<PAGE>
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 June 30, 1995
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.)
100 North Fourth Street, Suite 813, Steubenville, Ohio 43952
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone No., Including Area Code) (800) 666-6960
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 August 11, 1995: 5,210,600
RYMAC MORTGAGE INVESTMENT CORPORATION
FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1995 (unaudited)
and December 31, 1994 3
Consolidated Statements of Revenues and
Expenses (unaudited) for the three and
six months ended June 30, 1995 and 1994 4
Consolidated Statements of Cash Flows
(unaudited) for the three months ended
June 30, 1995 and 1994 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 22
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 23
<TABLE>
Part I. Financial Information
Item 1. Financial Statements
<CAPTION>
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
June 30, 1995 December 31, 1994
(Unaudited)
<S> <C> <C>
ASSETS
Real estate investments:
Mortgage related investments (note 4) $ 11,395 $ 12,430
Mortgage derivative securities
(notes 2 and 3) 1,170 1,990
12,565 14,420
Cash 4,978 4,917
Funds held by trustee 178 172
Receivables on mortgage related investments 470 212
Receivables on mortgage derivative securities 41 45
Other assets 112 126
$ 18,344 $ 19,892
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Funding notes payable (note 5) $ 11,782 $ 12,538
Accrued interest on funding notes payable 169 179
Other liabilities 130 188
12,081 12,905
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 June 30, 1995,
and December 31, 1994 52 52
Additional paid-in capital 43,985 43,985
Accumulated Deficit (note 8) (37,774) (37,050)
6,263 6,987
$ 18,344 $ 19,892
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Part I. Financial Information
Item 1. Financial Statements (continued)
<CAPTION>
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(amounts in thousands except share data)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
REVENUES
<S> <C> <C> <C> <C>
Interest:
Mortgage related investments $ 277 $ 483 $ 561 $1,626
Mortgage derivative securities (639) 289 (570) 490
Provision for investment losses 3 (98) - (98)
Temporary investments 78 36 165 61
Net gain/(loss) on the sale of
mortgage related investments - (134) - 448
(281) 576 156 2,527
EXPENSES
Interest on funding notes payable 273 355 558 1,111
Interest on CMOs payable - 164 - 707
Interest on notes payable - 33 - 75
General and Administrative 166 214 322 469
439 766 880 2,362
Net Income (loss) (note 8) $ (720) $ (190) $ (724) $ 165
Net Income (loss) per share $ (0.14) $(0.04) $ (0.14) $ 0.03
Weighted average number of common
shares outstanding 5,211,000 5,211,000 5,211,000 5,211,000
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Part I. Financial Information
Item 1. Financial Statements (continued)
<CAPTION>
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(amounts in thousands except share data)
1995 1994
<S> <C> <C>
Operating Activities:
Net Income (loss) (note 8) $ (724) $ 165
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of net premium on mortgage
related investments - 809
Amortization of premiums on
mortgage derivative securities 817 917
Interest accrued and added to funding notes
payable 152 324
Decrease in interest receivable on
mortgage related investments 6 490
Decrease in interest receivable on mortgage
derivative securities 4 229
Decrease in accrued interest on
funding notes payable and CMOs payable (10) (155)
Decrease in accrued expenses payable (58) (369)
Other, net 14 85
Net cash provided by operating activities 201 2,495
Investing Activities:
Principal payments on mortgage related
investments 771 54,665
Increase in funds held by trustee (6) (699)
Principal payments on funding notes payable (908) (29,319)
Principal payments on CMOs payable - (25,042)
Principal payments on mortgage derivative
securities 3 206
Net cash used in investing activities (140) (189)
Financing Activities:
Net repayments of notes payable - (1,558)
Net cash used in financing activities - (1,558)
Net increase in cash 61 748
Cash at beginning of period 4,917 1,695
Cash at end of period $ 4,978 $ 2,443
Supplemental disclosure of cash flow information:
Interest paid (net of amounts added to funding
notes payable) $ 416 $ 1,752
Second quarter dividends declared $ - $ -
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 investigating
alternative investment activities and is simultaneously evaluating
several business combination proposals that could effectively
utilize the Company's tax loss position. To date, no successful
business combination has been negotiated. If the Company is unable
to successfully institute new investment activities or a business
combination, the Company's ability to re-establish and conduct its
business activities would be significantly impaired. Under such
circumstances, the Company may consider a liquidation of its
current assets and distribution of resulting net proceeds to
stockholders. The market for the Company's remaining mortgage
assets is erratic and sometimes illiquid. Buyers of mortgage
assets may demand yield levels which would result in unsatisfactory
sales prices for remaining Company assets. Under such market
conditions, the Company might realize greater value for
stockholders through the periodic payout of cash flows received
from the assets in combination with specific asset sales at future
dates at improved prices.
