<PAGE>
<TABLE>
<CAPTION>
<S><C>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1995 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ______________ to ______________
Commission file number 1-10001
RYMAC MORTGAGE INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 25-1577534
(State or other (I.R.S. Employer Identification No.)
jurisdiction of incorporation
or organization)
100 N. Fourth Street, Suite 813, P.O. Box 250, Steubenville, OH 43952
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (800) 666-6960
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 American Stock Exchange, Inc.
Title of each class Name of exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
As of March 20, 1996, 5,210,600 shares of RYMAC Mortgage Investment
Corporation common stock were outstanding, and the aggregate market value
of the shares held by non-affiliates (based upon the closing price of the
common stock on that date as reported on the American Stock Exchange
Composite Tape) was approximately $7,165,000.
Documents Incorporated by Reference:
Registrant's 1996 definitive Proxy Statement to be filed with the
Securities and Exchange Commission no later than 120 days after the end of
the registrant's fiscal year.
</TABLE>
<PAGE>
PART I
Item 1. Business
(A) General Development of Business.
RYMAC Mortgage Investment Corporation (the "Company") was
incorporated in the State of Maryland on July 1, 1988. Prior to
1994, the Company was primarily engaged in making investments in
mortgage derivative securities and, to a lesser extent, mortgage
related investments, all of which are secured by single-family
residential mortgage loans. Two wholly-owned, limited purpose
finance subsidiaries of the Company, RYMAC Mortgage Investment I,
Inc. ("RMI I") and RYMAC Mortgage Investment II, Inc. ("RMI II"),
hold certain mortgage related investments. The Company also
generates revenues from other sources, such as interest earnings on
certain investments of the Company and sales of certain investments
of the Company.
The Company has elected to be taxed as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986,
as amended (the "Code"). As long as the Company qualifies as a
REIT, dividends paid to stockholders will be allowed as a deduction
for purposes of determining income subject to federal corporate
income tax. As a result, the Company will not be subject to such
tax on that portion of its net income that is distributed to
stockholders. (See "Federal Income Taxation of the Company and
Stockholders")
(B) Current Business Environment.
Since May 1992, the Company has not purchased any new
mortgage derivative or mortgage related investments. During 1995,
the Company purchased one 7% FNMA guaranteed pass-through
certificate backed by 30 year single-family mortgage loans of which
the Company maintains 100% ownership. The current principal
balance is approximately $3.4 million. During the period from the
Company's inception in 1988 through early 1992, mortgage interest
rate levels and prepayment speeds remained within ranges existent
from 1970 to early 1992. Historically, cash received from the
Company's investment portfolio represented interest and dividend
earnings and the return of investment principal (basis). However,
from June of 1992 to early 1994, mortgage rates declined to levels
lower than those existent for the prior twenty years, resulting in
extraordinarily rapid and sustained levels of residential mortgage
prepayments. As a direct result, the Company's investments
generated sharply reduced interest and dividend earnings. Further,
as the duration of high levels of prepayments continued, the
Company's cash flows from returns of investment principal and
interest and dividend earnings were also impaired and sufficient
only to reduce the Company's borrowings (including margin calls),
pay operating expenses and fund minimal dividend distributions to
stockholders during the second half of 1992 and all of 1993, 1994
and 1995. As a result of these earnings difficulties and a
substantially altered mortgage-backed securities market, the
Company's Board of Directors elected in mid-1994 not to pursue its
historical business. Instead, the Company and, since June 1995,
its financial advisor have been investigating alternatives to the
business currently conducted by the Company. Operating and capital
losses incurred during 1992 through 1995 have resulted in tax
losses estimated currently at $36 million. Such tax losses can be
carried forward and utilized to offset future taxable income
generated from current or contemplated activities before Company
earnings are taxable or, as a REIT, result in dividend
distributions.
Currently, the Company and its financial advisor are in the process
of identifying and soliciting interest from suitable candidates
regarding strategic transactions involving the acquisition of or
merger with a profitable growing concern. The successful
conclusion of a business combination or merger is subject to
financial and economic conditions in the marketplace, the
negotiation of mutually acceptable values, the particular
requirements of the owners and management of other entities and the
existence of competitive offers from entities with greater
resources than those of the Company. To date, the Company has not
successfully concluded any such discussions.
If the Company is unsuccessful in identifying a business
combination or merger that is likely to produce value building
results, it may elect to alternatively begin to develop an
investment portfolio of financial assets. A decision to pursue
such alternative investment activity would be subject to the
Company's financial position as well as general economic and
financial market conditions prevailing at such time. Either a new
investment activity or any business combination or merger would
seek to make effective use of the Company's tax loss position.
(See "Management's Discussion and Analysis of Financial Condition
and Results of Operations")
(C) Narrative Description of Business.
1. Management of Operations. The Company's investment
policy is controlled by its Board of Directors (the "Board of
Directors"). The By-laws of the Company provide that, except in
the case of a vacancy, a majority of the members of the Board of
Directors and of any committee of the Board of Directors must not
be employed by, or otherwise affiliated with, the Company or its
former manager.
2. Operating Policies and Strategies. Unprecedented
high levels of mortgage refinancings resulting in prepayment of the
Company's assets for all of 1992 and 1993 and continuing into the
early part of 1994, have caused the Company to incur large
operating losses. The extended duration of these prepayments
permanently reduced cash flows and earnings from these same assets
and caused the Company to consider alternative investment policies
and strategies, including the purchase and financing of alternative
financial assets and evaluation of potential business combinations.
(See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Investment Activities and Future
Prospects for the Company")
During the four year period ended December 31, 1995, the
Company incurred tax losses estimated at $36 million. Of this, it
is estimated that $31 million represents operating losses while $5
million represents capital losses related to sales of assets.
Operating tax losses may be carried forward for a period of up to
15 years from the date of occurrence, while capital tax losses can
be carried forward for five years from occurrence. The Company's
tax loss positions can be utilized to offset future taxable income
before the Company's earnings again become taxable, or, as a REIT,
result in required dividend distributions. Should its future
activities be successful, the Company would be in a position to
reinvest cash flows into suitable assets and activities.
Historically, the Company generated revenues primarily
from investments in mortgage derivative securities ("Mortgage
Derivative Securities"). The Company's investments in Mortgage
Derivative Securities currently consist of (i) a class or classes
of collateralized mortgage obligations ("CMOs") (as defined below)
that either represents a regular class of bonds or a residual class
of bonds or (ii) interests in a class or classes of mortgage-backed
pass-through certificates that either represent a regular class of
certificates or a residual class of certificates. These securities
entitle the Company to receive a portion of the cash flow from the
Mortgage Collateral (as defined below) underlying the CMOs or
mortgage-backed pass-through certificates. For federal income tax
purposes, a majority of the Company's Mortgage Derivative
Securities represent interests in real estate mortgage investment
conduits ("REMICs"). A CMO is a security issued in one or more
classes ("CMO Classes") collateralized by a specific group of
mortgage loans or mortgage certificates guaranteed by GNMA, FNMA
or FHLMC (collectively, the "Mortgage Certificates" and together
with the mortgage loans, the "Mortgage Collateral") and evidences
the right of the investors to cash flows from the assets underlying
such CMO. The Company had also generated revenues from Mortgage
Related Investments (as defined below) and had purchased for its
portfolio shares of common stock of companies engaged in businesses
similar to the Company's.
In addition, or as an alternative, the Company, with the
approval of a majority of the Unaffiliated Directors, may adopt
investment strategies which, among other things, could involve the
acquisition of non-real estate related assets. Such strategies, if
adopted, could result in the Company being unable to qualify as a
REIT under the Code. The failure to qualify as a REIT could have
severe adverse tax consequences for the Company. (See "Federal
Income Taxation of the Company and Stockholders") However, the
adverse tax consequences may be substantially mitigated by the
Company's net operating losses.
The Company may elect to purchase or otherwise reacquire,
shares of its Common Stock, par value $.01 per share ("Common
Stock"), if, in the opinion of the Board of Directors, such
purchases can be made upon favorable terms that can be expected to
result in an increase in distributions or value to the remaining
stockholders without adversely affecting the ability of the Company
to maintain its qualification as a REIT under the Code. The
Company did not purchase any shares of Common Stock during calendar
1995 nor does it anticipate any purchase of shares during calendar
1996.
The Company previously utilized borrowings to purchase
certain of the investments described above and contemplates the use
of borrowings in regard to any new investment activity or business
combination. During 1994, the Company elected to allow its bank
line of credit to expire and repaid in full all outstanding
repurchase agreements with Wall Street dealers. Since November 30,
1994, the Company has had no outstanding borrowings. (See "Capital
Resources")
3. Types of Investments. Historically, the Company's
portfolio of assets has included:
(a) Mortgage Related Investments. In its first fifteen
months of operations, the Company's primary source of income was
its mortgage related investments, wherein the Company purchased
from issuers of CMOs the right to receive the cash flow of the CMO
after debt service payments on the CMO are made ("Mortgage Related
Investments").
(b) Mortgage Derivative Securities. Although Mortgage
Related Investments still constitute a portion of the Company's
portfolio, the Company's portfolio also includes other investments,
consisting of Mortgage Derivative Securities such as IOs, Inverse
IOs, PAC and TAC IOs, POs, IOettes, Floating Rate and Inverse
Floating Rate Bonds, Z Bonds, MBSs, and Residual Bonds, as defined
below.
1) An IO is an interest only class. An IO entitles the
holder to receive the interest portion of the cashflow from the
underlying mortgage-backed security. These securities are bearish
in nature and thus show improved performance as prepayment speeds
slow and interest rates rise.
2) An Inverse IO is created by dividing a fixed rate
bond class into floating and inverse floating rate components based
upon a market interest rate index, such that, at any time the sum
of the interest payments to the two classes is no greater than the
coupon on the fixed rate bond. As the index rises, more interest
is required in the floating rate component and therefore less is
available to the inverse floating rate holder. In a rising
interest rate environment, the lower coupon payments due the
Inverse IO holder are to some degree offset by the IO structure of
the security. With rising rates, slower prepayments will enable
the Inverse IO holder to recognize a decreased coupon on an
outstanding balance for a longer period. An Inverse IO does not
guarantee the par face of the bond, unlike an Inverse Floating Rate
Bond (see 7 below), and is usually sold with nominal principal face
amount but at a premium.
3) A PAC (Planned Amortization Class) IO is an IO with
a fixed coupon calculated on a nominal principal balance that is
protected within a band of prepayment rates. This prepayment band
offers more average life assurance than a pure IO strip. A TAC
(Targeted Amortization Class) IO is similar to a PAC IO except that
the band of prepayment rates is much narrower. This narrower band
makes the average life of a TAC IO more sensitive to prepayment
speeds than a PAC IO.
4) A PO is a principal only class. A PO entitles the
holder to receive the principal portion of the underlying mortgage-
backed security. These securities are sold at a discount to face
and benefit when interest rates fall and prepayment rates rise.
5) An IOette represents an interest only strip from a
portion of the interest component of an underlying mortgage backed
security. This security is bearish in nature as it shows improved
performance as prepayments slow (interest rates rise).
6) A Floating Rate Bond is a CMO bond on which the
interest rate paid to bondholders fluctuates with changes in an
interest rate index, such as the London Interbank Offered Rate
("LIBOR"), and is usually reset monthly.
7) An Inverse Floating Rate Bond contains a coupon that
fluctuates inversely with changes in a floating rate index such as
LIBOR. As the index decreases, the formula used to set the coupon
on this bond results in an increased yield. Typically, this type
of Mortgage Derivative Security is purchased at or near the face
amount of the bond. Although the face amount of principal will
always be returned, it may be faster than expected due to an
increase in prepayment speeds usually associated with lower
interest rates.
8) A Z, or accrual, bond is a bond class that does not
receive payments of interest until certain other classes of bonds
are retired. Until the Z bond begins receiving interest payments,
the amount of interest due is accrued, or added, to the principal
amount of the bond.
9) Residual Bonds, in general, entitle the holder to
receive all or a portion of the residual cash flow from an
underlying CMO after payment of principal and interest on all other
bond classes and other expenses related to administration of the
CMO.
(c) Mortgage-Backed Securities. An MBS, or Mortgage-
Backed Security, is a security backed by an undivided interest in
a pool of mortgage loans. The cash flow from the mortgage loans is
used to pay principal of, and interest on, the securities. The
most commonly recognized MBSs are issued through the following
three governmental entities: GNMA; FNMA; and FHLMC.
