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
Fiscal year ended December 31, 2003
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 (I.R.S. Employer Identification
or 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 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 an accelerated filer (as
defined in Exchange Act Rule 12b-2). 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 FEBRUARY 27, 2004, 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 2. Properties 1
Item 3. Legal Proceedings 1
Item 4. Submission of Matters to a Vote of Security Holders 1
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 2
Item 6. Selected Financial Data 2
Item 7. Management's Discussion and Analysis of Results of
Operations 2
Item 8. Financial Statements and Supplementary Data 4
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
Item 9a. Controls and Procedures 15
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 15
Item 13. Certain Relationships and Related Transactions 15
Item 14. Principal Accountant Fees and Services 15
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 16
Signatures 17
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, 2003, all
outstanding capital stock of Municipal-SPI was owned by FGIC
Holdings, Inc., 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.
The business of Municipal-SPI 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, Municipal-SPI, pursuant to a standby 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, Municipal-SPI has entered into standby
loan agreements, with GE Capital, under which GE Capital will
irrevocably be obligated to lend funds as needed for Municipal-SPI
to purchase the securities. While Municipal-SPI holds 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 Municipal-SPI until they are remarketed, sold or until
maturity. Since inception, we have not been required to perform
under such arrangements.
Since 2002, Municipal-SPI has not been providing any new liquidity
facilities and management of the Company will continue to reassess
the decision in the future. The liquidity facilities are for a
term of approximately five years (subject to renewal) or earlier
if the bonds are no longer outstanding.
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 pending legal proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not required by this form.
- 1 -
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 FGIC Holdings, 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
RESULTS OF OPERATIONS
During 2003, the Company did not commit to any new liquidity
facilities. During 2002, four new liquidity facilities totaling
$0.3 billion, were added, compared with fifteen new liquidity
facilities totaling $1.9 billion in 2001.
The total capacity of Municipal-SPI's liquidity facility has
amounted to $7 billion since inception, of which $0 and $2 billion
were created in 2002 and 2001, respectively. At December 31, 2003,
the Company had remaining capacity of $0.1 billion.
Municipal-SPI earned liquidity fees of $8.8 million, $9.5 million
and $7.0 million in 2003, 2002 and 2001, respectively. The
decrease in liquidity fees from 2002 to 2003 was primarily due to
16 maturing contracts in 2003. The increase in liquidity fees from
2001 to 2002 was primarily due to the full year impact of 15 new
contracts entered into in 2001, which contributed to an increase
of approximately $2.7 million. In addition, four new contracts in
2002 added liquidity fees of approximately $0.4 million but were
offset by the renewal of existing contracts at lower basis points
and the expiration of ten contracts, which lowered liquidity fees
by approximately $0.6 million. The total liquidity facility in
force as of December 31, 2003 and 2002 was $3.8 billion and $4.8
billion, respectively. Weighted fees as of December 31, 2003 as
compared with 2002 were slightly lower due to the higher weighted
average fee associated with the 16 maturing contracts compared to
the remaining outstanding contracts.
OPERATING EXPENSES
Municipal-SPI incurred $0.9 million of total operating expenses in
both 2003 and 2002 compared with $1.2 million in 2001. Included in
total operating expenses were commitment fees owed to GE Capital,
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 $0.277 million, $.292 million and $.202 million in 2003,
2002 and 2001, respectively. The decrease in commitment fees from
2002 to 2003 and the increase in commitment fees from 2001 to 2002
correspond with the respective fluctuation in liquidity fees
earned which are also based upon the par in force outstanding.
Total operating expenses also includes general and administrative
expenses, which are principally comprised of intercompany overhead
expense allocations. Such allocations increased from 2002 to 2003
due to an increase in overall corporate expenses. Such allocations
decreased from 2001 to 2002 due to a decrease in allocated
expenses resulting from the decline in number of liquidity
facilities written.
INCOME TAX EXPENSE
The effective Federal tax rate during 2003, 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%.
- 2 -
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 the Company were required to
purchase any securities under the liquidity facilities issued.
