SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1993 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ______________ to ______________
Commission file number 1-10001
RYMAC MORTGAGE INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 25-1577534
(State or other (I.R.S. Employer Identification No.)
jurisdiction of incorporation
or organization)
500 Market Street, Suite 600, Steubenville, Ohio 43952
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (614) 284-6960
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 American Stock Exchange, Inc.
Title of each class Name of exchange on which registered
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 ___
As of March 24, 1994, 5,210,600 shares of RYMAC Mortgage Investment
Corporation common stock were outstanding, and the aggregate market value
of the shares held by non-affiliates (based upon the closing price of the
common stock on that date as reported on the American Stock Exchange
Composite Tape) was approximately $5,861,925.
Documents Incorporated by Reference:
Registrant's 1994 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.
<PAGE>
PART I
Item 1. Business
(A) General Development of Business.
RYMAC Mortgage Investment Corporation (the "Company") was
incorporated in the State of Maryland on July 1, 1988. The Company is
primarily engaged in making investments in mortgage derivative securities
and, to a lesser extent, mortgage related investments. Two wholly-owned,
limited purpose finance subsidiaries of the Company, RYMAC Mortgage
Investment I, Inc. ("RMI I") and RYMAC Mortgage Investment II, Inc. ("RMI
II"), hold certain mortgage related investments. The Company also generates
revenues from other sources, such as interest earnings on certain investments
of the Company and sales of certain investments of the Company.
The Company has elected to be taxed as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"). As long as the Company qualifies as a REIT, dividends paid to
stockholders will be allowed as a deduction for purposes of determining
income subject to federal corporate income tax. As a result, the Company
will not be subject to such tax on that portion of its net income that is
distributed to stockholders. (See "Federal Income Taxation of the Company
and Stockholders")
(B) Current Business Environment.
During the period from the Company's inception in 1988 through
early 1992, mortgage interest rate levels and prepayment speeds remained
within levels existent from 1970 to early 1992. Historically, cash received
from the Company's investments represented interest and dividend earnings and
the return of investment principal (basis). However, since June of 1992,
mortgage rates have been at levels lower than those existent for the prior
twenty years, resulting in extraordinarily rapid and sustained levels of
residential mortgage prepayments. As a direct result, the Company's
investments have generated reduced interest and dividend earnings and as the
duration of high levels of prepayments continued, the Company's cash flows
from returns of investment principal and interest and dividend earnings have
also been severely impaired and sufficient only to reduce the Company's
borrowings (including margin calls), pay operating expenses and fund dividend
distributions to stockholders during the second half of 1992 and all of 1993.
As such, no new investments have been added to the Company's portfolio since
May 1992, and there can be no assurance that new investments will be added
during the 1994 calendar year. As a result, the Company's investment
strategy has been modified and the Company is investigating other business
alternatives to the business currently conducted by the Company. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations")
(C) Narrative Description of Business.
1. Management of Operations. The Company's investment policy is
controlled by its Board of Directors (the "Board of Directors"). The By-laws
of the Company provide that, except in the case of a vacancy, a majority of
the members of the Board of Directors and of any committee of the Board of
Directors must not be employed by, or otherwise affiliated with, the Company
or its former manager.
<PAGE>
Until April 1, 1992, the Company's day to day activities were
managed by NVR Mortgage Management Partnership (the "Former Manager")
pursuant to a management agreement (the "Management Agreement") with the
Company. The Management Agreement expired on March 31, 1992, and the Board
of Directors determined that the Company would thereafter operate on a self-
managed basis. The Company and the Former Manager reached an agreement
whereby the employees of the Former Manager's affiliate who devoted a
substantial amount of time on behalf of the Former Manager to the operation
of the Company became employees of the Company. (See "Management Agreement
and Fees")
2. Operating Policies and Strategies. The Company has
historically generated revenues primarily from investments in mortgage
derivative securities ("Mortgage Derivative Securities"). The Company's
investments in Mortgage Derivative Securities currently consist of (i) a
class or classes of collateralized mortgage obligations ("CMOs") (as defined
below) that either represents a regular class of bonds or a residual class of
bonds or (ii) interests in a class or classes of mortgage-backed pass-through
certificates that either represent a regular class of certificates or a
residual class of certificates. These securities entitle the Company to
receive a portion of the cash flow from the Mortgage Collateral (as defined
below) underlying the CMOs or mortgage-backed pass-through certificates. For
federal income tax purposes, a majority of the Company's Mortgage Derivative
Securities represent interests in real estate mortgage investment conduits
("REMICs"). A CMO is a security issued in one or more classes ("CMO
Classes") collateralized by a specific group of mortgage loans or mortgage
certificates guaranteed by GNMA, FNMA or FHLMC (collectively, the "Mortgage
Certificates" and together with the mortgage loans, the "Mortgage
Collateral") and evidences the right of the investors to cash flows from the
assets underlying such CMO.
The Company also generates revenues from Mortgage Related
Investments (as defined below) and has purchased for its portfolio shares of
common stock of companies engaged in businesses similar to the Company's.
The Company may also generate revenues from other real estate and mortgage
related investments approved by its Board of Directors.
In addition, or as an alternative, to the investment strategies
described above, the Company, with the approval of a majority of the
Unaffiliated Directors, may adopt investment strategies which, among other
things, could involve the acquisition of non-real estate related assets.
Such strategies, if adopted, could result in the Company being unable to
qualify as a REIT under the Code. The failure to qualify as a REIT could
have severe adverse tax consequences for the Company. (See "Federal Income
Taxation of the Company and Stockholders") However, the adverse tax
consequences may be substantially mitigated by the Company's net operating
losses.
In addition, the Company may purchase or otherwise reacquire,
shares of its Common Stock, par value $.01 per share ("Common Stock"), if, in
the opinion of the Board of Directors, such purchases can be made upon
favorable terms that can be expected to result in an increase in
distributions to the remaining stockholders without adversely affecting the
ability of the Company to maintain its qualification as a REIT under the
Code. Pursuant to a Stock Repurchase Program adopted on March 21, 1990, the
Company was authorized to repurchase up to 500,000 shares of its Common Stock
over a twelve-month period at market prices. The Company repurchased 209,400
<PAGE>
shares of its Common Stock through March 20, 1992, at prices ranging from
$6.75 to $7.63 per share of Common Stock, or a weighted average price per
share of $7.20. In September 1992, the Company adopted a new stock
Repurchase Program which authorized the repurchase of up to 500,000
additional shares of its Common Stock during the period September 1992 to
September 1993. No shares were repurchased under such authoriza- tion, and
the Company does not currently anticipate that it will purchase any shares of
Common Stock during calendar 1994.
The Company has utilized borrowings to purchase certain of the
investments described above and contemplates the use of borrowings to
purchase future investments. Borrowings may be used to increase income
available for distribution to stockholders. There can be no assurance,
however, that the Company will be able to effect such borrowings in the
future or, if so effected, that the cost of such borrowings will be less than
the net cash flow on the investments acquired with the proceeds of such
borrowings. Also, the Company has reduced its available bank line of credit
to $250,000 from $5,000,000. The amount of borrowings by the Company was
approximately 62% of stockholders' equity as of December 31, 1993. (See
"Capital Resources")
3. Types of Investments.
(a) Mortgage Related Investments. In its first fifteen months of
operations, the Company's primary vehicle for the generation of income had
been its mortgage related investments, wherein the Company purchased from
issuers of CMOs the right to receive the cash flow of the CMO after debt
service payments on the CMO are made ("Mortgage Related Investments"). Some
were purchased from affiliates of the Former Manager and others in secondary
market transactions. The Company, through RMI I or RMI II, purchased from an
issuer of CMOs the Mortgage Collateral and other collateral securing a CMO
subject to the lien of the indenture pursuant to which such CMO was issued.
The Company used this arrangement to purchase certain Mortgage Collateral
from Ryan Mortgage Acceptance Corporation IV ("RYMAC IV") and from Ryland
Mortgage Securities Corporation ("Ryland Mortgage"). (See "Investment
Portfolio")
(b) Mortgage Derivative Securities. Although Mortgage Related
Investments still constitute a portion of the Company's portfolio, the
Company's more recent investments consist of Mortgage Derivative Securities
such as IOs, Inverse IOs, PAC and TAC IOs, POs, IOettes, Floating Rate and
Inverse Floating Rate Bonds, Z Bonds, MBSs, and Residual Bonds, as defined
below.
1) An IO is an interest only class. An IO entitles the holder to
receive the interest portion of the cashflow from the underlying mortgage-
backed security. These securities are bearish in nature and thus show
improved performance as prepayment speeds slow and interest rates rise.
2) An Inverse IO is created by dividing a fixed rate bond class
into floating and inverse floating rate components based upon a market
interest rate index, such that, at any time the sum of the interest payments
to the two classes is no greater than the coupon on the fixed rate bond. As
the index rises, more interest is required in the floating rate component and
therefore less is available to the inverse floating rate holder. In a rising
interest rate environment, the lower coupon payments due the Inverse IO
holder are to some degree offset by the IO structure of the security. With
<PAGE>
rising rates, slower prepayments will enable the Inverse IO holder to
recognize a decreased coupon on an outstanding balance for a longer period.
An Inverse IO does not guarantee the par face of the bond, unlike an Inverse
Floating Rate Bond (see 7 below), and is usually sold with nominal principal
face amount but at a premium.
3) A PAC (Planned Amortization Class) IO is an IO with a fixed
coupon calculated on a nominal principal balance that is protected within a
band of prepayment rates. This prepayment band offers more average life
assurance than a pure IO strip. A TAC (Targeted Amortization Class) IO is
similar to a PAC IO except that the band of prepayment rates is much
narrower. This narrower band makes the average life of a TAC IO more
sensitive to prepayment speeds than a PAC IO.
4) A PO is a principal only class. A PO entitles the holder to
receive the principal portion of the underlying mortgage-backed security.
These securities are sold at a discount to face and benefit when interest
rates fall and prepayment rates rise.
5) An IOette represents an interest only strip from a portion of
the interest component of an underlying mortgage backed security. This
security is bearish in nature as it shows improved performance as prepayments
slow (interest rates rise).
6) A Floating Rate Bond is a CMO bond on which the interest rate
paid to bondholders fluctuates with changes in an interest rate index, such
as the London Interbank Offered Rate ("LIBOR"), and is usually reset monthly.
7) An Inverse Floating Rate Bond contains a coupon that fluctuates
inversely with changes in a floating rate index such as LIBOR. As the index
decreases, the formula used to set the coupon on this bond results in an
increased yield. Typically, this type of Mortgage Derivative Security is
purchased at or near the face amount of the bond. Although the face amount
of principal will always be returned, it may be faster than expected due to
an increase in prepayment speeds usually associated with lower interest
rates.
8) A Z, or accrual, bond is a bond class that does not receive
payments of interest until certain other classes of bonds are retired. Until
the Z bond begins receiving interest payments, the amount of interest due is
accrued, or added, to the principal amount of the bond.
9) An MBS, or Mortgage Backed Security, is a security backed by an
undivided interest in a pool of mortgages or deeds of trust. The cash flow
from the mortgages or deeds of trust is used to pay principal of, and
interest on, the securities. The most commonly recognized MBSs are issued
through the following three governmental entities: GNMA; FNMA; and FHLMC.
10) Residual Bonds, in general, entitle the holder to receive all
or a portion of the residual cash flow from an underlying CMO after payment
of principal and interest on all other bond classes and other expenses
related to administration of the CMO.
<PAGE>
4. Investment Portfolio. During the year ended December 31, 1993,
the Company purchased no additional investments. (See "Current Business
Environment" above, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations")
The information presented below with respect to each of the
Mortgage Derivative Securities and Mortgage Related Investments held by the
Company at December 31, 1993, was provided to the Company either by the
issuer of the related CMO or obtained from the Bloomberg Financial System.
The Company did not participate in the issuance of such CMOs and is relying
on the respective CMO Issuers and Bloomberg regarding the accuracy of the
information provided. The Company believes, however, that such information
is accurate. In reading the information presented below, only information
regarding CMO classes whose structure and balance affect the performance of
the Company's investment in the related Mortgage Derivative Security or
Mortgage Related Investment is shown. For investments where no information
is shown for other CMO classes, the performance of the Company's investment
relates solely to prepayment speeds on the underlying Mortgage Collateral.
<PAGE>
<TABLE>
<CAPTION>
Collateralized Mortgage Obligations
Underlying Mortgage Related Investments
Held on December 31, 1993
Principal
Initial Amount Company's
Principal as of Issue Date/ Percentage
Name of Issuer CMO Amount Dec. 31, 1993 Interest Stated First Optional Ownership
and Series Class (In Thousands) (In Thousands) Rate Maturity Redemption Date Interest
<S> <C> <C> <C> <C> <C> <C> <C>
RYMAC IV
Series 3 3-F $31,500 $14,313 11.200% 09/01/15 08/29/85 100%
Date amount of Class
3-F less than 20%
of original amount
Series 4 4-Z(1) 6,100 10,444 9.450 04/01/16 03/27/86 100%
Date amount of Class
4-Z less than 100%
of original amount
Series 7 7-C 11,000 2,763 8.550 08/01/10 07/29/86 100%
7-Z(1) 1,500 2,921 9.400 08/01/16 Later of 08/01/01
or date Class 7-C
fully paid
Series 10 10-C 27,000 3,035 9.375 07/01/10 09/30/86 100%
10-Z(1) 4,000 7,814 9.450 10/01/16 Later of 10/01/01
or date Class 10-C
fully paid
Series 19 19-B 4,550 3,602 8.250 05/01/17 05/01/97 100%
Ryland 6-D 11,857 6,533 9.800 03/25/19 Earlier of 12/26/01 99.99%
Mortgage 6-E 18,500 18,500 9.850 11/25/20 or date amount of
Securities 6-F 50 9 1,224.190 11/25/20 Series 89-6 bonds
Corporation less than 10% of
Series 89-6 original amount
(Notes to table appear on page 11)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Collateralized Mortgage Obligations
Underlying Mortgage Derivative Securities
Held on December 31, 1993
Principal
Initial Amount Company's
Principal as of Issue Date/ Percentage
Name of Issuer CMO Amount Dec. 31, 1993 Interest Stated First Optional Ownership
and Series Class (In Thousands) (In Thousands) Rate Maturity Redemption Date Interest
<S> <C> <C> <C> <C> <C> <C> <C>
Collateralized Y(3) $199,025 $29,194 8.650% 03/01/03 01/29/88 49%
Mortgage R 750 146 (6) 03/01/03 Date amount of Bonds of Class R
Obligation less than 2% of
Trust 39 original amount
Collateralized A(3) 98,357 22,203 9.250 12/01/14 08/30/88 78.84%
Mortgage B(3) 9,293 9,293 9.500 09/01/15 Date amount of Bonds of Class R
Obligation C(3) 46,005 46,005 9.500 09/01/18 less than 2% of
Trust 46 R 440 50 (6) 09/01/18 original amount
Collateralized A(3) 83,817 18,933 9.000 07/01/14 08/30/88 44.65%
Mortgage B(3) 9,782 9,782 9.000 07/01/15 Date amount of Bonds of Class R
Obligation C(3) 40,458 40,458 8.950 09/01/18 less than 2% of
Trust 47 D 40,675 14,821 (4) 09/01/18 original amount
E 24,868 9,061 (5) 09/01/18
R 400 273 (6) 09/01/18
FNMA
REMIC 7-C 49,000 16,042 7.650 01/25/12 04/29/88 15%
Trust 1988-7 7-F 122,000 8,766 (4) 01/25/12 No optional redemp- of Class
7-Z(1) 20,000 33,973 9.250 04/25/18 tion permitted 7-R
7-R 700 131 (6) 04/25/18
FNMA
REMIC 11-A(3) 56,000 25,815 8.550 05/25/18 05/25/88 22%
Trust 1988-11 11-B(3) 6,700 3,089 (4) 05/25/18 No optional redemp- of Class
11-C 88,200 7,792 (4) 05/25/18 tion permitted 11-R
11-D 49,100 4,338 (5) 05/25/18
11-R 20 8 (6) 05/25/18
(Notes to table appear on page 11)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Collateralized Mortgage Obligations
Underlying Mortgage Derivative Securities
Held on December 31, 1993
Principal
Initial Amount Company's
Principal as of Issue Date/ Percentage
Name of Issuer CMO Amount Dec. 31, 1993 Interest Stated First Optional Ownership
and Series Class (In Thousands) (In Thousands) Rate Maturity Redemption Date Interest
<S> <C> <C> <C> <C> <C> <C> <C>
FNMA
REMIC 14-F(3) $75,200 $71,866 9.200% 12/25/17 06/29/88 100%
Trust 14-I(3) 18,700 18,700 9.200 06/25/18 No optional redemp- of Class
1988-14 14-R 2,000 242 (6) 06/25/18 tion permitted 14-R
FNMA
REMIC H 160 39 1,102.250 01/25/20 01/30/90 100%
Trust 90-09 Less than 1%
FHLMC
Series 1235 L 0 0 (8) Less than 1% Notional
$7,700,000
FNMA
REMIC IO 0 0 (2) 03/25/22 Less than 1% Notional
Trust 127 $5,000,000
Original
Face
FHLMC
Series 1248 H 186 61 (4) 03/15/22 03/30/92 10.8%
Less than 1%
FNMA
REMIC Trust SA 1,360 436 (4) 12/25/21 12/30/91 12.87%
1991-163 No optional redemp- of Class SA
tion permitted
FHLMC
Series 2 2-C 115,400 17,749 9.450 05/15/13 03/30/88 100%
2-Z(1) 19,260 32,810 9.300 03/15/19 No optional redemp- of Class 2-R
2-R 100 3 2,668.240(6) 03/15/19 tion permitted
(Notes to table appear on page 11)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Collateralized Mortgage Obligations
Underlying Mortgage Derivative Securities
Held on December 31, 1993
Principal
Initial Amount Company's
Principal as of Issue Date/ Percentage
Name of Issuer CMO Amount Dec. 31, 1993 Interest Stated First Optional Ownership
and Series Class (In Thousands) (In Thousands) Rate Maturity Redemption Date Interest
<S> <C> <C> <C> <C> <C> <C> <C>
FHLMC
Series 21 21-F $ 240,408 $ 22,461 9.450% 09/15/11 11/30/88 37.5%
21-Z(1) 84,750 137,101 9.500 01/15/20 Date amount of cer- of Class
21-R 100 19 (6) 01/15/20 tificates is less 21-R
than 1% of original
amount
Cornerstone A-1 20,009 7,047 9.250 08/30/18 08/25/88 100%
Mortgage Interest Date amount of cer- of Interest
Investment Receipts None None (7) 08/30/18 tificates is less Receipts
Group II, than 10% of original
Inc. amount
Series 13
Series 14 A-1 15,012 4,563 9.250 09/30/18 09/25/88 100%
Interest Date amount of cer- of Interest
Receipts None None (7) 09/30/18 tificates is less Receipts
than 10% of original
amount
PaineWebber L-4(3) 114,200 66,702 8.950 07/01/18 06/30/88 17.8%
CMO Trust L-5 185 185 (6) 07/01/18 No optional redemp- of Class L-5
Series L tion permitted
(Notes to table appear on page 11)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
<FN>
NOTES TO TABLE
(1) A Class of "Compound Interest Bonds" or "Accrual Certificates" on which interest accrues and is added to the principal
amount of such CMO Class but on which interest and principal is not paid until all CMO Classes having an earlier stated
maturity are fully paid.
(2) Beneficial ownership of undivided interests in 2.3084025854% of all future interest payments to be made on the FNMA
certificates underlying the CMO.
(3) A Scheduled Amortization Class on which principal is paid on a preferred basis with respect to other CMO Classes in a
specified amount, to the extent funds are available.
(4) A CMO Class whose interest rate varies based on a specified relationship to the 30-day London Interbank Offered Rate for
U.S. Dollar deposits ("LIBOR"), the 1 Year Treasury Index or the 3 Month Treasury Index, subject to a maximum interest rate.
