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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, 2001
[ ] 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 (IRS Employer Identification No.)
of incorporation or organization)
4551 Cox Road, Suite 300 23060
Glen Allen, Virginia (Zip Code)
(Address or principal executive offices)
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_X_
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 non-affiliates of the
registrant as of the latest practicable date, March 15, 2002: None
As of March 15, 2002, 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.
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MERIT SECURITIES CORPORATION
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
Number
PART I.
Item 1. Business 1
Item 2. Properties 1
Item 3. Legal Proceedings 1
Item 4. Submission of Matters to a Vote of Security Holders 1
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 2
Item 6. Selected Financial Data 2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 2
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 4
Item 8. Financial Statements and Supplementary Data 5
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 16
PART III.
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management 16
Item 13. Certain Relationships and Related Transactions 16
PART IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 17
SIGNATURES 19
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) other mortgage pass-through
certificates or mortgage-collateralized obligations, (iii) property tax
receivables and (iv) consumer installment loans (collectively, the
"Collateral"). In the future, the Company may also securitize other types of
loans or securities such as Federal National Mortgage Association
Mortgage-Backed Certificates, Federal Home Loan Mortgage Corporation
Mortgage-Backed Certificates, or Government National Mortgage Association
Mortgage-Backed Certificates.
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, 2001, the Company has issued
fourteen (14) series of Bonds totaling approximately $9.1 billion aggregate
principal amount. To date, ten (10) of these series have been called and
collapsed into subsequent issuances or called and re-offered for sale. As of
December 31, 2001, the Company had four (4) series of Bonds outstanding totaling
approximately $1.5 billion compared to four (4) series at December 31, 2000
totaling $2.1 billion.
At December 31, 2001, 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 currently anticipate
issuing additional Bonds in the near future, other than the possible call and
re-securitization or re-issuance of previously issued Bonds.
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,
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(amounts in thousands except series outstanding) 2001 2000
- --------------------------------------------------------------- ----------------- ----------- ----------------
Collateral for collateralized bonds $ 1,595,653 $ 2,208,015
Non-recourse debt - collateralized bonds 1,542,924 2,143,028
Shareholder's equity 57,164 64,997
Collateralized bond series outstanding 4 4
- --------------------------------------------------------------- ----------------- ----------- ----------------
Collateral for collateralized bonds
As of both December 31, 2001 and 2000, the Company had four series of
collateralized bonds outstanding. The collateral for collateralized bonds
decreased to $1.6 billion at December 31, 2001 compared to $2.2 billion at
December 31, 2000. This decrease of $0.6 billion is primarily the result of
$577.6 million in paydowns on the collateral during 2001.
Non-recourse debt - collateralized bonds
Collateralized bonds decreased to $1.5 billion at December 31, 2001 from $2.1
billion at December 31, 2000 as a result of $430.1 million in paydowns during
2001.
Shareholder's Equity
Shareholder's equity decreased to $57.2 million at December 31, 2001, from $65.0
million at December 31, 2000. This decrease was a result of dividend and return
of capital distributions made by the Company to IHC, partially offset by a $58.7
million decrease in the net unrealized loss on investments available-for-sale,
from $94.3 million at December 31, 2000 to $35.6 million at December 31, 2001,
and a net gain of $5.0 million during 2001.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
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(amounts in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Interest income $ 150,372 $ 201,317 $ 209,090
Interest expense on collateralized bonds 108,135 175,306 173,939
Provision for losses 34,510 34,108 13,555
Net interest margin 5,999 (9,709) 19,601
Loss on termination of interest rate caps - (2,440) -
Gain on sale of securities - - 397
Extraordinary (loss) gain - extinguishment of debt (1,013) - 26,815
Net income (loss) 4,986 (12,714) 45,187
- --------------------------------------------------------------------------------------------------------------------
Interest income on the collateral for collateralized bonds decreased to $150.4
million in 2001 from $201.3 million in 2000. This decrease was primarily a
result of the continued impact of prepayments on interest income, as average
collateral for collateralized bonds declined from $2.6 billion to $2.0 billion
for the years ended December 31, 2000 and 2001, respectively, coupled with the
overall decline in interest rates during 2001. 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 decline in the average
collateral for collateralized bonds, which decreased 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 expense on collateralized bonds decreased to $108.1 million in 2001
from $175.3 million in 2000, primarily due to the decrease in one-month London
InterBank Offered Rate ("LIBOR") during 2001 and the decline in average
collateralized bonds due to prepayments on the related collateral for
collateralized bonds. Interest expense on collateralized bonds increased from
$173.9 million in 1999 to $175.3 million in 2000, primarily due to the increase
in one-month 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.
