SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-12644
Financial Security Assurance Holdings Ltd.
(Exact name of registrant as specified in its charter)
New York 13-3261323
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
350 Park Avenue
New York, New York 10022
(Address of principal executive offices)
(212) 826-0100
(Registrant's telephone number,
including area code)
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 |_|
At July 31, 2000, there were 33,517,995 outstanding shares of Common Stock of
the registrant.
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Condensed Unaudited Financial Statements
Financial Security Assurance Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999 3
Consolidated Statements of Operations and Comprehensive
Income - Three and six months ended June 30, 2000 and 1999 4
Consolidated Statement of Changes in Shareholder's Equity
- Six months ended June 30, 2000 5
Consolidated Statements of Cash Flows
- Six months ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION, AS APPLICABLE
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
June 30, December 31,
2000 1999
---- ----
ASSETS
Bonds at market value (amortized cost of $1,908,290 and $1,919,677) $ 1,910,059 $ 1,852,669
Equity investments at market value (cost of $10,100 and $30,104) 9,762 23,606
Short-term investments 93,509 263,747
----------- -----------
Total investments 2,013,330 2,140,022
Cash 16,387 6,284
Deferred acquisition costs 190,688 198,048
Prepaid reinsurance premiums 333,782 285,105
Reinsurance recoverable on unpaid losses 9,921 9,492
Receivable for securities sold 98,372 40,635
Investment in unconsolidated affiliates 30,924 29,709
Other assets 286,098 196,349
----------- -----------
TOTAL ASSETS $ 2,979,502 $ 2,905,644
=========== ===========
LIABILITIES AND MINORITY INTEREST, REDEEMABLE PREFERRED
STOCK AND SHAREHOLDER'S EQUITY
Deferred premium revenue $ 908,607 $ 844,146
Losses and loss adjustment expenses 94,848 87,309
Deferred federal income taxes 49,397 43,341
Ceded reinsurance balances payable 43,850 36,387
Payable for securities purchased 50,738 243,519
Notes payable 230,000 230,000
Minority interest 34,054 32,945
Accrued expenses and other liabilities 259,362 135,313
----------- -----------
TOTAL LIABILITIES AND MINORITY INTEREST 1,670,856 1,652,960
----------- -----------
Redeemable preferred stock (20,000,000 shares authorized; 0 and
2,000,000 issued and outstanding; par value of $.01 per share) 20
Additional paid-in capital - preferred 680
-----------
REDEEMABLE PREFERRED STOCK 700
-----------
Common stock (200,000,000 shares authorized; 33,517,995 and
33,676,301 issued; par value of $.01 per share) 335 337
Additional paid-in capital - common 903,474 836,853
Accumulated other comprehensive income (loss) [net of deferred
income tax provision (benefit) of $563 and $(25,727)] 868 (47,779)
Accumulated earnings 403,969 436,417
Deferred equity compensation 52,670
Less treasury stock at cost (0 and 961,418 shares held) (26,514)
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 1,308,646 1,251,984
----------- -----------
TOTAL LIABILITIES AND MINORITY INTEREST, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDER'S EQUITY $ 2,979,502 $ 2,905,644
=========== ===========
See notes to condensed consolidated financial statements.