In the case of Collateralized Mortgage Obligation Trust 47, Class D, the interest rate at December 31, 1993 was 4.21%. The
maximum interest rate payable on such CMO Class is 14.50%. The interest rate at December 31, 1993 on Class 7-F of FNMA REMIC
Trust 1988-7 was 3.76%. The maximum interest rate payable on such CMO Class is 12.25%. The interest rates at December 31,
1993 on Class 11-B and 11-C of the FNMA REMIC Trust 1988-11 were 3.71% and 4.01%, respectively, with maximum interest rates
payable of 12.75% and 14.0%, respectively. The interest rate at December 31, 1993 on Class H of FHLMC Series 1248 was
6,218.77% with a maximum interest rate payable of 9,340.65%. The interest rate at December 31, 1993 on Class SA of the FNMA
REMIC Trust 1991-163 was 706.55% with a maximum interest rate payable of 1,034.80%.
(5) Zero coupon Bond that does not bear interest.
(6) Residual Bonds.
(7) Beneficial ownership of undivided interests in 2.105263% of all future interest payments to be made on the GNMA
certificates underlying the related CMO.
(8) Beneficial ownership of undivided interests in 2.4432810418% of all future interest payments to be made on the FHLMC
certificates underlying the CMO.
</TABLE>
<PAGE>
<TABLE>
The following table sets forth certain information with respect to the collateral underlying such CMO(1):
<CAPTION>
Collateral Descriptions
Type of Remaining Weighted Weighted Average
Mortgage Principal Amount Average Scheduled
Issuer Certificates of Mortgage Pass-Through Remaining Term
and Securing Certificates Rate of to Maturity
Series the CMO (In Thousands) Mortgage Certificates (Years:Months)
<S> <C> <C> <C> <C>
RYMAC IV
Series 3 GNMA $13,744 12.00% 21:2
Series 4 FNMA 10,071 10.00 18:7
Series 7 FNMA 4,542 9.25 20:10
Series 10 FNMA 10,077 9.62 20:10
Series 19 FNMA 3,197 8.79 21:4
Collateralized
Mortgage
Obligation
Trust 39 FNMA 54,757 9.50 8:0
Collateralized
Mortgage
Obligation
Trust 46 GNMA 73,435 9.50 21:11
Collateralized
Mortgage
Obligation
Trust 47 GNMA 88,480 9.00 21:8
FNMA
REMIC Trust
1988-7 FNMA 60,841 9.50 22:6
REMIC Trust
1988-11 FNMA 41,042 9.00 22:9
REMIC Trust
1988-14 FNMA 90,808 9.50 22:7
REMIC Trust
1991-163 FNMA 174,106 9.00 25:5
REMIC Trust
1990-9 FNMA 84,619 9.00 23:6
REMIC Trust
127 FNMA 131,932 8.00 27:1
(Note appears on next page)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Collateral Descriptions(continued)
Type of Remaining Weighted Weighted Average
Mortgage Principal Amount Average Scheduled
Issuer Certificates of Mortgage Pass-Through Remaining Term
and Securing Certificates Rate of to Maturity
Series the CMO (In Thousands) Mortgage Certificates (Years:Months)
<S> <C> <C> <C> <C>
FHLMC
Series 2 FHLMC $ 49,927 9.50% 19:3
Series 21 FHLMC 177,826 9.50 23:2
Series 1235 FHLMC 172,980 9.00 21:10
Series 1248 FHLMC 108,211 9.00 23:8
Cornerstone
Mortgage
Investment
Group II, Inc.
Series 13 GNMA 7,377 9.50 24:0
Series 14 GNMA 4,567 9.50 23:6
Ryland
Mortgage
Securities Insured
Corporation Mortgage 25,115 10.62 21:11
Series 89-6 Loans
PaineWebber
Series L FNMA 70,888 9.00 22:2
TOTAL PORTFOLIO WEIGHTED AVERAGE PASS-THROUGH RATE 9.16
<FN>
(1) Information on those RYMAC IV CMOs which did not have a payment date on January 1, 1994 is as of the payment date
for such CMOs that preceded January 1, 1994. All other information is as of January 1, 1994.
</TABLE>
<PAGE>
5. Cash Flow from Investments. The Company's return on
its investments has been substantially affected by a number of
factors, including short-term interest rates to the extent that
such rates affect certain of its investments, and the rates of
prepayment of the underlying Mortgage Collateral. The rate at
which principal payments occur on pools of single-family loans is
influenced by a variety of economic, geographic, social and other
factors. In general, however, mortgage loans are likely to be
subject to higher prepayment rates if prevailing interest rates are
significantly below the interest rates on the mortgage loans, as
was the case during recent prior periods. Conversely, in the event
that interest rates during 1994 are above the interest rate on the
mortgage loans, the rate of prepayment would be expected to
decrease. Other factors affecting the rate of prepayment of
mortgage loans include changes in mortgagor's housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged
properties, assumability of mortgage loans, servicing decisions and
the cost of refinancing.
The Company's Mortgage Derivative Securities each have
different characteristics, thus the cash flows from any particular
mortgage derivative security will vary based upon the structure of
the particular Mortgage Derivative Security (see 3(b) above), the
level of interest rates on mortgage loans and mortgage prepayment
levels. However, the Company's portfolio of Mortgage Derivative
Securities has been materially adversely affected because of such
levels.
The Company's cash flow from its Mortgage Related
Investments is derived from three principal sources: (a) any
positive difference between the interest rates of the Mortgage
Collateral and the weighted average interest rates of the related
CMO Classes; (b) any amounts available from prepayments on the
Mortgage Collateral that are not necessary for debt service
payments on such CMOs; and (c) any reinvestment income in excess of
amounts required to ensure timely payments of principal and
interest on such CMOs. The positive difference between rates on
the Mortgage Collateral and the weighted average rates on the
related CMO Classes has been negatively affected by the rapid
levels of mortgage prepayments in recent periods. Rapid
prepayments result in 1) a reduction of the positive difference
available to the Company and 2) a shortened duration of such
positive difference. Also, lower interest rates in recent periods
result in reduced reinvestment rates.
Excess cash flow from a particular investment will
decline over time and eventually terminate.
6. Other Potential Investments. The Company's Board of
Directors has adopted Investment Guidelines ("Guidelines") to
provide general parameters for the Company's investments and
borrowings pursuant to which the Company may make investments
without case by case approval by the Board of Directors. The
<PAGE>
Guidelines list certain investments which the Company is permitted
to make. Pursuant to the Guidelines, the Company may purchase
Mortgage Collateral which the Company may hold or pledge to secure
a CMO or to back other mortgage related securities. The Company
may also acquire shares of equity securities of other CMO residual
REITs. However, due to the performance of the Company's investment
portfolio and the current business environment for Mortgage Related
Investments in general, the Company made no additional investments
during 1993.
Pursuant to the investment criteria set forth in the
Guidelines, the Company may, for a fee, issue commitments to
sellers of Mortgage Collateral. The Company may purchase mortgage
loans (i) that are eligible for securitization and guaranty by
GNMA, FNMA or FHLMC or (ii) that are not eligible for such
securitization and guaranty. The Company may also purchase
Mortgage Collateral that could subsequently be used to secure
various CMOs issued by one or more CMO Issuers, and may participate
in the issuance of CMOs by forming, acquiring or entering into
arrangements with CMO Issuers. The Company has not engaged in any
of such activities to date.
7. Capital Resources. Prior to April 1993, the Company
maintained a line of credit with a commercial bank for $5,000,000
with an expiration of March 31, 1993. During the process of
documenting the line of credit renewal, the Company determined that
the collateral pledged to the bank under the line of credit had
substantially greater borrowing value to the Company in other
financing arrangements, particularly repurchase agreements, than
the value provided under the bank line of credit. Accordingly, the
Company and the bank agreed to the release of the majority of the
collateral pledged thereunder and the maintenance of a reduced line
of credit of $250,000 with an expiration date of April 30, 1994,
which availability is subject to periodic valuations of the
remaining collateral. Amounts borrowed under this agreement bear
interest at a rate of the prime rate plus 1.0%, and are
collateralized by the pledge of the Company's ownership interests
in the RYMAC IV Bonds and the Ryland Mortgage Securities
Corporation Series 89-6 Bonds. The availability under the line is
limited to the value of collateral pledged to the bank. At
December 31, 1993, no amount was outstanding and at December 31,
1992, $575,000 was borrowed under the line bearing interest at
6.5%.
The Company has supplemented its funds available for
investment through repurchase agreements. The repurchase
agreements entered into by the Company involve the transfer by the
Company of certain of its assets to a financial institution in
exchange for cash in an amount that is less than the fair market
value of such assets. At the same time, the Company agrees to
repurchase such assets at a future date at a price equal to the
cash paid by such financial institution plus interest thereon. The
extraordinarily high level of mortgage prepayments in recent
periods has caused dealers to reduce substantially the financing
value of investments pledged under repurchase agreements. Under
such circumstances, the Company is required to reduce the amount of
<PAGE>
outstanding borrowings by cash payments under the repurchase
agreement or the delivery of other unencumbered investments, thus
reducing the Company's ability to purchase new investments, as has
been the case since June 1992. (See "Management's Discussion and
Analysis - Liquidity and Capital Resources")
As of December 31, 1993 the Company had amounts
outstanding under twelve repurchase agreements aggregating
approximately $3,814,000 and as of March 24, 1994 approximately
$3,636,000. As of December 31, 1993 and March 24, 1994, the
Company has pledged substantially all of its Mortgage Derivative
Securities to secure its obligations under such repurchase
agreements.
The Company's By-laws provide that it may not incur
additional indebtedness if, after giving effect to such
indebtedness, its aggregate indebtedness (other than liabilities
incurred in connection with participation in the issuance of CMOs
and any loans between the Company and its corporate subsidiaries),
secured and unsecured, would exceed 300% of the Company's average
invested assets, in each case on a consolidated basis, as
calculated at the end of each calendar quarter in accordance with
generally accepted accounting principles, unless such additional
indebtedness is approved by a majority of the Unaffiliated
Directors. The Company is currently operating under a borrowing
limitation pursuant to a policy adopted by its Board of Directors
that limits total borrowings to $25,000,000, an amount
substantially in excess of the amount the Company would be able to
borrow under the current operating condition of the Company. As of
December 31, 1993 and March 24, 1994, the Company's indebtedness
aggregated approximately 62% and 59%, respectively, of
stockholders' equity.
The Company has authorized 50,000,000 shares of Common
Stock. Although Management believes that raising additional equity
capital would be in the long-term best interests of the Company,
the Company's present financial condition makes the prospect of
raising such equity capital unlikely.
In addition, the Company's Articles of Incorporation
permit the Board of Directors to authorize and issue from time to
time additional classes of stock without the necessity of further
approval by the stockholders and with such rights and preferences
as the Board of Directors of the Company may designate by
resolution. Depending upon the terms set by the Board of
Directors, the authorization and issuance of preferred stock or
other new classes of stock could adversely affect existing
stockholders. The effects on stockholders could include, for
example, dilution of existing stockholders, restriction on
dividends on Common Stock, restrictions on dividends for other
corporate purposes and preferences to holders of a new class of
stock in the distribution of assets upon liquidation. Since the
filing of the Articles of Incorporation, the Board of Directors has
neither authorized nor issued any additional classes of stock.
<PAGE>
8. Investment Restrictions. Restrictions on investments
by the Company in certain types of assets are imposed by the
provisions of the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Company believes that its current
investment activities do not bring it within the definition of an
investment company under the Investment Company Act because it is
primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real
estate. The Investment Company Act specifically excepts entities
primarily engaged in such activities from the definition of an
investment company (the "Real Estate Exception"). Under
interpretations issued by the staff of the Securities and Exchange
Commission, in order to qualify for the Real Estate Exception, the
Company must maintain at least 55% of its assets in mortgage loans
or certain other interests in real estate. The ability of the
Company to acquire Mortgage Derivative Securities may be limited by
the Investment Company Act depending, among other things, upon
whether the Company acquires all or only a portion of the residual
interest in a CMO, the nature of the collateral underlying such CMO
and the composition of the balance of the Company's assets at the
time of each such acquisition. Under interpretations of the staff
of the Commission, investments in mortgage-backed or other mortgage
related securities (including mortgage certificates) that are
securities considered to be separate from the underlying mortgage
loans are not considered to be investments in mortgage loans for
purposes of the 55% test unless such securities represent all the
certificates issued with respect to the 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 Investment Company
Act. The Company intends to monitor continually its operations in
order to evaluate the qualification of the Company for the Real
Estate Exception.
Uncertainties exist as to the interpretation of the
exception from the definition of an investment company under the
Investment Company Act for companies primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate. The Company believes that,
based upon its current and proposed method of operation, it falls
within such exception. In connection with the review by the
Commission of the registration statement for the Company's initial
public offering, the Company has been advised, based on a
preliminary review, that the staff of the Division of Investment
Management of the Commission, while not taking a definitive
position, is not in agreement with the Company's conclusion. If
the Company were required to register as an investment company or
to revise materially its contemplated method of operation to
qualify for an exemption, it would be subject to additional
limitations and restrictions on its activities.
<PAGE>
The Company is prohibited from purchasing real estate
contracts of sale. The Company also may not invest in unimproved
real property or mortgage loans on unimproved real property, nor
may it underwrite securities of other issuers. The foregoing
restrictions may not be changed without the approval of a majority
of the Unaffiliated Directors.
The Company may purchase or otherwise reacquire shares of
its Common Stock if, in the opinion of the Board of Directors, the
purchases can be made upon favorable terms that can be expected to
result in an increase in distributions to the remaining
stockholders. However, the Company may not make such purchases if
to do so would adversely affect the ability of the Company to
maintain its qualification as a REIT under the Code. (See "Federal
Income Taxation of the Company and Stockholders")
The operating policies and strategies of the Company are
governed by the Board of Directors, which has the power to modify
or alter such policies without the consent of the stockholders.
Although the Company has no present intention to seek modification
of its operating policies described herein, the Board of Directors
may conclude that it would be advantageous for the Company to do so
and may modify such operating policies accordingly.
9. Management Agreement and Fees. The Company's
Management Agreement with its Former Manager expired on March 31,
1992. The Board of Directors determined that the Company would
operate on a self-managed basis and, consequently, it did not enter
into a new management agreement with its Former Manager.
At the expiration of the Management Agreement, the
Company and its Former Manager reached an agreement pursuant to
which, among other things, the employees of the Former Manager's
affiliate that had devoted a substantial amount of time on behalf
of the Former Manager to the operation of the Company became
employees of the Company. In consideration therefor, the Company
agreed, among other things, to make payments to its Former Manager
for each of the Company's fiscal quarters for the period April 1,
1992 through March 31, 1994, in an amount equal to 50% of the
amount by which the fee that would have been paid to the Former
Manager under the Management Agreement for each such quarter (based
on the assets of the Company as of March 31, 1992) exceeds the
audited pre-tax deductible expenses of the Company for such quarter
(exclusive of certain expenses relating to any offerings by the
Company of its securities). For the period April 1, 1992 through
June 29, 1993, no amounts were due the Former Manager. Since both
the Company and its Former Manager anticipated that for the
remaining term of the agreement (ending March 31, 1994) no amounts
would be owing the Former Manager, the Company and its Former
Manager terminated their agreement on June 29, 1993. As such, the
Company is no longer responsible for any future payments to its
Former Manager.
<PAGE>
On a self-managed basis, the Company is responsible for
all expenses, including resources previously provided by the Former
Manager.
10. Dividend Reinvestment Plan. On December 13, 1988,
the Company adopted an Automatic Dividend Reinvestment Plan (the
"Plan"). The Plan is administered by American Stock Transfer &
Trust Company. The Plan provides to the Company's security holders
a method of investing cash dividends paid by the Company in new
shares of the Company's common stock. The Plan also permits
participants to make optional cash investments in additional shares
of the Company's common stock.
11. Federal Income Taxation of the Company and
Stockholders. THE PROVISIONS OF THE CODE ARE HIGHLY TECHNICAL AND
COMPLEX. THIS SUMMARY IS NOT INTENDED AS A DETAILED DISCUSSION OF
ALL APPLICABLE PROVISIONS OF THE CODE, THE RULES AND REGULATIONS
PROMULGATED THEREUNDER, OR THE ADMINISTRATIVE AND JUDICIAL
INTERPRETATIONS THEREOF. THE COMPANY HAS NOT OBTAINED A RULING
FROM THE INTERNAL REVENUE SERVICE WITH RESPECT TO ANY TAX
CONSIDERATIONS RELEVANT TO ITS ORGANIZATION OR OPERATION, OR TO AN
INVESTMENT IN ITS SECURITIES. THIS SUMMARY IS NOT INTENDED TO
SUBSTITUTE FOR PRUDENT TAX PLANNING, AND EACH STOCKHOLDER OF THE
COMPANY IS URGED TO CONSULT ITS OWN TAX ADVISER WITH RESPECT TO
THESE AND OTHER FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF SHARES OF THE COMMON STOCK
OF THE COMPANY AND ANY CHANGES IN APPLICABLE LAW.
General
The Company operates in a manner that permits it to
qualify as a REIT under the Code. As a REIT, the Company itself
generally will be subject to federal income tax only on the amount
of its taxable income, subject to certain modifications ("REIT
Taxable Income"), that it does not distribute in the taxable year
in which it is earned. In addition, the Company will be subject to
a 4% excise tax to the extent it fails to satisfy certain calendar
year distribution requirements. The Company expects that, with
limited exceptions, it will not be subject to federal income tax at
the corporate level or to federal excise tax.
The Company would be subject to tax (including any
applicable minimum tax) on its taxable income at regular corporate
rates without any deduction for distributions to stockholders if it
failed to qualify as a REIT in any taxable year. Unless entitled
to relief under specific statutory provisions, the Company also
would be disqualified from treatment as a REIT for the following
four taxable years. The failure to qualify as a REIT for even one
year could result in the Company incurring substantial
indebtedness in order to pay any resulting taxes, thus reducing the
amount of cash available for distribution to stockholders.
<PAGE>
For purposes of the special REIT taxation rules and the
REIT qualification requirements set forth below, the assets,
liabilities, income and deductions of any subsidiary, all of whose
stock has been owned by the Company during the subsidiary's entire
existence ("Qualified REIT Subsidiary"), will be treated as assets,
liabilities, income and deductions of the Company.
REIT Qualification Requirements
In order to qualify as a REIT, the Company must satisfy
various requirements with respect to (i) the nature of its assets
("Asset Requirements") and income ("Income Requirements"), (ii)
certain organizational matters ("Organizational Requirements") and
(iii) the amount of distributions to stockholders ("Distribution
Requirements").
Under the Asset Requirements, at the close of each
quarter during the taxable year (a) at least 75% of the assets of
the Company, by value, must consist of specified real estate
assets, cash or U. S. government securities and (b) as to its other
assets other than securities of a Qualified REIT Subsidiary, the
Company cannot own (1) securities of any one issuer which represent
more than 5% of the total value of the Company's assets or (2) more
than 10% of the outstanding voting securities of any one issuer.
The Income Requirements provide that at least 75% of the
Company's gross income must be derived from specified real estate
related sources, including interest on mortgage obligations, income
from REMIC interests, and gains from the sale of such obligations
and interests not held primarily for sale to customers in the
ordinary course of business ("Dealer Property"). Additionally, at
least 95% of the Company's gross income must consist of income
derived from items that qualify for the 75% income test plus other
specified types of passive income, such as interest, dividends and
gains from the sale or other disposition of stock and securities
other than Dealer Property.
If the Company fails to satisfy either of the foregoing
75% and 95% Income Requirements but (a) the Company otherwise
satisfies the requirements for qualification as a REIT, (b) such
failure is due to reasonable cause and not willful neglect and (c)
certain other requirements are met, then the Company will continue
to qualify as a REIT but will be subject to a 100% tax on the
greater of the amount by which it fails to satisfy either of such
tests reduced by expenses incurred in earning that amount.
