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 March 31, 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 May 13, 1994
--------------------- ---------------------------
$.01 Par Value 640,075 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 ended March 31, 1994 and 1993 3
Condensed Consolidated Balance Sheets
March 31, 1994 and December 31, 1993 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 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 12
Part II. Other Information
Item 4. Results of Votes of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
INVG MORTGAGE SECURITIES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended
March 31
----------------------------
1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C>
Interest Income
Mortgage Certificates, net $8,882,529 $15,732,374
Mortgage Derivative Investments 698,948 0
------------- -------------
Total Interest Income 9,581,477 15,732,374
Interest Expense 9,394,958 16,259,174
------------- -------------
Net Interest Income (Loss) 186,519 (526,800)
Gain on Sale of GNMA Certificates 4,500,169 25,954,618
Other Income 70,505 0
------------- -------------
Total Income 4,757,193 25,427,818
------------- -------------
Expenses
Incentive Management Fee 213,638 0
Professional Fees 10,514 45,485
Trustee Fees 2,397 18,482
Management Fees 78,000 78,000
Directors' Fees 7,000 8,000
State and Local Taxes 0 9,310
General and Administrative 37,285 34,444
------------- -------------
Total Expenses 348,834 193,721
------------- -------------
Income before Extraordinary Item 4,408,359 25,234,097
------------- -------------
Extraordinary Item - Loss from Redemption of Bonds 2,250,778 24,056,899
------------- -------------
Net Income $2,157,581 $1,177,198
============= =============
- -----------------------------------------------------------------------------------
Per Common Share
Income before Extraordinary Item $6.62 $37.04
Net Income $3.24 $1.73
Dividends Declared $0.20 $0.10
Weighted Average Shares Outstanding 665,792 681,264
- -----------------------------------------------------------------------------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>>
<PAGE>
<TABLE>
INVG MORTGAGE SECURITIES CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
1994 1993
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $2,922,749 $4,464,990
Government National Mortgage
Association Certificates, at amortized cost 208,001,362 287,539,482
Mortgage Derivative Investments 11,767,310 9,396,136
Accrued Interest Receivable 2,131,674 2,803,778
Deferred Issuance Costs 1,684,334 2,210,462
Organization Costs 46,602 46,602
Other Investments 3,301,056 2,301,244
------------- -------------
Total Assets $229,855,087 $308,762,694
============= =============
- -----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
GNMA-Backed Sequential Pay Bonds $208,491,310 $285,297,098
Accrued Interest Payable 1,991,807 2,153,064
Short-term Debt 4,799,750 5,947,500
Incentive Management Fee Payable 987,638 774,000
Payable to Broker 0 2,704,621
Accrued Expenses and Other Liabilities 108,995 146,878
Dividends Payable 136,455 136,455
------------- -------------
Total Liabilities 216,515,955 297,159,616
------------- -------------
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 (42,200 shares at March 31, 1994) (340,640) (55,568)
Retained Earnings (Deficit) (1,430,743) (3,451,869)
------------- -------------
Total Stockholders' Equity 13,339,132 11,603,078
------------- -------------
Total Liabilities and Stockholders' Equity $229,855,087 $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>
Three Months Ended
March 31,
----------------------------
1994 1993
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $2,157,581 $1,177,198
------------ ------------
Adjustments to reconcile Net Income to Net Cash
Provided by Operating Activities:
Amortization of Deferred Bond Issuance Costs 526,128 1,031,515
Amortization of Bond Discount 4,308,579 12,189,711
Amortization of Discount on Government
National Mortgage Association Certificates, Net (1,493,274) (10,043,850)
Earnings of Mortgage Derivative Investments (698,948) 0
Carrying Value of Investment Sold 78,736 0
Decrease in Accrued Interest Receivable 672,104 796,767
Increase in Incentive Management Fee Payable 213,638 0
Decrease in Accrued Expenses (37,883) (682,427)
Decrease in Accrued Interest Payable (161,257) (1,336,457)
------------ ------------
Total Adjustments 3,407,823 1,955,259
------------ ------------
Net Cash Provided by Operating Activities 5,565,404 3,132,457