4. Investment Portfolio. During the year ended December
31, 1995, in order to continue to qualify for an exemption under
the Investment Company Act of 1940 (See "Investment Restrictions"),
the Company made a sizeable investment in one 7% FNMA guaranteed 30
year single-family mortgage pool. (See "Current Business
Environment" above, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations")
The information presented below with respect to each of
the Mortgage Derivative Securities, Mortgage Related Investments
and Mortgage-Backed Securities held by the Company at December 31,
1995, was provided to the Company either by the issuer of the
related CMO or obtained from the Bloomberg Financial System
("Bloomberg"). The Company did not participate in the issuance of
such CMOs and is relying on the respective CMO Issuers and
Bloomberg regarding the accuracy of the information provided. The
Company believes, however, that such information is accurate. In
reading the information presented below, only information regarding
CMO classes whose structure and balance affect the performance of
the Company's investment in the related Mortgage Derivative
Security, Mortgage Related Investment or Mortgage-Backed Security
is shown. For investments where no information is shown for other
CMO classes, the performance of the Company's investment relates
solely to prepayment speeds on the underlying Mortgage Collateral.
<PAGE>
<TABLE>
Collateralized Mortgage Obligations
Underlying Mortgage Related Investments
Held on December 31, 1995
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Principal
Initial Amount Company's
Principal as of Issue Date/ Percentage
Name of Issuer CMO Amount Dec. 31, 1995 Interest Stated First Optional Ownership
and Series Class (In Thousands) (In Thousands) Rate Maturity Redemption Date Interest
RYMAC IV
Series 7 7-Z(1) $ 1,500 $ 2,741 9.400% 08/01/16 07/29/86 100%
Later of 08/01/01
or date Class 7-C
fully paid
Series 10 10-Z(1) 4,000 5,493 9.450 10/01/16 09/30/86 100%
Later of 10/01/01
or date Class 10-C
fully paid
Series 19 19-B 4,550 1,880 8.250 05/01/17 04/23/87 100%
05/01/97
(Notes to table appear on page 12)
</TABLE>
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<TABLE>
<CAPTION>
Collateralized Mortgage Obligations
Underlying Mortgage Derivative Securities
Held on December 31, 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Principal
Initial Amount Company's
Principal as of Issue Date/ Percentage
Name of Issuer CMO Amount Dec. 31, 1995 Interest Stated First Optional Ownership
and Series Class (In Thousands) (In Thousands) Rate Maturity Redemption Date Interest
FNMA
REMIC 7-Z(1) $ 20,000 $ 35,821 9.250% 04/25/18 04/29/88 15%
Trust 7-R 700 77 (5) 04/25/18 No optional redemp- of Class
1988-7 tion permitted 7-R
FNMA
REMIC 11-A(2) 56,000 16,703 8.550 05/25/18 05/25/88 22%
Trust 11-B(2) 6,700 1,998 (3) 05/25/18 No optional redemp- of Class
1988-11 11-C 88,200 3,233 (3) 05/25/18 tion permitted 11-R
11-D 49,100 1,800 (4) 05/25/18
11-R 20 5 (5) 05/25/18
FHLMC
Series 1248 H 186 36 (3) 03/15/22 03/30/92 10.8%
Date amount of certif-
icates is less than 1%
of original amount
FNMA
REMIC Trust SA 1,360 261 (3) 12/25/21 12/30/91 12.87%
1991-163 No optional redemp- of Class SA
tion permitted
FHLMC
Series 2 2-Z(1) 19,260 26,725 9.300 03/15/19 03/30/88 100%
2-R 100 2 2,668.240(5) 03/15/19 No optional redemp- of Class 2-R
tion permitted
(Notes to table appear on page 12)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Collateralized Mortgage Obligations
Underlying Mortgage Derivative Securities
Held on December 31, 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Principal
Initial Amount Company's
Principal as of Issue Date/ Percentage
Name of Issuer CMO Amount Dec. 31, 1995 Interest Stated First Optional Ownership
and Series Class (In Thousands) (In Thousands) Rate Maturity Redemption Date Interest
FHLMC
Series 21 21-Z(1) $ 84,750 $100,668 9.500% 01/15/20 11/30/88 37.5%
21-R 100 10 (5) 01/15/20 Date amount of multi- of Class
class bonds is less 21-R
than 1% of original
amount
Cornerstone
Mortgage
Investment
Group II,
Inc.
Series 13 A-1 20,009 4,986 9.250 08/30/18 08/25/88 100%
Interest Rcpts None None (6) 08/30/18 Date amount of cer- of Interest
tificates is less Receipts
than 10% of original
amount
Series 14 A-1 15,012 2,734 9.250 09/30/18 09/25/88 100%
Interest Rcpts None None (6) 09/30/18 Date amount of cer- of Interest
tificates is less Receipts
than 10% of original
amount
PaineWebber
CMO Trust L-4(2) 114,200 41,042 8.950 07/01/18 06/30/88 17.8%
Series L L-5 185 185 (5) 07/01/18 No optional redemp- of Class L-5
tion permitted
(Notes to table appear on page 12)
</TABLE>
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<TABLE>
<CAPTION>
Mortgage-Backed Security
Held on December 31, 1995
<S> <C> <C> <C> <C> <C> <C>
Principal Company's
Initial Amount as of Percentage
Name of Issuer Amount Dec. 31, 1995 Interest Stated Issue Ownership
and Pool Number (In Thousands) (In Thousands) Rate Maturity Date Interest
FNMA $3,400 $3,397 7.000% 11-1-25 12-1-95 100%
#332585
(Notes to table appear on page 12)
</TABLE>
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<TABLE>
<CAPTION>
NOTES TO TABLE
<S><C>
(1) A Class of "Compound Interest Bonds" or "Accrual Certificates" on which interest accrues and is added
to the principal amount of such CMO Class but on which interest and principal is not paid until all CMO
Classes having an earlier stated maturity are fully paid.
(2) A Scheduled Amortization Class on which principal is paid on a preferred basis with respect to other
CMO Classes in a specified amount, to the extent funds are available.
(3) A CMO Class whose interest rate varies based on a specified relationship to the 30-day London Interbank
Offered Rate for U.S. Dollar deposits ("LIBOR"), the 1 Year Treasury Index or the 3 Month Treasury Index,
subject to a maximum interest rate. The interest rates at December 31, 1995 on Class 11-B and 11-C of the
FNMA REMIC Trust 1988-11 were 6.39% and 6.69%, respectively, with maximum interest rates payable of 12.75%
and 14.0%, respectively. The interest rate at December 31, 1995 on Class H of FHLMC Series 1248 was
3,471.53% with a maximum interest rate payable of 9,340.65%. The interest rate at December 31, 1995 on
Class SA of the FNMA REMIC Trust 1991-163 was 427.05% with a maximum interest rate payable of 1,034.80%.
(4) Zero coupon Bond that does not bear interest.
(5) Residual Bonds.
(6) Beneficial ownership of undivided interests in 2.105263% of all future interest payments to be made on
the GNMA certificates underlying the related CMO.
</TABLE>
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<TABLE>
<CAPTION>
The following table sets forth certain information with respect to the collateral underlying such CMO(1):
Collateral Descriptions
<S> <C> <C> <C> <C>
Type of Remaining Weighted Weighted Average
Mortgage Principal Amount Average Scheduled
Issuer and Certificates of Mortgage Pass-Through Remaining Term
Series or Securing Certificates Rate of to Maturity
Pool Number the CMO (In Thousands) Mortgage Certificates (Years:Months)
RYMAC IV
Series 7 FNMA $ 2,774 9.24% 19:01
Series 10 FNMA 5,280 9.60 18:09
Series 19 FNMA 1,760 8.62 20:02
FNMA
#332585 ---- 3,397 7.00 29:10
FNMA
REMIC Trust
1988-7 FNMA 35,898 9.50 20:06
REMIC Trust
1988-11 FNMA 23,739 9.00 20:11
REMIC Trust
1991-163 FNMA 104,159 9.00 23:04
FHLMC
Series 2 FHLMC 26,727 9.50 17:03
Series 21 FHLMC 100,678 9.50 21:01
Series 1248 FHLMC 63,497 9.00 21:09
Cornerstone
Mortgage
Investment
Group II, Inc.
Series 13 GNMA 4,989 9.50 22:01
Series 14 GNMA 2,736 9.50 22:00
PaineWebber
Series L FNMA 41,217 9.00 20:03
TOTAL PORTFOLIO WEIGHTED AVERAGE PASS-THROUGH RATE 9.20
(1) Information on those RYMAC IV CMOs which did not have a payment date on January 1, 1996 is as of the payment date
for such CMOs that preceded January 1, 1996. All other information is as of January 1, 1996.
</TABLE>
<PAGE>
5. Cash Flow from Investments. The Company's return on
its investments has been substantially affected by a number of
factors, including short-term interest rates to the extent that
such rates affect certain of its investments, and the rates of
prepayment of the underlying Mortgage Collateral. The rate at
which principal payments occur on pools of single-family loans is
influenced by a variety of economic, geographic, social and other
factors. In general, however, mortgage loans are likely to be
subject to higher prepayment rates if prevailing interest rates are
significantly below the interest rates on the mortgage loans, as
was the case during the time period of early 1992 to early 1994 and
again during the second half of 1995. Conversely, in the event
that interest rates are near or above the interest rate on the
mortgage loans, the rate of prepayment would be expected to
decrease as had been the case in the period of mid 1994 to mid
1995. The extended duration of unprecedented high levels of
prepayments during the early 1992 to early 1994 time period caused
permanent impairment to the cash flow levels of a majority of the
Company's assets purchased prior to May of 1992. The extent of the
impairment was such that a return to slower prepayment speeds did
not materially improve the cash flow performance of such assets.
Other factors affecting the rate of prepayment of mortgage loans
include changes in mortgagor's housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties,
assumability of mortgage loans, servicing decisions and the cost of
refinancing.
The Company's Mortgage Derivative Securities each have
different characteristics; thus the cash flows from any particular
mortgage derivative security will vary based upon the structure of
the particular Mortgage Derivative Security (see 3(b) above), the
level of interest rates on mortgage loans and mortgage prepayment
levels. However, the Company's portfolio of Mortgage Derivative
Securities has been materially adversely affected because of such
levels.
The Company's cash flow from its Mortgage Related
Investments is derived from three principal sources: (a) any
positive difference between the interest rates of the Mortgage
Collateral and the weighted average interest rates of the related
CMO Classes; (b) any amounts available from prepayments on the
Mortgage Collateral that are not necessary for debt service
payments on such CMOs; and (c) any reinvestment income in excess of
amounts required to ensure timely payments of principal and
interest on such CMOs. The positive difference between rates on
the Mortgage Collateral and the weighted average rates on the
related CMO Classes was negatively affected by the rapid levels of
mortgage prepayments in the 1992 to early 1994 period. Rapid
prepayments result in 1) a reduction of the positive difference
available to the Company and 2) a shortened duration of such
positive difference. Also, lower interest rates result in reduced
reinvestment rates.
Excess cash flow from a particular investment will
decline over time and eventually terminate.
6. Other Potential Investments. The Company's Board of
Directors adopted Investment Guidelines ("Guidelines") to provide
general parameters for the Company's investments and borrowings
pursuant to which the Company may make investments without case by
case approval by the Board of Directors. The Guidelines list
certain investments which the Company is permitted to make.
Pursuant to the Guidelines, the Company may purchase Mortgage
Collateral which the Company may hold or pledge to secure a CMO or
to back other mortgage related securities. The Company may also
acquire shares of equity securities of other CMO residual REITs.
Additionally, the investment criteria set forth in the Guidelines,
allow the Company, for a fee, to issue commitments to sellers of
Mortgage Collateral. The Company may purchase mortgage loans (i)
that are eligible for securitization and guaranty by GNMA, FNMA or
FHLMC or (ii) that are not eligible for such securitization and
guaranty. The Company may also purchase Mortgage Collateral that
could subsequently be used to secure various CMOs issued by one or
more CMO Issuers, and may participate in the issuance of CMOs by
forming, acquiring or entering into arrangements with CMO Issuers.
