24
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 0-14447
INVG MORTGAGE SECURITIES CORP.
(Exact name of Registrant as specified in its Charter)
Maryland 13-3397560
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Meadow Wood Crown Plaza
1575 Delucchi Lane, Suite 115-20 89502
Reno, Nevada (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (702) 828-5405
________________________________________________________________________
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 and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock as of the latest practicable date
Class of Common Stock Outstanding at November 11, 1994
--------------------- ---------------------------
$.01 Par Value 615,075 Shares
(Exclusive of Treasury Stock)
<PAGE>
INVG MORTGAGE SECURITIES CORP.
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited) Page Number
Condensed Consolidated Statements of Income
Three months and nine months
ended September 30, 1994 and 1993 3
Condensed Consolidated Balance Sheets
September 30, 1994 and December 31, 1993 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1994 and 1993 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II. Other Information
Item 1. Legal Proceedings 16
Item 4. Results of Votes of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
INVG MORTGAGE SECURITIES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
1994 1993 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Mortgage Certificates, net $ 8,442,513 $13,504,698 $29,671,007 $42,828,704
Mortgage Derivative Investments 770,508 408,014 1,940,686 408,014
------------- ------------- ------------- -------------
Total Interest Income 9,213,021 13,912,712 31,611,693 43,236,718
Interest Expense 8,439,625 14,375,550 30,036,941 44,891,301
------------- ------------- ------------- -------------
Net Interest Income (Loss) 773,396 (462,838) 1,574,752 (1,654,583)
Gain (Loss) on Sales of Investments (164,565) 1,107,798 (134,019) 1,107,798
Gain on Sale of GNMA Certificates 0 0 4,500,169 25,954,617
Impairment of Mortgage Derivative Investments (1,460,452) 0 (1,460,452) 0
Valuation Reserve Provision 68,555 0 (916,847) 0
Other Income (Expense) (98) 0 5,851 0
------------- ------------- ------------- -------------
Total Income (Loss) (783,164) 644,960 3,569,454 25,407,832
------------- ------------- ------------- -------------
Expenses
Incentive Management Fee (94,679) 780,000 294,323 780,000
Professional Fees 159,950 63,833 314,343 176,865
Trustee Fee 5,883 10,482 37,379 45,328
Management Fee and Officers' Compensation 78,000 48,000 234,000 184,000
Directors' Fees 8,500 10,000 18,500 28,500
General and Administrative 68,712 17,793 148,670 86,975
------------- ------------- ------------- -------------
Total Expenses 226,366 930,108 1,047,215 1,301,668
------------- ------------- ------------- -------------
Income (Loss) before Extraordinary Item (1,009,530) (285,148) 2,522,239 24,106,164
Extraordinary Item - Loss from Redemption of Bonds 0 0 (2,250,778) (24,190,531)
------------- ------------- ------------- -------------
Net Income (Loss) ($1,009,530) ($285,148) $271,461 ($84,367)
============= ============= ============= =============
- -----------------------------------------------------------------------------------------------------------------
Per Common Share
Income (Loss) before Extraordinary Item ($1.63) ($0.42) $3.94 $35.58
Net Income (Loss) ($1.63) ($0.42) $0.42 ($0.13)
Dividends Declared $0.20 $0.10 $0.60 $0.30
Weighted Average Shares Outstanding 620,475 675,775 640,761 677,585
- -----------------------------------------------------------------------------------------------------------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>>
<PAGE>
<TABLE>
INVG MORTGAGE SECURITIES CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1994 1993
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $677,021 $4,464,990
Government National Mortgage
Association Certificates, at amortized cost 184,660,577 287,539,482
Other Mortgage Certificates 51,056 0
Mortgage Derivative Investments 17,528,430 9,396,136
Accrued Interest and Accounts Receivable 1,778,298 2,803,778
Deferred Issuance Costs 1,388,893 2,210,462
Organization Costs 46,602 46,602
Other Investments 2,988,896 2,301,244
------------- -------------
Total Assets $209,119,773 $308,762,694
============= =============
- -----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
GNMA-Backed Sequential Pay Bonds $185,546,955 $285,297,098
Accrued Interest Payable 1,758,351 2,153,064
Short-term Debt 10,028,250 5,947,500
Incentive Management Fee Payable 524,997 774,000
Payable to Broker 0 2,704,621
Accrued Expenses and Other Liabilities 108,995 146,878
Dividends Payable 136,455 136,455
------------- -------------
Total Liabilities 198,104,003 297,159,616
------------- -------------
Stockholders' Equity
Common Stock, $.01 Par Value;
25,000,000 Shares Authorized;
682,275 Shares Issued and Outstanding 6,823 6,823
Additional Paid-in Capital 15,103,692 15,103,692
