During the year ended December 31, 1995 the Company sold the residual interest certificate and optional redemption rights related to the trust representing its economic interest in TISMAC for $785,000 and recognized a loss on disposition of $331,000. As a result of this transaction, the Company no longer has the risk or reward of ownership and therefore the accounts of TISMAC are no longer included in the consolidated financial statements at December 31, 1995. The net assets of TISMAC (in thousands) at the date of sale were: Mortgage Certificates, net $ 32,690 Restricted Cash 191 Accrued Interest Receivable 278 Deferred Bond Issuance Costs 627 Other Assets 95 Collateralized Mortgage Obligations, net (32,492) Accrued Interest Payable (273) -------- Net Assets $ 1,116 ======== 16. Interest Income Interest income from Mortgage Related Assets consisted of: Years Ended December 31, ------------------------------------- (In thousands) 1995 1994 1993 - - --------------------------------------------------------------------- Mortgage Certificates, net $13,735 $18,298 $36,873 Short-term Investments 115 126 179 Residual Interests 1,483 3,650 186 Interest Only (IO) Bonds 1,128 2,208 1,997 Commercial Securitizations 89 51 0 - - --------------------------------------------------------------------- Total $16,550 $24,333 $39,235 ===================================================================== =
17. Pro Forma Data (Unaudited) All acquisitions, consisting only of operating real estate assets in 1995, have been accounted for as purchases. Operations of the businesses acquired have been included in the accompanying consolidated financial statements from their respective dates of acquisition (ranging from January to November 1995). The consolidated results of operations on a pro forma basis as though these acquisitions had been made as of the beginning of the Company's fiscal years 1994 to 1995 are as follows: Years Ended December 31, --------------------------- (in thousands except per share data) 1995 1994 - - --------------------------------------------------------------------- Income from Mortgage Related Assets $14,736 $23,995 Rental and Other Income 3,844 3,803 Net Income (Loss) (2,786) 2,573 Income (Loss) per share ($0.34) $0.32
18. Quarterly Financial Data (Unaudited) - - --------------------------------------------------------------------------------------------- (In thousands, First Second Third Fourth except per share data) Quarter Quarter Quarter Quarter Total - - --------------------------------------------------------------------------------------------- 1995 Interest Income from Mortgage Related Assets $5,407 $4,794 $2,753 $1,782 $14,736 Income (Loss) from Real Estate Operations 134 (21) (104) (298) (289) Net Income (Loss) 363 190 (1,619) (1,513) (2,579) Net Income (Loss) per Share $0.04 $0.03 ($0.20) ($0.19) ($0.32) - - --------------------------------------------------------------------------------------------- 1994 Interest Income from Mortgage Related Assets $6,484 $6,227 $5,877 $5,407 $23,995 Net Income 693 979 494 371 2,537 Net Income per Share $0.09 $0.12 $0.06 $0.04 $0.31 Dividends Declared per Share 0.00 0.00 0.02 0.00 0.02 - - ---------------------------------------------------------------------------------------------
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: March 27, 1996 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. Signature Title Date - - --------- ----- ---- /s/ Lorraine O. Legg Director, President and March 27, 1996 - - ----------------------- Principal Executive Officer Lorraine O. Legg /s/ John E. Castello Executive Vice President March 27, 1996 - - ----------------------- (Principal Financial Officer) John E. Castello /s/ Michael J. Stone Controller March 27, 1996 - - ----------------------- Michael J. Stone /s/ Patricia M. Howe Director, March 27, 1996 - - ----------------------- Chairman of the Board Patricia M. Howe /s/ John D. Boyce Director March 27, 1996 - - ----------------------- John D. Boyce /s/ Robert H. Edelstein Director March 27, 1996 - - ----------------------- Robert H. Edelstein /s/ Douglas B. Fletcher Director March 27, 1996 - - ----------------------- Douglas B. Fletcher /s/ Robert W. Ledoux Director March 27, 1996 - - ----------------------- Robert W. Ledoux /s/ Melvin W. Petersen Director March 27, 1996 - - ----------------------- Melvin W. Petersen /s/ Will M. Storey Director March 27, 1996 - - ----------------------- Will M. Storey EX-99 2 SCHEDULE III SCHEDULE III TIS MORTGAGE INVESTMENT COMPANY REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1995 (DOLLARS IN THOUSANDS)
Column A Column B Column C Column D Cost Initial Cost to Company Subsequently ----------------------- Capitalized Buildings and -------------- Description Encumbrances Land Improvements Improvements - - --------------------------------------------------------------------------------------- Shady Lane Village Visalia, CA $1,387 $379 $1,725 $38 River Oaks Hanford, CA 6,605 905 7,096 20 Villa San Marcos Fresno, CA 6,056 2,549 7,459 Four Creeks Village Visalia, CA 6,314 1,157 7,698 - - --------------------------------------------------------------------------------------- $20,362 $4,990 $23,978 $58 =======================================================================================
SCHEDULE III cont. TIS MORTGAGE INVESTMENT COMPANY REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1995 (DOLLARS IN THOUSANDS)
Column E Column F Column G Column H Column I Gross Amount at which Carried at Close of Period Life on ------------------------ which Building & Accumulated Date of Date Depreciation Description Land Improvements Total Depreciation Construction Acquired is Computed - - ------------------------------------------------------------------------------------------------------------------------- Shady Lane Village Visalia, CA $379 $1,763 $2,142 $42 1985 1995 40 years River Oaks Hanford, CA 905 $7,116 $8,021 148 1984 1995 40 years Villa San Marcos Fresno, CA 2,549 7,459 10,008 93 1991 1995 40 years Four Creeks Village Visalia, CA 1,157 7,698 8,855 56 1986-91 1995 40 years - - ------------------------------------------------------------------------------------------------------------------------- $4,990 $24,036 $29,026 $339 ==============================================================================
EX-27 3 EXHIBIT: FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 3,926 113,818 1,672 4,277 0 115,139 29,761 377 145,247 133,266 0 8 0 0 11,973 145,247 0 16,942 0 0 3,398 0 16,123 (2,579) 0 (2,579) 0 0 0 (2,579) (.32) (.32)
EX-99 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated March 4, 1996, included in the Form 10-K, into the Corporation's previously filed Registration Statements on Form S-3 (File No. 33-44526) and Form S-8 (File No. 33-96960). /s/ Arthur Andersen LLP ----------------------- San Francisco, California March 25, 1996 EX-99 5 STOCK OPTION PLAN TIS MORTGAGE INVESTMENT COMPANY 1995 STOCK OPTION PLAN NONQUALIFIED STOCK OPTION AGREEMENT ----------------------------------- This NONQUALIFIED STOCK OPTION AGREEMENT, dated as of June 21, 1995 (the "Grant Date"), is between TIS Mortgage Investment Company (the "Company"), and John D. Boyce (the "Optionee"), an Unaffiliated Director (as defined in the Company's By-Laws) of the Company. WHEREAS, the Company desires to afford the Optionee an opportunity to purchase shares of common stock of the Company ("Common Shares") as hereinafter provided, in accordance with the provisions of the TIS Mortgage Investment Company 1995 Stock Option Plan (the "Plan"), a copy of which is attached hereto; NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee the right and option (the "Option") to purchase all or any part of an aggregate of 1,000 shares of the Company's common stock, par value $0.001 per share ("Common Shares"). The Option is in all respects limited and conditioned as hereinafter provided, and is subject in all respects to the terms and conditions of the Plan now in effect and as it may be amended from time to time (which terms and conditions are incorporated herein by reference, made a part hereof, and shall control in the event of any conflict with any other terms of this Option Agreement). It is intended that the Option granted hereunder be a nonqualified stock option ("NQSO") and not an incentive option ("ISO") as such term is defined in section 422 of the Internal Revenue Cost of 1986, as amended (the "Code"). 2. Purchase Price. The purchase price of the Common Shares covered by this Option shall be $2.26 per Common Share, which price is 100% of the fair market value of such Common Share. This purchase price shall be reduced (but not below 50% of the amount in the preceding sentence) by the amount of cash dividends per Common Share declared by the Company between the Grant Date and the date the Option is exercised. 3. Term. Unless earlier terminated pursuant to any provision of the Plan or of this Option Agreement, this Option shall expire on June 21, 2005 (the "Expiration Date"), which date is not more than 10 years from the Grant Date. This Option shall not be exercisable on or after the Expiration Date. 4. Exercise of Option. Subject to Section 6(d)(v) of the Plan and any other applicable provisions contained in the Plan and in this Option Agreement, this Option may be exercised at any time commencing on the Grant Date, in whole or in part, until the expiration of the term of this Option as set forth in Paragraph 3 or until other termination of the Option. 5. Termination of Board Membership. If such Optionee's membership on the Board of Directors of the Company is terminated prior to the Expiration Date, such Option may be exercised, to the extent of the Common Shares with respect to which the Optionee could have exercised it on the date of termination, at any time prior to the earlier of (I) the Expiration Date, or (ii) 12 months after termination of said membership. 6. Disability. If such Optionee's membership on the Board of Directors of the Company is terminated prior to the Expiration Date by reason of such Optionee's disability (within the meaning of section 22(e)(3) of the Code), such Option may be exercised, to the extent of the Common Shares with respect to which the Optionee could have exercised it on the date of such termination, at any time prior to the earlier of (I) the Expiration Date, or (ii) 12 months after termination of said membership by reason of such disability. 7. Death. If such Optionee dies during his membership on the Board of Directors of the Company and prior to the Expiration Date or if Optionee dies after his membership on the Board is terminated but prior to the earlier of the Expiration Date or the expiration of the period determined under Paragraph 5 or Paragraph 6, such Option may be exercised, to the extent of the Common Shares with respect to which the Optionee could have exercised it on the date of his death, at any time prior to the earlier of (I) the Expiration Date, or (ii) 12 months after the Optionee's death. 8. Method of Exercising Option. Such to the terms and conditions of this Option Agreement and the Plan, the Option may be exercised by written notice to the Company at its principal office. Such notice (a suggested form of which is attached) shall state the election to exercise the Option and the number of Common Shares with respect to which it is being exercised, be signed by the person or persons so exercising the Option, and be accompanied by payment of the full Option price for such Common Shares. The Option price shall be paid to the Company in cash, or by certified check, bank draft or postal or express money order. Upon receipt of such notice and payment, the Company shall deliver a certificate or certificates representing the Common Shares with respect to which the Option is so exercised. Such certificate(s) shall be registered in the name of the person or persons so exercising the Option (or, if the Option is exercised by the Optionee and if the Optionee so requests in the notice exercising the Option, shall be registered in the name of the Optionee and Optionee's spouse, jointly, with right of survivorship) and shall be delivered as provided above to or upon the written order of the person or persons exercising the Option. In the event the Option is exercised by any person or persons after the death or disability of the Optionee, the notice shall be accompanied by appropriate proof of the right of such person or persons to exercise the Option. 9. Common Shares to be Purchased for Investment. The Company may require the person or persons exercising the Option to provide satisfactory assurances that the Common Shares acquired upon such exercise are being acquired for investment and not with a view to distribution, and the certificates representing such Common Shares may be legended accordingly. 10. Non-Transferability of Option. This Option is not assignable or transferable, in whole or in part, by the Optionee other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee or, in the event of his disability, by his legal representative. 11. Governing Law. This Option Agreement shall be construed in accordance with, and its interpretation shall be governed by, Maryland law. IN WITNESS WHEREOF, TIS MORTGAGE INVESTMENT COMPANY has caused this Nonqualified Stock Option Agreement to be duly executed by its duly authorized officers, and the Optionee has hereunto set his hand and seal, all on the day and year first above written. ATTEST: TIS MORTGAGE INVESTMENT COMPANY [SEAL] _____________________ By:________________________________ Secretary JOHN D. BOYCE _____________________ ___________________________________ Witness Optionee TIS MORTGAGE INVESTMENT COMPANY 1995 STOCK OPTION AND STOCK GRANT PLAN Notice of Exercise of Nonqualified Stock Option I hereby exercise the nonqualified stock option granted to me pursuant to a Nonqualified Stock Option Agreement dated as of June 21, 1995, by TIS Mortgage Investment Company the "Company"), with respect to the following number of shares of the Company's common stock ("Common Shares"), par value $0.001 per Common Shares, covered by said option: Number of Common Shares to be purchased __________ Option price per Common Share $__________ Total option price $__________ Enclosed is cash or my check, bank draft or postal or express money order in the amount of $__________ in full payment for such Common Shares. Please have the certificate or certificates representing the purchased Common Shares registered in the following name or names*: ____________________; and sent to: ____________________________________. DATED: ____________, 19___. _______________________________ Optionee's Signature _________________ *Certificates may be registered in the name of the Optionee alone or in the joint names (with right of survivorship) of the Optionee and his or her spouse. Schedule of Omitted Contracts ----------------------------- Nonqualified Stock Option Agreements identical to the Agreement dated June 21, 1995 with John D. Boyce. The omitted agreements are between Registrant and: Robert H. Edelstein Douglas B. Fletcher Robert W. Ledoux Harvie M. Merrill Will M. Storey TIS MORTGAGE INVESTMENT COMPANY 1995 STOCK OPTION PLAN NONQUALIFIED STOCK OPTION AGREEMENT This NONQUALIFIED STOCK OPTION AGREEMENT, dated as of September 13, 1995 (the "Grant Date"), is between TIS Mortgage Investment Company (the "Company"), and John E. Castello (the "Optionee"), an officer of the Company. WHEREAS, the Company desires to afford the Optionee an opportunity to purchase shares of the Company's common stock, par value $0.001 per share ("Common Shares") as hereinafter provided, in accordance with the provisions of the TIS Mortgage Investment Company 1995 Stock Option Plan (the "Plan"), a copy of which is attached hereto; NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee the right and option (the "Option") to purchase all or any part of an aggregate of 50,000 shares of the Company's common stock, par value $0.001 per share ("Common Shares"). The Option is in all respects limited and conditioned as hereinafter provided, and is subject in all respects to the terms and conditions of the Plan now in effect and as it may be amended from time to time (which terms and conditions are incorporated herein by reference, made a part hereof, and shall control in the event of any conflict with any other terms of this Option Agreement). It is intended that the Option granted hereunder be a nonqualified stock option ("NQSO") and not an incentive option ("ISO") as such term is defined in section 422 of the Internal Revenue Cost of 1986, as amended (the "Code"). 2. Purchase Price. The purchase price of the Common Shares covered by this Option shall be $2.25 per Share, which price is 100% of the fair market value of such Common Stock on the Grant Date. This exercise price shall be reduced (but not below 50% of the amount in the preceding sentence) by the amount of cash dividends per Common Stock declared by the Company between the Grant Date and the date the Option is exercised. 