The Company has not engaged in any of such activities to date and
does not expect to consider such activities. However, due to the
performance of the Company's investment portfolio since 1992 and
the altered business environment for mortgage investments in
general, the Company has made only one substantial investment since
May 1992 (See "Investment Portfolio" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations") and
is currently required to seek specific Board of Directors approval
for purchases of any new investment. The Board of Directors has
authorized management 1) to continue evaluation of alternative
investment activities and 2) to evaluate business combination
proposals that could effectively utilize the Company's tax loss
position.
7. Capital Resources. The Company had maintained a line
of credit with a commercial bank for $250,000 which expired on
April 30, 1994 and, at the Company's election, was not renewed.
The line of credit had been used to fund day-to-day operating needs
and in past periods to also temporarily fund acquisitions of new
investments pending negotiation of repurchase agreements or
awaiting return of invested principal.
The Company had historically supplemented its funds
available for investment through repurchase agreements. The
repurchase agreements entered into by the Company involved the
transfer by the Company of certain of its assets to a financial
institution in exchange for cash in an amount that was less than
the fair market value of such assets. At the same time, the
Company agreed to repurchase such assets at a future date at a
price equal to the cash paid by such financial institution plus
interest thereon. The extraordinarily high level of mortgage
prepayments in the 1992 to mid 1994 period caused dealers to reduce
substantially the financing value of investments pledged under
repurchase agreements. Under such circumstances, the Company was
required to reduce the amount of outstanding borrowings by cash
payments under the repurchase agreement or the delivery of other
unencumbered investments, thus reducing the Company's ability to
purchase new investments. (See "Management's Discussion and
Analysis - Liquidity and Capital Resources")
At December 31, 1995 and March 20, 1996 the Company had
no outstanding borrowings under repurchase agreements. As such,
all of the Company's Mortgage Derivative Securities and its
Mortgage-Backed Security are available to secure future borrowings,
although the financing value of such Mortgage Derivative Securities
is substantially limited.
The Company's By-laws provide that it may not incur
additional indebtedness if, after giving effect to such
indebtedness, its aggregate indebtedness (other than liabilities
incurred in connection with participation in the issuance of CMOs
and any loans between the Company and its corporate subsidiaries),
secured and unsecured, would exceed 300% of the Company's average
invested assets, in each case on a consolidated basis, as
calculated at the end of each calendar quarter in accordance with
generally accepted accounting principles, unless such additional
indebtedness is approved by a majority of the Unaffiliated
Directors. The Company is currently operating under a borrowing
limitation pursuant to a policy adopted by its Board of Directors
that limits total borrowings to $25,000,000, an amount
substantially in excess of the amount the Company would be able to
borrow under the current operating condition of the Company. At
December 31, 1995 and March 20, 1996, the Company had no
indebtedness outstanding. The Company's contemplated future
activities could include borrowings by the Company which would be
secured by a pledge of newly acquired assets and/or current
portfolio assets.
The Company has authorized 50,000,000 shares of Common
Stock. The Company's current financial condition substantially
limits its ability to raise additional equity capital. The
successful implementation of alternative investment strategies
and/or the negotiation of a business combination may involve
issuance by the Company of common stock. The Company believes that
the issuance of equity securities in connection with alternative
investment activities and/or a business combination and potentially
raising additional equity capital based upon the success of such
investment activity or combination is in the long-term best
interests of the Company.
In addition, the Company's Articles of Incorporation
permit the Board of Directors to authorize and issue from time to
time additional classes of stock without the necessity of further
approval by the stockholders and with such rights and preferences
as the Board of Directors of the Company may designate by
resolution. Depending upon the terms set by the Board of
Directors, the authorization and issuance of preferred stock or
other new classes of stock could adversely affect existing
stockholders. The effects on stockholders could include, for
example, dilution of existing stockholders, restriction on
dividends on Common Stock, restrictions on dividends for other
corporate purposes and preferences to holders of a new class of
stock in the distribution of assets upon liquidation. Since the
filing of the Articles of Incorporation, the Board of Directors has
neither authorized nor issued any additional classes of stock.
8. Investment Restrictions. Restrictions on investments
by the Company in certain types of assets are imposed by the
provisions of the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Investment Company Act specifically
exempts entities primarily engaged in such activities from the
definition of an investment company (the "Real Estate Exception").
Under interpretations issued by the staff of the Securities and
Exchange Commission, in order to qualify for the Real Estate
Exception, the Company must maintain at least 55% of its assets in
mortgage loans or certain other interests in real estate, and
another 25% of its assets in those or certain other types of real
estate-related interests. The ability of the Company to acquire
Mortgage Derivative Securities may be limited by the Investment
Company Act depending, among other things, upon whether the Company
acquires all or only a portion of the residual interest in a CMO,
the nature of the collateral underlying such CMO and the
composition of the balance of the Company's assets at the time of
each such acquisition. Under interpretations of the staff of the
Commission, investments in mortgage-backed or other mortgage
related securities (including mortgage certificates) that are
securities considered to be separate from the underlying mortgage
loans are not considered to be investments in mortgage loans for
purposes of the 55% test unless such securities represent all the
certificates issued with respect to the underlying pool of
mortgages. The Company's investment policies prohibit it from
making any investments that would cause the Company to be an
investment company within the meaning of the Investment Company
Act. The Company monitors its operations in order to evaluate the
qualification of the Company for the Real Estate Exception.
Uncertainties exist as to the interpretation of the
exception from the definition of an investment company under the
Investment Company Act for companies primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate. The Company believed that,
based upon its historical method of operation, it fell within such
exception. In connection with the review by the Commission of the
registration statement for the Company's initial public offering,
the Company had been advised, based on a preliminary review, that
the staff of the Division of Investment Management of the
Commission, while not taking a definitive position, was not in
agreement with the Company's conclusion. If the Company were
required to register as an investment company or to revise
materially its contemplated method of operation to qualify for an
exemption, it would be subject to additional limitations and
restrictions on its activities.
In order to continue to qualify for an exemption under
the Investment Company Act of 1940, (see note 2 of the Company's
Consolidated Financial Statements), the Company made a sizeable
investment in one 7% FNMA guaranteed 30 year single-family mortgage
pool, of which the Company owns 100%, during the fourth quarter of
1995. Such security is AAA rated and was purchased at a price that
under current market conditions minimizes principal risk to the
Company.
If the Company were unable to qualify for the Real Estate
Exception or otherwise 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 the balance sheet date to the extent not done so
already. The 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.
The Company is prohibited from purchasing real estate
contracts of sale. The Company also may not invest in unimproved
real property or mortgage loans on unimproved real property, nor
may it underwrite securities of other issuers. The foregoing
restrictions may not be changed without the approval of a majority
of the Unaffiliated Directors.
The Company may purchase or otherwise reacquire shares of
its Common Stock if, in the opinion of the Board of Directors, the
purchases can be made upon favorable terms that can be expected to
result in an increase in distributions to the remaining
stockholders. However, the Company may not make such purchases if
to do so would adversely affect the ability of the Company to
maintain its qualification as a REIT under the Code. (See "Federal
Income Taxation of the Company and Stockholders")
The operating policies and strategies of the Company are
governed by the Board of Directors, which has the power to modify
or alter such policies without the consent of the stockholders.
9. Management Agreement and Fees. The Company's
Management Agreement with its former manager expired on March 31,
1992. The Board of Directors determined that the Company would
operate on a self-managed basis and, consequently, it did not enter
into a new management agreement with its former manager.
On a self-managed basis, the Company is responsible for
all expenses, including resources previously provided by the former
manager.
10. Dividend Reinvestment Plan. On December 13, 1988,
the Company adopted an Automatic Dividend Reinvestment Plan (the
"Plan"). The Plan is administered by American Stock Transfer &
Trust Company. The Plan provides to the Company's security holders
a method of investing cash dividends paid by the Company in new
shares of the Company's common stock. The Plan also permits
participants to make optional cash investments in additional shares
of the Company's common stock.
11. Federal Income Taxation of the Company and
Stockholders. THE PROVISIONS OF THE CODE ARE HIGHLY TECHNICAL AND
COMPLEX. THIS SUMMARY IS NOT INTENDED AS A DETAILED DISCUSSION OF
ALL APPLICABLE PROVISIONS OF THE CODE, THE RULES AND REGULATIONS
PROMULGATED THEREUNDER, OR THE ADMINISTRATIVE AND JUDICIAL
INTERPRETATIONS THEREOF. THE COMPANY HAS NOT OBTAINED A RULING
FROM THE INTERNAL REVENUE SERVICE WITH RESPECT TO ANY TAX
CONSIDERATIONS RELEVANT TO ITS ORGANIZATION OR OPERATION, OR TO AN
INVESTMENT IN ITS SECURITIES. THIS SUMMARY IS NOT INTENDED TO
SUBSTITUTE FOR PRUDENT TAX PLANNING, AND EACH STOCKHOLDER OF THE
COMPANY IS URGED TO CONSULT ITS OWN TAX ADVISER WITH RESPECT TO
THESE AND OTHER FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF SHARES OF THE COMMON STOCK
OF THE COMPANY AND ANY CHANGES IN APPLICABLE LAW.
General
The Company operates in a manner that permits it to
qualify as a REIT under the Code. As a REIT, the Company itself
generally will be subject to federal income tax only on the amount
of its taxable income, subject to certain modifications ("REIT
Taxable Income"), that it does not distribute in the taxable year
in which it is earned. In addition, the Company will be subject to
a 4% excise tax to the extent it fails to satisfy certain calendar
year distribution requirements. The Company expects that, with
limited exceptions, it will not be subject to federal income tax at
the corporate level or to federal excise tax.
The Company would be subject to tax (including any
applicable minimum tax) on its taxable income at regular corporate
rates without any deduction for distributions to stockholders if it
failed to qualify as a REIT in any taxable year. Unless entitled
to relief under specific statutory provisions, the Company also
would be disqualified from treatment as a REIT for the following
four taxable years. The failure to qualify as a REIT for even one
year could result in the Company incurring substantial indebtedness
in order to pay any resulting taxes, thus reducing the amount of
cash available for distribution to stockholders.
For purposes of the special REIT taxation rules and the
REIT qualification requirements set forth below, the assets,
liabilities, income and deductions of any subsidiary, all of whose
stock has been owned by the Company during the subsidiary's entire
existence ("Qualified REIT Subsidiary"), will be treated as assets,
liabilities, income and deductions of the Company.
REIT Qualification Requirements
In order to qualify as a REIT, the Company must satisfy
various requirements with respect to (i) the nature of its assets
("Asset Requirements") and income ("Income Requirements"), (ii)
certain organizational matters ("Organizational Requirements") and
(iii) the amount of distributions to stockholders ("Distribution
Requirements").
Under the Asset Requirements, at the close of each
quarter during the taxable year (a) at least 75% of the assets of
the Company, by value, must consist of specified real estate
assets, cash or U. S. government securities and (b) as to its other
assets other than securities of a Qualified REIT Subsidiary, the
Company cannot own (1) securities of any one issuer which represent
more than 5% of the total value of the Company's assets or (2) more
than 10% of the outstanding voting securities of any one issuer.
The Income Requirements provide that at least 75% of the
Company's gross income must be derived from specified real estate
related sources, including interest on mortgage obligations, income
from REMIC interests, and gains from the sale of such obligations
and interests not held primarily for sale to customers in the
ordinary course of business ("Dealer Property"). Additionally, at
least 95% of the Company's gross income must consist of income
derived from items that qualify for the 75% income test plus other
specified types of passive income, such as interest, dividends and
gains from the sale or other disposition of stock and securities
other than Dealer Property.
If the Company fails to satisfy either of the foregoing
75% and 95% Income Requirements but (a) the Company otherwise
satisfies the requirements for qualification as a REIT, (b) such
failure is due to reasonable cause and not willful neglect and (c)
certain other requirements are met, then the Company will continue
to qualify as a REIT but will be subject to a 100% tax on the
greater of the amount by which it fails to satisfy either of such
tests reduced by expenses incurred in earning that amount.
The Income Requirements also require that less than 30%
of the Company's gross income be derived from the sale or other
disposition of (a) stock or securities held for less than one year,
(b) certain Dealer Property and (c) most real property (including
mortgage obligations and REMIC interests) held for less than four
years. In addition, the Code also generally imposes a 100% tax on
gains (less associated expenses) derived from sales of Dealer
Property (without an offset for any losses).
