UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2006
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
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(State or other jurisdiction incorporation or (I.R.S. Employer Identification
organization) No.)
201 HIGH RIDGE ROAD, STAMFORD, CONNECTICUT 06927
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(Address of principal executive offices) (Zip Code)
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE) (203) 357-4000
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
COMMON STOCK, PAR VALUE $10.00 PER SHARE
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 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.
At July 21, 2006, 10 shares of voting common stock, which constitutes all of the
outstanding common equity, with a par value of $10.00 per share were
outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE
FORMAT.
MUNICIPAL SECURITIES PURCHASE, INC.
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Financial Position 1
Statement of Income 2
Statement of Changes in Shareowner's Equity 3
Statement of Cash Flows 4
Notes to Unaudited Interim Financial Statements 5
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 6
Item 4. Controls and Procedures 7
PART II. OTHER INFORMATION
Item 6. Exhibits 8
Signatures 9
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. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MUNICIPAL SECURITIES PURCHASE, INC.
Statement of Financial Position
JUNE 30, DECEMBER 31,
2006 2005
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ASSETS (unaudited)
Liquidity fees receivable $ 609,064 $ 1,149,615
Due from GE Capital 1,491,167 2,854,275
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Total assets $ 2,100,231 $ 4,003,890
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LIABILITIES AND SHAREOWNER'S EQUITY
Deferred liquidity fee income $ 307,560 $ 393,002
Accounts payable and accrued expenses 7,000 13,700
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Total liabilities 314,560 406,702
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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 963,426 2,774,943
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Total shareowner's equity 1,785,671 3,597,188
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Total liabilities and shareowner's equity $ 2,100,231 $ 4,003,890
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The notes to unaudited interim financial statements are
an integral part of this statement.
1
MUNICIPAL SECURITIES PURCHASE, INC.
Statement of Income
(Unaudited)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
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2006 2005 2006 2005
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Liquidity fee income $ 1,034,408 $ 1,373,641 $ 2,101,694 $ 2,940,791
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Total revenues 1,034,408 1,373,641 2,101,694 2,940,791
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General and administrative expenses 12,180 6,498 61,396 50,636
GE Capital commitment fees 35,987 47,600 74,238 101,303
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Total operating expenses 48,167 54,098 135,634 151,939
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Income before provision for
income taxes 986,241 1,319,543 1,966,060 2,788,852
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Income tax expense:
Federal: 321,022 426,298 639,953 907,771
State and local 69,036 91,677 137,624 195,220
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Total income tax expense 390,058 517,975 777,577 1,102,991
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Net income $ 596,183 $ 801,568 $ 1,188,483 $ 1,685,861
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The notes to unaudited interim financial statements are
an integral part of this statement.
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MUNICIPAL SECURITIES PURCHASE, INC.
Statement of Changes in Shareowner's Equity
Six-months ended June 30, 2006 and 2005
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
Balance, December 31, 2004 $ 100 $822,145 $ 5,614,291 $ 6,436,536
Dividends paid (unaudited) (6,000,000) (6,000,000)
Net income (unaudited) 1,685,861 1,685,861
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Balance, June 30, 2005 (unaudited) $ 100 $822,145 $ 1,300,152 $ 2,122,397
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Balance, December 31, 2005 $ 100 $822,145 $ 2,774,943 $ 3,597,188
Dividends paid (unaudited) (3,000,000) (3,000,000)
Net income (unaudited) 1,188,483 1,188,483
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Balance, June 30, 2006 (unaudited) $ 100 $822,145 $ 963,426 $ 1,785,671
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The notes to unaudited interim financial statements are
an integral part of this statement.
3
MUNICIPAL SECURITIES PURCHASE, INC.
Statement of Cash Flows
(Unaudited)
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SIX-MONTHS ENDED
JUNE 30
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2006 2005
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Operating activities:
Net income $ 1,188,483 $ 1,685,861
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in due from GE Capital 1,363,108 4,230,958
Change in liquidity fees receivable 540,551 173,540
Change in deferred liquidity fee income (85,442) (109,333)
Change in accounts payable and accrued expenses (6,700) 18,974
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Cash from operating activities 3,000,000 6,000,000
Financing activities:
Dividends paid (3,000,000) (6,000,000)
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Cash used for financing activities (3,000,000) (6,000,000)
Net change in cash and cash equivalents - -
Cash and cash equivalents at beginning of period - -
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Cash and cash equivalents at the end of period $ - $ -
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The notes to unaudited interim financial statements are
an integral part of this statement.
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MUNICIPAL SECURITIES PURCHASE, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
(1) BUSINESS DESCRIPTION
Municipal Securities Purchase, Inc. (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 General Electric Company (GE). In
the fourth quarter of 2003, FGIC Securities Purchase, Inc.
(FGIC-SPI) changed its name to Municipal Securities Purchase, Inc.
