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. 33-5579
INVG GOVERNMENT SECURITIES CORP.
(Exact name of Registrant as specified in its Charter)
Delaware 13-3340656
(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
--------------------- ---------------------------
$.001 Par Value 1,000 Shares
All of the Common Stock of the Registrant is owned by INVG Mortgage
Securities Corp.
<PAGE>
INVG GOVERNMENT SECURITIES CORP.
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Statements of Income (Loss)
Three months ended March 31, 1994 and 1993 3
Condensed Balance Sheets
March 31, 1994 and December 31, 1993 4
Condensed Statements of Cash Flows
Three months ended March 31, 1994 and 1993 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
INVG GOVERNMENT SECURITIES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended
March 31
----------------------------
1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C>
Interest Income
Mortgage Certificates, net $369,478 $2,013,403
Mortgage Derivative Investments 321,939 0
------------- -------------
Total Interest Income 691,417 2,013,403
Interest Expense 591,469 1,966,362
------------- -------------
Net Interest Income (Loss) 99,948 47,041
Gain on Sale of GNMA Certificates 4,500,169 0
Other Income 8,880 0
------------- -------------
Total Income 4,608,997 47,041
------------- -------------
Expenses
Incentive Management Fee 338,120 0
Professional Fees 6,103 24,621
Trustee Fees 0 12,247
Management Fees 19,500 19,500
Directors' Fees 0 3,000
General and Administrative 11,281 6,481
------------- -------------
Total Expenses 375,004 65,849
------------- -------------
Income (Loss) before Extraordinary Item 4,233,993 (18,808)
Extraordinary Item - Loss from Redemption of Bonds 2,250,778 0
------------- -------------
Net Income (Loss) $1,983,215 ($18,808)
============= =============
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
INVG GOVERNMENT SECURITIES CORP.
CONDENSED BALANCE SHEETS
<CAPTION>
March 31 December 31,
1994 1993
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $49,730 $69,870
Government National Mortgage
Association Certificates, at amortized cost 0 61,239,633
Mortgage Derivative Investments 7,388,703 3,245,255
Accrued Interest and Accounts Receivable 20,194 526,097
Investment in INVG Mortgage Securities Corp. 340,640 55,568
Deferred Issuance Costs 0 445,800
Other Investments 3,051,056 2,051,244
Organization Costs 46,602 46,602
Due from INVG Mortgage Securities Corp. 421,580 421,580
------------ ------------
Total Assets $11,318,505 $68,101,649
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Collateralized Mortgage Obligations, net $ 0 $58,800,953
Short-term Debt 2,250,500 2,400,000
Due to Investors GNMA Mortgage-Backed
Securities Corp. 1,144,762 1,290,406
Incentive Management Fee Payable 338,120 0
Accrued Expenses 185 8,567
------------ ------------
Total Liabilities 3,733,567 62,499,926
------------ ------------
Stockholders' Equity
Series Z Preferred Stock, at Liquidation Value
1,000 Shares Authorized; 200 Shares
Issued and Outstanding 10,000 10,000
Common Stock, $.001 Par Value;
100,000 Shares Authorized;
1,000 Shares Issued and Outstanding 1 1
Additional Paid-in Capital 6,953,002 6,953,002
Retained Earnings 621,935 (1,361,280)
------------ ------------
Total Stockholders' Equity 7,584,938 5,601,723
------------ ------------
Total Liabilities and Stockholders' Equity $11,318,505 $68,101,649
============ ============
<FN>
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
INVG GOVERNMENT SECURITIES CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
March 31,
----------------------------
1994 1993
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $1,983,215 ($18,808)
------------ ------------
Adjustments to reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Amortization of Deferred Bond Issuance Costs 445,800 38,290
Amortization of Bond Discount 1,724,297 33,014
Amortization of Premium and Discount on Government
National Mortgage Association Certificates, Net 797,355 98,429
Earnings of Mortgage Derivative Investments (321,939) 0
Decrease in Accrued Interest and Accounts Receivable 505,903 70,574
Increase in Incentive Management Fee Payable 338,120 0
Decrease in Accrued Expenses (8,381) 0
------------ ------------
Total Adjustments 3,481,155 240,307
------------ ------------
Net Cash Provided by Operating Activities 5,464,370 221,499
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in Principal Amount of
Government National Mortgage Association Certificates 60,442,278 4,913,349
Investment in Mortgage Derivative Investments (4,205,432) 0
Purchases of Other Investments (1,000,000) 0
Cash Receipts from Mortgage Derivative Investments 383,923 0
Investment in INVG Mortgage Securities Corp. (285,073) (39,813)
Cash Receipts from Other Investments 189 0
------------ ------------
Net Cash From Investing Activities 55,335,885 4,873,536
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Principal Amount of
Collateralized Mortgage Obligations (60,525,251) (4,920,794)
Decrease in Short-term Debt (149,500) 0
Increase in Due from INVG Mortgage Securities Corp. 0 (9,066)
Increase (Decrease) in Due from GNMA Mortgage-Backed
Securities Trust, Inc. (145,644) 1,164,718
Dividends Paid 0 (100,000)
------------ ------------
Net Cash Used in Financing Activities (60,820,395) (3,865,142)
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (20,140) 1,229,893
Cash and Cash Equivalents at Beginning of Period 69,870 136,157
------------ ------------
Cash and Cash Equivalents at End of Period $49,730 $1,366,050
============ ============
<FN>
See Notes to Condensed Financial Statements
</TABLE>
<PAGE>
INVG GOVERNMENT SECURITIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. - Basis of Presentation
In the opinion of the Company, the accompanying condensed 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 quarter 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
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.
