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, 2000
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File No. 33-83524
MERIT SECURITIES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1736551
(State or other jurisdiction (I.R.S. Employer
of incorporation Identification No.)
4551 Cox Road, Suite 300, 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 No_XX_
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, March 30, 2001: NONE
As of March 30, 2001, 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
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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 20
PART III.
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners
and Management 20
Item 13. Certain Relationships and Related Transactions 20
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 20
SIGNATURES 23
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 have been used to purchase
Collateral from IHC or various third parties. IHC has used 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, 2000, 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, 2000, the Company had four (4)
series of Bonds outstanding totaling approximately $2.1 billion, compared to
four (4) series at December 31, 1999 totaling $2.7 billion.
At December 31, 2000, 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 does not anticipate issuing
additional Bonds in the near 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
- --------------------------------------------------------------- ----------------------------------------------
December 31,
----------------------------------------------
(amounts in thousands except series outstanding) 2000 1999
- --------------------------------------------------------------- ----------------- ----------- ----------------
Collateral for collateralized bonds $ 2,208,015 $2,839,324
Non-recourse debt - collateralized bonds 2,143,028 2,661,069
Shareholder's equity 64,997 136,015
Collateralized bond series outstanding 4 4
- --------------------------------------------------------------- ----------------- ----------- ----------------
Collateral for collateralized bonds
As of both December 31, 2000 and 1999, the Company had four series of
collateralized bonds outstanding. The collateral for collateralized bonds
decreased to $2.2 billion at December 31, 2000 compared to $2.8 billion at
December 31, 1999. This decrease of $0.6 billion is primarily the result of
$506.5 million in paydowns on the collateral during 2000.
Non-recourse debt - collateralized bonds
Collateralized bonds decreased to $2.1 billion at December 31, 2000 from $2.7
billion at December 31, 1999 as a result of $523.2 million in paydowns during
2000. The collateralized bonds were collateralized by securities primarily
secured by single family mortgage loans and consumer installment loans.
Shareholder's Equity
Shareholder's equity decreased to $65.0 million at December 31, 2000, from
$136.0 million at December 31, 1999. This decrease was a combined result of a
$79.6 million increase in the net unrealized loss on investments
available-for-sale from $14.7 million at December 31, 1999 to $94.3 million at
December 31, 2000, and a net loss of $12.7 million during 2000. These decreases
were partially offset by a $21.2 million capital contribution from IHC during
2000.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
-----------------------------------------------------
(amounts in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Interest income $ 201,317 $ 209,090 $ 253,352
Interest expense on collateralized bonds 175,306 173,939 247,380
Provision for losses 34,108 13,555 6,236
Net interest margin (9,709) 19,601 (3,643)
Loss on termination of interest rate caps (2,440) - -
Gain on sale of securities - 397 7,500
Extraordinary gain (loss) - extinguishment of debt - 26,815 (571)
Net (loss) income (12,714) 45,187 1,272
- --------------------------------------------------------------------------------------------------------------------
Interest income on the collateral for collateralized bonds decreased to $201.3
million in 2000 from $209.1 million in 1999. This decrease was primarily a
result of the continued impact of prepayments on interest income, as average
collateral for collateralized bonds declined from $2.9 billion to $2.6 billion
for the years ended December 31, 1999 and 2000, respectively. This decrease was
partially offset by lower premium amortization caused by lower prepayments
during the year ended December 31, 2000 than during the same period in 1999.
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 decline in the average collateral for collateralized bonds which
decreased from $3.6 billion to $2.9 billion for the years ended December 31,
1998 and 1999, respectively.
Interest expense on collateralized bonds increased to $175.3 million in 2000
from $173.9 million in 1999, primarily due to the increase in one-month London
InterBank Offered Rate ("LIBOR") during the first half of 2000, which was
partially offset by the decline in average collateralized bonds due to
prepayments on the related collateral for collateralized bonds. Interest expense
on collateralized bonds decreased from $247.4 million in 1998 to $173.9 million
in 1999 as a combined result of a decrease in the average one-month LIBOR rate
and a decrease in the average collateralized bonds during 1999.
Provision for losses increased to $34.1 million in 2000 from $13.6 million in
1999 as a result of an overall increase in credit risk retained from securities
issued by the Company (principally for securities issued in the latter portion
of 1999), and a charge of $13.3 million in the fourth quarter of 2000 due to the
underperformance of the Company's securitized manufactured housing loan
portfolio. The Company has seen the loss severity on manufactured housing loans
increase dramatically since the end of the third quarter of 2000 as a result of
the saturation in the market place with both new and used (repossessed)
manufactured housing units. In addition, the Company has seen some increase in
overall default rates on its manufactured housing loans. The Company anticipates
that market conditions for manufactured housing loans will remain unfavorable
through 2001. Provision for losses increased to $13.6 million in 1999 from $6.2
million in 1998 primarily due to the addition of three series of collateralized
bonds during 1999.
