Annual Report (Form 10-K), fiscal year 1994

Item 1. Business. -------- Introduction
INVG Mortgage Securities Corp. (the "Company") is a corporation organized under the laws of the State of Maryland on March 26, 1986. The Company's principal executive offices are located at Meadow Wood Crown Plaza, 1575 Delucchi Lane, Suite 115-20, Reno, Nevada 89502. Its telephone number is (702) 828-5405.
The Company holds all of the outstanding common stock of Investors GNMA Mortgage-Backed Securities Trust, Inc. ("Investors GNMA"), and INVG Government Securities Corp. ("INVG Government"). The Company, directly or through its subsidiaries, has historically generated revenues primarily from Collateralized Mortgage Obligation ("CMO") investments whereby the company was engaged in the business of acquiring modified mortgage-backed pass through certificates ("GNMA Certificates") and then issuing and selling bonds (Bonds) backed by the GNMA Certificates. These investments in CMO issuances give the Company the right to the excess cashflows and earnings on the GNMA Certificates over the expenses required on the Bonds ("CMO Issuance Investments"). The Company has also invested in other similar mortgage related investments wherein the Company has the right to receive the cashflows of a CMO bond offering after debt service payments are made, such as CMO Mortgage Derivative Investments and REMIC Mortgage Derivative Investments, ("Mortgage Derivative Investments").
The Company and its subsidiaries are qualified as real estate investment trusts under the Internal Revenue Code of 1986 as amended (the "Code"). The Company intends to operate in a manner so as to continue to qualify for the tax benefits accorded by Sections 856 to 860 of the Code and thereby not be subject to federal income tax at the corporate level. There can be no assurance, however, that the Company will be able to do so. Among the conditions that the Company must satisfy to obtain such benefits is the requirement that the Company distribute to its shareholders an amount equal to substantially all of its taxable income. See "Federal Income Tax Consequences - Federal Income Taxation of a REIT."
Investors GNMA issued $500,000,000 aggregate principal amount of its GNMA-Backed Sequential Pay Bonds Series 1983-1 (the "Series 1983-1 Bonds") on October 25, 1983; $500,000,000 aggregate principal amount of its GNMA- Backed Sequential Pay Bonds, Series 1984-1 (the "Series 1984-1 Bonds") on January 30, 1984; $300,000,000 aggregate principal amount of its GNMA- Backed Sequential Pay Bonds, Series 1984-2 (the "Series 1984-2 Bonds") on April 30, 1984; $250,000,000 aggregate principal amount of its GNMA-Backed Sequential Pay Bonds, Series 1984-3 (the "Series 1984-3 Bonds") on June 29, 1984; $500,000,000 aggregate principal amount of its GNMA-Backed Sequential Pay Bonds, Series 1984-4 (the "Series 1984-4 Bonds") on October 30, 1984 and $300,000,000 aggregate principal amount of its GNMA-Backed Sequential Pay Bonds, Series 1984-5 (The "Series 1984-5 Bonds") on December 27, 1984. No Bonds have been issued by Investors GNMA since December 1984. The Series 1984-5 Bonds were redeemed on May 26, 1992, the Series 1984-1 Bonds were redeemed on January 25, 1993 and the Series 1983-1 Bonds were redeemed on February 25, 1993. (See "Bond Redemptions".) The Company is currently exploring the feasibility of redeeming the remaining three Bond Series.
INVG Government was organized by the Company in May 1986. On December 30, 1986, INVG Government commenced operations by issuing $200,369,000 principal amount of its Collateralized Mortgage Obligations, Series A (the "Series A Bonds"). The issuance of the Series A Bonds was financed, in part, by the issuance of 115,000 shares of Series A Participating Preferred Stock (the "Series A Preferred Stock") by the Company to certain institutional investors including one or more pension plans for which Robert E. Greeley, a director of the Company, was investment manager, and including the Boston Safe Deposit and Trust Company, a subsidiary of Shearson Lehman Brothers Inc., for a purchase price of $100 per share. Holders of the Series A Preferred Stock were entitled to receive during 1990, 1989, 1988 and 1987 in the form of dividends or redemption payments 80.01% of the "Series A Net Cash Flow" (as defined in the terms governing the Series A Preferred Stock). The Company made a capital contribution to INVG Government of the full amount of the proceeds received by the Company from the sale of the Series A Preferred Stock. INVG Government used such funds to purchase GNMA Certificates to use as collateral for the Series A Bonds. No Bonds have been issued by INVG Government since December 1986. The Series A Bonds were redeemed on February 1, 1994.
The Series 1983-1 Bonds, the Series 1984-1 Bonds, the Series 1984-2 Bonds, the Series 1984-3 Bonds, the Series 1984-4 Bonds, the Series 1984-5 Bonds and the Series A Bonds are hereinafter collectively referred to as the "Issued Bonds." All of the Issued Bonds, to the extent still outstanding, are collateralized by GNMA Certificates.
Future Prospects - ---------------- The Company's Net Interest Margin continues to decline through the process of repayments and prepayments on the mortgages underlying the Company's assets as well as from the redemption of Bond Series. The dramatic decrease in long term interest rates throughout 1992 and 1993 has accelerated the rate of prepayments. However, in 1994 interest rates increased which decreased the prepayment rate. Additionally, the Company's asset pool is depleted by normal business expenses and the payment of dividends. The Company has been reinvesting its excess cash flows in Mortgage Derivative Investments which include CMO Residuals and REMIC Residual bonds. To the extent the Company continues to have cash in excess of that required for expenses and dividends, the Company intends to continue to reinvest that excess cash in Mortgage Derivative Investments in order to generate income for distribution to stockholders.
Administration Agreement - ------------------------ In December 1991, the Companies entered into a year to year Administration Agreement with TIS Asset Management, Inc. (the "Administrator") to perform corporate administrative services for the Companies. Under this agreement, the Administrator administers the day-to- day operations of the Companies and performs or supervises the performance of such other administrative functions as may be agreed upon by the Administrator and the Board of Directors of each Company, including the establishment and posting of books of original record with their attendant quarterly financial statements and maintenance of appropriate computer services to perform such administrative services. The Administrator prepares reports and forms as required to satisfy the continuous reporting and other requirements of any and all governmental bodies and agencies. The Administrator serves as the Companies' consultant with respect to the formation of investment criteria and policy guidelines for recommendation to the Boards of Directors. Until December 31, 1992, pursuant to the Administration Agreement, the Administrator received a monthly fee of $14,500 and pays the employment expenses of its personnel, computer expenses, rent and other office expenses and overhead. Effective January 1, 1993 this fee was increased to $16,000 per month.
Pursuant to the Administration Agreement, the Administrator does not assume responsibility other than to render in good faith the services called for thereunder and is not responsible for any action of the Board of Directors of any of the Companies in following or declining to follow any advice or recommendation of the Administrator. The Administrator, its directors, officers, shareholders and employees are not liable to any Company, any Company's Shareholders or others, except by reason of acts constituting bad faith, willful misfeasance, gross negligence or reckless disregard of its duties. The Companies have agreed to indemnify the Administrator and its Affiliates, shareholders, directors, officers, and employees with respect to all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever in respect of or arising from any acts or omissions performed or omitted by the Administrator in good faith and in accordance with the standard set forth in the Administration Agreement.
The foregoing description of the Administration Agreement does not purport to be complete but is merely a summary of the material provisions thereof and is qualified in its entirety by reference to the Administration Agreement which is incorporated by reference in Exhibit 10.3 hereto.
Consulting Agreement - -------------------- At the Annual Meeting of Shareholders held on October 26, 1993, a consulting agreement with Page Mill Asset Management was ratified. Under this agreement, which is effective January 1, 1993, the Companies will pay Page Mill a monthly fee of $10,000 plus an incentive management fee. The incentive management fee, determined with respect to the Companies' performance each fiscal year is equal to 25% of the dollar amount, if any, by which the Companies' consolidated taxable income for such fiscal year, 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 such fiscal year. Under this agreement, the Company has recorded expense in the year ended December 31, 1994 of $120,000 and $456,747 for the monthly and incentive management fees, respectively. The latter amount is net of a reversal of $230,674 of excess 1993 incentive management fee accrual. The amount of the incentive management fee is based on an estimate of consolidated taxable income for the year ended December 31, 1994. In the year ended December 31, 1993, the Company recorded expense of $120,000 and $774,000 of monthly and incentive management fee, respectively. Page Mill Asset Management is 100% owned by Robert E. Greeley, Chairman of the Board and President of the Company.
Other Expenses of the Companies - ------------------------------- Other operating expenses include annual fees payable to the trustees (the "Trustees") under the Indentures under which the Bonds are issued. Such fees are calculated at a rate of 0.015% per annum of the Bonds outstanding, except for the trustee fees for the Series A Bonds, which are calculated at a rate of 0.02% per annum of the Series A Bonds outstanding. Trustee fees accrued in 1993 were lower as certain fees were overpaid in prior years. 1994 aggregate legal and accounting fees approximated $408,000. Consulting fees for officers' services and administration approximated $312,000 plus the incentive management fee of $457,000 and annual fees paid to directors which approximated $40,000. Other administrative costs of the Company approximated $200,000.
Taxable Income and Dividends - ---------------------------- The Companies have each elected to qualify for the tax benefits accorded by Sections 856 to 860 of the Code, and intend to operate in a manner so as to continue to qualify for such benefits in the future and thereby not be subject to federal income tax at the corporate level. There can be no assurance, however, that the Companies will be able to do so. Among the conditions that the Companies must satisfy to obtain such benefits is the requirement that such entities must distribute to their shareholders an amount equal to substantially all of their taxable income. See "Federal Income Tax Consequences - Federal Income Taxation of a REIT".