Treasury Shares (61,800 shares at Sept. 30, 1994) (529,244) (55,568)
Unrealized Gain on Investments 6,012 0
Retained Earnings (Deficit) (3,571,513) (3,451,869)
------------- -------------
Total Stockholders' Equity 11,015,770 11,603,078
------------- -------------
Total Liabilities and Stockholders' Equity $209,119,773 $308,762,694
============= =============
- -----------------------------------------------------------------------------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>>
<PAGE>
<TABLE>>
INVG MORTGAGE SECURITIES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1994 1993
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $271,461 ($84,367)
------------ ------------
Adjustments to reconcile Net Income to Net Cash
Provided by Operating Activities:
Amortization of Deferred Bond Issuance Costs 821,569 1,469,509
Amortization of Bond Discount 13,426,024 21,852,886
Amortization of Discount on Government
National Mortgage Association Certificates, Net (9,519,465) (18,286,359)
Earnings of Mortgage Derivative Investments (1,940,686) (408,014)
Impairment of Mortgage Derivative Investments 1,460,452 0
Loss on Sales of Investments 134,019 0
Decrease in Reserve for Loss on Investments (683,721) 0
Decrease in Accrued Interest Receivable 1,018,882 2,091,244
Decrease (Increase) in Accounts Receivable 6,598 (358,187)
Increase (Decrease) in Incentive Management Fee Payable (249,002) 780,000
Decrease in Accrued Expenses (37,883) (682,427)
Decrease in Accrued Interest Payable (394,713) (1,665,953)
------------ ------------
Total Adjustments 4,042,074 4,792,699
------------ ------------
Net Cash Provided by Operating Activities 4,313,535 4,708,332
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in Principal Amount of
Government National Mortgage Association Certificates 113,093,195 214,829,832
Investment in Other Mortgage Certificates (11,527,555) 0
Investment in Mortgage Derivative Investments (15,113,913) (21,686,097)
Cash Receipts from Investments 19,111,590 8,456,688
Purchase of Other Investments (1,000,000) (373,891)
Organization Costs 0 (46,602)
------------ ------------
Net Cash From Investing Activities 104,563,317 201,179,930
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Principal Amount of
GNMA-Backed Sequential Pay Bonds (113,176,168) (207,175,897)
Increase in Short-term Debt 4,080,750 3,577,971
Decrease in Due to Broker (2,704,621) 0
Repurchase of Common Stock (473,676) (39,813)
Dividends Paid (391,106) (275,910)
------------ ------------
Net Cash Used in Financing Activities (112,664,821) (203,913,649)
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (3,787,969) 1,974,613
Cash and Cash Equivalents at Beginning of Period 4,464,990 2,645,568
------------ ------------
Cash and Cash Equivalents at End of Period $677,021 $4,620,181
============ ============
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
INVG MORTGAGE SECURITIES CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. - Basis of Presentation
In the opinion of the Company, the accompanying condensed consolidated
financial statements contain all adjustments necessary to present fairly
the financial position as of September 30, 1994 and the results of
operations and the cash flows for the nine months ended September 30, 1994
and 1993. Operating results for the quarter and nine months ended
September 30, 1994 are not necessarily indicative of the results that may
be expected for the entire year. These financial statements should be read
in conjunction with the December 31, 1993 financial statements and notes
thereto.
Note 2. - Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
Investors GNMA Mortgage-Backed Securities Trust, Inc. and INVG Government
Securities Corp. All significant intercompany balances and transactions
have been eliminated.
Accounting Change - On December 31, 1993 the Company adopted Statement
of Financial Accounting Standards No. 115 ("SFAS 115") - Accounting for
Certain Investments in Debt and Equity Securities. In accordance with this
new Standard, the Company classified its investments as either available-
for-sale or held-to-maturity. The Company has elected to classify its
investments in CMO Residuals and REMIC Residuals as available-for-sale
while it has elected to classify its investments in GNMA Certificates as
held-to-maturity investments. SFAS 115 requires that held-to-maturity
investments be accounted for at amortized cost. However, if the fair
value, as defined, of the investment declines below the amortized cost
basis and the decline is considered to be "other than temporary", the cost
basis of the individual asset must be written down to its fair value as the
new cost basis. The amount of the write down is included in the Company's
current earnings (i.e. accounted for as a realized loss). The decline in
fair value is considered to be other than temporary if the cost basis
exceeds the related projected cash flow from the investment discounted at a
risk-free rate of return.