3
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Net premiums written (net of premiums ceded
of $57,829, $20,090, $87,760 and $48,514) $ 72,703 $ 51,835 $ 109,639 $ 101,745
Increase in deferred premium revenue (28,021) (9,061) (17,373) (17,677)
--------- --------- --------- ---------
Premiums earned (net of premiums ceded of
$18,070, $14,780, $37,966 and $30,221) 44,682 42,774 92,266 84,068
Net investment income 29,406 22,736 57,839 44,760
Net realized losses (8,898) (10,454) (37,733) (9,630)
Other income 416 94 685 152
--------- --------- --------- ---------
TOTAL REVENUES 65,606 55,150 113,057 119,350
--------- --------- --------- ---------
Expenses:
Losses and loss adjustment expenses [net of
reinsurance recoveries of $(664), $(2,425),
$(609) and $(2,231)] 3,077 1,825 4,858 4,000
Interest expense 4,153 4,153 8,307 8,307
Policy acquisition costs 9,759 10,676 19,440 20,593
Merger related expenses 55,415 105,541
Other operating expenses 10,067 8,857 19,771 13,377
--------- --------- --------- ---------
TOTAL EXPENSES 82,471 25,511 157,917 46,277
--------- --------- --------- ---------
Minority interest and equity earnings (611) (343) (907) (928)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (17,476) 29,296 (45,767) 72,145
Benefit (provision) for income taxes 5,686 (5,824) 21,195 (16,516)
--------- --------- --------- ---------
NET INCOME (LOSS) (11,790) 23,472 (24,572) 55,629
--------- --------- --------- ---------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Holding gains (losses) arising during period 615 (35,254) 23,298 (48,340)
Less: reclassification adjustment for losses
included in net income (6,185) (7,184) (25,349) (6,648)
--------- --------- --------- ---------
Other comprehensive income (loss) 6,800 (28,070) 48,647 (41,692)
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ (4,990) $ (4,598) $ 24,075 $ 13,937
========= ========= ========= =========
See notes to condensed consolidated financial statements.
4
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
(Dollars in thousands)
Additional Accumulated
Paid-In Other Deferred
Common Capital - Comprehensive Accumulated Equity Treasury
Stock Common Income (Loss) Earnings Compensation Stock Total
----- ------ ------------- -------- ------------ ----- -----
BALANCE, December 31, 1999 $ 337 $ 836,853 $ (47,779) $ 436,417 $ 52,670 $ (26,514) $ 1,251,984
Net loss (24,572) (24,572)
Net unrealized gain on investments 48,647 48,647
Dividends paid on common stock
($0.24 per share) (7,876) (7,876)
Deferred equity compensation 29,419 29,419
Deferred equity payout 6,524 (18,811) 7,564 (4,723)
Purchase of 2,989 shares of
common stock (152) (152)
Sale of 511,031 shares of treasury
stock 23,113 15,530 38,643
Settlement of forward shares 39,408 39,408
Settlement of stock options 446 (446) 0
Recharacterization of deferred
compensation (62,832) (62,832)
Retirement of treasury stock (2) (3,570) 3,572 0
Contribution of redeemable preferred
stock 700 700
------ ---------- --------- --------- ---------- --------- -----------
BALANCE, June 30, 2000 $ 335 $ 903,474 $ 868 $ 403,969 $ 0 $ 0 $ 1,308,646
====== ========== ========= ========= ========== ========= ===========
See notes to condensed consolidated financial statements.
5
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended June 30,
2000 1999
---- ----
Cash flows from operating activities:
Premiums received, net $ 118,098 $ 78,387
Policy acquisition, merger and other operating
expenses paid, net (116,656) (44,123)
Loss and LAE recovered (paid), net 1,923 (600)
Net investment income received 49,225 37,470
Recoverable advances paid (4,178) (10,350)
Federal income taxes paid (21,911) (21,266)
Interest paid (8,269) (8,037)
Other, net (1,548) 338
----------- -----------
Net cash provided by operating activities 16,684 31,819
----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds 1,019,826 1,076,195
Purchases of bonds (1,275,788) (1,097,665)
Purchases of property and equipment (3,152) (476)
Net decrease (increase) in short-term securities 172,820 (12,253)
Other investments, net 719 1,283
----------- -----------
Net cash used for investing activities (85,575) (32,916)
----------- -----------
Cash flows from financing activities:
Dividends paid (7,876) (6,806)
Sale of treasury stock 38,643 12,888
Settlement of forward shares 39,408
Other 8,819 (49)
----------- -----------
Net cash provided by financing activities 78,994 6,033
----------- -----------
Net increase in cash 10,103 4,936
Cash at beginning of period 6,284 3,490
----------- -----------
Cash at end of period $ 16,387 $ 8,426
=========== ===========
See notes to condensed consolidated financial statements.