The Company's subsidiary, Investors GNMA, commencing fiscal 1986, changed its method of accruing original issue discount on its Bonds for purposes of reporting taxable income. Due to the adoption of this new method of tax accounting and due to tax losses in recent years, Investors GNMA and INVG Government have net operating loss carryforwards at December 31, 1994 aggregating $10.6 million and $1.8 million, respectively, which may be applied against the taxable income of those companies in future years commencing in 1995. While Investors GNMA may make distributions to the Company and the Company in turn may make distributions to its shareholders, during the years in which taxable income may be offset by net operating losses and in years in which Investors GNMA or the Company have no taxable income, any distributions during those years will be subject to the discretion of the Board of Directors of such entities and will depend upon the operating capital requirements of the Companies.
The taxable income of the Company principally is derived through its subsidiaries from: (1) the Net Interest Margin of the Company, plus non- cash income resulting from the amortization of market discount on the GNMA Certificates and less non-cash amortization of original issue discount on the Bonds, amortization of market premium on the GNMA Certificates and Bond issuance expenses, (2) interest received and earnings on other investments including Mortgage Derivative Investments, less (3) the operating expenses of the Company.
The Company, through its subsidiaries, has invested in REMIC securities, some of which have Excess Inclusion Income. The Company, and each of its subsidiaries, is required to distribute during the taxable year, as defined in IRC Section 561, to its shareholders, at least 95% of the greater of its REIT Taxable Income or Excess Inclusion Income in order to preserve its status as a REIT.
The Company's funds available for distribution to its shareholders are primarily derived from: (1) the excess of interest received on the GNMA Certificates collateralizing the Bonds over the interest payments due on the Bonds (such excess constituting the "Interest Margin"); (2) the excess of funds received from selling GNMA Certificates over the costs associated with redeeming the Bonds, plus investment earnings on cash balances and less operating expenses (together with the "Interest Margin," the "Net Interest Margin"); or (3) interest received and earnings from other investments which include investments in Mortgage Derivative Investments such as CMO Residuals, REMIC residual bonds, and other mortgage related investments.
If the taxable income of the Company of a subsidiary of the Company for any year exceeds its cash flow for such year, such subsidiary is required to distribute to its shareholder an amount substantially equal to such taxable income in order to preserve its status (and consequently the status of the Company) as a real estate investment trust and, therefore, may be required to distribute a portion of its working capital to its shareholders.
The Bond Offerings - ------------------ Investors GNMA. Bonds issued by Investors GNMA are issued pursuant to an Indenture (the "Investors GNMA Indenture") dated as of September 1, 1983 between Investors GNMA and Chemical Bank, as trustee (the "Investors GNMA Trustee"), as supplemented by a supplemental indenture with respect to each series of Bonds. The Investors GNMA Indenture limits the amount of Bonds which can be issued thereunder to $5,000,000,000, and provides that Bonds of any series may be issued thereunder up to the aggregate principal amount authorized from time to time by the Company. The collateral pledged to collateralize each series of Bonds issued by Investors GNMA consists of (i) GNMA Certificates, together with the payments thereon, having the characteristics described below, and (ii) a P&I Account (as defined in the Investors GNMA Indenture) (the "Investors GNMA P&I Account"). The Delivery Date GNMA Principal Balance (as defined in the Investors GNMA Indenture) for each series of Bonds are not less than the aggregate principal amount of the Bonds of such series issued, the lowest pass-through rate on any GNMA Certificate securing any series of Bonds issued by Investors GNMA will equal or exceed the highest interest rate (the "Bond Interest Rate") on the Bonds of any Sequence (as defined below). The difference between the lowest pass-through rate and the highest Bond Interest Rate with respect to any series of Bonds is the "Investors GNMA Minimum Spread" for such series.
Scheduled distributions of principal of, and interest on, the GNMA Certificates collateralizing a series are sufficient to pay accrued interest on the Bonds of such series and to amortize the entire principal amount of the Bonds of each sequence by their respective stated maturity date. The Mortgage Certificates for the Bonds of a particular series will collateralize only that series of Bonds.
Each series of Bonds issued by Investors GNMA is issuable in sequences ("Sequences"). Each Sequence has its own Bond Interest Rate and stated maturity which is the date on which the Bonds of such Sequence will be fully paid assuming no prepayments of principal are received with respect to the GNMA Certificates securing the Bonds of such series (the "Stated Maturity"). The actual maturity of any Sequence could differ substantially from its Stated Maturity based upon actual prepayment experience of such GNMA Certificates and because certain of the underlying mortgages for a GNMA Certificate may have terms to maturity that are shorter than the stated maturity of such GNMA Certificate.
All distributions of principal of, and interest on, the GNMA Certificates held on behalf of Investors GNMA will be remitted to the Investors GNMA Trustee who will deposit such funds in the Investors GNMA P&I Account for the related series of Bonds established under the Investors GNMA Indenture. Each series of Bonds will have a separate Investors GNMA P&I Account. All amounts on deposit in any Investors GNMA P&I Account representing distributions of principal of the GNMA Certificates will be applied on each monthly payment date (a "Monthly Payment Date") to pay principal on the then amortizing Sequence of the related series of Bonds. Each series of Bonds will mature by Sequence, and principal payments of succeeding Sequences will be made only after all Bonds of the immediately preceding Sequence have been paid in full. All amounts on deposit in any Investors GNMA P&I Account representing distributions of interest on the GNMA Certificates will be applied on each Monthly Payment Date to the extent necessary to pay interest on the aggregate principal balance of all the related Sequences of Bonds outstanding on the last day of the month preceding such Monthly Payment Date. All distributions received on the respective GNMA Certificates which are not required to pay principal of, and interest on, the related series of Bonds will be remitted monthly to Investors GNMA.
The Indenture for Bonds issued by Investors GNMA provides that the Bonds are not redeemable at the option of Investors GNMA, except that the last maturing Sequence of any series of Bonds may be redeemed at the option of Investors GNMA, in whole but not in part, on any Monthly Payment Date, when the outstanding principal amount of such Sequence declines to 10% or less of the original principal amount of the Bonds of such Sequence at a redemption price equal to the outstanding principal amount thereof, together with interest accrued thereon.
INVG Government. Bonds issued by INVG Government were issued pursuant to an Indenture (the "INVG Government Indenture") dated as of December 1, 1986 between INVG Government and Texas Commerce Bank National Association (the "INVG Government Trustee"), as amended, and as supplemented by supplemental indentures (each a "Series Supplement") with respect to each series of Bonds. The INVG Government Indenture does not limit the amount of Bonds which can be issued thereunder, and provides that Bonds of any series may be issued thereunder up to the aggregate principal amount that may be authorized from time to time by INVG Government.
The collateral pledged to secure each series of Bonds issued by INVG Government may consist of (i) Mortgage Certificates together with the distributions of principal and interest thereon, (ii) a Collection Account (as defined in the INVG Government Indenture) (the "INVG Government Collection Account") and (iii) other reserve funds and accounts which may be required in order to obtain the desired investment rating on the Bonds (collectively, the "Collateral"). On the closing date for each series of Bonds, the value of the Collateral pledged to secure such Bonds (calculated in accordance with the methodology specified in the INVG Government Indenture) will not be less than the aggregate principal amount of such Bonds. Scheduled distributions of principal of and interest on the Mortgage Certificates collateralizing each series of Bonds are calculated to be sufficient to pay accrued interest on such Bonds and to amortize the entire principal amount of each class of such Bonds by its respective stated maturity date. The Collateral for the Bonds of a particular series will secure only that series.
Each series of Bonds issued by INVG Government is issuable in Classes (the "Classes"). Each Class will have its own Bond Interest Rate, which may be a floating interest rate that is redetermined periodically according to a specified index, and its own Stated Maturity, which is the date on which the Bonds of such Class will be fully paid assuming no prepayments of principal are received on the Mortgage Certificates securing such series. Each series of Bonds will mature by Class, and principal payments on the various Classes of Bonds within each series will be made in the order specified in the Series Supplement. The actual maturity of any Class of Bonds could differ substantially from its Stated Maturity based upon the actual prepayment experience of the Mortgage Certificates and because certain of the underlying mortgage loans may have terms-to-maturity that are shorter than the Stated Maturity of the related Mortgage Certificate. No assurance can be given that the actual maturity and effective yield with respect to any Class of Bonds will be comparable to that experienced with respect to any other Class of Bonds within such series or within other series of Bonds issued by INVG Government or any of its affiliates.
All distributions of principal of and interest on the Mortgage Certificates pledged to secure a series of Bonds will be remitted to the INVG Government Trustee who will deposit such funds in the INVG Government Collection Account for such series. Each series of Bonds will have a separate INVG Government Collection Account. All amounts on deposit in any INVG Government Collection Account representing distributions of principal of the Mortgage Certificates will be applied on each payment date ("Payment Date") for the related series of Bonds to pay principal on the then- amortizing Class of such series. Amounts on deposit in the INVG Government Collection Account representing distributions of interest on the Mortgage Certificates will be applied on each Payment Date, to the extent necessary to pay interest on the aggregate principal balance of the outstanding Bonds of such Series accrued as of the date prior to such Payment Date specified in the Series Supplement. All amounts remaining in the INVG Government Collection Account for a Series of Bonds which are not applied to the payment of principal of and interest on the Bonds of the related series and the INVG Government Trustee's operating expenses will be remitted to INVG Government.
