SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-12644
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
(Exact name of registrant as specified in its charter)
NEW YORK 13-3261323
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
350 PARK AVENUE
NEW YORK, NEW YORK 10022
(Address of principal executive offices)
(212) 826-0100
(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 90 days. Yes /X/ No / /
At July 31, 1997, there were outstanding 31,016,527 shares of Common Stock,
par value $0.01 per share, of the registrant (includes 1,127,883 shares of
Common Stock owned by a trust on behalf of the Company and excludes 1,325,774
shares of Common Stock actually held in treasury).
INDEX
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Financial Security Assurance Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996 3
Consolidated Statements of Income - Six months ended
June 30, 1997 and 1996 4
Consolidated Statement of Changes in Shareholders' Equity
- Six months ended June 30, 1997 5
Consolidated Statements of Cash Flows
- Six months ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION, AS APPLICABLE
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
1997 1996
ASSETS ---- ----
Bonds, at market value (amortized cost of
$1,103,154 and $1,058,417) $1,121,397 $1,072,439
Equity investments at market value (cost
of $10,010 and $8,336) 11,354 8,336
Short-term investments 133,284 73,641
---------- ----------
Total investments 1,266,035 1,154,416
Cash 21,474 8,146
Deferred acquisition costs 150,581 146,233
Prepaid reinsurance premiums 169,112 151,224
Reinsurance recoverable on unpaid losses 29,799 29,875
Receivable for securities sold 4,525
Other assets 53,078 47,848
---------- ----------
TOTAL ASSETS $1,694,604 $1,537,742
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred premium revenue $ 570,363 $ 511,196
Losses and loss adjustment expenses 74,013 72,079
Deferred federal income taxes 44,187 41,167
Ceded reinsurance balances payable 19,589 12,599
Payable for securities purchased 52,235 14,390
Notes payable 30,000 30,000
Accrued expenses and other liabilities 63,018 55,051
---------- ----------
TOTAL LIABILITIES 853,405 736,482
---------- ----------
Preferred stock (3,000,000 shares
authorized; 2,000,000 issued and
outstanding; par value of $.01 per share) 20 20
Common stock (50,000,000 shares authorized;
32,276,301 issued; par value of $.01 per share) 323 323
Additional paid-in capital - preferred 680 680
Additional paid-in capital - common 694,650 695,118
Unrealized gain on investments (net of deferred
income tax provision of $6,856 and $4,908) 12,732 9,114
Accumulated earnings 182,429 142,721
Deferred equity compensation 14,302 12,069
Less treasury stock at cost (2,453,657 and
2,303,407 shares held) (63,937) (58,785)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 841,199 801,260
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,694,604 $1,537,742
---------- ----------
---------- ----------
See notes to condensed consolidated financial statements.
3
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Net premiums written (net of premiums ceded
of $23,500, $14,035, $37,427 and $32,476) $67,495 $30,726 $94,679 $64,865
Increase in deferred premium revenue (39,934) (10,976) (42,344) (22,381)
------- ------- ------- -------
Premiums earned (net of premiums ceded of
$10,401, $8,188, $19,266 and $21,167) 27,561 19,750 52,335 42,484
Net investment income 17,121 15,986 33,482 31,668
Net realized gains (losses) 1,831 (22) 1,333 1,512
Other income 2,809 43 3,257 105
------- ------- ------- -------
TOTAL REVENUES 49,322 35,757 90,407 75,769
------- ------- ------- -------
Expenses:
Losses and loss adjustment expenses (net of
reinsurance recoveries of $442, $571, $884
and $1,131) 2,156 1,530 4,441 3,155
Interest expense 542 542 1,083 1,083
Policy acquisition costs 7,140 4,965 13,349 12,620
Other operating expenses 4,426 3,509 9,210 7,466
------- ------- ------- -------
TOTAL EXPENSES 14,264 10,546 28,083 24,324
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 35,058 25,211 62,324 51,445
Provision for income taxes 9,825 6,463 16,841 13,153
------- ------- ------- -------
NET INCOME $25,233 $18,748 $45,483 $38,292
------- ------- ------- -------
------- ------- ------- -------
Weighted average common shares outstanding 29,887 30,758 29,932 31,074
------- ------- ------- -------
------- ------- ------- -------
Earnings per common share $ 0.84 $ 0.61 $ 1.52 $ 1.23
------- ------- ------- -------
------- ------- ------- -------
See notes to condensed consolidated financial statements.