3. Term. Unless earlier terminated pursuant to any provision of the Plan or of this Option Agreement, this Option shall expire on September 12, 2005 (the "Expiration Date"), which date is not more than 10 years from the Grant Date. This Option shall not be exercisable on or after the Expiration Date. 4. Exercise of Option. Subject to Section 6(d)(v) of the Plan and any other applicable provisions contained in the Plan and in this Option Agreement, this Option may be exercised at any time commencing on the Grant Date, in whole or in part, until the expiration of the term of this Option as set forth in Paragraph 3 or until other termination of the Option. 5. Termination of Service for any Reason, Including Death and Disability. If such Optionee's service with the Company is terminated prior to the Expiration Date for any reason, including the Optionee's death or disability, the Option may be exercised by the Optionee, or in the event of the Optionee's death by the Optionee's estate, personal representative or beneficiary, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of termination, at any time prior to the Expiration Date.. 6. Method of Exercising Option. Such to the terms and conditions of this Option Agreement and the Plan, the Option may be exercised by giving written notice of exercise to the Company at its principal office. Such notice (a suggested form of which is attached) shall state the election to exercise the Option and the number of shares with respect to which it is being exercised, be signed by the person or persons so exercising the Option, and be accompanied by payment of the full Option price for such shares. The Option price shall be paid to the Company in cash, or by certified check, bank draft or postal or express money order. Upon receipt of such notice and payment, the Company shall deliver a certificate or certificates representing the Common Stock with respect to which the Option is so exercised. Such certificate(s) shall be registered in the name of the person or persons so exercising the Option (or, if the Option is exercised by the Optionee and if the Optionee so requests in the notice exercising the Option, shall be registered in the name of the Optionee and Optionee's spouse, jointly, with right of survivorship) and shall be delivered as provided above to or upon the written order of the person or persons exercising the Option. In the event the Option is exercised by any person or persons after the death or disability of the Optionee, the notice shall be accompanied by appropriate proof of the right of such person or persons to exercise the Option. 7. Common Shares to be Purchased for Investment. The Company may require the person or persons exercising the Option to provide satisfactory assurances that the Common Shares acquired upon such exercise are being acquired for investment and not with a view to distribution, and the certificates representing such Common Shares may be legended accordingly. 8. Non-Transferability of Option. This Option is not assignable or transferable, in whole or in part, by the Optionee other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee or, in the event of his disability, by his legal representative. 9. Governing Law. This Option Agreement shall be construed in accordance with, and its interpretation shall be governed by, Maryland law. IN WITNESS WHEREOF, TIS MORTGAGE INVESTMENT COMPANY has caused this Nonqualified Stock Option Agreement to be duly executed by its duly authorized officers, and the Optionee has hereunto set his hand and seal, all on the day and year first above written. ATTEST: TIS MORTGAGE INVESTMENT COMPANY [SEAL] _____________________ By:________________________________ Secretary JOHN E. CASTELLO _____________________ ___________________________________ Witness Optionee TIS MORTGAGE INVESTMENT COMPANY 1995 STOCK OPTION AND STOCK GRANT PLAN Notice of Exercise of Nonqualified Stock Option I hereby exercise the nonqualified stock option granted to me pursuant to a Nonqualified Stock Option Agreement dated as of September 13, 1995, by TIS Mortgage Investment Company the "Company"), with respect to the following number of shares of the Company's common stock ("Common Shares"), par value $0.001 per Common Shares, covered by said option: Number of Common Shares to be purchased __________ Option price per Common Share $__________ Total option price $__________ Enclosed is cash or my check, bank draft or postal or express money order in the amount of $__________ in full payment for such Common Shares. Please have the certificate or certificates representing the purchased Common Shares registered in the following name or names*: ____________________; and sent to: ____________________________________. DATED: ____________, 19___. _______________________________ Optionee's Signature _________________ *Certificates may be registered in the name of the Optionee alone or in the joint names (with right of survivorship) of the Optionee and his or her spouse. Schedule of Omitted Contracts ----------------------------- Nonqualified Stock Option Agreements similar to the Agreement dated September 13, 1995 with John E. Castello. The omitted agreements are between Registrant and: Patricia M. Howe for 100,000 shares Lorraine O. Legg for 150,000 shares Patrick Maguire for 5,000 shares Soodabeh Shakerin for 10,000 shares Michael J. Stone for 15,000 shares EX-99 6 MANAGEMENT AGREEMENT MANAGEMENT AGREEMENT THIS AGREEMENT, dated as of June 19, 1995, by and between TIS MORTGAGE INVESTMENT COMPANY, a Maryland corporation (the "Company"), and TIS FINANCIAL SERVICES, INC., a Delaware corporation (the "Manager"). W I T N E S S E T H: WHEREAS, the Company intends to acquire and hold real estate and Mortgage Assets and expects to qualify for the tax benefits accorded by Sections 856 through 860 of the Internal Revenue Code of 1986; and WHEREAS, the Company desires to retain the Manager to manage the investments of the Company and to perform administrative services for the Company in the manner and on the terms set forth herein; NOW THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Definitions. Capitalized terms used herein shall have the respective meanings assigned them below, (a) "Affiliate" means, when used with reference to a specified Person, (i) any Person that directly or indirectly controls or is controlled by or is under common control with the specified Person, (ii) any Person that is an officer, director, employee, partner or trustee of, or serves in a similar capacity with respect to, the specified Person, or of which the specified Person is an officer, director, employee, partner or trustee of or with respect to which the specified Person serves in a similar capacity, (iii) any Person that, directly or indirectly, is the beneficial owner of 5% or more of any class of equity securities issued by the specified Person, or any Person 5% or more of whose equity securities are, directly or indirectly, beneficially owned by such other Person, and (iv) any Person that has a material business or professional relationship with the specified Person, provided, however, that a Person shall not be deemed to be an Affiliate of the Manager or of any Person which is an Affiliate of the Manager solely by reason of serving as a director of one or more investment companies of which the Manager or an Affiliate of the Manager serves as investment advisor or in any other capacity; (b) "Affiliated Issuer" means any Person that issues Structured Securities and which is organized by or on behalf of the Company; (c) "Average Invested Assets" for any period means the average of the aggregate book value of the consolidated assets of the Company, its trusts and subsidiaries, before reserves for depreciation or bad debts or other similar non-cash reserves, less the book value of the issued and outstanding Structured Securities of the Company, its trusts and subsidiaries, computed by taking the average of such values at the end of each month during such period; (d) "Board of Directors" means the Board of Directors of the Company; (e) "FHLMC" or "Freddie Mac" means the Federal Home Loan Mortgage Corporation, a corporation organized and existing under the laws of the United States, or any successor or assign or any resulting, surviving or transferee entity; (f) "FNMA" means the Federal National Mortgage Association, a corporation organized and existing under the laws of the United States, or any successor or assign or any resulting, surviving or transferee entity; (g) "FNMA Certificate" means a FNMA mortgage pass-through certificate; (h) "Freddie Mac Certificate" means a Freddie Mac mortgage participation certificate; (i) "GNMA" means the Government National Mortgage Association or any successor or assign or any resulting, surviving or transferee entity; (i) "GNMA Certificate" means a fully-modified pass-through mortgage- backed certificate guaranteed by GNMA; (k) "Mortgage Assets" means, collectively, Mortgage Instruments, Residual Interests and Structured Securities; (1) "Mortgage Certificates" means, collectively (i) GNMA Certificates, (ii) Freddie Mac Certificates, (iii) FNMA Certificates and (iv) Structured Securities; (m) "Mortgage Instruments" means, collectively, Mortgage Certificates and Mortgage Loans; (n) "Mortgage Loans" means, collectively, (i) mortgage loans which comply with the requirements for inclusion in a guaranty program sponsored by either FNMA, Freddie Mac or GNMA, and (ii) mortgage loans which are in conformance with the investment criteria and policies adopted by the Board of Directors and which meet the requirements of the guaranty programs of any of FNMA, FHLMC or GNMA, except for the requirements with respect to the maximum original outstanding principal amounts of such mortgage loans and such other particular requirements of such programs identified by the Board of Directors; (o) "Person" means a natural person, corporation, partnership, association, trust (including any beneficiary thereof), company, joint venture, joint stock company, unincorporated organization or other entity; (p) "Residual Interests" means residual interests in Structured Securities that entitle the holder to receive net income from the collateral pledged to secure such securities; (q) "Securities Administration Services" means the services provided by the Manager pursuant to Section 2 (n) hereof; (r) "Securities Issuance Services" means the services provided by the Manager pursuant to Section 2 (m) hereof; (s) "Series of Structured Securities" means a separate series of Structured Securities issued or caused to be issued by the Company or an Affiliated Issuer pursuant to an indenture or other agreement; (t) "Structured Securities" means, collectively, collateralized mortgage obligations, mortgage-collateralized securities and mortgage pass- through securities; (u) "Total Return" means the sum of (i) the dividends and distributions declared by the Board of Directors during a calendar year that are payable to holders of shares of common stock of the Company plus (ii) the total shareholders' equity as reported on the audited consolidated balance sheet of the Company at the end of the year less the total shareholders' equity as reported on the audited consolidated balance sheet of the Company at the end of the preceding year, which sum shall be divided by the weighted average number of shares of common stock of the Company that were outstanding during the year; and (v) "Unaffiliated Directors" means those members of the Board of Directors who (i) are not Affiliates of the Manager or of any person that is an Affiliate of the Manager and (ii) are not employed by, or receiving any compensation (except for serving as a director) from, the Company. SECTION 2. General Duties of the Manager. Subject to the supervision and control of the Board of Directors, the Manager shall provide services to the Company, and to the extent directed by the Board of Directors, shall provide similar services to any Affiliated Issuer or subsidiary of the Company as follows: (a) serve as the Company's consultant with respect to formulation of criteria regarding the assets to be acquired and held by the Company, and recommend policy guidelines to the Board of Directors; (b) issue commitments on behalf of the Company to purchase Mortgage Instruments and Residual Interests; (c) represent the Company in connection with the purchase and accumulation of Mortgage Assets; (d) furnish reports and statistical and economic research to the Company regarding the Company's assets and activities and the services performed for the Company by the Manager; (e) monitor and provide to the Board of Directors on an ongoing basis price information and other data obtained from certain nationally recognized dealers that maintain markets in Mortgage Instruments identified by the Board of Directors from time to time, and provide data and advice to the Board of Directors in connection with the identification of such dealers; (f) provide the executive and administrative personnel, office space and services required in rendering services to the Company; (g) administer or supervise the administration of the day-to-day operations of the Company and perform or supervise the performance of such other administrative functions necessary in the management of the Company as may be agreed upon by the Manager and the Board of Directors, including the collection of revenues and the payment of the Company's debts and obligations and maintenance of appropriate computer services to perform such administrative functions; (h) communicate or super-vise communications on behalf of the Company with the holders of the equity and debt securities of the Company as required to satisfy the reporting and other requirements of any governmental bodies or agencies and to maintain effective relations with such holders; (i) to the extent not otherwise subject to an agreement executed by the Company, designate a servicer for those Mortgage Loans sold to the Company by originators that have elected not to service such loans and arrange for the monitoring and administering of such servicer; (j) counsel the Company in connection with policy decisions to be made by the Board of Directors; (k) engage in hedging activities on behalf of the Company consistent with the Company's status as a real estate investment trust; (1) invest or reinvest any money of the Company; (m) provide to the Company itself or through another appropriate party all services in connection with the issuance of each Series of Structured Securities issued by the Company or any Affiliated Issuer including: (i) serving as consultant with respect to the structuring of each such Series of Structured Securities; (ii) negotiating the rating requirements with rating agencies with respect to the rating of each such Series of Structured Securities; (iii) accumulating and reviewing all Mortgage Instruments which may secure or constitute the mortgage pool for each such Series of Structured Securities; (iv) negotiating all agreements and credit enhancements with respect to each such Series of Structured Securities; (v) issuing commitments on behalf of the Company to purchase Mortgage Instruments to be used to secure or constitute the mortgage pool for each such Series of Structured Securities; and (vi) organizing and administering all activities in connection with the closing of each such Series of Structured Securities including all negotiations and agreements with underwriters, trustees, servicers, master servicers and other parties; (n) provide to the Company itself or through another appropriate party all services in connection with the administration of each Series of Structured Securities issued by the Company or any Affiliated Issuer including: (i) communicating on behalf of the Company with the holders of each such Series of Structured Securities as required to satisfy the reporting and tax informational requirements of any governmental bodies or agencies with respect to holders of each such Series of Structured Securities and as required to satisfy the provisions of any indenture, pooling and servicing agreement or other agreement with respect to each such Series of Structured Securities; (ii) determining the amount of and making all payments with respect to each such Series of Structured Securities and, if requested by the Company, directing investments in accordance with the terms of any indenture, pooling and servicing agreement or other agreement relating to each such Series of Structured Securities; (iii) furnishing all reports and statistical information required with respect to the administration of each such Series of Structured Securities; (iv) working with the Company and with accountants, counsel, trustees, servicers, master servicers and other parties with respect to the administration of each such Series of Structured Securities; (v) distributing all excess or residual payments with respect to each such Series of Structured Securities as directed by the Company or any indenture, pooling and servicing agreement or other agreement with respect to each such Series of Structured Securities; (vi) monitoring and providing on an on-going basis information with respect to each such Series of Structured Securities as is required by the Company; and (vii) advising the Company with respect to the administration of each such Series of Structured Securities; (o) pool Mortgage Loans purchased by the Company in accordance with the requirements of FHLMC, FNMA or GNMA, as