The Distribution Requirements require that the Company
distribute annually at least 95% of its REIT Taxable Income (and
95% of certain other income related to foreclosure property),
excluding any net capital gain, to its stockholders. For this
purpose, certain dividends paid by the Company after the close of
a taxable year may be considered as having been paid during such
taxable year, although they would be taxed to the stockholders in
the year in which they were actually paid. Such dividends will
also be treated as paid during the taxable year for purposes of
determining whether the Company has undistributed REIT Taxable
Income subject to income tax at the corporate level for the taxable
year. For purposes of the 4% excise tax (described above),
however, such dividends would not be treated as having been
distributed in the taxable year. In addition, dividends declared
in October, November or December of a calendar year, payable to
stockholders of record as of a date in such a month, and actually
paid during January of the following year will be considered as
paid on December 31 of such calendar year for excise tax purposes
as well as for other purposes under the REIT rules. Such
dividends, however, will also be treated as having been paid on
that December 31 for purposes of determining a stockholder's gross
income.
Due to the nature of the Company's income from its assets
and its deductions in respect of its obligations, under certain
circumstances, the Company may generate REIT Taxable Income in
excess of its cash flow. For example, the maturity and pass-
through rates of the Mortgage Collateral pledged to secure the CMO
issuances in which the Company holds an investment are not likely
to match the maturity and interest rates of the CMOs secured
thereby. Similarly, the Company may recognize taxable market
discount income with respect to its receipts from the sale,
retirement or other disposition of the portion of the Mortgage
Collateral that constitutes market discount bonds (i.e.,
obligations with a stated redemption price at maturity greater than
the Company's tax basis therein), whereas these receipts frequently
will be used to make nondeductible principal payments on CMOs. In
addition, certain CMOs may be issued with original issue discount,
the tax treatment of which may result in taxable income in excess
of cash flow. Accordingly, the Company may be required to
distribute a portion of its working capital to its stockholders or
borrow funds to make required distributions in years in which the
gross income of the Company on a tax basis (including "non-cash"
income) exceeds its deductible expenses. In the event that the
Company is unable to pay dividends equal to substantially all of
its REIT Taxable Income, it may incur income tax or excise tax or
may not be able to qualify as a REIT.
Dividends paid for a fiscal year in excess of the
Company's earnings and profits, as computed for federal income tax
purposes, are reported as a return of capital to the Company's
stockholders. Some of the Company's investments constitute REMIC
residual interests. Certain of these residual interests produce
"excess inclusion" income (see "Excess Inclusion Income" below)
during the fiscal year. The Code requires that excess inclusion
income be included in a taxpayer's income even though the taxpayer
has losses that would otherwise offset such income. As a result,
the Company could have taxable income from excess inclusions in a
taxable year even though it has losses from other investments that
would normally be sufficient to offset the amount of such excess
inclusion income. The Company is required to distribute the
taxable income representing excess inclusions to meet its 95%
distribution requirement and to avoid a corporate level tax on such
income. When such income is distributed to a stockholder, the
stockholder will have taxable income, rather than a return of
capital, equal to its share of such excess inclusion income during
the fiscal year. For fiscal 1993, the Company reported that all
its distributions paid in 1993, even though it experienced both a
net loss and a tax loss for 1993, represented excess inclusion
income. Although the Company made no distributions in 1994, excess
inclusion income which was reported to the Company for 1994 was
declared payable to stockholders in September 1995, prior to the
Company's filing of its 1994 Tax Return. This distribution
represented 1995 taxable income to stockholders. For a
stockholder, excess inclusion income cannot be offset by losses,
except in the case of certain excess inclusion income for certain
savings and loan associations and their "qualified" subsidiaries.
The most significant Organizational Requirement is that
the stock of the Company must be widely held. This requires that
the stock of the Company be held by a minimum of 100 persons for at
least 335 days in each taxable year and that no more than 50% in
value of the stock be owned, actually or indirectly, by five or
fewer individuals at any time during the second half of each
taxable year. For this purpose, some pension funds and certain
other tax-exempt entities are treated as individuals. To evidence
compliance with these requirements, the Company is required to
maintain records that disclose the actual ownership of its
outstanding shares of Common Stock. In fulfilling its obligations
to maintain records, the Company must demand written statements
each year from the record holders of designated percentages of its
shares of Common Stock which would, among other things, disclose
the actual owners of such shares.
Excess Inclusion Income
All of the cash dividends distributed to the Company's
stockholders in 1993 were comprised of "excess inclusion" income.
There were no distributions for 1994, but excess inclusion income
reported to the Company for 1994 was declared payable to
stockholders in September 1995, prior to the Company's filing of
its 1994 Tax Return. Such distribution represents 1995 taxable
income to stockholders. Excess inclusion income is attributable to
CMO issuances for which an election has been made to be treated as
a REMIC for federal income tax purposes. The portion of the
Company's dividends determined to be excess inclusion income is
taxable to certain otherwise tax-exempt stockholders as unrelated
business income. In addition, generally, excess inclusion income
may not be offset by any deductions or losses, including net
operating losses.
12. Restrictions on Transfer and Redemption of Shares.
Two of the requirements for qualification as a REIT under the Code
are that (i) during the last half of each taxable year not more
than 50% of the outstanding shares may be owned directly or
indirectly by five or fewer individuals and (ii) there must be at
least 100 stockholders for at least 335 days in each taxable year.
Those requirements apply for all taxable years after the year in
which the REIT elects REIT status.
In order that the Company may meet these requirements at
all times, the Company's Articles of Incorporation prohibit any
person or group of persons from acquiring or holding, directly or
indirectly, ownership of a number of shares of Common Stock in
excess of 9.8% of the outstanding shares. Shares of Common Stock
owned by a person or group of persons in excess of such amounts are
referred to in the Articles of Incorporation and herein as "Excess
Shares". The Articles of Incorporation also provide that in the
event any person acquires Excess Shares, such Excess Shares may be
redeemed by the Company, at the discretion of the Board of
Directors.
Under the Company's Articles of Incorporation, any
acquisition of shares of the Company that would result in the
disqualification of the Company as a REIT under the Code is void to
the fullest extent permitted by law, and the Board of Directors is
authorized to refuse to recognize a transfer of shares to a person
if, as a result of the transfer, that person would own Excess
Shares.
Additional provisions regarding restrictions on transfers
and redemptions of the Company's shares are set forth in the
Company's Articles of Incorporation, which were filed as Exhibit
3.1 to Amendment No. 1 to the Company's Registration Statement No.
33-22891 on Form S-11.
The Articles of Incorporation also contain provisions
intended to minimize the potential adverse effect on the Company of
a Code provision that would impose a tax on REITs (and other pass-
through entities) that hold REMIC interests if at any time during
the taxable year a Disqualified Organization (as defined below) is
a record holder of an interest in such entity. A "Disqualified
Organization" means the United States, any state or political
subdivision thereof, any foreign government, any international
organization or instrumentality of the foregoing, any tax-exempt
entity, other than a farmer's cooperative, not subject to the
unrelated business income tax and any rural electric or telephone
cooperative. If a Disqualified Organization were a stockholder of
record of the Company during a year in which the Company held a
REMIC interest, a tax might be imposed on the Company. The amount
of tax would be equal to the product of the highest marginal
corporate tax rate and the amount of REMIC excess inclusions for
the taxable year allocable to the interest in the Company held by
the Disqualified Organization.
Accordingly, the Articles of Incorporation provide that
any acquisition of shares of the Company that could or would result
in the direct or indirect imposition of a penalty tax on the
Company (including the tax described above) (a "Prohibited
Transfer") will be void ab initio to the fullest extent permitted
by applicable law, and the intended transferee of any shares that
are the subject of a Prohibited Transfer may be deemed never to
have had an interest therein. If the foregoing provision is
determined to be void or invalid, the transferee shall be deemed,
at the option of the Company, to have acted as agent of the Company
in acquiring those shares and to hold those shares on behalf of the
Company. In addition, any shares of the Company that are the
subject of a proposed, attempted or actual Prohibited Transfer may
be redeemed by the Company at the discretion of the Board of
Directors. Any such redemption will be effected as provided in the
preceding paragraphs with respect to Excess Shares. Furthermore,
whenever it is deemed by the Board of Directors to be prudent in
order to avoid a Prohibited Transfer, the Board of Directors may
require a holder or proposed transferee of shares to file a
statement or affidavit with the Company, stating that the holder or
proposed transferee is not a Disqualified Organization; and any
contract for the sale or other transfer of shares of the Company
will be subject to this provision. Moreover, the Board of
Directors may, in its discretion, refuse to transfer shares on the
books of the Company if (i) a statement or affidavit described in
the preceding sentence has not been received or (ii) the proposed
transferee is a Disqualified Organization.
13. Competition. In purchasing Mortgage Derivative
Securities, Mortgage Collateral, Mortgage-Backed Securities, all of
which the Company currently owns, or other assets, including assets
which the Company may utilize in future alternative investment
activities, the Company competes, or will compete, with investment
banking firms, savings and loan associations, banks, mortgage
bankers, insurance companies and other lenders, other REITs, GNMA,
FNMA and FHLMC and other entities, many of which have greater
financial resources than the Company.
Additionally, as the Company and its financial advisor
seek to identify suitable candidates regarding a strategic
transaction involving the acquisition of or merger with a
profitable growing concern, it competes with offers from entities
with greater resources than those of the Company, such as financial
buyers, venture capitalists, corporate entities and other
investment groups.
As a REIT, the Company's business activities are limited
by the provisions of the Code that require a REIT to meet certain
tests to maintain its qualification as a REIT. Many of the
Company's competitors operate through entities that may have more
flexibility than the Company in conducting their business
operations. In regard to its future activities, the Company may
forfeit its REIT status, either voluntarily or involuntarily.
14. Employees. The Company employs two full-time
employees and one part-time employee as of December 31, 1995, and
utilizes the services of consultants, as necessary.
Item 2. Properties.
The Company does not own real estate or physical
property. The executive offices of the Company are located in
leased space at 100 North Fourth Street, Suite 813, P.O. Box 250,
Steubenville, Ohio 43952. The lease covering such space can be
terminated at any time with notice to the lessor.
Item 3. Legal Proceedings.
As of December 31, 1995, there were no legal proceedings
pending or threatened to which the Company or its subsidiaries were
a party or to which any of their respective property was subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's
security holders during the fourth quarter of 1995.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company's Common Stock is traded on the American
Stock Exchange under the symbol "RM".
The table below sets forth the high and low sale prices
of the Company's Common Stock for each full quarterly period within
the two most recent fiscal years for which such stock was traded,
as reported on the American Stock Exchange Composite Tape, and
certain dividend information with respect to such shares.
Per Share
Dividends
Paid or
High Low Declared
First Quarter 1995 1 5/16 15/16 $ 0.00
Second Quarter 1995 1 3/4 1 0.00
Third Quarter 1995 1 3/4 1 1/16 0.003 1
Fourth Quarter 1995 1 7/16 1 0.00
First Quarter 1994 1 7/16 1 1/8 $ 0.00
Second Quarter 1994 1 1/8 11/16 0.00
Third Quarter 1994 1 11/16 0.00
Fourth Quarter 1994 1 1/4 11/16 0.00
1 Three tenths of one cent.
In order to qualify as a REIT under the Code, the
Company, among other things, must distribute as dividends to its
stockholders an amount at least equal to (i) 95% of its REIT
Taxable Income (determined before the deduction for dividends paid
and excluding any net capital gain and any net income from the sale
or other disposition of property held primarily for sale) plus (ii)
95% of the excess of its net income from foreclosure property over
the tax imposed on such income by the Code less (iii) any excess
noncash income (as determined under the Code). The actual amount
and timing of dividend payments, however, is at the discretion of
the Board of Directors and depends upon the financial condition of
the Company in addition to the requirements of the Code.
The Company's Common Stock was held by 466 stockholders
of record on March 20, 1996.
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data.
