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, 1999
[ ] 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)
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Virginia 54-1736551
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
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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 29, 2000: NONE
As of February 29, 2000, 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
I(1)(a) and (b) of Form 10-K and, therefore, is furnishing the abbreviated
narrative disclosure specified in Paragraph (2) of General Instruction I.
MERIT SECURITIES CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Page
Number
PART I.
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 7A. Quantitative and Qualitative Disclosures about Market Risk 6
Item 8. Financial Statements and Supplementary Data 8
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure 21
PART III.
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and Management 21
Item 13. Certain Relationships and Related Transactions 21
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21
SIGNATURES 24
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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"), a New York Stock Exchange listed financial
services company (symbol: DX). 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, (v) other mortgage pass-through
certificates or mortgage-collateralized obligations, (vi) property tax
receivables and (vii) 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, 1999, the Company has issued
fourteen (14) series of Bonds totaling approximately $9.1 billion aggregate
principal amount. To date, ten of these series have been called and collapsed
into subsequent issuances. As of December 31, 1999, the Company had four (4)
series of Bonds outstanding totaling approximately $2.7 billion, compared to
eight (8) series at December 31, 1998 totaling $3.2 billion.
At December 31, 1999, the Company had securities of approximately $308.6
million remaining for issuance under a shelf registration statement filed with
the Securities and Exchange Commission. The Company anticipates issuing
additional Bonds in the future.
The Company competes in a national market with other private conduits and
various financial firms. Economic conditions, interest rates, regulatory changes
and market dynamics all influence the 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 I.
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 I.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
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December 31,
----------------------------------------------
(amounts in thousands except series outstanding) 1999 1998
- - -------------------------------------------------------------- ---------------- ----------- -----------------
Collateral for collateralized bonds $ 2,839,324 $ 3,350,344
Non-recourse debt - collateralized bonds 2,661,069 3,153,060
Shareholder's equity 136,015 203,311
Collateralized bond series outstanding 4 8
- - -------------------------------------------------------------- ---------------- ----------- -----------------
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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. 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, 1999 and 1998, the
Company had four and eight series of collateralized bonds outstanding,
respectively. During 1999, the Company called seven series of collateralized
bonds and the associated collateral was resecuritized in 1999. The collateral
for collateralized bonds decreased to $2.8 billion at December 31, 1999 compared
to $3.4 billion at December 31, 1998. This decrease of $0.6 billion is primarily
the result of $1.1 billion in paydowns of collateral net of the addition of $0.7
billion of collateral related to the issuance of three series of collateralized
bonds in 1999.
Non-recourse debt - collateralized bonds Collateralized bonds decreased to
$2.7 billion at December 31, 1999 from $3.2 billion at December 31, 1998 as a
result of $1.1 billion in paydowns during 1999 net of the issuance of $0.6
billion of collateralized bonds. The collateralized bonds were collateralized by
securities primarily secured by single family mortgage loans and consumer
installment loans. During 1999, the Company called seven series of
collateralized bonds and the associated collateral was resecuritized in 1999.
Shareholder's Equity Shareholder's equity decreased to $136.0 million at
December 31, 1999 from $203.3 million at December 31, 1998. This decrease was
primarily the result of a $64.2 million capital distribution to IHC during 1999.
In addition, the net unrealized (loss) gain on investments available-for-sale
decreased $48.3 million to a $14.7 million net unrealized loss on investments
available-for-sale at December 31, 1999 from a $33.6 million net unrealized gain
on investments available-for-sale at December, 31 1998, primarily as a result of
prepayments on the collateral for collateralized bonds, an increase in interest
rates on the collateralized bonds during the fourth quarter of 1999 and an
increase in anticipated losses on the underlying collateral. These decreases in
shareholder's equity were partially offset by $45.2 million of net income earned
during 1999.
RESULTS OF OPERATIONS
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For the Year Ended December 31,
-----------------------------------------------------
(amounts in thousands) 1999 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
Interest income $ 209,090 $ 253,352 $ 181,690
Interest expense on collateralized bonds (173,939) (247,380) (173,096)
Net interest margin 19,601 (3,643) 2,363
Gain on sale of securities 397 7,500 -
Extraordinary item - extinguishment of debt 26,815 (571) -
Net income (loss) 45,187 1,272 (382)
- - -------------------------------------------------------------------------------------------------------------------
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Interest income on the collateral for collateralized bonds decreased to
$209.1 million in 1999 from $253.4 million in 1998. This decrease was primarily
a result of the continued impact of prepayments on interest income, as average
collateral for collateralized bonds declined from $3.6 billion to $2.9 billion
for the years ended December 31, 1998 and 1999, respectively. Interest income on
the collateralized bonds increased to $253.4 million in 1998 from $181.7 million
in 1997, primarily due to an increase in the average collateral for
collateralized bonds from $2.5 billion for the year ended December 31, 1997 to
$3.6 billion for the same period in 1998.
