===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended September 30, 1996
|_| Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission file number 33-83524
MERIT SECURITIES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1736551
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
4880 Cox Road, Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
(804) 967-5800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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 ninety days. |X| Yes () No
As of October 31, 1996, the latest practicable date, there were 1,000 shares of
Merit Securities Corporation common stock outstanding.
The registrant meets the conditions set forth in General Instructions H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
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<PAGE>
MERIT SECURITIES CORPORATION
FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 1996 and
December 31, 1995 3
Statements of Operations for the three months and
nine months ended September 30, 1996 and 1995 4
Statement of Shareholder's Equity for the nine months
ended September 30, 1996 5
Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995 6
Notes to Unaudited Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 12
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERIT SECURITIES CORPORATION
Balance Sheets
(amounts in thousands except share data)
<TABLE>
<CAPTION>
September December
30, 31,
1996 1995
----------- ----------
<S> <C> <C>
ASSETS:
Collateral for CMOs $2,600,418 $ 733,978
Prepaid shelf registration fees 243 752
Cash 10 10
=========== ==========
$2,600,671 $ 734,740
=========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Bonds payable $2,469,020 $665,240
Due to affiliate 34,916 21,736
----------- ----------
2,503,936
686,976
----------- ----------
SHAREHOLDER'S EQUITY:
Common stock, no par value,
10,000 shares authorized,
1,000 shares issued and outstanding 10 10
Additional paid-in capital 82,136 35,222
Net unrealized gain on mortgage 39,484 10,313
investments
Retained earnings (deficit) (24,895 ) 2,219
----------
-----------
96,735 47,764
=========== ==========
$ 2,600,671 $ 734,740
=========== ==========
</TABLE>
See notes to unaudited financial statements.
<PAGE>
<TABLE>
MERIT SECURITIES CORPORATION
Statements of Operations
<CAPTION>
(amounts in thousands except share Three Months Ended Nine Months Ended
data)
September 30, September 30,
1996 1995 1996 1995
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Interest Income:
Collateral for CMOs $ 33,599 $ 10,010 $ 76,381 $ 18,593
---------- --------- --------- ----------
Interest and CMO-related expense:
Interest on CMOs 29,377 9,361 69,308 15,654
Other CMO expense 717 60 1,871 864
Provision for losses 900 1,700
- -
---------- --------- --------- ----------
30,994 9,421 16,518
72,879
---------- --------- --------- ----------
Net interest margin 2,605 589 3,502 2,075
Provision for loss on Parent's sale (1,300 ) - (29,434 ) -
of affiliates
Interest on due to affiliate (602 ) (98 ) (1,182 ) (197 )
---------- --------- --------- ----------
Net income (loss) $ 703 $ 491 $ (27,114 ) $ 1,878
========== ========= ========= ==========
</TABLE>
See notes to unaudited financial statements.
<PAGE>
<TABLE>
MERIT SECURITIES CORPORATION
Statement of Shareholder's Equity
(amounts in thousands except share data)
<CAPTION>
Net
unrealized
Additional gain on Retained
Common paid-in mortgage earnings
stock capital investments (deficit) Total
------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December $ 10 $ 35,222 $ $ $
31, 1995 10,313 2,219 47,764
Contributed capital - - - 46,914
46,914
Change in net
unrealized gain - - 29,171 - 29,171
on mortgage
investments
Net loss - - (27,114) (27,114)
-
------- --------- --------- -------- ---------
Balance at September $ $ 82,136 $ $ (24,895) $ 96,735
30, 1996 10 39,484
======= ========= ========= ======== =========
</TABLE>
See notes to unaudited financial statements.
