13
====================================================================
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, 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 July 31, 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.
====================================================================
MERIT SECURITIES CORPORATION
FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at June 30, 1996 and
December 31, 1995 3
Statements of Operations for the three months and
six months ended June 30, 1996 and 19954
Statement of Shareholder's Equity for the six months
ended June 30, 1996 5
Statements of Cash Flows for the six months ended
June 30, 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)
June December
30, 31,
1996 1995
--------- ---------
Assets:
Collateral for CMOs $1,703,648 $ 733,978
Prepaid shelf registration fees 479 752
Cash 10 10
========= =========
$1,704,137 $734,740
========= =========
Liabilities and Shareholder's Equity
Liabilities:
Bonds payable $1,604,848 $ 665,240
Due to affiliate 30,063 21,736
--------- ---------
1,634,911 686,976
--------- ---------
Shareholder's Equity:
Common stock, no par value,
10,000 shares authorized,
1,000 shares issued and
outstanding 10 10
Additional paid-in capital 77,400 35,222
Net unrealized gain on mortgage
investments 17,414 10,313
Retained earnings (deficit) (25,598) 2,219
--------- ---------
69,226 47,764
========= =========
$1,704,137 $734,740
========= =========
See notes to unaudited financial statements.
MERIT SECURITIES CORPORATION
Statements of Operations
(amounts in thousands except
share data)
Three Months Six
Ended Months Ended
June 30, June 30,
1996 1995 1996 1995
------- ------- ------- --------
Interest Income:
Collateral for CMOs $25,515 $6,298 $42,782 $8,582
Interest and CMO-related expense:
Interest on CMOs 24,328 4,597 39,930 6,292
Other CMO expense 677 649 1,155 804
Provision for losses 400 800
- -
-------- --------- -------- ---------
25,405 5,246 41,885 7,096
Net interest income 110 1,052 897 1,486
-------- --------- -------- ---------
Provision for loss due to
parent's sale of affiliates 28,134 - 28,134 -
Interest due to affiliate 266 51 580 99
-------- --------- -------- ---------
Net income (loss) $ (28,290) $1,001 $(27,817) $ 1,387
======== ========= ======== =========
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 investments earnings Total
---------- -------- --------- --------- ---------
Balance at
December 31, 1995 $ 10 $ 35,222 $10,313 $ 2,219 $ 47,764
Contributed capital - 42,178 - - 42,178
Change in net
unrealized gain
on mortgage
investments - - 7,101 - 7,101
Net loss - - - (27,817) (27,817)
------- -------- ------- ------- --------
Balance at June
30, 1996 10 $ 77,400 $17,414 $(25,598) $ 69,226
======= ======== ======= ======= ========
See notes to unaudited financial statements.
MERIT SECURITIES CORPORATION
Statements of Cash Flows
(amounts in thousands)
Six Months Six Months
Ended Ended
June 30, June 30,
1996 1995
------------ ------------
Operating activities:
Net income (loss) $ (27,817) $ 1,387
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization, net 3,767 (1,760)
Provision for losses 800 -
Provision for loss on parent's sale
of affiliates 28,134 -
Increase in accrued interest, net (2,777) (216)
Decrease in prepaid shelf
registration fees 273 -
-------- --------
Net cash provided by (used for)
operating activities 2,380 (589)
-------- --------
Investing activities:
Collateral for CMOs:
Purchase of mortgage loans
subsequently securitized (1,176,393) (540,157)
Principal payments on collateral 185,908 57,868
Net increase in funds held by trustee - (10)
-------- --------
Net cash used for investing
activities (990,485) (482,299)
-------- --------
Financing activities:
Collateralized mortgage obligations:
Proceeds from issuance of securities 1,123,094 506,326
Principal payments on securities (185,494) (57,041)
Increase (decrease) in due to affiliate 8,327 (866)
Capital contributions 42,178 34,469
-------- --------
Net cash provided by financing
activities 988,105 482,888
-------- --------
Net decrease 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 $ 37,971 $ 7,298
======== ========
See notes to unaudited financial statements.