The Income Requirements also require that less than 30%
of the Company's gross income be derived from the sale or other
disposition of (a) stock or securities held for less than one year,
(b) certain Dealer Property and (c) most real property (including
mortgage obligations and REMIC interests) held for less than four
years. In addition, the Code also generally imposes a 100% tax on
gains (less associated expenses) derived from sales of Dealer
Property (without an offset for any losses).
<PAGE>
The Distribution Requirements require that the Company
distribute annually at least 95% of its REIT Taxable Income (and
95% of certain other income related to foreclosure property),
excluding any net capital gain, to its stockholders. For this
purpose, certain dividends paid by the Company after the close of
a taxable year may be considered as having been paid during such
taxable year, although they would be taxed to the stockholders in
the year in which they were actually paid. Such dividends will
also be treated as paid during the taxable year for purposes of
determining whether the Company has undistributed REIT Taxable
Income subject to income tax at the corporate level for the taxable
year. For purposes of the 4% excise tax (described above),
however, such dividends would not be treated as having been
distributed in the taxable year. In addition, dividends declared
in October, November or December of a calendar year, payable to
stockholders of record as of a date in such a month, and actually
paid during January of the following year will be considered as
paid on December 31 of such calendar year for excise tax purposes
as well as for other purposes under the REIT rules. Such
dividends, however, will also be treated as having been paid on
that December 31 for purposes of determining a stockholder's gross
income.
Due to the nature of the Company's income from its assets
and its deductions in respect of its obligations, under certain
circumstances, the Company may generate REIT Taxable Income in
excess of its cash flow. For example, the maturity and pass-
through rates of the Mortgage Collateral pledged to secure the CMO
issuances in which the Company holds an investment are not likely
to match the maturity and interest rates of the CMOs secured
thereby. Similarly, the Company may recognize taxable market
discount income with respect to its receipts from the sale,
retirement or other disposition of the portion of the Mortgage
Collateral that constitutes market discount bonds (i.e.,
obligations with a stated redemption price at maturity greater than
the Company's tax basis therein), whereas these receipts frequently
will be used to make nondeductible principal payments on CMOs. In
addition, certain CMOs may be issued with original issue discount,
the tax treatment of which may result in taxable income in excess
of cash flow. Accordingly, 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 the
gross income of the Company on a tax basis (including "non-cash"
income) exceeds its deductible expenses. In the event that the
Company is unable to pay dividends equal to substantially all of
its REIT Taxable Income, it may incur income tax or excise tax or
may not be able to qualify as a REIT.
Dividends paid for a fiscal year in excess of the
Company's earnings and profits, as computed for federal income tax
purposes, are reported as a return of capital to the Company's
stockholders. Some of the Company's investments constitute REMIC
residual interests. Certain of these residual interests produce
"excess inclusion" income (see "Excess Inclusion Income" below)
<PAGE>
during the fiscal year. The Code requires that excess inclusion
income be included in a taxpayer's income even though the taxpayer
has losses that would otherwise offset such income. As a result,
the Company could have taxable income from excess inclusions in a
taxable year even though it has losses from other investments that
would normally be sufficient to offset the amount of such excess
inclusion income. The Company is required to distribute the
taxable income representing excess inclusions to meet its 95%
distribution requirement and to avoid a corporate level tax on such
income. When such income is distributed to a stockholder, the
stockholder will have taxable income, rather than a return of
capital, equal to its share of such excess inclusion income during
the fiscal year. For fiscal 1993, the Company reported that all
its distributions paid in 1993, even though it experienced both a
net loss and a tax loss for 1993, represented excess inclusion
income. For a stockholder, excess inclusion income cannot be
offset by losses, except in the case of certain excess inclusion
income for certain savings and loan associations and their
"qualified" subsidiaries.
The most significant Organizational Requirement is that
the stock of the Company must be widely held. This requires that
the stock of the Company be held by a minimum of 100 persons for at
least 335 days in each taxable year and that no more than 50% in
value of the stock be owned, actually or constructively, by five or
fewer individuals at any time during the second half of each
taxable year. For this purpose, some pension funds and certain
other tax-exempt entities are treated as individuals. To evidence
compliance with these requirements, the Company is required to
maintain records that disclose the actual ownership of its
outstanding shares of Common Stock. In fulfilling its obligations
to maintain records, the Company must demand written statements
each year from the record holders of designated percentages of its
shares of Common Stock which would, among other things, disclose
the actual owners of such shares.
Excess Inclusion Income
All of the cash dividends distributed to the Company's
stockholders in 1993 were comprised of "excess inclusion" income.
Excess inclusion income is attributable to CMO issuances 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 stockholders as unrelated business income. In
addition, generally, excess inclusion income may not be offset by
any deductions or losses, including net operating losses.
12. Restrictions on Transfer and Redemption of Shares.
Two of the requirements for qualification as a REIT under the Code
are that (i) during the last half of each taxable year not more
<PAGE>
than 50% of the outstanding shares may be owned directly or
indirectly by five or fewer individuals and (ii) there must be at
least 100 stockholders for at least 335 days in each taxable year.
Those requirements apply for all taxable years after the year in
which the REIT elects REIT status.
In order that the Company may meet these requirements at
all times, the Company's Articles of Incorporation prohibit any
person or group of persons from acquiring or holding, directly or
indirectly, ownership of a number of shares of Common Stock in
excess of 9.8% of the outstanding shares. Shares of Common Stock
owned by a person or group of persons in excess of such amounts are
referred to in the Articles of Incorporation and herein as "Excess
Shares". The Articles of Incorporation also provide that in the
event any person acquires Excess Shares, such Excess Shares may be
redeemed by the Company, at the discretion of the Board of
Directors.
Under the Company's Articles of Incorporation, any
acquisition of shares of the Company that would result in the
disqualification of the Company as a REIT under the Code is void to
the fullest extent permitted by law, and the Board of Directors is
authorized to refuse to recognize a transfer of shares to a person
if, as a result of the transfer, that person would own Excess
Shares.
Additional provisions regarding restrictions on transfers
and redemptions of the Company's shares are set forth in the
Company's Articles of Incorporation which were filed as Exhibit 3.1
to Amendment No. 1 to the Company's Registration Statement No. 33-
22891 on Form S-11.
The Articles of Incorporation also contain provisions
intended to minimize the potential adverse effect on the Company of
a Code provision that would impose a tax on REITs (and other pass-
through entities) that hold REMIC interests if at any time during
the taxable year a Disqualified Organization (as defined below) is
a record holder of an interest in such entity. A "Disqualified
Organization" means the United States, any state or political
subdivision thereof, any foreign government, any international
organization or instrumentality of the foregoing, any tax-exempt
entity, other than a farmer's cooperative, not subject to the
unrelated business income tax and any rural electric or telephone
cooperative. If a Disqualified Organization were a stockholder of
record of the Company during a year in which the Company held a
REMIC interest, a tax might be imposed on the Company. The amount
of tax would be equal to the product of the highest marginal
corporate tax rate and the amount of REMIC excess inclusions for
the taxable year allocable to the interest in the Company held by
the Disqualified Organization.
Accordingly, the Articles of Incorporation provide that
any acquisition of shares of the Company that could or would result
in the direct or indirect imposition of a penalty tax on the
Company (including the tax described above) (a "Prohibited
<PAGE>
Transfer") will be void ab initio to the fullest extent permitted
by applicable law, and the intended transferee of any shares that
are the subject of a Prohibited Transfer may be deemed never to
have had an interest therein. If the foregoing provision is
determined to be void or invalid, the transferee shall be deemed,
at the option of the Company, to have acted as agent of the Company
in acquiring those shares and to hold those shares on behalf of the
Company. In addition, any shares of the Company that are the
subject of a proposed, attempted or actual Prohibited Transfer may
be redeemed by the Company at the discretion of the Board of
Directors. Any such redemption will be effected as provided in the
preceding paragraphs with respect to Excess Shares. Furthermore,
whenever it is deemed by the Board of Directors to be prudent in
order to avoid a Prohibited Transfer, the Board of Directors may
require a holder or proposed transferee of shares to file a
statement or affidavit with the Company, stating that the holder or
proposed transferee is not a Disqualified Organization; and any
contract for the sale or other transfer of shares of the Company
will be subject to this provision. Moreover, the Board of
Directors may, in its discretion, refuse to transfer shares on the
books of the Company if (i) a statement or affidavit described in
the preceding sentence has not been received or (ii) the proposed
transferee is a Disqualified Organization.
13. Competition. In purchasing Mortgage Derivative
Securities and Mortgage Collateral, the Company competes with
investment banking firms, savings and loan associations, banks,
mortgage bankers, insurance companies and other lenders, other
REITs, GNMA, FNMA and FHLMC and other entities, many of which have
greater financial resources than the Company.
As a REIT, the Company's business activities are limited
by the provisions of the Code that require a REIT to meet certain
tests to maintain its qualification as a REIT. Many of the
Company's competitors operate through entities that may have more
flexibility than the Company in conducting their business
operations.
14. Employees. The Company employs four full-time
employees as of March 24, 1994, and utilizes the services of
consultants, as necessary.
Item 2. Properties.
The Company does not own real estate or physical
property. The executive offices of the Company are located in
leased space at 500 Market Street, Suite 600, Steubenville, Ohio
43952 and consist of approximately 2,800 square feet. The lease
covering such space can be terminated upon 60 days notice to the
lessor.
<PAGE>
Item 3. Legal Proceedings.
As of December 31, 1993, there were no legal proceedings
pending or threatened to which the Company or its subsidiaries were
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 Company's
security holders during the fourth quarter of 1993.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company's Common Stock is traded on the American
Stock Exchange under the symbol "RM".
The table below sets forth the high and low sale prices
of the Company's Common Stock for each full quarterly period within
the two most recent fiscal years for which such stock was traded,
as reported on the American Stock Exchange Composite Tape, and
certain dividend information with respect to such shares.
<TABLE>
<CAPTION>
Per Share
Dividends
Paid or
High Low Declared
<S> <C> <C> <C>
First Quarter 1992 11 1/8 8 3/4 $ 0.40
Second Quarter 1992 11 1/4 9 1/8 0.40
Third Quarter 1992 10 4 0.05
Fourth Quarter 1992 6 1/8 3 5/8 0.05
First Quarter 1993 5 3/8 3 1/2 0.00
Second Quarter 1993 3 5/8 2 5/16 0.00
Third Quarter 1993 2 3/8 1 3/8 0.00
Fourth Quarter 1993 2 1 0.04
</TABLE>
In order to qualify as a REIT under the Code, 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 for dividends paid
and excluding any net capital gain and any net income from the sale
or other disposition of property held primarily for sale) 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
noncash income (as determined under the Code). The actual amount
and timing of dividend payments, however, is at the discretion of
the Board of Directors and depends upon the financial condition of
the Company in addition to the requirements of the Code.
The Company's Common Stock was held by 632 stockholders
of record on March 24, 1994.
<PAGE>
<TABLE>
Item 6. Selected Financial Data.
FINANCIAL HIGHLIGHTS - 1993, 1992, 1991, 1990 AND 1989
_____________________________________________________________________________________________
(amounts in thousands except per share data)
EARNINGS DATA
For the Years Ended December 31, 1993, 1992, 1991, 1990 and 1989
_____________________________________________________________________________________________
<CAPTION>
1993 1992 1991 1990 1989
__________________________________________________________________________________________
<S> <S> <C> <C> <C> <C>
Revenues (1) $(13,588) $ 21,861 $ 52,182 $ 55,224 $ 45,293
Expenses 12,036 23,729 44,244 50,075 40,639
Net Income (loss) (2) (25,624) (1,868) 7,938 5,149 4,654
Net Income (loss) per share (4.92) (0.36) 1.52 0.97 0.86
Taxable Income (loss) (3)&(4) (12,250) (16,656) 9,190 8,806 8,412
Taxable Income (loss) per share (2.35) (3.20) 1.76 1.66 1.55
Weighted Average Shares
Outstanding 5,211 5,211 5,211 5,317 5,420
Dividends Paid per Share 0.04 0.90 1.75 1.66 1.60
_____________________________________________________________________________________________
OTHER FINANCIAL DATA
At December 31, 1993, 1992, 1991, 1990 and 1989
_____________________________________________________________________________________________
<CAPTION>
1993 1992 1991 1990 1989
_____________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Mortgage Related Investments $ 65,248 $142,396 $332,998 $463,163 $511,800
Mortgage Derivative Securities 7,161 40,727 41,720 42,515 37,292
Total Assets 81,097 197,860 394,026 518,809 564,217
Funding Notes Payable 44,892 94,329 230,781 314,874 344,843
CMOs Payable 25,042 54,886 106,585 140,135 149,809
Notes Payable 3,814 14,833 12,241 16,851 17,555
Total Liabilities 74,915 166,184 355,455 478,624 519,299
Total Stockholders' Equity 6,182 31,676 38,571 40,185 44,918
Shares of Common Stock
Outstanding 5,211 5,211 5,211 5,228 5,420
<FN>
(1) Includes for 1993, cumulative effect of change in accounting principle of $(1,530).
(2) See note 8 to Audited Consolidated Financial Statements.
(3) Amounts estimated for 1993.
(4) See Management's Discussion and Analysis - Dividend Policy.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
INVESTMENT PHILOSOPHY AND INVESTMENT ACTIVITIES
The Company's portfolio of investments is sensitive to changes in
interest rates and mortgage prepayments. The lowest interest rate
levels in 20 years, beginning in early 1992 and continuing now for
over two years, have resulted in unprecedented mortgage
refinancings and therefore accelerated mortgage prepayments. As a
result of these prepayments, earnings and cash flow from the
Company's current investments have been, and continue to be,
adversely impacted. For a substantial number of individual assets,
earnings and cash flows have been permanently impaired and will not
recover if interest rates return to higher, historical levels. In
addition, the Company has been unable to sell any substantial
portion of its portfolio of investments at acceptable prices, thus
limiting acquisition of replacement or additional investments.
During the period from the Company's inception in 1988 through
early 1992, mortgage interest rate levels and prepayment speeds
remained within levels existent from 1970 to early 1992.
Historically, cash received from the Company's portfolio of
mortgage related investments and mortgage derivative securities
(collectively, "Investments") represented interest and dividend
earnings and the return of investment principal (basis) and were
used to 1) pay operating expenses and 2) make dividend
distributions to stockholders. Cash flow amounts representing
returns of principal on investments were used to 1) repay Company
borrowings, including margin calls on repurchase agreements and 2)
make suitable new investments for the Company's portfolio.
However, since June of 1992, mortgage rates have been at levels
lower than those existent for the prior twenty years, resulting in
extraordinarily rapid and sustained levels of residential mortgage
prepayments. As a direct result, the Company's Investments have
generated reduced interest and dividend earnings and as the
duration of high levels of prepayments continued, the Company's
cash flows from returns of investment principal and interest and
dividend earnings have also been severely impaired and sufficient
only to reduce the Company's borrowings (including margin calls),
pay operating expenses and fund dividend distributions to
stockholders during the second half of 1992 and all of 1993. As
such, no new investments have been added to the Company's portfolio
since May 1992.
The current prolonged period of rapid prepayments, which is
anticipated to continue at least through a portion of 1994, results
in 1) reduced cash flows because of the substantially diminished
size of the mortgage pools underlying the Company's Investments and
2) declining market values of the Company's Investments which
simultaneously reduces the financing value of these same assets.
(See "Liquidity and Capital Resources") As a result, during the
second half of 1992, all of 1993 and through the first several
months of 1994, the Company has not purchased any new assets.
<PAGE>
In response to the Company's reduced current cash flows, the
Company has been pursuing leveraged financings that either provide
additional current cash flows or incremental cash flows to the
Company but only at future dates. However, due to continued
adverse market conditions and competing products with terms to
investors more favorable than can be provided by the Company, to
date leveraged financing negotiations have been unsuccessful. In
addition, the Company continues to pursue other business activities
that would not be sensitive to the risks of high levels of mortgage
prepayments.
The Company had purchased for its portfolio shares of TIS Mortgage
Investment Company ("TIS"), a company engaged in a business similar
to the Company's. Due to an impairment in the value of TIS, the
Company elected to sell its 102,100 shares of TIS between September
15, 1993 and December 13, 1993 at an average net price of $1.804
per share versus its cost basis of $6.565 per share.
FUTURE PROSPECTS
If a leveraged financing providing incremental current cash flows
to the Company cannot be completed within the quarterly period
ending June 30, 1994, the Company intends to further reduce
operating expenses while making selective new investments from its
limited current cash flow.
If the Company is unable to successfully institute the above
mentioned plans, the Company's ability to re-establish an
investment portfolio would be significantly impaired, causing the
Company to evaluate actions that would include a merger or other
business combination with another entity or an orderly liquidation
of future excess cash receipts to stockholders. A continuation of
prepayment speeds at or near current levels for more than
approximately the next six months will further significantly reduce
future cash flow availability. However, if prepayment speeds slow
substantially within the same period, the amount of cash flow
available from the current portfolio of investments would be
stabilized.
Although the Company's portfolio of investments continues to
produce cash flows, the Company continues to incur tax losses that
approximate $28 million for the two-year period ended December 31,
1993. Additionally, further tax losses from the current portfolio
are likely in 1994 independent of the level of mortgage
prepayments.
Absent the existence of future excess inclusion income, future cash
flows from the Company's current portfolio of investments will
represent, to a large degree, return of investment principal
(basis) to the Company and not taxable income required to be
distributed as dividends to stockholders. This circumstance in
conjunction with the tax loss carryforward of $28 million can be
utilized to offset future taxable income generated from the
contemplated investment activities (see "Investment Philosophy and
Investment Activities") before the Company's earnings again become
<PAGE>
taxable and result in the requirement for dividend payments.
Should the contemplated investment activities be successful, the
Company would be in a tax position to use cash flows to rebuild the
Company's investment portfolio prior to resuming taxable dividend
payments.
DIVIDEND POLICY
In accordance with the Code, the Company is required to distribute
at least 95% of its taxable income to its stockholders each year in
order to maintain its status as a REIT. Dividends paid for a
fiscal year in excess of the Company's taxable income are reported
as a return of capital to the Company's stockholders, except as
provided below.
Some of the Company's investments constitute REMIC residual
interests. Certain of these residual interests produce "excess
inclusion" income during the fiscal year. The Code requires that
excess inclusion income be included in a taxpayer's income even
though the taxpayer has losses that would otherwise offset such
income. As a result, the Company could have taxable income from
excess inclusions in a taxable year even though it has losses from
other investments that would normally be sufficient to offset the
amount of such excess inclusion income. The Company is required to
distribute the taxable income representing excess inclusions to
meet its 95% distribution requirement and to avoid a corporate
level tax on such income. When such income is distributed to a
stockholder, the stockholder will have taxable income, rather than
a return of capital, equal to its share of such excess inclusion
income during the fiscal year. The Company reported for fiscal
1993 that all distributions paid in 1993 represent excess inclusion
income. (See note 8 of Notes to Consolidated Financial Statements)
For a stockholder, generally excess inclusion income cannot be
offset by losses.
The Company declared a dividend of $0.04 per share on December 17,
1993, payable on January 24, 1994 to stockholders of record at the
close of business on December 31, 1993. Total dividends paid for
fiscal 1993 totalled $0.04 per share, representing $0.04 per share
of taxable earnings, all of which was excess inclusion income.
Under the Code, a REIT must generally distribute its excess
inclusion income to its stockholders even though it has losses or
deductions. Accordingly, if the Company were to report future
excess inclusion income, it would be required to distribute such
excess inclusion income as dividends even though it has an
estimated net operating loss carryforward in excess of $28 million.
The net operating losses can be carried forward to offset ordinary
income of the Company for fifteen years after such loss is
recognized.
<PAGE>
RESULTS OF OPERATIONS
1993 TO 1992 COMPARISONS
For both years ended December 31, 1993 and 1992, the Company's
Balance Sheet and Statement of Revenues and Expenses reflect very
substantial changes related to the unprecedented high level and
extended duration of residential mortgage prepayments experienced
during all of 1992 and 1993. These prepayments have resulted in
the Company incurring significant losses during such periods.
