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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended June 30, 2002
|_| Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission file number 33-83524
MERIT SECURITIES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 52-1549373
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4551 Cox Road, Suite 300, Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
(804) 217-5800
(Registrant's telephone number, including area code)
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 ninety days. |_|Yes |X|No
As of July 31, 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 Instructions H (1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
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MERIT SECURITIES CORPORATION
FORM 10-Q
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
June 30, 2002 and December 31, 2001(as
restated) (unaudited)..............................................1
Condensed Consolidated Statements of Operations
for the three months and six months ended June 30,
2002 and 2001(as restated) (unaudited)............................2
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2002 and 2001
(as restated) (unaudited).........................................3
Notes to Unaudited Condensed Consolidated Financial Statements.......4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................6
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................10
Item 5. Other Information...................................................10
Item 6. Exhibits and Reports on Form 8-K....................................10
SIGNATURES...................................................................13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERIT SECURITIES CORPORATION
Condensed CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands except share data)
June 30, December 31,
2002 2001
--------------------- ---------------------
ASSETS: (As Restated,
See Note 4)
Collateral for collateralized bonds $ 1,517,707 $ 1,634,460
Loans 12,013 4,435
--------------------- ---------------------
$ 1,529,720 $ 1,638,895
===================== =====================
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Non-recourse debt - collateralized bonds $ 1,460,694 $ 1,542,924
SHAREHOLDER'S EQUITY:
Common stock, no par value, 10,000 shares authorized,
1,000 shares issued and outstanding 10 10
Additional paid-in capital 69,189 92,774
Accumulated other comprehensive (loss) income (2,499) 3,187
Retained earnings 2,326 -
--------------------- ---------------------
69,026 95,971
--------------------- ---------------------
$ 1,529,720 $ 1,638,895
===================== =====================
See notes to unaudited condensed consolidated financial statements.
MERIT SECURITIES CORPORATION
Condensed CONSOLIDATED STATEMENTS
OF OPERATIONS (UNAUDITED)
(amounts in thousands)
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------- -------------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
(As Restated, (As Restated,
See Note 4) See Note 4)
Interest income:
Collateral for collateralized
bonds $ 27,936 $ 39,973 $ 54,750 $ 84,727
Loans 27 - 27 -
---------------- ---------------- ---------------- ----------------
27,963 39,973 54,777 84,727
---------------- ---------------- ---------------- ----------------
Interest and related expense:
Interest expense on
collateralized bonds 16,485 28,752 33,354 64,629
Other
559 466 994 878
---------------- ---------------- ---------------- ----------------
17,044 29,218 34,348 65,507
---------------- ---------------- ---------------- ----------------
Net interest margin before
provision for losses 10,919 10,755 20,429 19,220
Provision for losses (5,279) (4,555) (11,156) (9,110)
---------------- ---------------- ---------------- ----------------
Net interest margin 5,640 6,200 9,273 10,110
Impairment charges (4,442) (1,783) (6,403) (3,566)
Affiliate interest expense (4) - (4) -
---------------- ---------------- ---------------- ----------------
Income before extraordinary item 1,194 4,417 2,866 6,544
Extraordinary item - loss on
extinguishment of debt (540) - (540) -
---------------- ---------------- ---------------- ----------------
Net income $ 654 $ 4,417 $ 2,326 $ 6,544
================ ================ ================ ================
See notes to unaudited condensed consolidated financial statements.