Held-to-Maturity. The investment in GNMA Certificates is classified
as a held-to-maturity investment. In connection with the fourth quarter
1993 adoption of SFAS 115 and consistent with the consensus reached by the
Emerging Issues Task Force on Issue No. 93-18, the Company measures other
than temporary impairment by comparing the net cash flows from the GNMA
Certificates (net of GNMA Bonds principal and interest payments and related
trustee expenses) discounted at a risk-free rate to the net carrying value
of the GNMA Certificates (i.e. net of GNMA Bond liabilities). If such
discounted cash flows are less than the net carrying value, the Company
records a reserve to reduce the net carrying value to fair value. For
purposes of determining fair value, the Company discounts the net cash
flows as discussed above using an estimated risk-adjusted rate of return.
In connection with the adoption of SFAS 115, the Company recorded a charge
of $8,530,329 in the fourth quarter of 1993 representing the cumulative
effect of the change in accounting principle.
Available-for-Sale. The Company is not in the business of trading its
mortgage-related assets, however, from time to time the Company may sell an
asset as part of the Company's efforts to adjust its portfolio composition
to reflect changes in economic conditions. Therefore the Company has
classified its investments in CMO Residual Interests and REMIC Residual
interests as available-for-sale. They are carried at fair value in the
financial statements. Unrealized holding gains and losses for available-
for-sale investments are excluded from earnings and reported as a net
amount in shareholders' equity until realized. Available-for-sale
investments are also subject to write down whenever the carrying value
(excluding unrealized losses) is less than the future projected cash flows
discounted at a risk-free rate. At September 30, 1994, the Company
recognized an impairment to its CMO residual interests and REMIC residual
interests of $1,460,452.
Cash Equivalents - Cash equivalents are short-term investments which
are readily converted to cash and have original maturities of less than
three months.
Mortgage Certificates and Collateralized Mortgage Obligation Bonds
("CMOs") - Mortgage certificates and CMO bonds are carried at their
outstanding principal balance plus or minus any premium or discount,
respectively.
Amortization of Deferred Issuance Costs, Premiums and Discounts -
Deferred issuance costs, premiums and discounts relating to mortgage
certificates and GNMA Bonds are amortized to income using the interest
method over the stated maturity of the mortgage certificates or bonds.
Prepayments are not anticipated. When prepayments occur, a proportionate
amount of the related costs, premiums and discounts are recognized in
income so that the effective interest rate on the remaining balance
continues unchanged.
Mortgage Derivative Investments - With respect to income recognition,
Mortgage Derivative Investments are accounted for under the Prospective
method. Under this method, assets are carried at cost and income is
amortized over their estimated lives based on a method which provides a
constant yield. At the end of each quarter, the yield over the remaining
life of the asset is recalculated based on expected future cash flows using
current interest rates and mortgage prepayment speeds. This new yield is
then used to calculate the subsequent quarter's income.
Under certain extended high interest rate periods, or in the event of
extremely high prepayment rates on the collateral, the return on the
Company's investment in a Mortgage Derivative Investment could be zero or
negative. In the event that the projected return on an investment in a
mortgage derivative investment falls below a risk-free rate, the Company
would be required to write down the investment to its fair value.
Income Taxes - The Company has elected to be taxed as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended. As a REIT, the Company must distribute annually at least 95% of
its taxable income to its shareholders. No provision has been made for
income taxes in the accompanying financial statements as the Company will
not be subject to income taxes. Over the life of a Mortgage Derivative
Investment, total taxable income will equal total financial statement
income; however, the timing of income recognition may differ significantly
between the two from year to year.
Net Income (Loss) Per Share - Net income (loss) per share is based
upon the weighted average number of shares of common stock outstanding.