appropriate, and seek to have Mortgage Certificates issued which are supported by Mortgage Loans, bear all responsibilities to FHLMC, FNMA or GNMA with respect to such Mortgage Loans and Mortgage Certificates, and service such Mortgage Loans after the issuance of the Mortgage Certificates in accordance with the requirements of FHLMC, FNMA or GNMA; (p) monitor and administer the servicing of the Company's Mortgage Loans, other than Mortgage Loans pooled to back Mortgage Certificates or pledged to secure Structured Securities, including serving as the Company's consultant with respect to the servicing of loans; collecting information and submission of reports pertaining to the Mortgage Loans and to moneys remitted to the Manager or the Company by servicers; periodically reviewing and evaluating the performance of each servicer to determine its compliance with the terms and conditions of the servicing agreement and, if deemed appropriate, recommending to the Company the termination of such servicing agreement; acting as a liaison between servicers and the Company and working with servicers to the extent necessary to improve their servicing performance; reviewing recommendations as to fire losses, easement problems and condemnation, delinquency and foreclosure procedures with regard to the Mortgage Loans; reviewing servicers, delinquency, foreclosing and other reports on Mortgage Loans; supervising claims filed under any mortgage insurance policies; and enforcing the obligation of any servicer to repurchase Mortgage Loans from the Company; (q) manage or supervise the management of multi-family properties and other real estate directly or indirectly beneficially owned or controlled by the Company, and provide to the Board of Directors whenever it considers the continuation of this Agreement a survey of competitive multi-family property management fee arrangements; and (r) perform or supervise the performance of such other services as may be required from time to time for management and other activities relating to the assets of the Company as the Manager or the Board of Directors shall deem appropriate under the particular circumstances. SECTION 3. Additional Activities of Manager. Nothing herein shall prevent or restrict the Manager or any of its Affiliates from engaging in any business or rendering services of any kind to any other person or entity, including the purchase of, or rendering advice to others purchasing, assets or Mortgage Assets which meet the Company's policies and criteria, except that the Manager and its Affiliates are prohibited from providing, directly or indirectly, any such services to any residential mortgage real estate investment trust other than the Company and its subsidiaries, unless the provision of such services is approved by a majority of the Unaffiliated Directors. Directors, partners, officers, employees and agents of the Manager or Affiliates of the Manager may serve as directors, partners, officers, employees, agents, nominees or signatories for the Company or any subsidiary of the Company. When executing documents or otherwise acting in such capacities for the Company, such persons shall use their respective titles in the Company. SECTION 4. Records; Confidentiality. The Manager shall maintain appropriate books of account and records relating to services performed hereunder, and such books of account and records shall be accessible for inspection by representatives of the Company or any subsidiary of the Company at any time during normal business hours. The Manager shall keep confidential any and all information obtained in connection with the services rendered hereunder and shall not disclose any such information to nonaffiliated third parties except with the prior written consent of the Board of Directors. SECTION 5. Obligations of Manager. The Manager shall require each seller or transferor of Mortgage Instruments to the Company to make such representations and warranties regarding such mortgage Instruments as may, in the judgment of the Manager, be necessary and appropriate. In addition, the Manager shall take such other action as it deems necessary or appropriate with regard to the protection of the Company's investments. SECTION 6. Compensation. (a) Base Fee. The Company shall pay to the Manager, for services rendered under this Agreement, a base management fee in an amount equal to 0.65% per annum of the Average Invested Assets of the Company during each calendar year. An amount equal to 0.1625% of the Average Invested Assets for each calendar quarter (or in the case of a partial calendar quarter a pro rata amount based on the number of days elapsed during such quarter), shall be paid to the Manager within 60 days after the end of such quarter as payment on account of the base management fee, subject to adjustment under Section 6(c) of this Agreement. (b) Incentive Compensation. The Company shall pay the Manager as incentive compensation for any calendar year an amount equal to 10% of the amount by which the Total Return for the year exceeds 0.12 (12%). Such amount shall be paid to the manager within fifteen days after the audited financial statements of the Company for the year have been completed. (c) Adjustment and Payment. The Manager shall compute the estimated compensation payable under Section 6(a) hereof within 45 days after the end of each calendar quarter. A copy of such computations shall be thereafter promptly submitted to each member of the Board of Directors, whereupon such compensation shall be due and payable. The aggregate amount of the Manager's compensation payable under Section 6(a) hereof for each calendar year shall be determined within fifteen days after the audited financial statements of the Company for the year have been completed, and any excess owed to, or shortfall owed by, the Manager as a result of the payments on account with respect to such compensation shall be promptly remitted by, or paid to, the Company. SECTION 7. Expenses of the Manager. (a) Without regard to the compensation received hereunder by the Manager, the Manager shall bear the following expenses, except to the extent that such expenses are obligations of the Company pursuant to Section 8 of this Agreement: (i) Employment expenses of the personnel employed by the Manager, including, but not limited to, salaries, wages, payroll taxes, and the cost of employee benefit plans; (ii) Travel and other expenses of directors, officers and employees of the Manager, except expenses of such persons who are directors, officers or employees of the Company or any subsidiary of the Company incurred in connection with attending meetings, conferences or conventions that relate solely to the business affairs of the Company or any subsidiary of the Company; (iii) Rent, telephone, utilities, office furniture, equipment and machinery (including computers) incurred in connection with the performance of the Manager's obligations hereunder; (iv) Any cost of computer services incurred in connection with the performance of the Manager's obligations hereunder. (v) All expenses connected with communications to holders of each Series of Structured Securities issued by or on behalf of the Company or any subsidiary of the Company and with governmental agencies and the other bookkeeping and clerical work necessary in maintaining relations with holders of such securities and in complying with the continuous reporting and other requirements of governmental bodies or agencies, including, without limitation, any costs of computer services in connection with this function, the cost of printing and mailing certificates for such securities and reports to third parties required under any indenture or other agreement to which the Company or any subsidiary of the Company is a party; (vi) If the Manager or an Affiliate acts as bond administrator for a Series of Structured Securities, all expenses relating to the performance of the services set forth in Sections 2(m) and 2(n) of this Agreement for such Series of Structured Securities; and (vii) Miscellaneous administrative expenses incurred in supervising and monitoring the Company's investments or any subsidiary's investments or relating to performance by the Manager of its functions hereunder. (b) Notwithstanding any other provisions of this Agreement, the Company shall reimburse the Manager for its costs in providing off-site operating, management and supervisory services with respect to the properties referred to in Section 2(q) of this Agreement, whether such services are provided by the Manager or on its behalf, but such reimbursement shall not exceed 5% of gross rents received from such properties by the Company in the aggregate. SECTION 8. Expenses of the Company. The Company or any subsidiary of the Company shall pay all of its expenses, except those that are the responsibility of the Manager pursuant to Section 7 of this Agreement, and without limiting the generality of the foregoing, the following expenses of the Company or any subsidiary of the Company shall be paid by the Company or such subsidiary and shall not be paid by the Manager: (a) Expenses related to raising capital, including the cost of borrowed money, interest payments, discounts, loan and commitment fees, points and any other related charges; (b) All license fees and all taxes applicable to the Company or any subsidiary of the Company, including interest and penalties thereon; (c) Legal, audit, accounting, underwriting, brokerage, listing, rating agency, registration and other fees, printing, engraving and other expenses and taxes incurred in connection with the issuance, sale, distribution, transfer, registration and stock exchange listing of the securities of the Company or-of any subsidiary of the Company; (d) Fees and expenses paid to employees, agents, advisers and independent contractors, consultants, managers, and other agents (other than the Manager) employed directly by the Company or any subsidiary of the Company or by the Manager at the request of the Company or such subsidiary for the account of the Company or the subsidiary; (e) Expenses connected with the acquisition, disposition, operation, maintenance, management and ownership of the assets of the Company or any subsidiary of the Company, including, without limitation, commitment, appraisal, guaranty and hedging fees, brokerage and acquisition fees and commissions, ad valorem taxes, costs of foreclosure, maintenance, repair and improvement of property, maintenance and protection of the lien of mortgages, property management fees, loan origination fees, servicing and master servicing fees, legal fees, premiums for insurance on property owned by the Company or any subsidiary of the Company and insurance and abstract expenses; provided, that with regard to brokerage fees, unless approved by a majority of the Unaffiliated Directors, neither the Manager nor any of its Affiliates shall charge a brokerage commission or similar fee to the Company or any subsidiary of the Company in connection with the acquisition, disposition or ownership of the assets of the Company or the subsidiary; (f) Expenses of organizing, reorganizing or dissolving the Company or any subsidiary of the Company; (g) All insurance costs not included in paragraph (e) hereof and incurred by the Company or any subsidiary of the Company, including without limitation, the cost of officer and director liability insurance; (h) Expenses connected with payments of dividends or interest or distributions in cash or any other form made or caused to be made by the Board of Directors to holders of the securities of the Company or any subsidiary of the Company; (i) All fees and expenses incurred in connection with the issuance of Structured Securities issued or caused to be issued by the Company, including trustee, accounting and auditing, consulting, legal, rating agency, registration, printing and engraving, tax advisory and tax preparation fees and expenses, underwriting discounts, issued discounts, master servicing fees, insurance premiums and costs of credit enhancements; (j) All expenses connected with communications to holders of equity securities or debt securities of the Company or any -subsidiary of the Company and with governmental agencies and the other bookkeeping and clerical work necessary in maintaining relations with holders of such securities and in complying with the continuous reporting and other requirements of governmental bodies or agencies, including, without limitation, any costs of computer services in connection with this function, the cost of printing and mailing certificates for such securities and proxy solicitation materials and reports to holders of the Company's or any subsidiary's securities and reports to third parties required under any indenture to which the Company or any subsidiary of the Company is a party, except such expenses that are the responsibility of the Manager as set forth in Section 7 hereof; (k) Fees and charges of any transfer agent or registrar; (1) Fees and expenses paid to directors of the Company or any subsidiary of the Company, except, in each case, directors who are Affiliates of the Manager; (m) Legal, accounting and auditing fees, and tax advisory and tax preparation fees, relating to the operations of the Company or any subsidiary; (n) Legal, accounting and auditing fees, tax advisory and tax preparation fees, consulting fees and expenses relating to the administration of Structured Securities issued or caused to be issued by the Company; (o) Any judgment rendered against the Company or any subsidiary of the Company, or against any director of the Company or any subsidiary of the Company in his capacity as such by any court or governmental agency; (p) Rent, telephone, utilities, office furniture, equipment and machinery (including computers) incurred in connection with the conduct of the Company's business. (q) If the Manager or an Affiliate does not act as bond administrator for a Series of Structured Securities issued by an Affiliated Issuer by or on behalf of the Company, all expenses relating to the performance of the services set forth in Sections 2(m) and 2(n) of this Agreement for such Series of Structured Securities; (r) Fees paid to the Manager with the approval of a majority of the Unaffiliated Directors for participation by the Company in programs operated by the Manager for the pricing and acquisition of Mortgage Loans; (s) Amounts payable by the Company to the Manager under Section 9 of this Agreement; (t) Expenses relating to accounting, bookkeeping and related administrative functions, including the employment expenses of any persons performing these functions who are employed by the Company, or by the Manager to the extent that such persons perform such services for the Company; and (u) Any cost of computer services incurred in connection with the conduct of the Company's business. (v) Other miscellaneous expenses of the Company or any subsidiary of the Company which are not expenses of the Manager under Section 7 of this Agreement. SECTION 9. Limits of Responsibility of the Manager. (a) The Manager assumes no responsibility under this Agreement other than to render the services called for hereunder, and shall not be responsible for any action of the Board of Directors in following or declining to follow any advice or recommendations of the Manager. The Manager, its partners, officers and employees will not be liable to the Company, any Affiliated Issuer, any subsidiary of the Company, the Unaffiliated Directors or the Company's or its subsidiary's stockholders for any acts or omissions by the Manager, its partners, officers or employees under or in connection with this Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties. The Company or any subsidiary shall reimburse, indemnify and hold harmless the Manager, its partners, officers and employees of and from any and all losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including expenses and reasonable attorneys' fees incurred in the defense thereof) in respect of or arising from any acts or omissions of the Manager, its partners, officers and employees in the performance of the Manager's duties in accordance with this Agreement and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of its or their duties. (b) The Manager shall reimburse, indemnify and hold harmless the Company or any of their stockholders, directors, officers and employees from any and all losses, damages, liabilities, demands, charges and claims (including expenses and reasonable attorneys, fees incurred in the defense thereof) arising out of any acts or omissions by the Manager, its partners, officers or employees under or in connection with this Agreement constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties. SECTION 10. No Joint Venture. The Company and the Manager are not partners or joint venturers with each other and nothing herein shall be construed to make them such partners or joint venturers or impose any liability as such on either of them. SECTION 11. Term; Termination. This Agreement shall take effect on the date first above written and shall supersede the Management Agreement between the Company and the Manager dated as of October 31, 1992 (the "1992 Management Agreement"), except that Section 6 of