6
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2000 and 1999
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Holdings Ltd. (the Company) is an insurance
holding company domiciled in the State of New York. The Company is primarily
engaged (through its insurance subsidiaries, collectively known as FSA) in the
business of providing financial guaranty insurance on asset-backed and municipal
obligations. On July 5, 2000, the Company became an indirect wholly owned
subsidiary of Dexia S.A. (Dexia), a publicly held Belgian corporation (see Note
3).
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q and, accordingly, do not include all
of the information and disclosures required by accounting principles generally
accepted in the United States of America. These statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1999 Annual Report to Shareholders filed on Form 10-K.
The accompanying financial statements have not been audited by independent
accountants in accordance with auditing standards generally accepted in the
United States of America but, in the opinion of management, all adjustments,
which include only normal recurring adjustments necessary to present fairly the
financial position, results of operations and cash flows at June 30, 2000 and
for all periods presented, have been made. The December 31, 1999 condensed
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America. The results of operations for the periods ended
June 30, 2000 and 1999 are not necessarily indicative of the operating results
for the full year.
3. MERGER
On July 5, 2000, the Company completed the previously announced merger,
pursuant to which the Company became an indirect wholly owned subsidiary of
Dexia. At the merger date, each outstanding share of the Company's common stock
was converted into the right to receive $76.00 in cash. Dexia also indirectly
acquired the Company's redeemable preferred stock and caused such stock to be
contributed to the Company's capital. In conjunction with this transaction, the
Company has reflected in its June 30, 2000 financial statements the effects of
the merger and related transactions. The Company has valued its liabilities
under the Company's equity-based compensation plans at the transaction price and
changed its assumption regarding those plans by assuming all future payments
will be settled in cash. It also reflected the settlement of its Forward Share
agreements at the merger price and the sale of 511,031 shares of the Company's
common stock to Dexia at the transaction price. The net effect of the merger is
to decrease net income for the three-month and six-month periods ended June 30,
2000 by $42.9 million and $75.5 million, respectively, and to decrease
shareholder's equity at June 30, 2000 by $36.1 million.
4. EARNINGS PER SHARE
The Company did not calculate earnings per share for the three-month or
the six-month periods ended June 30, 2000 since, due to the merger with Dexia
(see Note 3), shares of the Company's common stock are no longer publicly held.
7
5. ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS No. 133). FAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. FAS
No. 133, as amended, is effective for fiscal years beginning on or after January
1, 2001. Management believes that the adoption of FAS No. 133 will not have a
material impact on the consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulleting No. 101, Revenue Recognition (SAB No. 101). An amendment in
June 2000 delayed the effective date until the fourth quarter of 2000.
Management believes that the adoption of SAB No. 101 will not have a material
impact on the consolidated financial statements.
8
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
On July 5, 2000, the Company completed the previously announced merger in
which the Company became an indirect wholly owned subsidiary of Dexia S.A.
(Dexia), a publicly held Belgian corporation. At the merger date, each
outstanding share of the Company's common stock was converted into the right to
receive $76.00 in cash. Dexia also indirectly acquired the Company's redeemable
preferred stock and caused such stock to be contributed to the Company's
capital. In conjunction with this transaction, the Company has reflected in its
June 30, 2000 financial statements the effects of the merger and related
transactions. The Company has valued its liabilities under the Company's
equity-based compensation plans at the transaction price and changed its
assumption regarding those plans by assuming all future payments will be settled
in cash. It also reflected the settlement of its Forward Share agreements at the
merger price and the sale of 511,031 shares of the Company's common stock to
Dexia at the transaction price. The Company has reported the results of closing
the transaction in these financial statements. The net effect of the merger is
to decrease net income for the three-month and six-month periods ended June 30,
2000 by $42.9 million and $75.5 million, respectively, and to decrease
shareholder's equity at June 30, 2000 by $36.1 million.