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in Principal Amount of
Government National Mortgage Association 81,031,394 153,860,321
Certificates
Decrease in Due to Broker (2,704,621) 0
Investment in Mortgage Derivative Investments (4,205,432) 0
Cash Receipts from Mortgage Derivative Investments 2,454,470 0
Purchase of Other Investments (1,000,000) 0
Cash Receipts from Other Investments 188 0
------------ ------------
Net Cash From Investing Activities 75,575,999 153,860,321
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Principal Amount of
GNMA-Backed Sequential Pay Bonds (81,114,367) (146,184,338)
Decrease in Short-term Debt (1,147,750) (8,308,529)
Repurchase of Common Stock (285,072) (39,813)
Dividends Paid (136,455) (136,455)
------------ ------------
Net Cash Used in Financing Activities (82,683,644) (154,669,135)
------------ ------------
Net Increase in Cash and Cash Equivalents (1,542,241) 2,323,643
Cash and Cash Equivalents at Beginning of Period 4,464,990 2,645,568
------------ ------------
Cash and Cash Equivalents at End of Period $2,922,749 $4,969,211
============ ============
<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 March 31, 1994 and the results of operations
and the cash flows for the three months ended March 31, 1994 and 1993.
Operating results for the three months ended March 31, 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
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 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 fair value is less
than the future projected cash flows discounted at a risk-free rate. None
of the Company's available-for-sale investments were subject to write down
as of March 31, 1994.
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 - 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. Management has the intention and the ability to hold all
of its real estate investments to term.
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 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.
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
BOND INTEREST DUE PRINCIPAL UNAMORTIZED FAIR
CERTIFICATES SERIES RATE DATE AMOUNT DISCOUNT VALUE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1994
1984-2 8.0% 2008 $112,889,645 $90,389,290 $114,089,097
1984-3 9.0% 2009 78,157,987 60,487,327 81,968,189
1984-4 11.0% 2013 73,880,484 65,655,074 84,223,751
INVG A See Note 5 0 0
Reserve (8,530,329)
------------------------------------------
Total $264,928,116 $208,001,362 $280,281,037
==========================================
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>
BOND STATED DUE PRINCIPAL UNAMORTIZED
BONDS SERIES MATURITY DATE AMOUNT DISCOUNT NET
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1994
1984-2 7.875% 2008 $112,889,085 $27,368,637 $85,520,448
1984-3 8.875-9.0% 2009 78,157,532 19,676,055 58,481,477
1984-4 10.875% 2013 73,879,797 9,390,412 64,489,385
INVG A See Note 5 0 0 0
------------------------------------------
Total $264,926,414 $56,435,104 $208,491,310
==========================================
</TABLE>
<TABLE>
<CAPTION>
BOND STATED DUE PRINCIPAL UNAMORTIZED
BONDS SERIES MATURITY DATE AMOUNT DISCOUNT NET
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993
1984-2 7.875% 2008 $119,161,788 $28,472,377 $90,689,411
1984-3 8.875-9.0% 2009 85,448,713 20,690,041 64,758,672
1984-4 10.875% 2013 80,905,029 9,856,967 71,048,062
INVG A Variable 2017 60,525,251 1,724,298 58,800,953
------------------------------------------
Total $346,040,781 $60,743,683 $285,297,098
==========================================
</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 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.
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 84-1
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.
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
"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 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 the first quarter of 1993 an extraordinary loss of $8,291,052
from the retirement of the Series 1984-1 Bonds. The net cash the Company
received from this series of transactions was $673,436.
Note 7. - Tender and Redemption of Bond Series 83-1
On December 9, 1992, the Company commenced a tender offer (the
"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 the first quarter of 1993 a
gain of $14,930,197 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 in the first quarter
of $15,765,847 from the retirement of the Series 1983-1 Bonds. The net
cash the Company received from this series of transactions was $423,737.
