UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File No. 33-83524
MERIT SECURITIES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1736551
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10900 Nuckols Road, 3rd Floor, Glen Allen, Virginia 23060
(Address or principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804) 217-5800
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 90 days. Yes XX No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, 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. [ X ]
Aggregate market value of voting stock held by nonaffiliates of the
registrant as of the latest practicable date, February 28, 1997: NONE
As of February 28, 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 Instruction J(1)(a) and
(b) of Form 10-K and, therefore, is furnishing the abbreviated narrative
disclosure specified in Paragraph (2) of General Instruction J.
<PAGE>
MERIT SECURITIES CORPORATION
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
PART I.
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 3
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 3
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 4
Item 6. Selected Financial Data 4
Item 7. Management's Discussion and Analysis of Financial 4
Condition and Results of Operations 4
Item 8. Financial Statements and Supplementary Data 4
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III.
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV.
Item 14. Exhibits, Financial Statement Schedules and 15
Reports on Form 8-K
SIGNATURES 19
</TABLE>
<PAGE>
PART I
Item 1. Business
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). On September 4, 1996, Issuer Holding
Corporation, Inc. (IHC), a wholly-owned subsidiary of RMC, acquired all of the
outstanding stock of the Company and certain other affiliates of RMC.
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.
From the date of its inception to December 31, 1996, the Company has issued
eight (8) series of Bonds totaling approximately $3.0 billion aggregate
principal amount. Two of these series were subsequently collapsed and included
in subsequent issuances. As of December 31, 1996, the Company had six (6) series
of Bonds outstanding totaling approximately $2.3 billion, compared to three (3)
series at December 31, 1995 totaling $0.7 billion.
Interest income on the Collateral increased to $123 million in 1996 from $33
million in 1995, primarily as a result of the increased number of series
outstanding. Interest expense on Bonds also increased from $27 million in 1995
to $110 million in 1996 primarily due to the additional series outstanding.
At December 31, 1996, the Company had securities of approximately $161.2 million
remaining for issuance under a shelf registration statement filed in November
1995 with the Securities and Exchange Commission. During 1996, the Company filed
a shelf registration statement for an additional $2.0 billion in securities
which became effective January 1997. 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 securities market.
Item 2. Properties
The Company has no physical properties.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
Information in response to this Item is omitted pursuant to General Instruction
J.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
All of the Company's outstanding common stock is owned by IHC. Accordingly,
there is no market for its common stock. The Company has paid no dividends with
respect to its common stock.
Item 6. Selected Financial Data
Information in response to this Item is omitted pursuant to General
Instruction J. (See Item 7)
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information in response to this Item is omitted pursuant to General
Instruction J.
Item 8. Financial Statements and Supplementary Data
AUDITED FINANCIAL STATEMENTS
MERIT SECURITIES CORPORATION
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report.............................................5
Balance Sheets - December 31, 1996 and 1995..............................6
Statements of Operations - For the years ended December 31,
1996 and 1995 and for the period from August 19, 1994 (inception) to
December 31, 1994......................................................7
Statements of Shareholder's Equity - For the years ended
December 31, 1996 and 1995 and for the period from August 19, 1994
(inception) to December 31, 1994........................................8
Statements of Cash Flows - For the years ended December 31,
1996 and 1995 and for the period from August 19, 1994 (inception) to
December 31, 1994......................................................9
Notes to Financial Statements - For the years ended December 31, 1996
and 1995 and for the period from August 19, 1994 (inception) to
December 31,1994.................................................... .10
</TABLE>
<PAGE>
Independent Auditors' Report
The Board of Directors
Merit Securities Corporation:
We have audited the accompanying balance sheets of Merit Securities
Corporation as of December 31, 1996 and 1995 and the related statements of
operations, shareholder's equity and cash flows for the years ended December 31,
1996 and 1995 and for the period from August 19, 1994 (inception) to 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Merit Securities Corporation
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years ended December 31, 1996 and 1995 and for the period from
