<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 March 31, 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 May 11, 1995: 5,210,600
<PAGE>
RYMAC MORTGAGE INVESTMENT CORPORATION
FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1995 (unaudited)
and December 31, 1994 3
Consolidated Statements of Revenues and
Expenses (unaudited) for the three
months ended March 31, 1995 and 1994 4
Consolidated Statements of Cash Flows
(unaudited) for the three months ended
March 31, 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 14
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
<PAGE>
<TABLE>
Part I. Financial Information
Item 1. Financial Statements
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
<CAPTION>
March 31, 1995 December 31, 1994
(Unaudited)
ASSETS
<S> <C> <C>
Real estate investments:
Mortgage related investments (note 4) $ 11,939 $ 12,430
Mortgage derivative securities less valuation
allowance of $3 for 1995 (notes 2 and 3) 1,928 1,990
______ ______
13,867 14,420
Cash 4,964 4,917
Funds held by trustee 293 172
Receivables on mortgage related investments 164 212
Receivables on mortgage derivative securities 42 45
Other assets 125 126
________ ________
$ 19,455 $ 19,892
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Funding notes payable (note 5) $ 12,128 $ 12,538
Accrued interest on funding notes payable 175 179
Other liabilities 169 188
______ ______
12,472 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 March 31, 1995,
and December 31, 1994 52 52
Additional paid-in capital 43,985 43,985
Accumulated Deficit (note 8) (37,054) (37,050)
________ ________
6,983 6,987
________ ________
$ 19,455 $ 19,892
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
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, 1995 AND 1994
(amounts in thousands except share data)
<CAPTION>
1995 1994
REVENUES
<S> <C> <C>
Interest:
Mortgage related investments $ 284 $ 1,143
Mortgage derivative securities 69 201
Provision for investment losses (3) -
Temporary investments 87 25
Gain on the sale of mortgage related
investments - 582
___ _____
437 1,951
EXPENSES
Interest on funding notes payable 285 756
Interest on CMOs payable - 543
Interest on notes payable - 42
General and Administrative 156 255
___ _____
441 1,596
____ _____
Net Income (loss) (note 8) $ (4) $ 355
Net Income (loss) per share $ - $ 0.07
Weighted average number of common
shares outstanding 5,211,000 5,211,000
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
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, 1995 AND 1994
(amounts in thousands except share data)
<CAPTION>
1995 1994
<S> <C> <C>
Operating Activities:
Net Income (loss) (note 8) $ (4) $ 355
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of net premium on mortgage
related investments - 408
Amortization of premiums on
mortgage derivative securities 61 585
Interest accrued and added to funding notes
payable 76 69
Decrease in interest receivable on
mortgage related investments 4 296
Decrease in interest receivable on mortgage
derivative securities 2 177
Increase/(decrease) in accrued interest on
funding notes payable and CMOs payable (4) 84
Decrease in accrued expenses payable (19) (270)
Other, net 1 20
___ _____
Net cash provided by operating activities 117 1,724
Investing Activities:
Principal payments on mortgage related
investments 535 32,456
Increase in funds held by trustee (121) (1,147)
Principal payments on funding notes payable (486) (26,476)
Principal payments on CMOs payable - (5,055)
Principal payments on mortgage derivative
securities 2 112
_____ _____
Net cash used in investing activities (70) (110)
Financing Activities:
Net repayments of notes payable - (449)
Dividends paid - -
____ _____
Net cash used in financing activities - (449)
Net increase in cash 47 1,165
Cash at beginning of period 4,917 1,695
_____ ______
Cash at end of period $ 4,964 $ 2,860
Supplemental disclosure of cash flow information:
Interest paid (net of amounts added to funding
notes payable) $ 213 $ 1,171
First 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 implementing
actions to begin 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 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 an orderly distribution of its
current cash balance and 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. The net premium on mortgage related investments
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 2 - Summary of Significant Accounting Policies (continued)
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
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 2 - Summary of Significant Accounting Policies (continued)
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
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 3 - Mortgage Derivative Securities (continued)
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, 1995 and December 31, 1994, the Company had
investments in Mortgage Derivative Securities as set forth below:
<TABLE>
<CAPTION>
PORTFOLIO OF MORTGAGE DERIVATIVE SECURITIES
March 31, December 31,
1995 1994
<S> <C> <C>
____________________________________________________________________________
FNMA REMIC Trust 1988-7 ("FNMA 1988-7") $ 68 $ 73
- Trust 1988-11 ("FNMA 1988-11") 404 410
- Trust 1991-163 Class SA ("FNMA 1991-163") 738 763
FHLMC Multi-Class Mortgage Participation
Certificates
(Guaranteed)
- Series 2 ("FHLMC 2") 157 164
- Series 1248 Class H ("FHLMC 1248") 513 528
Cornerstone Mortgage Investment
Group II, Inc.
