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, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File 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 12, 1995
--------------------- ---------------------------
$.01 Par Value 599,475 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, 1995 and 1994 3
Condensed Consolidated Balance Sheets
March 31, 1995 and December 31, 1994 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1995 and 1994 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
----------------------------
1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C>
Interest Income
Mortgage Certificates $ 6,975,040 $8,882,529
Mortgage Derivative Investments 1,322,059 698,948
------------- -------------
Total Interest Income 8,297,099 9,581,477
Interest Expense 7,208,317 9,394,958
------------- -------------
Net Interest Income 1,088,782 186,519
Gain on Sale of GNMA Certificates 0 4,500,169
Valuation Reserve Provision 133,076 0
Other Income 103 70,505
------------- -------------
Total Income 1,221,961 4,757,193
------------- -------------
Expenses
Incentive Management Fee 0 213,638
Professional Fees 25,465 10,514
Trustee Fee 7,060 2,397
Management Fees 78,000 78,000
Directors' Fees 12,000 7,000
General and Administrative 46,969 37,285
------------- -------------
Total Expenses 169,494 348,834
------------- -------------
Income before Extraordinary Item 1,052,467 4,408,359
Extraordinary Item - Loss from Redemption of Bonds 0 2,250,778
------------- -------------
Net Income $1,052,467 $2,157,581
============= =============
- -----------------------------------------------------------------------------------
Per Common Share
Income before Extraordinary Item $1.75 $6.62
Net Income $1.75 $3.24
Dividends Declared $0.20 $0.20
Weighted Average Shares Outstanding 602,764 665,792
- -----------------------------------------------------------------------------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>>
<PAGE>
<TABLE>
INVG MORTGAGE SECURITIES CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
1995 1994
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $3,411,717 $1,425,534
Investment in Government National Mortgage
Association Certificates, at amortized cost 172,163,008 177,990,217
Other Mortgage Certificates 100,495 100,730
Investment in Mortgage Derivative Investments 25,265,532 21,322,104
Accrued Interest and Accounts Receivable 2,097,996 3,973,306
Deferred Issuance Costs 1,260,489 1,321,892
Organization Costs 69,972 74,145
Other Investments 837,986 837,149
------------- -------------
Total Assets $205,207,195 $207,045,077
============= =============
- -----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
GNMA-Backed Sequential Pay Bonds $172,986,920 $178,933,727
Accrued Interest Payable 1,680,506 1,723,202
Short-term Debt 17,394,769 14,694,000
Incentive Management Fee Payable 687,421 687,421
Accrued Expenses and Other Liabilities 108,995 173,874
Dividends Payable 136,455 136,455
------------- -------------
Total Liabilities 192,995,066 196,348,679
------------- -------------
Stockholders' Equity
Common Stock, $.01 Par Value;
25,000,000 Shares Authorized;
682,275 Shares Issued 6,823 6,823
Additional Paid-in Capital 15,103,692 15,103,692
Treasury Shares (82,800 shares at March 31, 1995) (740,685) (682,050)
Unrealized Gain on Investments 940,250 298,459
Retained Deficit (3,097,951) (4,030,526)
------------- -------------
Total Stockholders' Equity 12,212,129 10,696,398
------------- -------------
Total Liabilities and Stockholders' Equity $205,207,195 $207,045,077
============= =============
- -----------------------------------------------------------------------------------
<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,
----------------------------
1995 1994
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $1,052,467 $2,157,581
------------ ------------
Adjustments to reconcile Net Income to Net Cash
Provided by Operating Activities:
Amortization of Deferred Bond Issuance Costs 61,403 526,128
Amortization of Bond Discount 2,001,617 4,308,579
Amortization of Discount on Government
National Mortgage Association Certificates, Net (1,734,723) (1,493,274)
Amortization of Organization Costs 4,173 0
Decrease in Reserve for Loss on Investments (386,491) 0
Decrease in Accrued Interest and Accounts Receivable 1,875,310 672,104
Increase in Incentive Management Fee Payable 0 213,638
Decrease in Accrued Expenses (64,879) (37,883)
Decrease in Accrued Interest Payable (42,696) (161,257)
