UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the Securities Exchange Act of 1934
FOR THE QUARTER ENDED JUNE 30, 2003
Commission File No. 0-19564
FGIC SECURITIES PURCHASE, INC.
A DELAWARE CORPORATION
IRS EMPLOYER IDENTIFICATION NO. 13-3633082
125 PARK AVENUE, NEW YORK, NEW YORK 10017
TELEPHONE - (212) 312-3000
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Shares Outstanding
Title of Class at August 1, 2003
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Common Stock (voting), $10.00 par value 10
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.
FGIC SECURITIES PURCHASE, INC.
(A Wholly Owned Subsidiary of FGIC Holdings, Inc.)
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets 1
Statements of Income 2
Statements of Cash Flows 3
Note to Unaudited Interim Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
Item 4. Controls and Procedures 7
PART II. OTHER INFORMATION
Other Information:
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 8
Item 3. Defaults on Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 10
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FGIC SECURITIES PURCHASE, INC.
(A Wholly Owned Subsidiary of FGIC Holdings, Inc.)
Balance Sheets
June 30, 2003 and December 31, 2002
JUNE 30 DECEMBER 31,
Assets 2003 2002
------------------- -------------------
(Unaudited)
Liquidity fees receivable $ 2,389,799 1,827,918
Due from GE Capital 37,357,812 34,799,176
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Total assets $ 39,747,611 36,627,094
=================== ===================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deferred liquidity fee income $ 798,543 926,202
Due to affiliates 993,885 135,773
Commitment fees payable to GE Capital 1,133,349 992,975
Accounts payable and accrued expenses 508,135 496,417
Taxes payable 749,613 988,291
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Total liabilities 4,183,525 3,539,658
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Stockholder's Equity:
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 34,741,841 32,265,191
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Total stockholder's equity 35,564,086 33,087,436
------------------- -------------------
Total liabilities and stockholder's equity $ 39,747,611 36,627,094
=================== ===================
See accompanying notes to unaudited interim financial statements.
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FGIC SECURITIES PURCHASE, INC.
(A Wholly Owned Subsidiary of FGIC Holdings, Inc.)
Statements of Income and Retained Earnings
Three and six-months ended June 30, 2003 and 2002
(Unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------- ------------------------------------
2003 2002 2003 2002
------------------------------------- ----------------- -----------------
Liquidity fee income $ 2,362,602 2,010,548 4,624,816 4,247,414
General and administrative expenses 273,708 165,549 527,793 338,538
----------------- ----------------- ----------------- -----------------
Income before
income taxes 2,088,894 1,844,999 4,097,023 3,908,876
----------------- ----------------- ----------------- -----------------
Income tax expense:
Federal 679,935 603,210 1,333,581 1,272,339
State and local 146,223 129,150 286,792 273,621
----------------- ----------------- ----------------- -----------------
Total income tax expense 826,158 732,360 1,620,373 1,545,960
----------------- ----------------- ----------------- -----------------
Net income $ 1,262,736 1,112,639 2,476,650 2,362,916
================= ================= ================= =================
See accompanying notes to unaudited interim financial statements.
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FGIC SECURITIES PURCHASE, INC.
(A Wholly Owned Subsidiary of FGIC Holdings, Inc.)
Statements of Cash Flows
Six-months ended June 30, 2003 and 2002
(Unaudited)
2003 2002
------------------- -------------------
Operating activities:
Net income $ 2,476,650 2,362,916
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in taxes payable (238,678) 935,592
Change in due from GE Capital (2,558,636) (3,887,297)
Change in due to affiliates 858,112 810,369
Changes in other assets -- 62,337
Change in liquidity fees receivable (561,881) (469,372)
Change in deferred liquidity fee income (127,659) 38,919
Change in accounts payable and accrued expenses 11,718 15,529
Change in commitment fees payable to GE Capital 140,374 131,007
------------------- -------------------
Cash provided by operating activities -- --
------------------- -------------------
Net change in cash and cash equivalents -- --
Cash and cash equivalents at beginning of period --
------------------- -------------------
Cash and cash equivalents at end of period $ -- --
=================== ===================
See accompanying notes to unaudited interim financial statements.
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FGIC SECURITIES PURCHASE, INC.
(A Wholly Owned Subsidiary of FGIC Holdings, Inc.)
Notes to Unaudited Interim Financial Statements
June 30, 2003
(Unaudited)
(1) BUSINESS
FGIC Securities Purchase, Inc. (FGIC-SPI) is a wholly owned subsidiary of
FGIC Holdings, Inc. (the Parent). The Parent is wholly owned by GEI,
Inc., which, in turn, is wholly owned by General Electric Capital
Corporation (GE Capital). FGIC-SPI provides liquidity for certain
floating rate municipal securities whereby FGIC-SPI will, under certain
circumstances, purchase such securities in the event they are tendered by
the holders thereof as permitted under the terms of the respective bond
purchase documents. As of June 30, 2003, FGIC-SPI had approximately $4.6
billion (par and interest) of potential obligations under such
arrangements. At June 30, 2003, the Company had remaining capacity of
$0.3 billion. Presently, management of the Company has decided not to
provide any new standby security purchase agreement. Management will
continue to reassess this decision in the future. The current standby
security purchase agreements shall remain in effect in accordance with
their terms.