The INVG Government Indenture permits series of Bonds or Classes of Bonds within a series to be redeemed at the option of INVG Government upon the dates or under the circumstances specified in the related Series Supplement. The redemption price paid for such Bonds will be equal to their outstanding principal amount, together with accrued interest thereon to the date specified in the Series Supplement.
Bond Redemptions - ---------------- On May 4, 1992, following the consent of the holders of not less than a majority in principal amount of the outstanding bonds, the Board of Directors of the Company and the Trustee approved an amendment to the Indenture for Series 1984-5 GNMA-Backed Sequential pay bonds. This amendment related to the redemption provisions of the Indenture. On May 5, 1992, the Board of Directors resolved to effect a redemption of the Series 1984-5 Bonds and a notice was sent to all of the Bondholders to the effect that the Company, as issuer, was exercising its right of redemption in respect of the Series 1984-5 Bonds pursuant to the Section 11.01 of the Indenture. This redemption was scheduled for the next payment date of May 26, 1992. On May 22, 1992, Chemical Bank, acting as trustee under the indenture, sold the GNMA Certificates securing the Series 1984-5 Bonds, the proceeds of which were used to redeem the bonds on May 26, 1992. The gain to the Company from selling the mortgages was $7,476,302. After accounting for expenses of the transaction, including amortization of discount and deferred bond issuance costs, the extraordinary loss to the Company from the redemption of these bonds was $6,188,203. The net cash received by the Company on this transaction was $1,867,342.
On August 24 and November 30, 1992 the Company purchased for $7,197,087 and $3,414,410, respectively, a portion of its Bond Series 1984- 1. These bonds had original face values of $8,000,000 and $5,000,000 and current face values of $5,273,152 and $3,035,032 on their respective purchase dates. The bonds were acquired with $1,754,364 of cash and the remaining $8,857,133 was financed under a reverse repurchase agreement. The Company paid $548,604 principal on the reverse repurchase agreement in 1992, decreasing the outstanding balance to $8,308,529. At December 31, 1992 the interest rate on the reverse repurchase agreement was 5%. This debt is renewed on a month to month basis. For financial accounting purposes, the portion of Bond Series 1984-1 acquired was considered redeemed in 1992. This resulted in $3,387,807 in extraordinary losses from redemption of bonds, which is comprised of $2,303,313 from premium paid for the bonds; $387,272 in unamortized discount; $54,038 in unamortized deferred bond issuance costs and $643,183 in related bond redemption expenses.
On December 9, 1992, the Company commenced a tender offer (the "Offer") for all of its outstanding Series 1983-1 Bonds and 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 these Series not tendered pursuant to the Offer. On January 25, 1993, after giving consideration to the scheduled 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%, plus accrued interest to the purchase date, or a total of $52,706,392, and (ii) redeemed the remaining $2,952,592 of Series 1984-1 Bonds for par plus accrued interest to the redemption date. On February 25, 1993, after giving consideration to the scheduled payments, the Company (x) purchased $68,946,187 aggregate principal amount of its Series 1983-1 Bonds tendered pursuant to the Offer for an aggregate purchase price and consent payment of 113.5%, plus accrued interest to the purchase date, or a total of $78,787,507 and (y) redeemed the remaining $458,068 of Series 1983- 1 Bonds for par plus accrued interest to the redemption date. . In 1993 the Company realized a gain of $25,954,618 from selling the GNMA Certificates securing the Series 1983-1 and Series 1984-1 Bonds. After accounting for expenses, including amortization of discounts, the Company realized an extraordinary loss of $24,190,531 from the retirement of the Series 1983-1 and Series 1984-1 Bonds. The net cash the Company received from this series of transactions was $963,542.
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.
Issued Bonds - ------------ The following table sets forth certain information with respect to the Issued Bonds to the extent outstanding at December 31, 1994.
INVESTMENTS OF THE COMPANY -------------------------- Investment Policies - ------------------- The Company's investment policies and other policies are determined by its Board of directors in accordance with the articles and bylaws of the Company. The objective of the company is to maximize earnings and cashflow for distribution to the shareholder through mortgage related investments.
The Company, in its early years, invested in CMO Related Investments through issuance of its own Bonds. Over the last two years, the Company has been reinvesting its cashflows from these CMO Related Investments in Mortgage Derivative Investments which are similar in earnings and cashflow nature to its original CMO Related Investments. It is not unusual for many of these investments to be financed through borrowings secured by such investments.
At all times, the Company intends to make investments in such a manner as to be consistent with the requirements of the Code to qualify as a REIT unless, because of circumstances or changes in the Code (or in the regulations promulgated thereunder), the Company determines that it is no longer in the best interest of the Company to qualify as a REIT. The Company's policies with respect to such activities may be reviewed and modified from time to time by the Company.
The investment in Mortgage Derivative Investments and other investments may from time to time cause conflicts to occur between the articles of Investors GNMA and the Indenture under which the Investors GNMA Bonds were issued.
Government National Mortgage Association - ---------------------------------------- GNMA is a wholly owned corporate instrumentality of the United States within the United States Department of Housing and Urban Development (the "HUD"). Section 306 (g) of Title III of the National Housing Act of 1934, as amended (the "Housing Act"), authorized GNMA to guaranty the timely payment of the principal of, and interest on, certificates which are based on and backed by a pool of mortgage loans insured by the FHA under the Housing Act, or Title V of the Housing Act of 1949, or guaranteed by the United States Veterans Administration (the "VA") under the Servicemen's Readjustment Act of 1944, as amended or Chapter 37 of Title 38, United States Code or by other eligible mortgage loans.
Section 306(g) of the Housing Act provides that "the full faith and credit of the United States is pledged to the payment of all amounts which may be required to be paid under any guaranty under this subsection." In order to meet its obligations under such guarantees, GNMA is authorized, under Section 306(d) of the Housing Act, to borrow from the United States Treasury with no limitations as to amount.
GNMA Certificates - ----------------- Each GNMA Certificate is a "fully modified pass-through" mortgage- backed certificate issued under either the GNMA I or the GNMA II program (hereinafter described) and serviced by a mortgage banking company or other financial concern approved by GNMA as a seller-servicer of FHA Loans or VA loans. Although a GNMA certificate does not constitute a liability of, or evidence any right of recovery against, its issuer, the full and timely payment of principal of, and interest on, each GNMA Certificate is guaranteed by GNMA and such guaranty is backed by the full faith and credit of the United States. Each GNMA Certificate will evidence a fractional undivided interest in a pool of FHA Loans and VA Loans and provide for the payment to the registered holder of such GNMA Certificate of fixed monthly payments of principal and interest equal to the aggregate amount of the scheduled monthly principal and interest payments on each FHA or VA Loan, less a servicing and guaranty fee based on the outstanding principal of the FHA or VA Loans underlying the GNMA Certificate and liquidation proceeds in the event of a foreclosure or other disposition of any such FHA or VA Loans.
GNMA approves the issuance of each GNMA Certificate in accordance with a guaranty agreement (the "Guaranty Agreement") between GNMA and each issuer-servicer of the GNMA Certificates. Pursuant to its Guaranty Agreement such issuer-servicer is required to advance its own funds in order to make timely payments of all amounts due on the GNMA Certificate even if the payments received by such issuer on the FHA Loans and VA Loans backing the GNMA Certificate are less than the amounts due thereon. The Guaranty Agreement provides that in the event of default by the issuer- servicer, including (i) a failure by the issuer-servicer to make a required payment in accordance with the terms and conditions of such Guaranty Agreement, (ii) an advance by GNMA pursuant to a request to GNMA by the issuer-servicer to make a payment of principal of, or interest on, the GNMA Certificates, or (iii) insolvency of the issuer-servicer, GNMA shall have the right, by letter to the issuer-servicer, to effect the complete extinguishment of the issuer-servicer's interest in the pool of FHA Loans and VA Loans backing the GNMA Certificates, and the FHA Loans and VA Loans shall become the absolute property of GNMA, subject only to the unsatisfied rights of the holders of the GNMA Certificates. In such event, the Guaranty Agreement provides that, on and after the time GNMA directs such a letter of extinguishment to the issuer-servicer, GNMA shall be the successor in all respects to the issuer-servicer in its capacity under the Guaranty Agreement, and shall be subject to all responsibilities, duties and liabilities theretofore placed on the issuer-servicer by the terms and provisions of the Guaranty Agreement. At any time thereafter, however, GNMA may enter into an agreement with any other eligible issuer of GNMA Certificates under which such issuer undertakes and agrees to assume all or any part of such responsibilities, duties and liabilities placed on the original issuer-servicer, provided that no such agreement shall detract from the responsibilities, duties and liabilities of GNMA as guarantor of the GNMA Certificates or otherwise adversely affect the rights of the holders thereof to principal and interest payments on the GNMA Certificates.
The issuer of a GNMA Certificate expects that interest and principal payments on the FHA Loans and VA Loans backing each GNMA Certificate will be the source of funds for payments due on such GNMA Certificate. If the issuer is unable to make payments on the GNMA Certificates as they become due, it must promptly notify GNMA and request GNMA to make such payments. In the event no payment is made by the issuer and the issuer fails to notify GNMA and request GNMA to make such payment, the holder of the GNMA Certificate has recourse only against GNMA to obtain such payments. The Trustees, as registered holders of a GNMA Certificate, may proceed directly against GNMA under the terms of the Guaranty Agreement relating to such GNMA Certificate, for any amounts which are not paid when due.
