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 MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
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COMMISSION FILE NUMBER 0-19564
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MUNICIPAL SECURITIES PURCHASE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3633082
(State or other jurisdiction incorporation or (I.R.S. Employer Identification
organization) No.),
201 HIGH RIDGE ROAD, STAMFORD, CONNECTICUT 06927 (203) 357-4000
(Address of principal executive offices) (Zip Code) (Registrant's telephone
number,including area code)
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 12b2). 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 May 3, 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 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.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets 1
Statements of Income 2
Statements of Changes in Stockholder's Equity 3
Statements of Cash Flows 4
Notes to Unaudited Interim Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-9
Item 4. Controls and Procedures 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults on Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 13-14
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act Of 2002 15
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MUNICIPAL SECURITIES PURCHASE, INC.
Balance Sheets
March 31, 2004 and December 31, 2003
MARCH 31, DECEMBER 31,
2004 2003
ASSETS (Unaudited)
Liquidity fees receivable $ 1,685,634 $ 1,572,969
Due from GE Capital 5,082,444 39,284,435
----------------- -----------------
Total assets $ 6,768,078 $40,857,404
================= =================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deferred liquidity fee income $ 693,889 $ 701,593
Accounts payable and accrued expenses 103,719 69,148
Taxes payable 2,262,071 2,262,071
----------------- -----------------
Total liabilities 3,059,679 3,032,812
================= =================
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 2,886,154 37,002,347
----------------- -----------------
Total stockholder's equity 3,708,399 37,824,592
----------------- -----------------
Total liabilities and stockholder's equity $ 6,768,078 $40,857,404
================= =================
See accompanying notes to unaudited interim financial statements.
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MUNICIPAL SECURITIES PURCHASE, INC.
Statements of Income
Three-months ended March 31, 2004 and 2003
(Unaudited)
------------------------------------
THREE-MONTHS ENDED
MARCH 31
------------------------------------
2004 2003
----------------- -----------------
Liquidity fee income $ 1,578,842 $ 2,262,214
----------------- -----------------
Total revenues 1,578,842 2,262,214
----------------- -----------------
General and administrative expenses 60,000 184,347
GE capital commitment fees 56,796 69,738
----------------- -----------------
Total operating expenses 116,796 254,085
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Income before provision for income taxes 1,462,046 2,008,129
Income tax expense:
Federal 475,896 653,646
State and local 102,343 140,569
----------------- -----------------
Total income tax expense 578,239 794,215
----------------- -----------------
Net income $ 883,807 $ 1,213,914
================= =================
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MUNICIPAL SECURITIES PURCHASE, INC.
Statement of Changes in Stockholder's Equity
Three-months ended March 31, 2004
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
Balance, December 31, 2002 $ 100 $ 822,145 $32,265,191 $33,087,436
Net income - - 4,737,156 4,737,156
--------------- ----------------- ---------------- ----------------
Balance, December 31, 2003 100 822,145 37,002,347 37,824,592
Dividends paid (unaudited) - - (35,000,000) (35,000,000)
Net income (unaudited) - - 883,807 883,807
--------------- ----------------- ---------------- ----------------
Balance, March 31, 2004 (unaudited) $ 100 $ 822,145 $ 2,886,154 $ 3,708,399
=============== ================= ================ ================
See accompanying notes to unaudited interim financial statements.
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MUNICIPAL SECURITIES PURCHASE, INC.
Statements of Cash Flows
Three-months ended March 31, 2004 and 2003
(Unaudited)
------------------------------------
THREE-MONTHS ENDED
MARCH 31
------------------------------------
2004 2003
----------------- -----------------
Operating activities:
Net income $ 883,807 $ 1,213,914
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in taxes payable - (270,621)
Change in due from GE Capital 34,201,991 (1,719,120)
Change in due to affiliates - 1,102,094
Change in liquidity fees receivable (112,665) (325,358)
Change in deferred liquidity fee income (7,704) (78,962)
Change in accounts payable and accrued expenses 34,571 78,053
----------------- -----------------
Cash provided by operating activities 35,000,000 -
Financing activities:
Dividends paid (35,000,000) -
----------------- -----------------
Cash used in financing activities (35,000,000) -
Net change in cash and cash equivalents - -
----------------- -----------------
Cash and cash equivalents at beginning of period - -
----------------- -----------------
Cash and cash equivalents at the end of period $ - $ -
----------------- -----------------
See accompanying notes to unaudited interim financial statements.
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MUNICIPAL SECURITIES PURCHASE, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(1) BUSINESS
Municipal Securities Purchase, Inc. (Municipal-SPI or the Company)
is a wholly owned subsidiary of GE Funding Holdings Inc. (the
Parent), which is a wholly owned subsidiary of GEI, Inc., which in
turn is wholly owned by General Electric Capital Corporation (GE
Capital) the ultimate parent of which is General Electric Company
(GE). Until the fourth quarter of 2003, the name of Municipal-SPI
was FGIC 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 March 31, 2004 Municipal-SPI had approximately $3.7 billion
(par amount and interest) of potential obligations under such
arrangements. The liquidity facilities have a term of
approximately five years (subject to renewal) or less if the bonds
are no longer outstanding. In order to obtain funds to purchase
the securities, in the event such purchases are necessary,
Municipal-SPI has entered into standby loan agreements with GE
Capital totaling $3.7 billion as of March 31, 2004 under which GE
Capital is irrevocably obligated to lend funds as needed for
Municipal-SPI to purchase the securities. Since 2002,
Municipal-SPI has not provided any new liquidity facilities and
management of the Company will continue to reassess the decision
in the future.