2000 and 1999 Second Quarter Results
The Company's 2000 second quarter net loss was $11.8 million, compared with net
income of $23.5 million for the same period in 1999, a decrease of 150.2%. Core
net income (operating net income less the after-tax effect of refundings and
prepayments) was $41.2 million, compared with $33.6 million for the same period
in 1999, an increase of 22.8%. Total core revenues in the second quarter of 2000
increased $9.9 million, from $62.8 million in 1999 to $72.7 million in 2000,
while total core expenses increased only $1.1 million. Operating net income (net
income less the after-tax effect of net realized capital gains or losses and the
cost of the equity based compensation programs and other non-operating items)
was $42.0 million for the second quarter of 2000 versus $34.9 million for the
comparable period in 1999, an increase of $7.1 million, or 20.3%.
There are two measures of gross premiums originated for a given period. Gross
premiums written captures premiums collected in the period, whether collected
up-front for business originated in the period, or in installments for business
originated in prior periods. An alternative measure, the gross present value of
premiums written (gross PV premiums written) reflects future installment
premiums discounted to a present value, as well as up-front premiums, but only
for business originated in the period. The Company considers gross PV premiums
written to be the better indicator of a given period's origination activity
because a substantial part of the Company's premiums are collected in
installments, a practice typical of the asset-backed business. The discount rate
used to calculate the gross PV premiums written is 5.77% for 2000 and was 5.93%
for 1999. The discount rates represent the average pre-tax yield on the
Company's investment portfolio for the previous three years. Regardless of the
measure used, quarter to quarter comparisons are of limited significance because
originations fluctuate from quarter to quarter but historically have not
exhibited a seasonal pattern.
Gross premiums written increased 81.5%, to $130.5 million for the second quarter
of 2000 from $71.9 million for the second quarter of 1999. Gross PV premiums
written increased 44.8%, to $169.4 million in the second quarter of 2000 from
$117.0 million in the second quarter of 1999. In the second quarter of 2000,
asset-backed gross PV premiums written were $71.9 million as compared with $66.6
million in 1999, an increase of 8.0%, international gross PV premiums were $52.6
million as compared with $22.4 million, an increase of 134.8%, and municipal
business gross PV premiums written were $44.9 million as compared with $28.0
million, an increase of 60.4%. The increase in asset-backed premiums reflected
good results across the collateralized debt obligation, consumer receivable and
residential mortgage sectors. In the municipal bond market, an improved pricing
environment led to increased premiums despite a decline versus the comparable
quarter in municipal par volume issued. Growth in the international business was
driven primarily by infrastructure and structured finance transactions in
Europe.
9
In the second quarter of 2000, the Company insured par value of bonds totaling
$18.1 billion, an increase of 5.7% when compared to the second quarter of 1999.
FSA's second quarter asset-backed component rose 9.2% to $8.0 billion and the
international sector rose 49.4% to $4.5 billion while its municipal sector
declined 17.4% to $5.6 billion.
Net premiums written were $72.7 million for the second quarter of 2000, an
increase of 40.3% when compared with 1999. Net premiums earned for the second
quarter of 2000 were $44.7 million, compared with $42.8 million in the second
quarter of 1999, an increase of 4.5%. Premiums earned from refundings and
prepayments were $1.8 million for the second quarter of 2000 and $2.8 million
for the same period of 1999, contributing $0.8 million and $1.4 million,
respectively, to after-tax earnings. Net premiums earned for the quarter grew
7.4% relative to the same period in 1999 when the effects of refundings and
prepayments are eliminated.