FINANCIAL HIGHLIGHTS - 1995, 1994, 1993, 1992 and 1991
_____________________________________________________________________________________________
(amounts in thousands except per share data)
EARNINGS DATA
For the Years Ended December 31, 1995, 1994, 1993, 1992 and 1991
<S> <C> <C> <C> <C> <C>
_____________________________________________________________________________________________
1995 1994 1993 1992 1991
__________________________________________________________________________________________
Revenues (1) $ 898 $ 4,085 $(13,588) $ 21,861 $ 52,182
Expenses 1,654 3,280 12,036 23,729 44,244
Net Income (loss) (2) (756) 805 (25,624) (1,868) 7,938
Net Income (loss) per share (0.15) 0.15 (4.92) (0.36) 1.52
Taxable Income (loss) (3)&(4) (625) (8,425) (10,823) (16,656) 9,190
Taxable Income (loss) per share (0.12) (1.62) (2.08) (3.20) 1.76
Weighted Average Shares
Outstanding 5,211 5,211 5,211 5,211 5,211
Dividends Paid per Share 0.003 0.00 0.04 0.90 1.75
_____________________________________________________________________________________________
OTHER FINANCIAL DATA
At December 31, 1995, 1994, 1993, 1992 and 1991
_____________________________________________________________________________________________
1995 1994 1993 1992 1991
_____________________________________________________________________________________________
Mortgage Related Investments $ 9,814 $ 12,430 $ 65,248 $142,396 $332,998
Mortgage Derivative Securities 1,014 1,990 7,161 40,727 41,720
Mortgage-backed Securities 3,397 - - - -
Total Assets 16,602 19,892 81,097 197,860 394,026
Funding Notes Payable 10,114 12,538 44,892 94,329 230,781
CMOs Payable 0 0 25,042 54,886 106,585
Notes Payable 0 0 3,814 14,833 12,241
Total Liabilities 10,387 12,905 74,915 166,184 355,455
Total Stockholders' Equity 6,215 6,987 6,182 31,676 38,571
Shares of Common Stock
Outstanding 5,211 5,211 5,211 5,211 5,211
(1) Includes for 1993, cumulative effect of change in accounting principle of $(1,530).
(2) See note 7 to Audited Consolidated Financial Statements.
(3) Amounts estimated for 1995.
(4) See Management's Discussion and Analysis - Dividend Policy.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
INVESTMENT ACTIVITIES AND FUTURE PROSPECTS FOR THE COMPANY
A portion of the Company's current portfolio of
investments continues to be sensitive to changes in interest rates
and mortgage prepayments. The lowest mortgage interest rate levels
in 20 years were reached in 1992 and continued to 25 year lows
during the fourth quarter of 1993, resulting in unprecedented
mortgage refinancings and vastly accelerated mortgage prepayments.
As a result of the high level and extended duration of these
prepayments, earnings and cash flows from the Company's investments
were adversely impacted. For a large majority of those assets,
earnings and cash flows were permanently impaired and did not
recover even as prepayments returned to more historical levels in
the second, third and fourth quarters of 1994. These permanent
impairments were the direct result of the massive level of paydowns
on the mortgages collateralizing such investments. During this
time frame, most of the Company's assets represented the ownership
of identified cash flows in diverse CMO structures. Prepayments of
the underlying mortgage collateral, especially of the magnitude and
duration experienced from early 1992 through early 1994, served to
permanently reduce cash flows even when prepayment speeds slowed.
As an example, a specific identified cash flow representing a
single class of a CMO collateralized by $100 million in mortgages
produces only 20% of the original expected cash flows when the
underlying mortgage collateral prepays unexpectedly to a $20
million level. This type of phenomenon was representative of the
marketplace for investments of the type owned by the Company during
1992 to mid-1994.
In light of its earnings difficulties and the erratic
conditions in the mortgage-backed securities markets, both caused
by the 1992 to mid-1994 prepayment environment discussed above, the
Company elected in mid-1994 not to pursue its historical business.
With a slow down in prepayment speeds during the second half of
1994, the Company sold a substantial portion of its investment
portfolio, using the proceeds from such sales to repay all its
borrowing obligations and temporarily invest cash excesses in high
quality liquid investments. The Company then began to explore the
prospects for a business combination or merger with a profitable
growing concern and simultaneously began investigating alternative
investment activities outside the Company's historical business.
In regard to its search for an appropriate business
combination or merger, the Company's Board of Directors established
acquisition criteria in an effort to direct management's efforts
and, in June of 1995, engaged a financial advisor to permit the
Company to uncover and analyze a wider array of potential
transactions.
Currently, the Company and its financial advisor continue
the process of identifying suitable candidates regarding a
strategic transaction involving the acquisition of or merger with
a profitable growing concern. The successful conclusion of a
business combination or merger is subject to financial and economic
conditions in the marketplace, the negotiation of mutually
acceptable values, the particular requirements of the owners and
management of other entities and the existence of competitive
offers from entities with greater resources than those of the
Company. To date, the Company has not successfully concluded any
such negotiations.
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, it is anticipated
that the consummation of a transaction would be conditioned upon
the receipt of stockholder approval at a special meeting called for
such purpose.
If the Company is unsuccessful in identifying a
transaction that is likely to produce value building results, it
may elect to alternatively begin to develop an investment portfolio
of financial assets as a means of increasing value to stockholders.
A decision to pursue such alternative investment activity would be
subject to the Company's financial position as well as general
economic and financial market conditions prevailing at such time.
The Company and its financial advisor continue to believe
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.
In order to continue to qualify for an exemption under the
Investment Company Act of 1940 (see note 2 of the Company's
Consolidated Financial Statements), the Company made a sizeable
investment in one 7% FNMA guaranteed 30 year single-family mortgage
pool, of which the Company maintains 100% ownership, during the
fourth quarter of 1995. Such security is AAA rated and was
purchased at a price that under current market conditions minimizes
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.
For the tax year ended December 31, 1995, the Company paid
a dividend of $0.003 per share on September 29, 1995 to
stockholders of record on September 20, 1995. This 1995 dividend
was the result of excess inclusion income and is reportable by
stockholders as taxable income for 1995.
RESULTS OF OPERATIONS
1995 TO 1994 COMPARISONS
Statement of Revenues and Expenses
Net Income/(loss), as calculated in accordance with
generally accepted accounting principles, and as presented in the
accompanying consolidated financial statements, for the twelve
months ended December 31, 1995, was $(756,000), or $(0.15) per
share, as compared to $805,000, or $0.15 per share, for the twelve
months ended December 31, 1994.
Generally accepted accounting principles require the
Company to periodically evaluate its Investments based upon current
and expected future mortgage prepayment speeds and interest rates
and, effective December 31, 1993, market discount rates, as well.
(See note 2 to the Company's Consolidated Financial Statements)
Downward valuation adjustments, if necessary, are reflected as a
reduction of interest revenues in the Company's Consolidated
Statements of Revenues and Expenses. The results for 1995 reflect
downward valuation adjustments totalling $700,000, or $(0.13) per
share, all incurred during the second quarter of 1995. For 1994,
downward adjustments in carrying value were $285,000, or $(0.05)
per share.
The reduction in the Company's Net Income/(loss) from 1994
to 1995 of $1,561,000 is due to 1) larger writedowns in value of
Company Investments during 1995 and 2) the existence of gains from
the sale of assets in 1994, offset by reduced operating expenses
for 1995. Downward asset valuation adjustments in 1994 were
$285,000, while such writedowns in 1995 were $700,000, an increase
of $415,000. In 1994, the Company recorded net gains on the sales
of assets of $1,119,000. In 1995, the Company had no gains related
to asset sales. Absent 1994 sales gains, the Company's Net Income
would have been $(314,000), or $(0.06) per share. The Company
further reduced operating expenses from $850,000 in 1994 to
$590,000 in 1995, a decrease of $260,000.
The assumptions used to value assets at the end of each
quarter take into consideration the current level of interest rates
(short and long), 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 December 31, 1993, the application of a
market discount rate to future cash flows. If prepayment speeds
were to occur at levels higher than market expectations, market
expectations of future mortgage prepayment speeds increase beyond
current anticipated levels, short term interest rates increase
beyond their current levels, or the market discount rate applied
were to be increased, further reductions in the value of the
Company's Investments could be necessary.
Interest revenue on Mortgage Related Investments decreased
from $2,208,000 for the year ended December 31, 1994 to $1,063,000
for the year ended December 31, 1995, as a result of the reduction
in Mortgage Related Investments on the Company's Balance Sheet
between December 31, 1994 and December 31, 1995, discussed below.
Interest revenue on Mortgage Derivative Securities was $612,000 for
the year ended December 31, 1994 as compared to $(447,000) for the
year ended December 31, 1995. The decrease in interest revenue on
Mortgage Derivative Securities of $1,059,000 was primarily
attributable to a $700,000 writedown of this asset category for
1995 while such writedowns were only $285,000 for 1994. Such
writedowns are deducted from Mortgage Derivative Securities
interest revenues. There was also a general reduction in interest
earnings on that same asset category from 1994 to 1995 resulting
from the amortization of carrying value during the period in the
amount of $276,000.
Interest expense on Funding Notes and CMOs Payable
decreased from $2,430,000 to $1,064,000 for the years ended 1994
and 1995, respectively, as a result of the offsetting balance sheet
decline of Funding Notes and CMOs Payable, discussed below.
Operating expenses (which includes "Interest on Notes Payable" and
"General and Administrative") decreased from $850,000 for 1994 to
$590,000 for the comparable period in 1995. This decrease between
periods of $260,000 was the result of reduced interest expense on
Notes Payable of $109,000 as the Company repaid all amounts
outstanding under repurchase agreements during 1994 and had no
borrowings during 1995. General and Administrative Expenses
declined by $151,000, from $741,000 in 1994 to $590,000 in 1995.
General and Administrative Expenses for 1995 include the
amortization of $81,000 of deferred expenses related to the
Company's investigation of alternative investment activities,
specifically tax sale certificates. The balance of these expenses
will be completely amortized by the end of the first quarter of
1996, an additional $27,000.
Balance Sheet
The Company's assets declined during the twelve month
period ended December 31, 1995 by $3,290,000, to a total of
$16,602,000 at December 31, 1995. This decrease is attributable to
the Company's Mortgage Related Investments declining during the
twelve month period from $12,430,000 to $9,814,000, a decrease of
$2,616,000. This reduction is primarily the result of prepayments
and regularly scheduled principal payments on the underlying
Mortgage Collateral.
These asset reductions were matched by a corresponding
decrease in the related liability account, Funding Notes Payable,
from $12,538,000 to $10,114,000, or a decrease of $2,424,000 which
represented regularly scheduled and prepaid mortgage payments.
Mortgage Derivative Securities decreased from $1,990,000
at December 31, 1994 to $1,014,000 at December 31, 1995, a decrease
of $976,000, reflecting 1) the amortization and return of the cost
basis of the assets held in this category of approximately $276,000
and 2) the writedown of carrying value of such securities which
represents additional amortization in 1995 totaling $700,000.
Cash decreased from $4,917,000 to $1,549,000, a decrease
of $3,368,000, primarily due to the purchase of Mortgage-backed
Securities during 1995 of $3,400,000. At December 31, 1994, the
Company's cash was temporarily invested in liquid short-term U.S.
government securities and commercial paper rated in the highest
grade by both Standard & Poor's and Moody's Rating Services. As
fully described in note 2 of the Company's Consolidated Financial
Statements, in order to continue to qualify as an REIT, the Company
purchased in 1995 Mortgage-Backed Securities of a nature that
qualify under the Real Estate Exception and allow the Company to
continue to qualify as an REIT.
Mortgage-Backed Securities consists of one 7% FNMA
guaranteed 30 year single-family mortgage pool of which the Company
maintains 100% ownership. At December 31, 1995, the FNMA pool is
being carried at the Company's cost but is subject to periodic
downward valuation adjustments based upon market conditions. At
December 31, 1995, the FNMA security had a premium market value.
Funds held by trustee decreased from $172,000 at December
31, 1994 to $159,000 at December 31, 1995. This category of assets
represents the receipt of monthly mortgage payments awaiting
further payment (reduction) of Funding Notes Payable at a future
date. The magnitude of this account is directly affected by the
decrease in Mortgage Related Investments discussed above and the
level of mortgage prepayments.
Receivables on Mortgage Related Investments and Mortgage
Derivative Securities increased from $257,000 at December 31, 1994
to $415,000 at December 31, 1995. Such $158,000 increase is
attributable to the level of mortgage prepayments on the underlying
Mortgage Collateral.
Other assets increased from $126,000 at December 31, 1994
to $254,000 at December 31, 1995, related to the deferment of
expenses regarding the Company's investigation and analysis of
potential business combination/merger opportunities and alternative
investment activities. The Company will continue to defer expenses
related to its continuing efforts to successfully conclude a
business combination. Such deferrals were approximately $89,000 at
December 31, 1995.