Net interest margin in 2000 decreased to a negative $9.7 million from a positive
$19.6 million in 1999. This decrease was primarily the result of additional
provision for losses and an increase in interest expense, partially offset by
lower premium amortization caused by lower prepayments during 2000 than during
1999. Net interest margin increased in 1999 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.
Loss on termination of interest rate caps of $2.4 million during 2000 is the
result of the liquidation of the Company's interest rate cap agreements, which
had a notional balance of $351 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. 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.
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. During 1998, the Company
redeemed five series of previously issued collateralized bonds, which resulted
in $571 of additional costs related to such redemptions.
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, 2000, the Company retained $184.7 million
in aggregate principal amount of overcollateralization compared to $187.1
million at December 31, 1999. The Company had reserves, or otherwise had
provided coverage on $79.1 million and $49.3 million of this potential credit
loss exposure at December 31, 2000 and 1999, respectively. At December 31, 2000
and 1999, $30.3 million of these reserve amounts are in the form of a loss
reimbursement guarantee from an A rated third-party. During 2000, the Company
provided for additional reserves of $34.1 million and incurred credit losses of
$25.7 million.
The Company and Dynex are currently engaged in a dispute with the counterparty
to the loss reimbursement guarantees, which aggregated $30.3 million at December
31, 2000. Such guarantees are payable when cumulative loss trigger levels are
reached on certain of the Company's single-family mortgage loan securitizations.
Currently, these trigger levels have been reached on four of the Company's
securities, and the Company has made claims under the reimbursement guarantees
in amounts approximating $1.2 million. The counterparty has denied payment on
these claims, citing various deficiencies in loan underwriting which would
render these loans and corresponding claims ineligible under the reimbursement
agreements. The Company disputes this classification and is pursuing this matter
through court-ordered arbitration.
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 utilizes a
monthly static cash flow and yield projection under interest rate scenarios
detailed below. While Dynex may use this tool, there can be no assurance Dynex
will accomplish the goal of adequately managing the risk profile of the
Company's investment portfolio.
Dynex measures the sensitivity of the Company's 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 the Company's 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, 2000. 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, 2000. The analysis is heavily dependent upon the
assumptions used in the model. The effect of changes in future interest rates,
the shape of the yield curve or 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 applies prepayment rate assumptions
representing management's estimate of prepayment activity on a projected basis
for each collateral pool in the investment portfolio. While the Company'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) in Interest Margin
Interest Rates from Base Case
------------------------ ---------------------
+200 (9.7)%
+100 (4.8)%
Base -
-100 4.8%
-200 9.7%
------------------------ --------------------
Approximately $1.2 billion of the Company's collateral for collateralized
bonds as of December 31, 2000 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 26% 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, to the extent the
Company has entered into such agreements.
As part of its asset/liability management process, the Company may enter
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 had purchased interest rate caps
with a notional amount of $351 million, which helped 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 were based on one-month LIBOR, six-month LIBOR or one-year CMT. The Company
liquidated the interest rate caps during the second quarter of 2000.
The remaining portion of the Company's collateral for collateralized bonds
as of December 31, 2000, approximately $1.1 billion, is comprised of loans that
have coupon rates that are fixed. 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, 2000, 1999 and 1998........................9
Balance Sheets - December 31, 2000 and 1999.............................................................10
Statements of Operations - For the years ended December 31, 2000, 1999 and 1998.........................11
Statements of Shareholder's Equity - For the years ended December 31, 2000, 1999 and 1998...............12
Statements of Cash Flows - For the years ended December 31, 2000, 1999 and 1998.........................13
Notes to Financial Statements - For the years ended December 31, 2000, 1999 and 1998....................14
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, 2000 and 1999 and the related statements of operations, shareholder's equity
and cash flows for each of the three years in the period ended December 31,
2000. 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 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 financial statements present fairly, in all material
respects, the financial position of Merit Securities Corporation as of December
31, 2000 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2000in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 30, 2001
MERIT SECURITIES CORPORATION
Balance Sheets
December 31, 2000 and 1999
(amounts in thousands except share data)
2000 1999
----------------- ------------------
Assets:
Collateral for collateralized bonds $ 2,208,015 $ 2,839,324
Prepaid shelf registration fees - 94
Cash 10 10
----------------- ------------------
$ 2,208,025 $ 2,839,428
================= ==================
Liabilities and Shareholder's Equity
Liabilities:
Non-recourse debt - collateralized bonds $ 2,143,028 $ 2,661,069
Due to affiliates, net - 42,344
----------------- ------------------
2,143,028 2,703,413
----------------- ------------------
Shareholder's Equity:
Common stock, no par value
10,000 shares authorized, 1,000 issued and outstanding 10 10
Additional paid-in capital 147,240 125,997
Accumulated other comprehensive loss (94,296) (14,749)
Retained earnings 12,043 24,757
-----------------
------------------
64,997 136,015
----------------- ------------------
$ 2,208,025 $ 2,839,428
================= ==================
See accompanying notes to financial statements.
