(EXHIBIT 99.03)
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AMBAC FINANCIAL GROUP, INC.)
CONSOLIDATED UNAUDITED FINANCIAL STATEMENT
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
AND FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Ambac Assurance Corporation ("Ambac Assurance") is a leading insurer of
municipal and structured finance obligations and has been assigned triple-A
claims-paying ability ratings, the highest ratings available from Moody's
Investors Service, Inc., Fitch IBCA, Inc., and Japan Rating and Investment
Information, Inc., and a financial strength rating of triple-A from Standard &
Poor's Ratings Group. Financial guarantee insurance underwritten by Ambac
Assurance guarantees payment when due of the principal of and interest on the
obligation insured. In the case of a default on the insured obligation, payments
under the insurance policy may not be accelerated by the policyholder without
Ambac Assurance's consent. As of June 30, 1998, Ambac Assurance's net insurance
in force (principal and interest) was $297.7 billion. Ambac Assurance is a
wholly-owned subsidiary of Ambac Financial Group, Inc. (NYSE: ABK), a holding
company that provides financial guarantee insurance and financial management
services to clients in both the public and private sectors in the U.S. and
abroad through its subsidiaries.
On December 18, 1997, Ambac Assurance acquired Construction Loan Insurance
Corporation ("CLIC"). CLIC's wholly owned subsidiary, Connie Lee Insurance
Company ("Connie Lee"), a triple-A rated financial guarantee insurance company
which guaranteed bonds primarily for college and hospital infrastructure
projects, is not expected to write any new business. Ambac Assurance and Connie
Lee have arrangements in place to assure that Connie Lee maintains a level of
capital sufficient to support Connie Lee's outstanding obligations and for
Connie Lee insured bonds to retain their triple-A rating.
During the first quarter of 1997, Ambac Assurance established a new
subsidiary in the United Kingdom, Ambac Insurance UK Limited ("Ambac UK"), which
is authorized to conduct certain classes of general insurance business in the
United Kingdom. Ambac UK is the Company's primary vehicle for the issuance of
financial guarantee insurance policies in the United Kingdom and Europe.
Ambac Assurance, as the sole limited partner, owns a limited partnership
representing 90% of the total partnership interests of Ambac Financial Services,
L.P. ("AFS"), a limited partnership which provides interest rate swaps primarily
to states, municipalities and their authorities. The sole general partner of
AFS, Ambac Financial Services Holdings, Inc., a wholly-owned subsidiary of Ambac
Financial Group, Inc., owns a general partnership interest representing 10% of
the total partnership interest in AFS.
Ambac Assurance's consolidated unaudited interim financial statements
have been prepared on the basis of generally accepted accounting principles
("GAAP") and, in the opinion of management, reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
Company's financial condition, results of operations and cash flows for the
periods presented. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
of the financial statements and the reported revenues and expenses during the
reporting period. Actual results could differ from those estimates. The results
of operations for the six months ended June 30, 1998 may not be indicative of
the results that may be expected for the full year ending December 31, 1998.
These financial statements and notes should be read in conjunction with the
financial statements and notes included in the audited consolidated financial
statements of Ambac Assurance Corporation and its subsidiaries as of December
31, 1997 and 1996, and for each of the years in the three-year period ended
December 31, 1997.
(2) NEW ACCOUNTING STANDARD
As of January 1, 1998, the Company adopted Financial Accounting Standard
("FAS") No. 130, Reporting Comprehensive Income. This statement establishes
standards for the reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive income
encompasses all changes in stockholders' equity (except those arising from
transactions with shareholders) and includes net income, net unrealized capital
gains or losses on available-for-sale securities and foreign currency
translation adjustments. As this new standard only requires additional
information in the financial statements, it does not affect the Company's
financial position or results of operations.
Ambac Assurance Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
(Dollars in Thousands Except Share Data)
June 30, 1998 December 31, 1997
----------------------- -------------------------
(unaudited)
ASSETS
Investments:
Fixed income securities, at fair value
(amortized cost of $2,826,122 in 1998 and $2,696,603 in 1997) $3,017,130 $2,878,083
Short-term investments, at cost (approximates fair value) 158,772 116,905
----------------------- -------------------------
Total investments 3,175,902 2,994,988
Cash 21,893 8,004
Securities purchased under agreements to resell - 2,484
Receivable for securities sold 10,068 24,018
Investment income due and accrued 50,973 49,987
Deferred acquisition costs 110,973 105,996
Receivable from brokers and dealers 183,192 183,041
Reinsurance recoverable 4,119 4,219
Prepaid reinsurance 202,265 183,492
Other assets 147,586 90,785
----------------------- -------------------------
Total assets $3,906,971 $3,647,014
======================= =========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $1,228,099 $1,184,537
Losses and loss adjustment expenses 112,651 103,345
Ceded reinsurance balances payable 7,878 9,258
Deferred income taxes 127,985 122,554
Current income taxes 13,080 19,714
Accounts payable and other liabilities 157,791 111,624
Payable for securities purchased 237,591 195,388
----------------------- -------------------------
Total liabilities 1,885,075 1,746,420
----------------------- -------------------------
Stockholder's equity:
Preferred stock, par value $1,000.00 per share; authorized
shares - 285,000; issued and outstanding shares - none - -
Common stock, par value $2.50 per share; authorized shares
- 40,000,000; issued and outstanding shares - 32,800,000
at June 30, 1998 and December 31, 1997 82,000 82,000
Additional paid-in capital 525,937 521,153
Accumulated other comprehensive income 124,486 118,119
Retained earnings 1,289,473 1,179,322
----------------------- -------------------------
Total stockholder's equity 2,021,896 1,900,594
----------------------- -------------------------
Total liabilities and stockholder's equity $3,906,971 $3,647,014
======================= =========================
See accompanying Notes to Consolidated Unaudited Financial Statements.
