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, 1999 and December 31, 1998
and for the Periods Ended September 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 provider of
financial guarantees for 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
September 30, 1999, Ambac Assurance's net insurance in force (principal and
interest) was $362,488,000. Ambac Assurance is a wholly owned subsidiary of
Ambac Financial Group, Inc. ("AFGI"), a holding company whose subsidiaries
provide financial guarantees 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 MBIA. AMBAC 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
(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 nine months ended
September 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
September 30, 1999 and December 31, 1998
(Dollars in Thousands Except Share Data)
September 30, 1999 December 31, 1998
-------------------- --------------------
(unaudited)
ASSETS
------
Investments:
Fixed income securities, at fair value
(amortized cost of $3,406,852 in 1999 and $3,097,289 in 1998) $3,370,641 $3,310,047
Short-term investments, at cost (approximates fair value) 178,800 93,912
---------------------- -----------------------
Total investments 3,549,441 3,403,959
Cash 8,054 4,895
Securities purchased under agreements to resell 10,001 5,449
Receivable for securities sold 34,314 12,132
Investment income due and accrued 54,480 54,088
Deferred acquisition costs 133,079 120,619
Reinsurance recoverable 3,688 3,638
Prepaid reinsurance 201,579 199,920
Other assets 148,851 212,475
---------------------- -----------------------
Total assets $4,143,487 $4,017,175
====================== =======================
LIABILITIES AND STOCKHOLDER'S EQUITY
-------------------------------------
Liabilities:
Unearned premiums $1,376,099 $1,303,203
Losses and loss adjustment expenses 123,027 115,794
Ceded reinsurance balances payable 4,082 6,576
Deferred income taxes 64,856 144,565
Current income taxes 31,371 19,984
Other liabilities 171,668 226,950
Payable for securities purchased 70,128 33,758
---------------------- -----------------------
Total liabilities 1,841,231 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 September 30, 1999 and December 31, 1998 82,000 82,000
Additional paid-in capital 643,725 541,021
Accumulated other comprehensive (loss) income (23,383) 138,651
Retained earnings 1,599,914 1,404,673
---------------------- -----------------------
Total stockholder's equity 2,302,256 2,166,345
---------------------- -----------------------
$4,143,487 $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 September 30, 1999 and 1998
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
Revenues:
Gross premiums written $108,415 $90,494 $299,465 $259,090
Ceded premiums written (11,896) (4,764) (33,440) (40,899)
---------------- ---------------- ---------------- ----------------
Net premiums written $96,519 $85,730 $266,025 $218,191
================ ================ ================ ================
Net premiums earned $69,056 $50,705 $194,763 $158,424
Net fees earned and other income 4,430 6,255 15,376 18,915
Net investment income 53,045 47,438 154,003 138,513
Net realized losses (62) (9,273) (5,542) (16,066)
---------------- ---------------- ---------------- ----------------
Total revenues 126,469 95,125 358,600 299,786
---------------- ---------------- ---------------- ----------------
Expenses:
Losses and loss adjustment expenses 3,000 1,500 8,000 4,500
Underwriting and operating expenses 13,167 12,441 40,401 38,613
Interest expense 755 865 2,212 2,287
---------------- ---------------- ---------------- ----------------
Total expenses 16,922 14,806 50,613 45,400
---------------- ---------------- ---------------- ----------------
Income before income taxes 109,547 80,319 307,987 254,386
Provision for income taxes 26,611 17,141 73,746 57,057
---------------- ---------------- ---------------- ----------------
Net income $82,936 $63,178 $234,241 $197,329
================ ================ ================ ================
See accompanying Notes to Consolidated Unaudited Financial Statements
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Unaudited)
For The Periods Ended September 30, 1999 and 1998
(Dollars in Thousands)
1999 1998
-------------------------------- --------------------------------
Retained Earnings:
Balance at January 1 $1,404,673 $1,179,322
Net income 234,241 $234,241 197,329 197,329
----------- ----------
Dividends declared - common stock (39,000) (36,000)
--------------- ---------------
Balance at September 30 $1,599,914 $1,340,651
--------------- ---------------
Accumulated Other Comprehensive Income:
Balance at January 1 $138,651 $118,119
Unrealized (losses) gains on securities, ($248,968)
and $74,322, pre-tax, in 1999 and 1998, respectively (1) (161,829) 48,309
Foreign currency (loss) gain (205) 673
----------- ---------
Other comprehensive (loss) income (162,034) (162,034) 48,982 48,982
------------------------------ ------------------------------
Comprehensive income $72,207 $246,311
========== =========
Balance at September 30 ($23,383) $167,101
---------- ----------
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 $541,021 $521,153
Capital contribution 101,479 -
Exercise of stock options 1,225 5,867
---------- ----------
Balance at September 30 $643,725 $527,020
---------- ----------
Total Stockholder's Equity at September 30 $2,302,256 $2,116,772
========== ==========
(1) Disclosure of reclassification amount:
Unrealized holding (losses) gains arising during period ($165,431) $49,091
Less: reclassification adjustment for net (losses)
gains included in net income (3,602) 782
----------- ----------
Net unrealized (losses) gains on securities ($161,829) $48,309
=========== ==========
See accompanying Notes to Consolidated Unaudited Financial Statements.
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended September 30, 1999 and 1998
(Dollars in Thousands)
Nine Months Ended
September 30,
-----------------------------------
1999 1998
--------------- ---------------
Cash flows from operating activities:
Net income $234,241 $197,329
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,703 1,234
Amortization of bond premium and discount (3,477) (916)
Current income taxes 11,387 (1,246)
Deferred income taxes 7,429 452
Premiums receivable 5,050 (941)
Deferred acquisition costs (12,460) (10,634)
Unearned premiums, net 71,237 59,908
Losses and loss adjustment expenses 7,183 14,150
Ceded reinsurance balances payable (2,494) (5,482)
Losses on sales of investments 5,542 16,066
Other, net 12,841 (3,090)
--------------- ---------------
Net cash provided by operating activities 338,182 266,830
--------------- ---------------
Cash flows from investing activities:
Proceeds from sales of bonds 913,028 679,926
Proceeds from maturities of bonds 126,435 86,365
Purchases of bonds (1,236,499) (969,016)
Change in short-term investments (84,888) (38,255)
Securities purchased under agreements to resell (4,552) 2,484
Other, net (3,547) (18,006)
--------------- ---------------
Net cash used in investing activities (290,023) (256,502)
--------------- ---------------
Cash flows from financing activities:
Dividends paid (39,000) (36,000)
Short-term financing (6,000) 20,283
--------------- ---------------
Net cash used in financing activities (45,000) (15,717)
--------------- ---------------
Net cash flow 3,159 (5,389)
Cash at January 1 4,895 8,004
--------------- ---------------
Cash at September 30 $8,054 $2,615
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $50,860 $54,700
=============== ===============
Supplemental disclosure of non-cash financing activitites:
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.