<PAGE>
<TABLE>
MERIT SECURITIES CORPORATION
Statements of Cash Flows
(amounts in thousands)
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1996 1995
--------------- ---------------
<S> <C> <C>
Operating activities:
Net income (loss) $ (27,114 ) $ 1,878
Adjustments to reconcile net income to net
cash
provided by operating activities:
Amortization, net 5,323 1,242
Provision for losses 1,700 -
Provision for loss on Parent's sale of 29,434 -
affiliates
Increase in accrued interest, net (5,986 ) (9,658 )
Decrease in prepaid shelf registration fees 509 -
---------- ---------
Net cash provided by (used for) 3,866 (6,538 )
operating activities
---------- ---------
Investing activities:
Collateral for CMOs:
Purchase of mortgage loans subsequently (2,135,51) (540,157)
securitized
Principal payments on collateral 271,170 101,271
Net increase in funds held by trustee (198 ) (5 )
----------
---------
Net cash used for investing activities (1,864,53) (438,891)
---------- ---------
Financing activities:
Collateralized mortgage obligations:
Proceeds from issuance of securities 2,071,285 506,326
Principal payments on securities (270,707 ) (100,353)
Increase in due to affiliate 13,180 4,987
Capital contributions 46,914 34,469
---------- ---------
Net cash provided by financing activities 1,860,672 445,429
---------- ---------
Net decrease in cash - -
Cash at beginning of period 10 10
---------- ---------
Cash at end of period $ 10 $ 10
========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 63,507 $ 16,624
========== =========
</TABLE>
See notes to unaudited financial statements.
<PAGE>
MERIT SECURITIES CORPORATION
Notes to Unaudited Financial Statements September 30, 1996 (amounts in thousands
except share data)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. The financial statements include the accounts of
Merit Securities Corporation (the Company). The Company is a wholly-owned
subsidiary of Issuer Holding Corporation (IHC). IHC was formed on September 4,
1996 to acquire all of the outstanding stock of the Company and certain other
affiliates from Resource Mortgage Capital, Inc. (RMC). IHC is a wholly-owned
subsidiary of RMC. The Company was organized to facilitate the securitization of
mortgage loans through the issuance and sale of collateralized mortgage
obligations (the Bonds).
In the opinion of management, all material adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation of the
financial statements have been included. The Balance Sheet at September 30,
1996, the Statements of Operations for the three months and nine months ended
September 30, 1996 and 1995, the Statement of Shareholder's Equity for the nine
months ended September 30, 1996, the Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995, and the related notes to financial
statements are unaudited. Operating results for the nine months ended September
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996. For further information, refer to the audited
financial statements and footnotes included in the Company's Form 10-K for the
year ended December 31, 1995.
Certain amounts for 1995 have been reclassified to conform with the presentation
for 1996.
NOTE 2--AVAILABLE-FOR-SALE MORTGAGE SECURITIES
The Company has classified all of its mortgage securities, solely consisting of
collateral for CMOs, as available-for-sale. The following tables summarize the
Company's mortgage securities held at September 30, 1996. No mortgage securities
were sold during the nine months ended September 30, 1996.
<TABLE>
Securities held at September 30, 1996
<CAPTION>
-------------------------------------------------
Amortized Fair Gross Gross
cost basis value unrealized unrealized
gain loss
---------- ----------- ----------- ----------
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Collateral for CMOs $ 2,560,934 $ 2,600,418 $ 39,484 $ -
========== =========== =========== ===========
</TABLE>
NOTE 3 -- PROVISION FOR LOSS ON PARENT'S SALE OF AFFILIATES
On May 13, 1996, RMC completed the sale of various RMC affiliates to Dominion
Mortgage Services, Inc. (Dominion), a wholly-owned subsidiary of Dominion
Resources, Inc. Included in the affiliates sold was Meritech Mortgage Services,
Inc. (Meritech), the servicer for a significant portion of the Company's
collateral for CMOs. As a result of this sale, the Company recorded a $29.4
million provision for possible losses for those loans which are currently
serviced by Meritech, and where the Company has retained the credit risk. As
part of terms of the sale, Dominion has provided for reimbursement of losses
incurred by the Company pursuant to various Loss Reimbursement Guaranty
Agreements for actual losses incurred on loans pledged as collateral for CMOs
and serviced by Meritech which exceed the above reserve recorded by the Company,
up to an additional $30 million. Such guaranty agreements apply only to loans
serviced by Meritech and is specific to each CMO issued by the Company.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Merit Securities Corporation (the Company) was incorporated in Virginia on
August 19, 1994 as a wholly-owned, limited-purpose finance subsidiary of
Resource Mortgage Capital, Inc. (RMC). Issuer Holding Corporation, Inc. (IHC)
was formed on September 4, 1996 to acquire all of the outstanding stock of the
Company and certain other affiliates from RMC. IHC is a wholly-owned subsidiary
of RMC.