_________________________________________________________________
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. The net premium on mortgage related investments
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 2 - Summary of Significant Accounting Policies (continued)
was amortized over the estimated lives of the investments using the
interest method. (See note 4) Due to the sale of several of the
Company's mortgage related investments during 1994, the Company
determined that the remaining balance of any premiums was nominal
and, as such, decided to amortize all premiums at December 31,
1994.
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 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 first applied
FASB-115 to its December 31, 1993 financial statements. FASB-115
requires that impaired investments be carried at fair market value.
Quarterly, the Company projects the expected future cash flows from
its Mortgage Derivative Securities under market based assumptions
as to future mortgage prepayment speeds and interest rate levels.
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.
Investment Restrictions
In addition to qualifying as a REIT under the Code, the Company's
investment activities are restricted by provisions of the
Investment Company Act of 1940, as amended (the "Investment Company
Act"). Until 1994, the Company believed that its investment
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 2 - Summary of Significant Accounting Policies (continued)
activities did not bring it within the definition of an investment
company under the Investment Company Act because it was primarily
engaged in the business of purchasing or otherwise acquiring
mortgages and other liens and interests in real estate (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 and another 25% of its assets in those or certain other
types of real estate related interests. Between December 31, 1991
and 1994, changes in assets held by the Company caused the
composition of the Company's balance sheet to change sufficiently
to cause the Real Estate Exception historically relied upon by the
Company to be unavailable. Under Rule 3a-2 of the Investment
Company Act, the Company is deemed not to be an investment company
for at least one year, provided that the Company has a valid intent
to engage in a business other than that of investing, reinvesting,
owning, holding or trading in securities. The Company believes
that certain of the new activities contemplated could satisfy such
requirement, or, alternatively, the Company could acquire real
estate assets sufficient to qualify for the Real Estate Exception.
If the Company is unable to qualify for the Real Estate Exception
or engage in a business other than that of an investment company,
it will be required to register as an investment company under the
Investment Company Act. The Company is unable to predict how
registration under such Act would affect its current plans to
pursue new investment activities or business combinations.
Registration under the Investment Company Act would also require
the investments held by the Company to be adjusted to market value
at each financial reporting date to the extent not done so already.
Other financial statement reporting and disclosure requirements of
the Investment Company Act may differ in certain respects from
those to which the Company is currently subject.
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.
_________________________________________________________________
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 3 - Mortgage Derivative Securities (continued)
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 June 30, 1995 and December 31, 1994, the Company had investments
in Mortgage Derivative Securities as set forth below:
<TABLE>
<CAPTION>
PORTFOLIO OF MORTGAGE DERIVATIVE SECURITIES June 30, December 31,
1995 1994
____________________________________________________________________________
<S> <C> <C>
FNMA REMIC Trust 1988-7 ("FNMA 1988-7") $ 47 $ 73
- Trust 1988-11 ("FNMA 1988-11") 272 410
- Trust 1991-163 Class SA ("FNMA 1991-163") 336 763
FHLMC Multi-Class Mortgage Participation
Certificates
(Guaranteed)
- Series 2 ("FHLMC 2") 135 164
- Series 1248 Class H ("FHLMC 1248") 338 528
Cornerstone Mortgage Investment
Group II, Inc.