GNMA Certificates Collateralizing the Bonds - ------------------------------------------- All of the GNMA Certificates collateralizing the Bonds are registered in the name of the respective Trustee. The Company will not add any GNMA Certificates to, or substitute other GNMA Certificates for, the original GNMA Certificates included in the collateral for each series of Bonds.
Other Collateral - ---------------- Although the Company or INVG Government may issue Bonds secured by collateral other than GNMA Certificates, no such Bonds have been issued.
FEDERAL INCOME TAX CONSEQUENCES ------------------------------- The Company intends to operate in a manner that will enable it to continue to qualify as a real estate investment trust (a "REIT") under the Code. The discussion below is not intended as a detailed discussion of all applicable Code provisions, the rules and regulations promulgated thereunder, or the administrative and judicial interpretations thereof.
In general, if an entity desiring to qualify as a REIT (a "REIT Candidate") satisfies certain tests with respect to the nature of its income, assets, management, and share ownership, and the amount of its distributions, it will qualify as a REIT for federal income tax purposes. As a result, the REIT Candidate generally will not be subject to tax at the corporate level to the extent that it distributes its income to its shareholders. This treatment eliminates most of the "double taxation" (taxation at the corporate level and subsequently at the shareholder level when earnings are distributed) that typically results from the use of corporate investment vehicles. Such qualification, however, depends upon the ability of the Company to meet detailed factual and legal standards in future years.
Federal Income Taxation of a REIT - --------------------------------- In any year in which a REIT Candidate qualifies as a REIT, and for which an election to be a real estate investment trust is in effect, it generally will not be subject to federal income tax on that portion of its REIT Taxable Income (as defined below) or capital gain that is distributed to its shareholders. Any such income that is not distributed, however, will be subject to tax at the regular corporate rates. A REIT, moreover, may be subject to special taxes on certain types of income, regardless of distributions to shareholders, and to the corporate minimum tax on certain items of tax preference. The Company, however, does not expect to have income of such types.
As a REIT, the Company is required to use the calendar year both for tax purposes and financial reporting purposes. The taxable income of a REIT ("REIT Taxable Income") is generally computed as if it were an ordinary corporation, subject to certain adjustments. Due to the differences, however, between tax accounting rules and generally accepted accounting principles, the REIT Taxable Income of the Company may vary from net income for financial reporting purposes.
Gross Income and Asset Tests. In order to qualify as a REIT, a REIT Candidate must satisfy, for each taxable year, various tests with respect to the nature of its gross income and its assets. The three principal income tests are the following:
1. The 75 Percent Test. At least 75 percent of the gross income (excluding gross income from prohibited transactions) of a REIT Candidate for the taxable year must be derived from certain qualifying real estate related sources, including interest on obligations secured by mortgages on real property, gain from the sale or other disposition of interests in real property and real estate mortgages, dividends from other real estate investment trusts and commitment fees related to mortgage loans.
2. The 95 Percent Test. In addition to meeting the 75 percent test, at least an additional 20 percent of the gross income of a REIT Candidate for the taxable year must be derived from the items of income that qualify under the 75 percent test, or from certain types of passive investments. Income attributable to dividends from companies other than REITs, interest on obligations not secured by real property, and gains from the sale or disposition of stock or other securities, other than stock or other securities held for sale to customers in the ordinary course of business, will constitute qualified income for purposes of this 95 percent test, but will be non-qualifying income for purposes of the 75 percent test.
3. The 30 Percent Test. A REIT Candidate must also derive less than 30 percent of its gross income from the sale or other disposition of (i) real property or mortgage loans held for less than four years, other than certain foreclosure property or property involuntarily converted through destruction, condemnation or similar events, (ii) stock or securities held for less than one year, and (iii) property in any prohibited transaction (i.e., sale or other disposition of inventory or property held primarily for sale in the ordinary course of business that is not foreclosure property.
In addition, at the end of each quarter of the taxable year of a REIT Candidate, at least 75 percent of the value of such REIT Candidate's assets must be real estate assets (including interests in real property, loans secured by mortgages on real property and shares of other REITS), cash and cash items (including receivables), and certain United States government securities. The balance of a REIT Candidate's assets may be invested without restriction, except that holdings of securities may not exceed 25% of the value of the REIT Candidate's total assets. Moreover, the securities of any one non-governmental issuer must not exceed 5 percent of the value of such REIT Candidate's assets or 10 percent of the outstanding voting securities of that issuer. The securities of another REIT will not be treated as a security of a non-governmental issuer for purposes of the 5 percent and 10 percent asset test.
Since the gross income of the Company's subsidiaries will be derived principally from interest and gains with respect to GNMA Certificates and Mortgage Derivative Investments, and since their assets will consist principally of GNMA Certificates and certain United States government securities, such subsidiaries should satisfy the gross income and asset tests during each taxable year or relevant portion thereof. If the Company or either of its subsidiaries should inadvertently fail to meet the 75 percent or 95 percent income tests, loss of real estate investment trust status could be avoided if the relevant corporation pays a tax equal to 100 percent of any excess non-qualifying taxable income. There is no comparable safeguard that could protect against the failure of the Company or its subsidiaries to meet the 30 percent test.
The Distribution Test. The distribution test requires that a REIT distribute to its shareholders in each taxable year an amount equal to at least 95 percent of the greater of its REIT Taxable Income (computed before the dividends paid deduction and excluding any net capital gain) or Excess Inclusion Income, subject to various adjustments for income from certain foreclosure property, net losses from inventory type sales and certain penalty taxes. Generally, such distribution must be made in the taxable year, or in the following year if declared before the REIT timely files its tax return for such year and if paid on or before the first regular dividend payment after such declaration. The undistributed amount remains subject to tax at the tax rate then otherwise applicable. If a REIT Candidate fails to meet the 95 percent distribution requirement as a result of an adjustment to its tax returns by the Internal Revenue Service (the "Service) a REIT Candidate may retroactively cure the failure by paying a deficiency dividend (plus a penalty and interest).
Due to the nature of the income of the Company's subsidiaries from their assets and deductions in respect of their obligations, under certain circumstances the Company's subsidiaries may generate REIT Taxable Income, Excess Inclusion Income, or both in excess of cash flow. For example, the maturity and interest rates of the investments of the Company's subsidiaries are not likely to match the exact terms of the maturity and interest rates of the debt securities secured by such assets. Similarly, the Company's subsidiaries may recognize taxable market discount income realized upon the sale, retirement or other disposition of GNMA Certificates purchased at a discount from the stated redemption price at maturity; whereas the proceeds from such disposition may be used to make nondeductible principal payments on debt securities secured by such assets. Also, if the Company's subsidiaries' method of computing original issue discount (as discussed below) delayed its deductions, this could also result in REIT Taxable Income in excess of cash flow. The Company and its subsidiaries intend to monitor closely the interrelationship between REIT Taxable Income and cash flow. It is possible, although unlikely, that the Company and its subsidiaries may decide to terminate their REIT status as a result of any such cash shortfall.
Excess Inclusion Income. The Company, through its subsidiaries, has invested in REMIC securities, some of which have taxable income which exceeds a specified return as provided in the Code. This excess income is known as Excess Inclusion Income ("Excess Inclusion Income"). Neither the Company's nor its subsidiary's Excess Inclusion Income may be reduced by any expenses or deductions, including normal operating expenses, losses from other Mortgage Derivative Investments or Net Operating Losses. The Company, and each of its subsidiaries, is required to distribute during the taxable year, as defined in IRC Section 561, to its shareholders, at least 95% of the greater of its REIT Taxable Income or Excess Inclusion Income. Pursuant to the distribution requirements, the Company may be required, among other things to: (i) borrow funds; (ii) sell assets, or (iii) distribute to shareholders a portion of its working capital or securities to make required distributions in years in which its Excess Inclusion Income exceeds REIT Taxable Income and/or cash flow. In the event the Company is unable to distribute during the taxable year, as defined in IRC Section 561, to its shareholders the greater of 95% of its REIT Taxable Income or its Excess Inclusion Income, the Company will not maintain its status as a REIT. The Company had no Excess Inclusion Income in 1994 from direct investments in REMIC securities. Dividends paid to the Company from subsidiaries will be characterized as Excess Inclusion Income to the extent that such dividends are attributable to Excess Inclusion Income realized by the subsidiaries. It is estimated that both of the subsidiaries of the Company had Excess Inclusion Income in 1994 totaling approximately $1,400,000. The Company expects to comply with the distribution requirements of the Code.
The Ownership Test. The share ownership test requires that the REIT Candidate's outstanding shares be held by a minimum of 100 persons for at least, approximately, 92 percent of the days in each taxable year and that no more than 50 percent in value of the shares be owned, actually or constructively, by five or fewer individuals at all times during the second half of each taxable year. For this purpose a pension fund and certain other types of tax-exempt entities are included within the meaning of the term "individual." To evidence compliance with these requirements, a REIT Candidate is required to maintain records that disclose the beneficial ownership of its outstanding shares. In fulfilling its obligation to maintain records, a REIT Candidate must demand written statements each year from the record holders of designated percentages of its shares, which would, inter alia, disclose the actual owners of such shares.
