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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 March 31, 1996
|_| 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 54-1736551
(State or other jurisdiction of incorporation) (I.R.S.
Employer Identification No.)
4880 Cox Road, Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
(804) 967-5800
(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. |X| Yes [ ] No
As of April 30, 1996, 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 Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at March 31, 1996 and
December 31, 1995 3
Statements of Operations for the three months
ended March 31, 1996 and 1995 4
Statement of Shareholder's Equity for the three months
ended March 31, 1996 5
Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 6
Notes to Unaudited Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERIT SECURITIES CORPORATION
Balance Sheets
(amounts in thousands except share data)
March December
31, 31,
1996 1995
--------- ---------
Assets:
Collateral for CMOs $ 1,291,045 $ 733,978
Prepaid shelf registration fees 607 752
Cash 10 10
========= =========
$ 1,291,662 $ 734,740
========= =========
Liabilities and Shareholder's Equity
Liabilities:
Bonds payable $ 1,195,695 $ 665,240
Payable to affiliates 26,942 21,736
-------- ---------
1,222,637 686,976
--------- ---------
Shareholder's Equity:
Common stock, no par value,
10,000 shares authorized,
1,000 shares issued and 10 10
outstanding
Additional paid-in capital 48,697 35,222
Net unrealized gain on mortgage 17,626 10,313
investments
Retained earnings 2,692 2,219
--------- ---------
69,025 47,764
========= =========
$ 1,291,662 $ 734,740
========= =========
See notes to unaudited financial statements.
MERIT SECURITIES CORPORATION
Statements of Operations
(amounts in thousands)
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
--------- ----------
Interest Income:
Collateral for CMOs $ 17,267 $ 2,285
--------- ----------
Interest and CMO-related
expense:
Interest on CMOs 15,603 1,695
Other CMO expense 477 156
Provision for losses 400 -
--------- ----------
16,480 1,851
Net interest income 787 434
--------- ----------
Other expense (314) (48)
--------- ----------
Net income $ 473 $ 386
========= ==========
See notes to unaudited financial statements.
MERIT SECURITIES CORPORATION
Statement of Shareholder's Equity
(amounts in thousands except share data)
Net
unrealized
Additional gain on
Common paid-in mortgage Retained
stock capital investment earnings Total
---------- -------- --------- --------- ---------
Balance at
December 31, 1995 $ 10 $35,222 $ 10,313 $ 2,219 $ 47,764
Contributed capital - - - 13,475
13,475
Change in net
unrealized gain - - 7,313 - 7,313
on mortgage
investments
Net income - - 473 473
-
------ -------- ------- ------- --------
Balance at March
31, 1996 $ 10 $48,697 $ 17,626 $ 2,692 $ 69,025
====== ======== ======= ======= ========
See notes to unaudited financial statements.
MERIT SECURITIES CORPORATION
Statements of Cash Flows
(amounts in thousands)
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
--------- ---------
Operating activities:
Net income ..................................... $ 473 $ 386
Adjustments to reconcile net income to
net cash provided by operating
activities:
Amortization, net ............................ 945 (30)
Provision for losses ......................... 400 --
Increase in accrued interest, net ............ (200) (330)
Decrease in prepaid shelf .................... 145 --
registration fees
--------- ---------
Net cash provided by operating
activities ............................. 1,763 26
--------- ---------
Investing activities:
Collateral for CMOs:
Purchase of mortgage loans ................... (608,084) (165,073)
subsequently securitized
Principal payments on collateral ............. 58,362 19,630
Net increase in funds held by trustee ........ -- (5)
--------- ---------
Net cash used for investing
activities ............................. (549,722) (145,448)
--------- ---------
Financing activities:
Collateralized mortgage obligations:
Proceeds from issuance of securities ......... 587,348 162,055
Principal payments on securities ............. (58,070) (19,630)
--------- ---------
529,278 142,425
Increase in payable to affiliates .............. 5,206 469
Capital contributions .......................... 13,475 2,528
--------- ---------
Net cash provided by financing
activities .................................. 547,959 145,422
--------- ---------
Net increase in cash ............................. -- --
Cash at beginning of period ...................... 10 10
--------- ---------
Cash at end of period ............................ $ 10 $ 10
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................... $ 13,599 $ 1,708
========= =========
See notes to unaudited financial statements.
MERIT SECURITIES CORPORATION
Notes to Unaudited Financial Statements March 31, 1996 (amounts in thousands
except share data)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying 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 generally accepted accounting principles for
complete financial statements. The financial statements include the accounts of
Merit Securities Corporation (the Company). The Company is a wholly owned
subsidiary of Resource Mortgage Capital, Inc (RMC). The Company was organized to
facilitate the securitization of mortgage loans through the issuance and sale of
collateralized mortgage obligations (the Bonds).