- Series 13 ("Cornerstone 13") 27 32
- Series 14 ("Cornerstone 14") 15 20
____________________________________________________________________________
$1,170 $1,990
____________________________________________________________________________
</TABLE>
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 3 - Mortgage Derivative Securities (continued)
Interest rate declines during the late stages of 1995's first
quarter and throughout the second quarter of 1995, culminating in
the Federal Reserve's downward rate movement on July 6, 1995, have
caused a significant increase in mortgage refinancing activity and
the projection by mortgage market professionals of further
increases in future prepayment speeds. Wall Street dealer
projections of future prepayment speeds for all mortgage coupons
collateralizing the Company's remaining Mortgage Derivative Assets
have increased by 46-68% between March 31 and June 30, 1995 and by
42-58% between June 30, 1994 and June 30, 1995. The valuation
methodology assumption of a continuation of such increased PSA
speeds is directly responsible for the $700,000 in valuation
writedowns as of June 30, 1995.
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 June 30, 1995 and December 31, 1994, the Company
applied a discount rate of 12% to the cash flows for its portfolio
of Mortgage Derivative Securities, except for two assets, FNMA
1988-7 and FHLMC 1248, where at both valuation dates, a 16%
discount rate was applied to reflect the negative effects caused by
an increase in short-term interest rates on these two assets. If
the Company had applied higher discount rates, any resulting FASB-
115 adjustment would have increased.
None of the Company's mortgage derivative securities are pledged as
collateral for any borrowings and thus represent a source of
increased liquidity to the Company.
_________________________________________________________________
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 (as described below).
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"). 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 4 - Mortgage Related Investments (continued)
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.
During the first quarter of 1994, the Company sold its ownership
rights in the RYMAC IV Series 3 and 4 Bonds 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.
At June 30, 1995 and December 31, 1994, the Company owned mortgage
related investments with aggregate outstanding principal balances
of $11,395 and $12,430, 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.
_________________________________________________________________
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 multi-class series at June 30,
1995 and December 31, 1994, having stated maturities ranging from
August 1, 2016 to May 1, 2017. The classes of each series of
funding notes payable bear interest at fixed rates. The range of
fixed rates at June 30, 1995 and December 31, 1994 were 8.25% to
9.45%.
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)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 6 - Interest Expense on CMOs Payable
CMOs payable had represented, until May 1994, the Ryland Mortgage
Securities Corporation Mortgage Collateralized Bonds Series 1989-6
(the "RMSC Bonds"). During May 1994, the Company assigned its
ownership rights in the RMSC Bonds and the related assets (Mortgage
Related Investments) to a third party. As such, since May 1994,
interest on CMOs payable is no longer an expense of the Company,
but for the six month period ended June 30, 1994, it represented a
material portion of Company expenses.
_________________________________________________________________
Note 7 - Interest Expense on Notes Payable
During 1994, the Company was a party to several repurchase
agreements for borrowings collateralized by mortgage derivative
securities. Because the Company repaid all amounts borrowed during
November 1994, the Company has not incurred any interest costs
related to these former obligations since November 1994. These
costs represented a portion of the Company's expenses during 1994.
_________________________________________________________________
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 8 - Federal Income Taxes and Distributions (continued)
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 through 1994 to
aggregate approximately $35 million. Further tax losses are likely
in 1995. The Company's investment in certain REMICs may produce
excess inclusion income. Under the Code, a REIT must generally
distribute its excess inclusion income to its stockholders even
though it has other losses or deductions exceeding such excess
inclusion income. Accordingly, if the Company were to report
future excess inclusion income, it may elect to distribute such
excess inclusion income as dividends even though it has an
estimated tax loss carryforward approximating $35 million. The tax
losses can be carried forward to offset future taxable income of
the Company for fifteen years after such loss is recognized.