Net investment income was $29.4 million for the second quarter of 2000 and $22.7
million for the comparable period in 1999, an increase of 29.3%. The Company's
effective tax rate on investment income was 14.5% for the second quarter of 1999
compared with 13.0% for the same period in 2000. In the second quarter of 2000,
the Company realized $8.9 million in net capital losses as compared with $10.5
million for the same period in 1999. Capital gains and losses are generally a
by-product of the normal investment management process and will vary
substantially from period to period. However, the Company intentionally incurred
above normal realized losses during the second quarter of 2000 in order to take
advantage of various federal tax loss carrybacks which were available to the
Company.
The provision for losses and loss adjustment expenses during the second quarter
of 2000 was $3.1 million compared with $1.8 million in 1999, representing
additions to the Company's general loss reserve. The additions to the general
loss reserve represent management's estimate of the amount required to
adequately cover the net cost of claims. The Company will, on an ongoing basis,
monitor these reserves and may periodically adjust such reserves based on the
Company's actual loss experience, its future mix of business, and future
economic conditions. At June 30, 2000, the unallocated balance in the Company's
general loss reserve was $61.2 million.
Total policy acquisition and other operating expenses (excluding the cost of the
equity based compensation programs of $7.0 million for the second quarter of
2000 compared with $6.4 million for the same period of 1999) were $12.8 million
for the second quarter of 2000 compared with $13.1 million for the same period
in 1999, a decrease of 2.7%. Excluding the effects of refundings, total policy
acquisition and other operating expenses were $12.2 million for the second
quarter of 2000 compared with $12.4 million for the same period in 1999, a
decrease of 1.4%. The Company recognized $55.4 million in merger related
expenses, of which $35.9 million represented an increase in equity based
compensation and $19.5 million was for various fees related to the merger.
Loss before income tax benefits for the second quarter of 2000 was $17.5
million, as compared with income before income taxes of $29.3 million for the
same period in 1999.
The Company's effective tax rate for the second quarter of 2000 was 32.5%
compared with 19.9% for the same period in 1999. The effective tax rate differs
from the statutory tax rate of 35.0% due to the non-deductibility of certain
merger related expenses and tax-exempt interest income for the second quarter of
2000. The difference for the same period in 1999 is tax-exempt interest.
2000 and 1999 First Six Months Results
The Company's 2000 first half net loss was $24.6 million, compared with net
income of $55.6 million for the same period in 1999. Core net income was $83.0
million, compared with $64.3 million for the same period in 1999, an increase of
29.0%. Total core revenues for the first half of 2000 increased $24.7 million,
from $121.3 million in 1999 to $145.9 million in 2000, while total core expenses
increased only $1.9 million. Operating net income was $85.2 million for the
first half of 2000 versus $68.0 million for the comparable period in 1999, an
increase of $17.2 million, or 25.3%.
10
Gross premiums written increased 31.4% to $197.4 million for the first half of
2000 from $150.3 million for the first half of 1999. Gross PV premiums written
decreased 3.1%, from $239.1 million in 1999 to $231.7 million in the first half
of 2000. Asset-backed gross PV premiums written were $98.7 million in the first
half of 2000, as compared with $104.3 million in the first half of 1999, a
decrease of 5.4%. In the municipal business, first-half gross PV premiums
written decreased 8.4% to $65.7 million in 2000 from $71.7 million in 1999. For
the international sector, gross PV premiums written in the first half increased
to $67.3 million in 2000 from $63.1 million in 1999, an increase of 6.7%.
In the first half of 2000, the Company insured par value of bonds totaling $25.9
billion, a 13.5% decrease over the same period in 1999. FSA's first half
asset-backed and municipal sectors declined 10.2% to $11.6 billion and 23.7% to
$9.4 billion, respectively, while its international sector rose 4.1% to $4.9
billion.
Net premiums written were $109.6 million for the first half of 2000, an increase
of $7.9 million, or 7.8%, when compared with 1999. Net premiums earned for the
first half of 2000 were $92.3 million, compared with $84.1 million in the first
half of 1999, an increase of 9.8%. Premiums earned from refundings and
prepayments were $4.9 million for the first half of 2000 and $7.7 million for
the same period of 1999, contributing $2.3 million and $3.7 million,
respectively, to after-tax earnings. Net premiums earned for the first half grew
14.5% relative to the same period in 1999 when the effects of refundings and
prepayments are eliminated.