<PAGE>
Note 3. - GNMA Certificates
The GNMA Certificates are being used as collateral for the GNMA-Backed
Sequential Pay Bonds (the "Bonds"). Information with respect to such GNMA
Certificates is as follows:
<TABLE>
<CAPTION>
COST LESS ESTIMATED
BOND INTEREST DUE PRINCIPAL UNAMORTIZED FAIR
CERTIFICATES SERIES RATE DATE AMOUNT DISCOUNT VALUE
- ----------------------------------------------------------------------------------------------
- -
<S> <C> <C> <C> <C> <C> <C>
Sept. 30, 1994
1984-2 8.0% 2008 $102,985,425 $83,496,304 $100,024,594
1984-3 9.0% 2009 68,846,691 54,302,826 70,632,402
1984-4 11.0% 2013 61,034,199 54,696,951 67,747,961
INVG A See Note 5 0 0 0
Reserve (7,835,504)
------------------------------------------
--
Total $232,866,315 $184,660,577 $238,404,957
==========================================
==
December 31, 1993
1984-2 8.0% 2008 $119,192,348 $95,723,477 $125,455,610
1984-3 9.0% 2009 85,449,168 66,836,229 91,377,204
1984-4 11.0% 2013 80,905,716 72,270,472 92,030,252
INVG A Variable 2017 60,442,679 61,239,633 65,709,245
Reserve (8,530,329)
------------------------------------------
-
Total $345,989,911 $287,539,482 $374,572,311
==========================================
=
Note 4. - GNMA-Backed Sequential Pay Bonds
The Bonds are collateralized by the GNMA Certificates. Information
with respect to such Bonds is as follows:
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED
BOND STATED DUE PRINCIPAL UNAMORTIZED FAIR
BONDS SERIES MATURITY DATE AMOUNT DISCOUNT NET VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sept. 30, 1994
1984-2 7.875% 2008 $102,984,865 $23,782,913 $79,201,952 $100,224,130
1984-3 8.875-9.0% 2009 68,846,236 16,297,766 52,548,470 69,712,958
1984-4 10.875% 2013 61,033,512 7,236,979 53,796,533 66,185,377
INVG A See Note 5 2017 0 0 0 0
---------------------------------------------------------
-
Total $232,864,613 $47,317,658 $185,546,955 $236,122,465
=========================================================
=
December 31, 1993
1984-2 7.875% 2008 $119,161,788 $28,472,377 $90,689,411 $124,926,160
1984-3 8.875-9.0% 2009 85,448,713 20,690,041 64,758,672 91,215,162
1984-4 10.875% 2013 80,905,029 9,856,967 71,048,062 92,207,462
INVG A Variable 2017 60,525,251 1,724,298 58,800,953 60,525,251
---------------------------------------------------------
-
Total $346,040,781 $60,743,683 $285,297,098 $368,874,035
=========================================================
=
</TABLE>
The sequence of each series of bonds with the latest stated maturity is
redeemable at the option of the Company in whole, but not in part, when the
outstanding principal amount of that sequence declines to 10% or less of
its original outstanding principal amount at a redemption price equal to
the outstanding principal amount thereof, plus accrued interest, except for
the Series A Bonds. The Series A Bonds, which are redeemable at the option
of the Company in whole, but not in part, on any payment date after the
earlier of July 1, 1996 or the payment date on which the Class A-2 Bonds
are paid in full, were redeemed in the first quarter of 1994. See Note 5.
Note 5. - Redemption of Series A Bonds
On January 5, 1994 the Board of Directors of the Company authorized an
optional redemption of the Series A Bonds on February 1, 1994 pursuant to
the call provisions of the Series A Bonds. On January 24, 1994, the GNMA
Certificates securing the Series A Bonds were sold. The Company realized a
gain of $4,500,000 from the sale of the GNMA Certificates. On February 1,
1994, the Series A Bonds were redeemed at par. After accounting for
expenses, including amortization of discounts and premiums, the Company
incurred an extraordinary loss of $2,250,000 from the redemption of the
Series A Bonds. The net cash the Company received from this series of
transactions was $5,000,000.
Note 6. - Tender and Redemption of Bond Series 1984-1
On August 24 and November 30, 1992 the Company purchased for
$7,197,087 and $3,414,410, respectively, $5,273,152 and $3,035,032
aggregate principal amount, respectively, of its outstanding Series 1984-1
Bonds. These Bonds had original face values of $8,000,000 and $5,000,000,
respectively.
On December 9, 1992, the Company commenced a tender offer (the "1984-1
Offer") for all of its outstanding Series 1984-1 Bonds and a solicitation
of consents to amend the provisions of the related Indenture to permit the
Company to redeem Bonds of such Series not tendered pursuant to the 1984-1
Offer. On January 15, 1993, after obtaining the consent of not less than a
majority in principal amount of the outstanding Series 1984-1 Bonds, the
Company and the trustee entered into an amendment to the Indenture which
permitted the Company to redeem any Series 1984-1 Bonds not tendered
pursuant to the 1984-1 Offer. On January 25, 1993, after giving
consideration to the scheduled principal and interest payments, the Company
(i) purchased $46,926,150 aggregate principal amount of the Series 1984-1
Bonds tendered pursuant to the 1984-1 Offer for an aggregate purchase price
and consent payment of 111.5% of such aggregate principal amount plus
accrued interest to the purchase date, or a total of $52,706,392, and (ii)
redeemed the remaining $2,952,592 aggregate principal amount of Series 1984-
1 Bonds for par plus accrued interest to the redemption date.
For financial accounting purposes the Series 1984-1 Bonds that the
Company acquired in 1992 were considered redeemed in 1992. As a result,
the Company realized an extraordinary loss in the fourth quarter of 1992 of
$3,387,807. In 1993 the Company realized a gain of $11,024,421 from
selling the GNMA Certificates securing the Series 1984-1 Bonds. After
accounting for expenses, including amortization of discounts, the Company
realized in 1993 an extraordinary loss of $8,357,868 from the retirement of
the Series 1984-1 Bonds. The net cash the Company received from this
series of transactions was $606,620.