In order to obtain funds to purchase the securities, in the event such
purchases are necessary, FGIC-SPI has entered into standby loan
agreements with GE Capital totaling $4.6 billion at March 31, 2003, under
which GE Capital will be irrevocably obligated to lend funds as needed
for FGIC-SPI to purchase the securities.
(2) SIGNIFICANT ACCOUNTING POLICIES
The unaudited interim financial statements of FGIC-SPI contained in this
report reflect all normal recurring adjustments necessary, in the opinion
of management, for a fair statement of (a) results of operations for the
three and six months ended June 30, 2003 and 2002, (b) the financial
position as of June 30, 2003 and (c) cash flows for the six months ended
June 30, 2003 and 2002.
These unaudited interim financial statements should be read in
conjunction with the financial statements and related notes included in
the 2002 Annual Report on Form 10-K.
Significant accounting policies are as follows:
(A) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are carried at cost, which approximates
fair value. For purposes of the statement of cash flows, FGIC-SPI
considers all highly liquid investments with original maturities
of six months or less, which are not with affiliated entities, to
be cash equivalents.
(B) REVENUE RECOGNITION
Fees are paid up-front and in installments. Up-front fees are
earned on a straight-line basis over the life of the commitment,
usually five years, and installments fees are earned straight-line
over the installment period.
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(C) FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of FGIC-SPI's financial instruments, relating
primarily to short-term investments, liquidity fees receivable,
due from GE Capital, deferred liquidity fee income, due to
affiliates, commitment fees payable to GE Capital, accounts, and
accrued expenses and taxes payable, approximate their fair values.
(D) EXPENSES
Direct expenses incurred by the Parent are fully allocated to
FGIC-SPI on a specific identification basis. Employee related
expenses are allocated by affiliates to FGIC-SPI. For the six
months ended June 30, 2003 and 2002, expenses of $372,701 and
$200,000, respectively, were allocated to FGIC-SPI. For the three
months ended June 30, 2003 and 2002, expenses of $199,670 and
$100,000, respectively, were allocated to FGIC-SPI. Management
believes that such allocation method is reasonable. Management
believes that such expenses, as reported in the statement of
income, would not differ materially from what expenses would have
been on a stand-alone basis.
(E) COMMITMENT FEES
The commitment fees are accrued on the outstanding liquidity
facilities.
(F) RESERVE FOR LOSSES
It is management's policy to establish a reserve for losses based
upon its estimate of the ultimate aggregate losses relative to its
obligations under the liquidity facility arrangements written.
At June 30, 2003, management does not anticipate any losses
relative to such arrangements.
(G) OTHER COMPREHENSIVE INCOME
There are no elements of other comprehensive income.
(H) NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45 (FIN 45)
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. The
standby security purchase agreements issued by FGIC-SPI are
subject to the disclosure requirements of FIN 45 and management
believes the accounting provisions of FIN 45 are applicable to the
agreements issued by the Company; however, no new agreements were
issued in 2003.
(3) INCOME TAXES
Under an intercompany tax-sharing agreement with its parent, FGIC-SPI is
included in the consolidated Federal income tax returns filed by GE
Capital. FGIC-SPI provides for taxes as if it filed a separate tax
return.
- - 5 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Liquidity fees are received up-front at the inception of the contract and
in installments over the life of the contract. Up-front fees are earned
on a straight-line basis over the life of the commitment, and installment
fees are earned straight-line over the installment period.
Presently, management of the Company has decided not to provide any new
standby security purchase agreement. Management will continue to reassess
this decision in the future. The current agreements shall remain in
effect in accordance with their terms.
For the six months ended June 30, 2003, FGIC-SPI earned liquidity fees of
$4,624,816 compared to $4,247,414 for the six months ended June 30, 2002.
The increase in earnings is primarily due to new deals written in 2002
being fully in effect in 2003. FGIC-SPI incurred $527,793 and $338,538 of
general and administrative expenses for the six months ended June 30,
2003 and 2002, respectively. Included in general and administrative
expenses were commitment fees owed to GE Capital of $140,373 in 2003 and
$131,007 in 2002. The increase in commitment fees is consistent with the
increase in liquidity fees. The remainder of general and administrative
expenses is primarily comprised of intercompany overhead expense
allocations, which increased due to increase in underlying costs being
allocated. The effective Federal Tax rate during 2003 and 2002 was equal
to the Federal corporate tax rate of 35% giving consideration to the
benefit for the deduction of state taxes of 7%.