the 1992 Management Agreement (and the provisions in the 1992 Management Agreement referred to in Section 6 thereof) shall remain in effect through September 30, 1995, and Section 6 of this Agreement shall take effect on October 1, 1995. It shall continue in force until June 30, 1996, and for successive annual periods thereafter, provided that each annual continuance is consented to by the Manager and by the affirmative vote of a majority of the Board of Directors, including a majority of the Unaffiliated Directors. If this Agreement terminates pursuant to this Section 11, such termination shall be without any further liability or obligation of either party to the other, except as provided in Section 13 of this Agreement. SECTION 12. Assignments. (a) Except as set forth in Section 12(b) of this Agreement, this Agreement shall terminate automatically in the event of its assignment, in whole or in part, by the Manager, unless such assignment is consented to in writing by the Company with the consent of a majority of the Unaffiliated Directors. Any such assignment shall bind the assignee hereunder in the same manner as the Manager is bound. In addition, the assignee shall execute and deliver to the Company a counterpart of this Agreement naming such assignee as Manager. This Agreement shall not be assigned by the Company without the prior written consent of the Manager, except in the case of assignment by the Company to a REIT or other organization which is a successor (by merger, consolidation or purchase of assets) to the Company, in which case such successor organization shall be bound hereunder and by the terms of such assignment in the same manner as the Company is bound hereunder. (b) Notwithstanding any provision of this Agreement, the Manager may subcontract and assign any or all of its responsibilities under Sections 2(m), 2(n) and 2(q) of this Agreement to any of its Affiliates, and the Company hereby consents to any such assignment and subcontracting. SECTION 13. Action Upon Termination. (a) From and after the effective date of termination of this Agreement, pursuant to Sections 11 or 12 of this Agreement, the Manager shall not be entitled to compensation for further services hereunder, but shall be paid all compensation accruing to the date of termination. Upon such termination, the Manager shall forthwith: (i) after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled, pay over to the Company or any subsidiary of the Company all money collected and held for the account of the Company or any subsidiary of the Company pursuant to this Agreement; (ii) deliver to the Board of Directors a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board of Directors with respect to the Company or any subsidiary of the Company; and (iii) deliver to the Board of Directors all property and documents of the Company or any subsidiary of the Company then in the custody of the Manager. (b) Notwithstanding any other provisions of this Agreement, if this Agreement is terminated by the Company, including the failure of the Company to consent to an annual continuance under Section 11 on terms at least as favorable to the Manager as this Agreement, and such termination occurs within three years after a Change in Control (as hereinafter defined), the Company shall pay to the Manager, in addition to the amounts referred to in Section 13(a)(i) hereof, the following amounts for each fiscal quarter (or portion thereof) during the period beginning with the date of termination (the "Termination Date") and ending on the last day of the twelfth (12th) full fiscal quarter after the Termination Date: (i) The compensation that would be payable by the Company to the Manager pursuant to Section 6(a) of this Agreement for such quarter if the Average Invested Assets of the Company were computed without taking into account any investments made by the Company subsequent to the Termination Date; and (ii) the amount that would be payable by the Company to the Manager pursuant to Section 6(b) of this Agreement for such quarter if the total shareholders' equity were computed without taking into account any investments made by the Company subsequent to the Termination Date. All amounts payable to the Manager pursuant to this Section 13(b) shall be paid on a quarterly basis on or before the date on which the Manager would be paid pursuant to Section 6(c) of this Agreement. The Company shall, on or before the Termination Date, (a) deposit with an escrow agent reasonably acceptable to the Manager an amount equal to three times the compensation received by the Manager from the Company during the twelve months preceding the Termination Date and shall instruct the escrow agent to pay such amount, less any amounts previously paid to the Manager under this Section 13(b), to the Manager in the event the Company fails to make any required payment under this Section 13(b); or (b) take such other action as shall be approved by the Manager, which approval shall not be unreasonably withheld, to assure the Manager that the Company will fulfill its obligations under this Section 13(b). The Company shall allow the Manager reasonable access to the books and records of the Company for purposes of computing the compensation to be paid pursuant to this Section 13(b). (c) A "Change in Control" shall be deemed to have occurred if: (i) Any Person, or a "group" within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than (1) the Company and/or its wholly-owned subsidiaries, (2) any ESOP or other employee benefit plan of the Company, and any trustee or other fiduciary in such capacity holding securities under such plan, or (3) any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty (20) percent or more of the combined voting power of the Company's then outstanding securities, or such lesser percentage of voting power as a majority of the Board of Directors, including a majority of the Unaffiliated Directors, shall determine; (ii) Continuing Directors (as hereafter defined) shall at any time cease to constitute a majority of the Company's Board of Directors. "Continuing Directors" means those directors holding office on the date first above written and those directors who were recommended to succeed Continuing Directors by a majority of Continuing Directors; or (iii) The Company's shareholders or its Board of Directors shall approve (1) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which the Company's voting common shares (the "Common Shares") would be converted into cash, securities and/or other property, other than a merger of the Company in which holders of Common Shares immediately prior to the merger have the same proportionate ownership of common shares of the surviving corporation immediately after the merger as they had in the Common Shares immediately before, (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets or earning power of the Company, or (3) the liquidation or dissolution of the Company. Whether a Change in Control has occurred shall be determined by a majority of the Unaffiliated Directors who were in office on the day preceding the date of the event or events under consideration. SECTION 14. Release of Money or Other Property Upon Written Request. The Manager agrees that any money or other property of the Company or any subsidiary of the Company held by the Manager under this Agreement shall be held by the Manager as custodian for the Company or such subsidiary, and the Manager's records shall be appropriately marked clearly to reflect the ownership of such money or other property by the Company or such subsidiary. Upon the receipt by the Manager of a written request signed by a duly authorized officer of the Company requesting the Manager to release to the Company or any subsidiary of the Company any money or other property then held by the Manager for the account of the Company or any subsidiary of the Company under this Agreement, the Manager shall forthwith release such money or other property to the Company or such subsidiary. The Manager shall not be liable to the Company, any subsidiary of the Company, the Unaffiliated Directors, or the Company's or its subsidiary's stockholders for any acts performed or omissions to act by the Company or any subsidiary of the Company in connection with the money or other property released to the Company or any subsidiary of the Company in accordance with this Section. The Company and any subsidiary of the Company shall indemnify the Manager, its partners, officers and employees against any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, which arise in connection with the Manager's release of such money or other property to the Company or any subsidiary of the Company in accordance with the terms of this Section 14 of this Agreement, except insofar as such expenses, losses, damages, liabilities, demands, charges and claims arise out of acts of the Manager, its partners, officers and employees constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties. Indemnification pursuant to this provision shall be in addition to any right of the Manager to indemnification under Section 9 of this Agreement. SECTION 15. Representations and Warranties. (a) The Company hereby represents and warrants to the Manager as follows: (i) The Company is duly organized, validly existing and in good standing under the laws of the State of Maryland, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole. The Company does not do business under any fictitious business name. (ii) The Company has the corporate power and authority to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary corporate action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required hereunder. No consent of any other person including, without limitation, stockholders and creditors of the Company, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Company in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivery by a duly authorized officer of the Company; and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Company enforceable against the Company in accordance with its terms. (iii) The execution, delivery and performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on the Company, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Company, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Company, or the governing instruments of, or any securities issued by the Company or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Company is a party or by which the Company or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. (b) The Manager hereby represents and warrants to the Company as follows: (i) The Manager is duly formed, validly existing and in good standing under the laws of the State of California, has the power to own its assets and to transact the business in which it is now engaged and is duly qualified to do business and is in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Manager and its subsidiaries, taken as a whole. The Manager does not do business under any fictitious business name. (ii) The Manager has the power and authority to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary partnership action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required hereunder. No consent of any other person including, without limitation, partners and creditors of the Manager, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Manager in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This agreement has been, and each instrument or document required hereunder will be, executed and delivery by a duly authorized agent of the Manager, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Manager enforceable against the Manager in accordance with its terms. (iii) The execution, delivery and performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on the Manager, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Manager, or the partnership agreement of, or any securities issued by the Manager or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Manager is a party or by which the Manager or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Manager and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. SECTION 16. Notices. Unless expressly provided otherwise herein, all notices, requests, demands and other communications required or permitted under this Agreement shall be in writing. SECTION 17. Binding Nature of Agreement; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns as provided herein. SECTION 18. Entire Agreement. This Agreement contains the entire agreement and understanding between the parties hereto with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. SECTION 19. Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of Maryland, notwithstanding any Maryland or other conflict-of-law provisions to the contrary. SECTION 20. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. TIS MORTGAGE INVESTMENT COMPANY By: ____________________________________ Chairman of the Board TIS FINANCIAL SERVICES, INC. By: ____________________________________ President & CEO EX-99 7 EXHIBIT 10 (F): LOAN AND SECURITY AGREEMENT LOAN AND SECURITY AGREEMENT dated as of July 19, 1995 between TIS MORTGAGE INVESTMENT COMPANY, as Borrower and PAINE WEBBER REAL ESTATE SECURITIES INC., as Lender TABLE OF CONTENTS Page ARTICLE I DEFINITIONS 1.1 Certain Defined Terms 1 1.2 Accounting Terms 5 1.3 Other Definitional Provisions 6 ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS 2.1 Representations and Warranties Relating to Borrower 7 A. Formation, Powers, Good Standing and Subsidiaries 7 B. Authorization of Borrowing, etc. 7 C. Financial Condition 8 D. Changes, etc. 8 E. Title to Properties; Liens 8 F. Litigation; Adverse Facts 9 G. Payment of Taxes 9 H. Other Agreements; Performance 9 I. Governmental Regulation 10 J. Borrower's Securities Activities 10 K. Employee Benefit Plans 10 L. Disclosure 10 M. Compliance with State Law 10 ARTICLE III BORROWING AND REPAYMENTS; NOTE 3.1 11 Certifications; Advances 11 A. Certifications 11 B. Initial Advance 11 C. Subsequent Advances 11 D. Netting of Payments; Advance Maturity Dates 11 3.2 Margin Maintenance 12 3.3 Note; Interest 12 A. Note 12 B. Rate of Interest 12 C. Interest Payments 12 i D. Post-Maturity Interest 12 E. Computation of Interest 12 3.4 Prepayments and Payments 13 A. Repayment 13 B. Mandatory Prepayments 13 C. Optional Prepayment 13 D. Manner and Time of Payment 13 E. Payments on Non-Business Days 13 3.5 Acceleration by Lender 13 3.6 Extension of Termination Date 13 ARTICLE IV CONDITIONS TO THE ADVANCES 4.1 Conditions to the Effective Date and to the Initial Advance 14 4.2 Conditions to All Advances 15 ARTICLE V SECURITY 5.1 Grant of Security Interest 17 5.2 Authority to Collect 17 5.3 Lender Appointed Attorney-in-Fact 17 5.4 Security for Obligations 17 ARTICLE VI COVENANTS OF BORROWER 6.1 Financial Statements and Other Reports 18 6.2 Existence; Franchises 19 6.3 Payment of Taxes and Claims 19 6.4 Inspection 19 6.5 Compliance with Laws, etc. 20 6.6 Restriction on Fundamental Changes 20 6.7 Financial Covenants 20 A. Net Worth 20 B. Indebtedness Ratio 20 6.8 Notice of Changes in Articles or Bylaws 20 6.9 Further Assurances 20 6.10 Borrower's Securities Activities 20 6.11 Independence of Covenants 21 6.12 Corporate Separation and Indebtedness 21 6.13 Other Agreements 21 ii ARTICLE VII EVENTS OF DEFAULT 7.1 Events of Default 22 A. Failure to Make Payments When Due 22 B. Default in Other Agreements 22 C. Breach of Covenants 22 D. Breach of Warranty 22 E. Other Defaults 22 F. Involuntary Bankruptcy: Appointment of Receiver, etc. 22 G. Voluntary Bankruptcy; Appointment of Receiver; Material Adverse Change 23 H. Judgments and Attachments 23 I. Dissolution 23 J. Failure of Security Interest 23 7.2 Application of Proceeds 25 ARTICLE VIII MISCELLANEOUS 8.1 Expenses 27 8.2 Indemnity by Borrower 27 A. Indemnification by Borrower 27 B. Claims 28 8.3 Set-Off 28 8.4 Amendments and Waivers 28 8.5 Notices 28 8.6 Attorneys' Fees 28 8.7 Survival of Warranties and Certain Agreements 28 A. Agreement 28 B. Termination 28 8.8 Failure or Indulgence Not Waiver; Remedies Cumulative 29 8.9 Severability 29 8.10 Headings 29 8.11 Applicable Law 29 8.12 Successors and Assigns; Subsequent Holders of Note 29 8.13 Counterparts; Effectiveness 29 iii EXHIBITS Exhibit A Form of Compliance Certificate Exhibit B Form of Promissory Note Exhibit C-1 Form of Lender's Incumbency Certificate Exhibit C-2 Form of Borrower' s Incumbency Certificate Exhibit D Borrower' s Officer's Certificates Exhibit E Form of Request for Advance Exhibit F Form of Opinion of Borrower's Counsel iv LOAN AND SECURITY AGREEMENT This LOAN AND SECURITY AGREEMENT (the "Agreement") is dated as of July 19, 1995 between TIS MORTGAGE INVESTMENT COMPANY, a Maryland corporation ("Borrower"), and PAINE WEBBER REAL ESTATE SECURITIES INC., a Delaware corporation ("Lender"). RECITALS A. Borrower desires to finance certain Mortgage Related Assets (as defined below). Lender desires to provide financing to Borrower to enable Borrower to finance certain Mortgage Related Assets. B. The Mortgage Related Assets pledged by Borrower to Lender shall be held by Lender. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT ARTICLE I DEFINITIONS 1.1 Certain Defined Terms. The following terms used in this Agreement shall have the following meanings: "Additional Collateral" means any Mortgage Related Asset pledged by Borrower and accepted by Lender in connection with either (i) a Subsequent Advance or (ii) a Margin Deficit. "Additional Collateral Value" means, with respect to Additional Collateral, the Market Value less the applicable percentage used by Lender to calculate the Margin Amount. "Advance" means the Initial Advance or any Subsequent Advance, as applicable. "Advance Date" means any date on which an Advance is made by Lender to Borrower. "Advance Maturity Date" means, with respect to an Advance, the date set forth in the "Advance Maturity Date" column on the schedule attached to the Note. 1 "Affiliate" means a Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Borrower; or (ii) five percent or more of the voting stock or equity interest of which is beneficially owned or held by the Borrower. "Agreement" means this Loan and Security Agreement dated as of July 19, 1995, as it may from time to time be supplemented, modified or amended. "Business Day" means any day other than (a) a Saturday, Sunday or other day on which banks located in the City of New York, New York are authorized or obligated by law or executive order to be closed, or (b) any day on which Paine Webber Real Estate Securities Inc. is closed for business. "Capital Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee which would, in conformity with GAAP, be required to be accounted for as a capital lease on a balance sheet of that Person. "Collateral" means the Initial Collateral and any Additional Collateral and all proceeds thereof. "Collateral Value" means the sum of the Initial Collateral Value and any Additional Collateral Value. "Compliance Certificate" means a certificate substantially in the form of Exhibit A hereto delivered to Lender by Borrower pursuant to subsection (iii) of Section 6.1. "Contingent Obligation" means, as applied to any Person, any liability, contingent or otherwise, of that Person with respect to any Indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business), co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise liable, including, without limitation, any such obligation for which that Person is in effect liable through any agreement (contingent or otherwise) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain the solvency or any balance sheet item, level of income or other financial condition of the obligor of such obligation, or to make payment for any products, materials or supplies or for any transportation, services or lease regardless of the non-delivery or nonfurnishing thereof, in any such case if the purpose or intent of such agreement is to provide assurance that such obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected (in whole or in part) against loss in respect thereof. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported. 2 "Contractual Obligation" means, as applied to any Person, a provision of any security issued by that Person or of any material indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it is or any of its properties is bound or to which it or any of its properties is subject. "Dollar" means lawful currency of the United States of America. "Effective Date" means July 19, 1995. "Employee Benefit Plan" means any pension plan, any employee welfare benefit plan, or any other employee benefit plan which is described in Section 3(3) of ERISA and is maintained for employees of Borrower or any ERISA affiliate. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute. "ERISA Affiliate" means, as applied to any Person, any trade or business (whether or not incorporated) which is a member of a group of which that Person is a member and is under common control within the meaning of the regulations promulgated under Section 414 of the Internal Revenue Code of 1986. "Event of Default" means any of the events set forth in Section 7.1. "FNMA" means the Federal National Mortgage Association and any successor thereto. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. In the event of a change in GAAP, Borrower and Lender shall negotiate in good faith to revise any covenants of this Agreement affected thereby in order to make such covenants consistent with GAAP then in effect. "Indebtedness" means, as applied to any Person, (i) all indebtedness for borrowed money, (ii) that portion of obligations with respect to Capital Leases which is capitalized on a balance sheet in conformity with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (iv) any obligation owed for all or any part of the deferred purchase price of property or services which purchase price is (a) due more than six months from the date of incurrence of the obligation in respect thereof or (b) evidenced by a note or similar written instrument, and (v) all indebtedness secured by any Lien existing on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is 3 non-recourse to the credit of that Person. "Initial Collateral" means [CSFB 1994-CF1, Class F, CUSIP 126342BA1, Coupon Rate 7.8751%, Legal Stated Final Maturity 1/25/2028], pledged by Borrower and accepted by Lender in connection with the Initial Advance. "Initial Collateral Value" means, with respect to the Initial Collateral, the Market Value less the applicable percentage used by Lender to calculate the Margin Amount. "Initial Advance" means the initial advance made by Lender to Borrower pursuant to subsection B of Section 3.1. and which is secured by the Initial Collateral. "Interest Maturity Date" means, with respect to any Advance, the applicable date set forth in the "Interest Maturity Date" column on the schedule attached to the Note. "Lien" means any lien, mortgage, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "LIBOR" means the London interbank offered rate for U.S. Dollar deposits appearing on page five of the Telerate screen at or about 9:00 a.m. (New York City time) on the related date, having a term which most closely approximates the term used in connection therewith. "Margin Amount" means the amount obtained by application of a percentage (as specified by Lender in the confirmation substantially in the form of Exhibit E) to the amount of any Advance. "Margin Deficit" has the meaning set forth in Section 3.2. "Margin Stock" has the meaning assigned to that term in Regulation X of the Board of Governors of the Federal Reserve System as in effect from time to time. "Market Value" means the value of the Collateral as determined, from time to time, by Lender in its sole discretion. "Mortgage Related Asset" means (i) any class of collateralized mortgage obligations (including but not limited to the Initial Collateral) whose pledge by Borrower to Lender is accepted by Lender, in Lender's sole discretion; or (ii) any other securities or whole loans that are pledged by Borrower to Lender and accepted by Lender, in Lender's sole discretion. "Net Worth" means, as of any date of determination, the sum of the capital stock and additional paid-in capital of Borrower plus retained earnings (or minus accumulated deficits) 4 of Borrower, all as determined in accordance with GAAP. "Note" means the promissory note executed by Borrower in favor of Lender pursuant to Section 3.3 and substantially in the form of Exhibit B. "Obligations" means all obligations of every nature of Borrower from time to time owed to Lender under this Agreement. "Officer's Certificate" means a certificate executed on behalf of Borrower by the Chairman of the Board (if an officer) or President of Borrower or one of its Vice Presidents or by its Chief Financial Officer or its Treasurer or Controller. "Person" means and includes natural persons, corporations, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. "Potential Event of Default" means a condition or event which, after notice or lapse of time or both, would constitute an Event of Default if that condition or event were not cured or removed within any applicable grace or cure period. "Subsequent Advance" means any Advance made by Lender pursuant to subsection C of Section 3.1 and which is secured by Additional Collateral. "Subsidiary" means any corporation, association, partnership, trust or other business entity in which more than 50% of the total voting power or shares of stock entitled to vote in the election of directors, managers or trustees thereof, or more than 50% of the total equity interests (including partnership interests) therein, is at the time owned or controlled, directly or indirectly, by any Person or one or more of the other Subsidiaries of that Person or a combination thereof. "Termination Date" means one (1) year from the Effective Date or such later date as may be set pursuant to the terms of Section 3.6. 1.2 Accounting Terms. For purposes of this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. 5 1.3 Other Definitional Provisions. References to "Sections", "subsections" and "Articles" shall be to Sections, subsections, and Articles respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in Section 1.1 may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. 6 ARTICLE II REPRESENTATIONS WARRANTIES AND COVENANTS 2.1 Representations and Warranties Relating to Borrower. Borrower represents, warrants to and covenants with Lender at the time of execution of this Agreement and at the time any Advance is made to Borrower from Lender that: A. Formation, Powers, Good Standing and Subsidiaries. (i) Formation and Powers. Borrower is a corporation duly organized, validly existing and in good standing under the laws of Maryland and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into this Agreement, to issue the Note and to carry out the transactions contemplated hereby and thereby. (ii) Good Standing. Borrower is in good standing wherever necessary to carry on its business and operations, except in jurisdictions in which the failure to be in good standing has and will have no material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of Borrower. (iii) Tax Status. Borrower operates in a manner that it believes permits it to qualify for the tax treatment accorded to a real estate investment trust under the Internal Revenue Code of 1986, as amended. (iv) Affiliate. Borrower has no Affiliates, other than as identified in Schedule A hereto. B. Authorization of Borrowing, etc. (i) Authorization of Borrowing. The execution, delivery and performance of this Agreement, and the issuance, delivery and payment of the Note, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action by Borrower. (ii) No Conflict. The execution, delivery and performance by Borrower of this Agreement and the issuance, delivery and payment of the Note, and the consummation of the transactions contemplated hereby and thereby, do not and will not (a) violate any provision of law applicable to Borrower, the Articles of Incorporation or Bylaws of Borrower, or any order, judgment or decree of any court or other agency of government binding on Borrower, (b) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of Borrower, (c) result in or require the creation or imposition of any Lien, charge or encumbrance of any nature whatsoever upon any of its properties or assets except the Lien in favor of Lender pursuant to Section 5.1, or (d) require any approval of 7 shareholders or any approval or consent of any Person under any Contractual Obligation of Borrower other than approvals or consents which have been obtained and disclosed in writing to Lender. (iii) Governmental Consents. The execution, delivery and performance by Borrower of this Agreement and the issuance, delivery and payment of the Note, and the consummation of the transactions contemplated hereby and thereby, do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any Federal, state or other governmental authority or regulatory body or other Person by Borrower except those that have been obtained and disclosed in writing to Lender. (iv) Binding Obligation. This Agreement is, and the Note when executed and delivered hereunder will be, the legally valid and binding obligations of Borrower, enforceable against it in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally. C. Financial Condition. Borrower has heretofore delivered to Lender a balance sheet of Borrower as of March 31, 1995, and the related statements of income, shareholders' equity and statement of cash flows for the fiscal period then ended. All such statements were prepared in accordance with GAAP and fairly present the financial position of Borrower, as at the date thereof, and the results of operations and statement of cash flows of Borrower, for the period then ended. As of the Effective Date, Borrower will not have any material Contingent Obligation or liability for taxes, long-term lease or unusual forward or long-term commitment, which is not reflected in the foregoing statements, or in the notes thereto. D. Changes, etc. Since the date of the most recent balance sheet of Borrower that has been delivered to Lender and the related statements of income, shareholders' equity and statement of cash flow for the period then ended, there has been no change in the business, operations, properties, assets or condition (financial or otherwise) of Borrower which has been, either in any case or in the aggregate, materially adverse to Borrower, other than changes contemplated by or disclosed in this Agreement or otherwise disclosed by Borrower to Lender prior to the date hereof. E. Title to Properties; Liens. Borrower has good, sufficient, marketable and legal title to all the properties and assets reflected in the balance sheet referred to in subsection D of Section 2.1 (including all Collateral pledged pursuant to this Agreement and all assets held by Borrower on the date hereof but acquired subsequent to the date of such balance sheet), except for assets disposed of in the ordinary course of business. The pledge and assignment of the Collateral pursuant to this Agreement create a valid security interest in the Collateral and the Lien on the Collateral created by this Agreement will be a first priority Lien thereon, superior to all other Liens. Except for 8 the due filing of any financing statement with respect to the Collateral (and except for delivery to Lender of any Collateral as to which possession is the only method of perfecting a security interest in such Collateral), no further action need be taken in order to establish and perfect the security interest of Lender in all the Collateral. F. Litigation; Adverse Facts. There is no action, suit, proceeding or arbitration (whether or not purportedly on behalf of Borrower) at law or in equity or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, pending or, to the knowledge of Borrower, threatened against or affecting Borrower, or any of its properties, or any proposed tax assessment and there is no basis known to Borrower for any action, suit or proceeding which would have such an effect. Borrower is not (i) in violation of any applicable law which violation materially adversely affects or may materially adversely affect the business, operations, properties, assets or condition (financial or otherwise) of Borrower, or (ii) subject to or in default with respect to any final judgment, writ, injunction, decree, rule or regulation of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which would have a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of Borrower. There is no action, suit, proceeding or investigation pending or, to the knowledge of Borrower, threatened against or affecting Borrower which questions the validity or the enforceability of this Agreement or the Note. G. Payment of Taxes. Borrower has filed all tax returns that are required to be filed by Borrower, and all taxes, assessments, fees and other governmental charges upon Borrower as set forth in such returns and upon its properties and assets which are due and payable have been paid when due and payable, except to the extent permitted by Section 6.3. H. Other Agreements; Performance. (i) Agreements. Borrower is not, and on any Advance Date will not be, a party to or subject to any Contractual Obligation or charter or other internal restriction materially adversely affecting the business, properties, assets, operations or condition (financial or otherwise) of Borrower. (ii) Performance. Borrower is not, and on any Advance Date will not be, in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Contractual Obligation of Borrower, and no condition exists which, with the giving of notice or the lapse of time or both, would constitute such a default, except where the consequences, direct or indirect, of such default or defaults, if any, would not have a material adverse effect on the business, properties, assets, operations or condition (financial or otherwise) of Borrower. To the best knowledge of Borrower, the other parties to each Contractual Obligation of 9 Borrower are not in default thereunder, except where the consequences, direct or indirect, of such default or defaults, if any, would not have a material adverse effect on the business, properties, assets, operations or condition (financial or otherwise) of Borrower. I. Governmental Regulation. Borrower is not, and at the Effective Date will not be, subject to regulation under the Investment Company Act of 1940 or to any Federal or state statute or regulation limiting its ability to incur Indebtedness for money borrowed. J. Borrower's Securities Activities. Borrower is not, and at the Effective Date will not be, engaged in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. Neither Borrower nor any agent acting on its behalf has taken any action which might cause this Agreement or the Note to violate Regulation X or any other regulation of the Board of Governors of the Federal Reserve System as in effect now or as may hereafter be in effect on the date of any Advance. K. Employee Benefit Plans. Borrower is in compliance in all material respects with all applicable provisions of ERISA and the Internal Revenue Code of 1986 and the regulations and published interpretations thereunder with respect to all Employee Benefit Plans. L. Disclosure. No representation or warranty of Borrower contained in this Agreement or any other document, certificate or written statement furnished to Lender by or on behalf of Borrower for use in connection with the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits to state a material fact (known to Borrower in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading. There is no fact known to Borrower (other than matters of a general economic nature) which materially adversely affects the business, operations, property, assets or condition (financial or otherwise) of Borrower, which has not been disclosed herein or in such other documents, certificates and statements furnished to Lender for use in connection with the transactions contemplated hereby. M. Compliance with State Law. Borrower is in compliance with the laws, regulations and rules of each State of the United States of America, and with any other jurisdiction which may be applicable to Borrower, to the extent necessary to ensure the enforceability of the Collateral. Borrower has obtained all permits and licenses necessary to carry on its business and operations except in jurisdictions in which the failure to obtain a permit or license has and will have no material adverse effect on the business operations, properties, assets or condition (financial or otherwise) of Borrower or on the Collateral. 