UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10 - K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
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COMMISSION FILE NUMBER 0-19564
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MUNICIPAL SECURITIES PURCHASE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3633082
(State or other jurisdiction incorporation or (I.R.S. Employer Identification
organization) No.)
201 HIGH RIDGE ROAD, STAMFORD, CONNECTICUT 06927 (203) 357-4000
(Address of principal executive offices) (Zip Code) (Registrant's telephone
number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
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COMMON STOCK, PAR VALUE $10.00 PER SHARE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES NO X
--- ---
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES NO X
--- ---
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES X NO
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES NO X.
--- ---
AGGREGATE MARKET VALUE OF THE OUTSTANDING COMMON EQUITY HELD BY NONAFFILIATES OF
THE REGISTRANT AS OF THE LAST BUSINESS DAY OF THE REGISTRANT'S MOST RECENTLY
COMPLETED SECOND FISCAL QUARTER: NONE AT MARCH 2, 2006, 10 SHARES OF COMMON
STOCK WITH A PAR VALUE OF $10.00 PER SHARE WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE
FORMAT
MUNICIPAL SECURITIES PURCHASE, INC.
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 1
Item 1A. Risk Factors 1
Item 1B. Unresolved Staff Comments 2
Item 2. Properties 2
Item 3. Legal Proceedings 2
Item 4. Submission of Matters to a Vote of Security Holders 2
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 3
Item 6. Selected Financial Data 3
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 3
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 4
Item 8. Financial Statements and Supplementary Data 5
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14
Item 9A. Controls and Procedures 14
Item 9B. Other Information 14
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 15
Item 13. Certain Relationships and Related Transactions 15
Item 14. Principal Accounting Fees and Services 15
PART IV
Item 15. Exhibits and Financial Statement Schedules 15
Signatures 17
Unless the context otherwise requires, the "Company," "Municipal-SPI," "We,"
"Us," or "Our" shall mean Municipal Securities Purchase, Inc.
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements"- that is, statements related
to future, not past events. In this context, forward-looking statements often
address our expected future business and financial performance, and often
contain words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," or "will." Forward-looking statements by their nature address matters
that are, to different degrees, uncertain. For us, particular uncertainties
arise from the behavior of financial markets, including fluctuations in interest
rates and from numerous other matters of national, regional and global scale,
including those of a political, economic, business, competitive or regulatory
nature. These uncertainties may cause our actual future results to be materially
different than those expressed in our forward-looking statements. We do not
undertake to update our forward-looking statements.
PART I
ITEM 1. BUSINESS.
FGIC Securities Purchase, Inc. (FGIC-SPI) was incorporated in 1990
in the State of Delaware. In the fourth quarter of 2003, FGIC-SPI
changed its name to Municipal Securities Purchase, Inc.
(Municipal-SPI or the Company). As of December 31, 2005, all
outstanding capital stock of Municipal-SPI was owned by GE Funding
Services, Inc. (the Parent), a Delaware corporation and a
wholly-owned subsidiary of GEI, Inc. which, in turn, is wholly
owned by General Electric Capital Corporation (GE Capital), a
Delaware corporation, the ultimate parent of which is General
Electric Company.
Our business consists of providing liquidity for certain floating
rate municipal securities through a "liquidity facility". These
floating rate municipal securities may be tendered by holders
thereof for purchase at par periodically and are typically
remarketed by registered broker-dealers upon such tender for
purchase. In the event that such securities cannot be remarketed,
we, pursuant to a standby bond purchase agreement with the issuer
of the securities, will be obligated to purchase these securities,
at par. In order to obtain funds to purchase the securities, we
have entered into standby loan agreements, with GE Capital, under
which GE Capital will irrevocably be obligated to lend funds as
needed for us to purchase the securities. While we hold any such
bonds, interest payments received from the municipalities will be
at a floating rate specified in the applicable document that is in
excess of the stated rate on the bonds. Purchased bonds may be
held by us until they are remarketed, sold or until maturity.
Since inception, we have not been required to perform under such
arrangements.
Since 2002, we have not been providing any new liquidity
facilities. Each of the liquidity facilities have had a term of
approximately five years (subject to renewal) or less if the bonds
are no longer outstanding.
ITEM 1A. RISK FACTORS.