Interest expense on collateralized bonds decreased to $173.9 million in
1999 from $247.4 million in 1998, primarily due to a 32 basis point decrease in
the average one-month LIBOR rate and a decrease in the average collateral for
collateralized bonds during 1999. Interest expense on collateralized bonds
increased to $247.4 million in 1998 from $173.1 million in 1997, mainly due to
the increase in the average collateral for collateralized bonds during 1998.
Net interest margin in 1999 increased to $19.6 million from a negative $3.6
million in 1998. This increase was primarily the result of lower premium
amortization caused by lower prepayments during 1999 than during 1998. Net
interest margin decreased to a negative $3.6 million in 1998 from a positive
$2.4 million in 1997. This decrease was primarily the result of higher premium
amortization caused by higher prepayments during 1998 than during 1997 and
additional provision for losses.
Gain on sale of securities of $7.5 million during 1998 is the result of the
sale of a portion of the Merit 11B A-1 class, which had a principal balance of
$44.0 million. Gain on sale of securities of $0.4 million during 1999 is the
result of the recognition of the gain on the sale of the remaining portion of
the Merit 11B A-1 class, which had a principal balance of $4.9 million.
The Company also incurred an extraordinary gain of $26.8 million related to
the recognition of unamortized premiums net of unamortized issuance costs on
seven series of collateralized bonds, which were called and retired during 1999.
The associated collateral was resecuritized in 1999.
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, 1999, the Company retained $187.1 million
in aggregate principal amount of overcollateralization compared to $144.4
million at December 31, 1998. The Company had reserves, or otherwise had
provided coverage on $49.3 million and $47.4 million of this potential credit
loss exposure at December 31, 1999 and 1998, respectively. At December 31, 1999
and 1998, $30.3 million of these reserve amounts are in the form of a loss
reimbursement guarantee from an A rated third-party. During 1999, the Company
provided for additional reserves of $13.6 million and incurred credit losses of
$18.3 million.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument due to fluctuations in
interest and foreign exchange rates and in equity and commodity prices. Market
risk is inherent to both derivative and non-derivative financial instruments,
and accordingly, the scope of the Company's market risk management extends
beyond derivatives to include all market risk sensitive financial instruments.
As a financial services company, net interest income comprises the primary
component of the Company's earnings. As a result, the Company is subject to risk
resulting from interest rate fluctuations to the extent that there is a gap
between the amount of the Company's interest-earning assets and the amount of
interest-bearing liabilities that are prepaid, mature or reprice within
specified periods.
As the Company's parent, Dynex continuously monitors the aggregate cash
flow, projected net yield and market value of the collateral for collateralized
bonds under various interest rate and prepayment assumptions. Dynex has a
Portfolio Executive Committee ("PEC"), which includes executive management
representatives, and monitors and manages the interest rate sensitivity and
repricing characteristics of the balance sheet components consistent with
maintaining acceptable levels of change in both the net portfolio value and net
interest income. Dynex's exposure to interest rate risk is reviewed on a monthly
basis by the PEC and quarterly by the Board of Directors.
Dynex utilizes several tools and risk management strategies to monitor and
address interest rate risk, including (i) a quarterly sensitivity analysis using
option-adjusted spread ("OAS") methodology to calculate the expected change in
net interest margin as well as the change in the market value of various assets
within the portfolio under various extreme scenarios; and (ii) a monthly static
cash flow and yield projection under 49 different scenarios. Such tools allow
Dynex to continually monitor and evaluate its exposure to these risks and to
manage the risk profile of the investment portfolio in response to changes in
the market risk. While Dynex may use such tools, there can be no assurance Dynex
will accomplish the goal of adequately managing the risk profile of the
investment portfolio.
Dynex measures the sensitivity of its net interest income to changes in
interest rates. Changes in interest rates are defined as instantaneous,
parallel, and sustained interest rate movements in 100 basis point increments.
