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, 1997
[ ] 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
(State or other jurisdiction of incorporation or organization)
54-1736551
(IRS Employer Identification No.)
10900 Nuckols Road, 3rd Floor, Glen Allen, Virginia 23060
(Address or principal executive office (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, 1998: NONE
As of February 28, 1998, 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
1997 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 3
Item 6. Selected Financial Data 3
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 4
Item 8. Financial Statements and Supplementary Data 5
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure 16
PART III.
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners and Management 16
Item 13. Certain Relationships and Related Transactions 16
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
SIGNATURES 20
</TABLE>
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
Dynex Capital, Inc. ("Dynex"), formerly known as Resource Mortgage Capital, Inc.
On September 4, 1996, 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 by securities backed 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) other mortgage pass-through
certificates or mortgage-collateralized obligations and (vi) consumer
installment loans (collectively, the "Collateral"). In the future, the Company
may also securitize other types of 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, 1997, the Company has issued
ten (10) series of Bonds totaling approximately $5.3 billion aggregate principal
amount. Three of these series were subsequently called and/or collapsed and
included in subsequent issuances. As of December 31, 1997, the Company had seven
(7) series of Bonds outstanding totaling approximately $3.6 billion, compared to
six (6) series at December 31, 1996 totaling $2.3 billion.
At December 31, 1997, the Company had securities of approximately $867.8
million remaining for issuance under a shelf registration statement filed in
December 1997 with the Securities and Exchange Commission. During 1997, the
Company filed a shelf registration statement for an additional $1.0 billion in
securities which became effective December 8, 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.
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.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
<TABLE>
<CAPTION>
- --------------------------------------------------- ----------------------------------------------
December 31,
----------------------------------------------
(amounts in thousands) 1997 1996
- --------------------------------------------------- ---------------- ------------ ----------------
<S> <C> <C>
Collateral for collateralized bonds $ 3,835,289 $ 2,464,469
Non-recourse debt - collateralized bonds 3,622,877 2,298,985
Shareholder's Equity 168,967 121,130
Collateralized bond series outstanding 7 6
- --------------------------------------------------- -- ------------- ------------ - --------------
</TABLE>
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 and
securities through the issuance and sale of collateralized bonds. Prior to
September 4, 1996, the Company was a wholly-owned subsidiary of Dynex Capital,
Inc. ("Dynex"), formerly Resource Mortgage Capital, Inc. On September 4, 1996,
IHC acquired all of the outstanding stock of the Company and certain other
affiliates of Dynex. IHC is a wholly-owned subsidiary of Dynex.
Collateral for collateralized bonds As of December 31, 1997, the Company
had 7 series of collateralized bonds outstanding. The collateral for
collateralized bonds increased to $3.8 billion at December 31, 1997 compared to
$2.5 billion at December 31, 1996. This increase of $1.3 billion is the result
of the addition of $2.3 billion of collateral related to the issuance of two
series of collateralized bonds in 1997 net of $0.9 billion in paydowns of
collateral.
Non-recourse debt-collateralized bonds. Collateralized bonds increased to
$3.6 billion at December 31, 1997 from $2.3 billion at December 31, 1996 as a
result of the issuance of $2.2 billion of collateralized bonds during 1997. Two
series of collateralized bonds were collateralized by securities secured by
single-family mortgage loans and manufactured housing loans. One of these series
included collateral from a previously issued collateralized bond, which was
called in 1997. All series of collateralized bonds issued by the Company include
provisions to call the outstanding bonds once the remaining amount outstanding
is equal to or less than 35% of its original balance.
Shareholder's Equity Shareholder's equity increased to $169.0 million at
December 31, 1997 from $121.1 million at December 31, 1996. This increase was
primarily the result of a $43.8 million capital contribution from IHC. In
addition, the net unrealized gain on investments available-for-sale increased
$4.4 million from $60.3 million at December 31, 1996 to $64.7 million at
December 31, 1997, primarily due to the growth in collateral for collateralized
bonds.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
----------------------------------------------------------
(amounts in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 181,690 $ 123,089 $ 32,675
Interest expense (173,096 ) (110,401 ) (27,019 )
Net interest margin 2,363 7,631 2,555
Provision for loss on Dynex's sale of affiliates - (29,434 ) -
Net (loss) income (382 ) (23,539 ) 2,179
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Interest income on the collateral for collateralized bonds increased to
$181.7 million in 1997 from $123.1 million in 1996 and $32.7 in 1995, primarily
as a result of the increased number of series outstanding. Two series with
collateral totaling $2.3 billion, were issued during 1997 and three series with
$2.1 billion of collateral, were issued during 1996.
