UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 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, 06927
CONNECTICUT
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(Address of principal executive offices) (Zip Code)
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE) (203) 357-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
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COMMON STOCK, PAR VALUE $10.00 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X .
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At October 25, 2004, 10 shares of common stock, which constitutes all of the
common outstanding equity, with a par value of $10.00 per share were
outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A) AND (B)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE
FORMAT.
MUNICIPAL SECURITIES PURCHASE, INC.
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
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
Unless the context otherwise requires, the "Company", "Municipal-SPI", "We", or
"Our" shall mean Municipal Securities Purchase, Inc.
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" - that is, statements
related to future, not past, events. In this context, forward-looking statements
often address our expected future business and financial performance, and often
contain words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," or "will." Forward-looking statements by their nature address matters
that are, to different degrees, uncertain. For us, particular uncertainties
arise from the behavior of financial markets, including fluctuations in interest
rates and commodity prices; from future integration of acquired businesses; from
future financial performance of major industries which we serve; and from
numerous other matters of national, regional and global scale, including those
of a political, economic, business, competitive or regulatory nature. These
uncertainties may cause our actual future results to be materially different
than those expressed in our forward-looking statements. We do not undertake to
update our forward-looking statements.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MUNICIPAL SECURITIES PURCHASE, INC.
Statements of Financial Position
SEPTEMBER 30, DECEMBER 31,
2004 2003
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ASSETS (Unaudited)
Liquidity fees receivable $ 1,671,918 $ 1,572,969
Due from GE Capital 6,866,745 39,284,435
----------------- -----------------
Total assets $ 8,538,663 $40,857,404
================= =================
LIABILITIES AND SHAREOWNER'S EQUITY
Deferred liquidity fee income $ 690,002 $ 701,593
Accounts payable and accrued expenses 69,148 69,148
Taxes payable 2,262,071 2,262,071
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Total liabilities 3,021,221 3,032,812
================= =================
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 4,695,197 37,002,347
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Total shareowner's equity 5,517,442 37,824,592
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Total liabilities and shareowner's equity $ 8,538,663 $40,857,404
================= =================
See accompanying notes to unaudited interim financial statements.
- 1 -
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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2004 2003 2004 2003
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Liquidity fee income $1,610,649 $2,306,018 $4,805,848 $6,930,834
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Total revenues 1,610,649 2,306,018 4,805,848 6,930,834
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General and administrative expenses 60,000 240,672 180,000 628,092
GE Capital commitment fees 57,156 74,814 171,175 215,187
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Total operating expenses 117,156 315,486 351,175 843,279
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Income before provision for income taxes 1,493,493 1,990,532 4,454,673 6,087,555
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Income tax expense:
Federal 486,131 647,918 1,449,996 1,981,499
State and local 104,544 139,337 311,827 426,129
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Total income tax expense 590,675 787,255 1,761,823 2,407,628
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Net income $ 902,818 $1,203,277 $2,692,850 $3,679,927
============= ============= ============= =============
See accompanying notes to unaudited interim financial statements.
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ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
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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) - - 2,692,850 2,692,850
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Balance, September 30, 2004 (unaudited) $ 100 $ 822,145 $4,695,197 $5,517,442
============= =============== =============== ===============
See accompanying notes to unaudited interim financial statements.
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NINE-MONTHS ENDED
SEPTEMBER 30
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2004 2003
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Operating activities:
Net income $ 2,692,850 $ 3,679,927
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in taxes payable - 1,031,655
Change in due from GE Capital 32,417,690 (4,057,663)
Change in due to affiliates - (85,769)
Change in liquidity fees receivable (98,949) (717,113)
Change in deferred liquidity fee income (11,591) (138,502)
Change in accounts payable and accrued expenses - 287,465
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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 $ - $ -
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See accompanying notes to unaudited interim financial statements.
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MUNICIPAL SECURITIES PURCHASE, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
(1) BUSINESS DESCRIPTION
Municipal Securities Purchase, Inc. (the Company) is a wholly-owned
subsidiary of GE Funding 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 the Company was FGIC Securities Purchase, Inc. The
Company provides liquidity for certain floating rate municipal
securities whereby the Company will, under certain circumstances,
purchase such securities in the event they are tendered by the holders
thereof as permitted under the terms of the respective bond indentures.
As of September 30, 2004, the Company 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, the Company has entered into
standby loan agreements with GE Capital totaling $3.7 billion as of
September 30, 2004, under which GE Capital is irrevocably obligated to
lend funds as needed for the Company to purchase the securities. Since
2002, the Company has not provided any new liquidity facilities and
management of the Company will continue to reassess the decision in the
future.
(2) BASIS OF CONSOLIDATION
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts and related
disclosures. Actual results could differ from those estimates.
The unaudited interim financial statements of the Company contained in
this report reflect all normal recurring adjustments necessary, in the
opinion of management, for a fair statement of the results of
operations, financial position and cash flows. The results reported in
these quarterly financial statements should not be regarded as
necessarily indicative of results that may be expected for the entire
year. We label our quarterly information using a calendar convention,
that is, first quarter is labeled as ending March 31, second quarter as
ending on June 30, and third quarter as ending on September 30. It is
our longstanding practice to establish interim quarterly closing dates
using a fiscal calendar, which requires our business to close their
books on a Saturday. The effects of this practice are modest and only
exist within a reporting year.