Dynex estimates its interest income for the next twelve months assuming no
changes in interest rates from those at period end. Once the base case has been
estimated, cash flows are projected for each of the defined interest rate
scenarios. Those scenario results are then compared against the base case to
determine the estimated change to net interest income.
The following table summarizes the Company's net interest margin
sensitivity analysis as of December 31, 1999. This analysis represents
management's estimate of the percentage change in net interest margin given a
parallel shift in interest rates. The "Base" case represents the interest rate
environment as it existed as of December 31, 1999. The analysis is heavily
dependent upon the assumptions used in the model. The effect of changes in
future interest rates on the mix of assets and liabilities may cause actual
results to differ from the modeled results. In addition, certain financial
instruments provide a degree of "optionality." The model considers the effects
of these embedded options when projecting cash flows and earnings. The most
significant option affecting the Company's portfolio is the borrowers' option to
prepay the loans. The model uses a dynamic prepayment model that applies a
Constant Prepayment Rate ranging from 5.5% to 70.1% based on the projected
incentive to refinance for each loan type in any given period. While Dynex's
model considers these factors, the extent to which borrowers utilize the ability
to exercise their option may cause actual results to significantly differ from
the analysis. Furthermore, its projected results assume no additions or
subtractions to the Company's portfolio, and no change to the Company's
liability structure. Historically, the Company has made significant changes to
its assets and liabilities, and is likely to do so in the future.
---------------------- ----------------------
Basis Point % Change in Net
Increase (Decrease) Interest Margin from
in Interest Rates Base Case
---------------------- ----------------------
+200 (33.56)%
+100 (17.12)%
Base -
-100 13.50%
-200 15.53%
---------------------- ------------------ ---
Approximately $1.6 billion of the Company's collateral for collateralized
bonds as of December 31, 1999 is comprised of loans or securities that have
coupon rates which adjust over time (subject to certain periodic and lifetime
limitations) in conjunction with changes in short-term interest rates.
Approximately 64% and 27% of the ARM loans underlying the Company's collateral
for collateralized bonds are indexed to and reset based upon the level of
six-month LIBOR and one-year CMT, respectively.
Generally, during a period of rising short-term interest rates, the
Company's net interest spread earned on its collateralized bonds will decrease.
The decrease of the net interest spread results from (i) the lag in resets of
the ARM loans underlying the collateral for collateralized bonds relative to the
rate resets on the collateralized bonds and (ii) rate resets on the ARM loans
which are generally limited to 1% every six months or 2% every twelve months and
subject to lifetime caps, while the associated borrowings have no such
limitation. As short-term interest rates stabilize and the ARM loans reset, the
net interest margin may be restored to its former level as the yields on the ARM
loans adjust to market conditions. Conversely, net interest margin may increase
following a fall in short-term interest rates. This increase may be temporary as
the yields on the ARM loans adjust to the new market conditions after a lag
period. In each case, however, the Company expects that the increase or decrease
in the net interest spread due to changes in the short-term interest rates to be
temporary. The net interest spread may also be increased or decreased by the
proceeds or costs of interest rate swap and cap agreements.
As part of its asset/liability management process, the Company has entered
into interest rate cap and swap agreements. These interest rate agreements are
used by the Company to help mitigate the risk related to the collateral for
collateralized bonds for fluctuations in interest rates that would ultimately
impact net interest income. To help protect the Company's net interest income in
a rising interest rate environment, the Company has purchased interest rate caps
with a notional amount of $351 million, which help reduce the Company's exposure
to interest rate risk rising above the lifetime interest rate caps on ARM loans
underlying the collateral for collateralized bonds. These interest rate caps
provide the Company with additional cash flow should the related index increase
above the contracted rates. The contracted rates on these interest rate caps are
based on one-month LIBOR, six-month LIBOR or one-year CMT. The Company has also
utilized interest rate swaps to convert floating rate borrowings to fixed rate
where the associated collateral financed is fixed rate.
The interest rate cap agreements represent protection for the earnings and
cash flow of the net collateral for collateralized bonds in adverse markets. To
date, market conditions have not been adverse such that the caps have been
utilized.
