Item 1. Business.
FGIC Securities Purchase, Inc. ("FGIC-SPI") was incorporated in 1990 in the State of Delaware. As of December 31, 1997, all outstanding capital stock of FGIC-SPI was owned by FGIC Holdings, Inc., a Delaware corporation, a wholly-owned subsidiary of General Electric Capital Corporation ("GE Capital"), a New York corporation, the ultimate parent of which is General Electric Company.
The business of FGIC-SPI consists of providing liquidity for certain floating rate municipal securities through a "liquidity facility". These floating rate municipal securities are typically remarketed by registered broker-dealers at par on a periodic basis to establish the applicable interest rate for the next interest period and to provide a secondary market liquidity mechanism for security holders desiring to sell their securities. In the event that such securities cannot be remarketed, FGIC-SPI, pursuant to a standby purchase agreement with the issuer of the securities, will be obligated to purchase unremarketed securities, at par, from the holders thereof who desire to remarket their securities. In order to obtain funds to purchase the securities, FGIC-SPI has entered into standby loan agreements, with GE Capital, under which GE Capital will be irrevocably obligated to lend funds as needed for FGIC-SPI to purchase the securities.
Item 2.
Item 2. Properties.
FGIC-SPI conducts its business from the facilities of Financial Guaranty Insurance Company, a wholly-owned subsidiary of FGIC Corporation.
Item 3.
Item 3. Legal Proceedings.
FGIC-SPI is not involved in any pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
As of December 31, 1992, all of FGIC-SPI's common stock, its sole class of common equity, was owned by FGIC Corporation. In January 1993, the common stock of FGIC-SPI was dividended to GE Capital. GE Capital, in turn, made a capital contribution of the common stock of FGIC-SPI to FGIC Holdings, Inc., which now owns 100% of the common stock of FGIC-SPI. Accordingly, there is no public trading market for FGIC-SPI's common stock.
Item 6.
Item 6. Selected Financial Data.
Omitted.
Item 7.
Item 7. Management's Discussion and Analysis of Results of Operations.
FGIC-SPI commenced operations in March 1992. Fees are paid up-front and in installments. Up-front fees are earned on a straight-line basis over the life of the liquidity commitment, and installment fees are earned straight-line over the installment period.
For the years ended December 31, 1997 and 1996, fees earned totaled $9,283,899 and $11,785,585 respectively. The decrease in earnings is primarily due to a reduction in the liquidity facility utilized during 1997. FGIC-SPI also incurred $678,169 and $459,685 in expenses for the years ended December 31, 1997 and 1996, respectively. Expenses increased $218,484 or 48% from 1996 to 1997 primarily as a result of increased sales efforts. During 1997, two deals closed totaling $96.4 million of liquidity facility. During 1996, four deals closed totaling $75.4 million of liquidity facility.
For the years ended December 31, 1996 and 1995, fees earned totaled $11,785,585 and $12,331,893 respectively. The decrease in earnings is primarily due to a reduction in the liquidity facility utilized during 1996. FGIC-SPI also incurred $459,685 and $510,649 in expenses for the years ended December 31, 1996 and 1995 respectively. Expenses decreased $50,964 or 10% from 1995 to 1996 primarily as a result of a decrease in the number of transactions for which FGIC-SPI provided a liquidity facility. During 1996, four deals closed totaling $75.4 million of liquidity facility. During 1995, one deal closed totaling $220.3 million of liquidity facility.
Independent Auditors' Report
The Board of Directors and Stockholder FGIC Securities Purchase, Inc.
We have audited the accompanying balance sheets of FGIC Securities Purchase, Inc. as of December 31, 1997 and 1996, and the related statements of income, changes in stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit 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, the financial statements referred to above present fairly in all material respects, the financial position of FGIC Securities Purchase, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick
/s/KPMG Peat Marwick - ------------------------- KPMG Peat Marwick
January 17, 1998 New York, New York
Item 8.
Item 8. Financial Statements and Supplementary Data.