August 19, 1994 (inception) to December 31, 1994 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
March 19, 1997
<PAGE>
MERIT SECURITIES CORPORATION
Balance Sheets
December 31, 1996 and 1995
(amounts in thousands except share data)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Assets:
Collateral for collateralized bonds $2,463,842 $733,978
Prepaid shelf registration fees 849 752
Cash 10 10
========== =========
$2,464,701 $734,740
========== =========
Liabilities and Shareholder's Equity
Liabilities:
Collateralized bonds $2,301,598 $665,240
Due to affiliates 41,973 21,736
---------- ---------
2,343,571 686,976
---------- ---------
Shareholder's Equity:
Common stock, no par value,
10,000 shares authorized,
1,000 issued and outstanding 10 10
Additional paid-in capital 82,136 35,222
Net unrealized gain on investments 60,304 10,313
available-for-sale
Retained earnings (deficit) (21,320) 2,219
--------- ---------
121,130 47,764
========== ==========
$2,464,701 $734,740
========== ==========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
MERIT SECURITIES CORPORATION
Statements of Operations
For the years ended December 31, 1996 and 1995 and for the period from
August 19, 1994 (inception) to December 31, 1994
(amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Collateral for collateralized bonds 123,089 $ 32,675 $ 427
------------ ------------ ------------
Interest and related expense:
Interest expense on 110,401 27,019 374
collateralized bonds
Other collateralized bond 2,757 1,301 13
expense
Provision for losses 2,300 1,800 -
------------ ------------ ------------
115,458 30,120 387
------------ ------------ ------------
Net interest margin 7,631 2,555 40
Other expenses:
Provision for loss on RMC's (29,434) - -
sale of affiliates
Interest on due to affiliates (1,736) (376) -
------------ ------------ ------------
Net income (loss) $ (23,539) $ 2,179 $ 40
============ ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
MERIT SECURITIES CORPORATION
Statements of Shareholder's Equity
For the years ended December 31, 1996 and 1995 and for the period from
August 19, 1994 (inception) to December 31, 1994
(amounts in thousands)
<TABLE>
<CAPTION>
Net
unrealized
gain on
Additional investments Retained
Common paid-in available- earnings
stock capital for-sale (deficit) Total
-------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Common stock issued $ 10 $ - $ - $ - $ 10
Net income - - - 40 40
-------- ---------- ------------ ---------- -------------
Balance at December 31, 1994 10 - - 40 50
Contributed capital - 35,222 - - 35,222
Change in net unrealized
gain on investments - - 10,313 - 10,313
available-for-sale
Net income - - - 2,179 2,179
-------- ---------- ------------ ---------- -----------
Balance at December 31, 1995 10 35,222 10,313 2,219 47,764
Contributed capital - 46,914 - - 46,914
Change in net unrealized
gain on investments - - 49,991 - 49,991
available-for-sale
Net loss - - - (23,539) (23,539)
-------- ---------- ------------ ----------- -----------
Balance at December 31, 1996 $ 10 $ 82,136 $60,304 $ (21,320) $121,130
======== ========== ============ =========== ==========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
MERIT SECURITIES CORPORATION
Statements of Cash Flows
For the years ended December 31, 1996 and 1995 and for the period from
August 19, 1994 (inception) to December 31, 1994
(amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $(23,539) $2,179 $ 40
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating
activities:
Amortization, net 8,407 2,489 (24)
Provision for losses 2,300 1,800 -
Provision for loss on RMC's sale of affiliates 29,434 - -
Increase in accrued interest, net (14,922) (4,751) (39)
Increase in prepaid shelf registration fees (97) (752) -
------------ ------------ -----------
Net cash provided by (used for) 1,583 965 (23)
operating activities ------------ ------------ -----------
Investing activities:
Collateral for collateralized bonds:
Purchase of loans subsequently securitized (2,135,796) (791,735) (78,807)
Principal payments on collateral 433,484 146,532 693
Net change in funds held by trustee (198) (178) -
------------ ------------ -----------
Net cash used for investing activities (1,702,510) (645,381) (78,114)
------------ ------------ ------------
Financing activities:
Collateralized bonds:
Proceeds from issuance of 2,071,285 735,435 76,286
collateralized bonds
Principal payments on collateralized (437,509) (145,434) (692 )
bonds
------------ ------------ -----------
1,633,776 590,001 75,594
Increase in due to affiliates 20,237 19,193 2,543
Proceeds from capital contributions 46,914 35,222 -
Proceeds from issuance of common stock - - 10
------------ ------------ -----------
Net cash provided by financing 1,700,927 644,416 78,147
activities
------------ ------------ -----------
Net increase in cash - - 10
Cash at beginning of period 10 10 -
------------ ------------ -----------
Cash at end of period $ 10 $ 10 $ 10
============ ============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 107,819 $27,669 $401
============ ============ ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
MERIT SECURITIES CORPORATION
Notes to Financial Statements
For the years ended December 31, 1996 and 1995 and for the period from
August 19, 1994 (inception) to December 31, 1994
(amounts in thousands except share data)
NOTE 1 - THE COMPANY
Merit Securities Corporation (the Company) is a wholly-owned,
limited-purpose finance subsidiary of Issuer Holding Corporation, Inc. (IHC).