The following table illustrates the reconciliation between Net Loss
and Accumulated Deficit and the related per share data for the
three months ended June 30, 1995:
<TABLE>
<CAPTION>
1995
<S> <C>
Accumulated Deficit
at March 31, 1995 $(37,054)
Net Loss (720)
Less: Dividends Declared -
Accumulated Deficit
at June 30, 1995 $(37,774)
Per Share:
Net Income $ -
Dividends Declared $ -
_________________________________________________________________
</TABLE>
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 1995, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 9 - Employee Benefits (continued)
The Unaffiliated Directors adopted an incentive stock option
program during 1994 for the Company's two Officers and Affiliated
Director. Under the Stock Option Program, options on 240,000
shares of the Company's Common Stock were awarded at the market
price, exercisable over a ten year period ending September 2004.
In addition, a salary continuance program was provided to the
Company's officers, allowing for up to one year's base salary
should an officer not be offered employment by a surviving entity
and not find comparable employment within one year of any such
business combination.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
INVESTMENT ACTIVITIES AND FUTURE PROSPECTS FOR THE COMPANY
The unprecedented high level and extended duration of mortgage
prepayments during all of 1992 and 1993 and the early months of
1994 severely impacted the large majority of the Company's assets,
permanently reducing earnings and cash flows. Even as prepayments
returned to more historical levels beginning in the second quarter
of 1994, the impairment to the Company's assets was already
permanent, the direct result of the massive level of paydowns on
the mortgages collateralizing the Company's investments.
Interest rate declines in the second quarter of 1995 have again
resulted in substantial increases in both actual and expected
mortgage prepayment levels. Coupled with a mortgage market still
affected by 1992-1994's massive prepayment environment, values for
mortgage securities of the type owned by the Company are again
being negatively affected.
In response to these adverse effects on the Company's portfolio and
unstable mortgage market conditions, the Company has positioned
itself as follows: (i) operating expenses have been reduced by 80%
since the first quarter of 1993, including cuts in all expense
items; (ii) the Company's balance sheet reflects liquidity. During
the second half of 1994, ten assets were sold at a substantial
gain, the proceeds of which, along with the use of monthly cash
flows from the remaining portfolio, enabled the Company to finalize
the repayment of over $22,000,000 of debt between June 1992 and
November 1994. Since November 30, 1994, the Company has had no
outstanding debt obligations, and, as of the date hereof, its
balance sheet contains $5,000,000 in liquid, high quality AAA
investments and approximately $1,000,000 of book value of remaining
assets providing for monthly cash flows that are sufficient to fund
its reduced expense levels; and (iii) the Company has investigated
and analyzed the complicated tax regulations regarding utilization
of tax loss carryforwards in a business combination or merger.
The Company believes that these actions have made it an attractive
business combination candidate, with a debt free balance sheet,
unrestricted liquidity of over $5,000,000, an accumulated tax loss
carryforward of $35,000,000, an AMEX listing and public ownership,
enabling the pursuit of two potential strategies.
First, the Company has engaged in intensive efforts to identify
potential business combinations. These efforts continue currently.
The efforts have included numerous inquiries with investment
banking firms, venture capitalists and various other sources, some
of which have resulted in preliminary discussions regarding
possible strategic transactions that are currently being explored.
Inquiries have included real estate, mortgage banking and non-real
estate related business activities. In this regard, the Company
has engaged investment banking support.
The review of potential business combinations has centered around
a set of criteria developed by the Company's Board of Directors.
These criteria were developed to insure that the Company's focus is
on situations that create current and future value for the
Company's stockholders by effectively utilizing the assets that the
Company brings to a business combination. In general, the criteria
would identify combinations with privately held companies that 1)
seek to become publicly owned, 2) demonstrate past profitability,
3) operate in an industry or business with growth potential and 4)
are currently profitable.
The Company has narrowed active discussions to several
transactions. However, it has not closed off inquiries or interest
to new possibilities. Each of the current considerations present
value building prospects but, as with any negotiation, success or
failure is dependent on the requirements of individuals; legal, tax
and accounting issues; agreements on valuations; and a changing
economic environment. When a transaction is agreed upon and
recommended by the Company's Board of Directors, stockholders will
be asked for approval to proceed through a special proxy wherein
the proposed transaction will be fully described.