Since inception, the Company has not been required to purchase any
securities. If the Company were required to purchase such
securities, Municipal-SPI would draw on the standby loan agreement
with GE Capital. Since the standby loan agreement with GE Capital
is irrevocable during the period the liquidity agreements are
outstanding the Company believes it has sufficient liquidity in
the event that it is required to fund any draw under the liquidity
facilities issued. See note 5 for a description of the Company's
off-balance sheet risk relating to the maturity distribution of
the underlying par value supported by the liquidity facilities.
Municipal-SPI's primary source of cash is from liquidity fee
income. The Company believes that such income and access to the
intercompany receivable from GE Capital ($39.3 million at December
31, 2003) is sufficient to fund the general and administration
expenses of the Company.
Net cash provided by operating activities was $0 for the years
ended December 31, 2003, 2002, and 2001. There were no cash flows
related to investing and financing activities for the years ended
December 31, 2003, 2002, and 2001.
CRITICAL 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. Management
estimates 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. Depending on the method of
payment set forth in the liquidity facility, fees may be paid up
front and recognized over the life of the facility, or paid in
installments and recognized over the installment period.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. (FIN) 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The disclosure provisions of FIN 45 were
effective for the year ended in 2002 while the recognition and
measurement provisions became effective for guarantees issued or
modified on or after January 1, 2003. The standby security
purchase agreements issued by Municipal-SPI are subject to FIN 45,
however no new facilities were committed to during 2003. See note
5 to the financial statements for related disclosures.
- 3 -
ITEM 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Municipal Securities Purchase, Inc.
We have audited the accompanying balance sheets of Municipal Securities
Purchase, Inc. as of December 31, 2003 and 2002, and the related statements of
income, changes in stockholder's equity, and cash flows for each of the years in
the three-year period ended December 31, 2003. 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 auditing standards generally accepted
in the United States of America. 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, 2003 and 2002, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
February 6, 2004
New York, New York
- 4 -
MUNICIPAL SECURITIES PURCHASE, INC.
Balance Sheets
December 31, 2003 and 2002
ASSETS 2003 2002
------------------- -------------------
Liquidity fees receivable $ 1,572,969 $ 1,827,918
Due from GE Capital 39,284,435 34,799,176
------------------- -------------------
Total assets $ 40,857,404 $ 36,627,094
=================== ===================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deferred liquidity fee income $ 701,593 $ 926,202
Due to affiliates -- 135,773
Commitment fees payable to GE Capital -- 992,975
Accounts payable and accrued expenses 69,148 496,417
Taxes payable 2,262,071 988,291
------------------- -------------------
Total liabilities 3,032,812 3,539,658
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Stockholder's equity:
Common stock, par value $10.00 per share;
10 shares authorized, issued, and outstanding 100 100
Additional paid-in capital 822,145 822,145
Retained earnings 37,002,347 32,265,191
------------------- -------------------
Total stockholder's equity 37,824,592 33,087,436
------------------- -------------------
Total liabilities and stockholder's equity $ 40,857,404 $ 36,627,094
=================== ===================
See Notes to Financial Statements.
- 5 -
MUNICIPAL SECURITIES PURCHASE, INC.
Statements of Income
Years ended December 31, 2003, 2002, and 2001
2003 2002 2001
------------------- ------------------- -------------------
Liquidity fee income $ 8,761,963 $ 9,475,773 $ 6,961,782
------------------- ------------------- -------------------
Total revenues 8,761,963 9,475,773 6,961,782
------------------- ------------------- -------------------
General and administrative expenses 648,491 604,181 1,027,645
GE Capital commitment fees 276,986 292,724 202,373
------------------- ------------------- -------------------
Total expenses 925,477 896,905 1,230,018
------------------- ------------------- -------------------
Income before provision for
income taxes 7,836,486 8,578,868 5,731,764
------------------- ------------------- -------------------
Income tax expense:
Federal:
Current 2,550,776 2,792,421 1,865,690
Deferred -- -- --
State and local 548,554 600,522 401,223
------------------- ------------------- -------------------
Total income tax expense 3,099,330 3,392,943 2,266,913
------------------- ------------------- -------------------
Net income $ 4,737,156 $ 5,185,925 $ 3,464,851
=================== =================== ===================
See Notes to Financial Statements.