The Company was organized to facilitate the securitization of loans through the
issuance and sale of collateralized bonds. Prior to September 4, 1996, the
Company was a wholly-owned subsidiary of Resource Mortgage Capital, Inc. (RMC).
On September 4, 1996, IHC acquired all of the outstanding stock of the Company
and certain other affiliates of RMC. IHC is a wholly-owned subsidiary of RMC.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Federal Income Taxes
RMC and its wholly-owned subsidiaries, including the Company, (together,
Resource Mortgage) have elected to be taxed as a real estate investment trust
(REIT) under the Internal Revenue Code. As a result, Resource Mortgage generally
will not be subject to federal income taxation at the corporate level to the
extent that it distributes at least 95 percent of its taxable income to its
shareholders and complies with certain other requirements. Accordingly, no
provision has been made for income taxes for the Company in the accompanying
financial statements, as Resource Mortgage believes it has met the prescribed
distribution requirements.
Collateral for Collateralized Bonds
Collateral for collateralized bonds consists of adjustable-rate and
fixed-rate single-family mortgage loans which have been pledged to secure
collateralized bonds. The loans are carried at their outstanding principal
balance, net of unamortized premiums and discounts.
Pursuant to the requirements of Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities, the
Company has classified all of its collateral for collateralized bonds as
available-for-sale. As such, the collateral for collateralized bonds at December
31, 1996 and 1995 is reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of shareholder's
equity.
Deferred Issuance Costs
Costs incurred in connection with the issuance of collateralized bonds are
deferred and amortized over the estimated lives of the collateralized bonds
using the effective yield method adjusted for the effects of prepayments. These
costs are included in the carrying value of the collateral for collateralized
bonds.
Hedging Instruments
The nature of the Company's investment and financing strategies expose the
Company to interest rate risk. Interest rate cap agreements may be utilized to
limit the Company's risks related to the financing of collateral for
collateralized bonds should short-term interest rates rise above specified
levels. The amortization of the cost of such interest rate cap agreements will
reduce net interest margin on the collateral for collateralized bonds over the
lives of the interest rate cap agreements. The remaining unamortized cost is
included with collateral for collateralized bonds in the consolidated balance
sheets. The Company may also enter interest rate swaps to moderate the interest
rate risks inherent in the 1-month London Interbank Offered Rate (LIBOR) based
financing of its collateral for collateralized bonds. Revenues and costs
associated with interest rate swaps are recorded as adjustments to interest
expense on the financing obligation being hedged.
<PAGE>
Price Premiums and Discounts
Price premiums and discounts on the collateral for collateralized bonds and the
collateralized bonds are deferred as an adjustment to the basis of the related
collateral or bond and are amortized into interest income or expense,
respectively, over the lives of the related collateral or bond using the
effective yield method adjusted for the effects of prepayments.