------------ ------------
Total Adjustments 1,713,714 4,028,035
------------ ------------
Net Cash Provided by Operating Activities 2,766,181 6,185,616
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in Principal Amount of
Government National Mortgage Association Certificates 7,948,424 81,031,394
Decrease in Due to Broker 0 (2,704,621)
Investment in Mortgage Derivative Investments (4,172,960) (4,205,432)
Cash Receipts from Mortgage Derivative Investments 870,486 1,755,522
Purchase of Other Investments 0 (1,000,000)
Cash Receipts from Other Investments 235 78,924
------------ ------------
Net Cash From Investing Activities 4,646,185 74,955,787
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Principal Amount of
GNMA-Backed Sequential Pay Bonds (7,948,424) (81,114,367)
Increase (Decrease) in Short-term Debt 2,700,769 (1,147,750)
Repurchase of Common Stock (58,635) (285,072)
Dividends Paid (119,893) (136,455)
------------ ------------
Net Cash Used in Financing Activities (5,426,183) (82,683,644)
------------ ------------
Net Increase in Cash and Cash Equivalents 1,986,183 (1,542,241)
Cash and Cash Equivalents at Beginning of Period 1,425,534 4,464,990
------------ ------------
Cash and Cash Equivalents at End of Period $3,411,717 $2,922,749
============ ============
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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, 1995 and the results of operations
and the cash flows for the three months ended March 31, 1995 and 1994.
Operating results for the three months ended March 31, 1995 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, 1994 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. 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.
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 stockholders equity until realized. At March 31, 1995 the
carrying value of the Company's available-for-sale investments included net
unrealized holding gains of $955,235. Available-for-sale investments are
also subject to write down whenever the sum of the future projected cash
flows discounted at a risk-free rate is less than the carrying value
(excluding unrealized losses).
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 and
also for Mortgage Certificates, less any reserve balance (see Note 3).
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.
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
records a write down of such 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.
Reclassifications - Certain reclassifications have been made to the
Statement of Cash Flows for the three months ended March 31, 1994 to
conform such financial statement to the March 31, 1995 statement. Such
reclassifications do not affect net income as reported.
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>
March 31, 1995
1984-2 8.0% 2008 $ 96,338,842 $ 78,597,075 $ 95,495,877
1984-3 9.0% 2009 64,816,528 51,419,040 66,943,320
1984-4 11.0% 2013 54,972,156 49,365,055 60,193,718
Reserve (7,218,162)
------------------------------------------
Total $216,127,526 $172,163,008 $222,632,915
==========================================
December 31, 1994
1984-2 8.0% 2008 $ 99,473,878 $ 80,900,971 $ 95,090,811
1984-3 9.0% 2009 66,767,191 52,813,548 67,351,404
1984-4 11.0% 2013 57,834,880 51,880,352 62,823,138
Reserve (7,604,654)
------------------------------------------
Total $224,075,949 $177,990,217 $225,265,353
==========================================
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 INTEREST DUE PRINCIPAL UNAMORTIZED
BONDS SERIES RATE DATE AMOUNT DISCOUNT NET
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1995
1984-2 7.875% 2008 $ 96,338,229 $21,679,597 $74,658,632
1984-3 8.875-9.0% 2009 64,816,058 15,054,306 49,761,752
1984-4 10.875% 2013 54,971,448 6,404,912 48,566,536
------------------------------------------
Total $216,125,735 $43,138,815 $172,986,920
==========================================
December 31, 1994
1984-2 7.875% 2008 $ 99,473,266 $22,681,427 $76,791,839
1984-3 8.875-9.0% 2009 66,766,722 15,658,178 51,108,544
1984-4 10.875% 2013 57,834,171 6,800,827 51,033,344
------------------------------------------
Total $224,074,159 $45,140,432 $178,933,727
==========================================
</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.
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 $2,251,000 from the redemption of the
Series A Bonds. The net cash the Company received from this series of
transactions was $5,010,000.