- 6 -
MUNICIPAL SECURITIES PURCHASE, INC.
Statements of Changes in Stockholder's Equity
Years ended December 31, 2003, 2002, and 2001
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
----------------- ----------------- ----------------- -----------------
Balance, December 31, 2000 $ 100 $ 822,145 $ 23,614,415 $ 24,436,660
Net income -- -- 3,464,851 3,464,851
----------------- ----------------- ----------------- -----------------
Balance, December 31, 2001 100 822,145 27,079,266 27,901,511
Net income -- -- 5,185,925 5,185,925
----------------- ----------------- ----------------- -----------------
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
================= ================= ================= =================
See Notes to Financial Statements.
- 7 -
MUNICIPAL SECURITIES PURCHASE, INC.
Statements of Cash Flows
Years ended December 31, 2003, 2002, and 2001
2003 2002 2001
------------------- ------------------- -------------------
Operating activities:
Net income $ 4,737,156 $ 5,185,925 $ 3,464,851
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in liquidity fees receivable 254,949 9,855 (948,093)
Change in due from GE Capital (4,485,259) (5,702,397) 3,740,849
Change in other assets -- 147,822 251,787
Change in deferred liquidity fee
income (224,609) 60,591 320,955
Change in due to affiliates (135,773) (506,364) (7,144,319)
Change in commitment fees
payable to GE Capital (992,975) 292,724 202,372
Change in accounts payable and
accrued expenses (427,269) 35,466 141,544
Change in taxes payable 1,273,780 476,378 (29,946)
------------------- ------------------- -------------------
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 Notes to Financial Statements.
- 8 -
MUNICIPAL SECURITIES PURCHASE, INC.
Notes to Financial Statements
December 31, 2003 and 2002
(1) BUSINESS
Municipal Securities Purchase, Inc. (Municipal-SPI or the Company) is a
wholly owned subsidiary of FGIC Holdings, 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. 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, 2003, Municipal-SPI had
approximately $3.8 billion (par and interest) of potential obligations
under such arrangements. At December 31, 2003, the Company had remaining
capacity of $0.1 billion. Since 2002, Municipal-SPI has not been
providing any new liquidity facilities and management of the Company will
continue to reassess the decision in the future. The liquidity facilities
are for a term of approximately five years (subject to renewal) or
earlier 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 agreement's with GE Capital
totaling $3.8 billion as of December 31, 2003, under which GE Capital is
irrevocably obligated to lend funds as needed for Municipal-SPI to
purchase the securities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are carried at cost, which approximates
fair value. For purposes of the statement of cash flows,
Municipal-SPI considers all highly liquid investments with
original maturities of six months or less, which are not with
affiliated entities, to be cash equivalents.
REVENUE RECOGNITION
Fees are paid up-front or in installments. Up-front fees are
deferred and earned on a straight-line basis over the life of the
liquidity commitment, usually five years, and installment fees are
deferred and earned straight-line over the installment period.
EXPENSES
Direct expenses incurred by the Parent on behalf of Municipal-SPI
are allocated on a specific identification basis. Employee related
expenses are allocated by affiliates to Municipal-SPI based on the
percentage of time such employees devote to the activities of
Municipal-SPI. For the years ended December 31, 2003, 2002, and
2001 expenses of $0.7 million, $0.5 million, and $0.9 million,
respectively, were allocated to Municipal-SPI. Management believes
that such allocation method is reasonable, and that such expenses,
as reported in the statement of income, would not differ
materially from the amount of expenses on a stand-alone basis.
- 9 -
MUNICIPAL SECURITIES PURCHASE, INC.
Notes to Financial Statements
December 31, 2003 and 2002
COMMITMENT FEES
Commitment fees are accrued as a percentage of the par value of
the outstanding liquidity facilities.
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 December 31, 2003, management does not anticipate any losses
relative to such arrangements.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases, on a stand alone basis. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered to settled. The
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
OTHER COMPREHENSIVE INCOME
There are no elements of other comprehensive income.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. (FIN) 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The disclosure provisions of FIN 45 were
effective for the year ended 2002 while the recognition and
measurement provisions became effective for guarantees issued or
modified on or after January 1, 2003. The standby security
purchase agreements issued by Municipal-SPI are subject to FIN 45,
however no new facilities were committed to during 2003. See note
5 for related disclosures.