Provision for losses increased to $34.5 million in 2001 from $34.1 million in
2000. The Company has seen the loss severity on manufactured housing loans
increase dramatically since 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
2002. 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 under-performance of the Company's securitized manufactured
housing loan portfolio.
Net interest margin in 2001 increased to a positive $6.0 million from a negative
$9.7 million in 2000. This increase was the result of the reduction in the
Company's average cost of funds as a result of the overall decline in interest
rates during 2001. Due to the mismatch in the re-pricing of the Company's assets
and liabilities (the adjustable rate portion of the Company's assets resets
generally every six months and the adjustable rate portion of the Company's
collateralized bonds resets generally every month), the decrease in overall
rates benefited the Company's net interest margin. Net interest margin decreased
in 2000 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.
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
The Company incurred an extraordinary loss of $1.0 million in 2001 on the call
and re-issuance of $503.8 million of collateralized bonds related to its Series
11A bonds. 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 re-securitized 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, 2001, the Company retained $151.1 million
in aggregate principal amount of overcollateralization compared to $184.7
million at December 31, 2000.
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 margin comprises the primary
component of the Company's earnings. Additionally, cash flow from the investment
portfolio represents the primary component of the Company's incoming cash flow.
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 re-price within specified periods. The Company's strategy has been to
mitigate interest rate risk through the creation of a diversified investment
portfolio of high quality assets that, in the aggregate, preserves the Company's
capital base while generating stable income and cash flow in a variety of
interest rate and prepayment environments.
The Company monitors the aggregate cash flow, projected net yield and market
value of its investment portfolio under various interest rate and prepayment
assumptions. While certain investments may perform poorly in an increasing or
decreasing interest rate environment, other investments may perform well, and
others may not be impacted at all.
The Company focuses on the sensitivity of its cash flow, and measures such
sensitivity to changes in interest rates. Changes in interest rates are defined
as instantaneous, parallel, and sustained interest rate movements in 100 basis
point increments. The Company estimates its cash flow for the next twenty-four
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 cash flow.
The following table summarizes the Company's net interest margin cash flow
sensitivity analysis as of December 31, 2001. This analysis represents
management's estimate of the percentage change in net interest margin cash flow
given a parallel shift in interest rates. The "Base" case represents the
interest rate environment as it existed as of December 31, 2001. 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
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. The model applies the same
prepayment rate assumptions for all five cases indicated below. 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, there have been
significant changes in the Company's assets and liabilities, and there are
likely to be such changes in the future.
% Change in Net
Basis Point Interest Margin Cash
Increase (Decrease) in Flow From
Interest Rates Base Case
- --------------------------- ---------------------------
+200 (4.3)%
+100 (2.2)%
Base
-100 2.2%
-200 4.3%
Approximately $689 million of the Company's investment portfolio as of December
31, 2001 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 67% and 21% of the ARM
loans underlying the Company's ARM securities and 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 investment portfolio will decrease. The
decrease of the net interest spread results from (i) the lag in resets of the
ARM loans underlying the ARM securities and collateral for collateralized bonds
relative to the rate resets on the associated borrowings 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, cap or floor
agreements, to the extent that the Company has entered into such agreements.