Note 8. - Mortgage Derivative Investments
Presented below is a schedule of mortgage derivative investments held
by the Company.
<TABLE>
<CAPTION>
CARRYING
VALUE
PURCHASE % PURCHASE MARCH 31,
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 $2,337,975
FNMA REMIC 92-G64 R Aug. 26, 1993 100.00% GNMA 8.00% 3,668,000 680,888
Ryland IV Series 94-R Sept. 14, 1993 100.00% GNMA 10.00% 1,250,000 1,422,149
FHLMC REMIC 1424-R Sept. 27, 1993 100.00% FHLMC 8.00% 377,108 26,952
Paine Webber G-3 Oct. 14, 1993 25.00% FNMA 12.00% 318,719 289,618
FHLMC REMIC 9-R Oct. 14, 1993 37.00% FHLMC 10.01% 1,056,747 821,268
Drexel Burnham Q-7 Dec. 10, 1993 42.0869% FNMA 10.00% 745,361 704,573
Santa Barbara 1-A Dec. 10, 1993 6.00% FHLMC 9.50% 576,912 433,160
CMOT Series 5-R Dec. 10, 1993 49.00% FNMA 9.50% 560,682 605,503
CMOT Series 6-R Dec. 10, 1993 49.000% FHLMC 9.50% 154,713 173,976
Thomson McKinnon 2 Jan. 18, 1994 100.00% FHLMC 9.50% 1,000,000 1,059,009
Merrill Lynch Trust 3 Jan. 27, 1994 24.2309% GNMA 11.00% 640,432 626,484
Morgan Stanley Trust E Feb. 14, 1994 42.00% FHLMC 9.308% 315,000 326,358
Kidder Peabody Trust 3 Feb. 14, 1994 11.27% FHLMC 9.214% 250,000 257,106
Ryan Mortgage IV - 3 Mar. 28, 1994 100.00% GNMA 12.00% 800,000 801,417
Ryan Mortgage IV - 4 Mar. 28, 1994 100.00% FNMA 10.00% 400,000 400,426
CMIT Series 7 Mar. 30, 1994 100.00% GNMA 9.50% 800,000 800,448
------------
Total $11,767,310
============
</TABLE>
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
March 31, 1994. However, the Company is unable to sell the GNMA
Certificates and therefore realize any gain until the Bonds which are
collateralized by the certificates either mature or are called in
accordance with the underlying bond 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.
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 March 31, 1994:
<TABLE>
<CAPTION>
BOND SERIES COLLATERAL PSA FAIR VALUE
- -----------------------------------------------------------------
<S> <C> <C> <C>
Series 1984-2 GNMA 8.00% 156% $ 493,943
Series 1984-3 GNMA 9.00% 218% 321,077
Series 1984-4 GNMA 11.00% 280% 728,505
-------------
Total Fair Value $1,543,525
=============
</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 March 31, 1994 and
has concluded that the fair value of the mortgage derivative investments at
that date was approximately equal to the carrying value of $11,767,000 as
of March 31, 1994. These values are before expenses for trustee, auditing,
administration, legal and other requirements for Securities and Exchange
Commission registration.
Note 9. Other Investments
Presented below is a schedule of other investments held by the Company
at March 31, 1994.
<TABLE>
<CAPTION>
BOOK VALUE
PURCHASE PURCHASE MARCH 31,
DESCRIPTION DATE PRICE 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
10,000 RJR Nabisco Preferred Aug. 18, 1993 250,000 $250,000
50,000 GNMA 7% Certificates July 19, 1993 51,445 51,056
Interest in Pine Street Associates, L.P. Dec. 30, 1993 2,000,000 2,000,000
Bennett/Lawrence Partners Jan. 4, 1994 750,000 750,000
Argentina Growth Fund Jan. 27, 1994 250,000 250,000
-------------
$3,301,056
=============
</TABLE>
Note 10. - Short-Term Debt
At March 31, 1994 the Company owed $4,799,750 under six repurchase
agreements. These borrowings had initial terms of one month and are
renewed on a month-to-month basis. The weighted average interest rate of
these borrowings at March 31, 1994 was 3.94%. The debt is collateralized
by some of the Company's mortgage derivative investments.
