SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: December 31, 1994
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 0-14447
INVG MORTGAGE SECURITIES CORP.
(Exact name of registrant as specified in its charter)
Maryland 13-3397560
(State of incorporation) (I.R.S. Employer Identification No.)
Meadow Wood Crown Plaza
1575 Delucchi Lane, Suite 115-20
Reno, Nevada 89502
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 828-5405
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Par Value $.01 per share
-------------------------------------
Indicate by check mark whether the Resistrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained here, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Yes X No
----- -----
On April 7, 1995, the Registrant had outstanding 599,475 shares of Common
Stock. At April 7, 1995, the aggregate market value of the Registrant's
Common Stock held by non-affiliates was approximately $5,695,013.
Documents Incorporated by Reference
None
<PAGE>
PART I
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.
<TABLE>
<CAPTION>
Initial Outstanding
GNMA Bond Principal Principal Average
Bond Certificate Interest Amount Amount Interest
Sequence Rate Rate (000) (000) Margin
-------- ----------- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Series 1984-2
- -------------
E 8.00% 7.875% $100,000 $99,474 0.125%
Series 1984-3
- -------------
D 9.00% 9.000% $ 60,000 $16,767
E 9.00 8.875 50,000 50,000
---- ----- -------- --------
Total 9.00% 8.906% $110,000 $66,767 0.094%
Series 1984-4
- -------------
F 11.00% 10.875% $100,000 $57,835 0.125%
Weighted
Average/Total 9.072% 8.957% $310,000 $224,076 0.115%
<FN>
As the table indicates, on December 31, 1994, the weighted average Interest
Margin of the Company was approximately 0.115% of the total outstanding principal
amount of Issued Bonds of $224,076,000 as compared to 0.167% of the total
outstanding principal amount of Issued Bonds of $346,041,000 at December 31, 1993.
The weighted average Interest Margin is derived by subtracting the weighted average
Bond Interest Rate from the weighted average GNMA Certificate rate for the series
of Bonds listed on the preceding table.
</TABLE>
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: 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: Legal Proceedings
-----------------
None.
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
<PAGE>
PART II
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.
<TABLE>
<CAPTION>
CLOSING PRICE
----------------------------
High Low
----------------------------
<S> <C> <C>
Quarter Ended
March 31, 1993 7.50 5.25
June 30, 1993 6.25 5.00
September 30, 1993 8.00 5.25
December 31, 1993 8.25 6.50
Quarter Ended
March 31, 1994 8.75 7.00
June 30, 1994 10.75 9.00
September 30, 1994 11.00 9.00
December 31, 1994 10.25 9.50
Period Ended
April 7,1995 10.00 9.50
</TABLE>
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Applicable Date Amount Record Payable
Quarter Declared Declared Date Date
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, 1993 February 26, 1993 $0.10 March 31, 1993 April 15, 1993
June 30, 1993 June 18, 1993 $0.10 June 30, 1993 July 15, 1993
September 30, 1993 September 22, 1993 $0.10 September 30, 1993 October 15, 1993
December 31, 1993 December 15, 1993 $0.20 December 30, 1993 January 14, 1994
March 31, 1994 March 11, 1994 $0.20 March 31, 1994 April 15, 1994
June 30, 1994 May 17, 1994 $0.20 June 30, 1994 July 15, 1994
September 30, 1994 September 14, 1994 $0.20 September 30, 1994 October 15, 1994
December 31, 1994 December 15, 1994 $0.20 December 30, 1994 January 16, 1995
March 31, 1995 March 8, 1995 $0.20 March 31, 1995 April 15, 1995
- ----------------------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income $40,317,092 $56,719,300 $88,982,085 $106,396,506 $120,057,005