The remaining portion of the Company's collateral for collateralized bonds
as of December 31, 1999, approximately $1.2 billion, is comprised of loans that
have coupon rates that are either fixed or do not reset within the next 15
months. The Company has limited its interest rate risk on such collateral
primarily through the issuance of fixed-rate collateralized bonds. Overall, the
Company's interest rate risk is primarily related to the rate of change in
short-term interest rates, not the level of short-term interest rates.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AUDITED FINANCIAL STATEMENTS
MERIT SECURITIES CORPORATION
Independent Auditors' Report for the years ended December 31, 1999 and 1998....9
Independent Auditors' Report for the year ended December 31, 1997.............10
Balance Sheets - December 31, 1999 and 1998...................................11
Statements of Operations - For the years ended December 31, 1999, 1998 and
1997..........................................................................12
Statements of Shareholder's Equity - For the years ended December 31, 1999,
1998 and 1997.................................................................13
Statements of Cash Flows - For the years ended December 31, 1999, 1998 and
1997..........................................................................14
Notes to Financial Statements - For the years ended December 31, 1999, 1998
and 1997......................................................................15
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Merit Securities Corporation
We have audited the accompanying balance sheets of Merit Securities
Corporation, a wholly-owned subsidiary of Issuer Holding Corporation, Inc., as
of December 31, 1999 and 1998 and the related statements of operations,
shareholder's equity and cash flows for the years then ended. 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 audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such 1999 and 1998 financial statements present fairly, in
all material respects, the financial position of Merit Securities Corporation as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 30, 2000
Independent Auditors' Report
The Board of Directors
Merit Securities Corporation:
We have audited the accompanying statements of operations, shareholder's
equity and cash flows of Merit Securities Corporation for the year 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 audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Merit
Securities Corporation for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG LLP
Richmond, Virginia
March 24, 1998
MERIT SECURITIES CORPORATION
Balance Sheets
December 31, 1999 and 1998
(amounts in thousands except share data)
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1999 1998
------------------ -----------------
Assets:
Collateral for collateralized bonds $ 2,839,324 $ 3,350,344
Due from affiliates, net - 5,611
Prepaid shelf registration fees 94 406
Cash 10 10
================== =================
$ 2,839,428 $ 3,356,371
================== =================
Liabilities and Shareholder's Equity
Liabilities:
Non-recourse debt - collateralized bonds $ 2,661,069 $ 3,153,060
Due to affiliates, net 42,344 -
------------------ -----------------
2,703,413 3,153,060
------------------ -----------------
Shareholder's Equity:
Common stock, no par value
10,000 shares authorized, 1,000 issued and outstanding 10 10
Additional paid-in capital 125,997 190,156
Accumulated other comprehensive (loss) income (14,749) 33,575
Retained earnings (accumulated deficit) 24,757 (20,430)
------------------
-----------------
136,015 203,311
================== =================
$ 2,839,428 $ 3,356,371
================== =================
<FN>
See accompanying notes to financial statements.
</FN>
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MERIT SECURITIES CORPORATION
Statements of Operations
For the years ended December 31, 1999, 1998 and 1997
(amounts in thousands)
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1999 1998 1997
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Interest income:
Collateral for collateralized bonds $ 209,090 $ 253,352 $ 181,690
------------------------------------------------------
Interest and related expense:
Interest expense on collateralized bonds 173,939 247,380 173,096
Other collateralized bond expense 1,995 3,379 3,431
------------------------------------------------------
175,934 250,759 176,527
------------------------------------------------------
Net interest margin before provision for losses 33,156 2,593 5,163
Provision for losses (13,555) (6,236) (2,800)
------------------------------------------------------
Net interest margin 19,601 (3,643) 2,363
Other income (expenses):
Gain on sale of securities 397 7,500 -
Interest on due to affiliates, net (1,626) (2,014) (2,745)
------------------------------------------------------
Income (loss) before extraordinary item 18,372 1,843 (382)
Extraordinary gain (loss) - extinguishment of debt 26,815 (571) -
------------------------------------------------------
Net income (loss) $45,187 $ 1,272 $ (382)
======================================================
<FN>
See accompanying notes to financial statements.