The following risk factors have been extracted from the Annual
Report on Form 10-K of GE Capital (S.E.C. File No. 001-06461) for
the year ended December 31, 2005 because of the nature of our
business. As discussed in Item 1, in the event securities for
which we provide liquidity, cannot be remarketed, we are obligated
to purchase the securities. We obtain the funds for such purchase
from GE Capital pursuant to standby loan agreements under which GE
Capital has an irrevocable obligation to lend funds needed for us
to purchase the securities. As such, the risks related to our
ability to fund our purchase of securities are directly related to
the risks attendant to GE Capital.
The following discussion of risk factors contains "forward-looking
statements," as discussed in Item 1 of the Annual Report on Form
10-K of GE Capital. These risk factors may be important to
understanding any statement in the Annual Report on Form 10-K of
GE Capital or elsewhere. The following information should be
read in conjunction with Management's Discussion and Analysis
(MD&A), and the consolidated financial statements and related
notes included in the Annual Report on Form 10-K of GE Capital.
Our businesses routinely encounter and address risks, some
of which will cause our future results to be different - sometimes
materially different - than we presently anticipate. Discussion
about the important operational risks that our businesses
encounter can be found in the MD&A section and in the business
descriptions included in the Business section of Form 10-K of GE
Capital. Below, we have described our present view of certain
important strategic risks. Our reactions to material future
developments as well as our competitors' reactions to those
developments will determine our future results.
1
OUR GLOBAL GROWTH IS SUBJECT TO A NUMBER OF ECONOMIC, POLITICAL
AND REGULATORY RISKS
We conduct our operations in virtually every part of the world.
Global economic and regulatory developments affect businesses such
as ours in many ways. Operations are subject to the effects of
global competition. Particular local jurisdiction risks include
regulatory risks arising from local laws and from local liquidity
regulations, including risks of not being able to retrieve assets.
Our global business is affected by local economic environments,
including inflation, recession and currency volatility. Political
changes, some of which may be disruptive, can interfere with our
supply chain, our customers and all of our activities in a
particular location. While some of these risks can be hedged using
derivatives or other financial instruments and some are insurable,
such attempts to mitigate these risks are costly and not always
successful.
OUR CREDIT RATINGS ARE IMPORTANT TO OUR COST OF CAPITAL
The major debt agencies routinely evaluate our debt and have given
their highest debt ratings to us. One of our strategic objectives
is to maintain these "Triple A" ratings as they serve to lower our
borrowing costs and facilitate our access to a variety of lenders.
Failure to maintain our Triple A debt rating could adversely
affect our cost of funds and related margins.
THE DISPOSITION OF BUSINESSES THAT DO NOT FIT WITH OUR EVOLVING
STRATEGY CAN BE HIGHLY UNCERTAIN
We will continue to evaluate the potential disposition of assets
and businesses that may no longer help us meet our objectives. Our
decision to sell Genworth Financial, Inc. is a recent example of a
disposition decision. When we decide to sell assets or a business,
we may encounter difficulty in finding buyers or alternative exit
strategies on acceptable terms in a timely manner, which could
delay the accomplishment of our strategic objectives, or we may
dispose of a business at a price or on terms which are less than
we had anticipated. In addition, there is a risk that we sell a
business whose subsequent performance exceeds our expectations, in
which case our decision would have potentially sacrificed
enterprise value. Correspondingly, we may be too optimistic about
a particular business's prospects, in which case we may be unable
to find a buyer at a price acceptable to us and therefore may have
potentially sacrificed enterprise value.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
Municipal-SPI conducts its business at 201 High Ridge Road,
Stamford, CT.
ITEM 3. LEGAL PROCEEDINGS.
Municipal-SPI is not involved in any material pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not required by this form.
2
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Municipal-SPI's common stock, its sole class of common equity, is
owned by GE Funding Services, Inc; and, therefore, there is no
trading market in such stock.
ITEM 6. SELECTED FINANCIAL DATA.
Not required by this form.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
REVENUES
We provide liquidity facilities for certain floating rate
municipal securities whereby we will, under certain circumstances,
purchase such securities in the event they are tendered by the
holders thereof. We earn liquidity fees from the issuers of these
securities, municipal governments in the United States, for
providing the liquidity facilities.