Note 6. - Mortgage Derivative Investments
At March 31, 1995, the Company owned Mortgage Derivative Investments
as shown in the schedule below:
<TABLE>
<CAPTION>
CARRYING
VALUE
PURCHASE % PURCHASE MARCH 31,
RESIDUAL SERIES DATE OWNERSHIP COLLATERAL PRICE 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Merrill Lynch Trust 8-R Aug. 10, 1993 68.850% FHLMC 9.50% $ 3,600,000 $ 1,338,035
FHLMC REMIC 1332-R July 29, 1993 100.00% FHLMC 8.00% 6,333,000 0
FNMA REMIC 92-G64 R Aug. 26, 1993 100.00% GNMA 8.00% 3,668,000 153,542
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 51,564
Paine Webber G-3 Oct. 14, 1993 25.00% FNMA 12.00% 318,719 229,014
FHLMC REMIC 9-R Various 87.50% FHLMC 10.01% 2,114,992 1,424,327
Drexel Burnham Q-7 Various 74.4369% FNMA 10.00% 1,279,136 1,358,863
Santa Barbara 1-A Various 9.74406% FHLMC 9.50% 799,751 591,573
CMOT Series 5-R Dec. 10, 1993 49.00% FNMA 9.50% 560,682 310,581
CMOT Series 6-R Various 64.00% FHLMC 9.50% 189,713 459,066
Morgan Stanley Trust E Feb. 14, 1994 42.00% FHLMC 9.308% 315,000 260,983
Kidder Peabody Trust 3 Feb. 14, 1994 11.27% FHLMC 9.214% 250,000 188,886
Ryan Mortgage IV - 3 Mar. 28, 1994 100.00% GNMA 12.00% 800,000 632,409
Ryan Mortgage IV - 4 Mar. 28, 1994 100.00% FNMA 10.00% 400,000 311,791
CMIT Series 7 Mar. 30, 1994 100.00% GNMA 9.50% 800,000 382,462
FHLMC REMIC 4-R Apr. 21, 1994 52.593% FHLMC 10.5% 2,550,000 2,007,951
Oxford Acceptance 3D July 29, 1994 100.00% FHLMC 10.63% 1,999,316 1,837,348
CMSC Series 1988-14 July 5, 1994 100.00% FHLMC 10.60% 2,100,000 1,663,347
Mortgage Capital 6C July 22, 1994 100.00% GNMA 11.00% 1,350,000 1,189,666
Drexel Burnham Series N Sept. 3, 1994 50.00% FNMA 10.50% 611,326 493,369
FHLMC Series 150 Sept. 16, 1994 100.00% FHLMC 9.50% 1,350,000 1,139,153
FHLMC Series 118 Sept. 27, 1994 100.00% FHLMC 9.50% 725,000 666,651
FNMA Trust 88-19 Oct. 17, 1994 74.40% FNMA 9.50% 1,227,600 1,248,443
Drexel Burnham Trust D Nov. 10, 1994 12.6305% FHLMC 9.50% 235,000 263,161
E.F. Hutton III 87-1 Nov. 10, 1994 37.6143% GNMA 12.13% 1,222,225 1,310,141
E.F. Hutton Trust 1 Nov. 15, 1994 20.00% GNMA 10.00% 30,000 31,873
Merrill Lynch Trust 7 Nov. 17, 1994 8.96% FHLMC 11.00% 208,000 231,044
FHLMC REMIC 7 Nov. 23, 1994 10.00% FHLMC 9.50% 165,000 166,108
FBMS II 1987-4 Class 2 Nov. 30, 1994 100.00% Whl.Loan 9.5% 275,000 480,819
L.F. Rothschild Series 3 Nov. 30, 1994 20.90% GNMA 10.00% 5,539 1,701
Pacific Coll. Mtg. Trust 2 Nov. 30, 1994 7.50% FHLMC 10.00% 25,000 38,786
Kidder Peabody Trust 1 Various 100.00% FHLMC 9.00% 145,000 159,596
Leader Funding 1 Various 79.50% FHLMC 10.00% 628,308 848,874
Ryland Acceptance 38 Nov. 30, 1994 33.00% FHLMC 10.10% 132,000 178,397
FHLMC REMIC 105-R Jan. 17, 1995 69.6706% FHLMC 9.50% 1,672,093 1,229,446
Ryland Acceptance Feb. 8, 1995 27.995% GNMA 10.00% 350,116 295,183
Ryland Acceptance Feb. 8, 1995 23.664% GNMA 10.50% 466,104 699,068
Ryland Acceptance Feb. 8, 1995 35.997% GNMA 9.50% 472,337 568,948
FHLMC REMIC 105-R Mar. 27, 1995 100.00% FHTPM 9.50% 860,000 823,363
----------------------------
Total $42,811,065 $25,265,532
============================
</TABLE>
There is no exchange or other active market from which to obtain a
quoted market price for CMO Residual Interests. Instead, the estimate of
fair value was determined by calculating the present value of the projected
Excess Cash Flow to the Company discounted at a weighted average interest
rate of 22.1%. The discount rates, prepayment rates and other assumptions
were based upon current market information.
