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 SEPTEMBER 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 (I.R.S. Employer Identification
or 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
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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 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 .
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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
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X .
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At October 27, 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
September 30, December 31,
2006 2005
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ASSETS (unaudited)
Liquidity fees receivable $ 385,789 $1,149,615
Due from GE Capital 2,212,609 2,854,275
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Total assets $2,598,398 $4,003,890
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LIABILITIES AND SHAREOWNER'S EQUITY
Deferred liquidity fee income $ 262,982 $ 393,002
Accounts payable and accrued expenses 76,973 13,700
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Total liabilities 339,955 406,702
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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 1,436,198 2,774,943
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Total shareowner's equity 2,258,443 3,597,188
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Total liabilities and shareowner's equity $2,598,398 $4,003,890
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See accompanying notes to unaudited interim financial statements.
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MUNICIPAL SECURITIES PURCHASE, INC.
Statement of Income
(Unaudited)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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2006 2005 2006 2005
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Liquidity fee income $ 822,759 $1,336,962 $2,924,453 $4,277,753
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Total revenues 822,759 1,336,962 2,924,453 4,277,753
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General and administrative expenses 12,412 20,635 73,808 71,271
GE Capital commitment fees 28,260 45,884 102,498 147,187
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Total operating expenses 40,672 66,519 176,306 218,458
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Income before provision for
income taxes 782,087 1,270,443 2,748,147 4,059,295
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Income tax expense:
Federal: 254,569 413,529 894,522 1,321,300
State and local 54,746 88,931 192,370 284,151
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Total income tax expense 309,315 502,460 1,086,892 1,605,451
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Net income $ 472,772 $ 767,983 $1,661,255 $2,453,844
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See accompanying notes to unaudited interim financial statements.
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MUNICIPAL SECURITIES PURCHASE, INC.
Statement of Changes in Shareowner's Equity
Nine-months ended September 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) 2,453,844 2,453,844
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Balance, September 30, 2005 (unaudited) $ 100 $ 822,145 $ 2,068,135 $ 2,890,380
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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) 1,661,255 1,661,255
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Balance, September 30, 2006 (unaudited) $ 100 $ 822,145 $ 1,436,198 $ 2,258,443
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See accompanying notes to unaudited interim financial statements.
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MUNICIPAL SECURITIES PURCHASE, INC.
Statement of Cash Flows
(Unaudited)
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NINE-MONTHS ENDED
SEPTEMBER 30
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2006 2005
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Operating activities:
Net income $ 1,661,255 $ 2,453,844
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in due from GE Capital 641,666 4,045,343
Change in liquidity fees receivable 763,826 (316,458)
Change in deferred liquidity fee income (130,020) (169,511)
Change in accounts payable and accrued expenses 63,273 (13,218)
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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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See accompanying notes to unaudited interim financial statements.
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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 September 30, 2006, the Company had
approximately $1.6 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 $1.6 billion as of September 30,
2006, under which GE Capital is irrevocably obligated to lend funds as
needed for the Company to purchase the securities.
BASIS OF PRESENTATION
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 nine-months ended September 30, 2006, we did not
commit to any new liquidity facilities.
We earned liquidity fees of approximately $2.9 million and $4.3 million
during the nine-months ended September 30, 2006 and 2005, respectively
and $0.8 million and $1.3 million during the three-months ended
September 30, 2006 and 2005, respectively. The total liquidity facility
in force as of September 30, 2006 and September 30, 2005 was
approximately $1.6 billion and $2.9 billion, respectively. The decrease
in liquidity fees from 2005 to 2006 corresponds with the respective
decrease in the liquidity facilities in force. This decrease is due to
the maturity of the underlying liquidity facilities.
OPERATING EXPENSES
We incurred $176,306 and $218,458 of total operating expenses during
the nine-months ended September 30, 2006 and 2005, respectively, and
$40,672 and $66,519 during the three-months ended September 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 $102,498 and $147,187 for the nine-months ended September 30, 2006
and 2005, respectively, and $28,260 and $45,884 for the three-months
ended September 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 allocations.
General and administrative expenses were $73,808 and $71,271 for the
nine-months ended September 30, 2006 and 2005, respectively, and
$12,412 and $20,635 during the three-months ended September 30, 2006
and 2005, respectively.
INCOME TAX EXPENSE
The statutory U.S. Federal tax rate during the three-months ended
September 30, 2006 and 2005 was 35%. Our effective tax rate was 39.55%
including the net effect of state taxes for the three and nine-months
ended September 30, 2006.
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
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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.
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 ($2,212,609 at September 30,
2006) is sufficient to fund our general and administrative expenses.
Net cash provided by operating activities was $3.0 million for the
nine-months ended September 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 nine-months ended September 30, 2006. There
were no cash flows related to investing activities for the nine-months
ended September 30, 2006.
ITEM 4. CONTROLS AND PROCEDURES
Under the direction of our Chairman (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 September 30, 2006, and (ii) no change in internal
control over financial reporting occurred during the quarter ended
September 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.
(Registrant)
October 30, 2006 /s/ LeAnn Rogers
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Date LeAnn Rogers
Chairman
(Principal Executive Officer)
October 30, 2006 /s/ Peter Graham
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Date Peter Graham
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
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