SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-Q
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10001
RYMAC MORTGAGE INVESTMENT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland 25-1577534
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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
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 twelve 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 xx No ____
Number of shares of common stock, $.01 par value, outstanding as of May 11,
1994: 5,210,600
<PAGE>
RYMAC MORTGAGE INVESTMENT CORPORATION
FORM 10-Q
INDEX
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Page Number
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1994 (unaudited)
and December 31, 1993 3
Consolidated Statements of Revenues and
Expenses (unaudited) for the three
months ended March 31, 1994 and 1993 4
Consolidated Statements of Cash Flows
(unaudited) for the three months ended
March 31, 1994 and 1993 5
Notes to Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15
PART II. OTHER INFORMATION 23
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to Vote of Security
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
March 31, 1994 December 31, 1993
(Unaudited)
ASSETS
<S> <C> <C>
Real estate investments:
Mortgage related investments plus net premiums
of $432 and $840 (note 4) $ 35,141 $ 65,248
Mortgage derivative securities (notes 2 and 3) 6,486 7,161
41,627 72,409
Cash 2,860 1,695
Funds held by trustee 2,494 1,347
Receivables on mortgage related investments 2,086 5,139
Receivables on mortgage derivative securities 270 469
Other assets 18 38
$ 49,355 $ 81,097
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Funding notes payable (note 5) $ 18,485 $ 44,892
CMOs payable (note 6) 19,987 25,042
Accrued interest on funding notes
and CMOs payable 668 584
Notes payable (note 7) 3,365 3,814
Dividends payable - 208
Other liabilities 313 375
42,818 74,915
COMMITMENTS AND CONTINGENCIES (notes 2,3 and 7)
STOCKHOLDERS' EQUITY
Common stock: par value $.01 per share
50,000,000 shares authorized
5,210,600 issued and outstanding at March 31, 1994,
and December 31, 1993 52 52
Additional paid-in capital 43,985 43,985
Accumulated Deficit (note 8) (37,500) (37,855)
6,537 6,182
$ 49,355 $ 81,097
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements (continued)
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(amounts in thousands except share data)
1994 1993
REVENUES
Interest:
<S> <C> <C>
Mortgage related investments $ 1,143 $ 3,084
Mortgage derivative securities 201 (4,901)
Temporary investments 12 46
Gain on the sale of mortgage related investments 582 234
Other 13 13
1,951 (1,524)
EXPENSES
Interest on funding notes payable 756 1,976
Interest on CMOs payable 543 1,228
Interest on notes payable 42 144
General and Administrative 255 452
1,596 3,800
Net Income (loss) (note 8) $ 355 $(5,324)
Net Income (loss) per share $ 0.07 $ (1.02)
Weighted average number of common
shares outstanding 5,211,000 5,211,000
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements (continued)
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(amounts in thousands except share data)
1994 1993
<S> <C> <C>
Operating Activities:
Net Income (loss) (note 8) $ 355 $ (5,324)
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of net premium on mortgage
related investments 408 (381)
Amortization of premiums on
mortgage derivative securities 585 7,875
Interest accrued and added to funding notes
payable 69 63
Decrease in interest receivable on
mortgage related investments 296 257
Decrease/(increase) in interest receivable on
mortgage derivative securities 177 (386)
Increase in accrued interest on
funding notes payable and CMOs payable 84 1,068
Decrease in accrued expenses payable (270) (182)
Other, net 20 (9)
Net cash provided by operating activities 1,724 2,981
Investing Activities:
Principal payments on mortgage related investments 32,456 28,847
Increase in funds held by trustee (1,147) (4,149)
Principal payments on funding notes payable (26,476) (14,110)
Principal payments on CMOs payable (5,055) (9,774)
Principal payments on mortgage derivative
securities 112 1,029
Net cash provided by/(used in) investing
activities (110) 1,843
Financing Activities:
Net repayments of notes payable (449) (5,057)
Dividends paid - -
Net cash used in financing activities (449) (5,057)
Net increase/(decrease) in cash 1,165 (233)
Cash at beginning of period 1,695 636
Cash at end of period $ 2,860 $ 403
Supplemental disclosure of cash flow information:
Interest paid (net of amounts added to funding
notes payable) $ 1,171 $ 2,254
First quarter dividends declared $ 0 $ 0
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.