Interest Expense 37,544,948 58,868,273 91,041,486 107,758,170 120,820,868
Gain from the Sale of GNMA
Certificates 4,500,169 25,954,618 7,476,302 0 0
Extraordinary Loss from
Redemption of Bonds (2,250,778) (24,190,531) (9,576,010) 0 0
Cumulative Effect of
Accounting Change 0 (8,530,329) 0 0 0
Loss Applicable to Common Stock (78,841) (9,232,283) (5,006,252) (2,250,676) (1,772,222)
Loss per Common Share (1) ($0.12) ($13.64) ($7.34) ($3.30) ($2.60)
Cash Dividend and Distribution
Declared per Common Share (2) 0.80 0.50 0.60 0.00 1.25
</TABLE>
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------------------
Balance Sheet Data 1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $207,045,077 $308,762,694 $533,508,078 $733,466,247 $860,882,337
Total Liabilities 196,348,679 297,159,616 512,273,011 706,815,563 831,980,977
GNMA-Backed Sequential Pay Bonds
and Collateralized Mortgage
Obligations
Principal Amount $224,074,159 $346,040,781 $587,089,365 $814,380,191 $956,534,391
Less, Unamortized Discount (45,140,432) (60,743,683) (88,073,748) (113,708,281) (133,046,801)
------------ ------------ ------------ ------------ ------------
$178,933,727 $285,297,098 $499,015,617 $700,671,910 $823,487,590
============ ============ ============ ============ ============
Total Common Stockholders' Equity $10,696,398 $11,603,078 $21,235,067 $26,650,684 $28,901,360
============ ============ ============ ============ ============
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Taxable income (loss) differs from income (loss) as reported in the
Company's financial statements due to a difference in the timing of
recognition of accretion of market discount and premium on the GNMA
certificates and of amortization of issuance expenses and original issue
discount on the Bonds. Similarly, taxable income from Mortgage
Derivative Investments differs from income earned under Generally
Accepted Accounting Principles.
(2) Includes amounts distributed in the following year.
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
-------------------------------------------
<S> <C> <C> <C>
Net Loss ($78,841) ($9,232,283) ($5,006,252)
Plus Cumulative Effect of
Change in Accounting 0 8,530,329 0
Less Gain on Sale of GNMA Certificates (4,500,169) (25,954,618) (7,476,302)
Plus Loss (Less Gain) on Sales
of Investments 606,182 (1,105,556) 0
Plus Extraordinary Loss from
Redemption of Bonds 2,250,778 24,190,531 9,576,010
Plus Impairment of Mortgage Derivative
Investments 2,235,663 0 0
Less Other Income (5,949) (22,493) 0
-------------------------------------------
Net Income (Loss) from Remaining Investments $507,664 ($3,594,090) ($2,906,544)
===========================================
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993 1992
-------------------------------------------
<S> <C> <C> <C>
Interest from GNMA Certificates $22,983,846 $39,286,234 $68,610,463
Interest on Bonds 22,598,903 38,634,095 66,190,274
-------------------------------------------
Net Interest Margin 384,943 652,139 2,420,189
Amortization of Discount 12,184,866 16,308,294 20,216,288
Amortization of Bond Discount and
Bond Issuance Costs (14,439,594) (20,054,735) (24,777,643)
Amortization of Reserve for Loss 1,714,026 0 0
Income from Mortgage Derivative Investments 3,316,276 1,015,846 0
Other Interest Income 118,078 108,926 155,334
Interest on Short-term Debt (506,451) (179,443) (73,569)
-------------------------------------------
Net Interest Income (Expense) 2,772,144 ($2,148,973) ($2,059,401)
Valuation Reserve Provision (788,351) 0 0
Operating Expenses (1,476,129) (1,445,117) (847,143)
-------------------------------------------
Net Income (Loss) from Remaining Investments $ 507,664 ($3,594,090) ($2,906,544)
===========================================
</TABLE>
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.