Deduction of Bond Original Issue Discount - ----------------------------------------- The Company's subsidiaries' Bonds may have "original issue discount" for federal income tax purposes. The aggregate amount of original issue discount on a Bond, if any, will be the excess of its "stated redemption price at maturity" over its original issue price. The original issue price for a Bond of a particular Sequence is the initial offering price at which the Bonds in that Sequence are sold to the public. The Company's subsidiaries will deduct this original issue discount over the anticipated life of the Bond in computing its REIT Taxable Income.
The Company will abide by recently issued Treasury regulations and other available guidance for purposes of computing original issue discount in connection with determining taxable income
Original issue discount for federal income tax purposes is computed with respect to bonds, such as the Bonds, which are subject to acceleration due to prepayments on other debt obligations securing such Bonds, by taking into account the anticipated rate of prepayments assumed in pricing the Bonds (the "Prepayment Assumption"). The amount of original issue discount to be deducted by the Company's subsidiaries for an accrual period (generally the period between interest payments or compounding dates) is the excess of the sum of (a) the present value (discounted at the original yield to maturity of the Bond determined with reference to the Prepayment Assumption) of all payments remaining to be made on the Bond as of the close of such period and (b) the principal payments (or any payments made with respect to a bond that does not have qualified periodic interest payments) made during the accrual period, over the "adjusted issue price" of the Bond at the beginning of the accrual period. The adjusted issue price of a Bond is the sum of such Bond's issue price plus prior accruals of original issue discount less total prior payments of principal (or any payments made with respect to a bond that does not have qualified periodic interest payments). For purposes of the present value calculation above, the payments remaining to be made as of the end of the accrual period are determined (i) with regard to all events that have occurred before the close of such accrual period and (ii) assuming that the remaining payments will be made in accordance with the original Prepayment Assumption.
Failure to Qualify as a REIT - ---------------------------- If a REIT Candidate fails to qualify for taxation as a REIT in any taxable year, it will be subject to tax (including any applicable minimum tax) on its taxable income at regular corporate rates without any deduction for distributions to shareholders. Unless entitled to relief under specific Code provisions, a REIT Candidate will also be disqualified from treatment as a REIT for the following four taxable years. Failure to qualify for even one year could result in a REIT Candidate incurring substantial indebtedness in order to pay any resulting taxes, thus reducing the amount of cash available for distribution to shareholders.
Taxation of United States Shareholders - -------------------------------------- So long as a REIT Candidate qualifies for taxation as a REIT, distributions to shareholders out of current or accumulated earnings and profits will constitute dividends to the shareholders taxable as ordinary income (which will not be eligible for the dividends received deduction for corporations). In the event that a REIT Candidate's total distributions for a taxable year exceed its current and accumulated earnings and profits, a portion of each distribution will be treated first as a return of capital that reduces a shareholder's basis in his shares (but not below zero) and then as realized capital gain (if the shares are held as capital assets) to the extent that such distributions are in excess of adjusted basis. Distributions properly designated by a REIT Candidate as "capital gain dividends" will be taxable to shareholder as long-term capital gain to the extent such dividends do not exceed such REIT Candidate' actual net capital gain for the taxable year, regardless of the length of time for which the shareholder has owned the stock of the REIT. Any loss on the sale or exchange of stock of a REIT will, however, be treated as a long-term capital loss to the extent of any capital gain dividend received on such stock by such shareholder, regardless of the length of such shareholder's holding period.
The Company will notify its shareholders after the close of its taxable year of the portions of the distributions that constitute ordinary income, return of capital and capital gain. Shareholders of the Company may not deduct any net operating losses or capital losses of the Company.
State and Local Taxes - --------------------- The Company and its shareholders may be subject to state or local taxation in various state or local jurisdictions, including those in which they transact business or reside. As a result, shareholders should consult their own tax advisors for an explanation of how state and local tax laws may affect their investment in the Company.
Foreign Investors - ----------------- Distributions on the Common Stock received by a foreign investor which are treated as capital gain by reason of the fact that such distributions exceed the Company's current and accumulated earnings and profits, as calculated for federal income tax purposes for the taxable year of the distribution as well as the investor's adjusted basis in such shares, and gain from the sale of the Company's shares by a foreign person will not be subject to United States taxation, unless such gain is effectively connected with such person's United States trade or business, or in the case of an individual foreign person, such person is present within the United States for more than 182 days in such taxable year (or is otherwise treated as a resident for income tax purposes). Dividends paid to foreign persons, generally, will be subject to United States withholding tax at a rate of 30 percent, or at a lower rate if a stockholder can claim the benefits of a tax treaty. However, distributions of proceeds attributable to the sale or exchange by the Company of United States real property interests are subject to income and withholding taxes pursuant to the Foreign Investment in Real Property Tax Act of 1980. The federal income taxation of foreign persons is a highly complex matter that may be affected by many considerations. Accordingly, prospective purchasers who are foreign persons should consult their own tax advisers regarding the income and withholding tax considerations with respect to their investment in the Company.
ITEM 2:



ITEM 2: Properties ----------
On January 1, 1993 the Company entered into a month to month lease for offices at Meadow Wood Crown Plaza, 1575 Delucchi Lane, Suite 115-20, Reno, Nevada 89502. The Company has no other physical properties.
ITEM 3:

ITEM 3: Legal Proceedings -----------------
None.
ITEM 4:

ITEM 4: Submission of Matters to a Vote of Security Holders ---------------------------------------------------
At the annual meeting of shareholders on December 15, 1994, 596,215 or 96.9% of shares entitled to vote were represented in person or by proxy. The following items were submitted for a vote of the security holders and the results were:
1) Election of Robert E. Greeley, Russell Berg and W. Gordon Kruberg, M.D. as directors. Shares for Robert E. Greeley 592,267 Shares for Russell Berg 592,267 Shares for W. Gordon Kruberg, M.D. 592,267
2) Ratification of Deloitte & Touche as independent accountants for the year ending December 31, 1994. Shares for ratification 594,167 Shares against ratification 400 Shares abstaining 1,648
3) Ratification and approval of a consulting agreement with Page Mill Asset Management and the ratification of a prior consulting arrangement with the President of the Corporation. Shares for ratification and approval 481,122 Shares against ratification and approval 53,740 Shares abstaining 1,648
4) Approval of an amendment to the Articles of Incorporation of the Corporation to provide for indemnification of the officers and directors of the Corporation to the fullest extent permitted by Maryland law. Shares for 492,922 Shares against 44,240 Shares abstaining 2,648
5) Ratification and approval of indemnification agreements between the Corporation and each of its officers and/or directors. Shares for ratification and approval 491,922 Shares against ratification and approval 44,240 Shares abstaining 3,648
PART II
ITEM 5:

ITEM 5: Market for the Registrant's Common Stock and -------------------------------------------- Related Stockholder Matters ---------------------------
The Company's common stock is traded in the over-the-counter market and is included in the NASDAQ National Market System (NASDAQ symbol: INVG). As of March 31, 1995 there were approximately 70 common stock recordholders and participants in security position listings. The following table sets forth the range of representative high and low closing prices as reported by NASDAQ.
In order to maintain its qualification as a REIT under the Code for any taxable year, the Company, among other things, must distribute as dividends to its stockholders an amount at least equal to (i) 95% of its REIT taxable income (determined before the deduction of dividends paid and excluding any net capital gain) plus (ii) 95% of the excess of its net income from foreclosure property over the tax imposed on such income by the Code less (iii) any excess non-cash income (as determined under the Code). The Company intends that the cash dividends paid each year to its stockholders will equal or exceed the Company's taxable income generated from operations. The following table details the dividends declared and/or paid for the Company's two most recent fiscal years.
ITEM 6:

ITEM 6: Selected Financial Data -----------------------
The following selected financial data is qualified in its entirety by, and should be read in conjunction with, the financial statements and notes thereto appearing in sections of this Annual Report. The data as of December 31, 1994, 1993 and 1992 and for the years ended December 31, 1994, 1993 and 1992 have been derived from the Company's financial statements which are included elsewhere in this Annual Report on Form 10-K.
ITEM 7:

ITEM 7: Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations ----------------------
RESULTS OF OPERATIONS
Net loss for the year ended December 31, 1994 totaled $78,841. This compares to net losses of $9,232,283 and $5,006,252 for the years ended December 31, 1993 and 1992, respectively. Results for three years include gains from sales of GNMA Certificates and other investments as well as extraordinary losses from the redemption of bonds. 1994 results include a valuation reserve provision which writes down the carrying value of its held-to-maturity investments to fair value. 1993 results also include the cumulative effect of change in accounting. . The table below indicates the results of remaining investments:
The variance in net income (loss) from remaining investments from year to year is attributable to the change in the net interest income (expense) and operating expenses as follows:
Net interest margin (interest from GNMA certificates less interest on bonds) declined somewhat in 1994 because of the declining amount of Certificates and Bonds outstanding. For that reason as well as the redemptions of Series 1983-1 and 1984-1 and the increased rate of payments (including prepayments) on the principal of the GNMA certificates, net interest margin declined in 1993. Amortization of Discounts and Bond issuance Costs declined in 1994 because of the reduced amount of Certificates and Bonds outstanding. Additionally, amortizations declined in 1993 because of the redemptions. Income from Mortgage Derivative Investments exists only in 1994 and 1993 as the purchase of these investments began 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.