10 ARTICLE III BORROWING AND REPAYMENTS; NOTE 3.1 Certifications; Advances. A. Certifications. On each date that Lender makes an Advance to Borrower, Borrower shall be deemed to certify that (i) the representations and warranties of Borrower contained herein are accurate and complete in all material respects to the same extent as though made on and as of the date of such Advance; (ii) no Event of Default or Potential Event of Default has occurred and is continuing hereunder or will result from the proposed borrowing; (iii) Borrower has delivered or will cause to be delivered to Lender all documents required to be delivered to Lender pursuant to this Agreement; and (iv) Borrower has performed in all material respects all agreements and satisfied all conditions hereunder provided to be performed or satisfied by it on or before the date of such Advance. B. Initial Advance. On the Advance Date for the Initial Advance, if all conditions set forth in Sections 4.1 and 4.2 of this Agreement have been satisfied, Lender shall make an Advance to Borrower by causing an amount of immediately available funds equal to the amount of the proposed Initial Advance to be paid in accordance with the Borrower's wire instructions. On the Effective Date, the amount of the Initial Advance shall equal the amount set forth as the first entry in the "Principal Amount of Advance" column on the schedule attached to the Note. Lender will send, via facsimile transmission, a copy of the schedule attached to the Note updated to reflect such Advance, the applicable rate of interest and other terms set forth therein. C. Subsequent Advances. Borrower may request that Lender, upon at least three (3) Business Days' written notice in the form of Exhibit E hereto, and Lender may, in its sole discretion, agree to make Subsequent Advances to or for the account of Borrower, each in an amount at any time not to exceed the Collateral Value less the aggregate amount of any outstanding Advances. Each Subsequent Advance shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate per annum equal to the rate set forth in the respective "Interest Rate" column on the schedule attached to the Note. If all conditions set forth in Section 4.2 of this Agreement have been satisfied, Lender may, but shall have no obligation to, make an Advance to Borrower by causing an amount of immediately available funds equal to the amount of the proposed Subsequent Advance to be paid in accordance with Borrower's wire instructions. Lender will send, via facsimile transmission, a copy of the schedule attached to the Note updated to reflect such Advance, the applicable rate of interest and other terms set forth therein. D. Netting of Payments; Advance Maturity Dates To the extent that an Advance is made by Lender to Borrower on an Interest 11 Maturity Date or an Advance Maturity Date, Lender shall calculate the net amount payable and shall send Borrower a confirmation detailing Lender' s calculation and setting forth the net amount to be received or paid by Borrower, including, without limitation, amounts payable under the Note. The Advance Maturity Date for an Advance shall be the applicable date set forth in the "Advance Maturity Date" column on the schedule attached to the Note. 3.2 Margin Maintenance. If at any time the aggregate Collateral Value subject to Advances is less than the total amount outstanding under the Note (a "Margin Deficit"), then Lender may by notice to Borrower require Borrower, at Lender's option, to transfer to Lender cash or Additional Collateral reasonably acceptable to Lender, which is not less than the amount of the Margin Deficit. 3.3 Note; Interest. A. Note. (i) Borrower shall execute and deliver to Lender, not later than the Effective Date, the Note. (ii) Upon repayment in full of all amounts due and payable under the Note, Lender shall promptly cancel the Note and return the cancelled Note to Borrower. B. Rate of Interest. Subject to subsection D of Section 3.3, each Advance shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate per annum calculated on the Interest Maturity Date, equal to the rate set forth in the "Interest Rate" column on the schedule attached to the Note. C Interest Payments. Subject to subsection D of Section 3.3, interest shall be payable on each Advance on the related Interest Maturity Date. D. Post-Maturity Interest. Any Advance not repaid by Borrower when due and, to the extent permitted by applicable law, any interest payments on such Advance not paid when due or within any applicable grace period, in each case whether at stated maturity, by notice of prepayment, by acceleration or otherwise, shall thereafter bear interest payable on demand at a default interest rate equal to three percent (3%) above the rate set forth in the "Interest Rate" column on the schedule attached to the Note. E. Computation of Interest. Interest on each Advance shall be computed on the basis of a 360-day year and the actual number of days elapsed in the period during which it accrues. In computing interest on each Advance, the date of the making of such 12 Advance shall be included and the date of payment shall be excluded. 3.4 Prepayments and Payments. A. Repayment. Borrower shall repay the entire amount outstanding of each Advance on the related Advance Maturity Date. B. Mandatory Prepayments. Proceeds received from the sale or other disposition of Collateral hereof shall be applied to repay any outstanding Advance. In the event that at any time the Collateral Value is less than the amount outstanding, Borrower shall upon receipt of written demand from Lender immediately prepay the amount by which the amount outstanding exceeds the Collateral Value. C. Optional Prepayment. Borrower may, upon at least thirty (30) days' prior written notice to Lender, prepay the entire amount outstanding of any Advance prior to the related Advance Maturity Date; provided, however, that any such prepayment shall be in an amount equal to the sum of (i) the entire amount outstanding of the related Advance; (ii) all interest accrued on the Advance through and including the date of prepayment; and (iii) any fees or other amounts due hereunder. D. Manner and Time of Payment. All payments of principal, interest and fees hereunder and under the Note shall be made in immediately available funds and delivered to Lender for its own account, not later than 2:00 p.m. (New York City time) on a Business Day; funds received by Lender after that time shall be deemed to have been paid by Borrower on the next succeeding Business Day. E. Payments on Non-Business Days. Whenever any payment to be made hereunder or under the Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or under the Note. 3.5 Acceleration by Lender. Without limiting the rights and remedies of Lender pursuant to Articles VII and VIII herein, Lender may, in its sole discretion, upon at least thirty (30) days' prior written notice to Borrower, declare the unpaid principal amount of and accrued interest on the Note and any fees or other amounts due hereunder due and payable, whereupon the unpaid principal amount of and accrued interest on the Note and all such fees or other amounts shall become due and payable, without presentment, demand, further notice or other requirements of any kind, all of which are hereby expressly waived by Borrower, and any obligation of Lender to make any further Advances shall thereupon terminate. 3.6 Extension of Termination Date. Pursuant to Borrower's request received by Lender prior to April 19, 1996, the Termination Date may be extended by Lender. 13 ARTICLE IV CONDITIONS TO THE ADVANCES The obligation of Lender to make or maintain each Advance hereunder is subject to the satisfaction of all of the following conditions: 4.1 Conditions to the Effective Date and to the Initial Advance. The obligation of Lender to make or maintain any Advance on or after the Effective Date is, in addition to the conditions precedent specified in Section 4.2, subject to prior or concurrent satisfaction of the following conditions: A. On or before the Effective Date (unless otherwise specified herein), Borrower shall deliver to Lender: (i) certified copies of its Articles of Incorporation, with all amendments thereto, together with a good standing certificate from the Secretary of State of Maryland, each to be dated as of the Effective Date or as soon as practicable thereafter; (ii) copies of its Bylaws, with all amendments thereto, certified as of the Effective Date or as soon as practicable thereafter by the corporate secretary or an assistant secretary; (iii) resolutions of its Board of Directors approving and authorizing the execution, delivery and performance of this Agreement, and approving and authorizing the execution, delivery and payment of the Note, certified as of the Effective Date by the corporate secretary or an assistant secretary; (iv) signature and incumbency certificates of its officers executing this Agreement and the Note and of its representatives authorized to request the Advance, to transfer funds, and to make any payments on the Obligations hereunder; (v) executed copies of this Agreement and the executed Note relating to the Advance with appropriate insertions; (vi) such executed financing statement as Lender may require for filing pursuant to the Uniform Commercial Code; and (vii) the Initial Collateral. B. Lender and its counsel shall have received one or more favorable written opinions of Borrower's counsel, satisfactory to Lender and its counsel, dated as of the Effective Date and substantially in the form of Exhibit F hereto. 14 C. Borrower shall have performed in all material respects all agreements which this Agreement provides shall be performed on or before the Effective Date. D. All actions and documents required to create and perfect the first priority security interest and Liens in the Collateral shall have been duly authorized and executed and delivered or taken (all in a manner satisfactory to Lender and its counsel) and all filings with governmental agencies shall have been made or taken and completed. E. Lender shall have received written instructions from Borrower regarding (i) the wire instructions for the initial Advance and (ii) the wire instructions for all subsequent Advances. 4.2 Conditions to All Advances. At and as of each Advance Date, the obligation of Lender to make any Advance is subject to the following further conditions precedent: (i) the representations and warranties of Borrower contained herein shall be accurate and complete to the same extent as though made on and as of that date; (ii) no event shall have occurred and be continuing or would result from the consummation of the proposed Advance which would constitute an Event of Default or a Potential Event of Default; (iii) Borrower shall have performed all agreements and satisfied all conditions which this Agreement provides shall be performed by it on or before such date; (iv) no order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain Lender from making that Advance; (v) there shall not be pending or, to the knowledge of Borrower threatened, any action, suit, proceeding, governmental investigation or arbitration against or affecting Borrower or any property of Borrower, which has not been disclosed by Borrower to Lender in writing prior to the execution of this Agreement or prior to the making of the last preceding Advance, and there shall have occurred no development not disclosed by Borrower to Lender in writing prior to the execution of this Agreement or prior to the making of the last preceding Advance in any such action, suit, proceeding, governmental investigation or arbitration so disclosed, which, in either event, in the opinion of Lender, would reasonably be expected (a) to materially and adversely affect the business, operations, properties, assets or condition (financial or otherwise) of Borrower, or, (b) to impair the ability of Borrower to perform the Obligations or of Lender to enforce the Obligations; 15 (vi) Borrower shall have delivered to Lender, for its review and valuation, any Additional Collateral so that Lender can determine the related Collateral Value of such Additional Collateral; (vii) Borrower shall have performed in all material respects all agreements which this Agreement provides shall be performed on or before the Advance Date; (viii) all actions and documents required to create and perfect the first priority security interest and Liens in the Collateral shall have been duly authorized and executed and delivered (to lender, if applicable) or taken, in each case in a manner satisfactory to Lender and its counsel; (ix) Borrower shall have delivered the related Additional Collateral to Lender on or prior to the respective Advance Date; (x) all filings with respect to the Collateral with governmental agencies shall have been made or taken and completed; and (xi) Lender and its outside counsel shall have received certificates and opinions satisfactory to Lender and its counsel and dated as of the Advance Date, except with respect to any Advance secured by Collateral that is comprised of a Mortgage Related Asset that was issued or underwritten by Lender or an affiliate of Lender. 16 ARTICLE V SECURITY 5.1 Grant of Security Interest. To secure the payment of the Advances and the performance of the other Obligations, Borrower (i) pledges and hypothecates to Lender and grants a first priority security interest in favor of Lender, in all of Borrower's right, title and interest in and to the Collateral and (ii) pledges and hypothecates to Lender and grants a security interest in favor of Lender, in all of Borrower's property at any time held for any purpose by Lender or any affiliate of Lender, including, but not limited to, property held in any other accounts of Borrower with Lender or any affiliate of Lender, whether or not Lender has made advances in connection with such property. Lender may, without notice, transfer and retransfer from time to time any money or other property between any such accounts. 5.2 Authority to Collect. So long as no Event of Default shall have occurred and be continuing, Borrower shall have the right to collect for its own account all payments (but not proceeds of sale or other disposition of the Collateral) of principal, interest, penalties and other amounts due or to become due on the Collateral pledged and hypothecated under this Agreement. 5.3 Lender Appointed Attorney-in-Fact. Upon the occurrence of and during the continuance of an Event of Default, Borrower appoints Lender, as Borrower's attorney-in-fact, with full power of substitution, for the purpose of taking such action and executing such documents, in the name of Borrower or otherwise, as Lender may deem necessary or advisable to accomplish the purposes of this Agreement, which appointment is coupled with an interest and is irrevocable. Lender agrees promptly to notify Borrower after any such action or execution of instruments, provided that the failure to give such notice shall not affect the validity of such action or execution of instruments. 