The Company's Net Loss of $756,000, or $(0.15) per share,
for 1995 and its dividend distribution of $0.003 per share, or
$16,000, are reflected as increases to the Accumulated Deficit
which was $(37,822,000) at December 31, 1995, as compared to
$(37,050,000) at December 31, 1994, a total increase of $772,000.
1994 TO 1993 COMPARISONS
Statement of Revenues and Expenses
Net Income for the year ended December 31, 1994 was
$805,000 or $0.15 per share as compared to Net Loss of
$(25,624,000), or $(4.92) per share for the year ended December 31,
1993. This substantial improvement in the Company's results from
1993 to 1994 of $26,429,000 was due to 1) drastically larger
writedowns in value of Company Investments during 1993, 2) larger
gains from the sale of assets in 1994 and 3) sharply reduced
operating expenses for 1994. Downward asset valuation adjustments
in 1993 were $25,569,000, while such writedowns in 1994 were only
$285,000, a decrease of $25,284,000. The large magnitude of asset
valuation writedowns during 1993 reflected unprecedented actual
mortgage prepayment levels and market expectations of a
continuation of high prepayment levels. 1994's minor valuation
adjustments reflect the dramatic slowdown in prepayment speeds and
resultant stabilization in values of securities collateralized by
mortgage loans. In 1993, the Company recorded gains on the sale of
mortgage related investments of $838,000 and losses on the sale of
marketable equity securities of $486,000, for a total net gain of
$352,000 from asset sales. In 1994, the Company had total net
gains of $1,119,000, of which $461,000 related to the sale of
ownership rights in three mortgage related investments and $658,000
related to the sale of six mortgage derivative securities. The
difference in sales gains represents an increase of $767,000 in Net
Income between periods. The Company also reduced operating
expenses from $1,703,000 in 1993 to $850,000 in 1994, a decrease of
$853,000. These three substantial improvements, when combined with
other minor income reductions on assets between 1993 and 1994,
provide for an increase in the Company's Net Income of $26,429,000.
Balance Sheet
The Company's assets declined during the twelve month
period ended December 31, 1994 by $61,205,000, to a total of
$19,892,000 at December 31, 1994. This decrease was attributable
to the Company's Mortgage Related Investments declining during the
twelve month period from $65,248,000 to $12,430,000, a decrease of
$52,818,000. This reduction is primarily the result of 1) the
sales, during February 1994, of the ownership rights of two RYMAC
IV Bond Series, and during June 1994, of the ownership rights to
the Ryland Mortgage Securities Corporation Mortgage Collateralized
Bonds Series 1989-6, in order to take advantage of market premiums
on the underlying Mortgage Collateral (such sales reduced Mortgage
Related Investments by $40,755,000), 2) substantial prepayments on
collateral underlying the Company's remaining Mortgage Related
Investments and 3) to a much lesser extent, regularly scheduled
principal payments on the underlying Mortgage Collateral. Such
prepayments and scheduled principal payments further reduced
Mortgage Related Investments by approximately $12,000,000.
These asset reductions were matched by a corresponding
decrease in the related liability accounts, Funding Notes Payable
and CMOs Payable, from $69,934,000 to $12,538,000, or a decrease of
$57,396,000. The sale of ownership rights includes the transfer of
CMO and Funding Note obligations to the buyers while regularly
scheduled and prepaid principal on the underlying mortgages serve
to retire outstanding obligations secured by such mortgages. The
sale of ownership rights reduced CMO and Funding Notes by
$42,012,000, while regularly scheduled and prepaid mortgage
payments produced approximately $15,400,000 in reductions.
Mortgage Derivative Securities decreased from $7,161,000
at December 31, 1993 to $1,990,000 at December 31, 1994, a decrease
of $5,171,000 reflecting 1) the amortization and return of the cost
basis of the assets held in this category of approximately
$1,335,000, 2) the writedown of carrying value of these securities
which represented additional amortization in 1994 totalling
$285,000 and 3) the sale of six securities in 1994's third and
fourth quarters which removed the cost basis of these six assets
totalling $3,551,000 from the balance sheet.
Funds held by trustee decreased from $1,347,000 at
December 31, 1993 to $172,000 at December 31, 1994. This category
of assets represents the receipt of monthly mortgage payments
awaiting further payment (reduction) of Funding Notes and CMOs
Payable at a future date.
Receivables on Mortgage Related Investments and Mortgage
Derivative Securities declined from $5,608,000 at December 31, 1993
to $257,000 at December 31, 1994. Such $5,351,000 decrease is
directly attributable to the sizeable decreases in Mortgage Related
Investments and Mortgage Derivative Securities discussed
previously.
Notes Payable, consisting solely of repurchase agreements,
decreased from $3,814,000 at December 31, 1993 to $0 at December
31, 1994 due primarily to the result of dealer margin calls during
1994 and Kidder Peabody & Company's payment demand on five
repurchase agreements, which occurred immediately prior to Paine
Webber's acquisition of them during 1994. At November 30, 1994 the
Company repaid Kidder Peabody $433,000, reducing its Notes Payable
balance to zero.
Net Income for 1994 of $805,000, or $0.15 per share, is
reflected as a decrease to the Accumulated Deficit. Such amount
decreased from $(37,855,000) at December 31, 1993 to $(37,050,000)
at December 31, 1994. Taxable Income was a negative $8,425,000, or
$(1.62) per share. Of this amount, $4,811,000 represents capital
tax losses related to asset sales during 1994 and $3,614,000
represents operating tax losses. Additionally, $16,000 was
reported to the Company as excess inclusion income for 1994 which
the Company distributed to stockholders in September 1995. As
described above, this distribution represents 1995 taxable income
for stockholders. The Company declared no dividend distributions
for 1994.
EXPENSES AND USE OF BORROWED FUNDS
Operating expenses (Interest on Notes Payable and General
and Administrative) were $850,000 for the year ended December 31,
1994 versus $590,000 for the year ended December 31, 1995, a
decline of $260,000. The components of this significant decrease
in Operating expenses include: 1) reduced interest costs on Notes
Payable, which decreased from $109,000 in 1994 to $0 for 1995, as
Notes Payable on the Balance Sheet were paid in full during the
fourth quarter of 1994 and 2) a decrease of General and
Administrative Expenses from $741,000 in 1994 to $590,000 in 1995,
a decline of $151,000 as part of a continuing expense reduction
program.
Prior to 1995, the Company had used the proceeds from
repurchase agreements to fund a portion of its portfolio of
Mortgage Derivative Securities. Prior to April 1994, the Company
had also maintained a line of credit used to fund day-to-day
operating needs and in past periods to also temporarily fund
acquisitions of new investments pending negotiation of repurchase
agreements or awaiting return of invested principal.
LIQUIDITY AND CAPITAL RESOURCES
Until November 1994, the Company had been a party to
various repurchase agreements, the proceeds of which had been used
to acquire Mortgage Derivative Securities. Such repurchase
agreements were secured by substantially all of the Company's
Mortgage Derivative Securities.
The Company had maintained a line of credit with a
commercial bank for $250,000 which expired on April 30, 1994 and,
at the Company's election, was not renewed.
At both December 31, 1995 and December 31, 1994, 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 the
Company's current available credit sources.
During the third quarter and early fourth quarter of 1994,
the Company sold six Mortgage Derivative Securities. Since all of
these Mortgage Derivative Securities were subject to repurchase
agreement financing, their sales required the repayment in full of
associated borrowed amounts. The repayment of these repurchase
agreements totaled $1,901,000 and reduced repurchase agreement
borrowings to $433,000 as of late October 1994. 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 and Mortgage-Backed Security are available to secure any
future borrowings.
The Company believes that the periodic cashflows from its
remaining investment portfolio and the significant liquidity
existent in its highly liquid cash and Mortgage-Backed Securities
positions are sufficient to allow the Company to pursue the several
business alternatives it is currently investigating.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
RYMAC MORTGAGE INVESTMENT CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
PAGE
Consolidated Financial Statements:
Report of Independent Auditors 38
Consolidated Balance Sheets as of
December 31, 1995 and 1994 39
Consolidated Statements of Revenues and Expenses
for the years ended December 31, 1995,
1994 and 1993 40
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1995,
1994 and 1993 41
Consolidated Statements of Cash Flows
for the years ended December 31, 1995,
1994 and 1993 42
Notes to Consolidated Financial Statements 43
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
RYMAC Mortgage Investment Corporation:
We have audited the consolidated balance sheets of RYMAC Mortgage
Investment Corporation and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of revenues and
expenses, stockholders' equity and cash flows for each year in the
three year period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of RYMAC Mortgage Investment Corporation and
subsidiaries as of December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the
years in the three year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
(Successor to Kenneth Leventhal
& Company)
New York, New York
March 5, 1996
<PAGE>
<TABLE>
<CAPTION>
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
________________________________________________________________________________________
<S> <C> <C>
December 31, 1995 and 1994
(amounts in thousands except share data) 1995 1994
________________________________________________________________________________________
ASSETS
Real estate investments:
Mortgage related investments (note 4) $ 9,814 $ 12,430
Mortgage derivative securities less valuation
allowance of $39 for 1995 (notes 2 and 3) 1,014 1,990
Mortgage-backed securities (note 5) 3,397 -
_______________________________________________________________________________________
14,225 14,420
Cash 1,549 4,917
Funds held by trustee 159 172
Receivables on mortgage related investments 370 212
Receivables on mortgage derivative securities 45 45
Other assets 254 126
_______________________________________________________________________________________
$ 16,602 $ 19,892
_______________________________________________________________________________________
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Funding notes payable (note 6) $ 10,114 $ 12,538
Accrued interest on funding notes payable 146 179
Other liabilities 127 188
_______________________________________________________________________________________
10,387 12,905
COMMITMENTS AND CONTINGENCIES (notes 2, 3, & 8)
STOCKHOLDERS' EQUITY
Common stock: par value $.01 per share
50,000,000 shares authorized,
5,210,600 issued and outstanding at
December 31, 1995, and 1994 52 52
Additional paid-in capital 43,985 43,985
Accumulated Deficit (note 7) (37,822) (37,050)
________________________________________________________________________________________
6,215 6,987
________________________________________________________________________________________
$ 16,602 $ 19,892
________________________________________________________________________________________
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES
______________________________________________________________________________________
For the Years Ended December 31, 1995, 1994 and 1993
<S> <C> <C> <C>
(amounts in thousands except share data) 1995 1994 1993
______________________________________________________________________________________
REVENUES
Interest:
Mortgage related investments (note 4) $ 1,063 $ 2,208 $ 9,205
Mortgage derivative securities (note 3) (447) 612 (23,345)
Provision for investment losses (39) - -
Mortgage-backed securities (note 5) 12 - -
Temporary investments 309 37 160
Gain on the sale of marketable equity
securities - - 486
Gain on the sale of mortgage derivative
securities - 658 -
Gain on the sale of mortgage related
investments, net - 461 838
Other - 109 40
______________________________________________________________________________________
898 4,085 (13,588)
______________________________________________________________________________________
EXPENSES
Interest on funding notes payable 1,064 1,723 6,551
Interest on CMOs payable - 707 3,782
Interest on notes payable - 109 297
General and Administrative 590 741 1,406
______________________________________________________________________________________
1,654 3,280 12,036
______________________________________________________________________________________
Net Income (loss) (note 2) $ (756) $ 805 $(25,624)
______________________________________________________________________________________
Net Income (loss) per share (note 2) $ (0.15) $ 0.15 $ (4.92)
______________________________________________________________________________________
Weighted average number of common
shares outstanding 5,211,000 5,211,000 5,211,000
______________________________________________________________________________________
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
________________________________________________________________________________________
For the Years Ended
December 31, 1993, Total
1994 and 1995 Number Additional Accumulated Stock-
(amounts in thousands except of Common Paid-In Deficit Holders'
share data) Shares Stock Capital (Note 7) Equity
_______________________________________________________________________________________
Balance at December 31, 1992 5,210,600 $52 $43,985 $(12,361) $ 31,676
________________________________________________________________________________________
1993 Unrealized Loss - - - 338 (1) 338
1993 Net Loss - - - (25,624) (25,624)
1993 Dividends Declared - - - (208) (208)
________________________________________________________________________________________
Balance at December 31, 1993 5,210,600 52 43,985 (37,855) 6,182
________________________________________________________________________________________
1994 Net Income - - - 805 805
1994 Dividends Declared - - - - -
________________________________________________________________________________________
Balance at December 31, 1994 5,210,600 52 43,985 (37,050) 6,987
________________________________________________________________________________________
1995 Net Loss - - - (756) (756)
1995 Dividends Declared - - - (16) (16)
________________________________________________________________________________________
Balance at December 31, 1995 5,210,600 $52 $43,985 $(37,822) $ 6,215
________________________________________________________________________________________
See notes to consolidated financial statements.