MERIT SECURITIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
Six Months Ended
June 30,
-----------------------------------------------------
2002 2001
---------------------- ----------------------
(As Restated,
See Note 4)
Operating activities:
Net income $ 2,326 $ 6,544
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss on extinguishment of debt 540 -
Impairment charge 6,403 3,566
Provision for losses 11,156 9,110
Amortization, net 4,692 5,008
Net (increase) decrease in accrued interest receivable
and funds held by trustee (1,947) 1,545
Decrease in accrued interest payable (88) (589)
Other (222) 293
---------------------- ----------------------
Net cash provided by operating activities 22,860 25,477
---------------------- ----------------------
Investing activities:
Collateral for collateralized bonds:
Purchase of loans (158,933) -
Principal payments on collateral 242,160 307,171
Proceeds from sale of collateralized bonds 605,272 -
---------------------- ----------------------
Net cash provided by investing activities 688,499 307,171
---------------------- ----------------------
Financing activities:
Collateralized bonds:
Principal payments on collateralized bonds (687,774) (320,301)
Capital distributions (23,585) (12,357)
---------------------- ----------------------
Net cash used for financing activities (711,359) (332,658)
---------------------- ----------------------
Net change in cash - (10)
Cash, beginning of period - 10
---------------------- ----------------------
Cash, end of period $ - $ -
====================== ======================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 31,926 $ 63,329
====================== ======================
See notes to unaudited condensed consolidated financial statements.
MERIT SECURITIES CORPORATION
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(amounts in thousands except share data)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and notes required by accounting principles generally accepted in
the United States of America, hereinafter referred to as "generally accepted
accounting principles" for complete financial statements. The financial
statements include the accounts of Merit Securities Corporation (the "Company")
and its wholly owned subsidiary, Financial Asset Securitization, Inc. (FASI).
The Company is a wholly owned, limited-purpose finance subsidiary of Issuer
Holding Corporation ("IHC"). IHC was formed on September 4, 1996 to acquire all
of the outstanding stock of the Company and certain other affiliates of Dynex
Capital, Inc. ("Dynex"). IHC is a wholly owned subsidiary of Dynex. The Company
was organized to facilitate the securitization of loans through the issuance and
sale of collateralized bonds (the "Bonds"). All significant inter-company
balances and transactions have been eliminated in the consolidation of the
Company.
In the opinion of management, all material adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation of the
condensed consolidated financial statements have been included. The Condensed
Consolidated Balance Sheet at June 30, 2002, the Condensed Consolidated
Statements of Operations for the three and six months ended June 30, 2002 and
2001, the Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001, and the related notes to financial statements are
unaudited. Operating results for the six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
On March 31, 2002, the Company purchased from Dynex Capital, Inc., its
parent, 10,000 shares of common stock of Financial Asset Securitization, Inc.
Certain reclassifications have been made to the financial statements for 2001 to
conform to the presentation for 2002.
NOTE 2 -- COLLATERAL FOR COLLATERALIZED BONDS
Collateral for collateralized bonds consists of loans and 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 a UCC filing. 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 following table summarizes the components of collateral for collateralized
bonds as of June 30, 2002 and December 31, 2001. Debt securities pledged as
collateral for collateralized bonds are considered available for sale, and are
therefore recorded at fair value.
- ------------------------------------------------------------ -------------------------------------
June 30, 2002 December 31, 2001
- ------------------------------------------------------------ -------------------------------------
(As Restated,
See Note 4)
Loans, at amortized cost $ 1,155,265 $ 1,186,400
Debt securities, at fair value 377,823 463,424
- --------------------------------------------------------------------------------------------------
1,533,088 1,649,824
Reserve for loan losses (15,381) (15,364)
- --------------------------------------------------------------------------------------------------
$ 1,517,707 $ 1,634,460
- --------------------------------------------------------------------------------------------------
The following table summarizes the amortized cost basis, gross unrealized gains
and losses and estimated fair value of debt securities pledged as collateral for
collateralized bonds as of June 30, 2002:
- -------------------------------------------- ----------------------- --------------- -------------- ----------------
Gross Gross
Amortized unrealized unrealized Estimated fair
cost gains losses value
- -------------------------------------------- ----------------------- --------------- -------------- ----------------
Debt securities as of June 30, 2002 $ 380,322 - $ (2,499) $ 377,823
- -------------------------------------------- ----------------------- --------------- -------------- ----------------
Securitization. On April 25, 2002, the Company completed the securitization of
$602,000 of single-family mortgage loans and the associated issuance of $605,000
of collateralized bonds. Of the $602,000 of single-family mortgage loans
securitized, $447,000 million were loans which were already owned by the Company
and $155,000 represented new loans purchased. The securitization was accounted
for as a financing; thus the loans and associated bonds were included in the
accompanying condensed consolidated balance sheet as assets and liabilities of
the Company.