For the three months ended June 30, 2003, FGIC-SPI earned liquidity fees
of $2,362,602 compared to $2,010,548 for the three months ended June 30,
2002. The increase in earnings is primarily due to new deals written in
2002 being fully in effect in 2003. FGIC-SPI incurred $273,708 and
$165,549 of general and administrative expenses for the three months
ended June 30, 2003 and 2002, respectively. Included in general and
administrative expenses were commitment fees owed to GE Capital of
$70,635 in 2003 and $61,018 in 2002. The increase in commitment fees is
consistent with increase in liquidity fees. The remainder of general and
administrative expenses is primarily comprised of intercompany overhead
expense allocations, which increased due to the increase in underlying
costs being allocated. The effective Federal tax rate during 2002 and
2001 was equal to the Federal corporate tax rate of 35% giving
consideration to the benefit for the deduction of state taxes of 7%.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the ability to generate sufficient cash to meet
cash obligations as they come due. FGIC-SPI's primary source of cash is
from liquidity fees and investment income. Cash outflows primarily relate
to general and administrative expenses, GE Capital commitment fees, and
income taxes. To date FGIC-SPI has not been required to purchase
securities (fund a cash outflow) under the liquidity facilities issued.
Should FGIC-SPI be required to fund such an outflow, the Company can
readily access the cash balances held by GE Capital ($37.3 million at
June 30, 2003) and draw upon the standby loan agreement ($4.6 billion at
June 30, 2003) in the amount of the purchase price of tendered bonds.
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CRITICAL ACCOUNTING POLICIES
The footnotes to the Company's financial statements disclose the
Company's significant accounting policies. Some accounting policies may
be critical to the portrayal of the Company's financial condition and
results of operations as they require management to establish estimates
based on subjective judgments. The Company's accounting policy with
respect to the recognition of revenue was considered a critical
accounting policy as management estimates the risk associated with the
liquidity facilities is distributed ratably over the life of facilities
and as such earns the fees evenly over the liquidity facility period.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b), the Company's management, including the
Chief Executive Officer and Chief Financial Officer, conducted an
evaluation as of the end of the period covered by this report, of the
effectiveness of the Company's disclosure controls and procedures as
defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of the end
of the period covered by this report. As required by Rule 13a-15(d), The
Company's management, including the Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of the Company's internal
control over financial reporting to determine whether any changes
occurred during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting. Based on that evaluation,
there has been no such change during the quarter covered by this report.
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OTHER INFORMATION
1. LEGAL PROCEEDINGS
Omitted
2. CHANGES IN SECURITIES
Omitted
3. DEFAULTS ON SENIOR SECURITIES
Omitted
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted
5. OTHER INFORMATION
Omitted
6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 31.1 - Certification Pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002
Exhibit 31.2 - Certification Pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002
Exhibit 32 - Certification Pursuant to 18 U.S.C. Section 1350 As
Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002
b) Report on Form 8-K
Omitted
- 8 -
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.
FGIC SECURITIES PURCHASE, INC.
------------------------------
(Registrant)
Date: August 1, 2003 /s/ Deborah M. Reif
--------------------
Deborah M.Reif
President (principal
executive officer)
Date: August 1, 2003 /s/ Donna J. Blank
-------------------
Donna J. Blank
Chief Financial Officer
(principal financial
and accounting officer)
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EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Deborah M. Reif, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of FGIC Securities
Purchase, Inc. (the "Company");
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this quarterly
report based on such evaluation (the "Evaluation Date"); and
(c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal controls over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions);
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 1, 2003 /s/ Deborah M. Reif
---------------------
Deborah M. Reif
President (principal
executive officer)
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EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Donna J. Blank, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of FGIC Securities
Purchase, Inc. (the "Company");
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end or the period covered by this quarterly
report based on such evaluation (the "Evaluation Date"); and
(c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal controls over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions);
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 1, 2003 /s/ Donna J. Blank
--------------------
Donna J. Blank
Chief Financial Officer
(principal financial
and accounting officer)
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EXHIBIT 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of FGIC Securities Purchase, Inc. (the
Company) on Form 10-Q for the period ending June 30, 2003, as filed with the
Securities and Exchange Commission on the date hereof (the Report), we, Deborah
M. Reif and Donna J. Blank, Chief Executive Officer, and Chief Financial Officer
of the Company, herby certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) such Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in such Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: August 1, 2003 / s / Deborah M. Reif
---------------------
Deborah M. Reif
President (principal
executive officer)
Date: August 1, 2003 / s / Donna J. Blank
--------------------
Donna J. Blank
Chief Financial Officer
(principal financial
and accounting officer)
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