Statement of Revenues and Expenses
For fiscal 1992 and 1993, the Company derived its income (loss)
primarily from its investments in Mortgage Derivative Securities.
The Company's portfolio contains several types of mortgage
derivative securities. For each security that the Company
purchases, it receives the right to certain designated cash flows
from these securities. Due to the nature of these securities,
income calculated in accordance with the Code ("Taxable Income")
and income calculated in accordance with generally accepted
accounting principles ("Net Income") are not always identical for
any particular period, particularly when mortgage prepayment speeds
are exceedingly rapid, as for 1992 and 1993, or exceedingly slow.
The rapid prepayment environment of 1992 and 1993 is reflected in
the substantial differences between Taxable Loss and Net Loss.
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Net Loss $(25,624,000) $( 1,868,000)
Taxable Loss $(12,250,000) $(16,656,000)
(estimated)
Net Loss per share $(4.92) $(0.36)
Taxable Loss per share $(2.35) $(3.20)
(estimated)
</TABLE>
Net Loss, as calculated in accordance with generally accepted
accounting principles, and as presented in the accompanying
consolidated financial statements, for the twelve months ended
December 31, 1993, was $(25,624,000), or $(4.92) per share, as
compared to $(1,868,000), or $(0.36) per share, for the twelve
months ended December 31, 1992.
Generally accepted accounting principles require the Company to
periodically evaluate its Investments based upon current and
expected future mortgage prepayment speeds and interest rates and,
effective December 31, 1993, market discount rates, as well. (See
note 2 to the Company's Consolidated Financial Statements) The
record level of mortgage prepayments during 1992 and 1993 and
market expectations of further mortgage prepayments at the end of
1993 caused the Company to revalue its Investments periodically
<PAGE>
during the year, resulting in additional valuation adjustments of
$24,039,000 during 1993. Such adjustments are reflected as a
reduction of interest revenues in the Company's Consolidated
Statements of Revenues and Expenses. Adjustments for the year
ended December 31, 1992 totalled $7,921,000. In addition,
effective December 31, 1993, the Company elected to apply Financial
Accounting Standard No. 115 ("FASB-115") that requires impaired
investments to be carried at fair market value. Such application
resulted in an additional adjustment of $1,530,000 which is
reflected as a separate component on the Company's Consolidated
Statements of Revenues and Expenses for 1993.
The substantial increase in the Company's Net Loss from 1992 to
1993 of $23,756,000 is due to 1) substantially larger writedowns in
value of Company Investments during 1993, 2) lower gains from the
sale of assets in 1993 and 3) a general reduction in earnings on
all of the Company's assets. Downward asset valuation adjustments
in 1993 were $25,569,000, while such writedowns in 1992 were
$7,921,000, an increase of $17,648,000. In 1992 the Company
recorded gains on the sale of mortgage related investments and one
mortgage derivative security for a total gain of $1,602,000 but in
1993 had net gains of only $352,000 related to the sale of two
mortgage related investments for a gain of $838,000 and the sale of
marketable equity securities (TIS) for a loss of $486,000. The
difference in sales gains represents a decrease of $1,250,000 in
Net Income between periods. For 1993 the Company's earning assets
produced reduced levels of interest income in the amount of
$5,855,000. These three decreases, when combined with expense
reductions of $997,000 between 1992 and 1993, provide for a net
increase in the Company's Net Loss of $23,756,000.
The assumptions used to value assets at the end of each quarter
take into consideration the actual mortgage prepayment speeds
experienced for each asset through the end of the quarterly period,
Management's evaluation of the market expectations of future
prepayment speeds for the mortgages backing each asset, and
effective December 31, 1993 the application of a market discount
rate to future cash flows. If prepayment speeds were to continue
at levels higher than market expectations, market expectations of
future mortgage prepayment speeds increase beyond current
anticipated levels, or the market discount rate applied was
increased, further reductions in the value of the Company's
Investments would be necessary.
Interest revenue on Mortgage Related Investments decreased from
$20,402,000 for the year ended December 31, 1992 to $9,205,000 for
the year ended December 31, 1993, as a result of the substantial
reduction in Mortgage Related Investments on the Company's Balance
Sheet between December 31, 1992 and December 31, 1993 discussed
below. Interest revenue on Mortgage Derivative Securities was
$(815,000) for the year ended December 31, 1992 as compared to
$(21,815,000) for the year ended December 31, 1993. The reduction
in interest revenue on Mortgage Derivative Securities was
<PAGE>
attributable to a $23,270,000 writedown of this asset category for
1993 which is deducted from Mortgage Derivative Securities interest
revenues. There was also a general reduction in interest earnings
on that same asset category resulting from the high mortgage
prepayments during the period in the amount of $5,310,000.
Interest expense on Funding Notes and CMOs Payable decreased from
$21,007,000 to $10,333,000 for the years ended 1992 and 1993,
respectively, as a result of the offsetting balance sheet decline
of Funding Notes and CMOs Payable discussed below. Operating
expenses (includes "Interest on Notes Payable", "Management/
Settlement Fees" and "General and Administrative") decreased from
$2,722,000 for 1992 to $1,703,000 for the comparable period in
1993. This decrease between periods of $1,019,000 was the result
of reduced interest expense on Notes Payable of $668,000 as the
Company repaid substantial amounts under repurchase agreements
during 1993, a reduction in General and Administrative Expenses of
$224,000 as the Company reduced costs in response to the
deterioration of its investment portfolio, and the absence of
management fees payable to its Former Manager in 1993.
Balance Sheet
The Company's assets declined during the twelve month period ended
December 31, 1993 by $116,763,000, to a total of $81,097,000 at
December 31, 1993. This decrease is attributable to the Company's
Mortgage Related Investments declining during the twelve month
period from $142,396,000 to $65,248,000, a decrease of $77,148,000.
This reduction is primarily the result of 1) the calling, during
January and September 1993, of two RYMAC IV Bond Series in order to
take advantage of market premiums on the underlying Mortgage
Collateral of each of these series (such calls reduced Mortgage
Related Investments by approximately $16,917,000), 2) substantial
prepayments on collateral underlying the Company's remaining
Mortgage Related Investments and 3) to a much lesser extent,
regularly scheduled principal payments on the underlying Mortgage
Collateral. Such prepayments and scheduled principal payments
further reduced Mortgage Related Investments by approximately
$60,000,000.
These asset reductions were matched by a corresponding decrease in
the related liability accounts, Funding Notes Payable and CMOs
Payable, from $149,215,000 to $69,934,000, or a decrease of
$79,281,000, as returned principal on the underlying mortgages was
used to retire outstanding obligations secured by such mortgages.
Mortgage Derivative Securities decreased from $40,727,000 at
December 31, 1992 to $7,161,000 at December 31, 1993, a decrease of
$33,566,000, reflecting 1) the amortization and return of the cost
basis of the assets held in this category of approximately
$8,766,000 and 2) the writedown of carrying value of such
securities which represents additional amortization in 1993
totalling $24,800,000.
<PAGE>
Funds held by trustee decreased from $3,922,000 at December 31,
1992 to $1,347,000 at December 31, 1993. This category of assets
represents the receipt of monthly mortgage payments awaiting
further payment (reduction) of Funding Notes and CMOs Payable at a
future date.
Marketable securities decreased from $332,000 at December 31, 1992
to $0 at December 31, 1993, reflecting the result of the sale of
TIS during 1993.
Notes Payable decreased from $14,833,000 (inclusive of $575,000 of
bank line borrowings and $14,258,000 of repurchase agreements) at
December 31, 1992 to $3,814,000 at December 31, 1993 consisting
solely of repurchase agreements. Such $11,019,000 decrease in
leverage was primarily the result of dealer margin calls under
repurchase agreements.
The Company declared dividends of $0.04 per share, or $208,000, for
1993 (payable in January 1994) while incurring a Net Loss of
$25,624,000, or $(4.92) per share, and estimated Taxable Income of
a negative $12,250,000, or $(2.35) per share. The dividend
represents "excess inclusion income" for 1993 which under the Code
for Real Estate Investment Trusts must be distributed as dividends
even during periods where the Company has losses in excess of such
excess inclusion amount. This amount, $208,000, plus the Net Loss
of $25,624,000 and the reversal of $338,000 carried at December 31,
1992 as an unrealized loss but in 1993 representing a portion of
the Company's Net Loss with the sale of the Company's entire
holding of TIS, is reflected as an increase in Accumulated Deficit.
Such amount increased from $(12,361,000) at December 31, 1992 to
$(37,855,000) at December 31, 1993.
1992 TO 1991 COMPARISONS
Statement of Revenues and Expenses
Net Loss for the year ended December 31, 1992 was $(1,868,000) or
$(0.36) per share as compared to Net Income of $7,938,000, or $1.52
per share for the year ended December 31, 1991, a decrease of
$9,806,000. This significant decrease was due primarily to 1)
substantially reduced gains on sales of assets in 1992 as compared
to 1991 and 2) the writedown of asset valuations in 1992 to reflect
the high levels of mortgage prepayment speeds in that year as
compared to only minor negative adjustments in 1991.
Gains on sales of assets in 1991 were $3,351,000, including
$2,800,000 attributable to the sale of the Company's common stock
holdings in RAC Mortgage Investment Corporation (currently known as
Resource Mortgage Capital, Inc.) compared to $1,602,000 in asset
sale gains in 1992, a decrease of $1,749,000. Generally accepted
accounting principles which require periodic evaluation of the
Company's Investments based upon current and expected future
prepayment and interest rate levels caused writedowns of asset
valuations totalling $7,921,000 (such writedowns are reflected as
<PAGE>
reductions to interest revenues on the Company's Statement of
Revenues and Expenses) in 1992 compared to only $660,000 for 1991,
a difference of $7,261,000. Reduced sales gains of $1,749,000 and
asset writedown increments of $7,261,000, totalling $9,010,000
represent 92% of the decrease in Net Income from 1991 to 1992. The
remaining $796,000 difference was the net result of generally
reduced interest yields on the Company's portfolio of Investments
in 1992 related to the extremely high level of mortgage prepayments
in such year netted against a decrease in expenses (Interest on
Notes Payable, General and Administrative and Management Fees)
which declined from $3,344,000 in 1991 to $2,722,000 in 1992.
Balance Sheet
The Company's assets declined during the twelve month period ended
December 31, 1992 by $196,166,000, to a total of $197,860,000 at
December 31, 1992. This decrease was attributable to the Company's
Mortgage Related Investments declining during the twelve month
period from $332,998,000 to $142,396,000, a decrease of
$190,602,000. This reduction was primarily the result of 1) the
calling, during February and March 1992, of eight RYMAC IV Bond
Series in order to take advantage of market premiums on the
underlying Mortgage Collateral of each of these series (such calls
reduced Mortgage Related Investments by approximately $71,000,000),
2) substantial prepayments on collateral underlying the Company's
remaining Mortgage Related Investments and 3) to a much lesser
extent, regularly scheduled principal payments on the underlying
Mortgage Collateral. Such prepayments and scheduled principal
payments further reduced Mortgage Related Investments by
approximately $120,000,000.
These asset reductions were matched by a corresponding decrease in
the related liability accounts, Funding Notes Payable and CMOs
Payable, from $337,366,000 to $149,215,000, or a decrease of
$188,151,000, as returned principal on the underlying mortgages was
used to retire outstanding obligations secured by such mortgages.
Mortgage Derivative Securities decreased from $41,720,000 at
December 31, 1991 to $40,727,000 at December 31, 1992, a decrease
of $993,000, reflecting 1) the purchase of securities totalling
approximately $15,000,000, 2) the amortization and return of the
cost basis of the assets held in this category of approximately
$9,100,000, and 3) the writedown of carrying value of such
securities which represented additional amortization in 1992
totalling $7,580,000.
Funds held by trustee decreased from $3,988,000 at December 31,
1991 to $3,922,000 at December 31, 1992. This category of assets
represents the receipt of monthly mortgage payments awaiting
further payment (reduction) of Funding Notes and CMOs Payable at a
future date.
<PAGE>
Marketable securities increased only from $331,000 at December 31,
1991 to $332,000 at December 31, 1992, reflecting the net result of
adjusting the carrying value of TIS (see "Investment Philosophy and
Investment Activities") and additional purchases of TIS made in the
first quarter of 1992.
Notes Payable increased from $12,241,000 (inclusive of $1,330,000
of bank line borrowings and $10,911,000 of repurchase agreements)
at December 31, 1991 to $14,833,000 at December 31, 1992 consisting
of $575,000 in bank line borrowings and $14,258,000 in repurchase
agreements. Such $2,592,000 increase in leverage was used
principally to fund the purchases of new Mortgage Derivative
Securities in the first half of 1992.
The Company declared dividends of $0.90 per share, or $4,689,000,
for 1992, while incurring a Net Loss of $1,868,000, or $(0.36) per
share, and Taxable Income of a negative $16,656,000, or $(3.20) per
share. Of the dividend distributions, $4,175,000 represented a
return of stockholders' investment, which was reflected as a
reduction to Additional paid-in capital. (See note 8 of Notes to
Consolidated Financial Statements) This return of stockholders'
investment reduced Additional paid-in capital from $48,160,000 at
December 31, 1991 to $43,985,000 at December 31, 1992.
The remaining $514,000 of dividend distributions represented excess
inclusion income. This amount, $514,000 plus the Net Loss of
$1,868,000, totalling $2,382,000, is reflected as an increase to
Accumulated Deficit, which increased from $(9,641,000) at December
31, 1991 to $(12,023,000) at December 31, 1992.
At December 31, 1992, the Balance Sheet reflected an Unrealized
Loss on Marketable Equity Securities of $(338,000). This amount
represented the difference between the cost basis of the Company's
investment in TIS and the market value of such investment at
December 31, 1992.
EXPENSES AND USE OF BORROWED FUNDS
Operating expenses (Interest on Notes Payable, Management/
Settlement Fees and General and Administrative) were $1,703,000 for
the year ended December 31, 1993 versus $2,722,000 for the year
ended December 31, 1992, a decline of $1,019,000. The components
of this significant decrease in Operating expenses include: 1)
significantly reduced interest costs on Notes Payable, which
decreased from $965,000 in 1992 to only $297,000 for 1993, as Notes
Payable on the Balance Sheet declined from $14,833,000 to
$3,814,000 between December 31, 1992 and December 31, 1993
primarily due to dealer margin calls; 2) no payment of
Management/Settlement Fees was made in 1993 versus $127,000 paid to
the Company's Former Manager in 1992 (the Company has no further
obligations to its Former Manager - see note 9 of Notes to
Consolidated Financial Statements); and 3) a decrease of General
and Administrative Expenses from $1,630,000 in 1992 to $1,406,000
in 1993, a decline of $224,000 as part of an expense reduction
program.
<PAGE>
The Company uses the proceeds from repurchase agreements to fund a
portion of its portfolio of Mortgage Derivative Securities. (See
notes 3 and 7 of Notes to Consolidated Financial Statements and
"Liquidity and Capital Resources") The Company's line of credit in
recent periods has been used to fund day-to-day operating needs and
in past periods to also temporarily fund acquisitions of new
investments pending negotiation of repurchase agreements or
awaiting return of invested principal. During 1993 the Company
reduced its line of credit availability from $5,000,000 to $250,000
(see "Liquidity and Capital Resources") due to its ability to use
available collateral more efficiently in repurchase agreement
financings. During the second half of 1993 the Company had no
borrowings under its $250,000 line of credit.
As protection against the affects of rising interest rates on its
borrowings, the Company has historically entered into interest rate
cap agreements with Wall Street Dealers. At December 31, 1993
there are no outstanding cap agreements given the greatly reduced
level of the Company's borrowings and the low and stable level of
short-term interest rates during 1993. An interest rate cap
agreement with Salomon Brothers Holding Company, Inc. expired on
January 15, 1993. Under that agreement the Company had limited its
interest rate exposure to 5% on borrowings of $20,000,000. The
Company may enter into future interest rate cap agreements as
market conditions affecting interest rates and the level of the
Company's borrowings warrant.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently maintains a line of credit with a commercial
bank for $250,000 with an expiration date of April 30, 1994, which
availability is subject to periodic valuations of the remaining
collateral. Amounts borrowed under this agreement bear interest at
a rate of the prime rate plus 1.0%, and are collateralized by the
pledge of the Company's ownership interests in the RYMAC IV Bonds
and the Ryland Mortgage Securities Corporation Series 89-6 Bonds.
The availability under the line is limited to the value of
collateral pledged to the bank. No amount is currently outstanding
under such line of credit.
The Company is also a party to various repurchase agreements, the
proceeds of which have been used to acquire Mortgage Derivative
Securities. (See notes 3 and 7 of Notes to Consolidated Financial
Statements) At December 31, 1993 and December 31, 1992, the
Company had outstanding under repurchase agreements $3,814,000 with
maturities ranging from January 6, 1994 to April 4, 1994, and
$14,258,000 with maturities ranging from January 4, 1993 to June
14, 1993, respectively. The repurchase agreements are secured by
substantially all of the Company's Mortgage Derivative Securities.
The repurchase agreements bear interest at rates varying from 3.30%
to 5.00% at December 31, 1993 and are adjusted periodically
according to current market levels.
<PAGE>
At December 31, 1993, the total amount borrowed by the Company was
$3,814,000 while at December 31, 1992 the total amount borrowed was
$14,833,000. Such borrowings represented 62% and 47%,
respectively, of stockholders' equity at December 31, 1993 and
December 31, 1992. The Company is currently subject to a
limitation on the amount of total borrowings of $25,000,000
pursuant to a policy adopted by its Board of Directors in March
1992, although such amount is substantially in excess of the
Company's currently available credit sources.
During the period from June 8, 1992 through December 31, 1993, the
Company was subject to various margin calls from the dealers with
whom it had repurchase agreements. These margin calls, totalling
$7,798,000 during 1992, were the result of dealer revaluations of
the Mortgage Derivative Securities pledged by the Company to secure
such borrowings. The extraordinarily high level of mortgage
prepayments in the marketplace caused dealers to reassess the value
of their collateral and call upon the Company to reduce the
borrowings outstanding. Due to the continuation of high levels of
mortgage prepayments during all of 1993, the Company has
experienced further margin calls and normal principal repayments on
its Investments resulting in further reductions of repurchase
agreements by $10,444,000 during 1993. The Company has met all
such repayment requirements primarily through either the use of
cash flows from its portfolio of investments or the pledging of
unencumbered assets. Future repayment of margin calls, if any,
would be met through the use of current cash flows from the
Company's portfolio of investments. Any failure to meet any such
margin calls would result in the liquidation of the margined
collateral.
At December 31, 1993 the Company has pledged substantially all of
its mortgage derivative securities to secure repurchase agreement
outstandings. Nevertheless, since dealers have reduced the
financing value of these mortgage derivative securities to minimum
levels through margin calls, the Company believes that cash flows
from the Company's current investment portfolio will be sufficient
to enable the Company to meet its current and anticipated liquidity
needs.
DISCUSSION OF PREPAYMENTS
Beginning early 1992 and through the early portion of 1994, the
mortgage markets have experienced a period of unusually rapid and
unprecedented prepayments. This phenomenon has been the result of
residential mortgage interest rates, reaching in four different
periods, their lowest levels in over twenty years. These low
levels of mortgage interest rates have caused large numbers of
homeowners to refinance their existing mortgages to take advantage
of reduced monthly payments resulting from reduced interest costs.
High levels of mortgage refinancings continued into 1994's first
quarter.
Mortgage rates fell rapidly in early 1992 to 20 year lows. As a
result of these low rates, a record number of refinancing
applications caused prepayments, on some mortgage coupons, to reach
levels in March and April of 1992 which were nearly double those
experienced in the last period of rapid prepayments which occurred
<PAGE>
in the fall of 1986 through the spring of 1987. Intermediate and
long term interest rates then rose causing mortgage rates to rise
as well. With the higher mortgage rates, refinancing activity
slowed and prepayments began to slow as a result. In early July
1992, the Federal Reserve further reduced interest rates. This
move by the Federal Reserve caused mortgage rates to decrease again
in the August-September timeframe to levels lower than those
experienced in early 1992 and resulted in prepayment levels, for
some mortgage coupons, that were nearly as rapid as those
encountered in the March-April period.
