<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 September 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 November 7, 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
September 30, 1995 (unaudited)
and December 31, 1994 3
Consolidated Statements of Revenues and
Expenses (unaudited) for the three and
nine months ended September 30, 1995
and 1994 4
Consolidated Statements of Cash Flows
(unaudited) for the nine months ended
September 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 21
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 22
<PAGE>
<TABLE>
Part I. Financial Information
Item 1. Financial Statements
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
<CAPTION>
September 30, 1995 December 31, 1994
(Unaudited)
<S> <C> <C>
ASSETS
Real estate investments:
Mortgage related investments (note 4) $ 10,673 $ 12,430
Mortgage derivative securities less valuation
allowance of $19 for 1995 (notes 2 and 3) 1,087 1,990
________ ________
11,760 14,420
Cash 5,030 4,917
Funds held by trustee 305 172
Receivables on mortgage related investments 362 212
Receivables on mortgage derivative securities 47 45
Other assets 85 126
________ ________
$ 17,589 $ 19,892
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Funding notes payable (note 5) $ 11,093 $ 12,538
Accrued interest on funding notes payable 160 179
Other liabilities 123 188
________ ________
11,376 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 September 30,
1995, and December 31, 1994 52 52
Additional paid-in capital 43,985 43,985
Accumulated Deficit (note 8) (37,824) (37,050)
-------- --------
6,213 6,987
-------- --------
$ 17,589 $ 19,892
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Part I. Financial Information
Item 1. Financial Statements (continued)
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(amounts in thousands except share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES
Interest:
Mortgage related investments $ 260 $ 308 $ 821 $1,934
Mortgage derivative securities 59 305 (511) 795
Provision for investment losses (19) (88) (19) (186)
Temporary investments 78 33 243 94
Net gain on the sale of mortgage
related investments and mortgage
derivative securities - 503 - 951
----- ----- ----- -----
378 1,061 534 3,588
EXPENSES
Interest on funding notes payable 263 317 821 1,428
Interest on CMOs payable - - - 707
Interest on notes payable - 27 - 102
General and Administrative 149 175 471 644
----- ----- ----- -----
412 519 1,292 2,881
----- ----- ----- -----
Net Income (loss) (note 8) $ (34) $ 542 $ (758) $ 707
Net Income (loss) per share $ (0.01) $ 0.11 $ (0.15) $ 0.14
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)
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(amounts in thousands except share data)
<caption
1995 1994
<S> <C> <C>
Operating Activities:
Net Income (loss) (note 8) $ (758) $ 707
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of net premium on mortgage
related investments - 817
Amortization of premiums on
mortgage derivative securities 896 1,103
Interest accrued and added to funding notes
payable 152 584
Decrease in interest receivable on
mortgage related investments 12 500
Decrease/(increase) in interest receivable on
mortgage derivative securities (2) 309
Decrease in accrued interest on
funding notes payable and CMOs payable (19) (395)
Decrease in accrued expenses payable (65) (370)
Increase in other receivables - (1,150)
Gains on the sales of investments - (490)
Other, net 41 76
----- -----
Net cash provided by operating activities 257 1,691
Investing Activities:
Principal payments on mortgage related
investments 1,595 55,884
Decrease/(increase) in funds held by trustee (133) 956
Principal payments on funding notes payable (1,597) (32,217)
Principal payments on CMOs payable - (25,042)
Principal payments on mortgage derivative
securities 7 239
Proceeds from sales of investments - 2,934
----- -----
Net cash used in investing activities (128) 2,754
Financing Activities:
Net repayments of notes payable - (2,980)
Dividends paid (16) -
----- -----
Net cash used in financing activities (16) (2,980)
Net increase in cash 113 1,465
Cash at beginning of period 4,917 1,695
----- -----
Cash at end of period $ 5,030 $ 3,160
Supplemental disclosure of cash flow information:
Interest paid (net of amounts added to funding
notes payable) $ 688 $ 2,091
Third quarter dividends paid $ 16 $ -
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 light of its earnings difficulties and conditions in the
mortgage-backed securities markets, the Company has elected not to
pursue its historical business. Instead, the Company, together
with its financial advisor, continues to explore the prospects for
a strategic transaction involving the acquisition of or merger with
a profitable going concern. If, after consulting with its
financial advisor, the Company determines that a thorough review of
potential acquisition candidates has identified no feasible
transactions that are likely to result in enhancing stockholder
value, management at such time may determine to actively develop an
investment portfolio consisting of tax sale certificates as an
alternative means of delivering value to stockholders. Any
decision to pursue such an alternative or any other investment
strategy will necessarily be based upon the Company's financial
position as well as general economic and monetary conditions
prevailing at such time.
_________________________________________________________________
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 September 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 September 30, December 31,
1995 1994
___________________________________________________________________________
<S> <C> <C>
FNMA REMIC Trust 1988-7 ("FNMA 1988-7") $ 44 $ 73
- Trust 1988-11 ("FNMA 1988-11") 266 410
- Trust 1991-163 Class SA ("FNMA 1991-163") 315 763
FHLMC Multi-Class Mortgage Participation
Certificates
(Guaranteed)
- Series 2 ("FHLMC 2") 126 164
- Series 1248 Class H ("FHLMC 1248") 315 528
Cornerstone Mortgage Investment
Group II, Inc.