During 2005 and 2004, we did not commit to any new liquidity
facilities.
We earned liquidity fees of $5.5 million, $6.4 million and $8.8
million during the years ended December 31, 2005, 2004 and 2003,
respectively. The decrease in liquidity fees from 2004 to 2005 was
primarily due to the maturity of 6 contracts during 2004 and the
maturity of 11 contracts during 2005. The total outstanding par
amount of the liquidity facilities decreased by approximately $18
million during 2005 due to paydowns on the outstanding principal
of the liquidity facility for 6 contracts in addition to the
maturities noted above. The total liquidity facility in force as
of December 31, 2005 and 2004 was $2.5 billion and $3.6 billion,
respectively.
OPERATING EXPENSES
We incurred $276 thousand, $393 thousand and $925 thousand of
total operating expenses during the years ended December 31, 2005,
2004 and 2003, respectively. Included in total operating expenses
were commitment fees to GE Capital under the standby loan
agreements, which are based on the outstanding par in force on
each of the liquidity facilities at a rate of 0.625 basis points.
Commitment fees were $190 thousand, $228 thousand and $277
thousand for the years ended December 31, 2005, 2004 and 2003. The
decrease in commitment fees from 2005 to 2004 corresponds with the
respective decrease in liquidity fees earned, which is also based
upon the par in force on each of the liquidity facilities
outstanding. Total operating expenses also included general and
administrative expenses, which are principally comprised of
intercompany overhead and expense allocation. General and
administrative expenses were $86 thousand, $165 thousand and $648
thousand for the years ended December 31, 2005, 2004 and 2003,
respectively. The decrease in general and administrative expenses
from 2005 to 2004 reflects the decline in the Company's
activities, as the total outstanding par amount of the liquidity
facilities has decreased.
3
INCOME TAX EXPENSE
The statutory U.S. Federal tax rate during the years ended
December 31, 2005, 2004 and 2003 was 35%. Our effective tax rate
was 39.55% including the net effect of state taxes.
CAPITAL RESOURCES AND LIQUIDITY
Liquidity is a measure of the ability to generate sufficient cash
to meet cash obligations as they come due. The largest use of
potential liquidity would be if we were required to purchase
securities under the liquidity facilities issued. Since inception,
we have not been required to purchase any securities. If we were
required to purchase such securities, we would draw on the standby
loan agreements with GE Capital. Since the standby loan agreements
with GE Capital are irrevocable during the period the liquidity
agreements are outstanding, we believe we have sufficient
liquidity in the event that we are required to fund any draw downs
under the liquidity facilities issued. See note 5 for a
description of our off-balance sheet risk relating to the maturity
distribution of the underlying par value supported by the
liquidity facilities.
Our other primary source of cash is from liquidity fee income,
which we lend to GE Capital. We believe that such income and
access to the intercompany receivable from GE Capital ($2.9
million at December 31, 2005) is sufficient to fund our general
and administration expenses.
Net cash provided by operating activities was $6 million for the
year ended December 31, 2005, as we collected a portion of the
intercompany receivable from GE Capital. We used the cash to pay a
$6 million dividend to the Parent, resulting in a $6 million
financing cash outflow during the year ended December 31, 2005.
There were no cash flows related to investing activities for the
year ended December 31, 2005.
CRITICAL ACCOUNTING ESTIMATES
Accounting estimates and assumptions discussed in this section are
those that we consider to be the most critical to an understanding
of our financial statements because they inherently involve
significant judgments and uncertainties. For all of these
estimates, we caution that future events rarely develop exactly as
forecast, and the best estimates routinely require adjustment.
Also see note 2, Summary of Significant Accounting Policies, which
discusses accounting policies that we have selected from
acceptable alternatives.
REVENUE RECOGNITION
We estimate that the risk of being required to purchase securities
under the standby agreements is distributed evenly over the life
of the liquidity facilities; therefore, revenue recognition
policies have been adopted to recognize revenue evenly over the
life of the liquidity facilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required by this firm.
4
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareowner
Municipal Securities Purchase, Inc.
