UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 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
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(State or other jurisdiction incorporation or (I.R.S. Employer Identification
organization) No.),
201 HIGH RIDGE ROAD, STAMFORD, CONNECTICUT 06927 (203) 357-4000
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(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 July 29, 2004, 10 shares of common stock with a par value of $10.00 per share
were outstanding.
registrant meets the conditions set forth in general instruction H(1)(a) and (b)
of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure
format.
MUNICIPAL SECURITIES PURCHASE, INC.
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Statements of Financial Position 1
Statements of Income 2
Statements of Changes in Shareowner's Equity 3
Statements of Cash Flows 4
Notes to Unaudited Interim Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 6
Item 4. Controls and Procedures 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MUNICIPAL SECURITIES PURCHASE, INC.
Statements of Financial Position
JUNE 30, DECEMBER 31,
2004 2003
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ASSETS (Unaudited)
Liquidity fees receivable $ 1,655,240 $ 1,572,969
Due from GE Capital 5,981,354 39,284,435
----------------- -----------------
Total assets $ 7,636,594 $40,857,404
================= =================
LIABILITIES AND SHAREOWNER'S EQUITY
Deferred liquidity fee income $ 690,749 $ 701,593
Accounts payable and accrued expenses 69,150 69,148
Taxes payable 2,262,071 2,262,071
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Total liabilities 3,021,970 3,032,812
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Common stock, par value $10.00 per share. Authorized,
issued, and outstanding 10 shares 100 100
Additional paid-in capital 822,145 822,145
Retained earnings 3,792,379 37,002,347
----------------- -----------------
Total shareowner's equity 4,614,624 37,824,592
----------------- -----------------
Total liabilities and shareowner's equity $ 7,636,594 $40,857,404
================= =================
See accompanying notes to unaudited interim financial statements.
- 1 -
MUNICIPAL SECURITIES PURCHASE, INC.
Statements of Income
(Unaudited)
----------------------------- -----------------------------
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30 JUNE 30
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2004 2003 2004 2003
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Liquidity fee income $1,616,357 $2,362,602 $3,195,199 $4,624,816
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Total revenues 1,616,357 2,362,602 3,195,199 4,624,816
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General and administrative expenses 60,000 203,073 120,000 387,420
GE capital commitment fees 57,223 70,635 114,019 140,373
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Total operating expenses 117,223 273,708 234,019 527,793
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Income before provision for income taxes 1,499,134 2,088,894 2,961,180 4,097,023
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Income tax expense:
Federal 487,968 679,935 963,865 1,333,581
State and local 104,940 146,223 207,283 286,792
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Total income tax expense 592,908 826,158 1,171,148 1,620,373
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Net income $ 906,226 $1,262,736 $1,790,032 $2,476,650
============= ============= ============= =============
See accompanying notes to unaudited interim financial statements.
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MUNICIPAL SECURITIES PURCHASE, INC.
Statement of Changes in Shareowner's Equity
Six-months ended June 30, 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
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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) - - 1,790,032 1,790,032
------------- --------------- --------------- ---------------
Balance, June 30, 2004 (unaudited) $ 100 $ 822,145 $3,792,379 $4,614,624
============= =============== =============== ===============
See accompanying notes to unaudited interim financial statements.
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MUNICIPAL SECURITIES PURCHASE, INC.
Statement of Cash Flows
(Unaudited)
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SIX-MONTHS ENDED
JUNE 30
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2004 2003
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Operating activities:
Net income $ 1,790,032 $ 2,476,650
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in taxes payable - (238,678)
Change in due from GE Capital 33,303,081 (2,558,636)
Change in due to affiliates - 858,112
Change in liquidity fees receivable (82,271) (561,881)
Change in deferred liquidity fee income (10,844) (127,659)
Change in accounts payable and accrued expenses 2 152,092
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Cash from operating activities 35,000,000 -
Financing activities:
Dividends paid (35,000,000) -
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Cash used for financing activities (35,000,000) -
Net change in cash and cash equivalents - -
Cash and cash equivalents at beginning of period - -
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Cash and cash equivalents at the end of period $ - $ -
================= =================
See accompanying notes to unaudited interim financial statements.