<PAGE>
ITEM 8: Financial Statements and Supplementary Data
-------------------------------------------
INDEX TO FINANCIAL STATEMENTS
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
<PAGE>
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
<PAGE>
<TABLE>
INVG MORTGAGE SECURITIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1994 1993
------------- -------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $1,425,534 $4,464,990
Investment in Government National Mortgage
Association Certificates, at amortized cost 177,990,217 287,539,482
Other Mortgage Certificates 100,730 0
Investment in Mortgage Derivative Investments 21,322,104 9,396,136
Accrued Interest and Accounts Receivable 3,973,306 2,803,778
Deferred Issuance Costs 1,321,892 2,210,462
Organization Costs 74,145 46,602
Other Investments 837,149 2,301,244
------------- -------------
Total Assets $207,045,077 $308,762,694
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
GNMA-Backed Sequential Pay Bonds $178,933,727 $285,297,098
Accrued Interest Payable 1,723,202 2,153,064
Short-term Debt 14,694,000 5,947,500
Incentive Management Fee Payable 687,421 774,000
Payable to Broker 0 2,704,621
Accrued Expenses and Other Liabilities 173,874 146,878
Dividends Payable 136,455 136,455
------------- -------------
Total Liabilities 196,348,679 297,159,616
------------- -------------
Stockholders' Equity
Common Stock, $.01 Par Value;
25,000,000 Shares Authorized;
682,275 Shares Issued 6,823 6,823
Additional Paid-in Capital 15,103,692 15,103,692
Treasury Shares (1994 - 76,900 shares;
1993 - 8,700 shares) (682,050) (55,568)
Unrealized Gain on Investments 298,459 0
Retained Deficit (4,030,526) (3,451,869)
------------- -------------
Total Stockholders' Equity 10,696,398 11,603,078
------------- -------------
Total Liabilities and Stockholders' Equity $207,045,077 $308,762,694
============= =============
<FN>
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
INVG MORTGAGE SECURITIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Years Ended December 31,
1994 1993 1992
-------------------------------------------
<S> <C> <C> <C>
Interest Income
Mortgage Certificates $37,000,816 $55,703,454 $88,982,085
Mortgage Derivative Investments 3,316,276 1,015,846 0
-------------------------------------------
Total Interest Income 40,317,092 56,719,300 88,982,085
Interest Expense 37,544,948 58,868,273 91,041,486
-------------------------------------------
Net Interest Income (Expense) 2,772,144 (2,148,973) (2,059,401)
Gain on Sale of GNMA Certificates 4,500,169 25,954,618 7,476,302
Gain (Loss) on Sale of Investments (606,182) 1,105,556 0
Impairment of Mortgage Derivative Investments (2,235,663) 0 0
Valuation Reserve Provision (788,351) 0 0
Other Income 5,949 22,493 0
-------------------------------------------
Total Income 3,648,066 24,933,694 5,416,901
-------------------------------------------
Operating Expenses
Incentive Management Fee 456,747 774,000 0
Professional Fees 407,885 149,653 366,621
Trustee Fees 59,857 46,870 139,335
Management Fee and Officers' Compensation 312,000 312,000 230,681
Directors' Fees 40,500 44,500 27,000
General and Administrative 199,140 118,094 83,506
-------------------------------------------
Total Operating Expenses 1,476,129 1,445,117 847,143
-------------------------------------------
Income (Loss) before Extraordinary
Item and Cumulative Effect of
Accounting Change 2,171,937 23,488,577 4,569,758
Extraordinary Item - Loss from
Redemption of Bonds (2,250,778) (24,190,531) (9,576,010)
-------------------------------------------
Loss before Cumulative
Effect of Accounting Change (78,841) (701,954) (5,006,252)
Cumulative Effect of Accounting Change 0 (8,530,329) 0
-------------------------------------------
Net Loss ($78,841) ($9,232,283) ($5,006,252)
===========================================
Per Common Share
Income before Extraordinary Item and
Cumulative Effect of Accounting Change $3.43 $34.70 $6.70
Loss before Cumulative Effect
of Accounting Change ($0.12) ($1.04) ($7.34)
Net Loss ($0.12) ($13.64) ($7.34)
Dividends Declared $0.80 $0.50 $0.60
Weighted Average Shares Outstanding 634,073 676,884 682,275
<FN>
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
INVG MORTGAGE SECURITIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Additional Unrealized Retained