In the opinion of management, all material adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation of the
financial statements have been included. The Balance Sheet at March 31, 1996,
the Statements of Operations for the three months ended March 31, 1996 and 1995,
the Statement of Shareholder's Equity for the three months ended March 31, 1996,
the Statements of Cash Flows for the three months ended March 31, 1996 and 1995
and related notes to financial statements are unaudited. Operating results for
the three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. For further
information, refer to the audited financial statements and footnotes included in
the Company's Form 10-K for the year ended December 31, 1995.
Certain amounts for 1995 have been reclassified to conform with the presentation
for 1996.
NOTE 2--AVAILABLE-FOR-SALE MORTGAGE SECURITIES
The Company has classified all of its mortgage securities, consisting of solely
collateral for CMOs, as available-for-sale. The following tables summarize the
Company's mortgage securities held at March 31, 1996. No mortgage securities
were sold during the three months ended March 31, 1996.
Securities held at March 31, 1996
------------------------------------------
Amortized Gross Gross
cost Fair unrealized unrealized
basis value gain loss
--------- --------- --------- ----------
Collateral for CMOs $1,273,419 $1,291,045 $ 19,057 $ 1,431
========== ========== ========= =========
NOTE 3 - CONTRIBUTED CAPITAL
Contributed capital represents RMC's net contribution of Collateral for CMOs in
excess of the related bonds issued.
NOTE 4 - SUBSEQUENT EVENT
On May 13, 1996, RMC completed its sale of various RMC affiliates. Included in
the affiliates sold is Meritech Mortgage Services, Inc., which is the major
servicer for the Company's Collateral for CMOs.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Merit Securities Corporation (the Company) was incorporated in Virginia on
August 19, 1994 as a wholly owned, limited-purpose finance subsidiary of
Resource Mortgage Capital, Inc. (RMC).
The Company was organized to facilitate the securitization of mortgage loans
through the issuance and sale of collateralized mortgage obligations (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, and (v.) any other mortgage
pass-through certificates or mortgage-collateralized obligations (collectively,
the Collateral).
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 RMC or various third parties. RMC 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.
During the three months ended March 31, 1996, the Company issued one (1) series
of Bonds totaling approximately $582 million aggregate principal amount. As of
March 31, 1996, the Company had four (4) series of CMOs outstanding totaling
approximately $1,196 million, compared to $665 million at December 31, 1995.
Interest income on collateral for CMOs increased $15 million to $17.3 million
for the three months ended March 31, 1996 compared to $2.3 million for the three
months ended March 31, 1995 reflecting the higher balance of collateral for CMOs
resulting from the additional issuances during 1995 and the first quarter of
1996. Interest and CMO related expense increased $14.6 from $1.9 million for the
three months ended March 31, 1995 to $16.5 million for the three months ended
March 31, 1996 resulting from the higher level of Bonds outstanding at March 31,
1996.
At March 31, 1996, the Company had securities of approximately $1.6 billion
remaining for issuance under a registration statement filed with the Securities
and Exchange Commission. The Company anticipates issuing additional Bonds in the
future.
The Company competes in a national market with other private conduits and
various financial firms. Economic conditions, interest rates, regulatory changes
and market dynamics all influence the mortgage securities market.
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 1 Indenture Supplement, dated as of November 1, 1994,
by and between the Registrant and Texas Commerce Bank National
Association, as Trustee (including schedules and exhibits) (Incorporated
herein by reference to Exhibit to the Registrant's Current Report on Form
8-K, filed December 19, 1994).
4.5 Copy of the Series 2 Indenture Supplement, dated as of February 1, 1995,
by and between the Registrant and Texas Commerce Bank National
Association, as Trustee (including schedules and exhibits) (Incorporated
herein by reference to Exhibit to the Registrant's Current Report on Form
8-K, filed March 8, 1995).
4.6 Copy of the Series 3 Indenture Supplement, dated as of March 1, 1995, by
and between the Registrant and Texas Commerce Bank National Association,
as Trustee (including schedules and exhibits) (Incorporated herein by
reference to Exhibit to the Registrant's Current Report on Form 8-K, filed
April 21, 1995).
4.7 Copy of the Series 4 Indenture Supplement, dated as of June 1, 1995, by
and between the Registrant and Texas Commerce Bank National Association,
as Trustee (including schedules and exhibits) (Incorporated herein by
reference to Exhibit to the Registrant's Current Report on Form 8-K, filed
July 10, 1995).