Use of Estimates
Fair Value. The Company uses estimates in establishing fair value for its
collateral for collateralized bonds. Fair value estimates are determined by
calculating the present value of the projected net cash flows of the instruments
using appropriate discount rates and credit loss assumptions. The discount rates
used are based on management's estimates of market rates, and the net cash flows
are projected utilizing the current interest rate environment and forecasted
prepayment rates. Since the fair value of the Company's collateral for
collateralized bonds is based on estimates, actual gains and losses recognized
may differ from those estimates recorded in the financial statements. The fair
value of all on- and off- balance sheet financial instruments is presented in
Notes 3 and 6.
Allowance for losses. As discussed in Note 4, the Company has retained
credit risk on certain collateral for collateralized bonds. The Company has
established an allowance for losses for the estimated credit risk retained based
on management's judgment. The allowance for losses is evaluated and adjusted
periodically by management based on the actual and projected timing and amount
of the potential credit losses, as well as industry loss experience. Provisions
made to increase the allowance related to the credit risk retained is presented
as "Provision for Losses" in the accompanying financial statements. The
Company's actual credit losses may differ from those estimates used to establish
the allowance.
Prepaid Shelf Registration Fees
Fees incurred in connection with filing a shelf for the issuance of
collateralized bonds are deferred and recognized with each securitization
prorata to the size of the issuance.
Basis of Presentation
Certain amounts for 1995 and 1994 have been reclassified to conform to the
presentation for 1996.
NOTE 3 - COLLATERAL FOR COLLATERALIZED BONDS
The following table summarizes the Company's amortized cost basis and fair value
of collateral for collateralized bonds classified as available-for-sale at
December 31, 1996 and 1995, and the related average effective interest rates
(calculated for the month ended December 31, 1996 and 1995, and excluding
unrealized gains and losses):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
Effective Effective
Fair Interest Fair Interest
Value Rate Value Rate
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateral for
collateralized bonds:
Amortized cost $2,435,270 7.5% $ 725,465 8.3%
Allowance for losses (31,732) (1,800)
---------- ----------
Amortized cost, net 2,403,538 723,665
Gross unrealized gains 68,557 11,617
Gross unrealized losses (8,253) (1,304)
- ------------------------------------------------------------------------------
$2,463,842 $ 733,978
- ------------------------------------------------------------------------------
</TABLE>
Collateral for collateralized bonds consists of adjustable-rate and fixed-rate
loans secured by first liens on single-family residential housing. All
collateral for collateralized bonds is pledged to secure repayment of the
collateralized bonds. All principal and interest (less servicing related fees)
on the collateral is remitted directly to a trustee and is available for payment
on the collateralized bonds.
<PAGE>
The components of collateral for collateralized bonds at December 31,1996 and
1995 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Mortgage collateral, net of
allowance $2,329,721 $698,325
Funds held by trustees 377 178
Accrued interest receivable 16,877 5,661
Unamortized premiums and discounts, 53,950 17,866
net
Deferred issuance costs 2,613 1,635
Unrealized gain 60,304 10,313
- ------------------------------------------------------------
$2,463,842 $733,978
- -------------------------------------------------------------
</TABLE>
NOTE 4 - ALLOWANCE FOR LOSSES ON COLLATERAL FOR COLLATERALIZED BONDS
The following table summarizes the activity for the allowance for losses on
collateral for collateralized bonds for the years ended December 31, 1996 and
1995:
<TABLE>
<CAPTION>
- --------------------------------------------------------
1996 1995
- --------------------------------------------------------
<S> <C> <C>
Beginning balance $ 1,800 $ -
Provision for losses 2,300 1,800
Provision for loss on RMC's sale
of affiliates 29,434 -
Losses charged-off, net
(1,802) -
- --------------------------------------------------------
$31,732 $ 1,800
- --------------------------------------------------------
</TABLE>
The Company has limited exposure to credit risk retained on loans which it has
securitized through the issuance of collateralized bonds. The aggregate loss
exposure is generally limited to the Company's net investment in these
collateralized bonds, excluding price premiums and discounts and hedge gains and
losses. The Company only incurs credit losses to the extent that losses are
incurred in the repossession, foreclosure and sale of the underlying collateral.
