EXHIBIT 99.03
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Ambac Financial Group, Inc.)
Consolidated Unaudited Financial Statements
As of June 30, 1999 and December 31, 1998
and for the Periods Ended June 30, 1999 and 1998
Ambac Assurance Corporation and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
(Dollars in Thousands)
(1) Basis of Presentation
Ambac Assurance Corporation ("Ambac Assurance") is a leading insurer of
municipal and structured finance obligations. Ambac Assurance has earned
triple-A ratings, the highest ratings available from Moody's Investors Service,
Inc., Standard & Poor's Rating 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 monetary default on the insured bond,
payments under the insurance policy may not be accelerated by the policyholder
without Ambac Assurance's consent. As of June 30, 1999, Ambac Assurance's net
insurance in force (principal and interest) was $350,694,000. Ambac Assurance is
a wholly owned subsidiary of Ambac Financial Group, Inc. ("AFGI"), a holding
company whose subsidiaries provide financial insurance and financial management
services to clients in both the public and private sectors around the world.
In December 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 insurance company, guaranteed
bonds primarily for college and hospital infrastructure projects. 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.
Ambac Assurance serves clients in international markets through its wholly-
owned subsidiary Ambac Assurance UK Limited and through an arrangement with MBIA
Insurance Company ("MBIA") to participate in MBIAAMBAC International, an
unincorporated joint venture (the "Joint Venture") formed in 1995. The joint
venture was formed with the goal of bringing the combined resources of the two
companies together to more efficiently serve the international market. Under the
joint venture arrangement, financial guarantee policies are issued separately by
each of the companies and each company has the opportunity to assume up to 50%
of international business written by the other.
Ambac Assurance, through it's wholly owned subsidiary, Ambac Credit
Products ("ACP") enters into structured credit derivative transactions. These
structured credit derivatives require ACP to make payments upon the occurrence
of certain defined credit events relating to an underlying obligation. Should a
credit event occur, ACP would generally be required to purchase the impaired
asset or to make a payment equivalent to the difference between the par value
and market value of the underlying obligation. The majority of ACP's credit
derivatives have been structured so that a level of first loss protection is
provided.
Ambac Assurance Corporation and Subsidiaries
Notes to Consolidated Unaudited Financial Statements (Continued)
(Dollars in Thousands)
Ambac Assurance, as the sole limited partner, owns a limited partnership
interest representing 90% of the total partnership interests of Ambac Financial
Services, L.P. ("AFSLP"), a limited partnership which provides interest rate
swaps primarily to states, municipalities and their authorities. The sole
general partner of AFSLP, Ambac Financial Services Holdings, Inc., a wholly
owned subsidiary of AFGI, owns a general partnership interest representing 10%
of the total partnership interest in AFSLP.
The accompanying consolidated unaudited interim financial statements have
been prepared on the basis of U.S. 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 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, 1999 may not be indicative of the results that may be expected for the full
year ending December 31, 1999. 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, 1998 and 1997, and for each of the years in the
three-year period ended December 31, 1998.
Ambac Assurance Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
(Dollars in Thousands Except Share Data)
June 30, 1999 December 31, 1998
--------------- -------------------
(unaudited)
ASSETS
------
Investments:
Fixed income securities, at fair value
(amortized cost of $3,345,725 in 1999 and $3,097,289 in 1998) $3,407,424 $3,310,047
Short-term investments, at cost (approximates fair value) 86,879 93,912
---------- ----------
Total investments 3,494,303 3,403,959
Cash 6,684 4,895
Securities purchased under agreements to resell 3,605 5,449
Receivable for securities sold 29,726 12,132
Investment income due and accrued 57,949 54,088
Deferred acquisition costs 130,238 120,619
Reinsurance recoverable 3,668 3,638
Prepaid reinsurance 202,141 199,920
Other assets 128,291 212,475
---------- ----------
Total assets $4,056,605 $4,017,175
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Liabilities:
Unearned premiums $1,348,980 $1,303,203
Losses and loss adjustment expenses 120,483 115,794
Ceded reinsurance balances payable 5,879 6,576
Deferred income taxes 98,245 144,565
Current income taxes 19,675 19,984
Other liabilities 138,955 226,950
Payable for securities purchased 29,439 33,758
---------- ----------
Total liabilities 1,761,656 1,850,830
---------- ----------
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 June 30, 1999 and December 31, 1998 82,000 82,000
Additional paid-in capital 643,565 541,021
Accumulated other comprehensive income 39,406 138,651
Retained earnings 1,529,978 1,404,673
---------- ----------
Total stockholder's equity 2,294,949 2,166,345
---------- ----------
$4,056,605 $4,017,175
========== ==========
See accompanying Notes to Consolidated Unaudited Financial Statements.