</FN>
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MERIT SECURITIES CORPORATION
Statements of Shareholder's Equity
For the years ended December 31, 1999, 1998 and 1997
(amount in thousands)
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Accumulated other Retained
Additional comprehensive earnings
Common Stock paid-in income (loss) (accumulated
capital deficit) Total
--------------- -------------- -------------------- --------------- ---------------
Balance at January 1, 1997 $ 10 $ 82,136 $ 60,304 $ (21,320) $ 121,130
Comprehensive income:
Net loss - - - (382) (382)
Change in net unrealized gain on
investments available-for-sale - - 4,403 - 4,403
--------------- -------------- -------------------- --------------- ---------------
Total comprehensive income 4,403 (382) 4,021
Contributed capital - 43,816 - - 43,816
--------------- -------------- -------------------- --------------- ---------------
Balance at December 31, 1997 10 125,952 64,707 (21,702) 168,967
Comprehensive loss:
Net income - - - 1,272 1,272
Change in net unrealized gain on
investments available-for-sale - - (31,132) - (31,132)
--------------- -------------- -------------------- --------------- ---------------
Total comprehensive loss - - (31,132) 1,272 (29,860)
Contributed capital - 64,204 - - 64,204
--------------- -------------- -------------------- --------------- ---------------
Balance at December 31, 1998 10 190,156 33,575 (20,430) 203,311
Comprehensive loss:
Net income - - - 45,187 45,187
Change in net unrealized gain on - - (48,324) - (48,324)
investments available-for-sale
--------------- -------------- -------------------- --------------- ---------------
Total comprehensive loss - - (48,324) 45,187 (3,137)
Capital distribution - (64,159) - - (64,159)
--------------- -------------- -------------------- --------------- ---------------
Balance at December 31, 1999 $ $ 125,997 $ (14,749) $ 24,757 $ 136,015
10
=============== ============== ==================== =============== ===============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
MERIT SECURITIES CORPORATION
Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997
(amounts in thousands)
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1999 1998 1997
-----------------------------------------------------
Operating activities:
Net income (loss) $ $ 1,272 $ (382)
45,187
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on sale of securities (7,500) -
(397)
Provision for losses 13,555 6,236 2,800
Extraordinary (gain) loss - extinguishment of debt (26,815) 571 -
Amortization, net 15,664 35,018 20,440
Net change in prepaid shelf registration fees 312 (72) 515
Other 876 (515) 516
-----------------------------------------------------
Net cash provided by operating activities 48,382 35,010 23,889
-----------------------------------------------------
Investing activities:
Collateral for collateralized bonds:
Purchase of loans subsequently securitized (668,858) (1,696,198) (2,300,444)
Principal payments on collateral 1,096,474 2,074,578 916,580
Proceeds from sale of collateral for collateralized bonds 5,250 43,391 -
Net decrease (increase) in accrued interest receivable
and funds held by trustee 3,116 3,511 (8,129)
-----------------------------------------------------
Net cash provided by (used for) investing activities 435,982 425,282 (1,391,993)
-----------------------------------------------------
Financing activities:
Collateralized bonds:
Proceeds from issuance of collateralized bonds 623,286 1,589,198 2,243,324
Principal payments on collateralized bonds (1,091,382) (2,063,058) (919,370)
(Decrease) increase in accrued interest payable (64) (1,236) 1,758
Net change in due to/from affiliates 47,955 (49,400) (1,424)
(Repayment of capital distribution) proceeds from capital
contributions (64,159) 64,204 43,816
-----------------------------------------------------
Net cash (used for) provided by financing activities (484,364) (460,292) 1,368,104
-----------------------------------------------------
Net change 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 $ 172,259 $ 245,860 $ 172,853
=====================================================
Supplemental disclosure of non-cash activities:
Collateral for collateralized bonds subsequently $ 1,569,734 $ - $ 65,537
securitized
=====================================================
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
MERIT SECURITIES CORPORATION
Notes to Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(amounts in thousands)
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"), a New
York Stock Exchange listed financial services company (symbol: DX). 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 ("REIT") 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 debt securities which have been pledged to secure collateralized
bonds. These debt securities are backed primarily by adjustable-rate and
fixed-rate mortgage loans secured by first liens on single family residential
properties, manufactured housing installment loans secured by either a UCC
filing or a motor vehicle title, and property tax receivables.
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, 1999 and 1998 is reported at fair value, with unrealized gains and losses
excluded from earnings and reported as accumulated other comprehensive income.
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 accumulated
other comprehensive income.
As a part of Dynex REIT's interest rate risk management process, Dynex REIT
may be required periodically to terminate hedge instruments. Any realized gain
or loss resulting from the termination of a hedge is amortized into income or
expense of the corresponding hedged instrument over the remaining period of the
original hedge or hedged instrument as a yield adjustment.