(3) INCOME TAXES
Under an intercompany tax-sharing agreement with its parent,
Municipal-SPI is included in the consolidated federal income tax return
that GE company files. Municipal-SPI provides for taxes as if it filed a
separate tax return.
- 10 -
MUNICIPAL SECURITIES PURCHASE, INC.
Notes to Financial Statements
December 31, 2003 and 2002
Municipal-SPI's effective U.S. Federal tax rate differs from the
corporate tax rate on ordinary income of 35% in 2003, 2002, and 2001. 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:
YEAR ENDED DECEMBER 31
---------------------------------------------------------------
2003 2002 2001
------------------- ------------------- -------------------
Computed statutory tax provision $ 2,742,770 $ 3,002,604 $ 2,006,117
Benefit of deduction for state and
local income taxes (191,994) (210,183) (140,427)
------------------- ------------------- -------------------
Federal income taxes 2,550,776 2,792,421 1,865,690
State and local income taxes 548,554 600,522 401,223
------------------- ------------------- -------------------
Income tax expense $ 3,099,330 $ 3,392,943 $ 2,266,913
=================== =================== ===================
For the years ended December 31, 2003, 2002, and 2001, Federal and state
income taxes paid or settled through intercompany accounts totaled $1.8
million, $2.7 million, and $2.3 million, respectively.
(4) RELATED PARTY TRANSACTIONS
Financial Guaranty Insurance Company, a subsidiary of the Parent until
December 2003 when the Parent sold the subsidiary, insures all municipal
securities for which Municipal-SPI provides liquidity. Since
Municipal-SPI is not providing any new liquidity facilities, management
does not expect to have additional facilities for securities insured by
Financial Guaranty Insurance Company. As part of the standby loan
agreements with GE Capital (see note 6), Municipal-SPI has paid
commitment fees for the years ended December 31, 2003, 2002, and 2001 of
$0.3 million, $0.3 million, and $0.2 million, respectively.
At December 31, 2003 and 2002, the amounts classified as due from GE
Capital relates to intercompany receivable balances held by GE Capital.
Municipal-SPI has access to these funds on an as needed basis. All
amounts due from affiliates and due to affiliates are non-interest
bearing.
See note 2 for description of expenses allocated by the Parent.
(5) OFF-BALANCE-SHEET RISK
Municipal-SPI provides liquidity for certain floating rate municipal
securities whereby in the event that such securities cannot be
remarketed, Municipal-SPI, pursuant to a standby purchase agreement with
the issuer of the securities, will be obligated to purchase these
securities, at par.
- 11 -
MUNICIPAL SECURITIES PURCHASE, INC.
Notes to Financial Statements
December 31, 2003 and 2002
The geographical distribution of the underlying par value supported by
the liquidity facilities outstanding at December 31, 2003 was as follows
(dollars in millions):
New York $ 842
California 744
Michigan 740
Massachusetts 446
District of Columbia 284
Hawaii 250
Pennsylvania 153
Florida 120
New Hampshire 38
North Carolina 30
Alabama 22
-------------------
Total $ 3,669
===================
Of the $842 million of par value related to State of New York, $702
million relates to New York City. The next largest single exposure is to
the Massachusetts Water Resource Authority with $446 million in
outstanding par.
The maturity distribution of the underlying par value supported by the
liquidity facilities outstanding at December 31, 2003 is as follows
(dollars in millions):
Less than one year $ 120
One to two years 541
Two to three years 1,957
Three to four years 995
Four to five years 56
Over five years --
-------------------
Total $ 3,669
===================
The liquidity agreements are for a term of approximately five years
(subject to renewal) or earlier if the bonds are no longer outstanding.
As of December 31, 2003, the fair value of the future liquidity fees
receivable on outstanding facilities was $18 million. The fair value was
calculated based upon current expected cash inflows, assuming current
outstanding facilities at current fee rates, discounted at the risk free
rate of 3.25%.