We have audited the accompanying statements of financial position of Municipal
Securities Purchase, Inc. as of December 31, 2005 and 2004, and the related
statements of income, changes in shareowner's equity and cash flows for each of
the years in the three-year period ended December 31, 2005. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 Municipal Securities Purchase, Inc.
as of December 31, 2005 and 2004, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2005, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Stamford, Connecticut
March 3, 2006
5
MUNICIPAL SECURITIES PURCHASE, INC.
Statements of Financial Position
DECEMBER 31, DECEMBER 31,
2005 2004
---------- ----------
Assets
Liquidity fees receivable $1,149,615 $1,081,133
Receivable from GE Capital 2,854,275 6,070,626
---------- ----------
Total assets $4,003,890 $7,151,759
========== ==========
LIABILITIES AND SHAREOWNER'S EQUITY
Deferred liquidity fee income $ 393,002 $ 686,223
Accounts payable and accrued expenses 13,700 29,000
---------- ----------
Total liabilities 406,702 715,223
---------- ----------
Common stock, par value $10.00 per share. Authorized,
issued, and outstanding 10 shares 100 100
Additional paid-in capital 822,145 822,145
Retained earnings 2,774,943 5,614,291
---------- ----------
Total shareowner's equity 3,597,188 6,436,536
---------- ----------
Total liabilities and shareowner's equity $4,003,890 $7,151,759
========== ==========
The notes to financial statements are an integral part of these financial
statements.
6
MUNICIPAL SECURITIES PURCHASE, INC.
Statements of Income
Years ended December 31
---------- ---------- ----------
2005 2004 2003
---------- ---------- ----------
Liquidity fee income $5,504,770 $6,368,144 $8,761,963
---------- ---------- ----------
Total revenues 5,504,770 6,368,144 8,761,963
---------- ---------- ----------
General and administrative expenses 85,793 164,672 648,491
GE Capital commitment fees 190,437 228,380 276,986
---------- ---------- ----------
Total operating expenses 276,230 393,052 925,477
---------- ---------- ----------
Income before provision for income taxes 5,228,540 5,975,092 7,836,486
---------- ---------- ----------
Income tax expense:
Federal:
Current 1,701,890 1,944,892 2,550,776
Deferred
State and local 365,998 418,256 548,554
---------- ---------- ----------
Total income tax expense 2,067,888 2,363,148 3,099,330
---------- ---------- ----------
Net income $3,160,652 $3,611,944 $4,737,156
========== ========== ==========
The notes to financial statements are an integral part of these financial
statements.
7
MUNICIPAL SECURITIES PURCHASE, INC.
Statements of Changes in Shareowner's Equity
Years ended December 31, 2005, 2004 and 2003
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
Balance, December 31, 2002 $ 100 $ 822,145 $ 32,265,191 $ 33,087,436
Net income 4,737,156 4,737,156
------------ ------------ ------------ ------------
Balance, December 31, 2003 100 822,145 37,002,347 37,824,592
Net income 3,611,944 3,611,944
Dividends paid (35,000,000) (35,000,000)
------------ ------------ ------------ ------------
Balance, December 31, 2004 100 822,145 5,614,291 6,436,536
Net income 3,160,652 3,160,652
Dividends paid (6,000,000) (6,000,000)
------------ ------------ ------------ ------------
Balance, December 31, 2005 $ 100 $ 822,145 $ 2,774,943 $ 3,597,188
============ ============ ============ ============
The notes to financial statements are an integral part of these financial
statements.
8
MUNICIPAL SECURITIES PURCHASE, INC.
Statements of Cash Flows
Years ended December 31, 2005, 2004 and 2003
------------ ------------ ------------
2005 2004 2003
------------ ------------ ------------
Operating activities:
Net income $ 3,160,652 $ 3,611,944 $ 4,737,156
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in taxes payable -- (2,262,071) 1,273,780
Change in due from GE Capital 3,216,351 33,213,809 (4,485,259)
Change in due to affiliates -- -- (135,773)
Change in commitment fees payable to GE Capital -- -- (992,975)
Change in liquidity fees receivable (68,482) 491,836 254,949
Change in deferred liquidity fee income (293,221) (15,370) (224,609)
Change in accounts payable and accrued expenses (15,300) (40,148) (427,269)
------------ ------------ ------------
Cash from operating activities 6,000,000 35,000,000 --
Financing activities:
Dividends paid (6,000,000) (35,000,000) --
------------ ------------ ------------
Cash used for financing activities (6,000,000) (35,000,000) --
Net change in cash and cash equivalents -- -- --
Cash and cash equivalents at beginning of period -- -- --
------------ ------------ ------------
Cash and cash equivalents at the end of period $ -- $ -- $ --
============ ============ ============
The notes to financial statements are an integral part of these financial
statements.