Common Paid-in Treasury Gain on Earnings
Stock Capital Shares Investments (Deficit) Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1992 $6,823 $15,103,692 $0 $0 $11,540,169 $26,650,684
Net Loss -- -- -- -- (5,006,252) (5,006,252)
Distributions -- -- -- -- (409,365) (409,365)
----------------------------------------------------------------------------------------
Balance, December 31, 1992 6,823 15,103,692 0 0 6,124,552 21,235,067
Net Loss -- -- -- -- (9,232,283) (9,232,283)
Distributions -- -- -- -- (344,138) (344,138)
Purchase of 8,700 Shares -- -- (55,568) -- -- (55,568)
----------------------------------------------------------------------------------------
Balance, December 31, 1993 $6,823 $15,103,692 ($55,568) 0 ($3,451,869) $11,603,078
Net Loss -- -- -- -- (78,841) (78,841)
Distributions -- -- -- -- (499,816) (499,816)
Purchase of 68,200 Shares -- -- (626,482) -- -- (626,482)
Unrealized Gain on Investments -- -- -- 298,459 -- 298,459
----------------------------------------------------------------------------------------
Balance, December 31, 1994 $6,823 $15,103,692 ($682,050) $298,459 ($4,030,526) $10,696,398
========================================================================================
<FN>
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
INVG MORTGAGE SECURITIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
1994 1993 1992
-------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($78,841) ($9,232,283) ($5,006,252)
Adjustments to Reconcile Net Loss to Net
Cash Provided by Operating Activities:
Cumulative Effect of Accounting Change 0 8,530,329 0
Amortization of Deferred Bond Issuance Costs 888,570 1,717,022 1,347,686
Amortization of Bond Discount 15,603,251 27,330,065 23,429,957
Amortization of Discount on Government
National Mortgage Certificates, Net (11,408,621) (22,876,123) (20,216,288)
Amortization of Organization Costs 9,321 0 0
Impairment of Mortgage Derivative Investments 2,235,663 0 0
Loss (Gain) on Sales of Investments 606,182 (1,015,556) 0
Decrease in Reserve for Loss on Investments (925,675) 0 0
Non-cash Items Relating to Redemption of Bonds
and Disposition of GNMA Certificates 0 0 1,057,453
Decrease (Increase) in Accrued Interest
and Accounts Receivable (1,169,528) 2,247,090 1,957,847
Increase (Decrease) in Accrued Expenses 26,996 (644,545) 534,152
Increase (Decrease) in Management Fee Payable (86,579) 774,000 0
Decrease in Accrued Interest Payable (429,862) (1,867,924) (1,864,523)
-------------------------------------------
Net Cash Provided by Operating Activities 5,270,877 4,872,075 1,240,032
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in Principal Amount of Government
National Mortgage Association Certificates 121,883,561 248,690,470 219,574,510
Investment in Mortgage Derivative Investments (20,687,297) (25,309,212) 0
Principal Collection and Proceeds from Sales 0
of Mortgage Derivative Investments 5,618,209 17,018,632 0
Purchase of Other Mortgage Certificates
and Investments (12,577,698) (2,623,891) 0
Cash Receipts from Other Mortgage Certificates 12,313,084 0 0
Cash Receipts from Other Investments 2,227,713 322,647 0
Organization Costs (36,864) (46,602) 0
-------------------------------------------
Net Cash From Investing Activities 108,740,708 238,052,044 219,574,510
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Principal Amount of GNMA-Backed
Sequential Pay Bonds (121,966,622) (241,048,583) (227,290,825)
Increase (Decrease) in Short-term Debt 8,746,500 (2,361,029) 8,308,529
Increase (Decrease) in Due to Broker (2,704,621) 2,704,621 0
Dividends Paid (499,816) (344,138) (272,910)
Repurchase of Common Stock (626,482) (55,568) 0
-------------------------------------------
Net Cash Used in Financing Activities (117,051,041) (241,104,697) (219,255,206)
-------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (3,039,456) 1,819,422 1,559,336
Cash and Cash Equivalents at Beginning of Year 4,464,990 2,645,568 1,086,232
-------------------------------------------
Cash and Cash Equivalents at End of Year $1,425,534 $4,464,990 $2,645,568
===========================================
<FN>
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
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.