If the underlying asset or liability is sold or matures, or the criteria
that was executed at the time the hedge instrument was entered into no longer
exists, the Interest Rate Agreement is no longer accounted for as a hedge. Under
these circumstances, the accumulated change in the market value of the hedge is
recognized in current income to the extent that the effects of interest rate or
price changes of the hedged item have not offset the hedge results.
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.
Recent Accounting Pronouncements In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133").
FAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" ("FAS No. 137"). FAS No. 137 amends FAS No. 133 to defer its
effective date to all fiscal quarters of all fiscal years beginning after June
15, 2000. The Company is in the process of determining the impact of adopting
FAS No. 133.
Basis of Presentation Certain amounts for 1998 and 1997 have been
reclassified to conform to the presentation for 1999. 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, 1999 and 1998, and the related average effective interest rates
(calculated for the month ended December 31, 1999 and 1998, and excluding
unrealized gains and losses):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- - ------------------------------------------ ---------------------------------- ----------------------------------
1999 1998
Effective Effective
Fair Value Interest Rate Fair Value Interest Rate
- - ------------------------------------------ ----------------- ---------------- ----------------- ----------------
Collateral for collateralized bonds:
Amortized cost $ 2,865,903 7.5% $ 3,333,362 7.3%
Allowance for losses (11,830) (16,593)
----------------- -----------------
Amortized cost, net 2,854,073 3,316,769
Gross unrealized gains 17,124 47,244
Gross unrealized losses (31,873) (13,669)
- - ------------------------------------------ ----------------- ---------------- ----------------- ----------------
$ 2,839,324 $ 3,350,344
- - ------------------------------------------ ----------------- ---------------- ----------------- ----------------
</TABLE>
Collateral for collateralized bonds consists of debt securities backed
primarily by adjustable-rate and fixed-rate mortgage loans secured by first
liens on single family residential housing, manufactured housing installment
loans secured by either a UCC filing or a motor vehicle title and property tax
receivables. 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.
The components of collateral for collateralized bonds at December 31, 1999
and 1998 are as follows:
- - ------------------------------------------ ---------------- -----------------
1999 1998
- - ------------------------------------------ ---------------- -----------------
Collateral, net of allowance $ 2,827,301 $ 3,251,003
Funds held by trustees 2,069 553
Accrued interest receivable 17,091 21,723
Unamortized premiums and discounts, net 7,612 43,490
Unrealized (loss) gain, net (14,749) 33,575
- - ------------------------------------------ ---------------- -----------------
$ 2,839,324 $ 3,350,344
- - ------------------------------------------ ---------------- -----------------
During 1999, the Company securitized $2.3 billion of collateral, through
the issuance of three series of collateralized bonds, of which $1.6 billion
related to the resecuritization of the collateral from seven series of
previously issued collateralized bonds which were called in 1999. The collateral
securitized was primarily debt securities backed by single family mortgage loans
and manufactured housing installment loans. The securitizations were accounted
for as financing of the underlying collateral pursuant to Statement of
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FAS No. 125") as the
Company retained call rights on the bonds which are substantially in excess of a
clean-up call as defined by this accounting standard.
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 3 ended December 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- - ------------------------------------------------------ ----------------- ---------------- -----------------
1999 1998 1997
- - ------------------------------------------------------ ----------------- ---------------- -----------------
Beginning balance $ 16,593 $ 24,811 $ 31,732
Provision for losses 13,555 6,236 2,800
Losses charged-off, net of recoveries (18,318) (14,454) (9,721)
- - ------------------------------------------------------ ----------------- ---------------- -----------------
$ 11,830 $ 16,593 $ 24,811
- - ------------------------------------------------------ ----------------- ---------------- -----------------
</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 amount of collateral in excess of the
related investment-grade collateralized bonds issued (commonly referred to as
"overcollateralization"), excluding price premiums and discounts and hedge gains
and losses. The allowance for losses on the overcollateralization totaled
$11,830 and $16,593 at December 31, 1999 and 1998 respectively, and is included
in collateral for collateralized bonds in the accompanying consolidated balance
sheets. Overcollateralization at December 31, 1999 and 1998 totaled $187,070 and
$144,359 respectively.