4.8 Copy of the Series 5 Indenture Supplement, dated as of October 1, 1995, to
Indenture, dated as of November 1, 1994, by and between the Registrant and
Texas Commerce Bank National Association, as Trustee (related exhibits
available upon request to the Trustee). (Incorporated herein by reference
to Exhibit to the Registrant's Current Report on Form 8-K, filed November
15, 1995).
4.9 Copy of the Series 6 Indenture Supplement, dated as of March 1, 1996, by
and between the Registrant and Texas Commerce Bank National Association,
as Trustee (including schedules and exhibits) (Incorporated herein by
reference to Exhibit to the Registrant's Current Report on Form 8-K, filed
March 21, 1996).
99.1 Standard Provisions to Servicing Agreement (Incorporated herein by
reference to the Exhibits to Registrant's Registration Statement No.
33-83524 on Form S-3 filed August 31, 1994).
99.2 Form of Servicing Agreement (Incorporated herein by reference to the
Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3
filed August 31, 1994).
99.3 Standard Terms to Master Servicing Agreement (Incorporated herein by
reference to the Exhibits to Registrant's Registration Statement No.
33-83524 on Form S-3 filed August 31, 1994).
99.4 Form of Master Servicing Agreement (Incorporated herein by reference to the
Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3
filed August 31, 1994).
99.5 Form of Prospectus Supplement of Bonds secured by adjustable-rate mortgage
loans (Incorporated herein by reference to Exhibits to Registrant's
Pre-Effective Amendment No. 4 to Registration Statement No. 33-83524 on
Form S-3 filed December 5, 1994).
99.6 Form of Financial Guaranty Assurance Policy (Incorporated herein by
reference to the Exhibits to Registrant's Registration Statement No.
33-83524 on Form S-3 filed August 31, 1994).
99.7 Form of GEMICO Mortgage Pool Insurance Policy (Incorporated herein by
reference to the Exhibits to Registrant's Registration Statement No.
33-83524 on Form S-3 filed August 31, 1994).
99.8 Form of PMI Mortgage Insurance Co. Pool Insurance Policy (Incorporated
herein by reference to the Exhibits to Registrant's Registration Statement
No. 33-83524 on Form S-3 filed August 31, 1994).
99.9 Form of Prospectus Supplement of Bonds secured by fixed-rate mortgage loans
(Incorporated herein by reference to Exhibits to Registrant's Pre-Effective
Amendment No. 4 to Registration Statement No. 33-83524 on Form S-3 filed
December 5, 1994).
99.10 Copy of Financial Guaranty Insurance Policy No. 50331-N issued by
Financial Security Assurance Inc., dated December 7, 1994, with respect to
the Series 1 Bonds (Incorporated herein by reference to the Exhibit to
Registrant's 1994 Form 10-K, dated and filed March 31, 1995).
99.11 Copy of Financial Guaranty Insurance Policy No. 95010074 issued by
Financial Guaranty Insurance Company, dated February 23, 1995, with
respect to the Series 2 Bonds (Incorporated herein by reference to Exhibit
to the Registrant's Current Report on Form 8-K, filed March 8, 1995).
99.12 Copy of the Saxon Mortgage Funding Corporation Servicing Guide for Credit
Sensitive Loans, February 1, 1995 Edition (Incorporated herein by
reference to Exhibit to the Registrant's Current Report on Form 8-K, filed
March 8, 1995).
99.13 Copy of Financial Guaranty Insurance Policy No. 50364-N issued by
Financial Guaranty Assurance Inc., dated April 7, 1995, with respect to
the Series 3 Bonds (Incorporated herein by reference to Exhibit to the
Registrant's Current Report on Form 8-K, filed April 21, 1995).
99.14 Copy of Financial Guaranty Insurance Policy No. 50382-N issued by
Financial Guaranty Assurance Inc., dated June 29, 1995, with respect to
the Series 4 Bonds (Incorporated herein by reference to Exhibit to the
Registrant's Current Report on Form 8-K, filed July 10, 1995).
99.15 Copy of the Standard Terms to Master Servicing Agreement, June 1, 1995
Edition (incorporated herein by reference to Exhibit to the Registrant's
Current Report on Form 8-K, filed July 10, 1995).
99.16Copy 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).
99.17Copy 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).
(b) Reports on Form 8-K
Current Report on Form 8-K, dated February 29, 1996, as filed with the
Commission on March 6, 1996, relating to the Registrant's Series 6 Bonds.
Current Report on Form 8-K, dated March 12, 1996, as filed with the
Commission on March 21, 1996, relating to the Registrant's Series 6 Bonds.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERIT SECURITIES CORPORATION
By:/s/ Lynn K. Geurin
Lynn K. Geurin
(Principal Executive Officer)
/s/ Stephen J. Benedetti
Stephen J. Benedetti
(Principal Financial &
Accounting Officer)
Dated: May 15, 1996