Note 7. - Tender and Redemption of Bond Series 1983-1
On December 9, 1992, the Company commenced a tender offer (the "1983-1
Offer") for all of its outstanding Series 1983-1 Bonds and a solicitation
of consents to amend the provisions of the related Indenture to permit the
Company to redeem Bonds of such Series not tendered pursuant to the 1983-1
Offer. On February 12, 1993, after obtaining the consent of not less than
a majority in principal amount of the outstanding Series 1983-1 Bonds, the
Company and the trustee entered into an amendment to the Indenture which
permitted the Company to redeem any Series 1983-1 Bonds not tendered
pursuant to the 1983-1 Offer. On February 25, 1993, after giving
consideration to the scheduled payments, the Company (i) purchased
$68,946,187 aggregate principal amount of the Series 1983-1 Bonds tendered
pursuant to the 1983-1 Offer for an aggregate purchase price and consent
payment of 113.5% of such aggregate principal amount, plus accrued interest
to the purchase date, or a total of $78,787,507 and (ii) redeemed the
remaining $458,068 of Series 1983-1 Bonds for par plus accrued interest to
the redemption date. The Company realized in 1993 a gain of $14,930,196
from selling the GNMA Certificates securing the Series 1983-1 Bonds. After
accounting for expenses, including amortization of discounts, the Company
realized an extraordinary loss of $15,832,663 from the retirement of the
Series 1983-1 Bonds. The net cash the Company received from this series of
transactions was $356,922.
Note 8. - Other Mortgage Certificates
At September 30, 1994, Other Mortgage Certificates consisted of 7.0%
GNMA certificates.
On May 17, 1994, the Board of Directors of INVG Government Securities
Corp. authorized an optional redemption of Thomson McKinnon Mortgage Assets
Trust 2, which was previously classified as a Mortgage Derivative
Investment, and the Company received $11,527,555 Federal National Mortgage
Association bonds. Simultaneously the Company increased its short-term
borrowings by $11,698,000. On July 25, 1994 the bonds were sold and the
debt was retired resulting in a loss of $162,000.
Note 9. - Mortgage Derivative Investments
Presented below is a schedule of mortgage derivative investments held by
the Company.
<TABLE>
<CAPTION>
CARRYING
VALUE
PURCHASE % PURCHASE SEPTEMBER 30,
RESIDUAL SERIES DATE OWNERSHIP COLLATERAL PRICE 1994
- ------------------------------------------------------------------------------------------------------
- -
<S> <C> <C> <C> <C> <C>
Merrill Lynch Trust 8-R Aug. 10, 1993 68.850% FHLMC 9.50% $3,600,000 $1,470,964
FHLMC REMIC 1332-R July 29, 1993 100.00% FHLMC 8.00% 6,333,00 0
FNMA REMIC 92-G64 R Aug. 26, 1993 100.00% GNMA 8.00% 3,668,000 205,439
FNMA REMIC 92-G65 R Sept. 21, 1993 100.00% GNMA 8.00% 2,200,000 0
FHLMC REMIC 1424-R Sept. 27, 1993 100.00% FHLMC 8.00% 377,108 56,680
Paine Webber G-3 Oct. 14, 1993 25.00% FNMA 12.00% 318,719 279,764
FHLMC REMIC 9-R Oct. 14, 1993 37.00% FHLMC 10.01% 1,056,747 678,556
Drexel Burnham Q-7 Dec. 10, 1993 42.0869% FNMA 10.00% 745,361 816,020
Santa Barbara 1-A Various 9.74406% FHLMC 9.50% 799,751 738,067
CMOT Series 5-R Dec. 10, 1993 49.00% FNMA 9.50% 560,682 219,257
CMOT Series 6-R Dec. 10, 1993 49.00% FHLMC 9.50% 154,713 581,509
Merrill Lynch Trust 3 Jan. 27, 1994 24.2309% GNMA 11.00% 640,432 563,105
Morgan Stanley Trust E Feb. 14, 1994 42.00% FHLMC 9.308% 315,000 440,315
Kidder Peabody Trust 3 Feb. 14, 1994 11.27% FHLMC 9.214% 250,000 29,956
Ryan Mortgage IV - 3 Mar. 28, 1994 100.00% GNMA 12.00% 800,000 599,741
Ryan Mortgage IV - 4 Mar. 28, 1994 100.00% FNMA 10.00% 400,000 314,099
CMIT Series 7 Mar. 30, 1994 100.00% GNMA 9.50% 800,000 368,732
FHLMC REMIC 4-R Apr. 21, 1994 52.593% FHLMC 10.5% 2,550,000 2,141,995
Oxford Acceptance 3D July 29, 1994 100.00% FHLMC 10.63% 1,999,316 2,043,924
CMSC Series 1988-14 July 5, 1994 100.00% FHLMC 10.63% 2,100,000 1,889,642
Mortgage Capital 6C July 22, 1994 100.00% GNMA 11.00% 1,350,000 1,383,359
Drexel Burnham Series N Sept. 3, 1994 50.00% FNMA 10.50% 611,326 619,836
FHLMC Series 150 Sept. 16, 1994 100.00% FHLMC 10.00% 1,350,000 1,360,681
FHLMC Series 118 Sept. 27, 1994 100.00% FHLMC 9.50% 725,000 726,789
------------
Total $17,528,430
============
</TABLE>
During the quarter ended September 30, 1994, the Company sold its 100%
interest in Ryland IV Series 94-R for $1,300,000. This mortgage derivative
investment was purchased September 14, 1993 for $1,250,000 and had a
carrying value of $1,464,564 at the date of sale resulting in a loss of
$164,564.