Note 11. - Consulting Agreement
Under the terms of a consulting agreement with Page Mill Asset
Management, the Company will pay 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 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 expense in the three
months ended March 31, 1994 of $30,000 and $213,638 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 three months ended March 31, 1994. Taxable income cannot be precisely
determined until the end of the entire fiscal year.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Three months Ended March 31, 1994 compared to 1993
- --------------------------------------------------
Net income for the three months ended March 31, 1994 amounted to $2,157,581
or $6.62 per share. This compares to net income of $1,177,198, or $1.73
per share for the three months ended March 31, 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. The table below
indicates the results of operations exclusive of these items:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Net Income $2,157,581 $ 1,177,198
Less Gain on Sale of GNMA Certificates (4,500,169) (25,954,618)
Plus Loss from Redemption of Bonds 2,250,778 24,056,899
------------ ------------
Net Income (Loss) from Remaining CMO Issuance
Investments and Other Operations ($91,810) ($720,521)
============= =============
</TABLE>
The decline in the net loss from remaining CMO Issuance Investments and
other operations is attributable to the following:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
1994 1993 Change
------------ ------------ ------------
<S> <C> <C> <C>
Net Interest Income (Loss) $186,519 ($526,800) $713,319
Other Income 70,505 0 70,505
Incentive Management Fee (213,638) 0 (213,638)
Other Operating Expenses (135,196) (193,721) 58,525
------------ ------------ ------------
($91,810) ($720,521) $628,711
============= ============= ============
</TABLE>
The composition of net interest income (loss) is these periods is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
1994 1993 Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest from GNMA Certificates $6,573,433 $12,235,916 ($5,662,483)
Interest on Bonds 6,564,021 12,003,552 (5,439,531)
------------ ------------ ------------
Net Interest Margin 9,412 232,364 (222,952)
Amortization of Discount 2,269,519 3,476,021 (1,205,502)
Amortization of Bond Discount and
Bond Issuance Costs (2,782,480) (4,228,875) 1,446,395
Income from Mortgage Derivative Investments 698,948 0 698,948
Interest on Short-term Debt (48,457) (26,747) (21,710)
Other Interest Income 39,577 20,437 19,140
------------ ------------ ------------
Net Interest Income (Loss) $186,519 ($526,800) $713,319
============ ============= ============
</TABLE>
Net interest margin (interest from GNMA certificates less interest on
bonds) declined in 1994 because of the redemptions of Series 1983-1 and
1984-1 in the first quarter of 1993 and the redemption of Series A in the
first quarter of 1994. These redemptions also caused the declines in
amortizations. Income from Mortgage Derivative Investments exists only in
1994 as these investments were made in the last half of 1993. A number of
purchases of Mortgage Derivative Investments were financed with short-term
debt which accounts for the increase in that area.
On March 11, 1994 the Company declared a distribution of $0.20 per share,
payable on April 15, 1994 to shareholders of record as of March 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations of the Company totaled $5,565,404 for the
three months ended March 31, 1994 and $3,132,457 for the three months ended
March 31, 1993. Cash and cash equivalents of the Company decreased during
the first three months of 1994 by $1,542,241 but increased $2,323,643 in
the first three months of 1993.
The Company had total assets of $229.9 million at March 31, 1994. At March
31, 1994, GNMA Certificates collateralizing the Bonds comprised $208.0
million of the assets and deferred issuance costs accounted for $1.7
million of the assets.
The Company had no capital expenditures in the quarter ended March 31,
1994.
PART II - OTHER INFORMATION
- ---------------------------
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
March 31, 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: May 13, 1994