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 implemented. If the Company is unable to
successfully institute any of 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.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 2 - Summary of Significant Accounting Policies (continued)
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 result in further downward asset
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") 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 elected to apply FASB-115 effective December 31, 1993. FASB-115
requires that impaired investments be carried at fair market value. The EITF
has 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.
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 March 31, 1994 and December 31, 1993, the Company had investments in
Mortgage Derivative Securities as set forth below:
<TABLE>
<CAPTION>
PORTFOLIO OF MORTGAGE DERIVATIVE SECURITIES March 31, December 31,
1994 1993
<S> <C> <C>
_________________________________________________________________________
Collateralized Mortgage Obligation Trust 39
("CMOT 39") $ 412 $ 466
Collateralized Mortgage Obligation Trust 46
("CMOT 46") 55 81
Collateralized Mortgage Obligation Trust 47
("CMOT 47") 726 864
FNMA REMIC Trust 1988-7 ("FNMA 1988-7") 147 177
- Trust 1988-11 ("FNMA 1988-11") 433 467
- Trust 1988-14 ("FNMA 1988-14") 763 843
- Trust 1990-09 Class H ("FNMA 1990-09") 911 989
- Trust 1991-163 Class SA ("FNMA 1991-163") 859 930
FNMA Stripped Mortgage-Backed Securities
Trust 127 ("FNMA 127") 607 646
FHLMC Multi-Class Mortgage Participation
Certificates
(Guaranteed)
- Series 2 ("FHLMC 2") 189 202
- Series 21 ("FHLMC 21") 8 11
- Series 1235 Class L ("FHLMC 1235") 470 509
- Series 1248 Class H ("FHLMC 1248") 847 914
Cornerstone Mortgage Investment
Group II, Inc.
- Series 13 ("Cornerstone 13") 36 38
- Series 14 ("Cornerstone 14") 23 24
______________________________________________________________________________
$ 6,486 $ 7,161
______________________________________________________________________________
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 3 - Mortgage Derivative Securities (continued)
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. The Company adopted
FASB-115 effective 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 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.
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).
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"), certain GNMA certificates and FNMA certificates
and other collateral owned by RYMAC IV and pledged to secure RYMAC IV's
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 five purchase
agreements grants 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 4 - Mortgage Related Investments (continued)
During the first quarter of 1994, the Company sold its ownership rights in
the RYMAC IV Series 3 and 4 Bonds ("Series 3" and "Series 4", respectively),
for a net gain of approximately $582. (See note 5) 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. 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.
At March 31, 1994 and December 31, 1993, the Company owned mortgage related
investments with aggregate outstanding principal balances of $33,726 and
$64,408, respectively, which provide for monthly principal and interest
payments. The RYMAC IV collateral bears interest at rates ranging from 7.75%
to 10.50% and have scheduled maturity dates ranging from July 1, 2001 to
April 1, 2017. The RMSC collateral bears a weighted average net rate of
10.63% and a weighted average maturity of 261 months.
___________________________________________________________________________
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 three and five
multi-class series at March 31, 1994 and December 31, 1993, respectively,
having stated maturities ranging from July 1, 2010 to May 1, 2017. The
classes of each series of funding notes payable bear interest at fixed rates.
The range of fixed rates at March 31, 1994 and December 31, 1993 were 8.25%
to 9.45% and 8.25% to 11.20%, 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 quarter of 1994, the Company sold its ownership interest in
the RYMAC IV Series 3 and 4 Bonds. (See note 4)
___________________________________________________________________________
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. 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 March
31, 1994 and December 31, 1993 was 9.80% to 9.85%.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 6 - CMOs Payable (continued)
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.