Interest expense on collateralized bonds also increased to $173.1 million
in 1997 from $110.4 million and $27.0 million in 1996 and 1995, respectively,
primarily due to the additional series outstanding. During 1997, two series of
bonds were issued, totaling $2.2 billion while three series of bonds, totaling
$2.1 billion, were issued during 1996.
Net interest margin in 1997 decreased to $2.4 million, or 69%, from $7.6
million in 1996. This decrease was primarily the result of the securitization of
lower coupon collateral, principally A+ quality single-family ARM loans during
1997, coupled with the prepayments of higher coupon collateral during 1997. Net
interest margin increased to $7.6 million in 1996 from $2.6 million in 1995.
This increase was due to the spread earned on the three series of collateralized
bonds issued during 1996.
As a result of the Dynex's sale of Meritech Mortgage Services, Inc.
(Meritech), the servicer for a significant portion of the Company's collateral
for collateralized bonds, the Company recorded during 1996 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.
Credit Exposures With collateralized bond structures, the Company retains
credit risk relative to the amount of overcollateralization required in
conjunction with the bond insurance. Losses are generally first applied to the
overcollateralized amount, with any losses in excess of that amount borne by the
bond insurer or the holders of the collateralized bonds. 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, less any proceeds from mortgage
or hazard insurance, over the liquidation value of the collateral. To compensate
the Company for retaining this loss exposure, the Company generally receives an
excess yield on the collateralized loans relative to the yield on the
collateralized bonds. At December 31, 1997, the Company retained $112.9 million
in aggregate principal amount of overcollateralization compared to $88.0 million
at December 31, 1996. The Company had reserves, or otherwise had provided
coverage on $55.1 million and $62.1 million of this potential credit loss
exposure at December 31, 1997 and 1996, respectively. $30.3 million of this
reserve amount is in the form of a loss reimbursement guarantee from a
third-party rated A by Standards & Poors Ratings Services, Inc.
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
AUDITED FINANCIAL STATEMENTS
MERIT SECURITIES CORPORATION
<S> <C>
Independent Auditors' Report...........................................6
Balance Sheets - December 31, 1997 and 1996............................7
Statements of Operations - For the years ended December 31, 1997,1996 and
1995.....................8
Statements of Shareholder's Equity - For the years ended December 31, 1997, 1996
1995..........9
Statements of Cash Flows - For the years ended December 31, 1997, 1996 and
1995....................10
Notes to Financial Statements - For the years ended December 31, 1997, 1996 and,
1995..............11
</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, 1997 and 1996 and the related statements of
operations, shareholder's equity and cash flows for each of the years in the
three years ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three years ended December 31, 1997 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
March 24, 1998
<PAGE>
<TABLE>
<CAPTION>
MERIT SECURITIES CORPORATION
Balance Sheets
December 31, 1997 and 1996
(amounts in thousands except share data)
1997 1996
------------------ ------------------
<S> <C> <C>
Assets:
Collateral for collateralized bonds $ 3,835,289 $ 2,464,469
Prepaid shelf registration fees 334 849
Cash 10 10
================== ====================
$ 3,835,633 $ 2,465,328
================== ====================
Liabilities and Shareholder's Equity
Liabilities:
Non-recourse debt - collateralized bonds $ 3,622,877 $ 2,298,985
Due to affiliates 43,789 45,213
------------------ --------------------
3,666,666 2,344,198
------------------ --------------------
Shareholder's Equity:
Common stock, no par value,
10,000 shares authorized,
1,000 issued and outstanding 10 10
Additional paid-in capital 125,952 82,136
Net unrealized gain on investments available-for-sale 64,707 60,304
Accumulated deficit (21,702 ) (21,320 )
-------------- -------------
168,967 121,130
================== ==============
$ 3,835,633 $ 2,465,328
================== ==================
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERIT SECURITIES CORPORATION
Statements of Operations
For the years ended December 31, 1997, 1996 and 1995
(amounts in thousands)
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Interest income:
Collateral for collateralized bonds $ 181,690 $ 123,089 $ 32,675
--------------- --------------- -----------------
Interest and related expense:
Interest expense on collateralized bonds 173,096 110,401 27,019
Other collateralized bond expense 3,431 2,757 1,301
------------------- ------------------- -------------------
176,527 113,158 28,320