(1) Reversal of prior year unrealized loss as current year realized loss.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RYMAC MORTGAGE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
_________________________________________________________________________________________
For the Years Ended December 31, 1995, 1994 and 1993
<S> <C> <C> <C>
(amounts in thousands except share data) 1995 1994 1993
_________________________________________________________________________________________
Operating Activities:
Net Income (loss) $ (756) $ 805 $(25,624)
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of net premium on mortgage
related investments - 840 675
Amortization of premiums on
mortgage derivative securities 966 1,429 31,142
Interest accrued and added to funding notes
payable 153 658 1,782
Decrease in interest receivable on
mortgage related investments 18 505 701
Decrease (increase) in interest receivable on
mortgage derivative securities - 373 (5)
Decrease in accrued interest on funding notes
payable and CMOs payable (33) (405) (881)
Loss (gain) on the sales of investments - (658) 486
Decrease in accrued expenses payable (61) (395) (88)
Other, net (128) (87) 87
Net cash provided by operating activities 159 3,065 8,275
_________________________________________________________________________________________
Investing Activities:
Purchase of investments (3,400) - -
Principal payments on mortgage related
investments 2,440 56,400 79,917
Decrease in funds held by trustee 13 1,175 2,575
Principal payments on funding notes payable (2,577) (33,012) (51,219)
Principal payments on CMOs payable - (25,042) (29,844)
Principal payments on mortgage-backed security 3 - -
Proceeds from sales of investments - 4,209 184
Principal payments on mortgage derivative
securities 10 241 2,398
Net cash (used in)/provided by investing (3,511) 3,971 4,011
activities
_________________________________________________________________________________________
Financing Activities:
Net repayments of notes payable - (3,814) (11,019)
Dividends paid (16) - (208)
Net cash used in financing activities (16) (3,814) (11,227)
_________________________________________________________________________________________
Net (decrease)/increase in cash (3,368) 3,222 1,059
Cash at beginning of year 4,917 1,695 636
Cash at end of year $ 1,549 $ 4,917 $ 1,695
__________________________________________________________________________________________
Supplemental disclosure of cash flow information:
Interest paid (net of amount added to funding
notes payable) $ 944 $ 2,329 $ 9,931
Dividends declared - - 208
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.
The Company and its financial advisor continue the process of
identifying and soliciting interest from suitable candidates
regarding strategic transactions involving the acquisition of or
merger with a profitable growing concern. The successful
conclusion of a business combination or merger is subject to
financial/economic conditions in the marketplace, the negotiation
of mutually acceptable values, the particular requirements of the
owners and management of other entities and the existence of
competitive offers from entities with greater resources than those
of the Company. To date, the Company has not successfully
concluded any such discussions.
If the Company is unsuccessful in identifying a transaction that is
likely to produce value building results, it may elect to
alternatively begin to develop an investment portfolio of financial
assets. A decision to pursue such alternative investment activity
would be subject to the Company's financial position as well as
general economic and financial market 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.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 2 - Summary of Significant Accounting Policies (continued)
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
Mortgage Related Investments
Mortgage related investments are carried at their outstanding
principal balance and are designated as available for sale. 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.
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.
Mortgage-backed Securities
Mortgage-backed securities have been recorded at the lower of cost
or market and are considered held to maturity. At December 31,
1995, the market value was $3,425.
Fair Value
Statement of Financial Accounting Standards No. 107, "Disclosure
about Fair Value of Financial Instruments" ("FASB 107"), requires
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 2 - Summary of Significant Accounting Policies (continued)
the Company to disclose the fair value of financial instruments for
which it is practicable to estimate such value and to disclose the
method(s) and assumptions used to estimate such value(s). Each of
Notes 3, 4, 5 and 6 discuss the fair value of the Company's
mortgage derivative securities, mortgage related investments,
mortgage-backed securities and funding notes payable, respectively.
For mortgage related investments, prices for similar mortgage-
backed securities were obtained from Wall Street Dealers active in
mortgage-backed markets. It is important to note, however, that
the current market premiums on such similar mortgage-backed
securities are not available to the Company unless and until the
Company is able to call for early redemption the funding notes that
are collateralized by such mortgage related investments. The
potential for early redemption (calls) is specific to each
underlying collateralized obligation and the indenture covering
such transaction. For the Company's three remaining mortgage
related investments the timing of early redemptions are at future
dates, the earliest of which is May 1, 1997. As such, no value has
been assigned to potential premiums available at early redemption
dates.
In regard to funding notes payable, market price quotations for
these underlying obligations were obtained from a dealer who
actively trades such instruments. Although these instruments
currently trade at par or slight premiums in the present financial
environment, the Company's obligation thereunder is equal to the
face principal amounts without any applicable premiums or
discounts.
Investment Restrictions
In addition to qualifying as a Real Estate Investment Trust
("REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"), the Company's investment activities are restricted by
provisions of the Investment Company Act of 1940 as amended (the
"Investment Company Act"). The Investment Company Act specifically
exempts entities primarily engaged in the business of purchasing or
otherwise acquiring mortgages and other liens and interests in real
estate from the definition of an investment company (the "Real
Estate Exception"). Under interpretations issued by the staff of
the Securities and Exchange Commission, in order to qualify for the
Real Estate Exception, the Company must maintain at least 55% of
its assets in mortgage loans or certain other interests in real
estate, and another 25% of its assets in those or certain other
types of real estate related interests.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 2 - Summary of Significant Accounting Policies (continued)
During 1995, the Company purchased additional assets, specifically
mortgage-backed securities. As such, the Company continues to
maintain in excess of 55% of its assets in mortgage loans or
certain other interests in real estate and, therefore, can continue
to rely on the Real Estate Exception to qualify as a REIT under the
Code.
If the Company were unable to qualify for the Real Estate Exception
or engage in a business other than that of an investment company,
it would 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.
Federal Income Taxes
The Company has elected to be taxed as a REIT under the Code. As
a result, the Company generally will not be subject to federal
income taxation at the corporate level to the extent it distributes
annually at least 95% of its REIT taxable income, as defined in the
Code, to its stockholders and satisfies certain other requirements.
Accordingly, no provision has been made for income taxes in the
accompanying consolidated financial statements.
Net Income (Loss) Per Share
Net income (loss) per share is computed based on the weighted
average number of common shares outstanding during the period.
_________________________________________________________________
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 3 - Mortgage Derivative Securities (continued)
class of certificates. For federal income tax purposes, a majority
of the Company's mortgage derivative securities represent interests
in real estate mortgage investment conduits ("REMICs"). CMOs are
mortgage-backed bonds which bear interest at a specific
predetermined rate or at a rate which varies according to a
specified relationship to a specific short term interest rate
index, such as the London interbank offered rate for one-month U.S.
dollar deposits ("LIBOR").
Most residual bonds are structured so as to entitle the holder to
receive a proportionate share of the excess (if any) of payments
received from the collateral pledged to secure such bonds and the
other related classes, together with the reinvestment income
thereon, over amounts required to make debt service payments on
such CMOs and to pay related administrative expenses. In
connection with these investments, the Company acquired no other
rights relating to the collateral pledged to secure its mortgage
derivative securities. Most residual certificates are structured
so as to entitle the Company to receive a specified percentage of
the distributions generated from the pool of assets comprising the
trust funds of which the certificates evidence an interest.
At December 31, 1995 and 1994, the Company had net investments in
Mortgage Derivative Securities as set forth below:
<TABLE>
<CAPTION>
<S> <C> <C>
PORTFOLIO OF MORTGAGE DERIVATIVE SECURITIES 1995 1994
________________________________________________________________________
FNMA REMIC Trust 1988-7 ("FNMA 1988-7") $ 41 $ 73
- Trust 1988-11 ("FNMA 1988-11") 245 410
- Trust 1991-163 Class SA ("FNMA 1991-163") 294 763
FHLMC Multi-Class Mortgage Participation
Certificates
(Guaranteed)
- Series 2 ("FHLMC 2") 106 164
- Series 1248 Class H ("FHLMC 1248") 294 528
Cornerstone Mortgage Investment
Group II, Inc.
- Series 13 ("Cornerstone 13") 22 32
- Series 14 ("Cornerstone 14") 12 20
________________________________________________________________________
$ 1,014 $ 1,990
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 3 - Mortgage Derivative Securities (continued)
Under FASB-115, future cash flows are discounted at a rate
reflective of market yields for assets of the type held by the
Company. At December 31, 1995, the Company applied a discount rate
of 16% to the cash flows for its portfolio of Mortgage Derivative
Securities and at December 31, 1994, a 12% discount rate was
applied to most assets. At December 31, 1995 all assets in this
category were providing yields in a range of 18%-30%. Yields in
excess of 16% were utilized to fund a valuation reserve account in
order to provide for future downward valuation adjustments. At
December 31, 1995, the valuation reserve account had a balance of
$39. At December 31, 1994, the balance of the valuation reserve
account was utilized to reduce the value of certain assets. Total
valuation adjustments for 1994 were $285 as compared with $700 for
1995, all of which was incurred during the second quarter of 1995.
Additionally, in accordance with FASB-107, the Company is required
to compute the estimated fair value of its mortgage derivative
securities by projecting anticipated future cash flows and
discounting those cash flows at discount rates established in
market transactions for securities having similar characteristics
and backed by collateral of similar rate and term.
For the December 31, 1995 estimate of fair market values, the
Company used the same prepayment and interest rate assumptions as
for its determination of carrying values under FASB-115. (See note
2) The PSA speeds vary depending on the collateral. The
prepayment assumption model used by the Company incorporates a
market methodology established by the Public Securities Association
("PSA"). Such model assumes a rate of prepayment each month of the
unpaid principal balance of a pool of mortgage loans. 100% of PSA
assumes that 0.2% per annum of the then outstanding principal
balance of a pool of mortgage loans will prepay in the first month
of the life of such mortgage loans and an additional 0.2% per annum
in each month thereafter (for example, 0.4% per annum in the second
month, 0.6% in the third month, etc.) until the 30th month.
Beginning with the 30th month and in each month thereafter, 100%
PSA assumes a constant prepayment rate of 6% per annum of the then
outstanding principal balance of such mortgage loans. On a bi-
weekly basis, Bloomberg Financial Markets ("Bloomberg") obtains PSA
estimates for a wide range of mortgage coupons and ages from
several dealers in mortgage derivative securities and makes them
available to Bloomberg's subscribers.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 3 - Mortgage Derivative Securities (continued)
The prepayment speeds used by the Company in establishing the
estimated fair value of its securities at December 31, 1995 are:
Bloomberg Median PSA
Collateral/(Year of Issue) As of December 31, 1995
GNMA 9.5% (1986) 298%
FNMA/FHLMC 9.0 (1986) 333
FNMA/FHLMC 9.0 (1991) 331
FNMA/FHLMC 9.5 (1986) 331
Such PSA assumptions do not purport to be an historical description
of prepayment experience or a prediction of the future rate of
prepayments of any mortgage loan.
All assets were modeled forward using the December 31, 1995
Bloomberg Median PSA for the life of each asset. LIBOR was assumed
at 5.625% for the life of the assets and various discount rates
were applied. The resulting analysis indicated that the fair value
of all of the Company's Mortgage Derivative Securities was in
excess of their carrying value at December 31, 1995.
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 (the
"RYMAC IV Bonds"). (See note 6) 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 6) The purchase agreements grant to the
Company certain additional rights with respect to the RYMAC IV
Bonds, such as the right, if any, to substitute collateral, the
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 4 - Mortgage Related Investments (continued)
right to direct the reinvestment of collateral proceeds and the
right to call the related RYMAC IV Bonds. At December 31, 1995,
the Company's Mortgage Related Investments consist of RYMAC IV
Bonds, Series 7, 10 and 19.