__________________________________________________________________________
Note 7 - Notes Payable
At March 31, 1994, the Company was a party to thirteen separate
repurchase agreements for borrowings of $3,365 which are collateralized by
certain mortgage derivative securities. These repurchase agreements have
interest rates ranging from 3.5% to 5.0% with maturities ranging from April
4, 1994 to April 29, 1994. At maturity dates, repurchase agreements are
typically renewed for additional periods (usually one to twelve months). At
March 31, 1994, $2,181 of such repurchase agreements was outstanding with
Kidder Peabody and Company (eleven separate repurchase agreements). These
eleven repurchase agreements were secured by the pledge of mortgage
derivative securities with a carrying value of $4,909 and had an average
weighted maturity of 6.4 days. At December 31, 1993, repurchase agreement
borrowings were $3,814 under twelve separate repurchase agreements at rates
ranging from 3.3% to 5.0% and maturities ranging from January 6, 1994 to
April 4, 1994. 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 $250 with
an expiration of April 30, 1994, which availability was subject to periodic
valuations of the remaining collateral. Amounts borrowed under this
agreement were charged interest at a rate of the prime rate plus 1.0%, and
were collateralized by the pledge of the Company's ownership interests in the
RYMAC IV Bonds and the RMSC Bonds. The availability under the line was
limited to the value of collateral pledged to the bank. At March 31, 1994
and December 31, 1993, no amounts were outstanding under the line. Upon
expiration of the agreement, the Company elected not to renew the line of
credit.
The following summarizes information related to the Company's short-term
borrowings during 1994:
<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 Period Period Period
<S> <C> <C> <C> <C> <C>
Line of Credit $ 0 0% $ 0 $ 0 0%
Repurchase Agreements 3,365 4.38 4,108 3,805 4.43
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
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.
The Company estimates its taxable losses for 1992 and 1993 to aggregate
approximately $28 million. 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 and
Accumulated Deficit and the related per share data for the three months ended
March 31, 1994:
<TABLE>
<CAPTION>
1994
<S> <C>
Accumulated Deficit
at Beginning of Period $(37,855)
Net Income 355
Less: Dividends Declared -
Accumulated Deficit
at End of Period $(37,500)
Per Share:
Net Income $ 0.07
Dividends Declared $ -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
___________________________________________________________________________
Note 9 - 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 1994, the Company has established a minimum contribution of 3% of gross
compensation. 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>
Item 2. 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 mortgage
interest rate levels in 20 years were reached in 1992 and continued
to 25 year lows in the fourth quarter of 1993, resulting in
unprecedented mortgage refinancings and therefore accelerated
mortgage prepayments. As a result of the high level and extended
duration of these high 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 prepayments return to more 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 at recent historical
lows resulted 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 minimal 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 continued
through the first quarter 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 early months of 1994, the Company has not
purchased any new assets.
<PAGE>
In response to its reduced cash flows, the Company has been
pursuing leveraged financings that would increment cash flows to
the Company. However, due to continued adverse market conditions
and competing products with terms to investors more favorable than
can be provided by the Company, leveraged financing negotiations
have been unsuccessful. Additionally, the Company continues to
pursue other business activities that would not be sensitive to the
risks of high levels of mortgage prepayments.
FUTURE PROSPECTS
While the Company continues to seek acceptable financing
opportunities and pursue investment activities that are not
susceptible to the risks of mortgage prepayments, it intends to
further reduce operating expenses while considering 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. As such, the
Company is also evaluating 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
extending into the third quarter of 1994 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 and the Company reported net income for the
three month period ended March 31, 1994 (see "Results of
Operations"), the Company continues to incur tax losses that
approximated $28 million for the two-year period ended December 31,
1993. Additionally, tax losses for the first quarter of 1994 are
estimated to be $2,000,000.
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. Additionally, the
Company's estimated tax loss carryforward of $30 million as of
March 31, 1994 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 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.
<PAGE>
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 stock- holders, 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 represented excess
inclusion income. (See note 8 of Notes to Consolidated Financial
Statements) For a stockholder, generally excess inclusion income
cannot be offset by losses.