Municipal-SPI is exposed to credit risk that the issuer defaults on the
underlying municipal security at a time that Municipal-SPI is holding
securities purchased pursuant to a liquidity facility and the financial
guarantor (Financial Guaranty Insurance Company) fails to perform on its
insurance contract. It is the accounting policy of Municipal-SPI to
evaluate the likelihood of any credit loss at each reporting period and
to establish reserves for credit losses when deemed appropriate.
Management believes that no such reserves were required at December 31,
2003 and 2002.
- 12 -
MUNICIPAL SECURITIES PURCHASE, INC.
Notes to Financial Statements
December 31, 2003 and 2002
Municipal-SPI is exposed to market risk in the event that Municipal-SPI
is 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 the accounting policy of Municipal-SPI to evaluate the likelihood of
it being called upon to purchase securities under its liquidity
arrangements at amounts greater than their fair value at each reporting
period and to establish valuation reserves when deemed appropriate.
Management believes that no such valuation reserves were required at
December 31, 2003 and 2002, as Municipal-SPI has not been required to
purchase such securities to date.
(6) STANDBY LOAN AGREEMENTS
Municipal-SPI 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 Municipal-SPI in amounts not exceeding the
purchase price of the tendered bonds. The total standby loan agreement
amount at December 31, 2003, equals the total outstanding facility amount
of $3.8 billion.
In consideration of the commitment of GE Capital to make loans to
Municipal-SPI, Municipal-SPI agrees 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 Municipal-SPI and GE Capital.
In event of a failed remarketing, Municipal-SPI would borrow amounts from
GE Capital under the provisions of the standby loan agreements. The
standby loan agreements require the payment of interest by Municipal-SPI
to GE Capital based on a floating index plus a spread, which does not
exceed the rate that Municipal SPI is entitled to receive from the issuer
of the bonds.
(7) QUARTERLY DATA (UNAUDITED)
Selected quarterly financial data was as follows:
2003
---------------------------------------------------------------------------------
4TH 3RD 2ND 1ST TOTAL
--------------- -------------- --------------- --------------- --------------
Total revenues $ 1,831,129 2,306,018 2,362,602 2,262,214 8,761,963
Total expenses 82,197 315,486 273,708 254,086 925,477
--------------- -------------- --------------- --------------- --------------
Income before
provision for
income taxes 1,748,932 1,990,532 2,088,894 2,008,128 7,836,486
Income tax expense 691,702 787,255 826,158 794,215 3,099,330
--------------- -------------- --------------- --------------- --------------
Net income $ 1,057,230 1,203,277 1,262,736 1,213,913 4,737,156
=============== ============== =============== =============== ==============
- 13 -
MUNICIPAL SECURITIES PURCHASE, INC.
Notes to Financial Statements
December 31, 2003 and 2002
2002
---------------------------------------------------------------------------------
4th 3rd 2nd 1st Total
--------------- -------------- --------------- --------------- --------------
Total revenues $ 2,445,988 2,782,371 2,010,548 2,236,866 9,475,773
Total expenses 280,745 277,622 165,549 172,989 896,905
--------------- -------------- --------------- --------------- --------------
Income before
provision for
income taxes 2,165,243 2,504,749 1,844,999 2,063,877 8,578,868
Income tax expense 856,355 990,628 732,360 813,600 3,392,943
--------------- -------------- --------------- --------------- --------------
Net income $ 1,308,888 1,514,121 1,112,639 1,250,277 5,185,925
=============== ============== =============== =============== ==============
- 14 -
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 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, 2003 and (ii) no change in internal control over financial
reporting occurred during the quarter ended December 31, 2003 that
has materially affected, or is reasonably likely to materially
affect, such internal control over financial reporting.
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
Not required by this form.
ITEM 13. Certain Relationships and Related Transactions
Not required by this form.