4
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Additional Additional Unrealized Deferred
Paid-In Paid-In Gain Equity
Preferred Common Capital- Capital- (Loss) on Accumulated Compen- Treasury
Stock Stock Preferred Common Investments Earnings sation Stock Total
----- ----- --------- ------ ----------- -------- ------ ----- -----
BALANCE, December 31, 1996 $20 $323 $680 $695,118 $ 9,114 $142,721 $12,069 $(58,785) $801,260
Net income 45,483 45,483
Net unrealized gain on
investments 3,618 3,618
Dividends paid on common
stock ($0.19 per share) (5,775) (5,775)
Deferred equity compensation 5,253 5,253
Deferred equity payout (468) (3,020) 56 (3,432)
Repurchase of common stock (5,208) (5,208)
--- ---- ---- -------- ------- -------- ------- -------- --------
BALANCE, June 30, 1997 $20 $323 $680 $694,650 $12,732 $182,429 $14,302 $(63,937) $841,199
--- ---- ---- -------- ------- -------- ------- -------- --------
--- ---- ---- -------- ------- -------- ------- -------- --------
See notes to condensed consolidated financial statements.
5
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
---- ----
Cash flows from operating activities:
Premiums received, net $ 98,426 $ 70,424
Policy acquisition and other operating expenses
paid, net (32,773) (26,069)
Loss and LAE paid, net (2,332) (9,603)
Net investment income received 31,299 30,627
Recoverable advances received (paid) (443) 7,628
Federal income taxes recovered (paid) 292 (14,732)
Interest paid (1,058) (1,058)
Other, net 3 (851)
--------- ---------
Net cash provided by operating activities 93,414 56,366
--------- ---------
Cash flows from investing activities:
Proceeds from sales of bonds 471,648 479,363
Purchases of bonds (483,183) (467,682)
Other, net 2,586
Purchases of property and equipment (1,687) (1,225)
Net increase in short-term securities (57,868) (21,582)
--------- ---------
Net cash used for investing activities (68,504) (11,126)
--------- ---------
Cash flows from financing activities:
Stock-based compensation purchases (654)
Dividends paid (5,775) (4,925)
Treasury stock (5,153) (34,001)
--------- ---------
Net cash used for financing activities (11,582) (38,926)
--------- ---------
Net increase (decrease) in cash 13,328 6,314
Cash at beginning of period 8,146 1,118
--------- ---------
Cash at end of period $ 21,474 $ 7,432
--------- ---------
--------- ---------
See notes to condensed consolidated financial statements.
6
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Holdings Ltd. (the Company) is an insurance
holding company domiciled in the State of New York. The Company is primarily
engaged (through its insurance subsidiaries, collectively known as FSA) in
the business of providing financial guaranty insurance on asset-backed and
municipal obligations. At June 30, 1997, the Company was owned 40.6% by U S
WEST Capital Corporation (U S WEST), 11.6% by Fund American Enterprises
Holdings, Inc. (Fund American), 6.5% by The Tokio Marine and Fire Insurance
Co., Ltd. (Tokio Marine) and 41.3% by the public and employees.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q and, accordingly, do not include
all of the information and disclosures required by generally accepted
accounting principles. These statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's 1996 Annual Report to Shareholders. The accompanying financial
statements have not been audited by independent accountants in accordance
with generally accepted auditing standards but, in the opinion of management,
all adjustments, which include only normal recurring adjustments, necessary
to present fairly the financial position, results of operations and cash
flows at June 30, 1997 and for all periods presented have been made. The
December 31, 1996 condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles. The results of operations for the
periods ended June 30, 1997 and 1996 are not necessarily indicative of the
operating results for the full year.
Certain amounts in the 1996 financial statements have been reclassed to
conform to the 1997 presentation.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("EPS") ("FAS No. 128"). FAS No. 128 specifies the computation presentation
and disclosure requirements for EPS and is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
Earlier application is not permitted.