The Company was organized to facilitate the securitization of mortgage loans
through the issuance and sale of collateralized mortgage obligations (the
Bonds). The Bonds will be secured primarily by: (i) mortgage loans secured by
first or second liens on residential property, (ii) Federal National Mortgage
Association Mortgage-Backed Certificates, (iii) Federal Home Loan Mortgage
Corporation Mortgage-Backed Certificates, (iv) Government National Mortgage
Association Mortgage-Backed Certificates, and (v) any other mortgage
pass-through certificates or mortgage-collateralized obligations (collectively,
the Collateral).
After payment of the expenses of an offering and certain administrative
expenses, the net proceeds from an offering of Bonds will be used to purchase
Collateral from IHC or various third parties. IHC can be expected to use the
proceeds to reduce indebtedness incurred to obtain such loans or to acquire
additional Collateral. After the issuance of a series of Bonds, the Company may
sell the Collateral securing that series of Bonds, subject to the lien of the
Bonds.
During the three months ended September 30, 1996, the Company issued one (1)
series of Bonds totaling approximately $942 million aggregate principal amount.
As of September 30, 1996, the Company had six (6) series of CMOs outstanding
totaling approximately $2.5 billion, compared to $665 million at December 31,
1995. Interest income on collateral for CMOs increased $57.8 million to $76.4
million for the nine months ended September 30, 1996 compared to $18.6 million
for the nine months ended September 30, 1995 reflecting the higher balance of
collateral for CMOs resulting from the additional issuances during the last
quarter of 1995 and the first nine months of 1996. Interest and CMO-related
expense increased $56.4 from $16.5 million for the nine months ended September
30, 1995 to $72.9 million for the nine months ended September 30, 1996 resulting
from the higher level of Bonds outstanding at September 30, 1996.
As discussed in Note 3 to the financial statements, as a result of the parent
company's sale of certain affiliates during the second quarter of 1996, the
Company recorded a $29.4 million provision for the possible losses for loans
which are serviced by Meritech Mortgage Services, Inc. (Meritech), an affiliate
which was sold, and where the Company has retained the credit risk. The Company
has also recorded a provision for losses of $1.7 million for potential credit
losses from loans pledged as collateral for CMOs which are not serviced by
Meritech and where the Company has retained the credit risk on such loans. The
provision has been recorded as a reduction to net interest margin in the
accompanying financial statements.
At September 30, 1996, the Company had securities of approximately $161.2
million remaining for issuance under a registration statement filed with the
Securities and Exchange Commission. The Company anticipates issuing additional
Bonds in the future.
The Company competes in a national market with other private conduits and
various financial firms. Economic conditions, interest rates, regulatory changes
and market dynamics all influence the mortgage securities market.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
None
Item 5. Other Information:
None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
3.1 Articles of Incorporation of the Registrant (Incorporated herein by
reference to the Exhibits to Registrant's Registration Statement No.
33-83524 on Form S-3 filed August 31, 1994).
3.2 Bylaws of the Registrant (Incorporated herein by reference to the
Exhibits to Registrant's Registration Statement No. 33-83524 on Form
S-3 filed August 31, 1994).
3.3 Amended and Restated Articles of Incorporation of the Registrant,
effective April 19, 1995 (Incorporated herein by reference to Exhibit to
the Registrant's Current Report on Form 8-K, filed April 21, 1995).
4.1 Indenture between Registrant and Trustee, dated as of August 1, 1994
(Incorporated herein by reference to the Exhibits to Registrant's
Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994).
4.2 Form of Supplement Indenture between Registrant and Trustee
(Incorporated herein by reference to the Exhibits to Registrant's
Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994).
4.3 Copy of the Indenture, dated as of November 1, 1994, by and between the
Registrant and Texas Commerce Bank National Association, as Trustee
(Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K, filed December 19, 1994).