The remaining portion of the Company's collateral for collateralized bonds as of
December 31, 2001, approximately $956 million, 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, 2001, 2000 and 1999.....................................9
Balance Sheets - December 31, 2001 and 2000..................................10
Statements of Operations - For the years
ended December 31, 2001, 2000 and 1999....................................11
Statements of Shareholder's Equity - For
the years ended December 31, 2001, 2000 and 1999..........................12
Statements of Cash Flows - For the years ended
December 31, 2001, 2000 and 1999..........................................13
Notes to Financial Statements - For the years
ended December 31, 2001, 2000 and 1999....................................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, 2001 and 2000 and the related statements of operations, shareholder's equity
and cash flows for each of the three years in the period ended December 31,
2001. 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, 2001 and 2000, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 5, 2002
MERIT SECURITIES CORPORATION
Balance Sheets
December 31, 2001 and 2000
(amounts in thousands except share data)
2001 2000
----------------- ------------------
Assets:
Collateral for collateraliz $ 1,595,653 $ 2,208,015
Loans 4,435 -
Cash - 10
----------------- ------------------
$ 1,600,088 $ 2,208,025
================= ==================
Liabilities and Shareholder's Equity:
Liabilities:
Non-recourse debt - collateralized
bonds $ 1,542,924 $ 2,143,028
----------------- -----------------
1,542,924 2,143,028
----------------- -----------------
Shareholder's Equity:
Common stock, no par value
10,000 shares authorized,
1,000 issued and outstanding 10 10
Additional paid-in capital 92,774 147,240
Accumulated other comprehensive loss (35,620) (94,296)
Retained earnings - 12,043
----------------- ------------------
57,164 64,997
----------------- ------------------
$ 1,600,088 $ 2,208,025
================= ==================
See accompanying notes to financial statements.
MERIT SECURITIES CORPORATION
Statements of Operations
For the years ended December 31, 2001, 2000 and 1999
(amounts in thousands)
2001 2000 1999
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Interest income:
Collateral for collateralized bonds $ 150,372 $ 201,317 $ 209,090
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Interest and related expense:
Interest expense on collateralized bonds 108,135 175,306 173,939
Other collateralized bond expense 1,728 1,612 1,995
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109,863 176,918 175,934
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Net interest margin before provision for losses 40,509 24,399 33,156
Provision for losses (34,510) (34,108) (13,555)
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Net interest margin 5,999 (9,709) 19,601
Loss on termination of interest rate caps - (2,440) -
Gain on sale of securities - - 397
Other expense - (94) -
Interest on due to affiliates, net - (471) (1,626)
------------------------------------------------------
Income (loss) before extraordinary item 5,999 (12,714) 18,372
Extraordinary (loss) gain - extinguishment of debt (1,013) - 26,815
------------------------------------------------------
Net income (loss) $ 4,986 $ (12,714) $ 45,187
======================================================
See accompanying notes to financial statements.
MERIT SECURITIES CORPORATION
Statements of Shareholder's Equity For the years ended December 31, 2001,
2000and 1999 (amounts in thousands)
Accumulated other Retained
Additional comprehensive earnings
Common Stock paid-in income (loss) (accumulated
capital deficit) Total
--------------- --------------- -------------------- --------------- --------------
Balance at January 1, 1999 $ 10 $ 190,156 $ 33,575 $ (20,430) $ 203,311
Comprehensive loss:
Net income - - - 45,187 45,187
Change in net unrealized gain on
investments available-for-sale - - (48,324) - (48,324)
--------------
Total comprehensive loss (3,137)
Capital distributions - (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 contributions - 21,243 - - 21,243
--------------- --------------- -------------------- --------------- --------------
Balance at December 31, 2000 10 147,240 (94,296) 12,043 64,997
Comprehensive loss:
Net income - - - 4,986 4,986
Change in net unrealized loss on
investments available-for-sale - - 58,676 - 58,676
--------------
Total comprehensive income 63,662
Dividends and capital distributions - (54,466) - (17,029) (71,495)
--------------- --------------- -------------------- --------------- --------------
Balance at December 31, 2001 $ 10 $ 92,774 $ (35,620) $ - $ 57,164
=============== =============== ==================== =============== ==============
See accompanying notes to financial statements.