- Series 13 ("Cornerstone 13") 31 32
- Series 14 ("Cornerstone 14") 20 20
____________________________________________________________________________
$1,931 $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.
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 March 31, 1995 and December 31, 1994, the Company
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 3 - Mortgage Derivative Securities (continued)
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. The Company has established
a valuation reserve account to provide for future downward
valuation adjustments. At March 31, 1995, the valuation reserve
had a balance of $3, while at December 31, 1994, the balance of the
valuation reserve account was utilized to reduce the value of
certain assets.
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
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 4 - Mortgage Related Investments (continued)
At March 31, 1995 and December 31, 1994, the Company owned mortgage
related investments with aggregate outstanding principal balances
of $11,939 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 March 31,
1995 and December 31, 1994, having stated maturities ranging from
August 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, 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)
_________________________________________________________________
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 three month period ended March 31, 1994, it represented
a material portion of Company expenses.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
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
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 8 - Federal Income Taxes and Distributions
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 March 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1995
Accumulated Deficit
at Beginning of Period $(37,050)
Net Loss (4)
Less: Dividends Declared -
Accumulated Deficit
at End of Period $(37,054)
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.
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 PHILOSOPHY AND INVESTMENT ACTIVITIES
The Company's portfolio of investments is sensitive to changes in
interest rates and mortgage prepayments. As a result of the high
level and extended duration of these prepayments during all of 1992
and 1993 and the early months of 1994, earnings and cash flows from
the Company's investments were adversely impacted. For a large
majority of the assets, earnings and cash flows have been
permanently impaired and did not recover even as prepayments
returned to more historical levels beginning in the second quarter
of 1994. This permanent impairment is the direct result of the
massive level of paydowns on the mortgages collateralizing the
Company's investments. Since most of the Company's assets
represent the ownership of identified cash flows in diverse CMO
structures, accelerated prepayments of the underlying mortgage
collateral will permanently reduce cash flows even when prepayment
speeds slow. As an example, an "interest only" type investment in
a CMO collateralized by $100 million in mortgages produces only 20%
of the original expected cash flows when the underlying mortgage
collateral prepays to a $20 million level.
Historically, cash received from the Company's portfolio of
investments represented interest and dividend earnings and the
return of investment principal (basis). Interest and dividends
were used to 1) pay operating expenses and 2) make dividend
distributions to stockholders. Cash flow, representing returned
investment principal, was used to repay Company borrowings,
including dealer margin calls on repurchase agreements, and to
purchase new investments for the Company's portfolio. From mid-
year 1992 to mid-year 1994, all cash flows were utilized to reduce
the Company's borrowings (including margin calls), pay operating
expenses and fund minimal dividend distributions to stockholders.
Since the second half of 1992, the Company has elected not to
purchase any new assets, but during the same time period, Company
borrowings were reduced from approximately $22,000,000 to zero.
New purchases of mortgage derivative securities are currently
restricted to those specifically approved by the Company's Board of
Directors.
RECENT MARKET AND FUTURE PROSPECTS FOR THE COMPANY
As a result of the rapid decline in refinancing activity, mortgage
prepayment speeds for all mortgage coupon levels fell substantially
since the first quarter of 1994. These decreases in prepayment
speeds resulted in a stabilization of the Company's remaining cash
flows and improved market values on some of its assets. However,
the extended duration of historically high and unprecedented
<PAGE>
prepayments permanently reduced the level of cash flows and
earnings from the same assets; thus the Company does not expect any
increase in cash flows or earnings from its remaining portfolio.
Nevertheless, this stabilization of cash flows increased the time
available to the Company to evaluate and implement alternative
strategies.
During the third quarter and early fourth quarter of 1994 and as a
direct result of the substantial slowdown in prepayment speeds of
mortgages collateralizing the Company's investments, the Company
sold six mortgage derivative assets for approximately $4.25
million, representing a gain of approximately $650,000 over the
Company's carrying value for these same assets. After repayment of
related debt on these assets of approximately $1.9 million, the
Company increased its cash balances by $2.31 million.
Simultaneously, the Company has reduced operating expenses by
approximately 75% since early 1993. At such reduced expense
levels, the periodic cash flows from the Company's current
remaining assets are in excess of the Company's operating expenses.
During the three year period ended December 31, 1994, the Company
incurred tax losses estimated at $35 million. Absent the existence
of future excess inclusion income (see "Dividend Policy"), future
cash flows from the Company's current portfolio of investments
would 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 tax loss carryforward positions can be utilized to offset
future taxable income generated from future activities before the
Company's earnings again become taxable and result in the
requirement for dividend payments. Should new investment
activities be successful, the Company would be in a tax position to
reinvest cash flows as an alternative to or in conjunction with
resuming dividend payments.