Interest rates dropped even further in early 1993 and continued a
steady decline into the September-October 1993 time period,
reaching at that point a twenty-five year low. The result was a
renewed escalation of refinancing applications and resultant record
setting prepayment levels on mortgage-backed securities. However,
during the late fourth quarter 1993 and into the first quarter
1994, increasing indications of hightened economic activity caused
a substantial upward movement in interest rates, particularly
longer term rates, and a slowdown in new refinancing applications.
For the months of February and March 1994, statistics are beginning
to reflect a slowing of prepayment speeds based upon the increased
rates now applicable to new mortgage requests. Nevertheless,
prepayment levels are still high compared with historical standards
and continue to produce adverse affects on the Company's earnings.
Due to the extended duration of high prepayment levels, the cash
flows from certain of the Company's assets have been permanently
impaired while cash flows from certain other assets could be
preserved should the current trend toward slower prepayment speeds
continue.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
RYMAC MORTGAGE INVESTMENT CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
PAGE
Consolidated Financial Statements
<S> <C>
Independent Auditors' Report 40
Consolidated Balance Sheets as of
December 31, 1993 and 1992 41
Consolidated Statements of Revenues and Expenses
for the years ended December 31, 1993,
1992 and 1991 42
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1993,
1992 and 1991 43
Consolidated Statements of Cash Flows
for the years ended December 31, 1993,
1992 and 1991 44
Notes to Consolidated Financial Statements 45
</TABLE>
<PAGE>
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
RYMAC Mortgage Investment Corporation
We have audited the consolidated balance sheets of RYMAC Mortgage
Investment Corporation and subsidiaries as of December 31, 1993 and
1992, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1993. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of RYMAC Mortgage Investment Corporation and subsidiaries
as of December 31, 1993 and 1992 and the results of its operations
and its cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting
principles.
/s/ KENNETH LEVENTHAL & COMPANY
New York, New York
March 17, 1994
</AUDIT-REPORT>
<PAGE>
<TABLE>
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
________________________________________________________________________________________
<CAPTION>
December 31, 1993 and 1992
(amounts in thousands except share data) 1993 1992
________________________________________________________________________________________
<S> <C> <C>
ASSETS
Real estate investments:
Mortgage related investments plus net premiums
of $840 and $1,515 (note 4) $ 65,248 $142,396
Mortgage derivative securities (notes 2 and 3) 7,161 40,727
_______________________________________________________________________________________
72,409 183,123
Cash 1,695 636
Funds held by trustee 1,347 3,922
Receivables on mortgage related investments 5,139 9,284
Receivables on mortgage derivative securities 469 438
Marketable equity securities (at lower of cost or market)
less allowance for unrealized loss of $338 for 1992 - 332
Other assets 38 125
_______________________________________________________________________________________
$ 81,097 $197,860
_______________________________________________________________________________________
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Funding notes payable (note 5) $ 44,892 $ 94,329
CMOs payable (note 6) 25,042 54,886
Accrued interest on funding notes
and CMOs payable 584 1,465
Notes payable (note 7) 3,814 14,833
Dividends payable 208 261
Other liabilities 375 410
_______________________________________________________________________________________
74,915 166,184
COMMITMENTS AND CONTINGENCIES (notes 2, 3, 7 & 9)
STOCKHOLDERS' EQUITY
Common stock: par value $.01 per share
50,000,000 shares authorized,
5,210,600 issued and outstanding at
December 31, 1993, and 1992 52 52
Additional paid-in capital 43,985 43,985
Accumulated Deficit (note 8) (37,855) (12,023)
Unrealized loss on marketable equity securities - (338)
________________________________________________________________________________________
6,182 31,676
________________________________________________________________________________________
$ 81,097 $197,860
_______________________________________________________________________________________
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES
______________________________________________________________________________________
<CAPTION>
For the Years Ended December 31, 1993, 1992 and 1991
(amounts in thousands except share data) 1993 1992 1991
______________________________________________________________________________________
<S> <C> <C> <C>
REVENUES
Interest:
Mortgage related investments (note 4) $ 9,205 $20,402 $41,270
Mortgage derivative securities (note 3) (21,815) (815) 6,929
Temporary investments 160 610 514
Gain (loss) on the sale of marketable
equity securities (486) - 2,800
Gain on the sale of mortgage derivative
securities - 180 106
Gain on the sale of mortgage related
investments, net 838 1,422 445
Other 40 62 118
______________________________________________________________________________________
(12,058) 21,861 52,182
______________________________________________________________________________________
EXPENSES
Interest on funding notes payable 6,551 13,273 28,334
Interest on CMOs payable 3,782 7,734 12,566
Interest on notes payable 297 965 1,012
Management/Settlement fees (note 9) - 127 1,924
General and Administrative 1,406 1,630 408
______________________________________________________________________________________
12,036 23,729 44,244
______________________________________________________________________________________
Net Income (loss) before change in
accounting principle (note 2) $(24,094) $(1,868) $ 7,938
______________________________________________________________________________________
Net Income (loss) per share before
change in accounting principle (note 2) $(4.62) $(0.36) $1.52
______________________________________________________________________________________
Cumulative effect of change in
accounting principle (note 2) $ (1,530) - -
______________________________________________________________________________________
Net Income (loss) after cumulative
effect of change in accounting $(25,624) $(1,868) $ 7,938
principle (note 2)
______________________________________________________________________________________
Net Income (loss) per share $(4.92) $(0.36) $1.52
Weighted average number of common
shares outstanding 5,211,000 5,211,000 5,211,000
______________________________________________________________________________________
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
________________________________________________________________________________________
For the Years Ended
December 31, 1991, Total
1992, and 1993 Number Additional Accumulated Stock-
(amounts in thousands except of Common Paid-In Deficit Holders'
share data) Shares Stock Capital (Note 8) Equity
_______________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1990 5,227,700 $53 $48,279 $ (8,147) $40,185
_______________________________________________________________________________________
1991 Net Income - - - 7,938 7,938
1991 Dividends Declared - - - (9,432) (9,432)
Common Stock Repurchases (17,100) (1) (119) - (120)
________________________________________________________________________________________
Balance at December 31, 1991 5,210,600 52 48,160 (9,641) 38,571
________________________________________________________________________________________
1992 Unrealized Loss - - - (338) (338)
1992 Net Loss - - - (1,868) (1,868)
1992 Dividends Declared - - (4,175) (514) (4,689)
________________________________________________________________________________________
Balance at December 31, 1992 5,210,600 52 43,985 (12,361) 31,676
________________________________________________________________________________________
1993 Unrealized Loss - - - 338 (1) 338
1993 Net Loss - - - (25,624) (25,624)
1993 Dividends Declared - - - (208) (208)
________________________________________________________________________________________
Balance at December 31, 1993 5,210,600 $52 $43,985 $(37,855) $6,182
________________________________________________________________________________________
See notes to consolidated financial statements.
<FN>
(1) Reversal of prior year unrealized loss as current year realized loss.
</TABLE>
<PAGE>
<TABLE>
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
__________________________________________________________________________________________
<CAPTION>
For the Years Ended December 31, 1993, 1992 and 1991
(amounts in thousands except share data) 1993 1992 1991
__________________________________________________________________________________________
<S> <C> <C> <C>
Operating Activities:
Net Income (loss) $(25,624) $(1,868) $ 7,938
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of net premium on mortgage
related investments 675 1,653 1,833
Amortization of premiums on
mortgage derivative securities 31,142 14,940 4,873
Interest accrued and added to funding notes
payable 1,782 1,886 1,718
Decrease in interest receivable on
mortgage related investments 701 1,611 997
Decrease (increase) in interest receivable on
mortgage derivative securities (5) 235 (128)
Decrease in accrued interest on funding notes
payable and CMOs payable (881) (1,584) (991)
Loss (gain) on the sales of investments 486 (180) (3,351)
Decrease in accrued expenses payable (88) (2,128) -
Other, net 87 39 78
Net cash provided by operating activities 8,275 14,604 12,967
_________________________________________________________________________________________
Investing Activities:
Purchase of investments - (392) (111)
Principal payments on mortgage related
investments 79,917 191,845 120,502
Decrease (increase) in funds held by trustee 2,575 66 (1,266)
Principal payments on funding notes payable (51,219) (138,338) (85,820)
Principal payments on CMOs payable (29,844) (51,699) (33,548)
Purchase of mortgage derivative securities - (15,697) (7,230)
Proceeds from sales of investments 184 505 8,097
Principal payments on mortgage derivative
securities 2,398 1,438 316
Return of investment basis in equity investments - 53 -
Net cash (used in)/provided by investing 4,011 (12,219) 940
activities
__________________________________________________________________________________________
Financing Activities:
Repurchase of RYMAC Mortgage Investment
Corporation Common Stock - - (120)
Net proceeds (repayments) from notes payable (11,019) 2,592 (4,610)
Dividends paid (208) (4,689) (9,177)
Net cash used in financing activities (11,227) (2,097) (13,907)
__________________________________________________________________________________________
Net increase in cash 1,059 288 -
Cash at beginning of year 636 348 348
Cash at end of year $ 1,695 $ 636 $ 348
__________________________________________________________________________________________
Supplemental disclosure of cash flow information:
Interest paid (net of amount added to funding
notes payable) $ 9,931 $21,460 $ 40,922
Dividends declared 208 4,689 9,432
See notes to consolidated financial statements.
</TABLE>
<PAGE>
RYMAC MORTGAGE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share data)
___________________________________________________________________________
Note 1 - The Company
RYMAC Mortgage Investment Corporation ("RMIC") was incorporated in Maryland
on July 1, 1988. RMIC has two wholly-owned subsidiaries, RYMAC Mortgage
Investment I, Inc. ("RMI") and RYMAC Mortgage Investment II, Inc. ("RMII").
RMIC, RMI and RMII are collectively referred to hereafter as the "Company".
At inception, the Company issued 5,420,000 shares of its common stock.
During 1990 and 1991, the Company repurchased 209,400 shares of its common
stock in accordance with a stock repurchase program at costs ranging from
$6.75 to $7.63 per share. On September 21, 1992, the Board of Directors
authorized the Company to repurchase up to 500,000 shares of its common
stock in open market transactions over the ensuing twelve month period. No
shares were repurchased under that authorization.
The Company was a party to a Management Agreement (the "Management
Agreement") with NVR Mortgage Management Partnership ("NVRMMP") which
expired on March 31, 1992. The Company became self-managed effective April
1, 1992. (See note 9)
In response to the Company's earnings difficulties and reduced cash flows
from its investment portfolio, the Company is currently pursuing several
financing transactions and investigating the possibility of engaging in a
new complementary business. To date, no satisfactory transaction has been
negotiated or new business formulated. If the Company is unable to
successfully institute the above-mentioned plans, the Company's ability to
re-establish an investment portfolio would be impaired, causing the Company
to evaluate actions that would include a merger or other business
combination with another entity or an orderly liquidation of future excess
cash receipts to stockholders.
___________________________________________________________________________
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of RMIC and
its wholly-owned subsidiaries RMI and RMII. All intercompany balances and
transactions have been eliminated in consolidation.
Mortgage Related Investments
Mortgage related investments are carried at their outstanding principal
balance, plus or minus the applicable premium or discount. The net premium
on mortgage related investments is amortized over the estimated lives of
the investments using the interest method. (See note 4)
On a quarterly basis, the Company makes adjustments to its mortgage related
investments based upon valuation estimates. Such valuations are conducted
on an asset-by-asset basis using assumptions that incorporate both market
expectations as to future mortgage prepayment speeds at each valuation date
and an estimate of future interest rates implied by the yield curve at each
valuation date.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 2 - Summary of Significant Accounting Policies (continued)
The Company compares the results of such assumptions to other relevant
market data and makes appropriate adjustments if necessary. The cash flows
are also evaluated for volatility under increased stress levels (higher
prepayment assumptions) and additional adjustments are made for investments
where cash flows rapidly deteriorate under increased stress levels.
While the Company believes its prepayment assumptions are appropriate, if
higher prepayment speeds had been used in the Company's assumptions, the
results of the asset valuations would produce increased downward valuation
adjustments.
Mortgage Derivative Securities
Mortgage derivative securities have been recorded at cost and are amortized
over their estimated lives using the interest method. (See note 3)
The Company had been applying Emerging Issues Task Force ("EITF") Issue No.
89-4 "Accounting for a Purchased Investment in a Collateralized Mortgage
Obligation Instrument or in a Mortgage-Backed Interest-Only Certificate" in
its quarterly valuation of its Mortgage Derivative Securities. EITF 89-4
requires a valuation adjustment when, under market based assumptions as to
future mortgage prepayment speeds and interest rate levels, the nominal
cash flows expected from a Mortgage Derivative Security asset are less than
the current carrying value of the asset.
The Financial Accounting Standards Board ("FASB") has issued Financial
Accounting Standard No. 115 ("FASB-115"), "Accounting for Certain
Investments in Debt and Equity Securities," effective for fiscal years
beginning after December 15, 1993.
The Company has elected to apply FASB-115 effective December 31, 1993.
FASB-115 requires that impaired investments be carried at fair market
value. The EITF has tentatively concluded that an impairment to value
under FASB-115 has occurred if the future cash flows, discounted at a risk
free rate (the yield associated with a U.S. Treasury Security with a
maturity approximating the average life of the future cash flows from the
Company's portfolio of investments), are less than the investment's
carrying value. After consideration of the alternative, the Company has
determined to adopt FASB-115 as of December 31, 1993 instead of waiting
until 1994. The application of FASB-115 required the Company to reduce the
carrying value of its Mortgage Derivative Securities to their estimated
fair market value at December 31, 1993. This additional writedown is shown
in the Statements of Revenues and Expenses as "Cumulative Effect of Change
in Accounting Principle."
Fair Value
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" ("FASB 107"), requires the Company to
disclose the fair value of financial instruments for which it is
practicable to estimate such value and to disclose the method(s) and
assumptions used to estimate such value(s). Each of Notes 3, 4, 5 and 6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 2 - Summary of Significant Accounting Policies (continued)
discuss the fair value of the Company's mortgage derivative securities,
mortgage related investments, funding notes payable, and CMOs payable,
respectively. As described above under Mortgage Derivative Securities,
those assets are valued at December 31, 1993 at fair market value as a
result of the Company's application of FASB-115.
For mortgage related investments, prices for similar mortgage-backed
securities were obtained from Wall Street Dealers active in mortgage-backed
markets. It is important to note, however, that the current market
premiums on such similar mortgage-backed securities are not available to
the Company unless and until the Company is able to call for early
redemption the funding notes and CMOs payable that are collateralized by
such mortgage related investments. The potential for early redemption
(calls) is specific to each underlying collateralized obligation and the
indenture covering such transaction. Although the Company was able to call
for early redemption two series of bonds during 1993, the timing of
additional early redemptions, if any, is not predictable.
In regard to funding notes and CMOs payable, market price quotations for
these underlying obligations were obtained from a dealer who actively
trades such instruments. Although some of these instruments currently
trade at premiums in the present financial environment, the Company's
obligation thereunder is limited to the face principal amounts without any
premium. In certain circumstances, however, a premium to face may be paid
in order to effect a specific early redemption.
Marketable Equity Securities
At December 31, 1992, marketable equity securities were stated at the lower
of their aggregate cost or market. At such date, the aggregate cost
exceeded the aggregate market value by $338 and an allowance for unrealized
losses and a separate component of stockholders' equity was recorded.
During 1993, the Company sold all of its marketable equity securities for a
net loss of $486.
Federal Income Taxes
The Company has elected to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"). As a result, the Company generally will not be subject to
federal income taxation at the corporate level to the extent it
distributes annually at least 95% of its REIT taxable income, as defined in
the Code, to its stockholders and satisfies certain other requirements.
Accordingly, no provision has been made for income taxes in the
accompanying consolidated financial statements.
Net Income (Loss) Per Share
Net income (loss) per share is computed based on the weighted average
number of common shares outstanding during the period.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 3 - Mortgage Derivative Securities
The Company's investments in mortgage derivative securities currently
consist of (i) a class or classes of collateralized mortgage obligations
("CMOs") that either represents a regular class of bonds or a residual
class of bonds or (ii) interests in a class or classes of mortgage-backed
pass-through certificates that either represent a regular class of
certificates or a residual class of certificates. For federal income tax
purposes, a majority of the Company's mortgage derivative securities
represent interests in real estate mortgage investment conduits ("REMICs").
CMOs are mortgage-backed bonds which bear interest at a specific
predetermined rate or at a rate which varies according to a specified
relationship to a specific short term interest rate index, such as the
London interbank offered rate for one-month U.S. dollar deposits ("LIBOR").
Most residual bonds are structured so as to entitle the holder to receive a
proportionate share of the excess (if any) of payments received from the
collateral pledged to secure such bonds and the other related classes,
together with the reinvestment income thereon, over amounts required to
make debt service payments on such CMOs and to pay related administrative
expenses. In connection with these investments, the Company acquired no
other rights relating to the collateral pledged to secure its mortgage
derivative securities. Most residual certificates are structured so as to
entitle the Company to receive a specified percentage of the distributions
generated from the pool of assets comprising the trust funds of which the
certificates evidence an interest.
At December 31, 1993 and 1992, the Company had investments in Mortgage
Derivative Securities as set forth below:
<TABLE>
<CAPTION>
PORTFOLIO OF MORTGAGE DERIVATIVE SECURITIES 1993 1992
_____________________________________________________________________
<S> <C> <C>
Collateralized Mortgage Obligation Trust 39
("CMOT 39") $ 466 $ 1,485
Collateralized Mortgage Obligation Trust 46
("CMOT 46") 81 10,138
Collateralized Mortgage Obligation Trust 47
("CMOT 47") 864 5,219
FNMA REMIC Trust 1988-7 ("FNMA 1988-7") 177 972
- Trust 1988-11 ("FNMA 1988-11") 467 2,787
- Trust 1988-14 ("FNMA 1988-14") 843 3,267
- Trust 1990-09 Class H ("FNMA 1990-09") 989 4,771
- Trust 1991-163 Class SA ("FNMA 1991-163") 930 2,007
FNMA Stripped Mortgage-Backed Securities
Trust 127 ("FNMA 127") 646 1,972
FHLMC Multi-Class Mortgage Participation
Certificates
(Guaranteed)
- Series 2 ("FHLMC 2") 202 801
- Series 21 ("FHLMC 21") 11 135
- Series 1068 Class N ("FHLMC 1068") - 1,707
- Series 1203 Class P ("FHLMC 1203") - 720
- Series 1230 Class O ("FHLMC 1230") - 381
- Series 1235 Class L ("FHLMC 1235") 509 2,264
- Series 1248 Class H ("FHLMC 1248") 914 1,606
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 3 - Mortgage Derivative Securities (continued)
<TABLE>
<CAPTION>
PORTFOLIO OF MORTGAGE DERIVATIVE SECURITIES 1993 1992
_____________________________________________________________________
<S> <C> <C>
Cornerstone Mortgage Investment
Group II, Inc.
- Series 13 ("Cornerstone 13") $ 38 $ 138
- Series 14 ("Cornerstone 14") 24 97
Prudential Securities CMO PS-17 Class M ("PRUSEC 17") - 260
_______________________________________________________________________
$ 7,161 $40,727
_______________________________________________________________________
</TABLE>
The carrying values of the Company's investments in Mortgage Derivative
Securities are net of downward valuation adjustments during 1993 of
$24,800. The Company makes valuation adjustments at quarterly dates based
upon assumptions as to mortgage prepayment speeds, interest rates and
discount rates reflective of then current financial markets. For 1993
adjustments were made quarterly under EITF 89-4. The Company adopted FASB-
115 effective December 31, 1993, which resulted in an additional downward
adjustment at December 31, 1993. (See note 2) FASB-115 incorporates a
discounted cash flow valuation approach whereas EITF 89-4 was based upon
future expected undiscounted cash flows.