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For The Periods Ended June 30, 1999 and 1998
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------- ------- -------- --------
Revenues:
Gross premiums written $ 100,009 $ 88,975 $191,050 $168,596
Ceded premiums written (16,458) (10,048) (21,544) (36,135)
------- ------- -------- --------
Net premiums written 83,551 78,927 169,506 132,461
Increase unearned premiums, net (18,873) (25,038) (43,799) (24,742)
------- ------- -------- --------
Net premiums earned 64,678 53,889 125,707 107,719
Net investment income 51,371 45,939 100,958 91,075
Net realized losses (5,569) (6,943) (5,480) (6,793)
Other income 5,198 5,337 10,946 12,660
------- ------- -------- --------
Total revenues 115,678 98,222 232,131 204,661
------- ------- -------- --------
Expenses:
Losses and loss adjustment expenses 2,500 1,423 5,000 3,000
Underwriting and operating expenses 13,606 12,624 27,234 26,172
Interest expense 733 661 1,457 1,422
------- ------- -------- --------
Total expenses 16,839 14,708 33,691 30,594
------- ------- -------- --------
Income before income taxes 98,839 83,514 198,440 174,067
Provision for income taxes 23,101 18,087 47,135 39,916
------- ------- -------- --------
Net income $ 75,738 $ 65,427 $151,305 $134,151
======= ======= ======== ========
See accompanying Notes to Consolidated Unaudited Financial Statements
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Unaudited)
For The Periods Ended June 30, 1999 and 1998
(Dollars in Thousands)
1999 1998
----------------------- ------------------------
Retained Earnings:
Balance at January 1 $1,404,673 $1,179,322
Net income 151,305 $151,305 134,151 $ 134,151
-------- ---------
Dividends declared - common stock (26,000) (24,000)
---------- ----------
Balance at June 30 $1,529,978 $1,289,473
---------- ----------
Accumulated Other Comprehensive Income:
Balance at January 1 $ 138,651 $ 118,119
Unrealized (losses) gains on securities, ($151,059)
and $9,529, pre-tax, in 1999 and 1998, respectively /(1)/ (98,188) $ 6,194
Foreign currency (loss) gain (1,057) 173
-------- ---------
Other comprehensive (loss) income (99,245) (99,245) 6,367 6,367
----------------------- ------------------------
Comprehensive income $52,060 $ 140,518
======= =========
Balance at June 30 $ 39,406 $ 124,486
---------- ----------
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 $ 541,021 $ 521,153
Capital contribution 101,479 -
Exercise of stock options 1,065 4,784
---------- ----------
Balance at June 30 $ 643,565 $ 525,937
---------- ----------
Total Stockholder's Equity at June 30 $2,294,949 $2,021,896
========== ==========
(1) Disclosure of reclassification amount:
Unrealized holding (losses) gains arising during period ($101,750) $ 6,626
Less: reclassification adjustment for net (losses)
gains included in net income (3,562) 432
---------- ----------
Net unrealized (losses) gains on securities ($98,188) $ 6,194
========== ==========
See accompanying Notes to Consolidated Unaudited Financial Statements.
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended June 30, 1999 and 1998
(Dollars in Thousands)
Six Months Ended
June 30,
----------------------------------
1999 1998
--------------- --------------
Cash flows from operating activities:
Net income $ 151,305 $ 134,151
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,100 792
Amortization of bond premium and discount (2,479) (351)
Current income taxes (309) (6,634)
Deferred income taxes 6,551 2,096
Deferred acquisition costs (9,619) (4,977)
Unearned premiums, net 43,556 24,789
Losses and loss adjustment expenses 4,659 9,306
Ceded reinsurance balances payable (697) (1,380)
Losses on sales of investments 5,480 6,793
Net unrealized portfolio gain (5,137) (22,595)
Other, net 5,047 15,066
-------------- -------------
Net cash provided by operating activities 199,457 157,056
-------------- -------------
Cash flows from investing activities:
Proceeds from sales of bonds 742,060 471,056
Proceeds from maturities of bonds 79,961 47,080
Purchases of bonds (995,702) (590,082)
Change in short-term investments 7,033 (41,867)
Securities purchased under agreements to resell 1,844 2,484
Other, net (864) (7,838)
-------------- -------------
Net cash used in investing activities (165,668) (119,167)
-------------- -------------
Cash flows from financing activities:
Dividends paid (26,000) (24,000)
Short-term financing (6,000) -
-------------- -------------
Net cash used in financing activities (32,000) (24,000)
-------------- -------------
Net cash flow 1,789 13,889
Cash at January 1 4,895 8,004
-------------- -------------
Cash at June 30 $ 6,684 $ 21,893
============== =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 37,000 $ 39,700
============== =============
Supplemental disclosure of non-cash financing activities:
The Company received a capital contribution from its parent company in
April, 1999, in the form of fixed income securities amounting to $101,479.
See accompanying Notes to Consolidated Unaudited Financial Statements.