<PAGE>
Note 3. - GNMA Certificates
The GNMA Certificates are being used as collateral for the GNMA-Backed
Sequential Pay Bonds (the "Bonds"). Information with respect to such GNMA
Certificates is as follows:
<TABLE>
<CAPTION>
COST LESS
BOND INTEREST DUE PRINCIPAL UNAMORTIZED FAIR
CERTIFICATES SERIES RATE DATE AMOUNT DISCOUNT VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1994
1984-2 8.0% 2008 $ 99,473,878 $ 80,900,971 $ 95,090,811
1984-3 9.0% 2009 66,767,191 52,813,548 67,351,404
1984-4 11.0% 2013 57,834,880 51,880,352 62,823,138
Reserve (7,604,654)
-------------------------------------------
Total $224,075,949 $177,990,217 $225,265,353
===========================================
</TABLE>
<TABLE>
<CAPTION>
COST LESS
BOND INTEREST DUE PRINCIPAL UNAMORTIZED FAIR
CERTIFICATES SERIES RATE DATE AMOUNT DISCOUNT VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993
1983-1 See Note 8 $ 0 $ 0 $ 0
1984-1 See Note 7 0 0 0
1984-2 8.0% 2008 119,162,348 95,723,477 125,455,610
1984-3 9.0% 2009 85,449,168 66,836,229 91,377,204
1984-4 11.0% 2013 80,905,716 72,270,472 92,030,252
1984-5 See Note 5 0 0 0
INVG A Variable 2017 60,442,278 61,239,633 65,709,245
Reserve (8,530,329)
------------------------------------------
Total $345,959,510 $287,539,482 $374,572,311
==========================================
</TABLE>
Note 4. - GNMA-Backed Sequential Pay Bonds
The Bonds are collateralized by the GNMA Certificates. Information
with respect to such Bonds is as follows:
<TABLE>
<CAPTION>
ESTIMATED
BOND INTEREST DUE PRINCIPAL UNAMORTIZED FAIR
BONDS SERIES RATE DATE AMOUNT DISCOUNT NET VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994
1984-2 7.875% 2008 $ 99,473,266 $22,681,427 $ 76,791,839 $ 94,996,969
1984-3 8.875-9.0% 2009 66,766,722 15,658,178 51,108,544 66,036,274
1984-4 10.875% 2013 57,834,171 6,800,827 51,033,344 61,917,263
----------------------------------------------------------
Total $224,074,159 $45,140,432 $178,933,727 $222,950,506
==========================================================
December 31, 1993
1983-1 See Note 8 $ 0 $ 0 $ 0 $ 0
1984-1 See Note 7 0 0 0 0
1984-2 7.875% 2008 119,161,788 28,472,377 90,689,411 124,926,160
1984-3 8.875-9.0% 2009 85,448,713 20,690,041 64,758,672 91,215,162
1984-4 10.875% 2013 80,905,029 9,856,967 71,048,062 92,207,462
1984-5 See Note 6 0 0 0 0
INVG A Variable 2017 60,525,251 1,724,298 58,800,953 60,525,251
----------------------------------------------------------
Total $346,040,781 $60,743,683 $285,297,098 $368,874,035
==========================================================
</TABLE>
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.
<PAGE>
Note 9. - Mortgage Derivative Investments
At December 31, 1994, the Company owned Mortgage Derivative
Investments as shown in the schedule below:
<TABLE>
<CAPTION>
CARRYING
VALUE
PURCHASE % PURCHASE DECEMBER 31,
RESIDUAL SERIES DATE OWNERSHIP COLLATERAL PRICE 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Merrill Lynch Trust 8-R Aug. 10, 1993 68.850% FHLMC 9.50% $ 3,600,000 $ 1,096,472
FHLMC REMIC 1332-R July 29, 1993 100.00% FHLMC 8.00% 6,333,000 0
FNMA REMIC 92-G64 R Aug. 26, 1993 100.00% GNMA 8.00% 3,668,000 153,535
FNMA REMIC 92-G65 R Sept. 21, 1993 100.00% GNMA 8.00% 2,200,000 0