FGIC Securities Purchase, Inc. Balance Sheets
ASSETS December 31, December 31, 1997 1996 ------------- ------------
Short-term investments $ 117,390 $ 109,277 Liquidity fees receivable 1,278,386 1,905,938 Due from affiliates 18,408,928 13,284,308 Deferred tax asset 1,964,434 1,377,427 Other assets 456,074 322,079 ----------- -----------
Total assets $22,225,212 $16,999,029 =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deferred liquidity fee income $ 211,178 $ 347,223 Due to affiliates 140,980 - Commitment fees payable to GE Capital 822,145 643,741 Accounts payable and accrued expenses 283,259 412,619 Taxes payable 8,087,541 8,094,410 ---------- ----------
Total liabilities 9,545,103 9,497,993 ---------- ----------
Stockholder's Equity:
Common stock, par value $10.00 per share; 10 shares authorized, issued and outstanding 100 100 Retained earnings 12,680,009 7,500,936 ---------- -------------
Total stockholder's equity 12,680,109 7,501,036 ---------- -------------
Total liabilities and stockholder's equity $22,225,212 $16,999,029 =========== ===========
See accompanying notes to financial statements.
FGIC Securities Purchase, Inc. Statements of Income
For the Year Ended December 31,
1997 1996 1995 ---- ---- ----
Liquidity fee income $9,283,899 $11,785,585 $12,331,893 Investment income 8,113 1,414 77,686 ----------- ----------- ----------- Total revenues 9,292,012 11,786,999 12,409,579
General and administrative expenses 499,765 280,673 313,197 GE Capital commitment fees 178,404 179,012 197,452 ---------- ---------- -----------
Total expenses 678,169 459,685 510,649 ---------- ---------- -----------
Income before provision for income taxes 8,613,843 11,327,314 11,898,930
Income tax expense (benefit):
Federal Current 3,375,738 3,730,193 4,204,078 Deferred (587,006) (62,654) (341,679) State and local 646,038 849,549 890,170 ---------- ---------- -----------
Total income tax expense 3,434,770 4,517,088 4,752,569 ---------- ---------- -----------
Net income $5,179,073 $6,810,226 $7,146,361 ========== ========== ===========
See accompanying notes to financial statements.
FGIC Securities Purchase, Inc. Statements of Changes in Stockholder's Equity For the Years Ended December 31, 1997, 1996, and 1995
Common Retained Stock Earnings Total
Balance, January 1, 1995 $100 $6,044,349 $ 6,044,449
Net Income - 7,146,361 7,146,361
Dividends paid - (10,500,000) (10,500,000) ------- ------------ ------------
Balance, December 31, 1995 100 2,690,710 2,690,810
Net Income - 6,810,226 6,810,266
Dividends Paid - (2,000,000) (2,000,000) ------- ------------ -----------
Balance December 31, 1996 100 7,500,936 7,501,036
Net Income - 5,179,073 5,179,073
Dividends Paid - - - -------- ------------ -----------
Balance, December 31, 1997 $100 $12,680,009 $12,680,109 ==== =========== ===========
See accompanying notes to financial statements.
FGIC Securities Purchase, Inc. Statements of Cash Flows
See accompanying notes to financial statements.
FGIC Securities Purchase, Inc. Notes to Financial Statements December 31, 1997
(1) Business
FGIC Securities Purchase, Inc. ("FGIC-SPI") is a wholly-owned subsidiary of FGIC Holdings, Inc. (the "Parent") which, in turn, is wholly-owned by General Electric Capital Corporation ("GE Capital"). FGIC-SPI was capitalized on September 24, 1991. FGIC-SPI was formed to provide liquidity for certain floating rate municipal securities whereby FGIC-SPI will, under certain circumstances, purchase such securities in the event they are tendered by the holders thereof as permitted under the terms of the respective bond indentures. As of December 31, 1997, FGIC-SPI had approximately $2.8 billion par and interest of potential obligations under such arrangements. In order to obtain funds, in the event such purchases are necessary, FGIC-SPI has entered into standby loan agreements, with GE Capital, under which GE Capital will be irrevocably obligated to lend funds as needed for FGIC-SPI to purchase the securities.
(2) Significant Accounting Policies
The accompanying financial statements have been prepared on the basis of generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant accounting policies are as follows:
Revenue Recognition
Fees are paid up-front and in installments. Up-front fees are earned on a straight-line basis over the life of the liquidity commitment, usually five years, and installment fees are earned straight-line over the installment period.
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost, which approximates fair value. For purposes of the statement of cash flows, FGIC-SPI considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Fair Values of Financial Instruments
The carrying amounts of FGIC-SPI's financial instruments, relating primarily to short-term investments and liquidity fees, approximate their fair values.
SEC Registration Fees
SEC registrations fees are reimbursable to FGIC-SPI, as a separate item at the closing, by issuers as transactions are consummated. Such fees are deferred when paid and netted against the related reimbursement as transactions are consummated. Management evaluates the recoverability of such deferred fees at each reporting date.