Under EITF 89-4, when current prepayment and interest rate assumptions
caused the expectation that future cash flows from an asset would be less
than the current carrying value, a downward adjustment was made and a zero
yield applied to such asset for future quarterly accounting periods.
Under FASB-115, future cash flows are discounted at a rate reflective of
market yields for assets of the type held by the Company. At December 31,
1993, the Company applied a discount rate of 12% to the cash flows for its
portfolio of Mortgage Derivative Securities. The additional writedown
resulting from this change in accounting principle is $1,530 and is shown
in the Statements of Revenues and Expenses as "Cumulative Effect of Change
in Accounting Principle." If the Company had applied a higher discount
rate, 20%, the resulting FASB-115 adjustment would have been increased by
$900.
In accordance with FASB-107, the Company computes the estimated fair value
of its mortgage derivative securities by projecting anticipated future cash
flows and discounting those cash flows at discount rates established in
market transactions for securities having similar characteristics and
backed by collateral of similar rate and term.
For the December 31, 1993 estimate of fair market values, the Company used
the same prepayment and interest rate assumptions as for its determination
of carrying values under FASB-115. (See note 2) The PSA speeds vary
depending on the collateral. The prepayment assumption model used by the
Company incorporates a market methodology established by the Public
Securities Association ("PSA"). Such model assumes a rate of prepayment
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 3 - Mortgage Derivative Securities (continued)
each month of the unpaid principal balance of a pool of mortgage loans.
100% of PSA assumes that 0.2% per annum of the then outstanding principal
balance of a pool of mortgage loans will prepay 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, 0.6% in the
third month, etc.) until the 30th month. Beginning with the 30th month and
in each month thereafter, 100% PSA assumes a constant prepayment rate of 6%
per annum of the then outstanding principal balance of such mortgage loans.
On a bi-weekly basis, Bloomberg Financial Markets ("Bloomberg") obtains PSA
estimates for a wide range of mortgage coupons and ages from several
dealers in mortgage derivative securities and makes them available to
Bloomberg's subscribers.
The prepayment speeds used by the Company in establishing the estimated
fair value of its securities at December 31, 1993 are:
<TABLE>
<CAPTION>
Bloomberg
Median PSA
Collateral As of December 31, 1993
<S> <C>
GNMA 9.0% 395%
GNMA 9.5 437
FNMA 8.0 418
FNMA 9.0 503
FNMA 9.5 (15 year) 546
FNMA 9.5 519
FHLMC 9.0 503
FHLMC 9.5 502
</TABLE>
Such PSA assumptions do not purport to be an historical description of
prepayment experience or a prediction of the future rate of prepayments of
any mortgage loan.
All assets were modeled forward using the December 31, 1993 Bloomberg
Median PSA for the life of each asset. LIBOR was assumed at 3.25% for the
life of the assets and a discount rate of 12% was applied. Since PSA,
interest rate and discount rate assumptions under FASB-115 and FASB-107
were identical for the Company's Mortgage Derivative Securities at December
31, 1993, fair market values and carrying values of such assets are equal.
Substantially all of the Company's mortgage derivative securities have been
pledged as collateral for repurchase agreements as described in note 7.
___________________________________________________________________________
Note 4 - Mortgage Related Investments
The Company's mortgage related investments consist of ownership
interests in certain classes of mortgage-backed securities issued
by Ryan Mortgage Acceptance Corporation IV and Ryland Mortgage
Securities Corporation (as described below).
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 4 - Mortgage Related Investments (continued)
On November 29, 1989, the Company purchased from Ryland Mortgage Securities
Corporation ("RMSC") certain insured mortgage loans and other collateral
owned by RMSC and pledged to secure RMSC's Mortgage Collateralized Bonds
Series 1989-6 (the "RMSC Bonds"). This mortgage related investment and
other collateral were purchased subject to the lien of the Indenture (the
"RMSC Indenture") between RMSC and Sovran Bank, N.A., the Trustee for the
RMSC Bonds (the "RMSC Trustee"), pursuant to which the RMSC Bonds were
issued and subject to the rights of the RMSC Trustee and the bondholders
thereunder. (See note 6) This mortgage related investment grants to the
Company certain additional rights with respect to the RMSC Bonds, including
rights with respect to substitution of collateral, amendments of or
supplements to the RMSC Indenture, and calling of the RMSC Bonds.
On September 23, 1988 the Company purchased from Ryan Mortgage Acceptance
Corporation IV ("RYMAC IV"), an affiliate of NVRMMP, certain GNMA
certificates and FNMA certificates and other collateral owned by RYMAC IV
and pledged to secure RYMAC IV's GNMA/FNMA Collateralized Bonds, Series 1
and 2 and its Mortgage Collateralized Bonds, Series 3, 4, 7, 10, and 19
(collectively the "RYMAC IV Bonds"). (See note 5) These mortgage related
investments and other collateral were purchased subject to the lien of the
Indenture between RYMAC IV and the Trustee (the "RYMAC IV Indenture")
pursuant to which the RYMAC IV Bonds were issued and subject to the rights
of the Trustee and the bondholders thereunder. (See note 5) This series
of seven purchase agreements grant to the Company certain additional rights
with respect to the RYMAC IV Bonds, such as the right, if any, to
substitute collateral, the right to direct the reinvestment of collateral
proceeds and the right to call the related RYMAC IV Bonds. During the
first and third quarters of 1993, the Company was able to conclude early
redemptions of the RYMAC IV Series 1 and 2 Bonds ("Series 1" and "Series
2"), respectively. (See note 5)
At December 31, 1993 and 1992 the Company owned mortgage related
investments with aggregate outstanding principal balances of $64,408 and
$140,881, respectively, which provide for monthly principal and interest
payments. These mortgage related investments bear interest at rates
ranging from 7.75% to 12.00% and have scheduled maturity dates ranging from
July 1, 2001 to April 1, 2017. The RMSC collateral bears a weighted
average net rate of 10.62% and a weighted average maturity of 263 months.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 4 - Mortgage Related Investments (continued)
The Company held the following mortgage related investments as of December
31, 1993:
<TABLE>
<CAPTION>
Principal
Amount of
Loans
Subject to
Interest Final Delinquent
Rate Maturity Principal Principal
Description Range Date Range Amount or Interest
<S> <C> <C> <C> <C>
117 Pools of GNMA Certificates, 12.00% 6/15/2012 to
39 of which were under $50 8/15/2015 $ 13,744 None
150 Pools of FNMA Certificates, 7.75% to 7/01/2001 to
31 of which were under $50 10.50% 4/01/2017 27,886 None
Mortgage loans secured by first
liens on single family resi-
dential properties, located
primarily in California, 96 of
which were over $100, 9 of
which were between $50 and $100,
and 1 of which was less than 9.25% to 8/01/2004 to
$50 (excluding related premiums 12.00% 11/01/2019 22,778 $ 9,808
of $418)
Total $ 64,408 $ 9,808
</TABLE>
The RMSC collateral consists of mortgage loans, many of which have private
mortgage insurance. In addition, the collateral has limited "pool"
insurance. As of February 3, 1994, the two pool insurance policies
covering the RMSC collateral have remaining 90% and 96% of their available
loss limits, such amount totalling $22.8 million. Based upon this
information, even with the high delinquency and foreclosure levels on the
RMSC collateral, the Company anticipates no reduction to its cash flow as
residual interest holder. The RMSC collateral is experiencing significant
delinquencies. Delinquencies decreased from approximately $13.6 million
(51 loans) at December 28, 1992 to $9.8 million (35 loans) at December 27,
1993; however, the percentage of delinquencies increased from 1992 to 1993
for both the number of loans and loan balances outstanding. The percentage
of delinquent loans outstanding increased from 23% to 33% while delinquent
loan balances outstanding increased from 23% to 39%. A foreclosure to the
holder of the residual interest represents a prepayment upon disposition of
the property. Even though a loan may be delinquent, the servicer is
required to advance principal and interest on the loan until it returns to
a current status or its disposition through foreclosure.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 4 - Mortgage Related Investments (continued)
The following is a summary of total mortgage related investments for the
years ended December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Balance at beginning of year $140,881 $329,830
Sales of Collateral (17,483) (71,313)
Collections of principal (58,990) (117,636)
Balance at end of year $ 64,408 $140,881
</TABLE>
The sales of collateral were in connection with the redemption of the bonds
of RYMAC IV, Series 1 and 2. (See note 5)
In accordance with FASB-107, the Company obtained prices as of December 31,
1993 from Bloomberg for the mortgage-backed securities collateralizing the
Company's mortgage related investments. Although all of the GNMA and FNMA
Certificates were trading at premiums to their face values as of December
31, 1993, as described in note 2, the premiums on these GNMA and FNMA
certificates are only available to the Company under limited circumstances
related to early redemption of specific series of bonds. In that regard,
in January and September of 1993 the Company was able to effect an early
redemption of the RYMAC IV Series 1 and Series 2 Bonds respectively, and
thus obtain access to the market premiums on the Series 1 and 2 collateral
consisting of both GNMA and FNMA Certificates. After providing for all
expenses of the early redemptions, and recovery of the remaining discounts,
the Company recorded a net gain of approximately $838.
Further, in March of 1994, the Company sold its ownership rights in Series
3 and 4 including the rights to excess cash flows until applicable Series
call option dates, the rights to effecting the call options and the rights
to the premiums, if any, existent on the underlying GNMA and FNMA
certificates at future call dates. After providing for the expenses of
these contractual assignments and expensing of the remaining premium on
both Series, the Company expects to record a net gain of approximately
$400.
For the remaining RYMAC IV Bond Series 7, 10 and 19, it is not currently
anticipated that either call options or the contractual assignment of the
Company's rights will be available to the Company. Using similar
prepayment assumptions as for its Mortgage Derivative Securities, the
Company estimates the fair value of the RYMAC IV Bond Series 7, 10 and 19
to be $17,869, which equals the carrying value at December 31, 1993. For
the RMSC Bonds, based upon current and historical prepayment experience,
the Company anticipates access to the call option or the contractual
assignment of the Company's rights prior to June 30, 1994. The Company
received price indications at December 31, 1993 regarding the RMSC
collateral which would provide the Company a 3% premium at the call date or
a price for the assignment of its contractual rights producing a value to
the Company of approximately $23,800. During 1993 the Company recorded
downward adjustments on Mortgage Related Investments of $769.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 5 - Funding Notes Payable
Funding notes payable represent limited recourse notes delivered to RYMAC
IV as partial payment for the purchase of mortgage related investments and
other collateral, and have payment terms the same as the related series of
RYMAC IV Bonds. (See note 4) The funding notes payable consisted of five
and seven multi-class series at December 31, 1993 and 1992, respectively,
having stated maturities ranging from July 1, 2010 to May 1, 2017 and
January 1, 2010 to May 1, 2017, respectively. The classes of each series
of funding notes payable bear interest at fixed rates. The range of fixed
rates at December 31, 1993 and 1992 were 8.250% to 11.200% and 7.375% to
13.000%, respectively.
Principal and interest payments on the mortgage related investments are
used to make the monthly or quarterly payments on the funding notes
payable. In addition, prepayments of the underlying mortgage related
investments are passed through as prepayments of the funding notes payable
so that the funding notes payable may be fully paid prior to their stated
maturities.
During the first and third quarters of 1993, the Company called the RYMAC
IV Series 1 and 2 Bonds. (See note 4)
In accordance with FASB-107, the Company obtained prices for its Funding
Notes Payable as of December 31, 1993, from a dealer actively trading in
RYMAC IV Bonds and other bonds of this type. Such bonds were trading at
par or slight discounts to their face values as of December 31, 1993.
Market discounts on trades of these obligations do not affect the Company.
The Company's obligations for repayment of its Funding Notes Payable are at
par through receipt of principal and interest payments on its mortgage
related investments.
__________________________________________________________________________
Note 6 - CMOs Payable
CMOs payable represent the RMSC Bonds. (See note 4) The RMSC Bonds
are secured by insured mortgage loans and other collateral. (See
note 4) The RMSC Bonds consist of one multi-class series having
classes with stated maturities ranging from March 25, 2019 to November 25,
2020. The classes of the RMSC Bonds bear interest at fixed annual rates.
The range of fixed rates at December 31, 1993 and 1992 was 9.80% to 9.85%
and 9.70% to 9.85%, respectively.
Principal and interest payments on the mortgage related investments are
used to make the monthly payments on the CMOs payable. In addition,
prepayments and proceeds from foreclosures on the underlying mortgage
related investments are passed through as prepayments of the CMOs payable
so that the CMOs payable may be fully paid prior to their stated
maturities.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 6 - CMOs Payable (continued)
In accordance with FASB-107, the Company obtained prices for its CMOs
Payable as of December 31, 1993, from a dealer actively trading in bonds of
this type. Although RMSC Bond Classes D and E were trading at premiums to
their face values as of December 31, 1993, as described in note 2, market
premiums on trades of these obligations are not the responsibility of the
Company. The Company's obligation for repayment of its CMOs Payable are
only at par through receipt of principal and interest payments on its
mortgage related investments.
__________________________________________________________________________
Note 7 - Notes Payable
As of December 31, 1993, the Company was a party to twelve separate
repurchase agreements for borrowings of $3,814 which are collateralized by
certain mortgage derivative securities. These repurchase agreements have
interest rates ranging from 3.30% to 5.00% with maturities ranging from
January 6, 1994 to April 4, 1994. At maturity dates, repurchase agreements
are typically renewed for additional periods (usually one to twelve
months). At December 31, 1993, $2,622 of such repurchase agreements was
outstanding with Kidder Peabody and Company (nine separate repurchase
agreements). These nine repurchase agreements were secured by the pledge
of mortgage derivative securities with a carrying value of $4,820 and had
an average weighted maturity of 57 days. At December 31, 1992, repurchase
agreement borrowings were $14,258 under twelve separate repurchase
agreements at rates ranging from 4.00% to 5.25% and maturities ranging from
January 4, 1993 to June 14, 1993. If the borrowings under the repurchase
agreements exceed a specified percentage of the collateral value, as
determined by the lenders in their sole discretion, the lenders have the
right to require either the repayment of a portion of the borrowings prior
to maturity or the delivery of additional collateral.
The Company maintained a line of credit with a commercial bank for $5,000
with an expiration of March 31, 1993. During the process of documenting
the line of credit renewal, the Company determined that the collateral
pledged to the bank under the line of credit had substantially greater
borrowing value to the Company in other financing arrangements,
particularly repurchase agreements, than the value provided under the bank
line of credit. Accordingly, the Company and the bank agreed to the
release of the majority of the collateral pledged thereunder and the
maintenance of a reduced line of credit of $250 with an expiration date of
April 30, 1994, which availability is subject to periodic valuations of the
remaining collateral. Amounts borrowed under this agreement bear interest
at a rate of the prime rate plus 1.0%, and are collateralized by the pledge
of the Company's ownership interests in the RYMAC IV Bonds and the RMSC
Bonds. The availability under the line is limited to the value of
collateral pledged to the bank. At December 31, 1993, no amount was
outstanding and at December 31, 1992, $575 was borrowed under the line
bearing interest at 6.5%.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 7 - Notes Payable (continued)
The following summarizes information related to the Company's short-term
borrowings during 1993:
<TABLE>
<CAPTION>
Maximum Average Weighted
Weighted Amount Amount Average
Balance Average Outstanding Outstanding Interest
at End Interest During During Rate During
Description of Period Rate 1993 1993 1993
<S> <C> <C> <C> <C> <C>
Line of Credit $ 0 0% $ 2,368 $ 254 6.86%
Repurchase Agreements 3,814 4.27 14,258 7,653 4.50
__________________________________________________________________________________________
</TABLE>
Note 8 - Federal Income Taxes and Distributions
As described in note 2, the Company has elected to be treated, for federal
income tax purposes, as a REIT. As such, the Company is required to
distribute annually, in the form of dividends to its stockholders, at least
95% of its taxable income. Because of the provisions of the Code
applicable to the type of investments made by the Company, in the early
years of the life of certain of the Company's initial investments
(particularly investments made in connection with the Company's initial
public offering, and to a lesser degree during 1989) taxable income
exceeded net income. During the later years of such ownership Net Income
will exceed REIT taxable income. The principal reason for such difference
is that the Company reports income from its portfolio of mortgage related
investments and mortgage derivative securities on the interest method for
financial reporting purposes; however, for income tax purposes, the Company
reports its proportionate share of the difference between interest income
generated by the collateral and interest expense on the CMOs. More recent
investments made by the Company and investments currently available in the
market are typically structured so that taxable income and Net Income are
similar during each reporting period. Over the life of a particular
investment or security, taxable income and Net Income will be equal. In
reporting periods where taxable income exceeds Net Income, stockholders'
equity will be reduced by the amount of dividends in excess of Net Income
in such period and will be increased by the excess of Net Income over
dividends in future reporting periods.
During 1993 and 1992, the Company incurred both taxable losses and Net
Losses. During 1992, the Company made distributions totalling $4,689 of
which $4,175 represented the return of stockholders' investment,
representing a reduction to Additional paid-in capital. Distributions of
$208 for 1993 did not affect stockholders' investment.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 8 - Federal Income Taxes and Distributions (continued)
The Company estimates its taxable losses for 1992 and 1993 to aggregate
approximately $28 million. Additionally, further tax losses are likely in
1994. During 1992 and 1993, the Company's investment in certain REMICs
produced excess inclusion income of $514 and $213, respectively. Under the
Code a REIT must generally distribute its excess inclusion income to its
stockholders even though it has losses or deductions. Accordingly, if the
Company were to report future excess inclusion income, it would be required
to distribute such excess inclusion income as dividends even though it has
an estimated net operating loss carryforward approximating $28 million.
The net operating losses can be carried forward to offset ordinary income
of the Company for fifteen years after such loss is recognized.
The following table illustrates the reconciliation between Net Income,
Accumulated Deficit and stockholders' investment, and the related per share
data for the following periods:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Additional Paid-in-Capital
at Beginning of Period $ 43,985 $ 48,160
Accumulated Deficit
at Beginning of Period (12,023) (9,641)
Net Loss (25,624) (1,868)
Less: Dividends Declared 208 4,689
Additional Paid-in-Capital
at End of Period $ 43,985 $ 43,985
Accumulated Deficit
at End of Period (37,855) (12,023)
Per Share:
Net Loss $(4.92) $(0.36)
Dividends Declared $ 0.04 $ .90
______________________________________________________________________________________
</TABLE>
Note 9 - Related Party Transactions
Pursuant to the Management Agreement which expired on March 31, 1992,
NVRMMP was responsible for the day-to-day operations of the Company and
performed all services and activities of the Company subject to the
supervision of the Company's Board of Directors. As compensation for these
services, NVRMMP received a base management fee plus incentive compensation
based upon certain levels of performance.
At the expiration of the Management Agreement, the Company and NVRMMP
reached an agreement pursuant to which, among other things, the employees
of NVRMMP's affiliate that had devoted a substantial amount of time on
behalf of NVRMMP to the operation of the Company became employees of the
Company. In consideration therefor, the Company agreed, among other
things, to make payments to NVRMMP for each of the Company's fiscal
quarters for the period April 1, 1992 through March 31, 1994, in an amount
equal to 50% of the amount by which the fee that would have been paid to
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 9 - Related Party Transactions (continued)
NVRMMP under the Management Agreement for each such quarter (based on the
assets of the Company as of March 31, 1992) exceeds the audited pre-tax
deductible expenses of the Company for such quarter (exclusive of certain
expenses relating to any offerings by the Company of its securities). For
the period April 1, 1992 through June 29, 1993, no amounts were due NVRMMP.
Since both the Company and NVRMMP anticipated that for the remaining term
of the agreement (ending March 31, 1994) no amounts would be owing NVRMMP,
the Company and NVRMMP terminated their agreement on June 29, 1993. As
such, the Company is no longer responsible for any future payments to
NVRMMP.