Net investment income was $57.8 million for the first half of 2000 and $44.8
million for the comparable period in 1999, an increase of 29.2%. The Company's
effective tax rate on investment income was 14.9% for the first half of 1999
compared with 13.3% in 2000. In the first half of 2000, the Company realized
$37.7 million in net capital losses as compared with $9.6 million for the same
period in 1999. Capital gains and losses are generally a by-product of the
normal investment management process and will vary substantially from period to
period. However, the Company intentionally incurred above normal realized losses
during the first half of 2000 in order to take advantage of various federal tax
loss carrybacks which were available to the Company.
The provision for losses and loss adjustment expenses during the first half of
2000 was $4.9 million compared with $4.0 million for the same period in 1999,
representing additions to the Company's general loss reserve.
Total policy acquisition and other operating expenses (excluding the cost of the
equity based compensation programs of $13.4 million for the first half of 2000
compared with $8.5 million for the same period of 1999) were $25.8 million for
the first half of 2000 compared with $25.5 million for the same period in 1999,
an increase of 1.3%. Excluding the effects of refundings, total policy
acquisition and other operating expenses were $24.4 million for the first half
of 2000 compared with $23.4 million for the same period in 1999, an increase of
4.3%. The Company recognized $105.5 million in merger related expenses, of which
$85.8 million represented an increase in equity based compensation and $19.7
million was for various fees related to the merger.
Loss before income tax benefits for the first half of 2000 was $45.8 million, as
compared with income before income taxes of $72.1 million for the same period in
1999.
The Company's effective tax rate for the first half of 2000 was 46.3% compared
with 22.9% for the same period in 1999. The effective tax rate differs from the
statutory tax rate of 35.0% due to the non-deductibility of certain merger
related expenses and tax-exempt interest income for the first half of 2000. The
difference for the same period in 1999 is tax-exempt interest.
Liquidity and Capital Resources
The Company's consolidated invested assets and cash equivalents at June 30,
2000, net of unsettled security transactions, was $2,061.0 million, compared
with the December 31, 1999 balance of $1,937.1 million. These balances include
the change in the market value of the investment portfolio, which had an
unrealized gain position of $1.4 million at June 30, 2000 and $73.5 million in
unrealized losses at December 31, 1999.
11
At June 30, 2000, the Company had, at the holding company level, an investment
portfolio of $17.7 million available to fund the liquidity needs of its
activities outside of its insurance operations. Because the majority of the
Company's operations are conducted through FSA, the long-term ability of the
Company to service its debt and to declare and pay dividends will largely depend
upon the receipt of dividends or surplus note payments from FSA and upon
external financings.
FSA's ability to pay dividends is dependent upon FSA's financial condition,
results of operations, cash requirements, rating agency approval and other
related factors and is also subject to restrictions contained in the insurance
laws and related regulations of New York and other states. Under New York State
insurance law, FSA may pay dividends out of earned surplus, provided that,
together with all dividends declared or distributed by FSA during the preceding
12 months, the dividends do not exceed the lesser of (i) 10% of policyholders'
surplus as of its last statement filed with the New York Superintendent of
Insurance or (ii) adjusted net investment income during this period. FSA paid no
dividends in 1999. Based upon FSA's statutory statements for the quarter ended
June 30, 2000, and considering dividends that can be paid by its subsidiary, the
maximum amount normally available for payment of dividends by FSA without
regulatory approval over the following 12 months is approximately $79.3 million.
However, as a customary condition for approving the application of Dexia for a
change in control of FSA, the prior approval of the Superintendent of the New
York State Insurance Department is required for any payment of dividends by FSA
to the Company for a period of two years following such change in control. In
addition, the Company holds $120 million of convertible surplus notes of FSA.