MERIT SECURITIES CORPORATION
Statements of Operations
For the years ended December 31, 2000, 1999 and 1998
(amounts in thousands)
2000 1999 1998
------------------------------------------------------
Interest income:
Collateral for collateralized bonds $ 201,317 $ 209,090 $ 253,352
------------------------------------------------------
Interest and related expense:
Interest expense on collateralized bonds 175,306 173,939 247,380
Other collateralized bond expense 1,612 1,995 3,379
------------------------------------------------------
176,918 175,934 250,759
------------------------------------------------------
Net interest margin before provision for losses 24,399 33,156 2,593
Provision for losses (34,108) (13,555) (6,236)
------------------------------------------------------
Net interest margin (9,709) 19,601 (3,643)
Loss on termination of interest rate caps (2,440) - -
Gain on sale of securities - 397 7,500
Other expense (94) - -
Interest on due to affiliates, net (471) (1,626) (2,014)
------------------------------------------------------
(Loss) income before extraordinary item (12,714) 18,372 1,843
Extraordinary gain (loss) - extinguishment of debt - 26,815 (571)
------------------------------------------------------
Net (loss) income $ (12,714) 45,187 $ 1,272
======================================================
See accompanying notes to financial statements.
MERIT SECURITIES CORPORATION
Statements of Shareholder's Equity For the years ended December 31, 2000, 1999
and 1998 (amounts in thousands)
Accumulated other Retained
Additional comprehensive earnings
Common Stock paid-in income (loss) (accumulated
capital deficit) Total
--------------- --------------- -------------------- --------------- --------------
Balance at January 1, 1998 $ 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 (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 (3,137)
Capital distribution - (64,159) - - (64,159)
--------------- --------------- -------------------- --------------- --------------
Balance at December 31, 1999 10 125,997 (14,749) 24,757 136,015
Comprehensive loss:
Net loss - - - (12,714) (12,714)
Change in net unrealized loss on
investments available-for-sale - - (79,547) - (79,547)
--------------- --------------- -------------------- --------------- --------------
Total comprehensive loss (92,261)
Capital contribution - 21,243 - - 21,243
--------------- --------------- -------------------- --------------- --------------
Balance at December 31, 2000 $ $ 147,240 $ (94,296) $ 12,043 $ 64,997
10
=============== =============== ==================== =============== ==============
See accompanying notes to financial statements.
MERIT SECURITIES CORPORATION
Statements of Cash Flows
For the years ended December 31, 2000, 1999 and 1998
(amounts in thousands)
2000 1999 1998
-----------------------------------------------------
Operating activities:
Net (loss) income $ (12,714) $ 45,187 $ 1,272
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Loss on termination of interest rate caps 2,440 - -
Gain on sale of investments - (397) (7,500)
Provision for losses 34,108 13,555 6,236
Extraordinary (gain) loss - extinguishment of debt - (26,815) 571
Amortization, net 9,971 15,664 35,018
Other 36 1,188 (587)
-----------------------------------------------------
Net cash provided by operating activities 33,841 48,382 35,010
-----------------------------------------------------
Investing activities:
Collateral for collateralized bonds:
Purchase of loans subsequently securitized - (668,858) (1,696,198)
Principal payments on collateral 507,521 1,096,474 2,074,578
Proceeds from sale of collateral for collateralized bonds - 5,250 43,391
Net decrease in accrued interest receivable and funds
held by trustee 2,700 3,116 3,511
-----------------------------------------------------
Net cash provided by investing activities 510,221 435,982 425,282
-----------------------------------------------------
Financing activities:
Collateralized bonds:
Proceeds from issuance of collateralized bonds 657 623,286 1,589,198
Principal payments on collateralized bonds (523,198) (1,091,382) (2,063,058)
Decrease in accrued interest payable (420) (64) (1,236)
(Decrease) increase in due to affiliates (42,344) 47,955 (49,400)
Capital contributions (distributions) 21,243 (64,159) 64,204
-----------------------------------------------------
Net cash used for financing activities (544,062) (484,364) (460,292)
-----------------------------------------------------
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 $ 171,906 $ 172,259 $ 245,860
=====================================================
Supplemental disclosure of non-cash activities:
Collateral for collateralized bonds subsequently
securitized $ - $ 1,569,734 $ -
=====================================================
See accompanying notes to financial statements.