The Company's Net Interest Margin continues to decline through the process of repayments and prepayments on the mortgages underlying the Company's assets as well as from the redemptions of Bond Series. Additionally, the Company's asset pool is depleted by normal business expenses and the payment of dividends. The indentures under which the Bonds were issued do not permit the issuer to effect a redemption at the point where Net Interest Margin is less than expenses. As a result, the Company is exploring possible ways of refinancing the Bonds before net interest margin becomes insufficient to meet expenses, including seeking changes in the Indenture to allow a call redemption when market conditions allow.
Operating expenses of the Company were $1,476,129, $1,445,117 and $847,143 in the years ended December 31, 1994, 1993 and 1992, respectively. 1994 and 1993 expenses include $456,747 and $774,000, respectively, for an incentive management fee as described in Note 13 to the financial statements. The 1994 amount is net of a reversal of $230,674 of excess fee accrued in 1993. Trustee fees declined significantly in 1994 and 1993 because of the redemption of GNMA Bonds.
The Company had no Excess Inclusion Income for 1993 or 1994 from direct investments in REMIC securities. Dividends paid to the Company from subsidiaries will be characterized as Excess Inclusion Income to the extent that such dividends are attributable to Excess Inclusion Income realized by the subsidiaries. Excess Inclusion Income results from holding residual interests in REMICs. Excess Inclusion Income may not be reduced by any expenses or deductions, including normal operating expenses, losses from the Company's CMO Mortgage Derivative Investments and NOLs. Dividends paid to shareholders of the Company will be characterized as Excess Inclusion income to the extent that such dividends are attributable to Excess Inclusion income realized by the Company. Distributions of Excess Inclusion income are taxable as ordinary income to shareholders.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of the Company totaled $5,270,877 for the year ended December 31, 1994; $4,872,075 for the year ended December 31, 1993; and $1,240,032 for the year ended December 31, 1992. The Company's cash and cash equivalents decreased $3,039,456 in 1994 but increased $1,819,422 and $1,559,336 in 1993 and 1992, respectively. In the year ended December 31, 1994, the Company invested $12,577,698 in Other Mortgage Certificates and Investments, most of which were sold during the year, and $11,752,812, net of cash receipts and proceeds from sales, in Mortgage Derivative Investments. In the year ended December 31, 1993, the Company invested in Mortgage Derivative Investments, net of principal reductions, of $7,274,734 and invested $2,623,891 in Other Mortgage Certificates and Investments. In 1994 the funds for these purchases were provided by operating activities and increases in short-term debt. Sources of 1993 funds included the excess of principal payments received on the GNMA certificates over the principal payments on the GNMA-Backed Sequential pay bonds ($7,641,887) and cash provided by operations ($3,856,229). These amounts were offset by a decrease in short-term debt of $2,361,029 and the increase in cash and cash equivalents of $1,819,422.
The Company had total assets of $207.0 million and $308.8 million at December 31, 1994 and 1993, respectively. Of these amounts, $178.0 million and $287.5 million, respectively, were invested in GNMA Certificates which collateralize the bonds.
The Company had no capital expenditures during the year ended December 31, 1994.
ITEM 8:


ITEM 8: Financial Statements and Supplementary Data -------------------------------------------
Page ----
Report of Independent Auditors, Deloitte & Touche LLP 23
Consolidated Balance Sheets at December 31, 1994 and December 31, 1993 24
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1993 and 1992 25
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1994, 1993 and 1992 26
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 27
Notes to Consolidated Financial Statements 28-38
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of INVG Mortgage Securities Corp.
We have audited the accompanying consolidated balance sheets of INVG Mortgage Securities Corp. and subsidiary companies as of December 31, 1994 and 1993, and the related statements of operations, changes in stockholders' equity, and cash flows for the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the company at December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 2, in the year ended December 31, 1993, the Company changed its method of accounting for its investments to adopt the provisions of Statement of Financial Accounting Standards No. 115.
DELOITTE & TOUCHE LLP
New York, New York April 21, 1995
INVG MORTGAGE SECURITIES CORP. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. - Organization
INVG Mortgage Securities Corp. (the "Company") was incorporated on March 26, 1986 in the State of Maryland. On May 12, 1986, pursuant to a Merger and Reorganization Agreement approved by the shareholders of Investors GNMA Mortgage-Backed Securities Trust, Inc. ("Investors GNMA"), each outstanding share of Investors GNMA was converted into one share of the Company's common stock, par value $.01 per share. Pursuant to the merger, Investors GNMA became a subsidiary of the Company. On May 12, 1986, the Company formed another subsidiary, INVG Government Securities Corp. ("INVG Government").
The Company holds all of the outstanding common stock of Investors GNMA Mortgage-Backed Securities Trust, Inc. ("Investors GNMA"), and INVG Government Securities Corp. ("INVG Government"). The Company, directly or through its subsidiaries, has historically generated revenues primarily from Collateralized Mortgage Obligation ("CMO") investments whereby the company was engaged in the business of acquiring modified mortgage-backed pass through certificates ("GNMA Certificates") and then issuing and selling bonds (Bonds) backed by the GNMA Certificates. These investments in CMO issuances give the Company the right to the excess cashflows and earnings on the GNMA Certificates over the expenses required on the Bonds ("CMO Issuance Investments"). The Company has also invested in other similar mortgage related investments wherein the Company has the right to receive the cashflows of a CMO bond offering after debt service payments are made, such as CMO Mortgage Derivative Investments and REMIC Mortgage Derivative Investments, ("Mortgage Derivative Investments").
The Company's investment policies and other policies are determined by its Board of directors in accordance with the articles and bylaws of the Company. The objective of the company is to maximize earnings and cashflow for distribution to shareholders through mortgage related investments.
The Company, in its early years, invested in CMO Related Investments through issuance of its own Bonds. Over the last year, the Company has been reinvesting its cashflows from these CMO Related Investments in Mortgage Derivative Investments which are similar in earnings and cashflow nature to its original CMO Related Investments.
At all times, the Company intends to make investments in such a manner as to be consistent with the requirements of the Code to qualify as a REIT unless, because of circumstances or changes in the Code (or in the regulations promulgated thereunder), the Company determines that it is no longer in the best interest of the Company to qualify as a REIT. The Company's policies with respect to such activities may be reviewed and modified from time to time by the Company.
The investment in Mortgage Derivative Investments and other investments may from time to time cause conflicts to occur between the articles of Investors GNMA and the Indenture under which Investors GNMA's Bonds were issued.
Note 2. - 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. 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 stockholders equity until realized. At December 31, 1994 the carrying value of the Company's available-for-sale investments included net unrealized holding gains of $298,459. 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). At December 31, 1994 the Company's available-for-sale investments were written down by $2,235,663 with a corresponding charge to earnings. None of the Company's available-for-sale investments were subject to write down as of December 31, 1993.
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 December 31, 1993 financial statements to conform such financial statements to the December 31, 1994 financial statements. 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.
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:
Note 4. - GNMA-Backed Sequential Pay Bonds
The Bonds are collateralized by the GNMA Certificates. Information with respect to such Bonds is as follows:
Since principal payments on the Bonds are made by applying all distributions of principal received on the GNMA Certificates (both scheduled payments and prepayments), it is not possible to determine the annual amount of future principal payments. The scheduled principal payments to be made on the Bonds for each of the next five years ending December 31 are as follows: 1995, $8,386,000; 1996, $9,195,000; 1997, $10,082,000; 1998, $11,057,000; 1999, $12,127,000; thereafter $173,229,000. 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. Interest paid on the Bonds during the years ending December 31, 1994, 1993 and 1992 amounted to $23,917,073, $40,504,225 and $68,054,797, respectively.
The Company's Net Interest Margin continues to decline through the process of repayments and prepayments on the mortgages underlying the Company's assets as well as from the redemptions of Bond Series. Additionally, the Company's asset pool is depleted by normal business expenses and the payment of dividends. The indentures under which the Bonds were issued do not permit the issuer to effect a redemption at the point where Net Interest Margin is less than expenses. As a result, the Company is exploring possible ways of refinancing the Bonds before net interest margin becomes insufficient to meet expenses, including seeking changes in the Indenture to allow a call redemption when market conditions allow.
Note 5. - Redemption of Bond Series 1984-5
On May, 4, 1992, after obtaining the consent of the holders of not less than a majority in principal amount of the outstanding Bonds, the Company and the Trustee amended the redemption provisions of the Indenture governing Series 1984-5.
On May 5, 1992, the Board of Directors of Investors GNMA authorized a redemption of the Series 1984-5 Bonds. On that date a notice was sent to all of the Bondholders of such Series to the effect that the Company, as issuer, was exercising its right of redemption with respect to such Bonds pursuant to the Section 11.01 of the Indenture. The redemption was scheduled for the next payment date of May 26, 1992.
On May 22, 1992, Chemical Bank, acting as trustee under the Indenture, sold the GNMA Certificates securing the Series 1984-5 Bonds. The proceeds of the sale were used to redeem the Bonds on May 26, 1992. After accounting for expenses of the transaction, including amortization of discount and deferred bond issuance costs, the extraordinary loss to the Company from the redemption of the Bonds was $9,396,000. The net cash the Company received from this series of transactions was $1,867,342.
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 1992 of $3,387,807. In 1993 the Company realized a gain of $11,024,422 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 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 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. - 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 9. - Mortgage Derivative Investments
At December 31, 1994, the Company owned Mortgage Derivative Investments as shown in the schedule below:
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 interest rates ranging from 11.9% to 51.9%. 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.