ITEM 14. Principal Accountant Fees and Services
The aggregate fees billed for professional services by KPMG in
2003 and 2002 were:
(In thousands)
Type of Fees 2003 2002
------------ ---- ----
Audit Fees $75 $65
Audit-related fees 0 0
Tax fees 0 0
All Other fees 5 16
---------- ----------
Total $80 $81
In the above table, in accordance with the SEC's definitions and
rules, "audit fees" are fees Municipal-SPI paid KPMG for
professional services for the audit of Municipal-SPI's
consolidated 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 filings or engagements; "audit-related
fees" are fees for assurance and related services that are
reasonably related to the performance of the audit or the review
of Municipal-SPI's financial statements; "tax fees" are fees for
tax compliance, tax advice and tax planning, and "all other fees"
are fees for any service not included in the first three
categories.
- 15 -
PART IV
ITEM 15. Exhibits and Financial Statement Schedules.
(a) Financial Statements
Included in Part II of this report:
Independent Auditors' Report
Balance Sheets as of December 31, 2003 and 2002
Statements of Income for the years ended December 31,
2003, 2002, and 2001.
Statements of Changes in Stockholder's Equity for the
years ended December 31, 2003, 2002, and 2001.
Statements of Cash Flows for the years ended December 31,
2003, 2002, and 2001.
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.
(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)
1.4 - Consent of Independent Auditors
31(a) - Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31(b) - Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 - Certification Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- 16 -
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------ --------------------------------------- --------------
Chairman (principal executive officer),
/s/ Brian Wenzel Director March 1, 2004
- ------------------------ --------------
Brian Wenzel
Vice President and Treasurer (principal
/s/ Craig T. Beazer financial and accounting officer) March 1, 2004
- ------------------------ --------------
Craig T. Beazer
- 17 -
EXHIBIT 1.4
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Municipal Securities Purchase, Inc.
We consent to incorporation by reference in the registration statement (No.
333-71950) on Form S-3 of Municipal Securities Purchase, Inc. of our report
dated February 6, 2004 relating to the balance sheets of Municipal Securities
Purchase, Inc. as of December 31, 2003 and 2002, and the related statements of
income, changes in stockholder's equity, and cash flows for each of the years in
the three-year period ended December 31, 2003, which report appears in the
December 31, 2003 annual report on Form 10-K of Municipal Securities Purchase,
Inc.
/s/ KPMG LLP
New York, New York
March 1, 2004
- 18 -
EXHIBIT 31 (A)
CERTIFICATION
I, Brian Wenzel, certify that:
(1) I have reviewed this annual report on Form 10-K of Municipal Securities
Purchase, Inc.
(2) Based on my knowledge, this annual 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 report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this 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 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 have:
(a) Designated 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, is made known to us by others within those entities,
particularly during the period in which this 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 report
based on such evaluation (the "Evaluation Date"); and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter 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 control over financial reporting
to the registrant's auditors and the audit committee of the registrant's
board of directors;
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control of 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: March 1, 2004 /s/ Brian Wenzel
---------------------------------------
Brian Wenzel
Chairman
(principal executive officer)
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EXHIBIT 31 (B)
CERTIFICATION
I, Craig T. Beazer, certify that:
(1) I have reviewed this annual report on Form 10-K of Municipal Securities
Purchase, Inc.
(2) Based on my knowledge, this 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 report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this 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 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 have:
(a) Designated 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, is made known to us by others within those entities,
particularly during the period in which this 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 report
based on such evaluation (the "Evaluation Date"); and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter 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 control over financial reporting
to the registrant's auditors and the audit committee of registrant's
board of directors;
(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 controls over financial reporting.
Date: March 1, 2004 /s/ Craig T. Beazer
---------------------------------------
Craig T. Beazer
Vice President and Treasurer
(principal financial and accounting
officer)
- 20 -
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 Annual Report of Municipal Securities Purchase, Inc. (the
Registrant) on Form 10-K for the period ending December 31, 2003, as filed with
the Securities and Exchange Commission on the date hereof (the Report), we,
Brian Wenzel and Craig T. Beazer, Chairman, and Vice President and Treasurer,
respectively, of the Registrant, hereby certify pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) the 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
registrant.
Date: March 1, 2004 /s/ Brian Wenzel
-----------------------------------------
Brian Wenzel
Chairman
(principal executive officer)
Date: March 1, 2004 /s/ Craig T. Beazer
-----------------------------------------
Craig T. Beazer
Vice President and Treasurer
(principal financial and
accounting officer)
- 21 -