NOTE 3 -- USE OF ESTIMATES
Fair Value. The Company uses estimates in establishing fair value for its
financial instruments. Estimates of fair value for collateral for collateralized
bonds are determined by calculating the present value of the projected net cash
flows of the instruments using appropriate discount rates, prepayment rates and
credit loss assumptions. Discount rates used are those management believes would
be used by willing buyers of these financial instruments at prevailing market
rates. The discount rate used in the determination of fair value of the
collateral for collateralized bonds at both June 30, 2002 and December 31, 2001
was 16%. Prepayment rate assumptions at June 30, 2002, and December 31, 2001,
were generally at a "constant prepayment rate," or CPR ranging from 30%-60% for
2002 and 2001, for collateral for collateralized bonds consisting of
single-family mortgage loans, and a CPR equivalent ranging from 9%-12% for 2002
and 2001, 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 depending on the collateral pledged. The cash flows for the
collateral for collateralized bonds were projected to the estimated date that
the security could be called and retired by the Company if there is economic
value to the Company in calling and retiring the security.
Variations in market discount rates, prepayment rates and credit loss
assumptions may materially impact the resulting fair values of the Company's
financial instruments. Since the fair value of the Company's financial
instruments is based on estimates, actual gains and losses recognized may differ
from those estimates recorded in the condensed consolidated financial
statements.
NOTE 4 -- RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of its financial statements for the three months
ended March 31, 2002 and the year ended December 31, 2001, the Company
determined that the assets previously reported as debt securities subject to the
requirements of SFAS No.115, " Accounting for Certain Investments in Debt and
Equity Securities" were, in fact, collateralized borrowings, where the
collateral being pledged as securities were loans that should have been
accounted for under the requirements of SFAS No. 5, "Accounting for
Contingencies" or SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan." As a result, the accompanying condensed consolidated financial statements
for the three and six month period ended June 30, 2001 and the condensed
consolidated balance sheet as of December 31, 2001 have been restated from the
amounts previously reported to correct the accounting for these investments.
A summary of the significant effects of the restatement is as follows:
- -----------------------------------------------------------------------------------------------------------
December 31, December 31,
(amounts in thousands) 2001 2001
- -----------------------------------------------------------------------------------------------------------
(as previously
reported) (as restated)
- -----------------------------------------------------------------------------------------------------------
Collateral for collateralized bonds $ 1,595,653 $ 1,634,460
Total assets 1,600,088 1,638,895
Accumulated other comprehensive loss (35,620) (3,187)
Total shareholder's equity 57,164 95,971
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------- ------------------------------
2001 2001 2001 2001
(as previously (as previously
reported (as restated) reported (as restated)
Provision for losses $ (6,338) $ (4,555) $ (12,676) $ (9,110)
Net interest margin 4,417 6,200 6,544 10,110
Impairment charges - (1,783) - (3,566)
----------------------------------------------------------------------------------------------------------
This restatement had no effect on income before extraordinary items or net
income.
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations
As discussed in Note 4 to the condensed consolidated financial statements
included in Item 1, the Company has restated its financial statements as of
December 31, 2001 and for the three and six-month period ended June 30, 2001.
The following management discussion and analysis takes into account the effects
of the restatement. The Company intends to amend its Annual Report of Form 10-K
for the year ended December 31, 2001 and its quarterly report on Form 10-Q for
the quarterly period ended March 31, 2002 to include the restated financial
statements as soon as practicable.