FAS No. 128 is designed to improve the EPS information provided in
financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements, and increasing the comparability of EPS
data on an international basis. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of primary EPS and
replacing it with basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision, and (c) revising the
contingent share provisions and the supplemental EPS data requirements. FAS
No. 128 requires dual presentation of basic and diluted EPS on the face of
the income statements for all entities with complex capital structures
regardless of whether basic and diluted EPS are the same; it also requires a
reconciliation of the numerator and denominator used in computing basic and
diluted EPS.
The impact of FAS No. 128 on the Company has not yet been determined.
In June 1997, the Financial Accounting Standards Board issued FAS No.
130, Reporting Comprehensive Income. FAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. Comprehensive income is defined as the change in stockholders'
equity during a period from transactions and other events and circumstances
from non-owner sources and includes net income and all changes in
stockholders' equity except those resulting from investments by owners and
distributions to owners.
7
FAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by the nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of a
statement of financial position.
FAS No. 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required.
Also in June 1997, the Financial Accounting Standards Board issued FAS
No. 131, Disclosure about Segments of an Enterprise and Related Information.
FAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual and interim
financial statements and requires presentation of a measure of profit or
loss, certain specific revenue and expense items and segment assets. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers, superseding most of FAS No. 14,
Financial Reporting for Segments of a Business Enterprise.
FAS No. 131 requires that a public business enterprise report financial
and descriptive information about its reportable operating segments.
Generally, financial information is required to be reported on the basis that
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. The enterprise must report information about
revenues derived, countries in which it earns revenues and holds assets and
major customers regardless of whether that information is used in making
operating decisions. However, FAS No. 131 does not require an enterprise to
report information that is not prepared for internal use if reporting would
be impracticable.
FAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997. FAS No. 131 need not be applied to interim
financial statements in the initial year of its application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements of the interim periods in the second year of
application.
8
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 AND 1996 SECOND QUARTER RESULTS
The Company's 1997 second quarter net income was $25.2 million, compared with
$18.7 million for the same period in 1996, an increase of 34.6%. Core net
income (operating net income less the after-tax effect of refundings and
prepayments) was $22.0 million, compared with $19.3 million for the same
period in 1996, an increase of 14.1%. Total core revenues in the second
quarter of 1997 increased $6.0 million, from $35.6 million in 1996 to $41.6
million in 1997, while total core expenses increased only $1.9 million.
Operating net income (net income less the after-tax effect of net realized
capital gains or losses and the cost of the performance share program and
other non-operating items) was $23.6 million for the second quarter of 1997
versus $19.4 million for the comparable period in 1996, an increase of $4.2
million or 21.5%.
There are two measures of gross premiums originated for a given period.
Gross premiums written captures premiums collected in the period, whether
collected up-front for business originated in the period, or in installments
for business originated in prior periods. An alternative measure, the gross
present value of premiums written (gross PV premiums written) reflects future
installment premiums discounted to a present value, as well as up-front
premiums, but only for business originated in the period. The Company
considers gross PV premiums written to be the better indicator of a given
period's origination activity because a substantial part of the Company's
premiums are collected in installments, a practice typical of the
asset-backed business. Regardless of the measure used, quarter to quarter
comparisons are of limited significance because originations fluctuate from
quarter to quarter but historically have not exhibited a seasonal pattern.
Gross premiums written increased 103.3%, to $91.0 million for the second
quarter of 1997 from $44.8 million for the second quarter of 1996. Also,
gross PV premiums written increased 56.1%, to $87.2 million in 1997 from
$55.9 million in the second quarter of 1996. A substantial portion of the
increases in gross premiums written and gross PV premiums written came from
several large, high-premium European transactions closed in the second
quarter of 1997. In the second quarter of 1997, asset-backed gross PV
premiums written were $38.9 million, as compared with $28.8 million in 1996,
an increase of 35.2%. For the municipal business, gross PV premiums written
in the second quarter increased from $27.1 million in 1996 to $48.3 million
in 1997, an increase of 78.3%.