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 the Parent, the
Company is included in the consolidated federal income tax return that
GE files. The Company provides for taxes as if it files a separate tax
return.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
REVENUES
We provide liquidity facilities for certain floating rate municipal
securities whereby we will, under certain circumstances, purchase such
securities in the event they are tendered by the holders thereof. We
earn liquidity fees from the issuers of these securities, municipal
governments in the U.S., for providing the liquidity facilities.
During 2003 and the nine-months ended September 30, 2004, we did not
commit to any new liquidity facilities.
The total capacity of our liquidity facility has amounted to $7 billion
since inception. At September 30, 2004, we had remaining capacity of
$0.1 billion.
We earned liquidity fees of $4.8 million and $6.9 million during the
nine-months ended September 30, 2004 and 2003, respectively and $1.6
million and $2.3 million for the three-months ended September 30, 2004
and 2003, respectively. The decrease in liquidity fees from 2003 to
2004 was primarily due to the maturity of 11 contracts during the last
quarter of 2003 and the maturity of 5 contracts during the first
quarter of 2004. No contracts matured during the second and third
quarter of 2004, however, the total outstanding par amount of the
liquidity facilities decreased by approximately $5 million during the
same period due to paydowns on the outstanding principal of the
liquidity facility for 5 contracts. The total liquidity facility in
force as of September 30, 2004 and December 31, 2003 was $3.7 billion
and $3.8 billion, respectively.
OPERATING EXPENSES
We incurred $0.4 million and $0.8 million of total operating expenses
during the nine-months ended September 30, 2004 and 2003, respectively
and $0.1 million and $0.3 million of total operating expenses during
the three-months ended September 30, 2004 and 2003, respectively.
Included in total operating expenses were commitment fees owed to GE
Capital under the standby loan agreements, which are based on the
outstanding par in force on each of the liquidity facilities at a rate
of 0.625 basis points. Commitment fees were $171,175 and $215,187 for
the nine-months ended September 30, 2004 and 2003, respectively and
$57,156 and $74,814 for the three-months ended September 30, 2004 and
2003, respectively. The decrease in commitment fees from 2003 to 2004
corresponds with the respective decrease in liquidity fees earned which
is also based upon the par in force on each of the liquidity facilities
outstanding. Total operating expenses also includes general and
administrative expenses, which are principally comprised of
intercompany overhead expense allocations. General and administrative
expenses were $180,000 and $628,092 for the nine-months ended September
30, 2004 and 2003, respectively and $60,000 and $240,672 for the
three-months ended September 30, 2004 and 2003, respectively. The
decrease in general and administrative expenses from 2003 to 2004
reflect decline in the Company's activities as the total outstanding
par amount of the liquidity facilities decreased.
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INCOME TAX EXPENSE
The effective Federal tax rate during the nine-months ended September
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 we were required to purchase all securities under
the liquidity facilities issued. Since inception, we have not been
required to purchase any securities. If we were required to purchase
such securities, we would draw on the standby loan agreements with GE
Capital. Since the standby loan agreements with GE Capital are
irrevocable during the period the liquidity agreements are outstanding
we believe we have sufficient liquidity in the event that we are
required to fund any draw under the liquidity facilities issued.
Our other primary source of cash is from liquidity fee income, which we
lend to GE Capital. We believe that such income and access to the
intercompany receivable from GE Capital ($6.9 million at September 30,
2004) is sufficient to fund our general and administrative expenses.
Net cash provided by operating activities was $35 million for the
nine-months ended September 30, 2004 as we collected a portion of the
intercompany receivable from GE Capital. We used the cash to pay a $35
million dividend to the Parent resulting in a $35 million financing
cash outflow during the nine-months ended September 30, 2004. There
were no cash flows related to investing activities for the nine-months
ended September 30, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Under the direction of our Chairman of the Board (serving as the
principal executive officer) and Vice President and Treasurer (serving
as the 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 September 30, 2004, and (ii) no change in internal
control over financial reporting occurred during the quarter ended
September 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 and
Accounting 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 September 30, 2004
None
- 8 -
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.
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(Registrant)
October 26, 2004 /s/ Brian Wenzel
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Date Brian Wenzel
Chairman
(Principal Executive Officer)
October 26, 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, certify that:
(1) I have reviewed this quarterly report on Form 10-Q 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, 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: October 26, 2004
/s/ Brian Wenzel
Brian Wenzel
Chairman
(Principal Executive Officer)
EXHIBIT 31(B)
CERTIFICATIONS
I, Kathleen Gan, certify that:
(1) I have reviewed this quarterly report on Form 10-Q 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, 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: October 26, 2004
/s/ Kathleen Gan
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 September 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, 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: October 26, 2004
/s/ Brian Wenzel
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Brian Wenzel
Chairman
(Principal Executive Officer)
/s/ Kathleen Gan
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Kathleen Gan
Vice President and Treasurer
(Principal Financial and Accounting Officer)