- Series 13 ("Cornerstone 13") 26 32
- Series 14 ("Cornerstone 14") 14 20
____________________________________________________________________________
$1,106 $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)
Although long-term interest rates declined during the late first
and second quarters of 1995, causing an increase in mortgage
prepayment speeds, rates have stabilized during the third quarter
and, in conjunction with normal seasonal patterns, actual and
market projections of future prepayment speeds have slowed. As a
result, no downard valuation adjustments were necessary to the
Company's portfolio of assets during the third quarter; however,
the Company did elect to establish a valuation reserve account for
possible future period valuations. During the second quarter of
1995, the Company made $700 of downward valuation adjustments to
its portfolio.
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 September 30, 1995, the Company applied a discount
rate of 16% to the cash flows for its portfolio of Mortgage
Derivative Securities, whereas at December 31, 1994, the Company
applied a discount rate of 12% except for two assets, FNMA 1988-7
and FHLMC 1248, where a 16% discount rate was applied to reflect
the negative effects caused by increases in short-term interest
rates on these two assets.
None of the Company's mortgage derivative securities are pledged as
collateral for any borrowings and thus represent a source of
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 three
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 4 - Mortgage Related Investments (continued)
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, the Company is investigating the possible
contractual assignment of its ownership rights.
At September 30, 1995 and December 31, 1994, the Company owned
mortgage related investments with aggregate outstanding principal
balances of $10,673 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 September
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 September 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 a portion of the nine month period ended September 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.
On September 8, 1995, the Company announced a dividend payment of
$0.003 per share, payable on September 29, 1995, to stockholders of
record on September 20, 1995. The dividend payment, representing
excess inclusion income, is taxable to stockholders.
The following table illustrates the reconciliation between Net Loss
and Accumulated Deficit and the related per share data for the
three months ended September 30, 1995:
<TABLE>
<CAPTION>
<S> <C>
Accumulated Deficit
at June 30, 1995 $(37,774)
Net Loss (34)
Less: Dividends Paid (16)
Accumulated Deficit
at September 30, 1995 $(37,824)
Per Share:
Net Income $ (0.01)
Dividends Paid $ 0.003
_________________________________________________________________
</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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 9 - Employee Benefits (continued)
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 260,000
shares of the Company's Common Stock were awarded at market prices,
exercisable over ten year periods ending May 2005. In addition, a
salary continuance program was provided to the Company's officers,
allowing for up to one year's base salary following 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
In light of its earnings difficulties and conditions in the
mortgage-backed securities markets, the Company has elected not to
pursue its historical business. Instead, the Company continues to
explore the prospects for a strategic transaction involving the
acquisition of or merger with a profitable going concern. Together
with the Company's financial advisor, management has held recent
discussions with potential candidates regarding the possibility of
such a transaction. In addition, management has instructed the
Company's financial advisor to continue to identify and approach
additional suitable candidates regarding their interest in pursuing
a merger with the Company.
Any such transaction may involve payment by the Company of a cash
purchase price, the issuance of notes or preferred or common stock
or some combination thereof. In any case, management anticipates
that the consummation of any transaction would be conditioned upon
the receipt of stockholder approval at a special meeting called for
such purpose.
If, after consulting with its financial advisor, the Company
determines that a thorough review of potential acquisition
candidates has identified no feasible transactions that are likely
to result in enhancing stockholder value, management at such time
may determine to actively develop an investment portfolio
consisting of tax sale certificates as an alternative means of
delivering value to stockholders. Any decision to pursue such an
alternative or any other investment strategy will necessarily be
based upon the Company's financial position as well as general
economic and monetary conditions prevailing at such time.
The Company continues to be aware of the effects of time delays in
beginning new investment activities. However, the Company believes
that the future potential 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 previously composing the Company's investment
portfolio. Acquisitions of mortgage derivative securities are
currently restricted to those specifically approved by the
Company's Board of Directors.
In order to continue to qualify for an exemption under the
Investment Company Act of 1940, the Company expects to make,
subject to Board approval, sizeable investments in whole pool
residential mortgage pass-through certificates during the fourth
quarter of 1995. Such purchases will be restricted to AAA rated,
U.S. Government or quasi-government agency securities and will be
made at prices that minimize principal risk to the Company.
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 September 8, 1995, the
Company announced a dividend of $.0003 per share paid on September
29, 1995 to stockholders of record on September 20, 1995. This
third quarter 1995 dividend was the result of excess inclusion
income.
RESULTS OF OPERATIONS
The Company's Net Income declined from $707,000 for the nine month
period ended September 30, 1994 to a Net Loss of $(758,000) for the
nine month period ended September 30, 1995, a decrease of
$1,465,000. This net decline is attributable to 1) the Company's
incurring $700,000 in asset value writedowns during the 1995 (all
in the second quarter) period while only minor writedowns of
$33,000 were required for the first nine months of 1994, 2) the
existence of a net gain from the sale of assets of $951,000 in
1994's period as compared to no such gain in the 1995 period, and
3) a reduction in operating expenses of $275,000 between the 1994
and 1995 nine month periods.