On March 29, 1994, the Company announced that no dividend would be
paid for the quarter ended March 31, 1994. In making such
announcement, the Company determined that the prevailing low
interest rate environment continues to impact the Company's taxable
income and that any distribution at the current time would likely
represent a return of stockholders' capital, except for excess
inclusion distributions, and could reduce the Company's future
earnings potential.
RESULTS OF OPERATIONS
For the three months ended March 31, 1994, as compared to 1993's
comparable period, the Company's Net Income increased from
$(5,324,000) to $355,000. However, this increase was primarily
attributable to a substantial writedown in asset values during the
prior period and the non-recurring sale of two of the Company's
Mortgage Related Investments during the current period.
At December 31, 1993, the Company first applied Financial
Accounting Standard No. 115 ("FASB-115"). FASB-115 requires that
impaired investments be carried at fair market value, and as such,
all of the Company's Mortgage Derivative Securities were affected
at 1993 year end. Prior to the adoption of FASB-115 at December
31, 1993, such investments were carried at values equivalent to
their estimated future nominal monetary value, in accordance with
EITF 89-4. (See note 2 of Notes to Consolidated Financial
Statements) With the December 1993 fair value analysis on these
investments, the Company was able to recognize in 1994's first
quarter a rate of return of approximately 12% on these same
<PAGE>
investments. This income recognition, in combination with
increased gains on the sales of ownership interests, resulted in
the Company recognizing net income for the quarter ended March 31,
1994.
Statement of Revenues and Expenses
Net Income (loss), as calculated in accordance with generally
accepted accounting principles ("GAAP") and as presented in the
accompanying consolidated financial statements, was $355,000, or
$0.07 per share, for the three months ended March 31, 1994 as
compared with $(5,324,000), or $(1.02) per share, for the three
months ended March 31, 1993.
The primary reason for the significant difference in income between
periods results from the writedown of assets during the three
months ended March 31, 1993. Such adjustments totalled
approximately $5,893,000. No such writedowns were required for the
three month period ended March 31, 1994.
GAAP requires the Company to periodically evaluate its Investments
based upon current and expected future mortgage prepayment speeds,
interest rates and market discount rates. (See note 2 of Notes to
Consolidated Financial Statements) Such valuation adjustments are
reflected as a reduction of interest revenues in the Company's
Consolidated Statements of Revenues and Expenses. 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, market
expectations of future prepayment speeds for the mortgages backing
each asset, and effective for quarterly dates of December 31, 1993
and later, 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, additional
reductions in the value of the Company's Investments would be
necessary.
The Company derives 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 GAAP ("Net Income") are not always identical for any
particular period, particularly when mortgage prepayment speeds are
exceedingly rapid, as has been the case since early in 1992, or
exceedingly slow.
<PAGE>
The rapid prepayment environment experienced is reflected in the
substantial differences between Taxable Loss and Net Income (loss).
Three Months Ended March 31,
1994 1993
Net Income (loss) $ 355,000 $(5,324,000)
Estimated Taxable Loss $(2,000,000) $( 996,000)
Net Income (loss) per share $ 0.07 $(1.02)
Estimated Taxable Loss
per share $(0.38) $(0.19)
In addition to the absence of asset writedowns in the first quarter
of 1994, the other factors contributing to the $5,694,000 increase
in Net Income between periods are 1) an increase in the gains
recognized from sales of mortgage related investments, 2) a
decrease in interest expense on funding notes, CMOs and notes
payable and 3) a reduction in general and administrative expenses.
These changes, when combined with the decrease in interest revenue
on mortgage related investments, provided for the substantial
increment in the Company's Net Income.
Interest revenue on Mortgage Related Investments decreased from
$3,084,000 for the months ended March 31, 1993 to $1,143,000 for
the three months ended March 31, 1994, as a result of the
substantial reduction in Mortgage Related Investments on the
Company's Balance Sheet between December 31, 1993 and March 31,
1994 discussed below. Interest revenue on Mortgage Derivative
Securities was $(4,901,000) for the three months ended March 31,
1993 as compared to $201,000 for the three months ended March 31,
1994. The increase in interest revenue on Mortgage Derivative
Securities was attributable to writedowns of $5,859,000 which
occurred for 1993's first quarter. These writedowns are deducted
from Mortgage Derivative Securities interest revenues. There were
no writedowns for 1994's first quarter. There was also a general
increase in interest earnings on that same asset category resulting
from the application of 12% yields effective for the first quarter
of 1994.
