(EXHIBIT 99.04)
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Ambac Financial Group, Inc.)
Consolidated Unaudited Financial Statements
As of September 30, 1998 and December 31, 1997
and for the Periods Ended September 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 earned triple-A ratings,
the highest ratings available from Moody's Investors Service, Inc., Standard &
Poor's Ratings Group, Fitch IBCA, Inc., and Japan Rating and Investment
Information, Inc. 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 September 30, 1998, Ambac Assurance's net insurance
in force (principal and interest) was $311.3 billion. Ambac Assurance is a
wholly-owned subsidiary of Ambac Financial Group, Inc. (NYSE: ABK), a holding
company whose affiliates provide financial guarantee insurance and financial
management services to clients in both the public and private sectors in the
U.S. and abroad.
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 (CONTINUED)
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 nine months ended September 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
September 30, 1998 and December 31, 1997
(Dollars in Thousands Except Share Data)
September 30, 1998 December 31, 1997
------------------ -----------------
(unaudited)
ASSETS
------
Investments:
Fixed income securities, at fair value
(amortized cost of $2,975,896 in 1998 and $2,696,603 in 1997) $3,231,697 $2,878,083
Short-term investments, at cost (approximates fair value) 155,160 116,905
------------------ ----------------
Total investments 3,386,857 2,994,988
Cash 2,615 8,004
Securities purchased under agreements to resell - 2,484
Receivable for securities sold 39,272 24,018
Investment income due and accrued 50,377 49,987
Deferred acquisition costs 116,630 105,996
Receivable from brokers and dealers 188,326 183,041
Reinsurance recoverable 3,777 4,219
Prepaid reinsurance 199,264 183,492
Other assets 193,003 90,785
------------------ ----------------
Total assets $4,180,121 $3,647,014
================== ================
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Liabilities:
Unearned premiums $1,260,217 $1,184,537
Losses and loss adjustment expenses 117,053 103,345
Ceded reinsurance balances payable 3,776 9,258
Deferred income taxes 149,018 122,554
Current income taxes 18,468 19,714
Accounts payable and other liabilities 230,389 111,624
Payable for securities purchased 284,428 195,388
------------------ ----------------
Total liabilities 2,063,349 1,746,420
------------------ ----------------
Stockholder's equity:
Preferred stock, par value $1,000 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 September 30, 1998 and December 31, 1997 82,000 82,000
Additional paid-in capital 527,020 521,153
Accumulated other comprehensive income 167,101 118,119
Retained earnings 1,340,651 1,179,322
------------------ ----------------
Total stockholder's equity 2,116,772 1,900,594
------------------ ----------------
Total liabilities and stockholder's equity $4,180,121 $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 September 30, 1998 and 1997
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
1998 1997 1998 1997
------------- ------------ ------------- -------------
Revenues:
Gross premiums written $90,494 $53,444 $259,090 $180,207
Ceded premiums written (4,764) (6,495) (40,899) (19,122)
------------- ------------ ------------- -------------
Net premiums written 85,730 46,949 218,191 161,085
Increase in unearned premiums, net (35,025) (10,860) (59,767) (50,743)
------------- ------------ ------------- -------------
Net premiums earned 50,705 36,089 158,424 110,342
Net investment income 47,438 40,206 138,513 118,100
Net realized (losses) gains (9,273) 13,931 (16,066) 18,222
Other income 6,255 4,120 18,915 10,436
------------- ------------ ------------- -------------
Total revenues 95,125 94,346 299,786 257,100
------------- ------------ ------------- -------------
Expenses:
Losses and loss adjustment expenses 1,500 730 4,500 2,122
Underwriting and operating expenses 12,441 11,244 38,613 33,061
Interest expense 865 566 2,287 1,696
------------- ------------ ------------- -------------
Total expenses 14,806 12,540 45,400 36,879
------------- ------------ ------------- -------------
Income before income taxes 80,319 81,806 254,386 220,221
Provision for income taxes 17,141 19,241 57,057 49,033
------------- ------------ ------------- -------------
Net income $63,178 $62,565 $197,329 $171,188
============= ============ ============= =============
See accompanying Notes to Consolidated Financial Statements
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
For The Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands)
1998 1997
--------------------------- --------------------------
Retained Earnings:
Balance at January 1 $1,179,322 $991,815
Net income 197,329 $197,329 171,188 $171,188
------------- --------------
Dividends declared - common stock (36,000) (33,000)
Other - (319)
-------------- ------------
Balance at September 30 $1,340,651 $1,129,684
-------------- ------------
Accumulated Other Comprehensive Income:
Balance at January 1 $118,119 $65,822
Unrealized gains on securities, $74,322, pre-tax,
and $36,377, pre-tax, in 1998 and 1997, respectively (1) 48,309 23,645
Foreign currency gain (loss) 673 (154)
------------- --------------
Other comprehensive gain 48,982 48,982 23,491 23,491
--------------------------- --------------------------
Comprehensive income $246,311 $194,679
============= ==============
Balance at September 30 $167,101 $89,313
-------------- ------------
Preferred Stock:
Balance at January 1 and September 30 $- $-
-------------- ------------
Common Stock:
Balance at January 1 and September 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 5,867 3,964
-------------- ------------
Balance at September 30 $527,020 $521,123
-------------- ------------
Total Stockholders' Equity at September 30 $2,116,772 $1,822,120
============== ============
(1) Disclosure of reclassification amount:
Unrealized holding gains arising during period $49,091 $32,826
Less: reclassification adjustment for net gains
included in net income 782 9,181
-------------- ------------
Net unrealized gains on securities $48,309 $23,645
============== ============
See accompanying Notes to Consolidated Financial Statements.
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands)
Nine Months Ended
September 30,
-----------------------------------------------
1998 1997
--------------------- --------------------
Cash flows from operating activities:
Net income $197,329 $171,188
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,234 1,292
Amortization of bond premium and discount (916) (779)
Current income taxes (1,246) 2,076
Deferred income taxes 452 12,857
Deferred acquisition costs (10,634) (9,710)
Unearned premiums 59,908 50,735
Losses and loss adjustment expenses 14,150 867
Ceded reinsurance balances payable (5,482) (2,894)
Loss (gain) on sales of investments 16,066 (18,222)
Other, net 16,252 22,932
--------------------- --------------------
Net cash provided by operating activities 287,113 230,342
--------------------- --------------------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized cost 679,926 1,085,317
Proceeds from maturities of bonds at amortized cost 86,365 87,000
Purchases of bonds at amortized cost (969,016) (1,358,009)
Change in short-term investments (38,255) (13,221)
Securities purchased under agreements to resell 2,484 (5,789)
Other, net (18,006) 2,630
--------------------- --------------------
Net cash used in investing activities (256,502) (202,072)
--------------------- --------------------
Cash flows from financing activities:
Dividends paid (36,000) (33,000)
--------------------- --------------------
Net cash used in financing activities (36,000) (33,000)
--------------------- --------------------
Net cash flow (5,389) (4,730)
Cash at January 1 8,004 5,025
--------------------- --------------------
Cash at September 30 $2,615 $295
===================== ====================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $54,700 $29,900
===================== ====================
See accompanying Notes to Consolidated Unaudited Financial Statements.