The Company was organized to facilitate the securitization of loans through the
issuance and sale of collateralized bonds (the "Bonds"). The Bonds will be
secured primarily by: (i) mortgage loans secured by first or second liens on
residential property, (ii) Federal National Mortgage Association Mortgage-Backed
Certificates, (iii) Federal Home Loan Mortgage Corporation Mortgage-Backed
Certificates, (iv) Government National Mortgage Association Mortgage-Backed
Certificates, (v) other mortgage pass-through certificates or
mortgage-collateralized obligations. In the future, the Company may also
securitize other types of loans.
After payment of the expenses of an offering and certain administrative
expenses, the net proceeds from an offering of Bonds will be used to purchase
Collateral from IHC or various third parties. IHC can be expected to use the
proceeds to reduce indebtedness incurred to obtain such loans or to acquire
additional Collateral. After the issuance of a series of Bonds, the Company may
sell the Collateral securing that series of Bonds, subject to the lien of the
Bonds.
FINANCIAL CONDITION
- -----------------------------------------------------------------------------------------------
June 30, December 31,
(amounts in thousands except per share data) 2002 2001
- ------------------------------------------------ ------------------ ---------------------
Collateral for collateralized bonds $ 1,517,707 $ 1,634,460
Non-recourse debt - collateralized bonds 1,460,694 1,542,924
Shareholder's equity 69,026 95,971
Collateralized bond series outstanding 4 5
- -----------------------------------------------------------------------------------------------
Collateral for collateralized bonds
As of December 31, 2001, the Company had 5 series of collateralized bonds
outstanding. As of June 30, 2002, the Company had 4 series of collateralized
bonds outstanding. The collateral for collateralized bonds decreased to $1.5
billion at June 30, 2002 compared to $1.6 billion at December 31, 2001. This
decrease of $100 million is primarily the result of $242.2 million in paydowns
on the collateral. These were partially offset by $154.8 million of additional
collateral acquired in April 2002.
Non-recourse debt - collateralized bonds
Collateralized bonds decreased to $1.46 billion at June 30, 2002 from $1.54
billion at December 31, 2001 as a result of $257.6 million in paydowns during
the six months ended June 30, 2002, the call and retirement of $429.6 million of
bonds and the issuance of $605.3 million in bonds in the securitization
completed in April.
Shareholder's Equity
Shareholder's equity decreased to $69 million at June 30, 2002 from $96 million
at December 31, 2001. This decrease was primarily the result of net income of
$2.3 million, offset by an increase of $5.7 million in net unrealized loss on
investments available-for-sale, and a $24.1 million capital distribution to IHC
during the period for the six months ended June 30, 2002.
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------------
(amounts in thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------- ------------------------------------
Interest income $ 27,936 $ 39,973 $ 54,750 $ 84,727
Interest expense on collateralized bonds 16,485 28,752 33,354 64,629
Provision for losses 5,279 4,555 11,156 9,110
Net interest margin 5,640 6,200 9,273 10,110
Net income 654 4,417 2,326 6,544
- ------------------------------------------------------------------------------------------------------------------
Interest income on the collateral for collateralized bonds decreased to $54.8
million for the six months ended June 30, 2002 from $84.7 million for the same
period in 2001. This decrease was primarily a result of prepayments and paydowns
on principal and lower interest rates between the respective periods.
Interest expense on collateralized bonds decreased to $33.4 million for the six
months ended June 30, 2002 from $64.6 million for the six months ended June 30,
2001. This decrease resulted almost equally from the decline in collateralized
bonds due to prepayments and paydowns on the related collateral for
collateralized bonds coupled with an overall decline in the cost of funds on the
collateralized bonds.
Provision for losses increased to $11.2 million for the six months ended June
30, 2002 from $9.1 million for the same period in 2001. This increase was
primarily a result of increasing the reserve for probable losses on various loan
pools pledged as collateral for collateralized bonds where the Company has
retained credit risk, specifically the Company's investment in manufactured
housing loan pools.
Net interest margin decreased to $9.3 million from $10.1 million for the
six-month periods ended June 30, 2002 and 2001, respectively. An increase in
provision for losses and the decline in interest earning assets were partially
offset by reduced borrowing costs on collateralized bonds outstanding.