Expenses
Direct expenses incurred by the Parent are fully allocated to FGIC-SPI on a specific identification basis. Employee related expenses are allocated by affiliates to FGIC-SPI based on the percentage of time such employees devote to the activities of FGIC-SPI. Management believes that such allocation method is reasonable. Management believes that such expenses, as reported in the statement of income, would not differ materially from what expenses would have been on a stand-alone basis.
Reserve for Losses
It is management's policy to establish a reserve for losses based upon its estimate of the ultimate aggregate losses relative to its obligations under the liquidity facility arrangements written. At December 31, 1997, management does not anticipate any losses relative to such arrangements.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, on a stand alone basis, as provided in SFAs No. 109, "Accounting for Income Taxes". These temporary differences relate principally to accrued state taxes not settled with GE Capital. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(3) Income Taxes
Under an intercompany tax-sharing agreement with its parent, FGIC-SPI is included in the consolidated Federal income tax returns filed by GE Capital. FGIC-SPI provides for taxes as if it filed a separate tax return.
FGIC-SPI's effective Federal tax rate differs from the corporate tax rate on ordinary income of 35 percent in 1997, 1996 and 1995. The differences between the statutory Federal tax rate and expense computed by applying the statutory tax rate to earnings before income taxes are as follows:
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1997 1996 1995 ------------ ------------ ------------ Computed Statutory tax provision $3,014,845 $3,964,559 $4,164,626
State and local income taxes, net of Federal income tax benefit 419,925 552,207 578,611 Other - 322 9,332 ---------- ------------ -------------
Income tax expense $3,434,770 $4,517,088 $4,752,569 ========== ========== =============
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are as follows:
1997 1996 ---- ----
State taxes $1,754,812 $1,230,246 Commitment fees 287,912 225,471 ---------- ----------- Total gross deferred tax assets 2,042,724 1,455,717
Deferred tax liabilities - other 78,290 78,290 ---------- ------------
Net deferred tax asset $1,964,434 $1,377,427 ========== ==========
To the extent that the state and local income tax liability provided for by FGIC-SPI has exceeded the overall consolidated state and local income tax liability of GE Capital, such liability has not been settled (in accordance with the tax-sharing agreement) and remains a current liability of FGIC-SPI. Given that such state and local taxes will not be paid until some future period, the related federal income tax benefit is considered a deferred item. FGIC-SPI believes it is more likely than not that it will realize the benefits of these deductible differences and has not established a valuation allowance at December 31, 1997 and 1996.
(4) Related Party Transactions
All municipal securities for which FGIC-SPI provides liquidity are insured by Financial Guaranty Insurance Company, a subsidiary of the Parent.
As part of a standby loan agreement with GE Capital (see Note 6), FGIC-SPI has incurred commitment fees for the years ended December 31, 1997, 1996 and 1995 of $178,404, $179,012, and $197,452, respectively.
At December 31, 1997 and 1996, $18,408,928 and $8,696,139, respectively, of the amount classified as due from affiliates relates to cash balances held by GE Capital. FGIC-SPI has access to these funds on an as needed basis.
In 1995 and 1996, FGIC-SPI paid certain expenses on behalf of FGIC Advisors, Inc., and FGIC Plus Corp., affiliated companies. The unpaid balance of these expenses, which are classified as due from affiliates, amounted to $1,001,091 at December 31, 1996, and was reimbursed to FGIC-SPI, in the first quarter of 1997.
In April 1995, FGIC-SPI supplied its parent, FGIC Holdings, Inc., with $1.5 million to purchase Applied Municipal Network. This balance, which remained unpaid at December 31, 1996, was reimbursed to FGIC-SPI, in the first quarter of 1997.
All amounts due from affiliates and due to affiliates are non-interest bearing.
(5) Off-Balance-Sheet Risk
FGIC-SPI provides liquidity for certain floating rate municipal securities whereby FGIC-SPI will, under certain circumstances, purchase such securities at par in the event they are tendered by the holders thereof as permitted under the terms of the respective bond indentures.
The geographical distribution of the underlying par value supported by the thirty six liquidity facilities outstanding at December 31, 1997 was as follows (dollars in millions):
New York $ 1,649.4 California 301.6 Connecticut 289.6 Pennsylvania 163.6 Florida 135.1 Ohio 114.2 Louisiana 56.1 Texas 31.1 Oklahoma 21.4 South Carolina 9.0 Michigan 8.0 --------------- Total $ 2,779.1 ===============
The maturity distribution of the underlying par value supported by the thirty six liquidity facilities outstanding at December 31, 1997 was as follows (dollars in millions):
Less than one year $ 298.6 One to two years 447.8 Two to three years 0.0 Three to four years 449.9 Four to five years 1,423.3 Over five years 159.5 --------------- Total $ 2,779.1 ===============
The liquidity agreements are for a term of approximately five years (subject to renewal) or earlier if the bonds are no longer outstanding.