During the year ended December 31, 1994, the Company sold three Mortgage Derivative Investments - CMOT I-5, Ryland 94, and Merrill Lynch Trust 3 - for $1,934,509. These sales resulted in a net loss of $171,896. In addition, on May 17, 1994, the Board of Directors of INVG Government Securities Corp. authorized an optional redemption of Thomson McKinnon Mortgage Assets Trust 2. As a result, the Company received $11,527,555 Federal National Mortgage Association Mortgage-backed Securities and it simultaneously increased its short-term borrowings by $11,698,000. On June 25, 1994 the Mortgage-backed Securities were sold and the debt was retired resulting in a loss of $162,000. No additional cash receipts are anticipated from FHLMC REMIC 1332-R and FNMA REMIC 92-G65R. 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 10. - 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 Notes 3 and 4 the fair value of the GNMA Certificates and Bonds based on market prices for comparable instruments as of December 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 and other 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 20%. The following table gives the pertinent fair value assumptions used in forecasting the cash flows as of December 31, 1994 after targeted expenses of $175,000 per year:
The Company's methodology and fair value estimates for its mortgage derivative investments, including CMO Residuals and REMIC Residuals are discussed in Note 9. The Company has used available market information as of December 31, 1994 and has concluded that the fair value of the mortgage derivative investments at that date was approximately $300,000 in excess of amortized cost. The Company estimated the prospective yield on these investments for the first quarter of 1995 to be approximately 21.0% per annum.
Note 11. - Other Investments
At December 31, 1994 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 $837,149 at December 31, 1994. During the year, the Company sold its remaining other investments for $2,227,714 resulting in a loss of $272,286.
Note 12. - Tax Status
The Company has available at December 31, 1994 net operating loss carryforwards aggregating $10.6 million and $1.8 million which may be applied against future taxable income of Investors GNMA and INVG Government, respectively. Of the $10.6 million of net operating loss carryforward available at December 31, 1994 for Investors GNMA, $8.2 million, $.8 million, $.8 million, $.4 million and $.4 million expire in the years ending December 2003, 2004, 2005, 2006 and 2007, respectively. Of the $1.8 million of net operating loss carryforward available at December 31, 1994 for INVG Government, $1.6 million and $.2 million expire in the years ending December 31, 2008 and 2009, respectively.
The Company's policy is to comply with the requirements of the Internal Revenue Code that are applicable to real estate investment trusts and to distribute sufficient taxable income to qualify as a REIT. Accordingly, no provision for federal income taxes is required in the Company's financial statements to the extent that sufficient distributions of taxable income have been made to the shareholders for reporting in their respective tax returns.
In order to maintain its status as a REIT, the Company is required, among other things, to distribute during the taxable year, as defined in IRC Section 561, to its shareholders at least 95% of the greater of its REIT Taxable Income or Excess Inclusion income and meet certain asset, income and stock ownership tests. The Company currently intends to distribute 100% of the greater of its REIT Taxable Income or Excess Inclusion Income to its shareholders within the time limits prescribed by the Code.
In accordance with Statement of Financial Accounting Standards 109 disclosure requirements, the following differences existed at December 31, 1994 between the tax bases and the reported financial statement amounts of the Company's assets and liabilities (unaudited):
Note 13. - Management
The Company is managed by the Board of Directors. Effective in January 1992, the day-to-day Administrative affairs of the Company are managed, subject to the supervision of the Board of Directors, under an Administration Agreement with TIS Asset Management, Inc. This agreement provided for a monthly fee of $16,000 for administrative services to be divided among the affiliated Companies.
On August 6, 1993, the directors of the Company approved the 1993 Stock Option Plan (the "Plan"). Under the Plan, stock options of up to 34,000 shares of common stock may be granted. The plan provides for granting of stock options at an option price per share equal to 100 percent of the fair market value on the date of grant. These options have a term of five years and become exercisable ratably over a three year period commencing with the date of grant. During 1993, 17,000 options were granted with an option price of $7.125 per share, none of which were exercised as of December 31, 1994. The exercise price of the options is decreased by the amount of any cash dividend paid by the Company as of the record date for determining shareholders entitled to receive such dividend. As a result, the exercise price of the options was $6.125 at December 31, 1994.
Consulting Agreement - -------------------- At the Annual Meeting of Shareholders held on October 26, 1993, a consulting agreement with Page Mill Asset Management was ratified. Under this agreement, which is effective January 1, 1993, the Companies will pay Page Mill a monthly fee of $10,000 plus an incentive management fee. The incentive management fee, determined with respect to the Companies' performance each fiscal year is equal to 25% of the dollar amount, if any, by which the Companies' consolidated taxable income for such fiscal year, 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 such fiscal year. Under this agreement, the Company has recorded expense in the year ended December 31, 1994 of $120,000 and $456,747 for the monthly and incentive management fees, respectively. The amount of the incentive management fee is based on an estimate of consolidated taxable income for the year ended December 31, 1994. At December 31, 1994 the amount of incentive management fee payable is $687,421. Taxable income cannot be precisely determined until the tax return is filed for the year. The 1994 incentive management fee is net of a reversal of $230,674 of excess 1993 incentive management fee accrual. The comparable amounts for 1993 were $120,000 and $774,000, respectively. Page Mill Asset Management is 100% owned by Robert E. Greeley, Chairman of the Board and President of the Company.
Note 14 - Dividends
The Company declared dividends on its common stock of $0.80 per share in 1994, $0.50 per share in 1993 and $0.60 per share in 1992. All of the dividends are taxable as ordinary income. The Company's dividends are not eligible for the dividends received deduction for corporations.
During 1994, all of the dividends distributed to the Company's shareholders were estimated to be Excess Inclusion Income. Excess Inclusion Income results from holding residual interests in REMICs. Excess Inclusion Income may not be reduced by any expenses or deductions, including normal operating expenses, losses from the Company's CMO Mortgage Derivative Investments and NOLs. Dividends paid to shareholders of the Company will be characterized as Excess Inclusion Income to the extent that such dividends are attributable to Excess Inclusion Income realized by the Company. Distributions of Excess Inclusion Income are taxable as ordinary Income to shareholders.
Note 15. - Short-term Debt
At December 31, 1994 the Company owed $14,694,000 under sixteen repurchase agreements with Paine Webber & Co. These borrowings had initial terms of one month and are renewed on a month-to-month basis. The weighted average interest rate on these borrowings at December 31, 1994 was 6.425%. The debt is collateralized by some of the Company's Mortgage Derivative Investments which have a fair value of $19,803,000.
Note 16.- Quarterly Financial Data (Unaudited)
Income (Loss) before Extraordinary Item, Net Income (Loss) and the related amounts per common share for the second and third quarters of the year ended December 31, 1994 have been restated from amounts previously reported on Form 10-Q to properly reflect an impairment of a Mortgage Derivative Investment. Net loss the second quarter was previously reported as $876,590, or $1.38 per common share. Net loss for the third quarter was previously reported as $1,009,530, or $1.63 per common share.
ITEM 9:

ITEM 9: Changes in and Disagreements With Accountants on Accounting ----------------------------------------------------------- and Financial Disclosure ------------------------
Not applicable.
PART III
ITEM 10:



ITEM 10: Directors and Executive Officers of the Registrant --------------------------------------------------
The directors and executive officers named below are the directors and executive officers of the Company as of April 7, 1995. Mr. Russell Berg has served as a director from February 16, 1990. Mr. Joseph L. Masi was elected a director on March 15, 1995. Mr. Gordon Kruberg was elected a director on November 8, 1994, but resigned his position on February 2, 1995.
Directors and Executive Officers Positions Held With Corporation Age - -------------------------------- ------------------------------- ---
Robert E. Greeley Chairman of the Board 62 President and Treasurer.
Russell Berg Director and Secretary 74
Joseph L. Masi Director 65
The term for the directors will expire at the next meeting of shareholders of INVG Mortgage. Currently there is no date set for such a meeting.
Since the beginning of the Company's 1990 fiscal year, the Board of Directors has been seeking ways to reduce the Company's operating costs as the assets of the Company continue to attenuate through the normal process of repayments on the mortgages underlying those assets.
In connection with attuning the Company to its less active nature and smaller size, the Company accepted the resignations of all of its officers and all but one of its directors effective December 31, 1989. The immediate reason for the resignation was the unavailability of directors' and officers' liability insurance at a reasonable cost. The sole remaining director, Robert E. Greeley, appointed new directors to the Board. As part of the program of cost reduction, the Board then amended the Company's by- laws to reduce the number of directors and officers to three each. The newly constituted board elected officers. Mr. Robert E. Greeley, a director since 1986, was elected to the positions of Chairman of the Board and President of the Company and its two subsidiaries, Investors GNMA and INVG Government.
Mr. Greeley is President and Chairman of Page Mill Asset Management, an investment organization. He was Manager, Corporate Investment for Hewlett-Packard Company, a diversified company, from 1979 to May 1991. He is also the investment advisor to the William and Flora Hewlett Foundation. Mr. Greeley is a director of Morgan Grenfell Small Cap Fund, Pacific Horizon Funds and the Master Trust IA Bankamerica Investment Services. He is the General Partner of Greeley Partners. Mr. Greeley also serves as a director of Investors GNMA and INVG Government.
Mr. Berg has been the Managing Director of Viewpoints International, a management consulting organization since May 1986. Prior to that time he was Director of Marketing Communications of the Hewlett-Packard Company, from which Mr. Berg retired in May 1986. Mr. Berg is a member of the advisory board of Vantive Corp. and is a trustee of the Sensory Aids Foundation of Palo Alto. Mr. Berg is also a director of Investors GNMA Mortgage-Backed Securities Trust, Inc.