NOTE 5 - COLLATERALIZED BONDS
The components of collateralized bonds along with certain other information
at December 31, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
---------------------------------- ---------------------------------- ----------------------------------
1999 1998
Bonds Outstanding Range of Bonds Outstanding Range of
Interest Rates Interest Rates
---------------------------------- ----------------- ---------------- ----------------- ----------------
Variable-rate classes $ 1,957,075 5.8%-9.1% $ 2,568,506 5.3%-6.8%
Fixed-rate classes 722,615 6.2%-8.0% 555,842 6.2%-15.0%
Accrued interest payable 5,138 5,202
Deferred bond issuance costs (6,004) (2,081)
Unamortized (discount) premium (17,755) 25,591
---------------------------------- ----------------- ---------------- ----------------- ----------------
$ 2,661,069 $ 3,153,060
---------------------------------- ----------------- ---------------- ----------------- ----------------
Range of stated maturities 2015-2033 2016-2032
Number of series 4 8
---------------------------------- ----------------- ---------------- ----------------- ----------------
</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 6.2%, 6.8%, and 7.2% for the years ended December 31,
1999, 1998 and 1997, respectively.
During 1999, the Company redeemed two series of previously issued
collateralized bonds. The Company then called these two series in addition to
the five series of previously issued collateralized bonds redeemed in 1998 and
re-securitized the associated collateral in 1999, which resulted in a $26,815
gain from extinguishment in 1999. During 1998, the Company has a $571 loss from
extinguishment from five series of previously issued collateralized bonds which
were redeemed in 1998.
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, 1999
and 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
---------------------------------- ------------------------------------------- -------------------------------------------
1999 1998
Notional Amortized Notional Amortized
Amount Amount Fair Value Amount Amount Fair Value
---------------------------------- ------------- -------------- -------------- ------------- -------------- --------------
Recorded financial instruments:
Assets:
Collateral for collateralized
bonds $ $2,850,620 $2,838,439 $- $3,311,548 $3,349,975
-
Interest rate cap agreements 351,000 3,452 885 351,000 5,222 369
Cash - 10 10 - 10 10
Liabilities:
Collateralized bonds - 2,661,069 2,604,026 - 3,153,060 3,107,262
Off-balance sheet financial
instruments:
Interest rate swap agreements:
Collateralized bonds - - - 123,883 - (1,282)
---------------------------------- ------------- -------------- -------------- ------------- -------------- --------------
</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 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. The
fair value of the interest rate cap and swap agreements was determined using
market quotes and the fair value of the collateralized bonds was estimated to be
the carrying value as they reprice frequently.
During 1996, the Company purchased LIBOR-based interest rate cap 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 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. During 1999, the Company terminated
interest rate swap agreements with a notional value of $102,198. These interest
rate swap agreements related to an amortizing interest rate swap agreement
related to Prime rate-based ARM loans financed with LIBOR-based variable-rate
collateralized bonds. Under the terms of the agreement, the Company received
one-month LIBOR plus 2.65% and pays one-month average Prime rate in effect three
months prior. The cost of terminating this agreement was $750, which was
deferred and is being recognized as a yield adjustment over the remaining life
of the underlying collateral.
NOTE 7 - DUE TO/FROM AFFILIATES
At December 31, 1999 , amounts due to affiliates consisted of amounts
borrowed from IHC under demand promissory notes. Amounts due to IHC totaled
$42,344 at December 31, 1999. At December 31, 1998 , amounts due from affiliates
consisted of amounts loaned to Dynex net of amounts borrowed from IHC under
demand promissory notes. Amounts due to IHC totaled $43,107 and amounts due from
Dynex totaled $48,718 at December 31, 1998. The Company had net interest expense
related to these demand promissory notes of $1,626, $2,014 and $2,745 during
1999, 1998 and 1997, 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. In
addition, as a result of the Senior Demand Note issued by IHC during 1999, all
activity between the Company and Dynex are accounted for as additional capital
contributions or capital distributions. During 1999, capital distributions
totaled $64,159 and during 1998 and 1997, capital contributions totaled $64,204
and $43,816, respectively.
NOTE 9 - OTHER MATTERS
At December 31, 1999 and 1998, the Company had remaining $308,602 and
$328,964, respectively, for issuance under shelf registration statements filed
with the Securities and Exchange Commission.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 21, 1998, the Audit Committee of Dynex Capital, Inc. approved the
appointment of the accounting firm of Deloitte & Touche LLP ("D&T") as the
independent accountants for the year ending December 31, 1998 to replace KPMG
Peat Marwick LLP ("KPMG"), who were dismissed as the independent accountants
effective with such appointment.
The reports of KPMG on the Company's consolidated financial statements for
the year ended December 31, 1997 did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.