Pursuant to the Purchase Agreements between the Company and RYMAC IV (see
note 4), $64 has been withheld from amounts released from the lien of the
RYMAC IV Indenture, retained by RYMAC IV and deposited in escrow to be used
for payment of expenses of the CMOs secured by certain of the mortgage
related investments purchased by the Company. In addition, at December 31,
1993, the Company had incurred $43 of CMO administration fees which were
paid to RYMAC IV under the terms of the Purchase Agreements.
An affiliate of NVRMMP performs the servicing for the mortgage loans
underlying certain of the mortgage related investments owned by the
Company.
___________________________________________________________________________
Note 10 - Employee Benefits
The Company's Board of Directors has established a Salary Reduction-
Simplified Employee Pension Program ("SAR-SEP") for its full-time
employees. A SAR-SEP is a minimal administration 408-K Plan (similar to a
401-K) for companies with fewer than 25 employees.
For 1993, the Company contributed 3% of gross compensation and has
established the same minimum contribution for 1994. Company contributions
to the plan may vary and the Company is not required to continue the
program. Employee contributions are based upon established formulas under
the Employee Retirement Income Security Act ("ERISA") rules governing 408-K
Plans.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 11 - Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Quarter
First Second Third Fourth Year
<S> <C> <C> <C> <C> <C>
1993
Operating Results
Revenues(1) $(1,524) $(2,959) $(3,463) $(5,642) $(13,588)
Expenses 3,800 3,303 2,867 2,066 12,036
Net Loss (5,324) (6,262) (6,330) (7,708) (25,624)
Net Loss
per share $(1.02) $(1.20) $(1.22) $(1.48) $(4.92)
Dividends - - - $0.04 $0.04
Other Information
10 Year Treasury(2) 6.25% 5.97% 5.60% 5.60% 5.86%
1 Month LIBOR(3) 3.12 3.11 3.11 3.18 3.13
1992
Operating Results
Revenues(1) $10,252 $ 4,433 $ 5,868 $ 1,308 $21,861
Expenses 7,188 6,378 5,402 4,761 23,729
Net Income (loss) 3,064 (1,945) 466 (3,453) (1,868)
Net Income (loss)
per share $0.59 $(0.37) $0.09 $(0.67) $(0.36)
Dividends $0.40 $0.40 $0.05 $0.05 $0.90
Other Information
10 Year Treasury(2) 7.30% 7.37% 6.61% 6.73% 6.99%
1 Month LIBOR(3) 4.16 3.91 3.32 3.34 3.69
<FN>
1 Includes downward valuation adjustment to the carrying value of the Company's assets
and for 1993, the cumulative effect of a change in accounting principle. (See notes
2, 3 and 4)
2 Quarterly 10 Year Treasury figures are based upon the daily average while the yearly
figures are based upon the weekly average. (Source: Bloomberg Financial System)
3 Quarterly 1-Month LIBOR figures are based upon the daily average while the yearly
figures are based upon the weekly average. (Source: Bloomberg Financial System)
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
The 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 1994 Annual Meeting of
Stockholders to be held on or about May 25, 1994.
Item 11. Executive Compensation.
The 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 1994 Annual Meeting of
Stockholders to be held on or about May 25, 1994.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The 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 1994 Annual Meeting of
Stockholders to be held on or about May 25, 1994.
Item 13. Certain Relationships and Related Transactions.
The 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 1994 Annual Meeting of
Stockholders to be held on or about May 25, 1994.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports
On Form 8-K.
(a) Documents filed as part of this Report:
1. The following financial statements are included in
Part II, Item 8 of this Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Revenues and Expenses
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial statement schedules required:
None
<PAGE>
3. The following exhibits are included as part of
this Form 10-K:
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
<S> <C>
3.1 Amended and Restated Articles of
Incorporation of the Company
(incorporated by reference to
Exhibit 3.1 to Amendment No. 1
to the Company's Registration
Statement No. 33-22891 on Form S-11).
3.1.1 Articles of Amendment to Amended and
Restated Articles of Incorporation
of the Company (incorporated by reference
to Exhibit 3.1.1 to the Company's Form
10-K for the year ended December 31, 1990).
3.2.1 Amended and Restated By-laws of the
Company (incorporated by reference
to Exhibit 3.2 to Amendment No. 1
to the Company's Registration
Statement No. 33-22891 on Form S-11).
3.2.2 Amendment to By-laws of the Company
(incorporated by reference to
Exhibit 3.2.1 to Amendment No. 2 to
the Company's Registration Statement
No. 33-22891 on Form S-11).
10.1 Purchase Agreement dated as of
August 30, 1988 among the Company,
RMI I and RYMAC IV with respect to
collateral securing RYMAC IV's Series
3 Bonds (incorporated by reference to
Exhibit 10.3 to the Company's Form
10-Q for the quarter ended
September 30, 1988).
10.2 Purchase Agreement dated as of
August 30, 1988 among the Company,
RMI I and RYMAC IV with respect to
collateral securing RYMAC IV's Series
4 Bonds (incorporated by reference to
Exhibit 10.4 to the Company's Form
10-Q for the quarter ended
September 30, 1988).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.3 Purchase Agreement dated as of
August 30, 1988 among the Company,
RMI I and RYMAC IV with respect to
collateral securing RYMAC IV's Series
7 Bonds (incorporated by reference to
Exhibit 10.5 to the Company's Form
10-Q for the quarter ended
September 30, 1988).
10.4 Purchase Agreement dated as of
August 30, 1988 among the Company,
RMI I and RYMAC IV with respect to
collateral securing RYMAC IV's Series
10 Bonds (incorporated by reference
to Exhibit 10.6 to the Company's Form
10-Q for the quarter ended
September 30, 1988).
10.5 Purchase Agreement dated as of
August 30, 1988 among the Company,
RMI I and RYMAC IV with respect to
collateral securing RYMAC IV's Series
19 Bonds (incorporated by reference to
Exhibit 10.7 to the Company's Form
10-Q for the quarter ended
September 30, 1988).
10.6 First Amendment to Purchase Agreements
dated as of September 23, 1989 among the
Company, RMI I and RYMAC IV (incorporated
by reference to Exhibit 10.27 to the
Company's Form 10-Q for the quarter ended
March 31, 1989).
10.7 Residual Bond Purchase Agreement dated
as of September 30, 1988 between NVR
Mortgage L.P. and the Company
(incorporated by reference to Exhibit
10.21 to the Company's Form 10-Q for the
quarter ended September 30, 1988).
10.8 Agreement for Sale of Residual Interest
dated as of November 29, 1989 among the
Company, RMI II, Ryland Mortgage
Securities Corporation and Ryland
Acceptance Corporation with respect to
collateral securing Ryland Mortgage
Securities Corporation's Collateralized
Mortgage Bonds, Series 89-6 (incorporated
by reference to Exhibit 10.23 to the
Company's Form 10-K for the year ended
December 31, 1989).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.9 Amended and Restated Investment Guidelines
(incorporated by reference to Exhibit 10.38
to the Company's Form 10-K for the year
ended December 31, 1991).
10.10 Agreement dated as of March 31, 1992 between
the Company and NVR Mortgage Management
Partnership, NVR Mortgage Management, Inc.,
NVR Mortgage L.P., Ryan Securities, Inc.,
and NVR, L.P. (incorporated by reference to
Exhibit 10.16 to the Company's Form 10-K for
the year ended December 31, 1992).
10.11 Limited Waiver and Fourth Amendment to
Amended and Restated Revolving Credit
Agreement dated as of August 31, 1992
between the Company and Pittsburgh National
Bank (incorporated by reference to Exhibit
10.17 to the Company's Form 10-K for the
year ended December 31, 1992).
10.12 Limited Waiver and Fifth Amendment to
Amended and Restated Revolving Credit
Agreement dated as of December 30, 1992
between the Company and Pittsburgh National
Bank (incorporated by reference to Exhibit
10.18 to the Company's Form 10-K for the
year ended December 31, 1992).
10.13 Sixth Amendment to Amended and Restated
Revolving Credit Agreement dated as of
January 21, 1993 between the Company, RMI I,
RMI II and Pittsburgh National Bank
(incorporated by reference to Exhibit 10.19
to the Company's Form 10-K for the year
ended December 31, 1992).
10.14 Settlement Agreement dated as of June 29,
1993 by and among the Company, NVR Mortgage
Management Partnership, NVR Mortgage L.P.,
Ryan Securities, Inc., NVR L.P., NVR
Mortgage Management, Inc., Ryan Financial
Services, Inc., Ryan Mortgage Acceptance
Corporation IV, and RMI I (incorporated by
reference to Exhibit 99 to the Company's
Form 10-Q for the quarterly period ended
June 30, 1993).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.15 Seventh Amendment to Amended and Restated
Revolving Credit Agreement dated as of June
16, 1993 between the Company and PNC Bank,
National Association, formerly Pittsburgh
National Bank.
10.16 Eighth Amendment to Amended and Restated
Revolving Credit Agreement dated as of
September 15, 1993 by and among the Company,
RMI I, and PNC Bank, National Association.
20 Notice to stockholders regarding Dividend
Reinvestment Plan (incorporated by
reference to Exhibit 21 to the Company's
Form 10-K for the year ended December 31,
1988).
99.1 Dividend Reinvestment Plan of the
Company (incorporated by reference to
Exhibit 28.1 to the Company's Form 10-K
for the year ended December 31, 1988).
99.2 Dividend Reinvestment Service Agreement
dated December 13, 1988 between the
Company and Maryland National Bank
(incorporated by reference to Exhibit
28.2 to the Company's Form 10-K for the
year ended December 31, 1988).
(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.<PAGE>
SIGNATURES
</TABLE>
<PAGE>
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.
RYMAC MORTGAGE INVESTMENT CORPORATION
By: /s/ Richard R. Conte
Richard R. Conte, Chief Executive Officer
Date: March 24, 1994
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Richard R. Conte Chairman of the
Richard R. Conte Board of Directors,
Chief Executive
Officer and Principal
Financial Officer March 24, 1994
/s/ Ronald L. Temple President, Chief
Ronald L. Temple Operating Officer and
Director March 24, 1994
/s/ Edward S. Babbitt, Jr. Director March 24, 1994
Edward S. Babbitt, Jr.
/s/ Joseph P. Berghold Director March 24, 1994
Joseph P. Berghold
/s/ Spencer B. Burke Director March 24, 1994
Spencer B. Burke
[Signatures continued on next page.]
</TABLE>
<PAGE>
[Signatures continued from previous page.]
<TABLE>
<S> <C> <C>
/s/ James C. Chaplin, IV Director March 24, 1994
James C. Chaplin, IV
/s/ Malcolm M. Prine Director March 24, 1994
Malcolm M. Prine
/s/ Hay Walker, IV Director March 24, 1994
Hay Walker, IV
</TABLE>
RYMAC MORTGAGE INVESTMENT CORPORATION
EXHIBITS
FILED WITH
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
COMMISSION FILE NO. 1-10001
<PAGE>
RYMAC MORTGAGE INVESTMENT CORPORATION
EXHIBIT INDEX
to
EXHIBITS FILED WITH ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
10.15 Seventh Amendment to Amended and
Restated Revolving Credit Agreement
dated as of June 16, 1993 between
the Company and PNC Bank, National
Association, formerly Pittsburgh
National Bank.
10.16 Eighth Amendment to Amended and
Restated Revolving Credit Agreement
dated as of September 15, 1993 by
and among the Company, RMI I, and
PNC Bank, National Association.
</TABLE>
<PAGE>
EXHIBIT 10.15
SEVENTH AMENDMENT TO
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
This Seventh Amendment to Amended and Restated Revolving
Credit Agreement, dated as of June 16, 1993, by and between RYMAC
MORTGAGE INVESTMENT CORPORATION, a Maryland corporation (the
"Borrower"), and PNC BANK, NATIONAL ASSOCIATION, formerly
Pittsburgh National Bank (the "Bank").
WITNESSETH:
WHEREAS, the Borrower and the Bank entered into that
certain Amended and Restated Revolving Credit Agreement, dated as
of March 13, 1991 as amended by six amendments entered into prior
to the date hereof (the "Credit Agreement");
WHEREAS, all capitalized terms used herein shall have the
meanings as set forth in the Credit Agreement;
WHEREAS, the Commitment under the Credit Agreement expired
on March 31, 1993;
WHEREAS, the Bank has returned the various certificates,
powers of attorney and other documents perfecting the pledge by
Borrower to Bank of the Pledged Residual Interests pursuant to the
Pledge Agreement;
WHEREAS, the Borrower has requested that the Bank extend
the Expiration Date from March 31, 1993 to April 30, 1994, reduce
the Committed Amount to $250,000, increase the interest rate, and
terminate the Pledge Agreement so that the sole Collateral pledged
to Bank shall be Pledged Stock of RYMAC I and RYMAC II pledged
under the Stock Pledge Agreement;
WHEREAS, the parties desire to include only 50% of the
value of the Pledged Stock in the Portfolio Collateral Value so
that the amount of Loans outstanding will not be permitted to
exceed twenty-five percent (25%) of the value of the Pledged Stock;
WHEREAS, the parties desire to make certain other changes
to the Credit Agreement upon the terms and conditions hereinafter
set forth.
NOW, THEREFORE, the Borrower and the Bank, in
consideration of their mutual covenants and agreements hereinafter
set forth and intending to be legally bound hereby, covenant and
agree as follows:
<PAGE>
1. Defined Terms. The definitions of "Collateral,"
"Committed Amount", "Expiration Date" and "Portfolio Collateral
Value" contained in Section 1.01 are hereby amended and restated to
read as follows:
"Collateral" means all property of the Borrower
subject from time to time to the Lien of the Stock Pledge
Agreement and any other Financing Document.
"Committed Amount" means $250,000.
"Deficiency Date" shall have the meaning given to
such term in Section 2.01(E).
"Expiration Date" means April 30, 1994, provided,
that nothing herein shall be interpreted to limit the
right of the Bank to accelerate the Loans and other
Obligations pursuant to Section 7.02 hereof.
"Portfolio Collateral Value" means fifty percent
(50%) of the fair market value of the Pledged Stock as
determined by the Independent Appraisers, plus the value
of such other property of the Borrower as the Bank may in
its sole discretion accept as additional Collateral.
The definition of "Pledge Agreement" is hereby deleted
from Section 1.01.
2. Termination of Pledge Agreement. Borrower and Bank
acknowledge that the Pledge Agreement is terminated and of no
further force and effect. As of the effective date hereof the
Collateral consists solely of the Pledged Stock.
3. Appraisals; Minimum Collateral Requirement.
(a) Section 2.01(D) of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:
The Bank may, in its sole discretion, at any time at the
Borrower's expense, request an immediate appraisal of the
Collateral by an appraiser selected by the Bank. Upon
such a request, Borrower shall cause, or cooperate with
Bank in causing, such appraiser to prepare and forward to
the Bank and the Borrower its appraisal of the fair market
value of the applicable Collateral as of the date
specified in the request by the Bank. In appraising the
Collateral, each appraiser may assume such mortgage
prepayment speeds, discount rates, future interests rates
and such other matters as it reasonably considers
appropriate. Such appraisal shall supersede any
valuations of the Collateral by Borrower pursuant to
Section 2.01(E)(i)."
<PAGE>
(b) Section 2.01(E) of the Credit Agreement is hereby
amended and restated to read as follows:
(E) Minimum Collateral Requirement.
(i) Within 14 calendar days after the last day of
each calendar month (or promptly upon the request of the
Bank at any other time), the Borrower shall deliver to the
Bank a report in the form attached as Exhibit C (the
"Collateral Base Report") which shall be certified by a
Responsible Officer (in his capacity as an officer of
Borrower and not in his individual capacity) and shall set
forth as of the last day of such calendar month (or as of
such other date as the Bank may have requested) Borrower's
computation of (i) the Portfolio Collateral Value as of
such date; (ii) the Minimum Collateral Requirement as of
such date; and (iii) the Collateral Surplus or Collateral
Deficiency as of such date.
(ii) Bank may at any time reject a valuation of the
Collateral by the Borrower set forth in a Collateral Base
Report or in an appraisal delivered pursuant to Section
2.01(D) and notify Borrower of Bank's valuation of the
Portfolio Collateral Value. Bank's valuation shall govern
for all purposes under this Agreement, including the
determination of whether a Collateral Deficiency exists,
and shall supersede all valuations set forth in any
Collateral Base Report delivered pursuant to Section
2.01(E)(i) or any valuations provided by an appraiser
pursuant to Section 2.01(D).
(iii) If at any time a Collateral Deficiency shall
exist as evidenced by the Collateral Base Report, a
valuation by an appraiser or Bank's valuation pursuant to
Section 2.01(E)(ii) above, the Borrower shall, within 5
Business Days of the "Deficiency Date" (as defined below),
repay Loans in an amount sufficient to cure the Collateral
Deficiency. In the event the Borrower fails to repay
Loans sufficient to cure the Collateral Deficiency within
5 Business Days following the Deficiency Date, an Event of
Default shall have occurred. The "Deficiency Date" shall
be: (a) the date of Borrower's delivery of the Borrowing
Base Certificate if the Collateral Deficiency is evidenced
by a Borrowing Base Certificate; (b) the due date for
delivery of the Borrowing Base Report if the Borrower
fails to deliver a Borrowing Base Report when due (in such
event a Collateral Deficiency shall be deemed to exist on
such due date equal to the amount of Loans outstanding and
shall continue until such time as Borrower delivers a
Borrowing Base Report which reveals that no Collateral
Deficiency exists); (c) the date on which Bank delivers to
<PAGE>
Borrower an appraisal if the Collateral Deficiency is
evidenced by an appraisal; or (d) the date on which Bank
delivers notice to Borrower of Bank's valuation of the
Collateral if the Collateral Deficiency is evidenced by
Bank's valuation of the Collateral pursuant to Section
2.01(E)(ii).
4. Fees. Section 2.01(H) of the Credit Agreement is
hereby amended and restated to read as follows:
"(H) Loan Fees. On or prior to the effective date
of the Seventh Amendment to this Agreement, the Borrower
shall pay the Bank a loan fee in an amount equal to
$2,000. The Borrower shall also pay a non-usage fee in an
amount equal to 1/8 of 1% of the daily average amount of
the unused Committed Amount, payable quarterly in arrears
commencing July 31, 1993 and continuing on the last day of
each October, January, April and July thereafter and on
the earlier of the date on which Commitment is terminated
or the Expiration Date. The loan fee and the non-usage
fee shall be referred to herein as the "Fees"."
5. Interest Rate. The first sentence of Section 2.02 of
the Credit Agreement is hereby amended and restated to read as
follows:
"Until the date on which the principal is due (at
stated maturity, on acceleration or otherwise), interest
on the outstanding principal balance of the Loans shall
accrue for each day at the Prime Rate for such day plus
1%."
6. Collateral Additions, Releases and Substitutions.
Sections 3.02(B) through (G) are hereby deleted.
7. Consolidated Net Worth. Section 6.01(J) (Maintenance
of Consolidated Net Worth) is hereby deleted.
8. Event of Default. Section 7.01(B) is hereby amended
and restated to read as follows:
"(B) Collateral Deficiency. The failure of Borrowers
to repay Loans in sufficient amount to cure a Collateral
Deficiency within 5 Business Days following a Deficiency
Date."
9. Note. Exhibit A (Note) to the Credit Agreement is
hereby deleted and replaced with Exhibit A attached hereto.
10. Conditions to Effectiveness. This Seventh Amendment
shall become effective upon the fulfillment of the following
conditions precedent in a manner satisfactory to the Bank on or
before the date hereof:
<PAGE>
A. Corporate Proceedings of Borrower. The Bank shall
have received a copy, certified as of the date hereof by
the Secretary or an Assistant Secretary of the Borrower,
of the resolutions of its board of directors authorizing
the execution, delivery and performance of this Seventh
Amendment and the Note as amended.
B. Incumbency Certificates. The Bank shall have
received a certificate from the Borrower, signed by a duly
authorized officer of the Borrower, dated as of the date
hereof, as to the incumbency, authority and signatures of
the officers of the Borrower designated as Responsible
Officers hereunder or otherwise authorized to sign the
Financing Documents on behalf of the Borrower.
