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 March 31, 1997
|_| 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 (I.R.S. Employer
incorporation) Identification No.)
10900 Nuckols Road, 3rd Floor, Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
(804) 217-5800
(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 April 30, 1997, 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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MERIT SECURITIES CORPORATION
FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION -----------
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Item 1. Financial Statements
Balance Sheets at March 31, 1997 and
December 31, 1996 3
Statements of Operations for the three months
ended March 31, 1997 and 1996 4
Statement of Shareholder's Equity for the three months
ended March 31, 1997 5
Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 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
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERIT SECURITIES CORPORATION
Balance Sheets
(amounts in thousands except share data)
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<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Collateral for collateralized bonds $ 2,266,006 $ 2,463,842
Prepaid shelf registration fees 849 849
Cash 10 10
========== ==========
$ 2,266,865 $ 2,464,701
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Collateralized bonds $ 2,111,914 $ 2,301,598
Due to affiliates 38,126 41,973
---------- ----------
2,150,040 2,343,571
---------- ----------
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 82,136
Net unrealized gain on investments 54,505 60,304
available-for-sale
Retained deficit (19,826 ) (21,320)
--------- ----------
116,825 121,130
========== ==========
$ 2,266,865 $ 2,464,701
========== ==========
<FN>
See notes to unaudited financial statements.
</FN>
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MERIT SECURITIES CORPORATION
Statements of Operations
(amounts in thousands except share Three Months Ended
data)
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<CAPTION>
March 31,
1997 1996
----------- ----------
<S> <C> <C>
Interest Income:
Collateral for collateralized $ 42,549 $ 17,267
bonds
---------- ---------
Interest and related expense:
Interest expense on 38,974 15,603
collateralized bonds
Other collateralized bond expense 835 477
Provision for losses 600 400
---------- ---------
40,409 16,480
---------- ---------
Net interest margin 2,140 787
Interest on due to affiliate (646) (314)
---------- ---------
Net income $ 1,494 $ 473
========== =========
<FN>
See notes to unaudited financial statements.
</FN>
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MERIT SECURITIES CORPORATION
Statement of Shareholder's Equity
(amounts in thousands except share data)
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Net
unrealized
Additional gain on Retained
Common paid-in investments earnings
stock capital available-for-sale (deficit) Total
---------- ---------- ------------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 10 $ 82,136 $ 60,304 $(21,320) $ 121,130
Change in net
unrealized gain on - - (5,799) - (5,799)
investments
available-for-sale
Net income - - 1,494 1,494
------- --------- ----------- ---------- ---------
Balance at March 31, 1997 $ 10 $ 82,136 $ 54,505 $ (19,826) $ 116,825
========= =========== ============ =========== =========
<FN>
See notes to unaudited financial statements.
</FN>
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MERIT SECURITIES CORPORATION
Statements of Cash Flows
(amounts in thousands)
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Three Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
--------------- ----------------
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Operating activities:
Net income $ 1,494 $ 473
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Amortization, net 4,483 945
Provision for losses 600 400
Net change in accrued interest, other (2,147) (200)
assets and other liabilities
Decrease in prepaid shelf registration fees - 145
------------- ------------
Net cash provided by operating activities 4,430 1,763
------------- --------------
Investing activities:
Collateral for collateralized bonds:
Purchase of loans subsequently securitized - (608,084)
Principal payments on collateral 188,825 58,362
------------- ---------------
Net cash provided by (used for) 188,825 (549,722)
investing activities
------------- ---------------
Financing activities:
Collateralized bonds:
Proceeds from issuance of collateralized bonds - 587,348
Principal payments on collateralized bonds (189,408) (58,070)
Increase in due to affiliate (3,847) 5,206
Proceeds from capital contributions - 13,475
------------- -------------
Net cash (used for) provided by (193,255) 547,959
financing activities
------------- -------------
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 $ 39,251 $ 13,599
============= ===============
<FN>
See notes to unaudited financial statements.
</FN>
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MERIT SECURITIES CORPORATION
Notes to Unaudited Financial Statements March 31, 1997 (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,
limited-purpose finance 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 Dynex Capital, Inc. (Dynex), formerly
Resource Mortgage Capital, Inc. IHC is a wholly-owned subsidiary of Dynex. The
Company was organized to facilitate the securitization of loans through the
issuance and sale of collateralized bonds (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 March 31, 1997,
the Statements of Operations for the three months ended March 31, 1997 and 1996,
the Statement of Shareholder's Equity for the three months ended March 31, 1997,
the Statements of Cash Flows for the three months ended March 31, 1997 and 1996,
and the related notes to financial statements are unaudited. Operating results
for the three months ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997. 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, 1996.
Certain amounts for 1996 have been reclassified to conform with the presentation
for 1997.
NOTE 2--COLLATERAL FOR COLLATERALIZED BONDS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities, the
Company has classified collateral for collateralized bonds as
available-for-sale. The following table summarizes the Company's amortized cost
basis and fair value of collateral for collateralized bonds at March 31, 1997
and December 31, 1996, and the related average effective interest rates
(calculated for the month ended March 31, 1997 and December 31, 1996, and
excluding unrealized gains and losses):
- -------------------------------------------------------------------------------
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<CAPTION>
March 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------
Effective Effective
Fair Value Interest Fair Interest
Rate Value Rate
- -------------------------------------------------------------------------------
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Collateral for
collateralized bonds:
Amortized cost $ 2,242,208 7.6% $ 2,435,270 7.5%
Allowance for losses (30,707) (31,732)
- -------------------------------------------------------------------------------
Amortized cost, net 2,211,501 2,403,538
Gross unrealized gains 65,539 68,557
Gross unrealized losses (11,034) (8,253)
- -------------------------------------------------------------------------------
$ 2,266,006 $ 2,463,842
- -------------------------------------------------------------------------------
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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 Dynex
Capital, Inc. (Dynex), formerly Resource Mortgage Capital, Inc. On September 4,
1997, Issuer Holding Corporation, Inc. (IHC), a wholly-owned subsidiary of
Dynex, acquired all of the outstanding stock of the company and certain other
affiliates of Dynex.
The Company was organized to facilitate the securitization of loans through the
issuance and sale of collateralized bonds (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). In the
future, The Company may also securitize other types of loans, such as consumer
installment loans and commercial loans.
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.
The Company did not issue any Bonds during the three months ended March 31,
1997. As of March 31, 1997, the Company had six (6) series of collateralized
bonds outstanding totaling approximately $2.3 billion, compared to $2.5 billion
at December 31, 1996, and $1.3 billion at March 31, 1996. Interest income on the
Collateral increased $25.2 million to $42.5 million for the three months ended
March 31, 1997 compared to $17.3 million for the three months ended March 31,
1996 as a result of the increased number of series outstanding. Interest expense
on Bonds increased $23.4 from $15.6 million for the three months ended March 31,
1996 to $39.0 million for the three months ended March 31, 1997 primarily due to
the additional series outstanding.
At March 31, 1997, the Company had securities of approximately $2.2 billion
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
None.
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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: May 15, 1997
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<CASH> 10
<SECURITIES> 2,266,006
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,266,865
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2,111,914
0
0
<COMMON> 10
<OTHER-SE> 116,815
<TOTAL-LIABILITY-AND-EQUITY> 2,266,865
<SALES> 0
<TOTAL-REVENUES> 42,549
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,481
<LOSS-PROVISION> 600
<INTEREST-EXPENSE> 38,974
<INCOME-PRETAX> 1,494
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,494
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> The Company's balance sheet is unclassified
</FN>
</TABLE>