9
MUNICIPAL SECURITIES PURCHASE, INC.
Notes to Financial Statements
December 31, 2005, 2004 and 2003
(1) BUSINESS DESCRIPTION
Municipal Securities Purchase, Inc. (Municipal-SPI or the Company) is a
wholly-owned subsidiary of GE Funding Services, Inc. (the Parent), which
is a wholly-owned subsidiary of GEI, Inc., and in turn, wholly owned by
General Electric Capital Corporation (GE Capital) the ultimate parent of
which is the General Electric Company (GE). In the fourth quarter of
2003, FGIC Securities Purchase, Inc. (FGIC-SPI) changed its name to
Municipal Securities Purchase, Inc. Municipal-SPI provides liquidity for
certain floating rate municipal securities whereby Municipal-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, 2005, Municipal-SPI had
approximately $2.5 billion (par and interest) of potential obligations
under such arrangements. Since 2003, Municipal-SPI has not been providing
any new liquidity facilities. Each of the liquidity facilities have had a
term of approximately five years (subject to renewal) or less if the
bonds are no longer outstanding. In order to obtain funds to purchase the
securities, in the event such purchases are necessary, Municipal-SPI has
entered into standby loan agreements with GE Capital totaling $2.5
billion as of December 31, 2005, under which GE Capital is irrevocably
obligated to lend funds as needed for Municipal-SPI to purchase the
securities.
We have reclassified certain prior-year amounts to conform to the current
year's presentation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING PRINCIPLES
Our financial statements are prepared in conformity with U.S.
generally accepted accounting Principles (GAAP).
USE OF ESTIMATES
Preparing financial statements in conformity with generally
accepted accounting principles requires us to make estimates and
assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates.
REVENUE RECOGNITION
We estimate that the risk of being required to purchase securities
under the standby agreements is distributed evenly over the life
of the liquidity facilities; therefore, revenue recognition
policies have been adopted to recognize revenue evenly over the
life of the liquidity facilities.
EXPENSES
General and administrative expenses consist of direct expenses
incurred by GE Capital that are allocated on a specific
identification basis and employee related expenses that are
allocated based on the percentage of time such employees devote to
our activities. For the years ended December 31, 2005, 2004, and
2003 general and administrative expenses of $86 thousand, $165
thousand, and $648 thousand, respectively, were allocated to
Municipal-SPI. We believe that such allocation method is
reasonable, and that such expenses, as reported in the statements
of income, would not differ materially from the amount of expenses
on a stand-alone basis.
10
MUNICIPAL SECURITIES PURCHASE, INC.
Notes to Financial Statements
December 31, 2005, 2004 and 2003
COMMITMENT FEES
Commitment fees are accrued as a percentage of the par value of
the outstanding liquidity facilities.
RESERVE FOR LOSSES
We establish a reserve for losses based upon our estimate of the
ultimate aggregate losses relative to our obligations under the
liquidity facility arrangements written.
At December 31, 2005, we do not anticipate any losses relative to
such arrangements.
(3) INCOME TAXES
Under an intercompany tax-sharing agreement, we are included in the
consolidated U.S. federal income tax return, which GE files. The
provision for current tax expense includes our effect on the consolidated
return. We provide for taxes as if we filed a separate tax return.
Our effective U.S. Federal tax rate differs from the corporate tax rate
on ordinary income of 35% in 2005, 2004, and 2003. 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:
YEARS ENDED DECEMBER 31
----------------------------------------
2005 2004 2003
----------- ----------- -----------
Statutory tax provision $ 1,829,989 $ 2,091,282 $ 2,742,770
Benefit of deduction for state and
local income taxes (128,099) (146,390) (191,994)
----------- ----------- -----------
Federal income taxes 1,701,890 1,944,892 2,550,776
State and local income taxes 365,998 418,256 548,554
----------- ----------- -----------
Income tax expense $ 2,067,888 $ 2,363,148 $ 3,099,330
=========== =========== ===========
(4) RELATED PARTY TRANSACTIONS
We are not providing any new liquidity facilities. As part of the standby
loan agreements with GE Capital (see note 6), we have paid commitment
fees for the years ended December 31, 2005, 2004 and 2003 of $190
thousand, $228 thousand and $277 thousand, respectively.