MERIT SECURITIES CORPORATION
Notes to Unaudited Financial Statements June 30, 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 June 30, 1996, the
Statements of Operations for the three months and six months ended June 30, 1996
and 1995, the Statement of Shareholder's Equity for the six months ended June
30, 1996, the Statements of Cash Flows for the six months ended June 30, 1996
and 1995 and related notes to financial statements are unaudited. Operating
results for the six months ended June 30, 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 June 30, 1996. No mortgage securities were
sold during the six months ended June 30, 1996.
Securities held at June 30, 1996
------------------------------------------
Amortized Gross Gross
cost Fair unrealized unrealized
basis value gain loss
--------- --------- --------- ----------
--------- ---------- --------- ---------
Collateral for CMOs $1,686,234 $1,703,648 $ 19,613 $2,199
========= ========== ========= =========
NOTE 3 - CONTRIBUTED CAPITAL
Contributed capital represents RMC's net contribution of Collateral for CMOs in
excess of the related bonds issued.
NOTE 4 - PROVISION FOR LOSS DUE TO PARENT'S SALE OF AFFILIATES
On May 13, 1996, RMC completed its sale of various RMC affiliates to Dominion
Mortgage Services, Inc. (Dominion), a wholly-owned subsidiary of Dominion
Resources, Inc. Included in the affiliates sold were Meritech Mortgage Services,
Inc. (Meritech), which is the servicer for a significant portion of the
Company's collateral for CMOs. As a result of this sale, the Company recorded a
$28 million provision for possible losses for those loans which are serviced by
Meritech, and where the Company has retained the credit risk. In addition to the
provision recorded by the Company, Dominion has also provided for reimbursement
of losses incurred by the Company pursuant to the Loss Reimbursement Guaranty
Agreement, for any actual losses incurred on loans serviced by Meritech
exceeding the reserve recorded by the Company, up to an additional $30 million.
Such guaranty applies only to loans serviced by Meritech and is specific to each
CMO issued by the Company.
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 six months ended June 30, 1996, the Company issued one (1) series of
Bonds totaling approximately $517 million aggregate principal amount. As of June
30, 1996, the Company had five (5) series of CMOs outstanding totaling
approximately $1.6 billion, compared to $665 million at December 31, 1995.
Interest income on collateral for CMOs increased $34.2 million to $42.8 million
for the six months ended June 30, 1996 compared to $8.6 million for the six
months ended June 30, 1995 reflecting the higher balance of collateral for CMOs
resulting from the additional issuances during the second half of 1995 and the
first six months of 1996. Interest and CMO-related expense increased $34.8 from
$7.1 million for the six months ended June 30, 1995 to $41.9 million for the six
months ended June 30, 1996 resulting from the higher level of Bonds outstanding
at June 30, 1996.
As a result of the parent company's sale of certain affiliates during the second
quarter of 1996, the Company recorded a $28 million provision for the possible
losses for loans which are serviced by Meritech, an affiliate which was sold,
and where the Company has retained the credit risk.
At June 30, 1996, the Company had securities of approximately $1.1 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).
4.10 Copy of the Series 7 Indenture Supplement, dated as of May 1, 1996, 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 to Registrant's
Current Report on Form 8-K, filed June 19, 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).
99.16 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).
99.17 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).
99.18 Copy of Financial Guaranty Insurance Policy No. 21296 issued
by MBIA Insurance Corporation (Incorporated herein by
reference to Exhibit to the Registrant's Current Report on
Form 8-K, filed June 19, 1996).
(b) Reports on Form 8-K
Current Report on Form 8-K, dated May 30, 1996, as filed with the
Commission on June 7, 1996, relating to the Registrant's Series 7 Bonds.
Current Report on Form 8-K, dated June 6, 1996, as filed with the
Commission on June 19, 1996, relating to the Registrant's Series 7 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: August 14, 1996