In accordance with FASB-107, the Company shall disclose the fair value
of financial instruments for which it is practicable to estimate that
value. The Company has disclosed in Notes 3 and 4 the fair value of the
GNMA Certificates based on market prices for comparable instruments as of
September 30, 1994. However, the Company is unable to sell the GNMA
Certificates and therefore realize any gain until the Bonds which are
collateralized by the GNMA Certificates either mature or are called in
accordance with the underlying Indenture. For purposes of determining fair
value of the GNMA Certificates, the Company uses the cash flows from GNMA
Certificates net of bond interest expenses and related trustee expenses.
The Company includes in its net cash flows an assumption of redemption of
the Series at the earliest available stated redemption date with an assumed
sale of the GNMA Certificates at a current market price. The net cash
flows also assume annual expenses of $110,000 for the three Series for
trustee, auditing, administration and legal expenses. These cash flows are
discounted at a fair value rate of 12%. The following table gives the
pertinent fair value assumptions used in forecasting the cash flows as of
September 30, 1994:
<TABLE>
<CAPTION>
BOND SERIES COLLATERAL PSA FAIR VALUE
- -----------------------------------------------------------------
<S> <C> <C> <C>
Series 1984-2 GNMA 8.00% 126% $ 124,071
Series 1984-3 GNMA 9.00% 167% 53,222
Series 1984-4 GNMA 11.00% 248% 365,759
-------------
Total Fair Value $ 543,052
=============
</TABLE>
The Company computes the estimated fair value of its mortgage
derivative investments, including CMO Residuals and REMIC Residuals, 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.
The Company has used available market information as of September 30, 1994
and has concluded that the fair value of the mortgage derivative
investments at that date was $6,012 in excess of the amortized cost of the
investments as of September 30, 1994. This amount of net unrealized gain
is recorded directly to equity as prescribed by SFAS 115 for assets
classified as available-for-sale.
Note 10. - Other Investments
Presented below is a schedule of other investments held by the Company at
September 30, 1994.
<TABLE>
<CAPTION>
BOOK VALUE
PURCHASE PURCHASE SEPT. 30,
DESCRIPTION DATE PRICE 1994
- ----------------------------------------------------------------------------------------
- -
<S> <C> <C> <C>
Interest in Pine Street Associates, L.P. Dec. 30, 1993 2,000,000 $1,957,825
Bennett/Lawrence Partners Jan. 4, 1994 750,000 808,797
Argentina Growth Fund Jan. 27, 1994 250,000 222,274
-------------
$2,988,896
=============
</TABLE>
Note 11. - Short-Term Debt
At September 30, 1994 the Company owed $10,028,250 under eleven
repurchase agreements. These borrowings had initial terms of one month and
are renewed on a month-to-month basis. The interest rate on these
borrowings at September 30, 1994 was 5.25%. The debt is collateralized by
some of the Company's mortgage derivative investments.
Note 12. - Consulting Agreement
Under the terms of a consulting agreement with Page Mill Asset
Management, the Company pays a monthly fee of $10,000 plus an incentive
management fee. The incentive management fee is equal to 25% of the
amount, if any, by which the annual consolidated taxable income of the
group, before payment of any incentive fee to Page Mill, net operating loss
deductions arising from prior periods' losses and special Internal Revenue
Code deductions pertaining to real estate investment trusts, plus certain
other adjustments in accordance with generally accepted accounting
principles, exceeds the amount necessary to provide an annualized return on
equity equal to 1% over the average ten-year U.S. Treasury rate for the
year. Under this agreement, the Company has recorded net expense in the
nine months ended September 30, 1994 of $90,000 and $294,323 (after a
reversal of $230,674 for 1993) for the monthly and incentive management
fees, respectively. The amount of incentive management fee is based on an
estimate of consolidated taxable income for the nine months ended September
30, 1994. Taxable income cannot be precisely determined until the tax
return is filed for the year. Based on actual taxable income, the adjusted
incentive management fee for 1993 totaled $543,326. Pending approval of
the consulting agreement, by the shareholders of the Company, incentive
management fees paid or payable to Page Mill Asset Management for 1993 have
been placed in a segregated account.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1994 Compared to 1993
- -----------------------------------------------------
Net income for the nine months ended September 30, 1994 amounted to
$271,461 or $0.42 per share. This compares to a net loss of $84,367, or
$0.13 per share for the nine months ended September 30, 1993. Results for
both the 1994 and 1993 periods included gains from sales of GNMA
Certificates as well as extraordinary losses from the redemption of bonds.