As of December 31, 1997, the fair value of the uncollected balances on outstanding facilities was $23.8 million. The fair value was calculated based upon current expected cash inflows, assuming current outstanding facilities at current fee rates, discounted at the risk free rate of 5.9%.
FGIC-SPI is exposed to credit risk that the issuer defaults on the underlying municipal security at a time that FGIC-SPI is holding securities purchased pursuant to a liquidity facility and the financial guarantor fails to perform on its insurance contract. It is the accounting policy of FGIC-SPI to evaluate the likelihood of any credit loss at each reporting period and to establish reserves for credit losses when deemed appropriate. Management believes that no such reserves were required at December 31, 1997 and 1996.
FGIC-SPI is exposed to market risk in the event that FGIC-SPI is required to purchase municipal securities at their par amount at a time when such par value is in excess of the securities' fair value. It is the accounting policy of FGIC-SPI to evaluate the likelihood of it being called upon to purchase securities under its liquidity arrangements at amounts greater than their fair value at each reporting period and to establish valuation reserves when deemed appropriate. Management believes that no such valuation reserves were required at December 31, 1997 and 1996.
(6) Standby Loan Agreements
FGIC-SPI secured the right to obtain funds for the purchase of tendered bonds by entering into standby loan agreements with GE Capital who will lend funds to FGIC-SPI in amounts not exceeding the purchase price of the tendered bonds. Such agreements totaled $4.0 billion at December 31, 1997.
In consideration of the commitment of GE Capital to make loans to FGIC-SPI, FGIC-SPI agrees to pay GE Capital a fee equal to 0.625 basis points on the outstanding facility. The fee is payable on dates mutually agreed to by FGIC-SPI and GE Capital.
(7) Year 2000
Year 2000 compliance programs and information systems reviews have been initiated in an attempt to ensure that these systems and key processes will remain functional. This objective is expected to be achieved by modifying present systems using existing internal and external programming resources and by monitoring supplier and other third-party interfaces. While there can be no assurance that all such modifications will be successful, management does not expect that either costs of modifications or consequences of any unsuccessful modifications should have a material adverse effect on the financial position, results of operations or liquidity of FGIC-SPI.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. NONE
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Omitted.
Item 11.
Item 11. Executive Compensation.
Omitted.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Omitted.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements Included in Part II of this report: Report of Independent Auditors Balance Sheets as of December 31, 1997 and 1996 Statements of Income for the years ended December 31, 1997, 1996 and 1995. Statements of Changes in Stockholder's Equity for the years ended December 31, 1997, 1996 and 1995 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995. Notes to Financial Statements
All Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(b) Reports On Form 8-K
During the fourth quarter, reports on Form 8-K were filed on October 1, 1997 (dated September 25, 1997), November 11, 1997 and a Form 8-KA relating to such report (each dated October 2, 1997).
All Reports on Form 8-K related to Item 5 and Item 7.
(c) Exhibit Index
Exhibit 1.1 --Certificate of Incorporation of FGIC-SPI (Incorporated by reference to Exhibit 1.1 of FGIC-SPI's December 31, 1991 Form 10K) 1.2 -- By-Laws of FGIC-SPI (Incorporated by reference to Exhibit 1.2 of FGIC-SPI's December 31, 1991 Form 10K) 1.3 -- Consent of Independent Auditors
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/Ann C. Stern President (principal 3/27/98 - --------------------------- executive officer), Director Ann C. Stern
/s/Christopher Jacobs Treasurer, Director 3/27/98 - -------------------------- Christopher Jacobs
/s/Amedeo Edward Turi, III - -------------------------- Director 3/27/98 Amedeo Edward Turi, III
Consent of Independent Auditors
The Board of Directors and Stockholder FGIC Securities Purchase, Inc.
We consent to incorporation by reference in the registration statement (No. 33-84062) on Form S-3 of FGIC Securities Purchase, Inc. of our report dated January 17, 1998, relating to the balance sheets of FGIC Securities Purchase, Inc. of December 31, 1997 and 1996, and the related statements of income, changes in stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of FGIC Securities Purchase, Inc.
KPMG Peat Marwick
/s/ KPMG Peat Marwick - --------------------------- KMPG Peat Marwick
New York, New York March 24, 1998