(2) 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.
The unaudited interim financial statements of Municipal-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 months ended March 31,
2004 and 2003, (b) the financial position as of March 31, 2004 and
(c) cash flows for the three months ended March 31, 2004 and 2003.
These unaudited interim financial statements should be read in
conjunction with the financial statements and related notes
included in the 2003 Form 10-K.
Significant accounting policies are as follows:
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 three 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.
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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
three-months ended March 31, 2004 and 2003, expenses of
$60,000 and $173,031, 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.
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 losses relative to its
obligations under the liquidity facility arrangements written.
At March 31, 2004, 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 or 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.
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(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.
- 7 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During 2003 and the three-months ended March 31, 2004, the Company
did not commit to any new liquidity facilities.
The total capacity of Municipal-SPI's liquidity facility has
amounted to $7 billion since inception. At March 31, 2004, the
Company had remaining capacity of $0.1 billion.
Municipal-SPI earned liquidity fees of $1.6 million and $2.3
million during the three-months ended March 31, 2004 and 2003,
respectively. The decrease in liquidity fees from 2003 to 2004 was
primarily due to the maturity of 15 contracts during the last
three quarters of 2003. The total liquidity facility in force as
of March 31, 2004 and December 31, 2003 was $3.7 and $3.8 billion,
respectively.
OPERATING EXPENSES
Municipal-SPI incurred $0.1 million and $0.3 million of total
operating expenses during the three-months ended March 31, 2004
and 2003, respectively. 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 $56,796 and
$69,738 for the three-months ended March 31, 2004 and 2003,
respectively. The decrease in commitment fees from 2003 to 2004
corresponds 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 decreased from $173,031 in
2003 to $60,000 in 2004 due to a continued decrease in allocated
expenses resulting from the decline in number of liquidity
facilities written.
INCOME TAX EXPENSE
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%.
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 all 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.
Municipal-SPI's other primary source of cash is from liquidity fee
income. The Company believes that such income and access to the
intercompany receivable from GE Capital ($5.1 million at March 31,
2004) is sufficient to fund the general and administration
expenses of the Company.
- 8 -
Net cash provided by operating activities was $35 million for the
three-months ended March 31, 2004 as the Company collected a
portion of the intercompany receivable from GE Capital. The
Company used the cash to pay a $35 million dividend to the Parent
resulting in a $35 million financing cash outflow during the
three-months ended March 31, 2004. There were no cash flows
related to investing activities for the years ended March 31,
2004.
Net cash provided by operating activities was $0 and there were no
cash flows related to investing and financing activities for the
three-months ended March 31, 2003.
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.
- 9 -
ITEM 4. 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 March 31,
2004 and (ii) no change in internal control over financial
reporting occurred during the quarter ended March 31, 2004 that
has materially affected, or is reasonably likely to materially
affect, such internal control over financial reporting.
- 10 -
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Omitted
Item 2. CHANGES IN SECURITIES
Omitted
Item 3. DEFAULTS ON SENIOR SECURITIES
Omitted
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted
Item 5. OTHER INFORMATION
Omitted
Item 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) Reports on Form 8-K
Omitted
- 11 -
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 May 4, 2004
- ------------------------------- ---------------------------
Brian Wenzel
Vice President and Treasurer (principal
/s/ Kathleen Gan financial and accounting officer) May 4, 2004
- ------------------------------- ---------------------------
Kathleen Gan
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EXHIBIT 31.1
CERTIFICATION
I, Brian Wenzel, certified that:
(1) I have reviewed this quarterly report on Form 10-Q of Municipal
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) 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, including its consolidated subsidiaries, is made known
to us by other 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 and 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 controls 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 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: May 4, 2004 /s/ Brian Wenzel
----------------
Brian Wenzel
Chairman
(principal executive officer)
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EXHIBIT 31.2
CERTIFICATION
I, Kathleen Gan, certified that:
(1) I have reviewed this quarterly report on Form 10-Q of Municipal
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) 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, including its consolidated subsidiaries, is made known
to us by other 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 and 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 controls 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 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: May 4, 2004 /s/ Kathleen Gan
----------------
Kathleen Gan
Vice President and Treasurer
(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 Municipal Securities Purchase, Inc.
(the Registrant) on Form 10-Q for the three-months ended March 31, 2004, as
filed with the Securities and Exchange Commission on the date hereof (the
Report), we, Brian Wenzel and Kathleen Gan, Chairman and Vice President and
Treasurer, respectively, of the Registrant, 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) 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 the Report fairly presents, in all
material respects, the financial condition and results of operations of
the registrant.
Date: May 4, 2004 /s/ Brian Wenzel
----------------
Brian Wenzel
Chairman
(principal executive officer)
Date: May 4, 2004 /s/ Kathleen Gan
----------------
Kathleen Gan
Vice President and Treasurer
(principal financial and
accounting officer)
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