In addition, 1994 results include a loss from the revaluation of Mortgage
Certificates in accordance with the provisions of SFAS 115 which was
adopted by the Company on December 31, 1993 (see Note 2). The table below
indicates the results of operations exclusive of these items:
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30
----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Net Income (Loss) $271,461 ($84,367)
Less Gain on Sale of GNMA Certificates (4,500,169) (25,954,617)
Loss (Gain) on Sales of Investments 134,019 (1,107,798)
Plus Loss from Redemption of Bonds 2,250,778 24,190,531
Plus Valuation Reserve Provision 916,847 0
------------ ------------
Net Loss from Remaining CMO Issuance
Investments and Other Operations ($927,064) ($2,956,251)
============= =============
</TABLE>
The decrease in the net income from remaining CMO Issuance Investments and
other operations is attributable to the following:
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30
----------------------------
1994 1993 Change
------------ ------------ ------------
<S> <C> <C> <C>
Net Interest Income (Loss) $1,574,752 ($1,654,583) $3,229,335
Impairment of Mortgage
Derivative Investments (1,460,452) 0 (1,460,452)
Other Income 5,851 0 5,851
Incentive Management Fee (294,323) (780,000) 485,677
Other Operating Expenses (752,892) (521,668) (231,224)
------------ ------------ ------------
($927,064) ($2,956,251) $2,029,187
============= ============= ============
<FN>
The incentive management fee is described in Note 12. Other operating
expenses increased significantly in 1994 because of increased legal and
accounting costs.
</TABLE>
The composition of net interest income (loss) in these periods is as
follows:
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30
---------------------------
1994 1993 Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest from GNMA Certificates $17,840,157 $31,032,381 ($13,192,224)
Interest on Bonds 17,518,566 30,474,751 (12,956,185)
------------ ------------ ------------
Net Interest Margin 321,591 557,630 (236,039)
Amortization of Discount 10,295,710 11,718,530 (1,422,820)
Amortization of Bond Discount and
Bond Issuance Costs (12,195,367) (14,330,042) 2,134,675
Adjustment of Reserve for Loss 1,438,568 0 1,438,568
Income from Mortgage Derivative Investments 1,940,686 408,014 1,532,672
Interest on Short-term Debt (323,008) (86,508) (236,500)
Other Interest Income 96,572 77,793 18,779
------------ ------------ ------------
Net Interest Income (Loss) $1,574,752 ($1,654,583) $3,229,335
============ ============= ============
</TABLE>
Net interest margin (interest from GNMA Certificates less interest on
Bonds) declined in 1994 because of the redemption of the Series A Bonds in
February 1994. Amortizations declined somewhat due to the decline in the
principal amount of Certificates and Bonds outstanding. A number of
purchases of Mortgage Derivative Investments were financed with short-term
debt which accounts for the increase in that expense.
Three Months Ended September 30, 1994 Compared to 1993
- ------------------------------------------------------
The net loss for the three months ended September 30, 1994 amounted to
$1,009,530 or $1.63 per share. This compares to a net loss of $285,148 or
$0.42 per share for the three months ended September 30, 1993
The increase in the loss before extraordinary item is attributable to the
following:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30
----------------------------
1994 1993 Change
------------ ------------ ------------
<S> <C> <C> <C>
Net Interest Income (Loss) $773,396 ($462,838) $1,236,234
Gain (Loss) on Sales of Investments (164,565) 1,107,798 (1,272,363)
Impairment of Mortgage Derivative Investments (1,460,452) 0 (1,460,452)
Valuation Reserve Provision 68,555 0 68,555
Other Income (98) 0 (98)
Incentive Management Fee 94,679 (780,000) 874,679
Other Operating Expenses (321,045) (150,108) (170,937)
------------ ------------ ------------
($1,009,530) ($285,148) ($724,382)
============= ============= ============
<FN>
The incentive management fee is described in Note 12. Other operating
expenses increased significantly in 1994 because of increased legal and
accounting costs.