Such losses generally equal the excess of the principal amount outstanding plus
servicer advances, less any proceeds from mortgage or hazard insurance, over the
liquidation value of the collateral. An allowance for losses, which is based on
industry and Company experience, has been established and adjusted periodically
for estimated potential losses over the expected life of these securities. The
allowance for losses for collateralized bonds is included in collateral for
collateralized bonds in the accompanying consolidated balance sheets.
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. (NYSE:D). Included in the affiliates sold was Meritech Mortgage
Services, Inc. (Meritech), the servicer for a significant portion of the
Company's collateral for collateralized bonds. As a result of this sale, the
Company recorded a $29.4 million provision for possible losses for those loans
pledged as collateral for collateralized bonds which were serviced by Meritech,
and where the Company has retained the credit risk. As part of the 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 collateralized bonds 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 collateralized bond issued by the Company.
<PAGE>
NOTE 5 - COLLATERALIZED BONDS
The components of collateralized bonds along with certain other information at
December 31, 1996 and 1995 are summarized below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
1996 1995
-----------------------------------------------------------------------------------
Bonds Range of Bonds Range of
Outstanding Interest Rates Outstanding Interest Rates
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable-rate $ 1,922,021 5.6% - 6.0% $ 578,967 6.1% - 6.4%
classes
Fixed-rate classes 351,843 6.2% - 15.0% 79,466 15.0%
Accrued interest 4,680 1,299
payable
Unamortized premium 23,054 5,508
-----------------------------------------------------------------------------------
$ 2,301,598 $665,240
-----------------------------------------------------------------------------------
Range of stated 2028-2030 2028-2029
maturities
Number of series 6 3
-----------------------------------------------------------------------------------
</TABLE>
Each series of collateralized bonds may consist of various classes of bonds,
either at fixed or variable rates of interest. Payments received on the loans
pledged as collateral for collateralized bonds and any reinvestment income
thereon are used to make payments on the collateralized bonds (see Note 3). The
obligations under the collateralized bonds are payable solely from the
collateral for collateralized bonds and are otherwise non-recourse to the
Company. The maturity of each class is directly affected by the rate of
principal prepayments on the related mortgage collateral. Each series is also
subject to redemption according to specific terms of the respective indentures.
As a result, the actual maturity of any class of a collateralized bonds series
is likely to occur earlier than its stated maturity.
The variable rate classes are based on LIBOR. The average effective rate of
interest expense for collateralized bonds was 7.3%, 7.6% and 5.9% for the years
ended December 31, 1996 and 1995 and for the period from August 19, 1994
(inception) to December 31, 1994, respectively.
The carrying value of the collateralized bonds approximates fair value at
December 31, 1996 and 1995.
NOTE 6 - ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS
The following table presents the carrying values and estimated fair values of
the Company's recorded financial instruments, as well as information about
certain specific off-balance sheet financial instruments as of December 31, 1996
and 1995:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------------
Notional Notional
Amount Cost Basis Fair Value Amount Cost Basis Fair Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Recorded financial instruments:
Assets:
Collateral for $ - $ 2,394,925 $ 2,461,636 $ - $723,665 $ 733,978
collateralized bonds
Interest rate cap 351,000 8,613 2,206 - - -
agreements
Cash - 10 10 - 10 10
Liabilities:
Collateralized bonds - 2,301,598 2,301,598 - 665,240 665,240
Off-balance sheet financial instruments:
Interest rate swap agreements:
Collateralized bonds 432,801 - 334 213,450 - (3,898)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The estimated fair values of financial instruments have been determined using
available market information and appropriate valuation methodologies. However, a
degree of judgment is necessary in evaluating market data and forming these
estimates.
Recorded Financial Instruments. The carrying amount of cash and liabilities
considered to be financial instruments approximates fair value at December 31,
1996 and 1995. As discussed in Note 2, the fair value of the collateral for
collateralized bonds is based on the present value of the projected net cash
flows using appropriate discount rates and prepayment assumptions.