In connection with the audits of the Company's consolidated financial
statements for the year ended December 31, 1997, and through July 21, 1998,
there have been no disagreements between the Company and KPMG on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of KPMG, would
have caused them to make reference thereto in their report on the financial
statements for such years.
During the year ended December 31, 1997, and through July 21, 1998, the
Company had not consulted with D&T regarding either (i) the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements, and either a written report was provided to the Company or oral
advice was provided that D&T concluded was an important factor considered by the
Company in reaching a decision as to the accounting, auditing or financial
reporting issue; or (ii) any matter that was either the subject of a
disagreement, as that term is defined in Item 304 (a) (1) (iv) of Regulation S-K
and the related instructions to Item 304 of Regulation S-K, or a reportable
event, as that term is defined in Item 304 (a) (1) (v) of Regulation S-K.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is omitted pursuant to
GeneralInstruction I.
Item 11. EXECUTIVE COMPENSATION
Information in response to this Item is omitted pursuant to
GeneralInstruction I.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is omitted pursuant to
GeneralInstruction I.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is omitted pursuant to
GeneralInstruction I.
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).
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).
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).
4.11 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). (Incorporated herein by reference to Exhibit of Registrant's
Current Report on Form 8-K, filed January 6, 1998).
4.12 Copy of the Series 11 Indenture Supplement, dated as of March 1, 1998,
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 of Registrant's Current Report on
Form 8-K, filed June 12, 1998).
4.13 Copy of the Series 12 Indenture Supplement, dated as of March 1, 1999,
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 of Registrant's Current Report on
Form 8-K, filed April 12, 1999).
4.14 Copy of the Series 13 Indenture Supplement, dated as of August 1,
1999, 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 of Registrant's
Current Report on Form 8-K, filed September 13, 1999).
4.15 Copy of the Series 14 Indenture Supplement, dated as of November 1,
1999, 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 of Registrant's
Current Report on Form 8-K, filed November 12, 1999).
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 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).
99.11 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).
99.12 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).
99.13 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).
99.14 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).
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).
99.16 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 November 15,
1999, relating to the Registrant's Series 14 Bonds.
Current Report on Form 8-K as filed with the Commission on November 29,
1999, relating to the Registrant's Series 14 Bonds.
Current Report on Form 8-K as filed with the Commission on December 13,
1999, relating to the Registrant's Series 13 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, 2000
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 30, 2000
Thomas H. Potts
/s/ J. Thomas O'Brien, Jr. Director March 30, 2000
J. Thomas O'Brien, Jr.
/s/ William H. West, Jr. Director March 30, 2000
William H. West, Jr.
/s/ John C. Stevenson, Jr. Director March 30, 2000
John C. Stevenson, Jr.
EXHIBIT INDEX
Sequentially
Exhibit Numbered Page
23.1 Consent of DELOITTE & TOUCHE LLP I
23.2 Consent of KPMG LLP II
I
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Merit Securities Corporation
We consent to incorporation by reference in the registration statements No.
333-64385 of Merit Securities Corporation on Form S-3 of our report dated March
30, 2000, appearing in this Annual Report Form 10-K of Merit Securities
Corporation for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 30, 2000
II
Exhibit 23.2
Consent of Independent Auditors
The Board of Directors
Merit Securities Corporation
We consent to incorporation by reference in Registration Statements No.
333-64385 of Merit Securities Corporation on Form S-3 of our report dated March
24, 1998 relating to the statements of operations, shareholder's equity and cash
flows of Merit Securities Corporation for the year ended December 31, 1997,
which report appears in the December 31, 1999 Form 10-K of Merit Securities
Corporation.
KPMG LLP
Richmond, Virginia
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000929426
<NAME> MERIT Securities Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 10
<SECURITIES> 2,839,324
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,839,428
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 2,661,069
0
0
<COMMON> 10
<OTHER-SE> 136,005
<TOTAL-LIABILITY-AND-EQUITY> 2,839,428
<SALES> 0
<TOTAL-REVENUES> 209,487
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,621
<LOSS-PROVISION> 13,555
<INTEREST-EXPENSE> 173,939
<INCOME-PRETAX> 18,372
<INCOME-TAX> 0
<INCOME-CONTINUING> 18,372
<DISCONTINUED> 0
<EXTRAORDINARY> 26,815
<CHANGES> 0
<NET-INCOME> 45,187
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1> The company's balance sheet is unclassified.
</FN>
</TABLE>