Secondly, the Company has carefully investigated the commencement
of an investment business in Tax Sale Certificates, through both
direct equity based ownership of such assets and leveraged
financing of incremental asset acquisitions using rated,
securitized notes that would be sold subject to subordination of
the Company's equity investment. These investigations and analyses
have included all facets of Tax Sale Certificates, including the
issuance of investment grade, rated securities backed by such Tax
Sale Certificates. These efforts have positioned the Company to
begin this investment activity on a conservatively underwritten
basis, but the Company has elected to postpone any asset
acquisitions pending the results of current business combination
discussions.
The Company is aware of the effects of time delays in beginning new
investment activities. However, at the current time the Company
believes that the future earnings and value building aspects of
utilizing its assets in a successful business combination outweigh
those of rebuilding an investment portfolio containing lower-risk
assets than those that previously comprised the Company's
investment portfolio. Acquisitions of mortgage derivative
securities are currently restricted to those specifically approved
by the Company's Board of Directors.
No assurances can be given regarding the success of discussions
regarding a business combination or the acquisition and financing
of a new investment portfolio, given the Company's dependence upon
financial markets, the existence of market competition and its
limited resources. If the Company is unable to successfully
institute new investment activities or a business combination as
described above, the Company's ability to re-establish and conduct
its business activities would be significantly impaired. Under
such circumstances, the Company may consider a liquidation of its
current assets and distribution of resulting net proceeds to
stockholders. The market for the Company's remaining mortgage
assets is erratic and sometimes illiquid. Buyers of mortgage
assets may demand yield levels which would result in unsatisfactory
sale prices for remaining Company assets. Under such market
conditions, the Company might realize greater value for
stockholders through the periodic payout of cash flows received
from the assets in combination with specific asset sales at future
dates at improved prices.
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 may 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 current or prior 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 current or prior 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 a stockholder, generally, excess inclusion
income cannot be offset by losses. On August 2, 1995, the Company
announced that no dividends would be paid for the quarter ended
June 30, 1995.
RESULTS OF OPERATIONS
The Company's Net Income declined from $165,000 for the six month
period ended June 30, 1994 to a Net Loss of $(724,000) for the six
month period ended June 30, 1995, a decrease of $889,000. This
decline is attributable to 1) the Company's incurring $700,000 in
asset value writedowns during the 1995 period while only minor
writedowns of $33,000 were required for the first six months of
1994 and 2) the existence of a net gain from the sale of assets of
$448,000 in 1994's period as compared to no such gain in the 1995
period.
Generally Accepted Accounting Principles ("GAAP") require 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 increase to levels higher than current
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 could be
necessary.
Interest rate declines during the late stages of 1995's first
quarter and throughout the second quarter of 1995, culminating in
the Federal Reserve's downward rate movement on July 6, 1995, have
caused a significant increase in mortgage refinancing activity and
the projection by mortgage market professionals of further
increases in future prepayment speeds. Wall Street dealer
projections of future prepayment speeds for all mortgage coupons
collateralizing the Company's remaining Mortgage Derivative Assets
have increased by 46-68% between March 31 and June 30, 1995 and by
42-58% between June 30, 1994 and June 30, 1995. The valuation
methodology assumption of a continuation of such increased PSA
speeds is directly responsible for the $700,000 in valuation
writedowns as of June 30, 1995.
Without the net gain recorded from the sale of Mortgage Related
Investments in 1994's first half, the Company would have incurred
a loss of $(283,000) for such period.
Without regard to asset valuation writedowns, the Company operated
at an approximate break-even level during the first half of 1995
because operating expenses remained at substantially reduced levels
of $150-160,000 per quarter as compared to $250-260,000 per quarter
in 1994's first half.