In the second quarter of 1997, the Company insured par value of bonds
totaling $9.5 billion, a 27.6% increase over the same period in 1996. FSA's
second quarter asset-backed component rose 3.3% to $4.6 billion while its
municipal sector rose 63.5% to $4.9 billion.
Net premiums written were $67.5 million for the second quarter of 1997, an
increase of $36.8 million or 119.7% when compared with 1996. Net premiums
earned for the second quarter of 1997 were $27.6 million, compared with $19.8
million in the second quarter of 1996, an increase of 39.5%. Premiums earned
from refundings and prepayments were $3.3 million for the second quarter of
1997 and $0.1 million for the same period of 1996, contributing $1.5 million
and $0.1 million, respectively, to after-tax earnings. Net premiums earned
for the quarter grew 23.9% relative to the same period in 1996 when the
effects of refundings and prepayments are eliminated.
Net investment income was $17.1 million for the second quarter of 1997 and
$16.0 million for the comparable period in 1996, an increase of 7.1%. The
Company's effective tax rate on investment income was 19.6% for the second
quarter of 1996 compared with 20.1% in 1997. In the second quarter of 1997,
the Company realized $1.8 million in net capital gains as compared with a
nominal capital loss for the same period in 1996. Capital gains and losses
are a by-product of the normal investment management process and will vary
substantially from period to period.
9
The provision for losses and loss adjustment expenses during the second quarter
of 1997 was $2.2 million compared with $1.5 million in 1996, representing
additions to the Company's general loss reserve. The additions to the general
reserve represent management's estimate of the amount required to adequately
cover the net cost of claims. The Company will, on an ongoing basis, monitor
these reserves and may periodically adjust such reserves based on the Company's
actual loss experience, its future mix of business, and future economic
conditions. In the second quarter of 1997, $3.3 million was reclassified from
the general reserve to case reserves for certain home improvement loan
securitizations. At June 30, 1997, the unallocated balance in the Company's
general loss reserve was $30.5 million.
Total policy acquisition and other operating expenses (excluding the cost of
the performance share program of $1.8 million for the second quarter of 1997
compared with $1.0 million for the same period of 1996) were $9.7 million for
the second quarter of 1997 compared with $7.5 million for the same period in
1996, an increase of 29.4%. Excluding the effects of refundings, total policy
acquisition and other operating expenses were $8.8 million for the second
quarter of 1997 compared with $7.5 million for the same period in 1996, an
increase of 17.6%. The increase was the result of higher DAC amortization due
to a higher level of premiums earned, personnel costs and bank facility fees.
During the second quarter of 1997, the Company realized a $2.6 million net gain
from the sale of a subsidiary, less certain previously capitalized expenses.
The subsidiary was sold because its insurance licenses were no longer required.
Income before income taxes for the second quarter of 1997 was $35.1 million, up
from $25.2 million, or 39.1%, for the same period in 1996.
The Company's effective tax rate for the second quarter of 1997 was 28.0%
compared with 25.6% for the same period in 1996.
The weighted average number of shares of common stock outstanding decreased to
29,887,000 for the quarter ended June 30, 1997, from 30,758,000 during the
second quarter of 1996. This decrease was due to shares the Company repurchased
to fund obligations of employee benefit plans as discussed in previous filings.
Earnings per share increased to $0.84 for the second quarter of 1997 from $0.61
for the same period in 1996.
1997 AND 1996 FIRST SIX MONTHS RESULTS
The Company's 1997 first half net income was $45.5 million, compared with $38.3
million for the same period in 1996, an increase of 18.8%. Core net income was
$42.6 million, compared with $37.6 million for the same period in 1996, an
increase of 13.2%. Total core revenues in the first half of 1997 increased
$11.1 million, from $80.9 million in 1996 to $69.8 million in 1997, while total
core expenses increased only $3.7 million. Operating net income was $45.2
million for the first half of 1997 versus $38.7 million for the comparable
period in 1996, an increase of $6.5 million or 16.9%.