At December 31, 2005 and 2004, the amounts classified as receivable from
GE Capital relate to intercompany balances held by GE Capital. We have
access to these funds on an as needed basis. All amounts receivable from
GE Capital are non-interest bearing.
See note 2 for description of expenses allocated by GE Capital.
11
MUNICIPAL SECURITIES PURCHASE, INC.
Notes to Financial Statements
December 31, 2005, 2004 and 2003
(5) OFF-BALANCE-SHEET RISK
We provide liquidity for certain floating rate municipal securities
whereby in the event that such securities cannot be remarketed, we,
pursuant to a standby purchase agreement with the issuer of the
securities, will be obligated to purchase these securities, at par.
The geographical distribution of the underlying par value supported by
the liquidity facilities outstanding at December 31, 2005, was as follows
(dollars in millions):
New York $ 841
Michigan 719
California 435
District of Columbia 266
Pennsylvania 56
Florida 49
New Hampshire 35
North Carolina 26
Alabama 21
------
Total $2,448
======
Of the $841 million of par value related to State of New York, $702
million relates to Municipal Water Finance Authority in New York City.
The next largest single exposure is to the City of Detroit with $459
million in outstanding par.
The maturity distribution of the underlying par value supported by the
liquidity facilities outstanding at December 31, 2005, is as follows
(dollars in millions):
Less than one year $1,400
One to two years 991
Two to three years 57
------
Total $2,448
======
Each of the liquidity facilities has had a term of approximately five
years (subject to renewal) or less if the bonds are no longer
outstanding.
We are exposed to credit risk that the issuer defaults on the underlying
municipal security at a time that we are holding securities purchased
pursuant to a liquidity facility and the financial guarantor fails to
perform on its insurance contract. It is our policy to evaluate the
likelihood of any credit loss at each reporting period and to establish
reserves for credit losses when deemed appropriate. At December 31, 2005
and 2004 no such reserves were required.
We are exposed to market risk in the event that we are 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 our policy to
evaluate the likelihood of us being called upon to purchase securities
under our liquidity arrangements at amounts greater than the fair value
of the securities at each reporting period and to establish valuation
12
MUNICIPAL SECURITIES PURCHASE, INC.
Notes to Financial Statements
December 31, 2005, 2004 and 2003
reserves when deemed appropriate. No such valuation reserves were
required at December 31, 2005 and 2004.
(6) STANDBY LOAN AGREEMENTS
We 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 us in amounts not exceeding the purchase price of the tendered
bonds. The total standby loan agreement amount at December 31, 2005,
equals the total outstanding facility amount of $2.5 billion.
In consideration of the commitment of GE Capital to make loans to us, we
agree to pay GE Capital a fee equal to 0.625 basis points on the
outstanding facility. The fee is payable on dates mutually agreed by us
and GE Capital.
In event of a failed remarketing, we would borrow amounts from GE Capital
under the provisions of the standby loan agreements. The standby loan
agreements require the payment of interest by us to GE Capital based on a
floating index plus a spread, which would not exceed the rate that we are
entitled to receive from the issuer of the bonds.
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 2005, the estimated fair value of the liquidity
facilities was approximately $5 million. The estimated fair value of the
standby loan agreements with GE Capital was approximately $0.2 million.
The fair value was calculated based upon current expected cash inflows
and outflows, assuming current outstanding facilities at current fee
rates, discounted at the risk free rate of 4.35%. We believe the fair
value approximates cost for all other assets and liabilities. There is no
assurance that such estimates could actually have been realized at
December 31, 2005.