------------------- ------------------- -------------------
Net interest margin before provision for losses 5,163 9,931 4,355
Provision for losses (2,800) (2,300) (1,800)
------------------- ------------------- -------------------
Net interest margin 2,363 7,631 2,555
Other expenses:
Provision for loss on Dynex's sale of - (29,434) -
affiliates
Interest on due to affiliates (2,745) (1,736) (376)
------------------ --------------- -----------------
Net (loss) income $ (382) $ (23,539) $ 2,179
=================== =================== ====================
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
MERIT SECURITIES CORPORATION
Statements of Shareholder's Equity
For the years ended December 31, 1997, 1996 and 1995
(amounts in thousands)
<TABLE>
<CAPTION>
Net unrealized
gain on Retained
Additional investments earnings
Common paid-in available-for-sale (accumulated
stock capital deficit) Total
------------ -------------- ---------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 10 $ - $ - $ 40 $ 50
Contributed capital 35,222 - - 35,222
-
Change in net unrealized gain on
investments available-for-sale - - 10,313 - 10,313
Net income - - 2,179 2,179
-
-------- ----------- ------------- ------------ ----------
Balance at December 31, 1995 35,222 10,313 2,219 47,764
10
Contributed capital 46,914 - - 46,914
-
Change in net unrealized gain on
investments available-for-sale - - 49,991 - 49,991
Net loss - - ( 23,539 ) ( 23,539 )
-
-------- ----------- ------------- ------------ ----------
Balance at December 31, 1996 10 82,136 60,304 (21,320 ) 121,130
Contributed capital - 43,816 - - 43,816
Change in net unrealized gain on
investments available-for-sale - - 4,403 - 4,403
Net loss - - - (382 ) (382 )
--- -------- -- ----------- -- ------------- -- ------------ -- ----------
Balance at December 31, 1997 $ 10 $ 125,952 $ 64,707 $ (21,702 ) $ 168,967
=== ======== == =========== == ============= == ============ == ==========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
MERIT SECURITIES CORPORATION
Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
(amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (382) (23,539) 2,179
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for losses 2,800 2,300 1,800
Provision for loss on Dynex's sale of affiliates - 29,434 -
Amortization, net 20,440 8,407 2,489
Net change in prepaid shelf registration fees 515 (97) (752)
Other 368 1,125 (429)
----------------- ----------------- -----------------
Net cash provided by operating activities 23,741 17,630 5,287
----------------- ----------------- -----------------
Investing activities:
Collateral for collateralized bonds:
Purchase of loans subsequently securitized (2,300,444) (2,135,796) (791,735)
Principal payments on collateral 916,580 433,484 146,532
Increase in accrued interest receivable (8,358) (11,216) (5,114)
Net change in funds held by trustee 377 (198) (178)
----------------- ----------------- -----------------
Net cash used for investing activities (1,391,845) (1,713,726) (650,495)
----------------- ----------------- -----------------
Financing activities:
Collateralized bonds:
Proceeds from issuance of collateralized bonds 2,243,324 2,071,285 735,435
Principal payments on collateralized bonds (919,370) (437,509) (145,434)
Increase in accrued interest payable 1,758 3,381 792
(Decrease) increase in due to affiliates (1,424) 12,025 19,193
Proceeds from capital contributions 43,816 46,914 35,222
----------------- ----------------- -----------------
Net cash provided by financing activities 1,368,104 1,696,096 645,208
----------------- ----------------- -----------------
Net increase in cash - - -
Cash at beginning of year 10 10 10
--------------
----------------- ----------------- ----
Cash at end of year $ 10 $ 10 $ 10
================= ================= =================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 172,853 107,819 27,669
================= ================= =================
Supplemental disclosure of non-cash activities:
Purchase of interest rate agreements from affiliate $ - $ 11,452 $ -
================= ================= =================
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
MERIT SECURITIES CORPORATION
Notes to Financial Statements
For the years ended December 31, 1997, 1996 and 1995
(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 Dynex Capital, Inc. ("Dynex"), formerly
Resource Mortgage Capital, Inc. On September 4, 1996, IHC acquired all of the
outstanding stock of the Company and certain other affiliates of Dynex. IHC is a
wholly-owned subsidiary of Dynex.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Federal Income Taxes Dynex and its wholly-owned subsidiaries, including the
Company, (together, "Dynex Capital") have elected to be taxed as a real estate
investment trust ("REI") under the Internal Revenue Code. As a result, Dynex
Capital 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 Dynex Capital believes it has met the
prescribed distribution requirements.