For the three months ended March 31, 1993, the Company recorded a
gain on the early redemption of RYMAC IV Series 1 of $234,000,
while for the three months ended March 31, 1994, the Company
recorded a gain of $582,000 on the sale of its ownership rights in
RYMAC IV Series 3 and 4. The difference in sales gains represents
an increase in Net Income of $348,000. Without the gain recorded
from the sale of ownership rights in RYMAC IV Series 3 and 4, the
Company would have reported a slight loss for 1994's first quarter.
Interest expense on Funding Notes and CMOs Payable decreased from
$3,204,000 to $1,299,000 for the three months ended March 31, 1993
and 1994, respectively, as a result of the offsetting balance sheet
decline of Funding Notes and CMOs Payable discussed below. First
quarter operating expenses (includes "Interest on Notes Payable"
<PAGE>
and "General and Administrative") decreased from $596,000 for 1993
to $297,000 for the comparable period in 1994. This decrease
between periods of $299,000 was the result of reduced interest
expense on Notes Payable of $102,000, as the Company repaid
substantial amounts under repurchase agreements during 1993 and
1994, and a reduction in General and Administrative Expenses of
$197,000, as the Company reduced costs in response to the
deterioration of its investment portfolio.
Balance Sheet
The Company's assets declined during the three month period ended
March 31, 1994 by $31,742,000, to a total of $49,355,000 at March
31, 1994. This decrease is attributable to the Company's Mortgage
Related Investments declining during the three month period from
$65,248,000 to $35,141,000, a decrease of $30,107,000. This
reduction is primarily the result of 1) the sale, during February
1994, of the ownership rights to the RYMAC IV Bond Series 3 and 4
in order to take advantage of market premiums on the underlying
mortgage collateral of each of these series (such sales reduced
Mortgage Related Investments by approximately $22,911,000), 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 $7,196,000.
These asset reductions were matched by a corresponding decrease in
the related liability accounts, Funding Notes Payable and CMOs
Payable, from $69,934,000 to $38,472,000, or a decrease of
$31,462,000, as returned principal on the underlying mortgages was
used to retire outstanding obligations secured by such mortgages.
Mortgage Derivative Securities decreased from $7,161,000 at
December 31, 1993 to $6,486,000 at March 31, 1994, a decrease of
$675,000, reflecting the amortization of premium and return of
principal basis of the assets held in this category.
Funds held by trustee increased from $1,347,000 at March 31, 1993
to $2,494,000 at March 31, 1994. 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.
Receivables on Mortgage Related Investments and Mortgage Derivative
Securities declined from $5,608,000 at December 31, 1993 to
$2,356,000, a decrease of $3,252,000, reflective of the substantial
drop in the corresponding assets, Mortgage Related Investments and
Mortgage Derivative Securities, of $30,782,000.
Notes Payable decreased from $3,814,000 at December 31, 1993 to
$3,365,000 at March 31, 1994. At both dates, Notes Payable
consists solely of repurchase agreements outstanding. Such
$449,000 decrease in leverage was the result of dealer margin calls
under repurchase agreements, all of which were met with cash
payments.
<PAGE>
The Company's Accumulated Deficit declined from $(37,855,000) at
March 31, 1993 to $(37,500,000) at March 31, 1994. Since the
Company declared no dividend distribution for 1994's first quarter,
the entire amount of its Net Income of $355,000 served to reduce
its Accumulated Deficit.