4.4 Copy of the Series 1 Indenture Supplement, dated as of November 1, 1994,
by and between the Registrant and Texas Commerce Bank National
Association, as Trustee (including schedules and exhibits) (Incorporated
herein by reference to Exhibit to the Registrant's Current Report on Form
8-K, filed December 19, 1994).
4.5 Copy of the Series 2 Indenture Supplement, dated as of February 1, 1995,
by and between the Registrant and Texas Commerce Bank National
Association, as Trustee (including schedules and exhibits) (Incorporated
herein by reference to Exhibit to the Registrant's Current Report on Form
8-K, filed March 8, 1995).
4.6 Copy of the Series 3 Indenture Supplement, dated as of March 1, 1995, by
and between the Registrant and Texas Commerce Bank National Association,
as Trustee (including schedules and exhibits) (Incorporated herein by
reference to Exhibit to the Registrant's Current Report on Form 8-K, filed
April 21, 1995).
4.7 Copy of the Series 4 Indenture Supplement, dated as of June 1, 1995, by
and between the Registrant and Texas Commerce Bank National Association,
as Trustee (including schedules and exhibits) (Incorporated herein by
reference to Exhibit to the Registrant's Current Report on Form 8-K, filed
July 10, 1995).
4.8 Copy of the Series 5 Indenture Supplement, dated as of October 1, 1995, to
Indenture, dated as of November 1, 1994, by and between the Registrant and
Texas Commerce Bank National Association, as Trustee (related exhibits
available upon request to the Trustee). (Incorporated herein by reference
to Exhibit to the Registrant's Current Report on Form 8-K, filed November
15, 1995).
4.9 Copy of the Series 6 Indenture Supplement, dated as of March 1, 1996, by
and between the Registrant and Texas Commerce Bank National Association,
as Trustee (including schedules and exhibits) (Incorporated herein by
reference to Exhibit to the Registrant's Current Report on Form 8-K, filed
March 21, 1996).
<PAGE>
4.10 Copy of the Series 7 Indenture Supplement, dated as of May 1, 1996, by and
between the Registrant and Texas Commerce Bank National Association, as
Trustee (related schedules and exhibits available upon request of the
Trustee). (Incorporated herein by reference to Exhibit to Registrant's
Current Report on Form 8-K, filed June 19, 1996).
4.11 Copy of the Series 8 Indenture Supplement, dated as of September 1, 1996,
by and between the Registrant and Texas Commerce Bank National
Association, as Trustee (related schedules and exhibits available upon
request of the Trustee). (Incorporates herein by reference to Exhibit of
Registrant's Current Report on Form 8-K, filed October 9, 1996).
99.1 Standard Provisions to Servicing Agreement (Incorporated herein by
reference to the Exhibits to Registrant's Registration Statement No.
33-83524 on Form S-3 filed August 31, 1994).
99.2 Form of Servicing Agreement (Incorporated herein by reference to the
Exhibits to Registrant's Registration Statement No. 33-83524 on Form
S-3 filed August 31, 1994).
99.3 Standard Terms to Master Servicing Agreement (Incorporated herein by
reference to the Exhibits to Registrant's Registration Statement No.
33-83524 on Form S-3 filed August 31, 1994).
99.4 Form of Master Servicing Agreement (Incorporated herein by reference to
the Exhibits to Registrant's Registration Statement No. 33-83524 on
Form S-3 filed August 31, 1994).
99.5 Form of Prospectus Supplement of Bonds secured by adjustable-rate
mortgage loans (Incorporated herein by reference to Exhibits to
Registrant's Pre-Effective Amendment No. 4 to Registration Statement
No. 33-83524 on Form S-3 filed December 5, 1994).
99.6 Form of Financial Guaranty Assurance Policy (Incorporated herein by
reference to the Exhibits to Registrant's Registration Statement No.
33-83524 on Form S-3 filed August 31, 1994).
99.7 Form of GEMICO Mortgage Pool Insurance Policy (Incorporated herein by
reference to the Exhibits to Registrant's Registration Statement No.
33-83524 on Form S-3 filed August 31, 1994).