C. Note. The Bank shall have received the Note, as
amended, in the form of Exhibit A attached hereto and
executed by a duly authorized officer of the Borrower.
D. Closing Certificate. There shall have been delivered
to the Bank a certificate dated as of the date hereof and
executed by a Responsible Officer of the Borrower to the
effect set forth in subsections 5.02 (A), (D), (E), (F)
and (G) of the Credit Agreement.
E. Appraisal; Collateral Base Report. Borrower shall
have delivered an appraisal of the Pledged Stock as
described within Section 2.01(D) of the Credit Agreement
and a Collateral Base Report, each dated as of the last
day of the calendar month preceding the effective date
hereof.
F. Opinion of Counsel. The Bank shall have received the
favorable opinion of counsel for the Borrower in form and
substance satisfactory to the Bank as to all matters set
forth in subsections 4.01 (A), (C) (last clause of first
sentence and second sentence only), (D), (E), (F), (N),
(P) and (R).
G. Fees. Borrower shall have paid to Bank the loan fee
due on the date hereof and the fees of Borrower's counsel
incurred in connection with the negotiation and
preparation of this Seventh Amendment.
H. Good Standing and Articles. Borrower shall have
delivered to Bank an original good standing certificate
and certified copy of its articles of incorporation from
the State of Maryland.
11. Full Force and Effect. All terms and conditions of
the Credit Agreement and the other Financing Documents remain in
full force and effect, except for such terms explicitly amended
hereby. The execution, delivery and effectiveness of this Seventh
Amendment shall not operate as a waiver of any other right, power
<PAGE>
or remedy of the Bank under the Credit Agreement, any other
Financing Document or any other document or agreement executed in
connection therewith.
IN WITNESS WHEREOF, each of the parties hereto have
executed and delivered this Seventh Amendment to Amended and
Restated Revolving Credit Agreement as of the day and year first
written above.
RYMAC MORTGAGE INVESTMENT
CORPORATION
By: /s/ Richard R. Conte
Title: Chief Executive Officer
PNC BANK, NATIONAL ASSOCIATION
By:/s/ William P. Leemhuis
Title:Assistant Vice President
<PAGE>
EXHIBIT 10.16
EIGHTH AMENDMENT TO AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
This Eighth Amendment to Amended and Restated Revolving
Credit Agreement, dated as of September 15, 1993, by and among
RYMAC MORTGAGE INVESTMENT CORPORATION, a Maryland corporation (the
"Borrower"), RYMAC MORTGAGE INVESTMENT I, INC., a Delaware
corporation ("RYMAC I") and PNC BANK, NATIONAL ASSOCIATION, a
national banking association (the "Bank").
W I T N E S S E T H:
WHEREAS, the Borrower and the Bank entered into that
certain Amended and Restated Revolving Credit Agreement, dated as
of March 13, 1991 as subsequently amended by seven amendments prior
to the date hereof (the "Credit Agreement");
WHEREAS, RYMAC I is a wholly-owned subsidiary of Borrower;
WHEREAS, pursuant to a Purchase Agreement, dated
August 30, 1988 (the "Purchase Agreement"), RYMAC I purchased from
Ryan Mortgage Acceptance Corporation IV ("Issuer") Issuer's
interest in the mortgage collateral (the "Securities") pledged by
Issuer to The Bank of New York, as Trustee ("Trustee"), to secure
the obligations of the Issuer under mortgage collateralized bonds
denominated Series 2 (the "Bonds") issued by Issuer;
WHEREAS, the Trustee serves as the trustee for the holders
of the Bonds pursuant to that certain Indenture dated as of May 1,
1984, as amended by that certain Series 2 Supplement, dated as of
September 1, 1984, and by various series supplements thereto (the
"Indenture");
WHEREAS, the Indenture permits the Issuer to redeem the
Bonds at the Issuer's election subject to the terms and conditions
set forth therein;
WHEREAS, under the Purchase Agreement the Issuer assigned
to RYMAC I the Issuer's rights under the Indenture to redeem the
Bonds;
WHEREAS, RYMAC I has delivered notices notifying Issuer of
RYMAC I's desire to redeem the Bonds on October 20, 1993 and Issuer
has delivered notices notifying the Trustee of RYMAC I's desire to
redeem the Bonds on October 20, 1993.
WHEREAS, the Indenture provides; (i) Trustee shall send
notices of redemption to each of the holders of the Bonds to be
redeemed at least 20 days before the date set by the Issuer for
redemption of the Bonds; (ii) the Issuer shall deposit with the
<PAGE>
Trustee an amount sufficient to redeem the Bonds on or before the
close of business on the business day immediately preceding the
date on which the Trustee shall send the notices of redemption
referred to in clause (i) above; and (iii) the liens on the
Securities securing such bonds shall be released on the date on
which the Trustee sends such notices of redemption.
WHEREAS, Borrower has entered into binding commitments to
sell the Securities securing the Bonds, as more fully described on
Exhibit B hereto (the "Sales Contracts");
WHEREAS, Borrower has requested that the Bank amend the
Credit Agreement to permit the Borrower to borrow money to fund the
redemption of the Bonds on behalf of RYMAC I, provided that such
loans shall be repaid in full out of proceeds from the Sales
Contracts;
WHEREAS, all capitalized terms used herein and not
otherwise defined herein shall have the meanings set forth in the
Credit Agreement;
NOW, THEREFORE, the Borrower, RYMAC I and the Bank, in
consideration of their mutual covenants and agreements hereinafter
set forth and intending to be legally bound hereby, covenant and
agree as follows:
1. Redemption Loan Commitment. During the period
between and including September 15, 1993 and September 20, 1993
(the "Redemption Loan Commitment Period"), the Borrower may request
a loan from the Bank in the amount not to exceed $6,000,000 (the
"Redemption Loan Commitment") in order to fund the redemption of
the Bonds on behalf of RYMAC I (the "Redemption Loan"). Borrower
shall use the proceeds of the Redemption Loan solely for the
purpose of making the Redemption Deposit on behalf of RYMAC I
described in Section 8 hereof. Although Borrower and RYMAC I may
account for the Redemption Deposit as a loan by Borrower to RYMAC
I, the proceeds of the Redemption Loan shall be transferred
directly by Bank into the account of the Trustee and shall not be
deposited into the account of RYMAC I.
2. Redemption Loan Notice. The Bank will not be
obligated to make the Redemption Loan unless the Bank shall have
received an irrevocable written notice (the "Redemption Loan
Notice") from the Borrower specifying the amount to be borrowed,
the requested date on which the Redemption Loan is to be made, the
settlement date for the sale of the Securities pledged to secure
the Bonds, which shall be no later than the close of business on
September 17, 1993 (the "Redemption Loan Due Date") and the net
sales proceeds from the sale of the Securities. The Redemption
Loan Notice shall be received by the Bank at least one Business Day
prior to the requested effective date of the Redemption Loan. The
<PAGE>
Redemption Loan Notice shall be executed by a Responsible Officer
and shall constitute a certification and confirmation to the Bank
that the conditions precedent for the Redemption Loan set forth
herein are satisfied.
3. Repayment. The Borrower shall repay in full the
Redemption Loan, including interest accrued thereon, on or before
the Redemption Loan Due Date.
4. Redemption Loan Note. The obligation of Borrower to
pay with interest the Redemption Loan shall be evidenced by a note
(the "Redemption Loan Note") in face amount of $6,000,000 in the
form attached as Exhibit F.
5. Treatment of Redemption Loans Under Credit Agreement.
(a) The Redemption Loan Commitment hereunder is in
addition to the Commitment of the Bank under Section 2.01 of the
Credit Agreement. The Borrower may continue to borrow revolving
credit Loans during the Redemption Loan Commitment Period in an
amount up to the Committed Amount pursuant to Section 2.01 of the
Credit Agreement. The Note dated June 16, 1993 in the face amount
of $250,000 evidencing Borrower's obligations to repay such
revolving credit Loans remains in force and effect on and after the
date hereof.
(b) The Redemption Loan shall be treated as a "Loan"
under all provisions the Credit Agreement except that references to
the term, "Loan", in the following places shall not be deemed to
include Redemption Loans:
(i) Section 1.01 - Definition of Minimum
Collateral Requirement;
(ii) Section 2.01 - Revolving Credit
Facilities;
(iii) Section 5.02 - Conditions to all Loans;
and
(iv) The $250,000 revolving credit Note.
In accordance with the foregoing and without limiting its meaning,
interest shall accrue on the Redemption Loan at the same rate as
interest accrues on Loans under Section 2.02 of the Credit
Agreement.
(c) The Redemption Loan Note, Securities Pledge
Agreement (as hereinafter defined) and this Amendment each shall
constitute a Financing Document under the Credit Agreement.
<PAGE>
(d) Each reference to the Note in Articles XII
(Defaults and Remedies) or VIII (Miscellaneous) of the Credit
Agreement shall be deemed to refer also to the Redemption Loan
Note, and each reference in such Articles to the Commitment shall
be deemed also to refer to the Redemption Loan Commitment.
6. Security.
(a) The Redemption Loan shall constitute both an
Obligation and a Secured Obligation under the Credit Agreement and
Secured Indebtedness under the Pledge Agreement and as such shall
be secured by the security interests granted by Borrower to the
Bank in the Collateral.
(b) Borrower hereby grants to the Bank a security
interest in the Sales Contracts and all products and proceeds
thereof, and such Sales Contracts and all products and proceeds
thereof are hereby made part of the Collateral under the Credit
Agreement and the Pledged Collateral under the Securities Pledge
Agreement. At the request of Bank, Borrower shall execute and file
appropriate UCC-1 financing statements or UCC-3 amendments in order
to perfect Bank's security interest in the Sales Contracts.
(c) To secure prompt payment and performance of the
Redemption Loan and other Secured Obligations, Borrower and RYMAC I
each shall grant the Bank a continuing security interest in the
Securities to the extent of their respective interests therein,
pursuant to the Securities Pledge and Security Agreement in
substantially the form attached hereto as Exhibit E (the
"Securities Pledge Agreement"), which shall be executed and
delivered by Borrower and RYMAC I to the Bank on or prior to the
making of the Redemption Loan.
(d) Notwithstanding Section 6(a), (b), and (c)
above, the Sales Contracts and the Securities shall be excluded
from the computation of the Portfolio Collateral Value and the
determination of whether a Collateral Deficiency exists.
7. Trustee Acknowledgement. Borrower and RYMAC I each
hereby covenant and agree to cause the Trustee and Issuer to
execute an acknowledgement in the form attached as Exhibit D hereto
(the "Trustee Acknowledgement") on or prior to the making of the
Redemption Loan.
8. Representations and Warranties. Borrower and RYMAC I
hereby represent and warrant as follows:
(a) All of the representations and warranties under
the Credit Agreement are true and correct on the date hereof,
including such representations and warranties as relate to this
Amendment.
<PAGE>
(b) The Borrower has full corporate power and
authority to enter into this Amendment, to make the borrowings
hereunder, to execute and deliver this Amendment, the Trustee
Acknowledgement, the Redemption Loan Note and the other Amendment
Documents (as hereafter defined) to which it is a party and to
incur the Redemption Loan and perform the other obligations
provided for herein and in the other Amendment Documents to which
it is a party, all of which have been duly authorized by all proper
and necessary corporate action. RYMAC I has full corporate power
and authority to enter into this Amendment, to execute and deliver
this Amendment, the Trustee Acknowledgement, the Securities Pledge
Agreement and the other Amendment Documents to which it is a party
and to perform the other obligations provided for herein and in the
other Amendment Documents to which it is a party, all of which have
been duly authorized by all proper and necessary corporate action.
No consent or approval of shareholders of or lenders to the
Borrower or RYMAC I or any other third party and no consent,
approval, filing or registration with or notice to any Governmental
Authority is required as a condition to the validity of this
Amendment, the Trustee Acknowledgement, the Securities Pledge
Agreement, the Redemption Loan Note or the other Amendment
Documents or the performance by the Borrower or RYMAC I of its
obligations hereunder or thereunder. For purposes of this
Amendment, the term "Amendment Documents" means collectively this
Amendment, the Redemption Loan Note, the Securities Pledge
Agreement, the Trustee Acknowledgement and any other instrument
(including, without limitation, bond powers), agreement or document
simultaneously or hereafter executed and delivered by the Borrower
or RYMAC I and/or any other Person, singly or jointly with another
Person or Persons, evidencing, securing, guarantying any of the
Obligations and/or in connection with this Amendment and/or the
Redemption Loan Note.
(c) This Amendment constitutes, and the Trustee
Acknowledgement, the Securities Pledge Agreement, the Redemption
Loan Note and each of the other Amendment Documents, when executed
and delivered pursuant hereto will constitute, the valid and
legally binding obligations of the Borrower and RYMAC I, as
applicable, enforceable against the Borrower and RYMAC I, as
applicable, in accordance with their respective terms, subject,
however, to applicable bankruptcy, insolvency, reorganization,
moratorium and other similar laws affecting creditors' rights
generally from time to time in effect.
(d) Exhibit B hereto contains a true and correct
description of each of the Securities and each of the Sales
Contracts for the sale of such Security, including the settlement
date thereunder and amount due on such settlement date. Borrower
has entered into a Sales Contract with respect to each of the
Securities. Each of the Sales Contracts is a binding obligation of
the purchaser named therein.
<PAGE>
(e) RYMAC I holds all right, title and interest in,
to and under the Securities securing the Bonds, subject only to the
lien in favor of the Trustee under the Indenture and the lien in
favor of the Issuer under the Funding Notes as such term is defined
in the Trustee Acknowledgement.
(f) Except for the delivery of the cash deposit (the
"Redemption Deposit") to the Trustee described on Exhibit A hereto,
Borrower, RYMAC I and Issuer each have delivered all of the notices
to the Trustee and taken all other actions required of it to redeem
the Bonds on October 20, 1993 and such date constitutes the "Issuer
Redemption Date" under the Indenture. The Trustee has agreed to
send notices of RYMAC I's redemption to the holders of the Bonds on
or before September 16, 1993, provided that the Trustee has
received the Redemption Deposit with respect to the Bonds on or
before the business day immediately preceding such date. Upon the
date on which the Trustee sends notice of redemption of the Bonds:
(i) the Securities shall be released from the lien in favor of the
Trustee under the Indenture and the lien in favor of the Issuer
under the Funding Notes and RYMAC I shall hold the Securities free
and clear of all liens except for those in favor of the Bank, and
(ii) the Trustee shall be required to transfer title to the
Securities to RYMAC I (or to another party designated by RYMAC I)
or cause such transfer of title to occur. Exhibit A correctly
sets forth the estimated amount of the Redemption Deposit and the
date on which Borrower intends to make such Redemption Deposit.
Trustee has orally agreed to send the notices of redemption of the
Bonds on the business day following its receipt of each Redemption
Deposit. Exhibit A sets forth the dates on which Trustee has
orally agreed to deliver such notice of redemption. Borrower will
obtain Trustee's written acknowledgement pursuant to the Trustee
Acknowledgement confirming Trustee's oral agreement.
(g) The making of the Redemption Loan, the
redemption of the Bonds and the consummation of the Sales Contracts
do not breach or conflict with the terms of the Indenture or any
document to which RYMAC I or Borrower is a party.
(h) Each of the matters set forth in the recitals to
this Amendment is true and correct.
9. Conditions to Redemption Loan. The making of the
Redemption Loan is subject to the fulfillment of each of the
following conditions precedent:
(a) Sales Contracts. Borrower shall have delivered
to the Bank true and correct copies of each of the written
confirmations confirming the Sales Contracts.
(b) Trustee Acknowledgement. The Trustee
Acknowledgement shall have been executed by all of the parties
thereto and delivered to the Bank.
<PAGE>
(c) Securities Pledge Agreement. RYMAC I shall have
executed the Securities Pledge Agreement and delivered it to the
Bank.
(d) Redemption Loan Note. Borrower shall have
executed and delivered to the Bank the Redemption Loan Note.
(e) Compliance; Default. Borrower shall be in
compliance with all terms, covenants, conditions and provisions of
this Amendment, the Credit Agreement and the other Amendment
Documents and the representations and warranties of the Borrower
contained in this Amendment and in the Credit Agreement shall be
true and correct. There shall exist no Event of Default hereunder
or under the Credit Agreement or Potential Default under the Credit
Agreement.
(f) Redemption Loan Notice and Disbursement
Instructions. Borrower shall deliver to the Bank a Redemption Loan
Notice and written instructions as to the disbursement of the
proceeds of such Redemption Loan.
(g) Adverse Change. No adverse change shall have
occurred in the financial condition of the Borrower which would
materially impair the ability of the Borrower to pay the Redemption
Loan or any other Obligations.
(h) Additional Matters. All other documents and
legal matters in connection with the transactions contemplated by
this Amendment, the Trustee Acknowledgement, the Securities Pledge
Agreement and the other Amendment Documents shall be satisfactory
in form and substance to the Bank and its counsel.
(i) Opinion. The Bank shall have received favorable
opinions of Brown & Wood and Eckert Seamans Cherin & Mellott in
form and substance satisfactory to the Bank as to the matters set
forth in Sections 8(b), (c), (e), (f), (g) and (h) hereof. The
Bank shall have received a copy of the opinion of Eckert Seamans to
Trustee in connection with the redemption and such opinion shall
provide that Bank may rely thereon.
10. Indebtedness Covenant. Section 6.02(D)
(Indebtedness) of the Credit Agreement is hereby deleted.
11. Compliance Report; Collateral Base Report.
(a) Compliance Report. Section 6.02(k) (Compliance
Report) of the Credit Agreement is hereby deleted. Clause (iii) of
Section 6.01(A) (which requires that Borrower deliver to Bank a
certificate regarding Borrower's compliance with the Credit
Agreement when Borrower delivers its financial statements to Bank)
is hereby deleted.
<PAGE>
(b) Collateral Base Report. Exhibit C to the Credit
Agreement (Collateral Base Report) is hereby amended and restated
to read as set forth on Exhibit C hereto.
12. Default. The occurrence of any of the following
events shall constitute an Event of Default hereunder and under the
Credit Agreement:
(a) Payment of Redemption Loan. The failure to
repay the Redemption Loan on or before the Redemption Loan Due
Date.
(b) Covenants. The failure of the Borrower to
perform, observe or comply with any of Borrower's covenants
hereunder.
(c) Representations and Warranties. If any
representation and warranty contained herein or any other
information at any time given by or on behalf of the Borrower or
furnished in connection with this Amendment shall prove to be false
or incorrect in any material respect on the date as of which made.
13. Fees and Expenses. Borrower shall pay to the Bank a
commitment fee of $10,000 for the Redemption Loan. Such fee shall
be paid in full on the date on which the Redemption Loan is made.
Borrower shall pay all reasonable fees and expenses, including
without limitation fees of the Bank's counsel, incurred by Bank in
connection with this Amendment. Such fees and expenses shall be
paid in full on the date on which the Redemption Loan is made.
14. Notices to RYMAC I.
(a) The address for notices to the Borrower set
forth in Section 8.02 of the Credit Agreement is hereby amended and
restated to read as follows:
RYMAC Mortgage Investment Corporation
500 Market Street
Suite 600
P.O. Box 250
Steubenville, OH 43952
(b) All notices, statements, requests, demands and
other communications given to or made upon RYMAC I hereunder or
under the Credit Agreement shall be given or made in care of
Borrower in the manner and at the address for Borrower set forth in
Section 8.03 of the Credit Agreement.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto have
executed and delivered this Eighth Amendment to Amended and
Restated Revolving Credit Agreement as of the day and year first
written above.
RYMAC MORTGAGE INVESTMENT
CORPORATION
By: /s/ Richard R. Conte
Title: Chief Executive Officer
RYMAC MORTGAGE INVESTMENT I, INC.
By: /s/ Ronald L. Temple
Title: President
PNC BANK, NATIONAL ASSOCIATION
By: /s/ William P. Leemhuis
Title: Assistant Vice President