(8) QUARTERLY DATA (UNAUDITED)
Selected quarterly financial data was as follows:
2005
--------------------------------------------------------------------------
4TH 3RD 2ND 1ST TOTAL
---------- ---------- ---------- ---------- ----------
Total revenues $1,227,017 $1,336,962 $1,373,641 $1,567,150 $5,504,770
Total expenses 57,772 66,519 54,098 97,841 276,230
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes 1,169,245 1,270,443 1,319,543 1,469,309 5,228,540
Income tax expense 462,437 502,460 517,975 585,016 2,067,888
---------- ---------- ---------- ---------- ----------
Net income $ 706,808 $ 767,983 $ 801,568 $ 884,293 $3,160,652
========== ========== ========== ========== ==========
2004
--------------------------------------------------------------------------
4TH 3RD 2ND 1ST TOTAL
---------- ---------- ---------- ---------- ----------
Total revenues $1,562,296 $1,610,649 $1,616,357 $1,578,842 $6,368,144
Total expenses 41,877 117,156 117,223 116,796 393,052
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes 1,520,419 1,493,493 1,499,134 1,462,046 5,975,092
Income tax expense 601,326 590,675 592,908 578,239 2,363,148
---------- ---------- ---------- ---------- ----------
Net income $ 919,093 $ 902,818 $ 906,226 $ 883,807 $3,611,944
========== ========== ========== ========== ==========
13
MUNICIPAL SECURITIES PURCHASE, INC.
Notes to Financial Statements
December 31, 2005, 2004 and 2003
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Under the direction of our Chairman of the Board (serving as the
principal executive officer) and Vice President and Treasurer
(serving as the chief financial officer), we evaluated our
disclosure controls and procedures and internal control over
financial reporting and concluded that (i) our disclosure controls
and procedures were effective as of December 31, 2005 and (ii) no
change in internal control over financial reporting occurred
during the quarter ended December 31, 2005, that has materially
affected, or is reasonably likely to materially affect, such
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
Not Applicable.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Not required by this form.
ITEM 11. EXECUTIVE COMPENSATION.
Not required by this form.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Not required by this form.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not required by this form.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The aggregate fees billed for professional services by KPMG LLP in
2005 and 2004 were:
(IN THOUSANDS)
TYPE OF FEES 2005 2004
-------- --------
Audit Fees $ 51 $ 55
-------- --------
Total $ 51 $ 55
======== ========
In the above table, in accordance with the SEC's definitions and rules, "audit
fees" are fees we paid KPMG for professional services for the audit of our
annual financial statements included in Form 10-K and review of financial
statements included in Form 10-Q's and for services that are normally provided
by the accountant in connection with statutory and regulatory filing or
engagements.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Financial Statements
Included in Part II of this report:
Report of Independent Registered Public Accounting Firm
Statements of Financial Position as of December 31, 2005
and 2004
Statements of Income for the years ended December 31,
2005, 2004 and 2003
Statements of Changes in Shareowner's Equity for the
years ended December 31, 2005, 2004 and 2003
Statements of Cash Flows for the years ended December 31,
2005, 2004 and 2003
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.
15
(b) Exhibit Index
1.1 - Certificate of Incorporation of Municipal-SPI
(Incorporated by reference to Exhibit 1.1 of
Municipal-SPI's December 31, 1991 Form 10-K)
1.2 - Certificate of Amendment of Certificate of
Incorporation of Municipal-SPI (Incorporated by
reference to Exhibit 1.4 of Municipal-SPI's
Current Report on Form 8-K filed on November 14,
2003).
1.3 - By-Laws of Municipal-SPI (Incorporated by
reference to Exhibit 1.2 of Municipal-SPI's
December 31, 1991 Form 10-K)
23(ii) - Consent of Independent Registered Public
Accounting Firm
31(a) - Certification Pursuant to Rules 13a-14(a) and
15d-14(a) under the Securities Exchange Act of
1934, as amended.
31(b) - Certification Pursuant to Rules 13a-14(a) and
15d-14(a) under the Securities Exchange Act of
1934, as amended.
32 - Certifications Pursuant to 18 U.S.C Section 1350
16
SIGNATURES
Pursuant to
the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MUNICIPAL SECURITIES PURCHASE, INC.
(Registrant)
March 3, 2006 /s/ LeAnn Rogers
- ------------- ----------------
Date LeAnn Rogers
Chairman
(Principal Executive Officer)
March 3, 2006 /s/ Peter Graham
- ------------- ----------------
Date Peter Graham
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
17