Statement of Revenues and Expenses
Net Income (loss), as calculated in accordance with GAAP and as
presented in the accompanying consolidated financial statements,
was $(724,000), or $(0.14) per share, for the six months ended June
30, 1995 as compared with $165,000, or $0.13 for the six months
ended June 30, 1994, and $(720,000), or $(0.14) per share, for the
three months ended June 30, 1995 as compared to $(190,000), or
$(0.04) per share, for the three months ended June 30, 1994.
Interest revenue on Mortgage Related Investments decreased from
$1,626,000 for the six months ended June 30, 1994 to $561,000 for
the six months ended June 30, 1995, as a result of the substantial
reduction in Mortgage Related Investments on the Company's Balance
Sheet, which decreased from an average outstanding of $39,622,000
during 1994's first six months to an average outstanding of
$11,912,000 during the first six months of 1995. Interest revenue
on Mortgage Derivative Securities was $490,000 for the six months
ended June 30, 1994 as compared to $(570,000) for the six months
ended June 30, 1995. This $1,060,000 reduction in interest revenue
was the result of 1) the sale of six Mortgage Derivative Securities
during 1994's third and fourth quarters, which, although producing
substantial sales gains in such periods, also resulted in the
decrease of interest revenue recognition from these disposed assets
during subsequent periods, and 2) the valuation writedown of assets
equal to $700,000 in 1995's second quarter as compared with $33,000
for the first half of 1994. Such writedowns are reflected as a
decrease to interest revenues on Mortgage Derivative Securities
during the period incurred.
Income on Temporary Investments increased from $36,000 for the
quarter ended June 30, 1994 to $78,000 for the quarter ended June
30, 1995 and from $61,000 to $165,000 for the six month periods
ended June 30, 1994 and 1995, respectively, as the Company held its
unrestricted cash reserves in high quality, short-term financial
investments. The Company's cash reserves are the result of the
profitable sale of Mortgage Related Investments and Mortgage
Derivative Securities during 1994 and the substantial reduction in
operating expenses between periods. Such sales were largely
responsible for providing funds sufficient to 1) repay the balance
of repurchase agreement loans collateralized by such assets and 2)
increase cash reserves by $3,535,000 between June 30, 1994 and June
30, 1995.
Interest expense on Funding Notes and CMOs Payable decreased from
$558,000 and $1,818,000 for the three and six months ended June 30,
1994 to $273,000 and $519,000 for the three and six months ending
June 30, 1995, respectively, as a result of the substantial
offsetting balance sheet decline of Funding Notes and CMOs Payable,
which decreased from an average outstanding of $42,915,000 during
the first half of 1994 to an average of $12,160,000 during the six
months ended June 30, 1995. Operating expenses (includes "Interest
on Notes Payable" and "General and Administrative") decreased from
$544,000 for 1994's first half to $322,000 in 1995's first half.
This decrease between periods of $222,000 was the result of 1) the
Company incurring no interest expense on Notes Payable during the
1995 period as compared to $75,000 of interest cost on borrowings
in the comparable 1994 period, (the Company repaid all Notes
Payable, including repurchase agreements, as of November 30, 1994
and has not incurred any interest expenses on borrowed funds since
that date) and 2) a further reduction in General and Administrative
expenses of $147,000, as the Company continued to be responsive to
its substantially reduced balance sheet and completed its extensive
cost reduction efforts begun in early 1994.
Balance Sheet
The Company's assets declined during the six month period ended
June 30, 1995 by $1,548,000, to a total of $18,344,000 at June 30,
1995. This decrease is primarily attributable to the Company's
Mortgage Related Investments declining during the six month period
from $12,430,000 to $11,395,000, a decrease of $1,035,000. This
reduction is the result of principal payments on the mortgage
collateral underlying the Company's Mortgage Related Investments.