MERIT SECURITIES CORPORATION
Statements of Cash Flows
For the years ended December 31, 2001, 2000 and 1999
(amounts in thousands)
2001 2000 1999
-----------------------------------------------------
Operating activities:
Net income (loss) $ 4,986 $ (12,714) $ 45,187
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Loss on termination of interest rate caps - 2,440 -
Gain on sale of investments - - (397)
Provision for losses 34,510 34,108 13,555
Extraordinary loss (gain) - extinguishment of debt 1,013 - (26,815)
Amortization, net 9,264 9,971 15,664
Other (2,703) 36 1,188
-----------------------------------------------------
Net cash provided by operating activities 47,070 33,841 48,382
-----------------------------------------------------
Investing activities:
Collateral for collateralized bonds:
Purchase of loans subsequently securitized - - (668,858)
Principal payments on collateral 577,625 507,521 1,096,474
Proceeds from sale of collateral for collateralized bonds 48,710 - 5,250
Net decrease in accrued interest receivable and funds
held by trustee 3,911 2,700 3,116
-----------------------------------------------------
Net cash provided by investing activities 630,246 510,221 435,982
-----------------------------------------------------
Financing activities:
Collateralized bonds:
Proceeds from issuance of collateralized bonds 503,914 657 623,286
Principal payments on collateralized bonds (1,108,734) (523,198) (1,091,382)
Decrease in accrued interest payable (1,011) (420) (64)
(Decrease) increase in due to affiliates - (42,344) 47,955
Dividends and capital contributions (distributions) (71,495) 21,243 (64,159)
-----------------------------------------------------
Net cash used for financing activities (677,326) (544,062) (484,364)
-----------------------------------------------------
Net change in cash (10) - -
Cash at beginning of year 10 10 10
-----------------------------------------------------
Cash at end of year $ 10 $ - $ 10
=====================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 105,654 $ 171,906 $ 172,259
=====================================================
Supplemental disclosure of non-cash activities:
Collateral for collateralized bonds subsequently $ - $ - $ 1,569,734
securitized
=====================================================
See accompanying notes to financial statements.
MERIT SECURITIES CORPORATION
Notes to Financial Statements
For the years ended December 31, 2001, 2000 and 1999
(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 subsidiary 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 and manufactured housing
installment loans secured by either a UCC filing or a motor vehicle title.
Pursuant to the requirements of Statement of Financial Accounting Standards
("FAS") 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, 2001 and 2000 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 may enter into interest rate swap agreements, interest rate cap
agreements, interest rate floor agreements, financial forwards, financial
futures and options on financial futures ("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. At the
inception of the hedge, these instruments are designated as either hedge
positions or trading positions using criteria established in FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities".
For Interest Rate Agreements designated as hedge instruments, the Company
evaluates the effectiveness of these hedges against the financial instrument
being hedged under various interest rate scenarios. The effective portion of the
gain or loss on an Interest Rate Protection Agreement designated as a hedge is
reported in accumulated other comprehensive income, and the ineffective portion
of such hedge is reported in 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.
If the underlying asset, liability or commitment is sold or matures, the hedge
is deemed partially or wholly ineffective, 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 or otherwise previously been
recognized in income.
For Interest Rate Agreements entered into for trading purposes, realized and
unrealized changes in fair value of these instruments are recognized in the
consolidated statements of operations as trading activities in the period in
which the changes occur or when such trade instruments are settled. Amounts
payable to or receivable from counterparties, if any, are included on the
consolidated balance sheets in accrued expenses and other liabilities.
FAS No. 133, as amended, established 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 adopted FAS No. 133 effective January 1,
2001. The adoption of FAS No. 133 did not have a significant impact on the
financial position, results of operations, or cash flows of the Company.
Loans
Loans considered held for sale are carried at the lower of amortized cost or
market. Loans held to maturity are carried at amortized cost. At December 31,
2001, $3,529 was considered held for sale and $906 was considered held to
maturity.