EXPENSES AND USE OF BORROWED FUNDS
Operating expenses (Interest on Notes Payable and General and
Administrative) were $297,000 for the three months ended March 31,
1994 versus $596,000 for the three months ended March 31, 1993, a
decline of $299,000. The components of this decrease in Operating
expenses include: 1) significantly reduced interest costs on Notes
Payable, which decreased from $144,000 in 1993's first quarter to
only $42,000 for 1994's first quarter, as Notes Payable on the
Balance Sheet declined from $9,776,000 to $3,365,000 between March
31, 1993 and March 31, 1994 primarily due to dealer margin calls,
and 2) a decrease of General and Administrative Expenses from
$452,000 in 1993's first quarter to $255,000 in 1994's
corresponding period, a decline of $197,000 as part of an expense
reduction program on the part of the Company in response to the
deterioration of its investment portfolio.
The Company has used 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 had maintained
a line of credit 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. In the second half of 1993 and through the first
quarter of 1994, the Company had no borrowings under its $250,000
line of credit which expired at April 30, 1994 and will not be
renewed by the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company is 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 March 31, 1994, the Company
had outstanding under repurchase agreements $3,814,000 with
maturities ranging from January 6, 1994 to April 4, 1994, and
$3,365,000 with maturities ranging from April 4, 1994 to April 29,
1994, respectively. The repurchase agreements are secured by
substantially all of the Company's Mortgage Derivative Securities.
The repurchase agreements bear interest at rates ranging from 3.50%
to 5.00% at March 31, 1994 and are adjusted periodically according
to current market levels.
The Company had maintained a line of credit with a commercial bank
for $250,000 which expired on April 30, 1994 and, at the Company's
election, will not be renewed. The Company's decision to allow its
line of credit to expire was based upon the sale during the first
<PAGE>
quarter of 1994 of two of the assets used to collateralize the line
of credit and the insignificant borrowing value that the remaining
collateral would support.
At March 31, 1994, the total amount borrowed by the Company was
$3,365,000 while at December 31, 1993 the total amount borrowed was
$3,814,000. Such borrowings represented 51% and 62%, respectively,
of stockholders' equity at March 31, 1994 and December 31, 1993.
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 March 31, 1994, the
Company was subject to various margin calls from the dealers with
whom it had repurchase agreements. These margin calls, totalling
$18,691,000, are the result of periodic dealer revaluations of the
Mortgage Derivative Securities pledged by the Company to se- cure
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. 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 could
result in the liquidation of the margined collateral.
At March 31, 1994, the Company has pledged substantially all of its
Mortgage Derivative Securities to secure repurchase agreement
outstandings. 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.
Recently, Wall Street dealers have reduced substantially their
estimates of future prepayments on the mortgage collateral
underlying the Company's Mortgage Derivative Securities resulting
in an increase in financing value on several of the Company's
assets. At the current time, this increased financing value
represents a source of additional liquidity to the Company.
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 through 1994's first
quarter.
<PAGE>
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
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 of 1993 and into the first quarter
1994, increasing indications of heightened 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, refinancing application
statistics are beginning to suggest a slowing of prepayment speeds
based upon the increased rates now applicable to new mortgage
applications. Wall Street dealer projections of future prepayment
speeds are also suggestive of a slowing in prepayment speeds.
Nevertheless, prepayment levels are still high compared with
historical standards and continue to produce adverse affects on the
Company's earnings and, since certain of the Company's assets have
been permanently impaired, reductions in prepayment speeds will not
materially positively affect such assets.
Due to the extended duration of high prepayment levels, the cash
flows from certain of the Company's assets have been permanently
reduced. Should the current trend toward slower prepayment speeds
continue, however, remaining cash flows from a large number of the
Company's assets could be stabilized and for several assets future
cash flows could increase slightly.
<PAGE>
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included as part of
this Form 10-Q.
None
(b) Reports on Form 8-K
Form 8-K was filed during the first quarter
of 1994 on February 10, 1994, reflecting
"Item 5 - Other Events" as the Company
implemented Financial Accounting Standard
No. 115.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
RYMAC MORTGAGE INVESTMENT CORPORATION
BY: /s/ Richard R. Conte
Richard R. Conte, Chairman of the
Board, Chief Executive Officer and
Principal Financial Officer
/s/ Ronald L. Temple
Ronald L. Temple
President and Chief Operating Officer
Dated: May 11, 1994
</TABLE>