Credit Exposures
With collateralized bond structures, the Company retains credit risk relative to
the amount of overcollateralization required in conjunction with the bond
issuance. Losses are generally first applied to the overcollateralized amount,
or in some instances surplus cash and then 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 June
30, 2002, the Company retained $117.8 million in aggregate principal amount of
overcollateralization. The Company had reserves, or otherwise had provided
coverage on $21.8 million at June 30, 2002. During the first six months of 2002,
the Company provided for additional reserves of $11.2 million and incurred
credit losses of $10.9 million.
Other forms of credit enhancement that benefit the Company, based upon the
performance of the underlying loans, may provide additional protection against
losses. These additional protections include loss reimbursement guarantees with
a remaining balance of $30.3 and a remaining deductible aggregating $2.0 million
on $108 million of securitized single family mortgage loans which are subject to
such reimbursement agreements and $326 million of securitized single family
mortgage loans which are subject to various mortgage pool insurance policies
whereby losses would need to exceed the remaining stop loss of at least 39% on
such policies before the Company would incur losses.
Other Matters
At June 30, 2002, the Company had securities of approximately $308.6 million
remaining for issuance under a registration statement filed with the Securities
and Exchange Commission. The Company anticipates issuing additional Bonds in the
future.
Item 3. - 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.
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 re-price within specified periods.
The Company and IHC monitor the aggregate cash flow, projected net yield and
market value of the collateral for collateralized bonds under various interest
rate and prepayment assumptions.
Approximately $607 million of the Company's collateral for collateralized bonds
as of June 30, 2002, 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 74% and 15%
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 that
the Company has entered into such agreements.
The remaining portion of the Company's collateral for collateralized bonds as of
June 30, 2002, approximately $931 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 and to the level of short-term
interest rates.
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 net interest margin 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 net interest
income.
The following table summarizes the Company's net interest margin cash flow
sensitivity analysis as of June 30, 2002. 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 June 30, 2002. 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.
----------------------------------------------
Basis Point % Change in Net
Increase (Decrease) Interest Margin
in Interest Rates from Base Case
----------------------------------------------
+200 (19.4)%
+100 (10.3)%
Base -
-100 11.0%
-200 23.0%
----------------------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
None
Item 5. Other Information:
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
3.1 Articles of Incorporation of the Registrant (Incorporated herein by
reference to the Exhibits to Registrant's Registration Statement No. 33-83524 on
Form S-3 filed August 31, 1994).
3.2 Bylaws of the Registrant (Incorporated herein by reference to the
Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3 filed
August 31, 1994).
3.3 Amended and Restated Articles of Incorporation of the Registrant,
effective April 19, 1995 (Incorporated herein by reference to Exhibit to the
Registrant's Current Report on Form 8-K, filed April 21, 1995).
4.1 Indenture between Registrant and Trustee, dated as of August 1, 1994
(Incorporated herein by reference to the Exhibits to Registrant's Registration
Statement No. 33-83524 on Form S-3 filed August 31, 1994).
4.2 Form of Supplement Indenture between Registrant and Trustee
(Incorporated herein by reference to the Exhibits to Registrant's Registration
Statement No. 33-83524 on Form S-3 filed August 31, 1994).
4.3 Copy of the Indenture, dated as of November 1, 1994, by and between the
Registrant and Texas Commerce Bank National Association, as Trustee
(Incorporated herein by reference to Exhibit to the Registrant's Current Report
on Form 8-K, filed December 19, 1994).
4.4 Copy of the Series 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).
4.5 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).
4.6 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).
4.7 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).
4.8 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).
4.9 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/ Stephen J. Benedetti
-----------------------------------------------
Stephen J. Benedetti
Executive Vice President
(Principal Executive Officer)
/s/ Stephen J. Benedetti
------------------------------------------------
Stephen J. Benedetti
Treasurer
(Principal Financial & Accounting Officer)
Dated: August 26, 2002