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.
The effect of adopting this change in accounting was not material.
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 shareholder's 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.
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. Management has the intention and the ability to hold the
Mortgage Certificates and CMO Bonds to term.
Amortization of Deferred Issuance Costs, Premiums and Discounts -
Deferred issuance costs, premiums and discounts relating to mortgage
certificates and CMOs are amortized to income using the interest method
over the stated maturity of the mortgage certificates or CMOs. 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
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.
Statement of Cash Flows - For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
Note 3. - 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 $2,236,000 from the redemption of the
Series A Bonds. The net cash the Company received from this series of
transactions was $5,000,000.
The GNMA Certificates were being used as collateral for the
Collateralized Mortgage Obligations, Series A (the "Bonds"). At December
31, 1993 the GNMA Certificates had a principal balance of $60,442,679,
interest rates of 9.0% and 11.5% and a final maturity date of 2017. The
cost plus amortized discount or premium on the GNMA Certificates at
December 31, 1993 amounted to $61,239,633 and a fair value of $65,709,245.
The Bonds were collateralized by the GNMA Certificates. At December
31, 1993 the Bonds had a principal balance of $60,525,251, interest rates
of 8.5% and 9.0% and a final maturity date of 2017. The unamortized
discount on the Bonds at December 31, 1993 amounted to $1,724,298 and the
net amount of the Bonds was $58,800,953.
Note 4. - 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
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% 800,000 801,418
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 $7,388,703
=============
</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 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
March 31, 1994 was approximately equal to the carrying value of $7,389,000
as of March 31, 1994.
<PAGE>
Note 5. - 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 6. - Short-Term Debt
At March 31, 1994 the Company owed $2,250,500 under two repurchase
agreements. This borrowing had an initial term of one month and is renewed
on a month-to-month basis. The interest rate of this borrowing at March
31, 1994 was 3.9375%. The debt is collateralized by some of the Company's
Mortgage Derivative Investments.
Note 6. - 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 $15,000 and $338,120 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
$1,983,215. This compares to a net loss of $18,808 for the three months
ended March 31, 1993. Results for the 1994 period included gains from
sales of GNMA 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 $1,983,215 ($18,808)
Less Gain on Sale of GNMA Certificates (4,500,169) 0
Plus Loss from Redemption of Bonds 2,250,778 0
------------ ------------
Net Loss from Remaining CMO Issuance
Investments and Other Operations ($226,176) ($18,808)
============= =============
</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) $ 99,948 $47,041 $ 52,907
Other Income 8,880 0 8,880
Incentive Management Fee (338,120) 0 (338,120)
Other Operating Expenses (36,884) (65,849) 28,965
------------ ------------ ------------
($266,176) ($18,808) ($247,368)
============ ============ ============
</TABLE>
<PAGE>
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 $390,008 $2,102,979 ($1,712,971)
Interest on Bonds 453,939 1,895,056 (1,441,117)
------------ ------------ ------------
Net Interest Margin (63,931) 207,923 (271,854)
Amortization of Discount (21,110) (98,429) 77,319
Amortization of Bond Discount and
Bond Issuance Costs (117,871) (71,305) (46,566)
Income from Mortgage Derivative Investments 321,939 0 321,939
Interest on Short-term Debt (19,659) 0 (19,659)
Other Interest Income 580 8,852 (8,272)
------------ ------------ ------------
Net Interest Income (Loss) $ 99,948 $ 47,041 $ 52,907
============ ============ ============
</TABLE>
Net interest margin (interest from GNMA certificates less interest on
bonds) declined in 1994 because of the redemption of Series A in the first
quarter of 1994. This redemption occasioned the write-off of all remaining
unamortized amounts which accounts for the variation in amortization.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations of the Company totaled $5,464,370 for the
three months ended March 31, 1994 and $221,499 for the three months ended
March 31, 1993. Cash and cash equivalents of the Company decreased during
the first three months of 1994 by $20,140 but increased $1,229,893 in the
first three months of 1993.
The Company had total assets of $11.3 million at March 31, 1994 consisting
primarily of Mortgage Derivative Investments and other investments.
The Company had no capital expenditures during the quarter ended March 31,
1994.
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
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.
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 GOVERNMENT 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