Payments of principal and interest on such notes may be made with the approval
of the New York Insurance Department.
Dividends paid by the Company to its shareholders increased to $7.9 million in
the first half of 2000 from $6.8 million in 1999 and to $0.240 per common share
in 2000 from $0.225 in 1999. In addition to paying dividends, the Company uses
funds to make debt service payments and used funds to repurchase shares of the
Company's common stock to fund employee benefit plans.
In connection with the merger, FSA repurchased $55.0 million of its stock from
the Company, and the Company sold 511,031 of its shares held in a rabbi trust to
Dexia for $38.6 million. The proceeds from these transactions were used to fund
the Company's obligations under certain of its long-term, equity-linked
compensation programs.
In 1996, the Company entered into forward agreements with two financial
institutions (the Counterparties) in respect of 1,750,000 shares (the Forward
Shares) of the Company's common stock. Under the forward agreements, the Company
had the obligation either (i) to purchase the Forward Shares from the
Counterparties for a price equal to $26.50 per share plus carrying costs or (ii)
to direct the Counterparties to sell the Forward Shares, with the Company
receiving any excess or making up any shortfall between the sale proceeds and
$26.50 per share plus carrying costs (net of dividends) in cash or additional
shares, at its option. The Company made the economic benefit and risk of 750,000
of these shares available for subscription by certain of the Company's employees
and directors. When an individual participant exercised Forward Shares under the
subscription program, the Company settled with the participant but did not
necessarily close out the corresponding Forward Share position with the
Counterparties. In the fourth quarter of 1999, the Company entered into
additional forward agreements with two Counterparties to purchase 750,000
Forward Shares at an initial cost of $53.50 per share. These agreements were
similar to the Forward Share agreements described above, and the economic
benefit and risk of these shares were for the account of the Company's employees
and directors as described above. All of the Company's forward agreements were
settled as a part of the merger with Dexia and, at June 30, 2000, the Company
recognized a $39.4 million increase in the Company's additional paid-in capital
reflecting the amounts due from the Counterparties.
FSA's primary uses of funds are to pay operating expenses and to pay dividends
to, or repay surplus notes held by, its parent. FSA's funds are also required to
satisfy claims, if any, under insurance policies in the event of default by an
issuer of an insured obligation and the unavailability or exhaustion of other
payment sources in the transaction, such as the cash flow or collateral
underlying the obligations. FSA seeks to structure asset-backed transactions to
address liquidity risks by matching insured payments with available cash flow or
other payment sources. The insurance policies issued by FSA provide, in general,
that payments of principal, interest and other amounts insured by FSA may not be
accelerated by the holder of the obligation but are paid by FSA in accordance
with the obligation's original payment schedule or, at FSA's option, on an
accelerated basis. These policy provisions prohibiting acceleration of certain
claims are mandatory under Article 69 of the New York Insurance Law and serve to
reduce FSA's liquidity requirements.
12
The Company believes that FSA's expected operating liquidity needs, both on a
short- and long-term basis, can be funded from its operating cash flow. In
addition, FSA has a number of sources of liquidity that are available to pay
claims on a short- and long-term basis: cash flow from written premiums, FSA's
investment portfolio and earnings thereon, reinsurance arrangements with
third-party reinsurers, liquidity lines of credit with banks, and capital market
transactions.
FSA has a credit arrangement, aggregating $150.0 million at June 30, 2000, that
is provided by commercial banks and intended for general application to
transactions insured by FSA and its insurance company subsidiaries. At June 30,
2000, there were no borrowings under this arrangement, which expires on April
27, 2001, unless extended. In addition, there are credit arrangements assigned
to specific insured transactions. In August 1994, FSA entered into a facility
agreement with Canadian Global Funding Corporation and Hambros Bank Limited.
Under the agreement, FSA can arrange financing for transactions subject to
certain conditions. The amount of this facility was $186.9 million, of which
$113.4 million was unutilized at June 30, 2000.