Gross premiums written increased 35.7%, to $132.1 million for the first half
of 1997 from $97.3 million for the first half of 1996. Also, gross PV
premiums written increased 10.6%, to $129.7 million in 1997 from $117.3
million in the first half of 1996. In the first half of 1997, asset-backed
gross PV premiums written were $60.2 million, as compared with $70.4 million
in 1996, a decrease of 14.5% attributable to large, high premium transactions
in the first quarter of 1996. For the municipal business, gross PV premiums
written in the first half increased to $69.5 million in 1997 from $46.9
million in 1996, an increase of 48.2%.
In the first half of 1997, the Company insured par value of bonds totaling
$16.3 billion, a 27.0% increase over the same period in 1996. FSA's first
half asset-backed component rose 17.9% to $8.9 billion while its municipal
sector rose 40.0% to $7.4 billion.
Net premiums written were $94.7 million for the first half of 1997, an
increase of $29.8 million or 46.0% when compared with 1996. Net premiums
earned for the first half of 1997 were $52.3 million, compared with $42.5
million in the first half of 1996, an increase of 23.2%. Premiums earned
from refundings and prepayments were $5.6 million for the first half of 1997
and $4.5 million for the same period of 1996, contributing $2.6 million and
10
$1.0 million, respectively, to after-tax earnings. Net premiums earned for
the first half grew 23.0% relative to the same period in 1996 when the
effects of refundings and prepayments are eliminated.
Net investment income was $33.5 million for the first half of 1997 and $31.7
million for the comparable period in 1996, an increase of 5.7%. The
Company's effective tax rate on investment income was 19.1% for the first
half of 1996 compared with 19.5% in 1997. In the first half of 1997, the
Company realized $1.3 million in net capital gains as compared with $1.5
million for the same period in 1996. Capital gains and losses are a
by-product of the normal investment management process and will vary
substantially from period to period.
The provision for losses and loss adjustment expenses during the first half
of 1997 was $4.4 million compared with $3.2 million in 1996, representing
additions to the Company's general loss reserve.
Total policy acquisition and other operating expenses (excluding the cost of
the performance share program of $3.5 million for the first half of 1997
compared with $2.1 million for the same period of 1996) were $19.1 million
for the first half of 1997 compared with $18.0 million for the same period in
1996, an increase of 6.0%. Excluding the effects of refundings, total policy
acquisition and other operating expenses were $17.5 million for the first
half of 1997 compared with $15.1 million for the same period in 1996, an
increase of 15.9%.
Income before income taxes for the first half of 1997 was $62.3 million, up
from $51.4 million, or 21.2%, for the same period in 1996.
The Company's effective tax rate for the first half of 1997 was 27.0%
compared with 25.6% for the same period in 1996.
The weighted average number of shares of common stock outstanding decreased
from 31,074,000 during the first six months of 1996 to 29,932,000, for the
six months ended June 30, 1997. Earnings per share increased to $1.52 for
the first six months of 1997 from $1.23 for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated invested assets and cash equivalents at June 30,
1997, net of unsettled security transactions, was $1,218.3 million, compared
with the December 31, 1996 balance of $1,139.9 million. These balances
include the change in the market value of the investment portfolio, which had
an unrealized gain position of $14.0 million at December 31, 1996, compared
with an unrealized gain position of $19.6 million at June 30, 1997.
A subsidiary of the Company has $30.0 million of outstanding long-term debt.
The Company has no plans for material capital expenditures within the next
twelve months.
Because the operations of the Company are conducted through FSA, the ability
of the Company to declare and pay dividends both on a short- and long-term
basis will be largely dependent upon FSA's ability to do so and upon external
financings.
FSA's ability to pay dividends is dependent upon FSA's financial condition,
results of operations, cash requirements, rating agency approval and other
related factors and is also subject to restrictions contained in the
insurance laws and related regulations of New York and other states. Under
New York State insurance law, FSA may pay dividends out of earned surplus,
provided that, together with all dividends declared or distributed by FSA
during the preceding 12 months, the dividends do not exceed the lesser of (i)
10% of policyholders' surplus as of its last statement filed with the New
York Superintendent of Insurance or (ii) adjusted net investment income
during this period. FSA has paid no dividends for the six months ended June
30, 1997. Based upon FSA's statutory statements for the quarter ended June
30, 1997 and considering dividends which can be paid by its subsidiary, the
maximum amount available for payment of dividends by FSA without regulatory
approval over the following 12 months is approximately $46.3 million. In
addition, the New York Superintendent has approved the repurchase by FSA of
up to $75.0 million of its shares from the Company through December 31, 1998,
pursuant to which FSA has repurchased $7.0 million of its shares during the
six months ended June 30, 1997, and a total of $34.0 million between the
initiation of the program and June 30, 1997. Share repurchases pursuant to
such program may not exceed cumulative statutory net income beginning January
1, 1997.