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For The Periods Ended June 30, 1998 and 1997
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
1998 1997 1998 1997
---------------- --------------- ---------------- ----------------
Revenues:
Gross premiums written $88,975 $74,593 $168,596 $126,763
Ceded premiums written (10,048) (7,195) (36,135) (12,627)
---------------- --------------- ---------------- ----------------
Net premiums written 78,927 67,398 132,461 114,136
Increase in unearned premiums, net (25,038) (30,595) (24,742) (39,883)
---------------- --------------- ---------------- ----------------
Net premiums earned 53,889 36,803 107,719 74,253
Net investment income 45,939 39,363 91,075 77,894
Net realized (losses) gains (6,943) 3,479 (6,793) 4,291
Other income 5,337 3,331 12,660 6,316
---------------- --------------- ---------------- ----------------
Total revenues 98,222 82,976 204,661 162,754
---------------- --------------- ---------------- ----------------
Expenses:
Losses and loss adjustment expenses 1,423 664 3,000 1,392
Underwriting and operating expenses 12,624 10,763 26,172 21,817
Interest expense 661 565 1,422 1,130
---------------- --------------- ---------------- ----------------
Total expenses 14,708 11,992 30,594 24,339
---------------- --------------- ---------------- ----------------
Income before income taxes 83,514 70,984 174,067 138,415
Provision for income taxes 18,087 15,434 39,916 29,792
---------------- --------------- ---------------- ----------------
Net income $65,427 $55,550 $134,151 $108,623
================ =============== ================ ================
See accompanying Notes to Consolidated Financial Statements
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
For the Periods Ended June 30, 1998 and 1997
(Dollars in Thousands)
1998 1997
-------------------------------- --------------------------------
Retained Earnings:
Balance at January 1 $1,179,322 $991,815
Net income 134,151 $134,151 108,623 $108,623
---------------- ----------------
Dividends declared - common stock (24,000) (22,000)
Other - 23
---------------- ----------------
Balance at June 30 $1,289,473 $1,078,461
---------------- ----------------
Accumulated Other Comprehensive Income:
Balance at January 1 $118,119 $65,822
Unrealized gains (losses) on securities, $9,529 pre-tax 6,194 (1,699)
and ($2,614) pre-tax in 1998 and 1997, respectively (1)
Foreign currency 173 397
---------------- ----------------
Other comprehensive loss 6,367 6,367 (1,302) (1,302)
-------------------------------- --------------------------------
Comprehensive income $140,518 $107,321
================ ================
Balance at June 30 $124,486 $64,520
---------------- ----------------
Preferred Stock:
Balance at January 1 and June 30 $- $-
---------------- ----------------
Common Stock:
Balance at January 1 and June 30 $82,000 $82,000
---------------- ----------------
Additional Paid-in Capital:
Balance at January 1 $521,153 $515,684
Capital contribution - 1,475
Exercise of stock options 4,784 3,222
---------------- ----------------
Balance at June 30 $525,937 $520,381
---------------- ----------------
Total Stockholders' Equity at June 30 $2,021,896 $1,745,362
================ ================
(1) Disclosure of reclassification amount:
Unrealized holding gains arising during period $6,626 $380
Less: reclassification adjustment for gains
included in net income 432 2,079
---------------- ----------------
Net unrealized gains (losses) on securities $6,194 ($1,699)
================ ================
See accompanying Notes to Consolidated Financial Statements.
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended June 30, 1998 and 1997
(Dollars in Thousands)
Six Months Ended
June 30,
----------------------------------
1998 1997
--------------- ---------------
Cash flows from operating activities:
Net income $134,151 $108,623
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 792 871
Amortization of bond premium and discount (351) (591)
Current income taxes (6,634) (1,649)
Deferred income taxes 2,096 5,667
Deferred acquisition costs (4,977) (7,179)
Unearned premiums 24,789 39,896
Losses and loss adjustment expenses 9,306 821
Ceded reinsurance balances payable (1,380) 4,285
Loss (gain) on sales of investments 6,793 (4,291)
Accounts payable and other liabilities 46,167 (6,780)
Other, net (53,696) 2,464
--------------- ---------------
Net cash provided by operating activities 157,056 142,137
--------------- ---------------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized cost 471,056 711,775
Proceeds from maturities of bonds at amortized cost 47,080 55,411
Purchases of bonds at amortized cost (590,082) (880,479)
Change in short-term investments (41,867) (7,166)
Securities purchased under agreements to resell 2,484 (463)
Other, net (7,838) 106
--------------- ---------------
Net cash used in investing activities (119,167) (120,816)
--------------- ---------------
Cash flows from financing activities:
Dividends paid (24,000) (22,000)
--------------- ---------------
Net cash used in financing activities (24,000) (22,000)
--------------- ---------------
Net cash flow 13,889 (679)
Cash at January 1 8,004 5,025
--------------- ---------------
Cash at June 30 $21,893 $4,346
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $39,700 $22,600
=============== ===============
See accompanying Notes to Consolidated Unaudited Financial Statements.