The Company provides liquidity for certain floating rate municipal
securities whereby the Company will, under certain circumstances,
purchase such securities in the event they are tendered by the
holders as permitted under the terms of the respective bond
indentures. As of June 30, 2006, the Company had approximately
$2.0 billion (par amount and interest) of potential obligations
under such arrangements. When issued, each of the liquidity
facilities had a term not exceeding five years (subject to
renewal). In order to obtain funds to purchase the securities, in
the event such purchases are necessary, the Company has entered
into standby loan agreements with GE Capital totaling $2.0 billion
as of June 30, 2006, under which GE Capital is irrevocably
obligated to lend funds as needed for the Company to purchase the
securities.
BASIS OF CONSOLIDATION
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect reported amounts and
related disclosures. Actual results could differ from those
estimates.
The unaudited interim financial statements of the Company
contained in this report reflect all normal recurring adjustments
necessary, in the opinion of management, for a fair statement of
income, financial position and cash flows. The results reported in
these quarterly financial statements should not be regarded as
necessarily indicative of results that may be expected for the
entire year. We label our quarterly information using a calendar
convention, that is, first quarter is labeled as ending March 31,
second quarter as ending on June 30, and third quarter as ending
on September 30. It is our longstanding practice to establish
interim quarterly closing dates using a fiscal calendar, which
requires our business to close their books on a Saturday. The
effects of this practice are modest and only exist within a
reporting year. The fiscal closing calendar from 1993 through 2013
is available on our website, www.ge.com/secreports.
These unaudited interim financial statements should be read in
conjunction with the financial statements and related notes
included in the 2005 Form 10-K.
(2) INCOME TAXES
We are included in GE's consolidated U.S. federal income tax
return under an intercompany tax-sharing agreement. The provision
for current tax expense includes our effect on the consolidated
return. We provide for taxes as if we filed a separate return.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
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. We earn liquidity fees from the issuers of these
securities, municipal governments in the U.S., for providing the
liquidity facilities.
During 2005 and the six-months ended June 30, 2006, we did not
commit to any new liquidity facilities.
We earned liquidity fees of approximately $2.1 million and $2.9
million during the six-months ended June 30, 2006 and 2005,
respectively and $1.0 million and $1.4 million during the
three-months ended June 30, 2006 and 2005, respectively. The total
liquidity facility in force as of June 30, 2006 and June 30, 2005
was approximately $2.0 billion and $3.1 billion, respectively. The
decrease in liquidity fees from 2005 to 2006 corresponds with the
respective decrease in liquidity facility in force. This decrease
is due to maturity of underlying liquidity facilities.
OPERATING EXPENSES
We incurred $135,634 and $151,939 of total operating expenses
during the six-months ended June 30, 2006 and 2005, respectively
and $48,167 and $54,098 during the three-months ended June 30,
2006 and 2005, respectively. Included in total operating expenses
were commitment fees owed 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 $74,238 and $101,303 for the six-months ended
June 30, 2006 and 2005, respectively, and $35,987 and $47,600 for
the three-months ended June 30, 2006 and 2005, respectively. The
decrease in commitment fees from 2005 to 2006 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 includes general and
administrative expenses, which are principally comprised of
intercompany overhead expense allocation. General and
administrative expenses were $61,396 and $50,636 for the
six-months ended June 30, 2006 and 2005, respectively, and $12,180
and $6,498 during the three-months ended June 30, 2006 and 2005,
respectively.
INCOME TAX EXPENSE
The statutory U.S. Federal tax rate during the three-months ended
June 30, 2006 and 2005 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 all
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
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outstanding, we believe we have sufficient liquidity in the event
that we are required to fund any draw downs under the liquidity
facilities issued.
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 ($1,491,167
at June 30, 2006) is sufficient to fund our general and
administrative expenses.
Net cash provided by operating activities was $3.0 million for the
six-months ended June 30, 2006 as we collected a portion of the
intercompany receivable from GE Capital. We used the cash to pay a
$3.0 million dividend to the Parent, resulting in a $3.0 million
financing cash outflow during the six-months ended June 30, 2006.
There were no cash flows related to investing activities for the
six-months ended June 30, 2006.
ITEM 4. 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 Principal Financial and Accounting 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 June 30,
2006, and (ii) no change in internal control over financial
reporting occurred during the quarter ended June 30, 2006, that
has materially affected, or is reasonably likely to materially
affect, such internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit 31(a) - Certification Pursuant to Rules 13a-14(a) and
15d-14(a) under the Securities Exchange Act of 1934, as Amended.
Exhibit 31(b) - Certification Pursuant to Rules 13a-14(a) and
15d-14(a) under the Securities Exchange Act of 1934, as Amended.
Exhibit 32 - Certification Pursuant to 18 U.S.C. Section 1350.
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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.
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(Registrant)
July 24, 2006 /s/ LeAnn Rogers
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Date LeAnn Rogers
Chairman
(Principal Executive Officer)
July 24, 2006 /s/ Peter Graham
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Date Peter Graham
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
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