Mr. Masi is an independent consultant. Prior to his retirement, he was a research consultant at SRI International, a large management consulting firm. Mr. Masi serves on the board of several eleemosynary groups. Mr. Masi is also a director of Investors GNMA.
During 1994, the Board of Directors met four times and each director attended at least 75% of the meetings of the Board. The Board of Directors does not have standing audit, nominating or compensation committees.
ITEM 11:

ITEM 11: Executive Compensation ----------------------
No directors, officers or employees of the Administrator (as defined herein) or its affiliated companies are directors or executive officers of the Company.
For 1994, each director of the Company, other than those who are executive officers or employees of the Company, was entitled to receive a fee of $500 for each Board of Directors or committee meeting attended by that director (together with all actual out-of-pocket expenses incurred in connection with attendance at such meetings), plus additional compensation at an annual rate of $8,000. Robert E. Greeley, as president, received no compensation. With respect to those directors and officers who also serve on the Board of Directors of INVG Government and/or Investors GNMA, such compensation was paid jointly by the Company and such affiliates. During 1994 all directors and officers as a group consisting of 4 persons received from the Company aggregate remuneration in the amount of $40,500.
The following table sets forth certain information with respect to options granted in 1993 to acquire common stock of the Company to its principal executive officers.
The original exercise price per share of the options granted was $7.125, the fair market value of the shares underlying the options on the date of grant, and the exercise price per share is decreased by the amount of any cash dividend paid by the Company as of the record date for determining shareholders entitled to receive such dividend. As a result, the exercise price of the options was $6.125 at December 31, 1994.
The options held by Report Ford were canceled in January 1995 following his resignation as a director of the Company.
As described in Note 13 to the financial statements, an incentive management fee of $687,421 is payable to Page Mill Asset Management. This fee was unpaid as of March 31, 1995. Mr. Robert E. Greeley, Chairman of the Board and President of the Company, is the sole stockholder of Page Mill Asset Management.
ITEM 12:

ITEM 12: Security Ownership of Certain Beneficial Owners and Management --------------------------------------------------------------
Commencing on March 17, 1993, INVG Government began a program of acquiring shares of INVG Mortgage Investment Company in the open market. As of December 31, 1994, INVG Government had purchased 76,900 shares at an aggregate cost of $682,060 and reduced the number of outstanding shares to 605,375 at that date. Subsequent to December 31, 1994, INVG Government has acquired an additional 5,900 shares.
At April 7, 1994, the common stock, par value $.01 per share, of the Company beneficially owned by security holders holding 5% or more of the outstanding common stock of the Company was as follows:
Name of Amount and Nature Beneficial of Beneficial Percent of Owner Address Ownership Class - --------------- ----------------------- ------------------ ---------- Page Mill Asset Meadow Wood Crown Plaza 253,800 Shares (1) 42.34% Management 1575 Delucchi Lane Reno, Nevada 89502
The table below sets forth, as of April 7, 1995, the number of shares of Common Stock beneficially owned by each director of the Company, and by all of the Company's officers and directors as a group, which information as to beneficial ownership is based upon statements furnished to the Company by such persons.
ITEM 13:

ITEM 13: Certain Relationships and Related Transactions ----------------------------------------------
The Company has entered into a Consulting Agreement with Page Mill Asset Management, 100% of which is owned by Robert E. Greeley, Chairman of the Board and President of the Company. Under this agreement, the Company has recorded expense in the year ended December 31, 1994 of $120,000 and $456,747 for the monthly and incentive management fees, respectively. The amount of the incentive management fee is based on an estimate of consolidated taxable income for the year ended December 31, 1994. The 1994 incentive management fee is net of a reversal of $230,674 of excess 1993 incentive management fee accrual.
PART IV
ITEM 14:

ITEM 14: Exhibits, Financial Statements Schedules and Reports on Form 8-K ----------------------------------------------------------------
(a) Documents filed as part of this report:
(1) Financial statements of the Company - as listed in the "Index to Financial Statements" included in Part II, Item 8 of this Form 10-K.
All financial statement schedules not included have been omitted because of the absence of conditions under which they are required or because the information is given in the consolidated financial statements and notes included in Part II, Item 8 of this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of the year ended December 31, 1994.
(c) Exhibits
The following exhibits (unless incorporated by reference to another report) are included in a separate volume filed with this report and are identified by the numbers indicated.
Exhibit No. Description - ------- -----------
3.1 Articles of Incorporation of the Company (Incorporated by reference from Exhibit 3.1 to the Company's Form 10-K for the year ended December 31, 1987)
3.2 By-Laws of the Company (Incorporated by reference from Exhibit 3.2 to the Company's Form 10-K for the fiscal year ended December 31, 1986)
4.1 Indenture, between Investors GNMA and Chemical Bank, as trustee (Incorporated by reference from Exhibit 4.1 to Investors GNMA Report on Form 8-K dated January 30, 1984 (File No. 2-85391))
4.2 Supplement to Indenture for Series 1983-1 Bonds of Investors GNMA (Incorporated by reference from Exhibit 4.2 to the Company's Report on Form 8-K dated January 30, 1984 (File No. 2-85391)
4.3 Supplement to Indenture for Series 1984-1 Bonds of Investors GNMA (Incorporated by reference from Exhibit 4.3 to Investors GNMA Report on Form 8-K dated January 30, 1984 (File No. 2-85391))
4.4 Supplement to Indenture for Series 1984-2 Bonds of Investors GNMA (Incorporated by reference from Exhibit 4.5 to Investors GNMA Report on Form 8-K dated April 30, 1984 (File No. 2-85391))
4.5 Supplement to Indenture for Series 1984-3 Bonds of Investors GNMA (Incorporated by reference from Exhibit 4.4 to Investors GNMA Report on Form 10-K for the year ended December 31, 1985 (File No. 2-85391))
4.6 Supplement to Indenture for Series 1984-4 Bonds of Investors GNMA (Incorporated by reference from Exhibit 4.4 to Investors GNMA Report on Form 10-K for the year ended December 31, 1985 (File No. 2-85391))
4.7 Supplement to Indenture for Series 1984-5 Bonds of Investors GNMA (Incorporated by reference from Exhibit 4.4 to Investors GNMA Report on Form 10-K for the year ended December 31, 1985 (File No. 2-85391))
4.8 Pledge Agreement, between Investors GNMA and Chemical Bank (Incorporated by reference from Exhibit 4.4 to Investors GNMA Report on Form 8-K dated January 30, 1984 (File No. 2-85391))
4.9 Indenture dated as of December 1, 1986 between INVG Government Securities Corp. and Texas Commerce Bank National Association (Incorporated by reference from Exhibit 4.1 to INVG Government Report on Form 10-K for the year ended December 31, 1986)
4.10 Series A Supplement to Indenture dated as of December 30, 1986 between INVG Government Securities Corp. and Texas Commerce Bank National Association (Incorporated by reference from Exhibit 4.2 to INVG Government Report on Form 10-K for the year ended December 31, 1986)
10.1 Management Agreement dated as of May 12, 1986 among the Company, Investors GNMA and INVG Government (Incorporated by reference from Exhibit 10.1 to INVG Government Report on Form 10-K for the year ended December 31, 1987)
10.2 Advisors Agreement dated as of February 14, 1990 among the Company, INVG Government and Investors GNMA (Incorporated by reference from Exhibit 10.2 to the Company's Report on Form 10-K for the year ended December 31, 1989)
10.3 Administration Agreement dated as of December 1, 1991 among the Company, INVG Government and Investors GNMA and TIS Asset Management, Inc.
13.1 The Company's Annual Report to Shareholders for 1994 (Furnished for the information of the Commission and not deemed to be filed except for those portions which are expressly incorporated by reference into this Form 10-K)
22.1 List of Subsidiaries (Incorporated by reference from Exhibit 22.1 to the Company's Report on Form 10-K for the year ended December 31, 1986)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INVG MORTGAGE SECURITIES CORP.
By: /s/ Robert E. Greeley --------------------------- Robert E. Greeley Chairman of the Board
Date: April 25, 1995 *
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Date Title - --------- ---- -----
/s/ Robert E. Greeley April 25, 1995 Chairman of The Board, - --------------------- President and Treasurer. Robert E. Greeley (Principal Executive and Financial Officer)
/s/ Russell Berg April 25, 1995 Director and Secretary - --------------------- Russell Berg
/s/ Joseph L. Masi April 25, 1995 Director - --------------------- Joseph L. Masi
* The Form 10-K was delayed because the auditors' certificate was not signed until after Deloitte & Touche LLP had completed their audit which occurred after April 17, 1995.
BOARD OF DIRECTORS LEGAL COUNSEL RUSSELL BERG Marron Reid & Sheehy Director, San Francisco, CA Viewpoints International
JOSEPH L. MASI INDEPENDENT ACCOUNTANTS Independent Consultant Deloitte & Touche LLP New York, NY
ROBERT E. GREELEY ADMINISTRATOR General Partner, TIS Asset Management, Inc. Cypress Cove Fund L.P. 655 Montgomery Street #800 San Francisco, CA 94111
CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT Harris Trust 110 William Street New York, NY 10038
A copy of the Company's Form 10-K filed with the Securities and Exchange Commission may be obtained without charge by writing to:
INVG Mortgage Securities Corp. Meadow Wood Crown Plaza 1575 Delucchi Lane, Suite 115-20 Reno, Nevada 89502