</TABLE>
The composition of net interest income (loss) in these periods is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30
---------------------------
1994 1993 Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest from GNMA Certificates $5,511,203 $9,012,185 ($3,500,982)
Interest on Bonds 5,305,095 8,887,441 (3,582,346)
------------ ------------ ------------
Net Interest Margin 206,108 124,744 81,364
Amortization of Discount 2,532,526 4,454,646 (1,922,120)
Amortization of Bond Discount and
Bond Issuance Costs (2,984,149) (5,428,346) 2,444,197
Adjustment of Reserve for Loss 376,104 0 376,104
Income from Mortgage Derivative Investments 770,508 408,014 362,494
Interest on Short-term Debt (150,381) (59,762) (90,619)
Other Interest Income 22,680 37,866 (15,186)
------------ ------------ ------------
Net Interest Income (Loss) $773,396 ($462,838) $1,236,234
============ ============= ============
</TABLE>
Net interest margin (interest from GNMA Certificates less interest on
Bonds) remained relatively constant in 1994 in spite of the decreased
principal amounts outstanding. Amortizations declined in 1994 due to the
Series A redemption and the lower outstanding principal balance of the
Certificates and the Bonds. A number of purchases of Mortgage Derivative
Investments were financed with short-term debt which accounts for the
increase in that area.
On September 14, 1994 the Company declared a distribution of $0.20 per
share, payable on October 14, 1994 to shareholders of record as of
September 30, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations of the Company totaled $4,313,535 for the
nine months ended September 30, 1994 and $4,708,332 for the nine months
ended September 30, 1993. Cash and cash equivalents of the Company
decreased during the first nine months of 1994 by $3,787,969 but increased
$1,974,613 in the first nine months of 1993.
The Company had total assets of $209.1 million at September 30, 1994. At
September 30, 1994, GNMA Certificates collateralizing the Bonds comprised
$184.7 million of the assets and deferred issuance costs accounted for $1.4
million of the assets. Other mortgage certificates and mortgage derivative
investments accounted for $17.6 million of the assets.
The Company had no capital expenditures in the quarter ended September 30,
1994.
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
-----------------
As set forth in the Form 10-Q for the period ended June 30, 1994, a
lawsuit was filed in the U.S. District Court, Northern District of Illinois
on July 29, 1994 by David R. Denis, a shareholder of the Company, on his
own behalf and on behalf of a class of persons similarly situated, against
the Company, its directors and Page Mill Asset Management. Plaintiff
alleged that the approval by the shareholders at a meeting on October 26,
1993 of a consulting agreement pursuant to which incentive management fees
are payable to Page Mill Asset Management (of which Robert E. Greeley, the
Chairman, President and Treasurer of the Corporation, is sole shareholder
and sole director) was based upon information contained in a proxy
statement that was materially false and misleading.
Plaintiff sought, on behalf of a purported class, to invalidate the
approval of the consulting agreement, to enjoin further payment of any
incentive management fees and to obtain repayment of any such fees
previously paid. Plaintiff also sought his attorneys' fees and costs
relating to the lawsuit. This suit was settled in September 1994. In
connection with the settlement, all incentive management fees earned by
Page Mill Asset Management for 1993 have been placed into a segregated
account pending the outcome of the resolicitation of the shareholders of
INVG with respect to the consulting agreement.
Item 4. Results of Votes of Security Holders
------------------------------------
Not Applicable
Item 5. Other Information
-----------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
The Company did not file any reports on Form 8-K during the
quarter ended September 30, 1994.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INVG MORTGAGE SECURITIES CORP.
By: /s/ Robert E. Greeley
-------------------------------------
Robert E. Greeley
Chairman of the Board,
President and Treasurer.
(Principal Executive and Financial Officer)
Dated: November 11, 1994
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEEET AS OF SEPTEMBER 30, 1994 AND THE
CONDENSED COLSOLIDATED STATEMENT OF INCOME (LOSS) FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 677,021
<SECURITIES> 17,528,430
<RECEIVABLES> 1,788,298
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,384,429
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 209,119,773
<CURRENT-LIABILITIES> 12,557,049
<BONDS> 185,546,955
<COMMON> 6,823
0
0
<OTHER-SE> 11,008,947
<TOTAL-LIABILITY-AND-EQUITY> 209,119,774
<SALES> 0
<TOTAL-REVENUES> 35,983,694
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,047,215
<LOSS-PROVISION> 2,377,299
<INTEREST-EXPENSE> 30,036,941
<INCOME-PRETAX> 2,522,239
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,522,239
<DISCONTINUED> 0
<EXTRAORDINARY> (2,250,778)
<CHANGES> 0
<NET-INCOME> 271,461
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