Additionally, Mortgage Derivative Securities decreased from
$1,990,000 at December 31, 1994 to $1,170,000 at June 30, 1995, a
decrease of $820,000. Such $820,000 decline was the result of the
$700,000 valuation writedown incurred as of June 30, 1995 and
normal monthly amortization of the Company's investment basis in
its Mortgage Derivative Securities. All other asset category
changes between December 31, 1994 and June 30, 1995 represented an
increase of $307,000, including a $61,000 increase in the Company's
cash accounts between the December 31, 1994 and June 30, 1995
balance sheet dates and a timing related increase of $254,000 in
receivables related to the Company's mortgage assets.
The decrease in Mortgage Related Investments was matched by a
corresponding decrease in the related liability account, Funding
Notes Payable, from $12,538,000 to $11,782,000, or a decrease of
$756,000, as returned principal on the underlying mortgages was
used to retire outstanding obligations secured by such mortgages.
Funds held by trustee increased from $172,000 at December 31, 1994
to $178,000 at June 30, 1995. This category of assets represents
the receipt of monthly mortgage payments (principal and interest)
on the Company's Mortgage Related Investments awaiting the future
payment (reduction) of Funding Notes, Interest on Funding Notes and
payment of excess monies (if any) to the Company.
The two liability accounts, Accrued interest on funding notes
payable and Other liabilities, decreased in total by $68,000, both
reflecting the overall reduction in the size of the Company's
balance sheet between December 31, 1994 and June 30, 1995.
The Company's Accumulated Deficit increased from $(37,050,000) at
December 31, 1994 to $(37,774,000) at June 30, 1995 reflecting the
$724,000 loss incurred during the first half of 1995. The Company
declared no dividend distribution for 1995's second quarter.
EXPENSES AND USE OF BORROWED FUNDS
Operating expenses ("Interest on Notes Payable" and "General and
Administrative") were $544,000 for the six months ended June 30,
1994 versus $322,000 for the six months ended June 30, 1995, a
decline of $222,000. The components of this decrease in Operating
expenses include: 1) reduced interest costs on Notes Payable, which
decreased from $75,000 in 1994's first half to $0 for 1995's first
half, as Notes Payable on the Balance Sheet declined from
$3,365,000 to $0 between March 31, 1994 and November 30, 1994, at
which date the Company repaid its remaining repurchase agreement
outstandings, and 2) a decrease of General and Administrative
expenses from $469,000 in 1994's first half to $322,000 in 1995's
corresponding period, a decline of $147,000, as the Company
continued its cost reduction efforts.
During the first eleven months of 1994, the Company used the
proceeds from repurchase agreements to fund a portion of its
portfolio of Mortgage Derivative Securities. (See note 7 of Notes
to Consolidated Financial Statements and "Liquidity and Capital
Resources") All repurchase agreements were repaid on November 30,
1994.
LIQUIDITY AND CAPITAL RESOURCES
At both December 31, 1994 and June 30, 1995, the total amount
borrowed by the Company was $0. The Company is 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 amounts
that could currently be borrowed by the Company.
At November 30, 1994, the Company repaid in full its remaining
repurchase agreement obligations and has had no outstanding Notes
Payable since that date. As such, all of the Company's remaining
Mortgage Derivative Securities are available to secure future
borrowings. These potential borrowings of approximately $500,000
or the proceeds from the potential sale of these assets of
approximately $1,000,000, and current cash reserves of $5,000,000,
held in high quality short-term instruments, provide the Company
with sufficient liquidity with which to pursue its proposed
business activities. (See "Investment Activities and Future
Prospects for the Company")
<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.
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None
<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
Dated: August 11, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the Company's
report on Form 10-Q for the quarter ended June 30, 1995 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 5,156
<SECURITIES> 12,565
<RECEIVABLES> 623
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,949
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,344
<CURRENT-LIABILITIES> 299
<BONDS> 11,782
<COMMON> 52
0
0
<OTHER-SE> 6,211
<TOTAL-LIABILITY-AND-EQUITY> 18,344
<SALES> 0
<TOTAL-REVENUES> (281)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 439
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (720)
<INCOME-TAX> 0
<INCOME-CONTINUING> (720)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (720)
<EPS-PRIMARY> $(0.14)
<EPS-DILUTED> 0
</TABLE>