With the Company's expectation of a period of more stable interest
rates and acceptable economic conditions, and in order to utilize
the Company's accumulated tax loss position, the Company is
considering alternative investment activities involving 1) the
evaluation of several business combination proposals that could
effectively add significant earning assets to the Company's balance
sheet and utilize its tax loss position, 2) the acquisition and
leveraged financing of tax sale certificates, and 3) the selective
purchase, with Board approval, of mortgage derivative securities
having attractive risk/return profiles reflective of the materially
altered marketplace for such securities.
Since the second quarter of 1994, the Company has analyzed numerous
potential business combinations. At the current time, the Company
has narrowed its consideration to several situations, all of which
present value maximizing opportunities. Although these discussions
<PAGE>
are positive in tone, any business combination is subject to
extensive negotiations of an economic, financial, and legal nature,
to changes in general market conditions and to the attitudes and
requirements of other entities and individuals. If a transaction
is identified and recommended by the Company's Board of Directors,
stockholders would be asked for approval to proceed through a proxy
vote.
The Company continues to make progress towards beginning the
portfolio acquisition and potential non-recourse leveraged
financing of tax sale certificates. Currently, discussions are
being held with potential third party equity investors who are
considering subordinated equity positions which, together with
Company funds, would be utilized in investment grade rated
collateralized securitizations, substantially incrementing the
level of tax sale certificate activities the Company's own cash
reserves could support.
Therefore, the acquisition of tax sale certificates could include
incremental borrowings by the Company and will include exposure to
market risks. It is the Company's intention to incur only non-
recourse debt in connection with any such investments by means of
a pledge of the underlying assets acquired and subordination of the
cash invested in new assets. The Company believes that use of
conservative underwriting standards will serve to mitigate market
risks in both equity and leveraged based purchases of such assets.
The Company expects to make its initial equity investment in tax
sale certificates during the second quarter of 1995.
Additionally, as a result of new investment regulations and
increased capital requirements for insurance companies, investment
funds, pension funds, commercial banks and savings banks, the
investing activities of these entities in mortgage derivative
products have been greatly reduced, creating conditions for an
oversupplied market. Therefore, the Company may from time to time
consider acquiring a limited number of mortgage derivative
securities available at attractive price levels. If acquired, such
securities would be purchased at discount prices, backed by lower
coupon mortgages less subject to substantial volatility in
prepayment speed levels and contain AAA rated principal guarantees.
Nevertheless, these securities would, if purchased, introduce to
the Company an added degree of prepayment and interest rate risk.
If implemented, the Company may also utilize a conservative level
of leveraging, through repurchase agreement financing, to increase
returns available to the Company.
No assurances can be given regarding the success of either of these
new investment activities, given dependence upon financial market
conditions, the availability of assets that meet established
underwriting criteria, the successful negotiation of a servicing
contract in the case of tax sale certificates, the existence of
substantial market competition and the successful placement of non-
<PAGE>
recourse debt and repurchase agreement borrowings.
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 elect to 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 currently erratic and sometimes illiquid. Buyers of
mortgage assets may demand yield levels which would result in
unsatisfactory sale prices for 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. The Company reported for fiscal 1993 that all
distributions paid in 1993 represented excess inclusion income. No
distributions were paid for fiscal 1994, but the Company estimated
the existence of a minor amount of excess inclusion income for
1994. Due to the minor amount of such excess inclusion income the
Company paid the income taxes due (an amount less than $2,400)
rather than incur the expense of a negligible stockholder
distribution. For a stockholder, generally, excess inclusion
income cannot be offset by losses.
<PAGE>
On March 21, 1995, the Company announced that no dividends would be
paid for the quarter ended March 31, 1995.
RESULTS OF OPERATIONS
The Company's Net Income decreased from $355,000 for the three
month period ended March 31, 1994 to a Net Loss of $(4,000) for the
three month period ended March 31, 1995, a decrease of $359,000.
This decrease in net income between periods is attributable to the
recognition of gains on the sale of two of the Company's Mortgage
Related Investments during the 1994 period in the amount of
$582,000 while the 1995 period contained no such asset sales gains.
Without the gains recorded from the sale of Mortgage Related
Investments in 1994's first quarter, the Company would have
incurred a loss of $(227,000) for such period.
The Company operated at an approximate break-even level during the
first quarter of 1995 because 1) operating expenses remained at
recent substantially reduced levels of $130-150,000 per quarter, 2)
no downward asset valuation adjustments were incurred and 3) there
were no gains on sales of assets.
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 $(4,000), (per share effect is negligible), for the
three months ended March 31, 1995.