Collateral for Collateralized Bonds Collateral for collateralized bonds
consists of securities which have been pledged to secure collateralized bonds.
These securities are backed by single-family mortgage loans and manufactured
housing installment loans.
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, 1997 and 1996 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 a method that approximates the effective yield
method. These costs are included in the carrying value of the collateralized
bonds.
Price Premiums and Discounts Price premiums and discounts on the collateral
for collateralized bonds and the collateralized bonds are amortized into
interest income or expense, respectively, over the life of the related
investment or obligation using a method that approximates the effective yield
method.
Derivative Financial Instruments The Company enters into interest rate swap
agreements and interest rate cap agreements ("Interest Rate Agreements") to
manage its sensitivity to changes in interest rates. These Interest Rate
Agreements are intended to provide income and cash flow to offset potential
reduced net interest income and cash flow under certain interest rate
environments. The Company has designated these instruments as hedge positions.
The Company evaluates the effectiveness of these hedges against the
financial instrument being hedged under various interest rate scenarios. The
revenues and costs associated with interest rate swap agreements are recorded as
adjustments to interest expense on the collateralized bonds being hedged. For
interest rate cap agreements, the amortization of the cost of the agreements is
recorded as a reduction in the net interest margin on the collateral for
collateralized bonds. The unamortized cost is included in the carrying amount of
the collateral for collateralized bonds. These Interest Rate Agreements are
carried at fair value, with unrealized gains and losses reported as a separate
component of shareholder's equity.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates. The primary estimates
inherent in the accompanying consolidated financial statements are discussed
below.
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 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 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 1996 and 1995 have been
reclassified to conform to the presentation for 1997.
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, 1997 and 1996, and the related average effective interest rates
(calculated for the month ended December 31, 1997 and 1996, and excluding
unrealized gains and losses):
<TABLE>
<CAPTION>
- ------------------------------------------ --------------------------------- ---- ---------------------------------
1997 1996
- ------------------------------------------ ----------------- -- ------------ ---- ----------------- -- ------------
Effective Effective
Interest Interest
Fair Value Rate Fair Value Rate
- ------------------------------------------ ----------------- -- ------------ ---- ----------------- -- ------------
<S> <C> <C> <C> <C>
Collateral for collateralized bonds:
Amortized cost $ 3,795,393 7.2% $ 2,435,897 7.5%
Allowance for losses (24,811 ) (31,732 )
--- ------------- --------------
Amortized cost, net 3,770,582 2,404,165
Gross unrealized gains 77,973 68,557
Gross unrealized losses (13,266 ) (8,253 )
- ------------------------------------------ --- ------------- -- ------------ ---- -- -------------- -- ------------
$ 3,835,289 $ 2,464,469
- ------------------------------------------ --- ------------- -- ------------ ---- -- -------------- -- ------------
</TABLE>
Collateral for collateralized bonds consists of securities backed by
adjustable-rate and fixed-rate mortgage loans secured by first liens on
singlefamily residential housing, as well as manufactured housing installment
loans secured by either a UCC filing or a motor vehicle title. All collateral
for collateralized bonds is pledged to secure repayment of the related
collateralized bonds. All principal and interest (less servicing-related fees)
on the collateral is remitted to a trustee and is available for payment on the
collateralized bonds. The Company's exposure to loss on collateral for
collateralized bonds is generally limited to the amount of collateral pledged in
excess of the related collateralized bonds issued, as the collateralized bonds
issued are non-recourse to the Company. The collateral for collateralized bonds
can be sold by the Company, but only subject to the lien of the collateralized
bond indenture.