5.4 Security for Obligations. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until payment in full of all Obligations, (ii) be binding upon Borrower, its successors and assigns, and (iii) inure to the benefit of Lender and its successors, transferees and assigns. Upon the payment in full of the Obligations, Borrower shall be entitled to the return, upon its request and at its expense, of such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. 17 ARTICLE VI COVENANTS OF BORROWER Borrower covenants and agrees that until the payment in full of all Obligations, unless Lender shall otherwise give prior written consent, Borrower will perform all covenants in this Article VI. 6.1 Financial Statements and Other Reports. Borrower will maintain a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP. Borrower will deliver, or cause to be delivered, to Lender the following: (i) as soon as practicable and in any event within 45 days after the end of each calendar quarter, a balance sheet of Borrower as at the end of such period and the related statements of income, shareholders' equity and statement of cash flows of Borrower for such quarter and for the period from the beginning of the current fiscal year to the end of such quarter, setting forth in each case in comparative form the figures for the corresponding periods of the previous fiscal year, all in reasonable detail and certified by the chief financial officer of Borrower that they fairly present the financial condition and results of operations of Borrower, subject to changes resulting from audit and normal year-end adjustments as at the end of and for the period covered thereby. The delivery by Borrower to Lender of Borrower's Form 10-Q for such period shall satisfy the requirements of this subdivision (i); (ii) as soon as practicable and in any event within 90 days after the end of each fiscal year, a balance sheet of Borrower as at the end of such fiscal year and the related statements of income, shareholders' equity and statement of cash flows of Borrower for such fiscal year, setting forth in each case in comparative form the figures for the previous year, all in reasonable detail and certified by the chief financial officer of Borrower and accompanied by a report thereon of independent certified public accountants of recognized national standing selected by Borrower and satisfactory to Lender which report shall state that such financial statements present fairly the financial position of Borrower as at the dates indicated and the results of its operations and statement of cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise stated therein) and that the examination by such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards. The delivery by Borrower to Lender of Borrower's Form 10-K for such period shall satisfy the requirements of this subdivision (ii); (iii) together with each delivery of financial statements of Borrower pursuant to subdivisions (i) and (ii) above, a Compliance Certificate, (a) stating that the signers of the Compliance Certificate have reviewed the terms of this Agreement and the Note and have made, or caused to be made under their supervision, a review in 18 reasonable detail of the transactions and condition of Borrower during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of the Compliance Certificate, of any condition or event which constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Borrower has taken, is taking and proposes to take with respect thereto and (b) demonstrating in reasonable detail compliance during and at the end of such accounting periods with the restrictions contained in Section 6.7; (iv) promptly upon becoming available to Borrower, copies of any press releases issued by Borrower or any Affiliate; and (v) promptly upon any officer of Borrower obtaining knowledge (a) of any condition or event which constitutes an Event of Default or Potential Event of Default, (b)that any Person has given any notice to Borrower or taken any other action with respect to a claimed default or event or condition of the type referred to in subsection B of Section 7.1, or (c) of the institution of any litigation involving an alleged liability of Borrower equal to or greater than $500,000, or any adverse determination in any litigation involving a potential liability of Borrower equal to or greater than $500,000, or any adverse determination in any litigation which would materially adversely affect the business, operations, properties, assets or condition (financial or otherwise) or the validity or enforceability of this Agreement or Borrower's ability to perform the Obligations, an Officers' Certificate specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such holder or Person and the nature of such claimed default, Event of Default, Potential Event of Default, event or condition, and what action Borrower has taken, is taking and proposes to take with respect thereto. 6.2 Existence; Franchises. Borrower will at all times preserve and keep in full force and effect its corporate existence and all rights, licenses and franchises material to its business. 6.3 Payment of Taxes and Claims. Borrower will pay all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets before any penalty or interest accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or may become a Lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; provided that no such charge or claim need be paid if being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor. 6.4 Inspection. Borrower will permit any authorized representatives of Lender 19 to visit and inspect any of the properties of Borrower including its financial and accounting records, and to make copies and take extracts therefrom, and to discuss its affairs, finances and accounts with its officers and, with the permission of Borrower (which may not be unreasonably withheld), its independent public accountants, all upon reasonable notice and at such reasonable times during normal business hours and as often as may be reasonably requested; provided that no permission of Borrower shall be required in order to discuss Borrower's affairs, finances and accounts during an Event of Default or Potential Event of Default; provided, further, that Lender shall use any non-public information obtained during such visit or inspection only for the purposes contemplated by this Agreement and shall not disclose any such non-public information to any person without Borrower's prior consent. 6.5 Compliance with Laws, etc. Borrower will exercise all due diligence in order to comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, noncompliance with which would materially adversely affect the business, properties, assets, operations or condition (financial or otherwise) of Borrower. 6.6 Restriction on Fundamental Changes. Borrower will not enter into any transaction of merger or consolidation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or, except in the ordinary course of business, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its business, property or assets, whether now owned or hereafter acquired, or acquire by purchase or otherwise all or substantially all the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person. 6.7 Financial Covenants. A. Net Worth. Borrower will not permit its Net Worth at any time to be less than $10,000,000. B. Indebtedness Ratio. Borrower will not permit the ratio of its total liabilities (as calculated in accordance with GAAP) to total shareholder equity (as calculated in accordance with GAAP) to equal or exceed 10:1. 6.8 Notice of Changes in Articles or Bylaws. Borrower shall notify Lender of any anticipated change in the provisions of Borrower's Articles of Incorporation or Bylaws. 6.9 Further Assurances. Borrower shall, at Borrower's expense, do all such further acts, and execute, acknowledge and deliver all such further documents as Lender reasonably shall require to more fully or effectively carry out the intention or facilitate the performance of this Agreement. 6.10 Borrower's Securities Activities. No part of the proceeds of any Advance made hereunder will be used for "purchasing" or "carrying" Margin Stock or for any purpose which violates, or would be inconsistent with, the provisions of the Regulations of the Board of 20 Governors of the Federal Reserve System. 6.11 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Potential Event of Default if such action is taken or condition exists. 6.12 Corporate Separation and Indebtedness. So long as the Obligations are outstanding, Borrower covenants and agrees, for the benefit of Lender, that: A. At all times, at least one member of its Board of Directors will be a Person (which may be the same Person) who is not a director of any Affiliate of Borrower. B. It will maintain corporate records and books of account separate from those of any Affiliate of Borrower. C. It will not commingle its funds or assets with those of any Person. D. Its Board of Directors will hold all appropriate meetings to authorize and approve its corporate actions. E. It shall not be liable for or issue, incur, or assume any other indebtedness, or guaranty any indebtedness of any Person other than a Subsidiary. F. In all matters relating to the operation of Borrower and an Affiliate of Borrower, neither Borrower nor any agent acting on behalf of Borrower will hold out or represent that Borrower and any Affiliate constitute a single entity or that either has the authority to act on behalf of the other. 6.13 Other Agreements: A. Borrower will not request or permit any Person to take any action which might adversely affect Lender's interest in the Collateral or the value of the Collateral without obtaining the prior written consent of Lender. B. Borrower will not consent to any amendment to any documents relating to Collateral without obtaining the prior written consent of Lender. 21 ARTICLE VII EVENTS OF DEFAULT 7.1 Events of Default. If any of the following conditions or events ("Events of Default") shall occur: A. Failure to Make Payments When Due. Failure to pay the principal of an Advance when due, whether at stated maturity, by acceleration, by notice of prepayment or otherwise; or failure to pay any installment of interest on the Advance or any other amount due under this Agreement on the due date thereof; or B. Default in Other Agreements. Failure of Borrower to pay or any default in the payment of any amount of principal of or interest on any other Indebtedness in the aggregate principal amount of $500,000 or more, or in the payment of any Contingent Obligation in the aggregate principal amount of $500,000 or more, beyond any period of grace provided unless a bond or other provision for payment thereof reasonably satisfactory to Lender has been made; or breach or default with respect to any other material term of any evidence of any other Indebtedness or of any loan agreement, mortgage, indenture or other agreement relating thereto, or any Contingent Obligation, if the effect of such default or breach is to cause Indebtedness of Borrower in the aggregate amount of $500,000 or more to become or be declared due prior to its stated maturity; or C. Breach of Covenants. Failure of Borrower to perform or comply with any material term or condition applicable to it contained in this Agreement, provided, however, that with respect to the covenants contained in subsections (i), (ii) or (iv) of Section 6.1 or in Section 6.8 Lender shall give Borrower three Business Days' notice before such failure shall become an Event of Default; or D. Breach of Warranty. Any of Borrower's representations or warranties made or deemed made herein or in any statement, notice or certificate at any time given by Borrower in writing pursuant hereto or in connection herewith shall be incorrect, incomplete or misleading in any material respect on the date as of which made or deemed made; or E. Other Defaults. Borrower shall default in the performance of or compliance with any term contained in this Agreement other than those referred to above in subsections A, C or D of this Section 7.1; or F. Involuntary Bankruptcy; Appointment of Receiver, etc. (i) A court having jurisdiction in the premises shall enter a decree or order for relief in respect of Borrower, in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, which decree or order is not stayed; or (ii) any other similar relief shall be granted under any applicable Federal or state law; or (iii) a 22 decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Borrower, or over all or a substantial part of their respective property, shall have been entered; or (iv) the involuntary appointment shall be made of an interim receiver, trustee or other custodian of Borrower, for all or a substantial part of their respective property (by petition, application, answer, consent or otherwise); or (v) a warrant of attachment, execution or similar process shall be issued against any substantial part of the property of Borrower; or G. Voluntary Bankruptcy; Appointment of Receiver; Material Adverse Change. Borrower shall have an order for relief entered with respect to it or commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion to an involuntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its or his property; the making by Borrower of any assignment for the benefit of creditors; the inability or failure of Borrower, or the admission by Borrower in writing of its or his inability, to pay its or his debts as such debts become due or the Board of Directors of Borrower (or any committee thereof) adopts any resolution or otherwise authorizes action to approve any of the foregoing; or Lender determines in its sole discretion that there has been a material adverse change in Borrower's financial condition; or H. Judgments and Attachments. Any money judgment, writ or warrant of attachment, or similar process involving in any case an amount in excess of $500,000 shall be entered or filed against Borrower or any of its assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of ten days or in any event later than five days prior to the date of any proposed sale thereunder; or I. Dissolution. Any order, judgment or decree shall be entered against Borrower decreeing the dissolution or splitting up of Borrower; or J. Failure of Security Interest. The security interest of Lender in any portion of the Collateral shall become impaired or unenforceable; THEN (i) Upon the occurrence of any Event of Default described in subsections F or G of Section 7.1, the unpaid principal amount of and accrued interest on the Note and any fees due hereunder shall automatically become due and payable, without presentment, demand, notice or other requirements of any kind, all of which are hereby expressly waived by Borrower, and the obligation of Lender to make any further Advances shall thereupon terminate. (ii) Upon the occurrence of any Event of Default (other than those 23 described in subsection F or G of Section 7.1), Lender may, by written notice to Borrower, declare the unpaid principal amount of and accrued interest on the Note and any fees or any other amounts due hereunder to be due and payable whereupon the same shall forthwith become due and payable, without presentment, demand, notice or other requirements of any kind, all of which are hereby expressly waived by Borrower, and the obligation of Lender to make any further Advances shall thereupon terminate. If Borrower learns of the occurrence of an Event of Default hereunder, Borrower shall promptly notify Lender; provided that the failure of Borrower to provide any such notice shall not limit or otherwise affect the Obligations or the rights of Lender hereunder. (iii) Upon the occurrence of any Event of Default, Lender may do any of the following: (a) Collect by legal proceedings all interest, principal payments and other sums payable with respect to any outstanding Advance. (b) Foreclose upon or otherwise enforce its security interest in and Lien on the Collateral pursuant to this Agreement. (c) Sell the Collateral in one or more lots, at one or more times, at public or private sales, in an established market therefor or otherwise, as Lender may elect, at such prices and on such terms, as to cash or credit, as Lender may deem proper. Any sale may be made at any place designated by Lender, and Lender shall have the right to become the purchaser at any such sale which is open to the public and, to the extent permitted by law, private sales. If notice is given of the sale of any Collateral, it is agreed that notice shall be satisfactorily given for all purposes if Lender sends, via facsimile transmission, a copy of such notice to Borrower not less than two days prior to such sale. The foregoing notice provisions shall not preclude Lender's rights to foreclose upon the Collateral in any other manner permitted under the Uniform Commercial Code of the State of New York; provided that a sale of the Collateral in accordance with such notice requirements shall be deemed a disposal of the Collateral in a commercially reasonable manner. Lender shall have the right in connection with the Collateral either to sell the same as above provided, or to foreclose, sue upon, or otherwise seek to enforce the same in its own name or in the name of Borrower as provided herein. Subject to the foregoing provisions of this paragraph, after an Event of Default shall occur and be continuing, Lender shall have the right to renew, extend the time of payment of, or otherwise amend, supplement, settle or compromise, in any manner, any obligations for the payment of money included in the Collateral, any security therefor and any other agreements, instruments, claims or chooses in action of any kind which may be included in the Collateral. Each purchaser at any sale or other disposition shall hold the Collateral free from any claim or right of whatever kind, including any equity or right of redemption of Borrower, and Borrower specifically waives (to the extent permitted by law) all rights of redemption, stay or appraisal which it has or may have under any rule of law or statute now existing or hereafter adopted. 