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MUNICIPAL SECURITIES PURCHASE, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
(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 June 30, 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 June 30, 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
the results of operations, financial position and cash flows.
These unaudited interim financial statements should be read in
conjunction with the financial statements and related notes
included in the 2003 Form 10-K.
(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.
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1. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
2. RESULTS OF OPERATIONS
During 2003 and the six-months ended June 30, 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 June 30, 2004, the
Company had remaining capacity of $0.1 billion.
Municipal-SPI earned liquidity fees of $3.2 million and $4.6
million during the six-months ended June 30, 2004 and 2003,
respectively and $1.6 million and $2.4 million for the three
months ended June 30, 2004 and 2003, respectively. The decrease in
liquidity fees from 2003 to 2004 was primarily due to the maturity
of 12 contracts during the last two quarters of 2003 and the
maturity of 5 contracts during the first quarter of 2004. The
total liquidity facility in force as of June 30, 2004 and December
31, 2003 was $3.7 and $3.8 billion, respectively.
OPERATING EXPENSES
Municipal-SPI incurred $0.2 million and $0.5 million of total
operating expenses during the six-months ended June 30, 2004 and
2003, respectively and $0.1 million and $0.3 million of total
operating expenses during the three-months ended June 30, 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 $114,019 and
$140,373 for the six-months ended June 30, 2004 and 2003,
respectively and $57,223 and $70,635 for the three-months ended
June 30, 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 $372,701 to $120,000 during the six-months ended
June 30, 2003 and 2004, respectively 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 the six-months ended June
30, 2004 and 2003 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.
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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 ($6.0 million at June 30,
2004) is sufficient to fund the general and administration
expenses of the Company.
Net cash provided by operating activities was $35 million for the
six-months ended June 30, 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 six-months ended
June 30, 2004. There were no cash flows related to investing
activities for the period ended June 30, 2004.
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3. 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 June 30,
2004, and (ii) no change in internal control over financial
reporting occurred during the quarter ended June 30, 2004, that
has materially affected, or is reasonably likely to materially
affect, such internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 31(a) - Certifications of Principal Executive Officer
Pursuant to Rule 13a-14(a) under the Exchange Act
Exhibit 31(b) - Certifications of Principal Financial Officer
Pursuant to Rule 13a-14(a) under the Exchange Act
Exhibit 32 - Certifications Pursuant to 18 U.S.C. Section 1350
b) Reports on Form 8-K during the quarter ended June 30, 2004
None
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Municipal Securities Purchase, Inc.
(Registrant)
July 30, 2004 /s/ Brian Wenzel
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Date Brian Wenzel
Chairman
(principal executive officer)
July 30, 2004 /s/ Kathleen Gan
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Date Kathleen Gan
Vice President and Treasurer
(principal financial and
accounting officer)
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EXHIBIT 31(A)
CERTIFICATIONS
I, Brian Wenzel, certified that:
(1) I have reviewed this report on Form 10-Q of Municipal Securities
Purchase, Inc. (the Company);
(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 quarterly 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, including its consolidated subsidiaries, 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; and
(c) Disclosed in this 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 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 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: July 30, 2004
/s/ Brian Wenzel
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Brian Wenzel
Chairman
(principal executive officer)
EXHIBIT 31(B)
CERTIFICATIONS
I, Kathleen Gan, certified that:
(1) I have reviewed this report on Form 10-Q of Municipal Securities
Purchase, Inc. (the Company);
(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 quarterly 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, including its consolidated subsidiaries, 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; and
(c) Disclosed in this 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 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 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: July 30, 2004
/s/ Kathleen Gan
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Kathleen Gan
Vice President and Treasurer
(principal financial and accounting officer)
EXHIBIT 32
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report of Municipal Securities Purchase, Inc.
(the registrant) on Form 10-Q for the period ended June 30, 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, that to our knowledge:
(1) The report fully complies with the requirements of Section 13(a) or 15
(d) of the Securities Exchange Act of 1934, as amended; 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: July 30, 2004
/s/ Brian Wenzel
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Brian Wenzel
Chairman
(principal executive officer)
Date: July 30, 2004
/s/ Kathleen Gan
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Kathleen Gan
Vice President and Treasurer
(principal financial and accounting officer)