<PAGE>
The components of collateral for collateralized bonds at December 31,1997
and 1996 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------- ------------------ --- ------------------
1997 1996
- ----------------------------------------------------- ------------------ --- ------------------
<S> <C> <C>
Collateral, net of allowance $ 3,681,789 $ 2,329,721
Funds held by trustees - 377
Accrued interest receivable 25,235 16,877
Unamortized premiums and discounts, net 63,558 57,190
Unrealized gain, net 64,707 60,304
- ----------------------------------------------------- -- --------------- --- -- ---------------
$ 3,835,289 $ 2,464,469
- ----------------------------------------------------- -- --------------- --- -- ---------------
</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, 1997 and
1996:
<TABLE>
<CAPTION>
- ------------------------------------------------------ --------------- -- ---------------
1997 1996
- ------------------------------------------------------ --------------- -- ---------------
<S> <C> <C>
Beginning balance $ 31,732 $ 1,800
Provision for losses 2,800 2,300
Provision for loss on Dynex's sale of affiliates - 29,434
Losses charged-off, net (9,721 ) (1,802 )
- ------------------------------------------------------ --- ----------- -- --- -----------
$ 24,811 $ 31,732
- ------------------------------------------------------ --- ----------- -- --- -----------
</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 is included in collateral for collateralized bonds in the
accompanying consolidated balance sheets.
On May 13, 1996, Dynex completed the sale of various Dynex 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 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, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------- ------------------------------------ --- --------------------------------------
Bonds Range of Bonds Outstanding Range of
Outstanding Interest Rates Interest Rates
- ----------------------------- ----------------- -- --------------- --- ------------------ -- ----------------
<S> <C> <C> <C> <C>
Variable-rate classes $ 3,192,049 5.9%-7.7% $ 1,922,021 5.6% - 6.0%
Fixed-rate classes 401,893 6.2%-15.0% 351,843 6.2%-15.0%
Accrued interest payable 6,438 4,680
Deferred bond issuance costs (2,918 ) (2,613)
Unamortized premium 25,415 23,054
- ----------------------------- -- -------------- -- --------------- --- -- --------------- -- ----------------
$ 3,622,877 $ 2,298,985
- ----------------------------- -- -------------- -- --------------- --- -- --------------- -- ----------------
Range of stated maturities 2016-2031 2028- 2030
Number of series 7 6
- ---------------------------- -- -------------- -- --------------- --- -- --------------- -- ----------------
</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. Collateralized bonds are
carried at their outstanding principal balance, net of unamortized premiums and
discounts.
The variable rate classes are based on one-month London InterBank Offered
Rate ("LIBOR"). The average effective rate of interest expense for
collateralized bonds was 7.2%, 7.3% and 7.1% for the years ended December 31,
1997, 1996 and 1995, respectively.
NOTE 6 - ADDITIONAL INFORMATION ABOUT FINANCIAL INTRUMENTS
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, 1997
and 1996:
<TABLE>
<CAPTION>
- ------------------------------------- --------------------------------------- --- -----------------------------------------
1997 1996
- ------------------------------------- ----------- ------------- ------------- --- ----------- -------------- --------------
Notional Amortized Notional Amortized
Amount Cost Fair Value Amount Cost Fair Value
- ------------------------------------- ----------- ------------- ------------- --- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Recorded financial instruments:
Assets:
Collateral for collateralized bonds $ - $ 3,761,518 $ 3,834,465 $ - $ 2,394,533 $ 2,462,263
Interest rate cap agreements 351,000 9,064 824 351,000 9,632 2,206
Cash - 10 10 - 10 10
Liabilities:
Collateralized bonds - 3,622,877 3,605,158 - 2,298,985 2,282,718
Off-balance sheet financial instruments:
Interest rate swap agreements:
Collateralized bonds 333,644 - (870) 432,801 - 334
- ------------------------------------- -- -------- -- ---------- -- ---------- --- -- -------- --- ----------- -- ----------
</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 approximates
fair value at December 31, 1997 and 1996. The fair value of the collateral for
collateralized bonds is based on the present value of the projected cash flows
using appropriate discount rates, credit loss 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 8.0% to
9.5%, with expiration dates ranging from 1999 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 $148,513. Under the terms of this
agreement, the Company receives one-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 $185,131 related to prime-based
loans financed with LIBOR-based variable-rate collateralized bonds. Under the
terms of the agreement, the Company receives one-month LIBOR plus 2.65% and pays
one-month average prime in effect 3 months prior.
NOTE 7 - DUE TO AFFILIATES
At December 31, 1997 and 1996, amounts due from affiliates consisted of
amounts borrowed from IHC and Dynex under demand promissory notes. Amounts due
to IHC and Dynex totaled $40,457 and $3,332 at December 31, 1997, respectively.
At December 31, 1996, amounts due to IHC totaled $970,127 and amounts due from
Dynex totaled $924,914. The Company had net interest expense related to these
demand promissory notes of $2,745 and $1,736 during 1997 and 1996, respectively.