MERIT SECURITIES CORPORATION
Notes to Financial Statements
For the years ended December 31, 2000, 1999 and 1998
(dollar 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. The Company is a qualified REIT subsidiary of Dynex.
Should the Company not maintain its qualified REIT status in the future, or if
Dynex does not maintain its REIT status, it may be subject to income taxes.
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, 2000 and 1999 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 the Company's interest rate risk management process, the Company
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. During 2000,
the Company terminated all rate cap agreements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 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 registration for the issuance of
collateralized bonds are deferred and recognized with each securitization
prorata to the size of the issuance.
Recent Accounting Pronouncements Statement of Financial Accounting
Standards ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", is effective for all fiscal years beginning after June 15, 2000.
FAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Under FAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company will adopt FAS No. 133 effective January
1, 2001. Management does not expect the adoption of FAS No. 133 to have any
impact on the financial position, results of operations, or cash flows of the
Company.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" ("FAS No.
140"). FAS No. 140 replaces the Statement of Financial Accounting Standards No.
125 "Accounting for the Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("FAS No. 125"). FAS No. 140 revises the
standards for accounting for securitization and other transfers of financial
assets and collateral and requires certain disclosure, but it carries over most
of FAS No. 125 provisions without reconsideration. FAS No. 140 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after March 31, 2001. FAS No. 140 is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures about securitization and collateral accepted need not be reported
for periods ending on or before December 15, 2000, for which financial
statements are presented for comparative purposes. FAS No. 140 is to be applied
prospectively with certain exceptions. Other than those exceptions, earlier or
retroactive application of its accounting provision is not permitted. The
Company does not believe the adoption of FAS No. 140 will have a material impact
on its financial statements.
Basis of Presentation
Certain amounts for 1999 and 1998 have been reclassified to conform to the
presentation for 2000.
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, 2000 and 1999, and the related average effective interest rates
(calculated for the month ended December 31, 2000 and 1999, and excluding
unrealized gains and losses):
- ------------------------------------------ ---------------------------------- ----------------------------------
2000 1999
Effective Effective
Fair Value Interest Rate Fair Value Interest Rate
- ------------------------------------------ ----------------- ---------------- ----------------- ----------------
Collateral for collateralized bonds:
Amortized cost $ 2,322,537 8.1% $ 2,865,903 7.5%
Allowance for losses (20,226) (11,830)
----------------- --------------
Amortized cost, net 2,302,311 2,854,073
Gross unrealized gains 25,113 17,124
Gross unrealized losses (119,409) (31,873)
- ------------------------------------------ ----------------- ---------------- ----------------- ----------------
$ 2,208,015 $ 2,839,324
- ------------------------------------------ ----------------- ---------------- ----------------- ----------------
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, 2000 and
1999 are as follows:
- --------------------------------------------- ---------------- -----------------
2000 1999
- --------------------------------------------- ---------------- -----------------
Collateral, net of allowance $ 2,285,703 $ 2,827,301
Funds held by trustees 1,381 2,069
Accrued interest receivable 15,079 17,091
Unamortized premiums and discounts, net 148 7,612
Unrealized loss, net (94,296) (14,749)
- --------------------------------------------- ---------------- -----------------
$ 2,208,015 $ 2,839,324
- --------------------------------------------- ---------------- -----------------
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 as the Company retained call rights on
the bonds which are substantially in excess of a standard clean-up call.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, 2000, 1999
and 1998:
- ------------------------------------------------------ ----------------- ---------------- -----------------
2000 1999 1998
- ------------------------------------------------------ ----------------- ---------------- -----------------
Beginning balance $ 11,830 $ 16,593 $ 24,811
Provision for losses 34,108 13,555 6,236
Losses charged-off, net of recoveries (25,712) (18,318) (14,454)
- ------------------------------------------------------ ----------------- ---------------- -----------------
Ending balance $ 20,226 $ 11,830 $ 16,593
- ------------------------------------------------------ ----------------- ---------------- -----------------
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
$20,226 and $11,830 at December 31, 2000 and 1999 respectively, and is included
in collateral for collateralized bonds in the accompanying consolidated balance
sheets. Overcollateralization at December 31, 2000 and 1999 totaled $184,671 and
$187,070 respectively. The Company also has loss reimbursement guarantees
aggregating $30,334 from third parties which partially reduce its
overcollateralization exposure. The Company and Dynex are currently engaged in a
dispute with the counterparty to the loss reimbursement guarantees. Such
guarantees are payable when cumulative loss trigger levels are reached on
certain of the Company's single-family mortgage loan securitizations. Currently,
these trigger levels have been reached on four of the Company's securities, and
the Company has made claims under the reimbursement guarantees in amounts
approximating $1.2 million. The counterparty has denied payment on these claims,
citing various deficiencies in loan underwriting which would render these loans
and corresponding claims ineligible under the reimbursement agreements. The
Company disputes this classification and is pursuing this matter through
court-ordered arbitration.