FSA has a standby line of credit in the amount of $240.0 million with a group of
international banks to provide loans to FSA after it has incurred, during the
term of the facility, cumulative municipal losses (net of any recoveries) in
excess of the greater of $240.0 million or 5.75% of average annual debt service
of the covered portfolio. The obligation to repay loans made under this
agreement is a limited recourse obligation payable solely from, and
collateralized by, a pledge of recoveries realized on defaulted insured
obligations in the covered portfolio, including certain installment premiums and
other collateral. This commitment has a term that began on April 30, 1999 and
will expire on April 30, 2007 and contains an annual renewal provision subject
to approval by the banks. No amounts have been utilized under this commitment as
of June 30, 2000.
The Company has no plans for material capital expenditures within the next
twelve months.
Forward-Looking Statements
This quarterly report contains forward-looking statements regarding, among other
things, the Company's plans and prospects. Important factors, including general
market conditions and the competitive environment, could cause actual results to
differ materially from those described in such forward-looking statements.
Certain of these factors are described in more detail under the heading
"Forward-Looking Statements" in Item 1 of the Company's Annual Report on Form
10-K, for the year ended December 31, 1999. Forward-looking statements in this
report are expressly qualified by all such factors. The Company undertakes no
obligation to revise or update any forward-looking statements to reflect changes
in events or expectations or otherwise.
13
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on Thursday, May 18,
2000. At the 2000 Annual Meeting, there were present by proxy or in person
32,357,856 shares of Common Stock and 2,000,000 shares of the Company's
Preferred Stock, representing approximately 91.1% of the 35,517,995 shares
(including the 2,000,000 shares of Preferred Stock) outstanding and eligible to
vote. There were three proposals for consideration, each of which was approved.
The results of the vote were as follows:
Proposal 1 -- Approval of the Merger Agreement
To approve an Agreement and Plan of Merger, providing for the merger of PAJY
Inc. with and into the Company, with the Company being the surviving
corporation:
FOR AGAINST ABSTAIN
--- ------- -------
30,507,217 10,314 4,191
There were 1,850,639 shares constituting "broker no votes" for Proposal 1.
Proposal 2 -- Election of Directors
For the election of Directors of the Company to hold office until the next
Annual Meeting of Shareholders or until their respective successors are elected
and qualified, as follows:
Votes Being Cast For Votes Being Withheld
-------------------- --------------------
Terry L. Baxter 32,318,675 39,181
Robert P. Cochran 32,291,926 65,930
Robert N. Downey 32,262,440 95,416
Anthony M. Frank 32,163,840 194,016
Fudeji Hama 32,277,700 80,156
K. Thomas Kemp 32,298,375 59,481
David O. Maxwell 32,317,840 40,016
Sean W. McCarthy 32,291,426 66,430
James M. Osterhoff 32,318,675 39,181
James H. Ozanne 32,318,675 39,181
Richard A. Post 32,298,375 59,481
Roger K. Taylor 32,291,926 65,930
Howard M. Zelikow 32,318,175 39,681
Proposal 3 -- Ratification of Selection of PricewaterhouseCoopers LLP as
Independent Auditors
To ratify and approve the selection by the Company's Board of Directors of
PricewaterhouseCoopers LLP as independent auditors for the Company for the
fiscal year ending December 31, 2000:
FOR AGAINST ABSTAIN
--- ------- -------
32,335,617 11,560 10,679
14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedules.
99 Financial statements of Financial Security Assurance Inc. for the
quarterly period ended June 30, 2000.
(b) Reports on Form 8-K
None
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
By /s/ Jeffrey S. Joseph
---------------------------------------
August 14, 2000 Jeffrey S. Joseph
Managing Director & Controller (Chief Accounting Officer)
16
Exhibit Index
Exhibit No. Exhibit
- ----------- -------
27 Financial Data Schedules.
99 Financial statements of Financial Security Assurance Inc. for
the quarterly period ended June 30, 2000.