During the first quarter of 1994, the Company sold certain
ownership rights in the RYMAC IV Bonds for a net gain of
approximately $595. (See note 6) For the remaining RYMAC IV Bonds
the Company is investigating the possible contractual assignment of
the Company's rights. Additionally, the Company assigned its
ownership rights in the Ryland Mortgage Securities Corporation
Mortgage Collateralized Bonds Series 1989-6 to a third party during
the second quarter of 1994 and realized a net loss of approximately
$134. No such sales or assignments occurred during 1995.
At December 31, 1995 and 1994, the Company owned mortgage related
investments with aggregate outstanding principal balances of $9,814
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.
The Company held the following mortgage related investments as of
December 31, 1995:
Interest Final
Rate Maturity Principal
Description Range Date Range Amount
82 Pools of FNMA 7.75% to 7/01/2001 $9,814
Certificates, 10.50% to 4/01/2017
24 of which were
under $50
The following is a summary of total mortgage related investments
for the years ended December 31, 1995 and 1994:
1995 1994
Balance at beginning of year $ 12,430 $ 64,408
Sales of collateral or ownership rights - (40,755)
Collections of principal (2,616) (11,223)
Balance at end of year $ 9,814 $ 12,430
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 4 - Mortgage Related Investments (continued)
In accordance with FASB-107, the Company obtained prices from a
Wall Street Dealer for the mortgage-backed securities
collateralizing the Company's mortgage related investments.
Although the FNMA Certificates were trading at premiums to their
face values as of December 31, 1995, as described in note 2, the
premiums on these FNMA Certificates are only available to the
Company under limited circumstances related to early redemption of
specific series of bonds.
The Company estimates the fair value of the RYMAC IV Bond Series 7,
10 and 19 to equal the carrying values at December 31, 1995 and
1994.
_________________________________________________________________
Note 5 - Mortgage-backed Securities
Mortgage-backed securities have been recorded at the lower of cost
or market. At December 31, 1995, no valuation allowance was
required. The fair value of the Company's Mortgage-backed
Securities were at a premium to its carrying value at December 31,
1995. However, since such assets are being held for investment
purposes, no unrealized gains have been recognized.
_________________________________________________________________
Note 6 - 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 December 31,
1995 and 1994 having stated maturities ranging from August 1, 2016
to May 1, 2017 and August 1, 2010 to May 1, 2017, respectively.
The classes of each series of funding notes payable bear interest
at fixed rates. The range of fixed rates at December 31, 1995 and
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 6 - Funding Notes Payable (continued)
In accordance with FASB-107, the Company obtained prices for its
Funding Notes Payable as of December 31, 1995 and 1994, from a
dealer actively trading in RYMAC IV Bonds and other bonds of this
type. Such bonds were trading at par or slight premiums to their
face values as of December 31, 1995 and 1994. Market premiums (or
discounts) on trades of these obligations do not affect the
Company. The Company's obligations for repayment of its Funding
Notes Payable are at par through receipt of principal and interest
payments on its mortgage related investments.
_________________________________________________________________
Note 7 - 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.
For 1995, the Company made a distribution of $0.003 per share to
its stockholders on September 29, 1995, with a record date of
September 20, 1995. The dividend represented excess inclusion
income. The Company expects to have a tax loss of approximately
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 7 - Federal Income Taxes and Distributions (continued)
$625 for the year. The Company's taxable losses through 1995
aggregate to approximately $36 million. During 1994, the Company's
investment in certain REMICs produced excess inclusion income of
$16. For 1995, the Company's investments did not generate any
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 $36 million,
including approximately $5 million in capital loss carryforwards.
The tax losses can be carried forward to offset future income of
the Company.
The following table illustrates the reconciliation between Net
Income and Accumulated Deficit, and the related per share data for
the following periods:
_________________________________________________________________
Note 8 - Related Party Transactions
Pursuant to the Purchase Agreements between the Company and RYMAC
IV (see note 4), $27 has been withheld from amounts released from
the lien of the RYMAC IV Indenture, retained by RYMAC IV and
deposited in escrow to be used for payment of expenses of the CMOs
secured by certain of the mortgage related investments purchased by
the Company. In addition, during the year ended December 31, 1995,
the Company incurred $14 of CMO administration fees which were paid
to RYMAC IV under the terms of the Purchase Agreements.
_________________________________________________________________
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 contributed 3% of gross compensation and has
established the same minimum contribution for 1996. 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
_________________________________________________________________
Note 9 - Employee Benefits (continued)
shares of the Company's Common Stock were awarded at market prices,
exercisable over ten year periods ending May 2005. The Company
accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees", and, accordingly,
recognizes no compensation expense for the stock option grants. In
addition, a salary continuance program was provided to the
Company's officers, allowing for up to one year's base salary
following the consummation of a business combination.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands except share data)
__________________________________________________________________
Note 10 - Quarterly Financial Data (unaudited)
Quarter
First Second Third Fourth Year
1994
Operating Results
Revenues(1) $ 1,951 $ 576 $ 1,061 $ 497 $ 4,085
Expenses 1,596 766 519 399 3,280
Net Income (loss) 355 (190) 542 98 805
Net Income (loss)
per share $0.07 $(0.04) $0.11 $ 0.01 $ 0.15
Dividends $ - $ - $ - $ - $ -
Other Information
10 Year Treasury(2) 6.07% 7.07% 7.32% 7.83% 7.10%
1 Month LIBOR(3) 3.40 4.19 4.73 5.54 4.48
1995
Operating Results
Revenues(1) $ 437 $ (281) $ 378 $ 364 $ 898
Expenses 441 439 412 362 1,654
Net Loss (4) (720) (34) 2 (756)
Net Loss
per share $ - $(0.14) $(0.01) $ - $(0.15)
Dividends - - $ 0.003 $ - $0.003
Other Information
10 Year Treasury(2) 7.47% 6.60% 6.32% 5.89% 6.58%
1 Month LIBOR(3) 6.06 6.08 5.89 5.86 5.96
1 Includes downward valuation adjustment to the carrying value of the
Company's assets. (See notes 2, 3 and 4)
2 Quarterly 10 Year Treasury figures are based upon the daily average while
the yearly figures are based upon the weekly average. (Source: Bloomberg
Financial System)
3 Quarterly 1-Month LIBOR figures are based upon the daily average while the
yearly figures are based upon the weekly average. (Source: Bloomberg
Financial System)
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required to be set forth hereunder has
been omitted and will be incorporated by reference, when filed,
to the Company's Proxy Statement for its 1996 Annual Meeting of
Stockholders to be held on or about May 22, 1996.
Item 11. Executive Compensation.
The information required to be set forth hereunder has
been omitted and will be incorporated by reference, when filed,
to the Company's Proxy Statement for its 1996 Annual Meeting of
Stockholders to be held on or about May 22, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required to be set forth hereunder has
been omitted and will be incorporated by reference, when filed,
to the Company's Proxy Statement for its 1996 Annual Meeting of
Stockholders to be held on or about May 22, 1996.
Item 13. Certain Relationships and Related Transactions.
The information required to be set forth hereunder has
been omitted and will be incorporated by reference, when filed,
to the Company's Proxy Statement for its 1996 Annual Meeting of
Stockholders to be held on or about May 22, 1996.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports
On Form 8-K.
(a) Documents filed as part of this Report:
1. The following financial statements are included in
Part II, Item 8 of this Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Revenues and Expenses
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
2. Financial statement schedules required:
None
3. The following exhibits are included as part of
this Form 10-K:
Exhibit No. Description Page No.
3.1 Amended and Restated Articles of
Incorporation of the Company
(incorporated by reference to
Exhibit 3.1 to Amendment No. 1
to the Company's Registration
Statement No. 33-22891 on Form S-11).
3.1.1 Articles of Amendment to Amended and
Restated Articles of Incorporation
of the Company (incorporated by reference
to Exhibit 3.1.1 to the Company's Form
10-K for the year ended December 31, 1990).
3.2.1 Amended and Restated By-laws of the
Company (incorporated by reference
to Exhibit 3.2 to Amendment No. 1
to the Company's Registration
Statement No. 33-22891 on Form S-11).
3.2.2 Amendment to By-laws of the Company
(incorporated by reference to
Exhibit 3.2.1 to Amendment No. 2 to
the Company's Registration Statement
No. 33-22891 on Form S-11).
10.1 Purchase Agreement dated as of
August 30, 1988 among the Company,
RMI I and RYMAC IV with respect to
collateral securing RYMAC IV's Series
7 Bonds (incorporated by reference to
Exhibit 10.5 to the Company's Form
10-Q for the quarter ended
September 30, 1988).
<PAGE>
Exhibit No. Description Page No.
10.2 Purchase Agreement dated as of
August 30, 1988 among the Company,
RMI I and RYMAC IV with respect to
collateral securing RYMAC IV's Series
10 Bonds (incorporated by reference
to Exhibit 10.6 to the Company's Form
10-Q for the quarter ended
September 30, 1988).
10.3 Purchase Agreement dated as of
August 30, 1988 among the Company,
RMI I and RYMAC IV with respect to
collateral securing RYMAC IV's Series
19 Bonds (incorporated by reference to
Exhibit 10.7 to the Company's Form
10-Q for the quarter ended
September 30, 1988).
10.4 First Amendment to Purchase Agreements
dated as of September 23, 1989 among the
Company, RMI I and RYMAC IV (incorporated
by reference to Exhibit 10.27 to the
Company's Form 10-Q for the quarter ended
March 31, 1989).
10.5 Residual Bond Purchase Agreement dated
as of September 30, 1988 between NVR
Mortgage L.P. and the Company
(incorporated by reference to Exhibit
10.21 to the Company's Form 10-Q for the
quarter ended September 30, 1988).
20 Notice to stockholders regarding Dividend
Reinvestment Plan (incorporated by
reference to Exhibit 21 to the Company's
Form 10-K for the year ended December 31,
1988).
27.1 Financial Data Schedule
99.1 Dividend Reinvestment Plan of the
Company (incorporated by reference to
Exhibit 28.1 to the Company's Form 10-K
for the year ended December 31, 1988).
<PAGE>
Exhibit No. Description Page No.
99.2 Dividend Reinvestment Service Agreement
dated December 13, 1988 between the
Company and Maryland National Bank
(incorporated by reference to Exhibit
28.2 to the Company's Form 10-K for the
year ended December 31, 1988).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last
quarter of the period covered by this Report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RYMAC MORTGAGE INVESTMENT CORPORATION
By: /s/ Richard R. Conte
Richard R. Conte, Chief Executive Officer
Date: March 20, 1996
Pursuant to the requirements of the Securities Exchange
Act of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Name Title Date
/s/ Richard R. Conte Chairman of the
Richard R. Conte Board of Directors,
Chief Executive
Officer and Principal
Financial Officer March 20, 1996
/s/ Edward S. Babbitt, Jr. Director March 20, 1996
Edward S. Babbitt, Jr.
/s/ Joseph P. Berghold Director March 20, 1996
Joseph P. Berghold
/s/ James C. Chaplin, IV Director March 20, 1996
James C. Chaplin, IV
/s/ Malcolm M. Prine Director March 20, 1996
Malcolm M. Prine
[Signatures continued on next page.]
<PAGE>
[Signatures continued from previous page.]
/s/ Ronald L. Temple Director March 20, 1996
Ronald L. Temple
/s/ Hay Walker, IV Director March 20, 1996
Hay Walker, IV
<PAGE>
RYMAC MORTGAGE INVESTMENT CORPORATION
EXHIBIT INDEX
Exhibits filed with Annual Report on Form 10-
K For the Fiscal year Ended December 31, 1995
Exhibit
No. Description
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the Company's report
on Form 10-K for the year ended December 31, 1995 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,708
<SECURITIES> 14,225
<RECEIVABLES> 415
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,534
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,602
<CURRENT-LIABILITIES> 273
<BONDS> 10,114
0
0
<COMMON> 52
<OTHER-SE> 6,163
<TOTAL-LIABILITY-AND-EQUITY> 16,602
<SALES> 0
<TOTAL-REVENUES> 937
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 590
<LOSS-PROVISION> 39
<INTEREST-EXPENSE> 1,064
<INCOME-PRETAX> (756)
<INCOME-TAX> 0
<INCOME-CONTINUING> (756)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (756)
<EPS-PRIMARY> $(0.15)
<EPS-DILUTED> $(0.15)
</TABLE>