NOTE 5 - COLLATERALIZED BONDS
The components of collateralized bonds along with certain other information at
December 31, 2000 and 1999 are summarized below:
- ------------------------------------ ---------------------------------- ----------------------------------
2000 1999
Bonds Range of Bonds Range of
Outstanding Interest Rates Outstanding Interest Rates
- ------------------------------------ ----------------- ---------------- ----------------- ----------------
Variable-rate classes $ 1,507,786 6.9%-10.1% $ 1,957,075 5.8%-9.1%
Fixed-rate classes 648,708 6.2%-8.0% 722,615 6.2%-8.0%
Accrued interest payable 4,754 5,138
Deferred bond issuance costs (4,905) (6,004)
Unamortized (discount) premium (13,315) (17,755)
- ------------------------------------ ----------------- ---------------- ----------------- ----------------
$ 2,143,028 $ 2,661,069
- ------------------------------------ ----------------- ---------------- ----------------- ----------------
Range of stated maturities 2015-2033 2015-2033
Number of series 4 4
- ------------------------------------ ----------------- ---------------- ----------------- ----------------
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 bond 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 7.6%, 6.2%, and 6.8% for the years ended December 31, 2000, 1999 and
1998, 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.
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, 2000
and 1999:
------------------------------------ ------------------------------------------- -------------------------------------------
2000 1999
Notional Amortized Notional Amortized
Amount Amount Fair Value Amount Amount Fair Value
------------------------------------ ------------- -------------- -------------- ------------- -------------- --------------
Recorded financial instruments:
Assets:
Collateral for collateralized
bonds $ - $ 2,302,311 $ 2,208,015 $ - $2,850,620 $2,838,439
Interest rate cap agreements - - - 351,000 3,452 885
Cash - 10 10 - 10 10
Liabilities:
Collateralized bonds - 2,143,028 2,095,805 - 2,661,069 2,604,026
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 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
received 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. The Company liquidated
these interest rate cap agreements during 2000.
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 that
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 paid 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. The Company had net interest expense related to this demand
promissory note of $471, $1,626 and $2,014 during 2000, 1999 and 1998,
respectively.
NOTE 8 - OTHER MATTERS
At both December 31, 2000 and 1999, the Company had remaining $308,602 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
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is omitted pursuant to General
Instruction I.
Item 11. EXECUTIVE COMPENSATION
Information in response to this Item is omitted pursuant to General
Instruction I.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is omitted pursuant to General
Instruction I.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is omitted pursuant to General
Instruction 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).
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).
4.7 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).
4.11 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).
99.15 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
None.
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/ Thomas H. Potts
-------------------------------------
Thomas H. Potts
(Principal Executive Officer)
By: /s/ Stephen J. Benedetti
-------------------------------------
Stephen J. Benedetti
(Principal Financial and
Accounting Officer)
Dated: April 16, 2001
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 April 16, 2001
- ----------------------------------------
Thomas H. Potts
/s/ J. Thomas O'Brien, Jr. Director April 16 , 2001
- ----------------------------------------
J. Thomas O'Brien, Jr.
/s/ John C. Stevenson, Jr. Director April 16, 2001
- ----------------------------------------
John C. Stevenson, Jr.
EXHIBIT INDEX
Sequentially
Exhibit Numbered Page
- ------- ----------------
23.1 Consent of DELOITTE & TOUCHE LLP I