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 and credit losses. The discount rate used in the determination
of fair value of the collateral for collateralized bonds was 16% at December 31,
2001 and 2000. Prepayment rate assumptions at December 31, 2001 and 2000 were
generally at a "constant prepayment rate," or CPR, ranging from 35%-60% for
2001, and 28% for 2000, respectively, for collateral for collateralized bonds
consisting of single-family mortgage loans and securities, and a CPR equivalent
ranging from 9%-10% for 2001 and 7% for 2000, respectively for collateral for
collateralized bonds consisting of manufactured housing loan collateral. CPR
assumptions for each year are based in part on the actual prepayment rates
experienced for the prior six-month period and in part on management's estimate
of future prepayment activity. The loss assumptions utilized vary for each
series of collateral of collateralized bonds, depending on the collateral
pledged. The cash flows for the collateral for collateralized bonds were
projected to the estimated date that the security can be called and retired by
the Company, if there is economic value to the Company in calling and retiring
the security, which is typically triggered when the remaining security balance
equals 35% of the original balance (the "Call Date"). The Company estimates
anticipated market prices of the underlying collateral at the Call Date. 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 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 are 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 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. The Company
adopted FAS No. 133 effective January 1, 2001. The adoption of FAS No. 133 did
not have a significant impact on the financial position, results of operations,
or cash flows of the Company.
In September 2000, the Financial Accounting Standards Board ("FASB") issued
FAS 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 adoption of FAS No. 140 did not
have a material impact on the Company's financial statements.
In June 2001, FASB issued FAS No. 141, "Business Combinations". FAS No. 141
requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. Business combinations originally accounted for under the pooling of
interest method will not be changed. The adoption of FAS No. 141 did not have an
impact on the financial position, results of operations or cash flows of the
Company.
In June 2001, the FASB issued FAS No. 142, "Goodwill and Other Intangible
Assets". FAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. FAS
No. 142 provides that intangible assets with finite useful lives be amortized
and that goodwill and intangible assets with indefinite lives will not be
amortized, but will rather be tested at least annually for impairment. As the
Company has no goodwill or intangible assets that it is amortizing, the adoption
of SFAS No. 142 will have no effect on the financial position, results of
operations or cash flows of the Company.
In June 2001, the FASB issued FAS No. 143, "Accounting for Asset Retirement
Obligations." FAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. FAS No.143 is effective for fiscal years
beginning after June 15, 2002. The Company does not believe the adoption of FAS
No. 143 will have a significant impact on the financial position, results of
operations or cash flows of the Company.
In August 2001, the FASB issued FAS No. 144, "Accounting for the Impairment of
Long-Lived Assets" which supersedes FAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be disposed of" and the
accounting and reporting provisions of Accounting Principles Board (APB) No. 30,
"Reporting the Results of Operations - Reporting and Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of business. This
statement is effective for fiscal years beginning after December 15, 2001. FAS
No. 144 retains many of the provisions of FAS No. 121, but addresses certain
implementation issues associated with that Statement. The Company does not
believe the adoption of FAS No. 144 will have a significant impact on the
financial position, results of operations or cash flows of the Company.
Basis of Presentation
Certain amounts for 2000 and 1999 have been reclassified to conform to the
presentation for 2001.
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, 2001 and 2000, and the related average effective interest rates
(calculated for the month ended December 31, 2001 and 2000, and excluding
unrealized gains and losses):
- ------------------------------------------ ---------------------------------- ----------------------------------
2001 2000
Effective Effective
Fair Value Interest Rate Fair Value Interest Rate
- ------------------------------------------ ----------------- ---------------- ----------------- ----------------
Collateral for collateralized bonds:
Amortized cost $ 1,652,346 6.9% $ 2,322,537 8.1%
Allowance for losses (21,073) (20,226)
----------------- -----------------
Amortized cost, net 1,631,273 2,302,311
Gross unrealized gains 26,929 25,113
Gross unrealized losses (62,549) (119,409)
- ------------------------------------------ ----------------- ---------------- ----------------- ----------------
$ 1,595,653 $ 2,208,015
- ------------------------------------------ ----------------- ---------------- ----------------- ----------------
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 and manufactured housing installment loans
secured by either a UCC filing or a motor vehicle title. All collateral for
collateralized bonds is pledged to secure repayment of the related
collateralized bonds. All principal and interest (less servicing-related fees)
on the collateral is remitted to a trustee and is available for payment on the
collateralized bonds. The Company's exposure to loss on collateral for
collateralized bonds is generally limited to the amount of collateral pledged in
excess of the related collateralized bonds issued, as the collateralized bonds
issued are non-recourse to the Company. The collateral for collateralized bonds
can be sold by the Company, but only subject to the lien of the collateralized
bond indenture.