99.8 Form of PMI Mortgage Insurance Co. Pool Insurance Policy (Incorporated
herein by reference to the Exhibits to Registrant's Registration
Statement No. 33-83524 on Form S-3 filed August 31, 1994).
99.9 Form of Prospectus Supplement of Bonds secured by fixed-rate mortgage
loans (Incorporated herein by reference to Exhibits to Registrant's
Pre-Effective Amendment No. 4 to Registration Statement No. 33-83524 on
Form S-3 filed December 5, 1994).
99.10 Copy of Financial Guaranty Insurance Policy No. 50331-N issued by
Financial Security Assurance Inc., dated December 7, 1994, with respect to
the Series 1 Bonds (Incorporated herein by reference to the Exhibit to
Registrant's 1994 Form 10-K, dated and filed March 31, 1995).
99.11 Copy of Financial Guaranty Insurance Policy No. 95010074 issued by
Financial Guaranty Insurance Company, dated February 23, 1995, with
respect to the Series 2 Bonds (Incorporated herein by reference to Exhibit
to the Registrant's Current Report on Form 8-K, filed March 8, 1995).
99.12 Copy of the Saxon Mortgage Funding Corporation Servicing Guide for Credit
Sensitive Loans, February 1, 1995 Edition (Incorporated herein by
reference to Exhibit to the Registrant's Current Report on Form 8-K, filed
March 8, 1995).
99.13 Copy of Financial Guaranty Insurance Policy No. 50364-N issued by
Financial Guaranty Assurance Inc., dated April 7, 1995, with respect to
the Series 3 Bonds (Incorporated herein by reference to Exhibit to the
Registrant's Current Report on Form 8-K, filed April 21, 1995).
99.14 Copy of Financial Guaranty Insurance Policy No. 50382-N issued by
Financial Guaranty Assurance Inc., dated June 29, 1995, with respect to
the Series 4 Bonds (Incorporated herein by reference to Exhibit to the
Registrant's Current Report on Form 8-K, filed July 10, 1995).
99.15 Copy of the Standard Terms to Master Servicing Agreement, June 1, 1995
Edition (incorporated herein by reference to Exhibit to the Registrant's
Current Report on Form 8-K, filed July 10, 1995).
99.16 Copy of Financial Guaranty Insurance Policy No. 19804 issued by MBIA
Insurance Corporation (Incorporated herein by reference to Exhibit to
the Registrant's Current Report on Form 8-K, filed November 15, 1995).
99.17 Copy of Financial Guaranty Insurance Policy No. 20596 issued by MBIA
Insurance Corporation (Incorporated herein by reference to Exhibit to
the Registrant's Current Report on Form 8-K, filed March 21, 1996).
99.18 Copy of Financial Guaranty Insurance Policy No. 21296 issued by MBIA
Insurance Corporation (Incorporated herein by reference to Exhibit to
the Registrant's Current Report on Form 8-K, filed June 19, 1996).
(b) Reports on Form 8-K
Current Report on Form 8-K as filed with the Commission on October 9,
1996, relating to the Registrant's Series 8 Bonds.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERIT SECURITIES CORPORATION
By: /s/ Lynn K. Geurin
Lynn K. Geurin
(Principal Executive Officer)
/s/ Stephen J. Benedetti
Stephen J. Benedetti
(Principal Financial & Accounting Officer)
Dated: November 14, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000929426
<NAME> Merit Securities Corp.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-1996
<PERIOD-START> jul-01-1996
<PERIOD-END> sep-30-1996
<CASH> 10
<SECURITIES> 2,600,418
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,600,671
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,600,671
<CURRENT-LIABILITIES> 34,916
<BONDS> 2,649,020
0
0
<COMMON> 10
<OTHER-SE> 96,725
<TOTAL-LIABILITY-AND-EQUITY> 2,600,671
<SALES> 0
<TOTAL-REVENUES> 33,599
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 602
<LOSS-PROVISION> 1,300
<INTEREST-EXPENSE> 30,994
<INCOME-PRETAX> 703
<INCOME-TAX> 0
<INCOME-CONTINUING> 703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 703
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0
</TABLE>