24 (d) Take possession of all or any portion of the Collateral that is not already in the possession of Lender, and Borrower agrees to assemble and make available the Collateral to Lender at a convenient location. Lender may manage and protect the Collateral, do any acts which Lender deems proper to protect the Collateral as security hereunder, and sue upon any contract or claim relating to the Collateral and receive any payments due thereon or any damages thereunder, and apply all sums received to the payment of the Obligations secured hereby in accordance with Section 7.2. (e) Be entitled, without regard to the adequacy of the security for the Obligations secured hereby, to the appointment of a receiver by any court having jurisdiction, and without notice, to take possession of and protect, collect, manage, liquidate and sell the Collateral or any portion thereof, collect the payments due with respect to the Collateral or any portion thereof, and do anything that Lender is authorized with respect thereto to do. (f) Grant extensions of time, make any compromise or settlement it deems desirable with respect to the Collateral, or waive or release any security interest in Collateral. (g) Exercise all rights and remedies of a secured creditor under the Uniform Commercial Code. (h) Require Borrower to pursue, to the extent applicable, in its own name but for the benefit of Lender, any one or more of the remedies described in (a) through (g) above. (i) All remedies are cumulative. Any failure on the part of Lender to exercise or any delay in exercising any right hereunder shall not operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right hereunder preclude any other exercise thereof or the exercise of any other right. 7.2 Application of Proceeds. Any money collected by Lender pursuant to this Article VII (whether upon voluntary payment, foreclosure or otherwise) shall be promptly applied as follows unless otherwise required by provisions of applicable law: (i) first, to the payment of all expenses incurred by Lender under this Agreement and in enforcing its rights and the rights of Lender hereunder, including all costs and expenses of collection, attorneys' fees, court costs, and foreclosure expenses; (ii) next, to the payment of all principal and interest due and unpaid on any Advance; (iii) next, to the payment of any other Obligations owed by Borrower to Lender; and 25 (iv) next, to Borrower or as a court of competent jurisdiction may direct. 26 ARTICLE VIII MISCELLANEOUS 8.1 Expenses. Whether or not the transactions contemplated hereby shall be consummated, Borrower agrees to pay on demand (i) all the costs of furnishing all opinions by counsel for Borrower (including without limitation any opinions requested by Lender as to any legal matters arising hereunder), and of Borrower's performance of and compliance with all agreements and conditions contained herein on its part to be performed or complied with; (ii) the cost of delivering to Lender the Note pursuant to the provisions of this Agreement; (iii) all the actual costs and expenses of creating and perfecting Liens in favor of Lender, pursuant to this Agreement, including filing and recording fees and expenses, reasonable fees and expenses of counsel for providing such opinions as Lender may reasonably request; (iv) all other actual and reasonable out-of-pocket expenses incurred by Lender in connection with the administration of this Agreement, and the other documents contemplated herein or therein, and the making of the Advances; and (v) after the occurrence of an Event of Default, all costs and expenses (including reasonable attorneys' fees and costs of settlement) incurred by Lender in enforcing any Obligations of or in collecting any payments due from Borrower hereunder, under the Note by reason of such Event of Default. Attorneys' fees, expenses and disbursements incurred in enforcing, or on appeal from, a judgment pursuant hereto shall be recoverable separately from and in addition to any other amount included in such judgment, and this clause is intended to be severable from the other provisions of this Agreement and to survive and not be merged into such judgment. 8.2 Indemnity by Borrower. A. Indemnification by Borrower. In addition to the payment of expenses pursuant to Section 8.1, whether or not the transactions contemplated hereby shall be consummated, Borrower agrees to indemnify, pay and hold harmless Lender and the officers, directors, employees and agents of Lender (collectively called the "Indemnitees"), from and against any and all other liabilities, obligations, losses damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements (including, without limitation, the reasonable fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding, whether or not such Indemnitee shall be designated a party thereto), which may be imposed on, incurred by, or asserted against such Indemnitee, in any manner relating to or arising out of the use or intended use of the proceeds of the Advances or on account of the Collateral taken hereunder (the "indemnified liabilities"); provided that Borrower shall have no obligation hereunder with respect to indemnified liabilities arising from the gross negligence or willful misconduct of any such Indemnitee. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it violates any law or public policy, Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all indemnified liabilities incurred by the Indemnitees or any of them. 27 B. Claims. If any claim is made, or any action, suit or proceeding is brought against any Person indemnified pursuant to this Section 8.2, the Indemnitee shall notify Borrower of such claim or of the commencement of such action, suit or proceeding, and Borrower will assume the defense of such action, suit or proceeding, employing counsel selected by Borrower and reasonably satisfactory to such Indemnitee and pay the fees and expenses of such counsel; provided, however, that if counsel to the Indemnitee shall reasonably determine that, due to conflicts in the liabilities or defenses of Borrower and Lender, Lender should retain its own counsel, Lender shall have the right to retain counsel and the reasonable fees and expenses of such counsel shall be for the account of Borrower. 8.3 Set-Off. Borrower hereby grants to Lender a right of set-off against the payment of any amounts that may be due and payable to Lender from Borrower or any Affiliate, such right to be upon any and all monies or other property of Borrower or any Affiliate held or received by Lender (or any Affiliate of Lender) or due and owing from Lender to Borrower or any Affiliate. 8.4 Amendments and Waivers. No amendment, modification, termination or waiver of any provision of this Agreement or of the Note, or consent to any departure by Borrower therefrom, shall in any event be effective without the written concurrence of Lender. 8.5 Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telecopied, telexed or sent by overnight courier and shall be deemed to have been given when delivered in person, upon receipt of telecopy or telex or two Business Days after deposit with an overnight courier. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered as provided in this Section 8.5) shall be as set forth under each party's name on the signature pages hereof. 8.6 Attorneys' Fees. Subject to Sections 8.1, 8.2 and 8.3, if any party hereto commences litigation for the interpretation, enforcement, termination, cancellation or rescission hereof, or for damages for the breach hereof, the prevailing party in such action shall be entitled to its reasonable attorneys' fees and court and other costs incurred, to be paid by the losing party as fixed by the court or in a separate action brought for that purpose. 8.7 Survival of Warranties and Certain Agreements. A. Agreement. All covenants, agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement, the making of the Advances hereunder and the execution and delivery of the Note. B. Termination. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Borrower set forth in Sections 8.1, 8.2 and 8.3 shall survive the payment of the Advances and the Note and the termination of 28 this Agreement. 8.8 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of Lender in the exercise of any power, right or privilege hereunder or under the Note shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement or the Note are cumulative to and not exclusive of, any rights or remedies otherwise available. 8.9 Severability. In case any provision in or obligation under this Agreement or the Note shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligations in any other jurisdiction, shall not in any way be affected or impaired thereby. 8.10 Headings. Article, section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 8.11 Applicable Law. This Agreement and the Note shall be governed by, and shall be construed and enforced in accordance with, the laws of the State of New York. 8.12 Successors and Assigns; Subsequent Holders of Note. This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of Lender. The terms and provisions of this Agreement shall inure to the benefit of any assignee or transferee of the Note, and in the event of such transfer or assignment, the rights and privileges herein conferred upon Lender shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. Borrower's rights, obligations or any interest therein hereunder may not be assigned without the express written consent of Lender. 8.13 Counterparts; Effectiveness. This Agreement and any amendments, waivers, consents, or supplements may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. 29 WITNESS the due execution hereof by the respective duly authorized officers of the undersigned as of the date first written above. TIS MORTGAGE INVESTMENT COMPANY By: /s/ John Costello ----------------------------------------- Name: John Costello ----------------------------------------- Title: Executive VP and Chief Financial Officer ----------------------------------------- By: /s/ Lorraine O. Legg ----------------------------------------- Name: Lorraine O. Legg ----------------------------------------- Title: President and CEO ----------------------------------------- Notice Address: 655 Montgomery St., Suite 800 San Francisco, California 94111 Attention: John Costello Telephone: (415) 274-1830 Telecopier: (415) 393-8006 PAINE WEBBER REAL ESTATE SECURITIES INC. By Name: Al Marrapodi Title: Managing Director Notice Address: 1285 Avenue of the Americas New York, New York 10019 Attention: Al Marrapodi Managing Director Telephone: (212) 713-6042 Telecopier: (212) 265-3881 EXHIBIT B PROMISSORY NOTE $10,000,000 New York, New York Dated: July 19, 1995 FOR VALUE RECEIVED, the undersigned TIS MORTGAGE INVESTMENT COMPANY having its principal place of business at 655 Montgomery St., Suite 800, San Francisco, California 94111 ("Borrower"), promises to pay to the order of PAINE WEBBER REAL ESTATE SECURITIES INC., a Delaware corporation, with its principal office at 1285 Avenue of the Americas, New York, New York 10019 ("Lender"), at the Lender's principal office or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the lesser of (i) the principal sum of TEN MILLION DOLLARS ($10,000,000) or (ii) the sum of the unpaid principal amounts of the advances ("Advances") made by the Lender to the Borrower and recorded on the "Advance Schedule" attached hereto, plus interest, as provided herein. The Borrower shall pay to the Lender interest on each Advance from time to time outstanding at a rate per annum equal to that rate set forth in the "Interest Rate" column attached to the Note. Such interest shall be due and payable monthly in arrears commencing on the applicable date of an advance and continuing on the applicable Interest Maturity Date (as defined below) until and including payment in full of the unpaid principal amount of such Advance. As used in the schedule attached to the Note, the term "LIBOR" means the London interbank offered rate for U.S. Dollar deposits appearing on page five of the Telerate screen at 9:00 a.m. (New York City time) on the related date having a term which most closely approximates the term used in connection therewith. With respect to each Advance recorded on the "Advance Schedule" attached hereto, the "Interest Maturity Date" shall mean the applicable date set forth in the "Interest Maturity Date" column of such "Advance Schedule". With respect to each Advance, the Borrower shall pay to the Lender (i) on the Interest Maturity Date, in full, the accrued and unpaid interest on such Advance and (ii) on the date set forth in the "Advance Maturity Date" column of the applicable schedule attached hereto (the "Advanced Maturity Date"), in full, the outstanding principal amount of such Advance. All Advances made by the Lender hereunder and all payments made on account of the principal hereof shall be recorded by the Lender on the schedule attached to this Note (provided that any failure by the Lender to make any such notation on such schedule shall not affect the obligations of the Borrower hereunder). If any amount due hereunder is not paid when due (whether at stated maturity, 1 by acceleration or otherwise) a rate per annum during the period commencing on the due date until such amount is paid in full equal to 3% above the otherwise applicable rate, to the extent permitted by applicable law, shall be imposed on said amount. Interest shall be computed for the actual number of days elapsed on the basis of a 360-day year. In no event shall interest be chargeable or collectible hereunder in excess of the maximum lawful rate under applicable law. The Borrower promises to pay the holder hereof all costs and expenses of collection of this Note and to pay all attorney's fees incurred in such collection or in any suit or action to collect this Note and any appeal thereof. The provisions of this Note shall inure to the benefit of the Lender and its successors and assigns and be binding on the Borrower and its successors and assigns. This Note shall in all respects be governed by, and construed in accordance with, the laws of the State of New York, including all matters of construction, performance and validity. The Borrower waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note. No failure or delays by the Lender in the exercise of any power or right under this Note shall operate as a waiver thereof, and no exercise or waiver of any single power or right, or the partial exercise thereof, shall affect the Lender's rights with respect to any and all other rights and powers. The Borrower hereby irrevocably consents and submits to the nonexclusive jurisdiction and venue of any State or Federal Court sitting in New York County over any action or proceeding arising out of or relating to this Note or any document or instrument delivered in connection herewith, and the Borrower hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such State or Federal Court. The Borrower waives any objection to any action or proceeding in any State or Federal Court sitting in New York County on the basis of forum non conveniens. The Borrower hereby waives the right to trial by jury, rights of set- off and rights to interpose counterclaims of any nature, except for compulsory counterclaims. The Borrower agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The Borrower further agrees that any action or proceeding brought against the Lender shall be brought only in any State or Federal Court sitting in New York County. The Borrower further agrees that in the Lender's discretion, it may serve legal process in any other manner permitted by law and may bring any action or proceeding against the Borrower or its property in the courts of any other jurisdiction. The unenforceability or invalidity of any provision or provisions of this Note shall not render any other provision or provisions herein contained unenforceable or invalid. 2 This Note cannot be amended, modified or changed in any way except by a written instrument executed by both the Borrower and the Lender. TIS MORTGAGE INVESTMENT COMPANY By: /s/ Lorraine O. Legg ----------------------------------------- Name: Lorraine O. Legg ----------------------------------------- Title: President and CEO ----------------------------------------- 3 -----END PRIVACY-ENHANCED MESSAGE-----