The components of collateral for collateralized bonds at December 31, 2001 and
2000 are as follows:
- --------------------------------------------- ---------------- -----------------
2001 2000
- --------------------------------------------- ---------------- -----------------
Collateral, net of allowance $ 1,623,957 $ 2,285,703
Funds held by trustees 530 1,381
Accrued interest receivable 11,165 15,079
Unamortized premiums and discounts, net (4,379) 148
Unrealized loss, net (35,620) (94,296)
- --------------------------------------------- ---------------- -----------------
$ 1,595,653 $ 2,208,015
- --------------------------------------------- ---------------- -----------------
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, 2001, 2000
and 1999:
- --------------------------------------------- ---------------- -----------------
2001 2000 1999
- --------------------------------------------- ---------------- -----------------
Beginning balance $ 20,226 $ 11,830 $ 16,593
Provision for losses 34,510 34,108 13,555
Losses charged-off, net of
recoveries (33,663) (25,712) (18,318)
- --------------------------- ----------------- ---------------- -----------------
Ending balance $ 21,073 $ 20,226 $ 11,830
- --------------------------- ----------------- ---------------- -----------------
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
$21,073 and $20,226 at December 31, 2001 and 2000 respectively, and is included
in collateral for collateralized bonds in the accompanying consolidated balance
sheets. Overcollateralization at December 31, 2001 and 2000 totaled $93,468and
$149,435 respectively
NOTE 5 - COLLATERALIZED BONDS
The components of collateralized bonds along with certain other information at
December 31, 2001 and 2000 are summarized below:
------------------------------------ ---------------------------------- ----------------------------------
2001 2000
Bonds Outstanding Range of Bonds Outstanding Range of
Interest Rates Interest Rates
------------------------------------ ----------------- ---------------- ----------------- ----------------
Variable-rate classes $ 979,174 2.5%-5.6% $ 1,507,786 6.9%-10.1%
Fixed-rate classes 572,390 6.2%-8.0% 648,708 6.2%-8.0%
Accrued interest payable 3,744 4,754
Deferred bond issuance costs (4,003) (4,905)
Unamortized (discount) premium (8,381) (13,315)
------------------------------------ ----------------- ---------------- ----------------- ----------------
$ 1,542,924 $2,143,028
------------------------------------ ----------------- ---------------- ----------------- ----------------
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 6.1%, 7.6%, and 6.2% for the years ended December 31, 2001, 2000 and
1999, respectively.
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, 2001
and 2000:
------------------------------------ --------------------------------------- ------------------------------------
2001 2000
Amortized Amortized
Amount Fair Value Amount Fair Value
------------------------------------ -------- --------------- -------------- ------ -------------- --------------
Recorded financial instruments:
Assets:
Collateral for collateralized bonds $ 1,631,273 $ 1,595,653 $ 2,302,311 $ 2,208,015
Loans 4,435 4,435 - -
Cash - - 10 10
Liabilities:
Collateralized bonds 1,542,924 1,485,756 2,143,028 2,095,805
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 loans was based on management's estimate. Non-recourse debt is
both floating and fixed, and is considered within the security structure along
with the associated collateral for collateralized bonds.
NOTE 7 - OTHER MATTERS
At both December 31, 2001 and 2000, 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 &
Accounting Officer)
Dated: March 28, 2002
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 28, 2002
- ----------------------------------------
Thomas H. Potts
/s/ J. Thomas O'Brien, Jr. Director March 28, 2002
- ----------------------------------------
J. Thomas O'Brien, Jr.
/s/ Christopher T. Bennett Director March 28, 2002
- ----------------------------------------
Christopher T. Bennett
EXHIBIT INDEX
Sequentially
Exhibit Numbered Page
- ------- ----------------
23.1 Consent of DELOITTE & TOUCHE LLP I
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to incorporation by reference in the Registration Statement No.
333-64385 of Merit Securities Corporation on Form S-3 of our report dated March
5, 2002, appearing in this Annual Report on Form 10-K of Merit Securities
Corporation for the year ended December 31, 2001.
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 28, 2002