Excess Cash Flow represents the Company's proportionate share of the
difference between (I) the cash flow from the collateral pledged to secure
the related CMO issuance together with reinvestment income thereon, if any;
and (ii) the amount required for debt service payments on such CMO issuance
together with administrative expenses.
No additional cash receipts are anticipated from FHLMC REMIC 1332-R
and FNMA REMIC 92-G65-R. Therefore these investments are carried at zero.
However, such investments are still expected to have taxable income or loss
in the future which would be recognized in taxable income or loss of the
Company in amounts that are not presently determinable.
Note 7. - Fair Value of Investments
In accordance with FASB-107, the Company shall disclose the fair value
of financial instruments for which it is practicable to estimate that
value. Due to the complex nature of CMO structures, every CMO investment
and, in particular, every CMO Residual has a unique risk/return profile.
Not only do CMO structures vary significantly from issuance to issuance,
but the individual mortgage loans underlying the mortgage certificate
collateral for one CMO issuance are separate and distinct from those
underlying the mortgage certificate collateral of another CMO issuance. As
a result, these investments are very illiquid and there is no exchange or
other active market from which to obtain a quoted market price for these
financial instruments. Accordingly, the estimates of fair value have been
determined by the Company using available market information and valuation
methodologies. Considerable judgment was required to interpret the market
information and develop the estimates of fair value. The estimates of fair
value presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different
market assumptions and/or valuation methodologies may have a material
effect on the estimates of fair value.
The Company has disclosed in Note 3 the fair value of the GNMA
Certificates based on market prices for comparable instruments as of March
31, 1995. 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. The net cash flows also assume
annual expenses of $175,000 for the three Series for trustee, auditing,
administration and legal expenses. These cash flows are discounted at a
fair value rate of 20%. The following table gives the pertinent fair value
assumptions used in forecasting the cash flows as of March 31, 1995:
<TABLE>
<CAPTION>
BOND SERIES COLLATERAL PSA FAIR VALUE
- -----------------------------------------------------------------
<S> <C> <C> <C>
Series 1984-2 GNMA 8.00% 132% $ 154,634
Series 1984-3 GNMA 9.00% 174% 53,961
Series 1984-4 GNMA 11.00% 306% 248,758
-------------
Total Fair Value $ 457,353
=============
</TABLE>
The Company's methodology and fair value estimates for its mortgage
derivative investments, including CMO Residuals and REMIC Residuals are
discussed in Note 6. The Company has used available market information as
of March 31, 1995 and has concluded that the fair value of the mortgage
derivative investments at that date was approximately $850,000 in excess of
amortized cost. The Company estimated the prospective yield on these
investments for 1995 to be approximately 21.5% per annum.
Note 8. Other Investments
At March 31, 1995 Other Investments consists of an interest in
Bennett/Lawrence Partners, L.P., an investment fund. This interest was
purchased January 4, 1994 for $750,000 and has a fair value of $837,986 at
March 31, 1995.