FHLMC REMIC 1424-R Sept. 27, 1993 100.00% FHLMC 8.00% 377,108 57,038
Paine Webber G-3 Oct. 14, 1993 25.00% FNMA 12.00% 318,719 256,813
FHLMC REMIC 9-R Various 87.50% FHLMC 10.01% 2,114,992 1,676,185
Drexel Burnham Q-7 Various 74.4369% FNMA 10.00% 1,279,136 1,410,506
Santa Barbara 1-A Various 9.74406% FHLMC 9.50% 799,751 706,023
CMOT Series 5-R Dec. 10, 1993 49.00% FNMA 9.50% 560,682 228,833
CMOT Series 6-R Dec. 10, 1993 49.00% FHLMC 9.50% 154,713 265,288
Morgan Stanley Trust E Feb. 14, 1994 42.00% FHLMC 9.308% 315,000 317,702
Kidder Peabody Trust 3 Feb. 14, 1994 11.27% FHLMC 9.214% 250,000 42,775
Ryan Mortgage IV - 3 Mar. 28, 1994 100.00% GNMA 12.00% 800,000 644,488
Ryan Mortgage IV - 4 Mar. 28, 1994 100.00% FNMA 10.00% 400,000 257,158
CMIT Series 7 Mar. 30, 1994 100.00% GNMA 9.50% 800,000 216,962
FHLMC REMIC 4-R Apr. 21, 1994 52.593% FHLMC 10.5% 2,550,000 2,249,470
Oxford Acceptance 3D July 29, 1994 100.00% FHLMC 10.63% 1,999,316 1,889,253
CMSC Series 1988-14 July 5, 1994 100.00% FHLMC 10.60% 2,100,000 1,932,202
Mortgage Capital 6C July 22, 1994 100.00% GNMA 11.00% 1,350,000 1,365,012
Drexel Burnham Series N Sept. 3, 1994 50.00% FNMA 10.50% 611,326 598,570
FHLMC Series 150 Sept. 16, 1994 100.00% FHLMC 9.50% 1,350,000 1,333,142
FHLMC Series 118 Sept. 27, 1994 100.00% FHLMC 9.50% 725,000 807,205
FNMA Trust 88-19 Oct. 17, 1994 74.40% FNMA 9.50% 1,227,600 1,187,255
Drexel Burnham Trust D Nov. 10, 1994 12.6305% FHLMC 9.50% 235,000 245,822
E.F. Hutton III 87-1 Nov. 10, 1994 37.6143% GNMA 12.13% 1,222,225 1,168,279
E.F. Hutton Trust 1 Nov. 15, 1994 20.00% GNMA 10.00% 30,000 31,077
Merrill Lynch Trust 7 Nov. 17, 1994 8.96% FHLMC 11.00% 208,000 213,415
FHLMC REMIC 7 Nov. 23, 1994 10.00% FHLMC 9.50% 165,000 116,253
FBMS II 1987-4 Class 2 Nov. 30, 1994 100.00% Whl.Loan 9.5% 275,000 267,001
L.F. Rothschild Series 3 Nov. 30, 1994 20.90% GNMA 10.00% 5,539 4,057
Pacific Coll. Mtg. Trust 2 Nov. 30, 1994 7.50% FHLMC 10.00% 25,000 19,438
Kidder Peabody Trust 1 Nov. 30, 1994 48.00% FHLMC 9.00% 60,000 63,336
Leader Funding 1 Nov. 30, 1994 49.50% FHLMC 10.00% 396,000 363,611
Ryland Acceptance 38 Nov. 30, 1994 33.00% FHLMC 10.10% 132,000 137,928
----------------------------
Total $38,638,107 $21,322,104
============================
</TABLE>
There is no exchange or other active market from which to obtain a
quoted market price for CMO Residual Interests. Instead, the estimate of
fair value was determined by calculating the present value of the projected
Excess Cash Flow to the Company discounted at 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:
<TABLE>
<CAPTION>
BOND SERIES COLLATERAL PSA FAIR VALUE
- ---------------------------------------------------------------
<S> <C> <C> <C>
Series 1984-2 GNMA 8.00% 113% $175,766
Series 1984-3 GNMA 9.00% 140% 52,163
Series 1984-4 GNMA 11.00% 236% 172,064
--------
Total Fair Value $399,993
</TABLE>
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):
<TABLE>
<CAPTION>
REPORTED TAX
AMOUNTS AMOUNTS DIFFERENCE
- ----------------------------------------------------------
<S> <C> <C> <C>
Assets $207,045,077 $196,686,217 $10,358,860
Liabilities 196,348,679 200,930,956 (4,582,277)
</TABLE>
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.