NOTE 8 - CONTRIBUTED CAPITAL
Contributed capital represents IHC's net contribution of collateral for
collateralized bonds in excess of the related collateralized bonds issued.
During 1997 and 1996, capital contributions totaled $43,816 and $46,914,
respectively.
NOTE 9 - OTHER MATTERS
At December 31, 1997 and 1996, the Company had remaining $0.9 billion and
$0.2 billion respectively, for issuance under shelf registration statements
filed with the Securities and Exchange Commission. During 1997, the Company
filed a shelf registration statement for an additional $1.0 billion in
securities which became effective December 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).
4.12 Copy of the Series 9 Indenture Supplement, dated as of June 1, 1997,
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 July 11, 1997).
4.13 Copy of the Series 10 Indenture Supplement, dated as of December 1,
1997, 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 January 6, 1998).
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 December 30,
1997, relating to the Registrant's Series 6 Bonds.
Current Report on Form 8-K as filed with the Commission on December 30,
1997, relating to the Registrant's Series 7 Bonds.
Current Report on Form 8-K as filed with the Commission on December 30,
1997, relating to the Registrant's Series 8 Bonds.
Current Report on Form 8-K as filed with the Commission on December 30,
1997, relating to the Registrant's Series 9 Bonds.
Current Report on Form 8-K as filed with the Commission on January 6, 1998,
relating to the Registrant's Series 10 Bonds.
Current Report on Form 8-K as filed with the Commission on February 10,
1998, relating to the Registrant's Series 6 Bonds.
Current Report on Form 8-K as filed with the Commission on February 10,
1998, relating to the Registrant's Series 7 Bonds.
Current Report on Form 8-K as filed with the Commission on February 10,
1998, relating to the Registrant's Series 8 Bonds.
Current Report on Form 8-K as filed with the Commission on February 10,
1998, relating to the Registrant's Series 9 Bonds.
Current Report on Form 8-K as filed with the Commission on February 10,
1998, relating to the Registrant's Series 10 Bonds.
Current Report on Form 8-K as filed with the Commission on March 11, 1998,
relating to the Registrant's Series 6 Bonds.
Current Report on Form 8-K as filed with the Commission on March 11, 1998,
relating to the Registrant's Series 7 Bonds.
Current Report on Form 8-K as filed with the Commission on March 11, 1998,
relating to the Registrant's Series 8 Bonds.
Current Report on Form 8-K as filed with the Commission on March 11, 1998,
relating to the Registrant's Series 9 Bonds.
Current Report on Form 8-K as filed with the Commission on March 11, 1998,
relating to the Registrant's Series 10 Bonds.
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 30, 1998
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.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
/s/ Thomas H. Potts Director March 30, 1998
- ------------------- -------- --------------
Thomas H. Potts
/s/ J. Thomas O'Brien, Jr. Director March 30, 1998
- -------------------------- -------- --------------
J. Thomas O'Brien, Jr.
/s/ William H. West, Jr. Director March 30, 1998
- ------------------------ -------- --------------
William H. West, Jr.
/s/ John C. Stevenson, Jr. Director March 30, 1998
- -------------------------- -------- --------------
John C. Stevenson, Jr.
</TABLE>
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered Page
23.1 Consent of KPMG Peat Marwick LLP I
<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, Nos. 333-15539 and Nos. 333-40951) on Form S-3 of Merit
Securities Corporation of our report dated March 24, 1998, relating to the
balance sheets of Merit Securities Corporation as of December 31, 1997 and 1996
and the related statements of operations, shareholder's equity and cash flows
for each of the years in the three years ended December 31, 1997, which report
appears in the December 31, 1997 Form 10-K of Merit Securities Corporation.
KPMG PEAT MARWICK LLP
Richmond, Virginia
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000929426
<NAME> Merit Securities Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 10
<SECURITIES> 3,835,289
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,835,633
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 3,622,877
0
0
<COMMON> 10
<OTHER-SE> 168,957
<TOTAL-LIABILITY-AND-EQUITY> 3,835,633
<SALES> 0
<TOTAL-REVENUES> 181,690
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,176
<LOSS-PROVISION> 2,800
<INTEREST-EXPENSE> 173,096
<INCOME-PRETAX> (382)
<INCOME-TAX> 0
<INCOME-CONTINUING> (382)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (382)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1> the Company's balance sheet is unclassified
</FN>
</TABLE>