Note 9. - Short-Term Debt
At March 31, 1995 the Company owed $17,394,769 under 21 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, 1995 was 6.425%. The debt is collateralized
by some of the Company's mortgage derivative investments.
Note 10. - 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, 1995 of $30,000 for the monthly management fee. No
accrual was made in this period for the incentive management fee as it was
impracticable to estimate consolidated taxable income for the period. In
the three months ended March 31, 1994, the Company recorded expense of
$30,000 and $213,638 for the monthly and incentive management fees,
respectively. 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, 1995 compared to 1994
- --------------------------------------------------
Net income for the three months ended March 31, 1995 amounted to $1,052,467
or $1.75 per share. This compares to net income of $2,157,581, or $3.24
per share for the three months ended March 31, 1994. Results for 1994
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 Mar. 31
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Net Income $1,052,467 $2,157,581
Less Gain on Sale of GNMA Certificates 0 (4,500,169)
Plus Loss from Redemption of Bonds 0 2,250,778
------------ ------------
Net Income (Loss) from Remaining Investments $1,052,467 ($ 91,810)
============= =============
</TABLE>
The variance in net income (loss) from remaining investments from year to
year is attributable to the change in net interest income and operating
expenses as follows:
<TABLE>
<CAPTION>
Three Months Ended Mar. 31
---------------------------
1995 1994 Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest from GNMA Certificates $4,972,036 $6,573,433 (1,601,397)
Interest on Bonds 4,889,097 6,564,021 (1,674,924)
------------ ------------ ------------
Net Interest Margin 82,939 9,412 73,527
Amortization of Discount 1,734,723 2,269,519 (534,796)
Amortization of Reserve for Loss 253,415 0 253,415
Amortization of Bond Discount and
Bond Issuance Costs (2,063,020) (2,782,480) 719,460
Income from Mortgage Derivative Investments 1,322,059 698,948 623,111
Other Interest Income 14,866 39,577 (24,711)
Interest on Short-term Debt (256,200) (48,457) (207,743)
------------ ------------ ------------
Net Interest Income 1,088,782 186,519 902,263
Valuation Reserve Provision 133,076 0 133,076
Other Income 103 70,505 (70,402)
Operating Expenses (169,494) (348,834) 179,340
------------ ------------ ------------
Net Income (Loss) from Remaining Investments $1,052,467 ($ 91,810) $1,144,277
============ ============= ============
</TABLE>
Net interest margin (interest from GNMA certificates less interest on
bonds) remained constant in 1995 because the relationship of interest rates
on the Certificates and the Bonds remained the same. However, the amount
of interest income, interest expense and amortization declined in 1995
because of the decreased principal amount of Certificates and Bonds
outstanding.
On March 14, 1995 the Company declared a distribution of $0.20 per
share, payable on April 17, 1995 to shareholders of record as of March 31,
1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations of the Company totaled $2,766,181 for
the three months ended March 31, 1995 and $6,185,616 for the three months
ended March 31, 1994. Cash and cash equivalents of the Company increased
during the first three months of 1995 by $1,986,183 but decreased
$1,542,241 in the first three months of 1994.
The Company had total assets of $205.2 million at March 31, 1995. At
March 31, 1995, GNMA Certificates collateralizing the Bonds comprised
$172.2 million of the assets, Mortgage Derivative Investments were $25.3
million and deferred issuance costs accounted for $1.3 million of the
assets.
The Company had no capital expenditures in the quarter ended March 31,
1995.
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, 1995.
<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 12, 1995
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1995 AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> QTR-1
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 3,411,717
<SECURITIES> 198,367,021
<RECEIVABLES> 2,097,996
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 205,207,195
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 205,207,195
<CURRENT-LIABILITIES> 20,008,146
<BONDS> 172,986,920
<COMMON> 6,823
0
0
<OTHER-SE> 12,205,306
<TOTAL-LIABILITY-AND-EQUITY> 205,207,195
<SALES> 0
<TOTAL-REVENUES> 8,430,278
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 169,494
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,208,317
<INCOME-PRETAX> 1,052,467
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,052,467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,052,467
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 1.75
</TABLE>