11
In May 1996, the Company repurchased 1,000,000 shares of its common stock
from US WEST for a purchase price of $26.50 per share. At the same time, the
Company also entered into forward agreements with National Westminster Bank
Plc and Canadian Imperial Bank of Commerce (the Counterparties) in respect of
1,750,000 shares (the Forward Shares) of the Company's common stock. Under
the forward agreements, the Company has the right either to (a) purchase the
Forward Shares from the Counterparties for a price equal to $26.50 per share
plus carrying costs or (b) direct the Counterparties to sell the Forward
Shares, with the Company receiving any excess or making up any shortfall
between the sale proceeds and $26.50 per share plus carrying costs in cash or
additional shares, at its option. The Company is making the economic benefit
of 647,200 of these shares available for subscription by certain employees
and its board of directors. If the Company were to settle these Forward
Shares at the Company's June 30, 1997 market price of $38.9375, it would
receive approximately 312,000 shares, net of the portion allocable to
employees and directors.
12
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company's Annual Meeting of Shareholders was held on Thursday, May 8, 1997.
At the 1997 Annual Meeting, shareholders elected all 15 nominees for director
and approved the Company's selection of Coopers & Lybrand L.L.P. as independent
auditors for the year ending December 31, 1997. The number of votes cast with
respect to each director nominee were as follows:
NOMINEE NUMBER OF SHARES VOTED FOR NUMBER OF SHARES WITHHELD
------- -------------------------- -------------------------
John J. Byrne 31,165,193 66,208
Robert P. Cochran 31,165,193 66,208
Michael Djordjevich 31,165,193 66,208
Robert N. Downey 31,165,193 66,208
Anthony M. Frank 31,154,552 76,849
Toshiki Kaneda 31,165,193 66,208
K. Thomas Kemp 31,164,551 66,850
David O. Maxwell 31,155,195 76,206
James M. Osterhoff 31,165,193 66,208
James H. Ozanne 31,165,193 66,208
Staats M. Pellett, Jr. 31,155,195 76,206
Richard A. Post 31,165,122 66,279
Roger K. Taylor 31,165,193 66,208
Allan L. Waters 31,165,193 66,208
Howard M. Zelikow 31,165,193 66,208
The selection of Coopers & Lybrand L.L.P. was ratified by 31,209,114 shares;
11,969 shares were voted against ratification and holders of 10,319 shares
abstained from voting on this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(1) Financial statements of Financial Security Assurance Inc. for the
quarterly period ended June 30, 1997.
(2) First Amended and Restated Credit Agreement dated as of April 30,
1997, among Financial Security Assurance Inc., Financial Security
Assurance of Maryland Inc., Financial Security Assurance of
Oklahoma, Inc., the Banks signatory thereto and Bayerische
Landesbank Girozentrale, New York Branch, as Agent.
(b) REPORTS ON FORM 8-K
None
13
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.
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
By /s/ Jeffrey S. Joseph
August 13, 1997 ----------------------------------------------
Jeffrey S. Joseph
Managing Director & Controller (Chief Accounting
Officer)
14
Exhibit Index
EXHIBIT NO. EXHIBIT
1. Financial statements of Financial Security Assurance Inc. for the
quarterly period ended June 30, 1997
2. First Amended and Restated Credit Agreement dated as of April 30, 1997,
among Financial Security Assurance Inc., Financial Security
Assurance of Maryland Inc., Financial Security Assurance of
Oklahoma, Inc., the Banks signatory thereto and Bayerische
Landesbank Girozentrale, New York Branch, as Agent.