Interest revenue on Mortgage Related Investments decreased from
$1,143,000 for the three months ended March 31, 1994 to $284,000
for the three months ended March 31, 1995, as a result of the
substantial reduction in Mortgage Related Investments on the
Company's Balance Sheet, which decreased between these same dates
from $35,141,000 to $11,939,000, respectively. Interest revenue on
Mortgage Derivative Securities was $201,000 for the three months
ended March 31, 1994 as compared to $69,000 for the three months
ended March 31, 1995. The sale of six Mortgage Derivative
Securities during 1994's third and fourth quarters, while resulting
in increased sales gains during those periods, resulted in the
decrease of interest revenue recognition from those same assets
during those and subsequent periods.
Income on Temporary Investments increased from $25,000 for the
quarter ended March 31, 1994 to $87,000 for the quarter ended March
31, 1995 as the Company held its unrestricted cash reserves during
1995's first quarter in high quality, short-term financial
investments. The Company's cash reserves are the result of the
<PAGE>
profitable sale of Mortgage Related Investments and Mortgage
Derivative Securities during 1994. 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 $3,269,000 between March 31, 1994 and
March 31, 1995.
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, while no sales gains were recognized during the
three months ended March 31, 1995. Without the sales gains, the
Company would have incurred a loss for the three months ended March
31, 1994 of $227,000, or $(0.04) per share.
Interest expense on Funding Notes and CMOs Payable decreased from
$1,299,000 to $285,000 for the three months ended March 31, 1994
and 1995, respectively, as a result of the substantial offsetting
balance sheet decline of Funding Notes and CMOs Payable, which
decreased from $38,472,000 to $12,128,000 between March 31, 1994
and March 31, 1995, respectively. First quarter Operating expenses
(includes "Interest on Notes Payable" and "General and
Administrative") decreased from $297,000 for 1994's first quarter
to $156,000 in 1995's first quarter. This decrease between periods
of $145,000 was the result of 1) the Company incurring no interest
expense on Notes Payable during the 1995 period as compared to
$42,000 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
$99,000, as the Company continued to be responsive to its
substantially reduced balance sheet.
Balance Sheet
The Company's assets declined during the three month period ended
March 31, 1995 by $437,000, to a total of $19,455,000 at March 31,
1995. This decrease is attributable to the Company's Mortgage
Related Investments declining during the three month period from
$12,430,000 to $11,959,000, a decrease of $491,000. This reduction
is the result of principal payments on the mortgage collateral
underlying the Company's Mortgage Related Investments. All other
asset category changes between December 31, 1994 and March 31, 1995
represented a minor increase of $54,000, highlighted by a $47,000
increase in the Company's cash accounts between the December 31,
1994 and March 31, 1995 balance sheet dates.
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 $12,128,000, or a decrease of
$410,000, as returned principal on the underlying mortgages was
used to retire outstanding obligations secured by such mortgages.
<PAGE>
Mortgage Derivative Securities decreased from $1,990,000 at
December 31, 1994 to $1,928,000 at March 31, 1995, a decrease of
$62,000, reflecting the amortization of premium and return of
principal basis of the assets held in this category.
Funds held by trustee increased from $172,000 at December 31, 1994
to $293,000 at March 31, 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.
Receivables on Mortgage Related Investments and Mortgage Derivative
Securities declined from $257,000 at December 31, 1994 to $206,000
at March 31, 1995, a decrease of $51,000, reflective of the drop in
the corresponding assets, Mortgage Related Investments and Mortgage
Derivative Securities, of $553,000.
The two liability accounts, Accrued interest on funding notes
payable and Other liabilities, decreased in total by $23,000, both
reflecting the overall slight reduction in the size of the
Company's balance sheet between December 31, 1994 and March 31,
1995.
The Company's Accumulated Deficit increased slightly from
$(37,050,000) at March 31, 1994 to $(37,054,000) at March 31, 1995.
The Company declared no dividend distribution for 1995's first
quarter.
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 $156,000 for the three months ended March 31, 1995, a
decline of $141,000. The components of this decrease in Operating
expenses include: 1) reduced interest costs on Notes Payable, which
decreased from $42,000 in 1994's first quarter to $0 for 1995's
first quarter, 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 $255,000 in 1994's first quarter to $156,000 in
1995's corresponding period, a decline of $99,000, as the Company
continued its cost reduction efforts.
During 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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At both December 31, 1994 and March 31, 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 $1,000,000
and cash reserves of $5,000,000, currently held in high quality
short-term instruments, provide the Company with significant
liquidity with which to pursue its proposed business activities.
(See "Recent Market 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: May 11, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's report on Form 10-Q for the quarter ended March 31, 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> MAR-31-1995
<CASH> 5,257
<SECURITIES> 13,867
<RECEIVABLES> 331
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,516
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,455
<CURRENT-LIABILITIES> 344
<BONDS> 12,128
<COMMON> 52
0
0
<OTHER-SE> 6,931
<TOTAL-LIABILITY-AND-EQUITY> 19,455
<SALES> 0
<TOTAL-REVENUES> 440
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 441
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