During 1996, the Company purchased LIBOR-based interest rate agreements to
limit its exposure to the lifetime interest rate caps on certain of its
collateral for collateralized bonds. Under these agreements, the Company will
receive additional cash flow should the related index increase above the
contracted rates. Contract rates on these cap agreements range from 9.0% to
10.5%, with expiration dates ranging from 2000 to 2003.
Off-Balance Sheet Financial Instruments. The Company may enter into various
interest rate swap agreements to limit its exposure to changes in financing
rates of certain collateralized bonds. The Company has entered into a 5-year
amortizing interest rate swap agreement related to variable-rate collateralized
bond classes financing fixed-rate collateral for collateralized bonds. The
remaining notional amount of the agreement is $178,045. Under the terms of this
agreement, the Company receives 1-month LIBOR and pays 6.15%. This agreement
expires in 2000. The Company has also entered into a 7-year amortizing interest
rate swap agreement with remaining notional of $254,756 related to prime-based
loans financed with LIBOR-based variable-rate collateralized bonds. Under the
terms of the agreement, the Company receives 1-month LIBOR plus 2.65% and pays
1-month average prime in effect 3 months prior.
NOTE 7 - CONTRIBUTED CAPITAL
Contributed capital represents IHC's net contribution of collateral for
collateralized bonds in excess of the related collateralized bonds issued.
NOTE 8 - OTHER MATTERS
At December 31, 1996 and 1995, the Company had remaining $0.2 billion and $2.2
billion respectively, for issuance under shelf registration statements filed
with the Securities and Exchange Commission. During 1996, the Company filed a
shelf registration statement for an additional $2.0 billion in securities which
became effective January 1997.
<PAGE>
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure:
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Information in response to this Item is omitted pursuant to
General Instruction J.
Item 11. Executive Compensation
Information in response to this Item is omitted pursuant to
General Instruction J.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information in response to this Item is omitted pursuant to
General Instruction J.
Item 13. Certain Relationships and Related Transactions
Information in response to this Item is omitted pursuant to
General Instruction J.
PART IV
Item 14. Exhibits, Financial Statement Schedules 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).
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).
23.1 Consent of KPMG Peat Marwick LLP (filed herewith).
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)
By: /s/ Stephen J. Benedetti
______________________________
Stephen J. Benedetti
(Principal Financial & Accounting Officer)
Dated: March 31, 1997
Pursuant to the requirements of the Securities and 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 Capacity Date
/s/ Thomas H. Potts Director March 31, 1997
- --------------------------
Thomas H. Potts
/s/ J. Thomas O'Brien Director March 31, 1997
- ---------------------------
J. Thomas O'Brien
/s/ William H. West, Jr. Director March 31, 1997
- ---------------------------
William H. West, Jr.
/s/ John C. Stevenson, Jr. Director March 31, 1997
- ---------------------------
John C. Stevenson, Jr.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered Page
<S> <C> <C>
23.1 Consent of KPMG Peat Marwick LLP I
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
Merit Securities Corporation
We consent to incorporation by reference in the registration statements (Nos.
33-99316 and Nos. 333-15539) on Form S-3 of Merit Securities Corporation of our
report dated March 19, 1997, relating to the balance sheets of Merit Securities
Corporation as of December 31, 1996 and 1995 and the related statements of
operations, shareholder's equity and cash flows and for the years ended December
31, 1996, 1995 and for the period from August 19, 1994 (inception) to December
31, 1994, which report appears in the December 31, 1996 Form 10-K of Merit
Securities Corporation.
KPMG PEAT MARWICK LLP
Richmond, Virginia
March 31, 1997
<TABLE> <S> <C>
<CAPTION>
<S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 10
<SECURITIES> 2,463,842
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,464,701
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2,301,598
0
0
<COMMON> 10
<OTHER-SE> 121,120
<TOTAL-LIABILITY-AND-EQUITY> 2,464,701
<SALES> 0
<TOTAL-REVENUES> 123,089
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,493
<LOSS-PROVISION> 31,734
<INTEREST-EXPENSE> 110,401
<INCOME-PRETAX> (23,539)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,539)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,539)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> The Company's balance sheet is unclassified.
</FN>
</TABLE>