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,
caused a significant increase in mortgage refinancing activity
during such period and a projection by mortgage market
professionals of further increases in future prepayment speeds.
The valuation methodology assumption of a continuation of such
increased PSA speeds was directly responsible for the $700,000 in
valuation writedowns as of June 30, 1995. Without such downward
valuation adjustments, the Company's net loss for the first nine
months of 1995 would have been limited to $58,000.
Without the net gain recorded from the sale of Mortgage Related
Investments in 1994's first nine months, the Company would have
incurred a loss of $(244,000) for such period.
Without regard to asset valuation writedowns, the Company has
operated at a slight loss per month during the first nine months of
1995.
Statement of Revenues and Expenses
Net Income (loss), as calculated in accordance with GAAP and as
presented in the accompanying consolidated financial statements,
was $(758,000), or $(0.15) per share, for the nine months ended
September 30, 1995 as compared with $707,000, or $0.14 per share,
for the nine months ended September 30, 1994, and $(34,000), or
$(0.01) per share, for the three months ended September 30, 1995 as
compared to $542,000, or $0.11 per share, for the three months
ended September 30, 1994.
Interest revenue on Mortgage Related Investments decreased from
$1,934,000 for the nine months ended September 30, 1994 to $821,000
for the nine months ended September 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 $39,089,000 during 1994's first nine months to an
average outstanding of $11,552,000 during the first nine months of
1995. Interest revenue on Mortgage Derivative Securities was
$795,000 for the nine months ended September 30, 1994 as compared
to $(511,000) for the nine months ended September 30, 1995. This
$1,306,000 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 first nine months (all in the second quarter) as compared
with $33,000 for the first nine months 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 $33,000 for the
quarter ended September 30, 1994 to $78,000 for the quarter ended
September 30, 1995 and from $94,000 to $243,000 for the nine month
periods ended September 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 $2,587,000 between June 30, 1994
and September 30, 1995.
Interest expense on Funding Notes and CMOs Payable decreased from
$317,000 and $2,135,000 for the three and nine months ended
September 30, 1994 to $263,000 and $821,000 for the three and nine
months ending September 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
$41,597,000 during the first nine months of 1994 to an average of
$11,816,000 during the nine months ended September 30, 1995.
Operating expenses (includes "Interest on Notes Payable" and
"General and Administrative") decreased from $746,000 for 1994's
first nine months to $471,000 in 1995's first nine months. This
decrease between periods of $275,000 was the result of 1) the
Company incurring no interest expense on Notes Payable during the
1995 period as compared to $102,000 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 $173,000, as the Company continued to be responsive to
its substantially reduced balance sheet by implementing extensive
cost reduction efforts.
Balance Sheet
The Company's assets declined during the nine month period ended
September 30, 1995 by $2,303,000, to a total of $17,589,000 at
September 30, 1995. This decrease is primarily attributable to the
Company's Mortgage Related Investments declining during the nine
month period from $12,430,000 to $10,673,000, a decrease of
$1,757,000. 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 $1,087,000 at
September 30, 1995, a decrease of $903,000. Such $903,000 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 September 30,
1995 represented an increase of $357,000, including a $113,000
increase in the Company's cash accounts between the December 31,
1994 and September 30, 1995 balance sheet dates and a timing
related increase of $152,000 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 $11,093,000, or a decrease of
$1,445,000, 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 $305,000 at September 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 $84,000, both
reflecting the overall reduction in the size of the Company's
balance sheet between December 31, 1994 and September 30, 1995.
The Company's Accumulated Deficit increased from $(37,050,000) at
December 31, 1994 to $(37,824,000) at September 30, 1995 reflecting
the $758,000 loss incurred during the first half of 1995 and the
Company's third quarter 1995 dividend distribution of $16,000.
EXPENSES AND USE OF BORROWED FUNDS
Operating expenses ("Interest on Notes Payable" and "General and
Administrative") were $746,000 for the nine months ended September
30, 1994 versus $471,000 for the nine months ended September 30,
1995, a decline of $275,000. The components of this decrease in
Operating expenses include: 1) reduced interest costs on Notes
Payable, which decreased from $102,000 in 1994's first nine months
to $0 for 1995's first nine months, 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 $644,000 in 1994's first nine months
to $471,000 in 1995's corresponding period, a decline of $173,000.
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 September 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. The Company believes that potential borrowings of
approximately $500,000 secured by such assets or estimated proceeds
realizable upon the 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: November 7, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the Company's report
on Form 10-Q for the quarter ended September 30, 1995 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000835669
<NAME> RYMAC MORTGAGE INVESTMENT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 5,335
<SECURITIES> 11,760
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<TOTAL-ASSETS> 17,589
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<COMMON> 52
0
0
<OTHER-SE> 6,161
<TOTAL-LIABILITY-AND-EQUITY> 17,589
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<INCOME-PRETAX> (34)
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</TABLE>