<PAGE>
Note 16.- Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1994
Interest Income $9,581,477 $12,817,195 $9,213,021 $8,705,399 $40,317,092
Income (Loss) Before
Extraordinary Item 4,408,359 (1,502,963) (383,157) (350,302) 2,171,937
Net Income (Loss) 2,157,581 (1,502,963) (383,157) (350,302) (78,841)
Per Common Share
Income (Loss) Before
Extraordinary Item $6.62 ($2.36) ($0.62) ($0.57) $3.43
Net Income (Loss) 3.24 (2.36) (0.62) (0.57) (0.12)
Dividends Declared per Share $0.20 $0.20 $0.20 $0.20 $0.80
</TABLE>
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.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Interest Income $15,732,374 $13,591,632 $13,912,712 $13,482,582 $56,719,300
Income (Loss) Before Extra-
ordinary Item and Cumulative
Effect of Accounting Change 25,234,097 (842,785) (285,148) (617,587) 23,488,577
Income (Loss) Before Cumulative
Effect of Accounting Change 1,177,198 (976,417) (285,148) (617,587) (701,954)
Net Income (Loss) 1,177,198 (976,417) (285,148) (9,147,916) (9,232,283)
Per Common Share
Income (Loss) Before Extra-
ordinary Item and Cumulative
Effect of Accounting Change $37.28 ($1.24) ($0.42) ($0.92) $34.70
Income (Loss) Before Cumulative
Effect of Accounting Change 1.73 (1.43) (0.42) (0.92) (1.04)
Net Income (Loss) 1.73 (1.43) (0.42) (13.52) (13.64)
Dividends Declared per Share $0.10 $0.10 $0.10 $0.20 $0.50
</TABLE>
<PAGE>
ITEM 9: Changes in and Disagreements With Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosure
------------------------
Not applicable.
PART III
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: 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.
<TABLE>
<CAPTION>
Number of Shares Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
December 31, 1994 December 31, 1994
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Russell Berg 0 $0 3,111/4,889 $12,055/$18,945
Robert Ford 0 0 1,556/2,444 $6,030/$9,470
</TABLE>
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: 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.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name and Address Beneficially Owned ** Common Stock
- ---------------- --------------------- ------------
--
<S> <C> <C>
Robert E. Greeley 253,800 42.34%
Russell Berg 6,111 ***
All Directors and Officers as a Group 259,111 43.22%
<FN>
All shares of the Company's common stock beneficially owned by
security holders holding 5% or more of the outstanding common stock and by
directors of the Company aggregate approximately 43% of the total
outstanding shares of common stock of the Company.
* Each Director and executive officer of the Company may be reached
through the Company at Meadow Wood Creek Plaza, 1575 Delucchi Lane,
Suite 115-20, Reno, Nevada 89502.
** Unless otherwise indicated, the beneficial owner has sole voting and
investment power.
*** Less than one percent of the outstanding shares of Common Stock.
(1) Of the 253,800 shares, all are beneficially owned by Robert Greeley
and are included in his shares held. Mr. Greeley has no beneficial
ownership in any shares other than those held by Page Mill Asset
Management.
</TABLE>
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.
<PAGE>
PART IV
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)
<PAGE>
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.
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEET AS OF DECEMBER 31, 1994 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,425,534
<SECURITIES> 199,413,051
<RECEIVABLES> 0
<ALLOWANCES> 3,973,306
<INVENTORY> 0
<CURRENT-ASSETS> 204,811,891
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 207,045,077
<CURRENT-LIABILITIES> 17,414,952
<BONDS> 178,933,727
<COMMON> 6,823
0
0
<OTHER-SE> 10,689,575
<TOTAL-LIABILITY-AND-EQUITY> 207,045,077
<SALES> 0
<TOTAL-REVENUES> 44,211,079
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,705,843
<LOSS-PROVISION> 788,351
<INTEREST-EXPENSE> 37,544,948
<INCOME-PRETAX> 2,171,937
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,171,937
<DISCONTINUED> 0
<EXTRAORDINARY> (2,250,778)
<CHANGES> 0
<NET-INCOME> (78,841)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
