<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest Event
Reported) December 26, 1996
FINANCIAL ASSET SECURITIES CORP., (as depositor under the Pooling and
Servicing Agreement, dated as of December 1, 1996, providing for the
issuance of Financial Asset Securities Corp., Headlands Home Equity Loan
Trust 1996-1, Revolving Home Equity Loan Asset-Backed Certificates, Series
1996-1).
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 333-10273 06-1442010
- ------------------------------- ------------ -------------------
(Commission (I.R.S. Employer
(State or Other Jurisdiction of File Number) Identification No.)
Incorporation)
600 Steamboat Road 06830
Greenwich, Connecticut ----------
- ---------------------------------- (Zip Code)
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code (203) 625-2700
---- ----------
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<PAGE>
Item 5. Other Events
- --------------------
Filing of Computational Materials and Financial Statements of CapMAC.
- --------------------------------------------------------------------
Pursuant to Rule 424(b) under the Securities Act of 1933, concurrently
with, or subsequent to, the filing of this Current Report on Form 8-K (the "Form
8-K"), Financial Asset Securities Corp. (the "Company") is filing a prospectus
and prospectus supplement with the Securities and Exchange Commission relating
to Headlands Home Equity Loan Trust 1996-1, Revolving Home Equity Loan Asset-
Backed Certificates, Series 1996-1 (the "Offered Certificates").
In connection with the offering of the Headlands Home Equity Loan
Trust 1996-1, Revolving Home Equity Loan Asset-Backed Certificates, Series 1996-
1, Greenwich Capital Markets Inc., as underwriter of the Offered Certificates
(the "Underwriter"), has prepared certain materials (the "Computational
Materials") for distribution to its potential investors. Although the Company
provided the Underwriter with certain information regarding the characteristics
of the mortgage loans in the related portfolio, it did not participate in the
preparation of the Computational Materials.
For the purposes of this Form 8-K, Computational Materials shall mean
computer generated tables and/or charts displaying, with respect to any Class or
Classes of Certificates, any of the following: yield; average life; duration;
expected maturity; interest rate sensitivity; loss sensitivity; cash flow
characteristics; background information regarding the mortgage loans; the
proposed structure; decrement tables; or similar information (tabular or
otherwise) of a statistical, mathematical, tabular or computational nature. The
Computational Materials are attached hereto as Exhibit 99.1.
In connection with the offering of the Headlands Home Equity Loan
Trust 1996-1, Revolving Home Equity Loan Asset-Backed Certificates, Series 1996-
1, Capital Markets Assurance Corporation ("CapMAC") has provided its Financial
Statements as Annex I to the Prospectus Supplement for distribution to potential
investors. The Financial Statements are attached hereto as Exhibit 99.2.
Environmental Matters
- ---------------------
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
In certain circumstances, these laws and regulations impose obligations on
owners or operators of residential properties such as those subject to the
Loans. The failure to comply with such laws and regulations may result in fines
and penalties.
Under various federal, state and local laws and regulations, an owner
or operator of real estate may be liable for the costs of addressing hazardous
substances
2
<PAGE>
on, in or beneath such property and related costs. Such liability could exceed
the value of the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or arrange
for the transportation, disposal or treatment of hazardous substances, at off-
site locations may also be held liable if there are releases or threatened
releases of hazardous substances at such off-site locations.
Under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), contamination
of property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states, such a lien has priority over the lien of
an existing mortgage against such property.
Under the laws of some states, and under CERCLA and the federal Solid
Waste Disposal Act, there is a possibility that a lender may be held liable as
an "owner" or "operator" for costs of addressing releases or threatened releases
of hazardous substances at a property, or releases of petroleum from an
underground storage tank, under certain circumstances.
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks,
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or arrange
for the transportation, disposal or treatment of hazardous substances, at off-
site locations may also be held liable if there are releases or threatened
releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against such property. Under CERCLA, such
a lien is subordinate to pre-existing, perfected security interests.
3
<PAGE>
Under the laws of some states, and under CERCLA, there is a
possibility that a lender may be held liable as an "owner" or "operator" for
costs of addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act ("SWDA") provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the
management" of the facility in question or is found not to have held its
interest primarily to protect a security interest, the lender may forfeit its
secured creditor exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
("EPA") in April 1992 attempted to clarify the activities in which lenders could
engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The rule was
struck down in 1994 by the United States Court of Appeals for the District of
Columbia Circuit in Kelley ex rel State of Michigan v. Environmental Protection
Agency, 15 F.3d 1100 (D.C Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied
sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of the SWDA. That regulation has not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA to
provide additional clarification regarding the scope of the lender liability
exemptions under the two statutes. Among other things, the 1996 amendments
specify the circumstances under which a lender will be protected by the CERCLA
and SWDA exemptions, both while the borrower is still in possession of the
secured property and following foreclosure on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility will be
considered to participate in management only if, while the borrower is still in
possession of the facility encumbered by the security interest, the lender (1)
exercises decisionmaking control over environmental compliance related to the
facility, such that the lender has undertaken responsibility for hazardous
substance handling or disposal practices related to the facility, or (2)
exercises control at a level comparable to that of a manager of the facility,
such that the person has assumed or manifested responsibility (a) for overall
management of the facility encompassing day-to-day decisionmaking with respect
to environmental compliance, or (b) over all or substantially all of the
operational functions (as distinguished from financial or administrative
functions) of the facility other than the function of environmental compliance.
The amendments
4
<PAGE>
also specify certain activities that are not considered to be "participation in
management", including monitoring or enforcing the terms of the extension of
credit or security interest, inspecting the facility, and requiring a lawful
means of addressing the release or threatened release of a hazardous substance.
The 1996 amendments also specify that a lender who did not participate
in management of a facility prior to foreclosure will not be considered an
"owner or operator", even if the lender forecloses on the facility and after
foreclosure sells or liquidates the facility, maintains business activities,
winds up operations, undertakes an appropriate response action, or takes any
other measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at the
earliest practicable, commercially reasonable time, on commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements.
The CERCLA and SWDA lender liability amendments specifically address
the potential liability of lenders who hold mortgages or similar conventional
security interests in real property, such as the Trust Fund does in connection
with the Home Equity Loans and the Home Improvement Contracts. The amendments
do not clearly address the potential liability of lenders who retain legal title
to a property and enter into an agreement with the purchaser for the payment of
the purchase price, and interest, over the term of the contract, such as the
Trust Fund does in connection with the Installment Contracts.
If a lender (including a lender under an Installment Contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a previous
owner or operator. However, such persons or entities may be bankrupt or
otherwise judgment proof, and the costs associated with environmental cleanup
and related actions may be substantial. Moreover, some state laws imposing
liability for addressing hazardous substances do not contain exemptions from
liability for lenders. Whether the costs of addressing a release or threatened
release at a property pledged as collateral for one of the Loans, or at a
property subject to an Installment Contract, would be imposed on the Trust Fund,
and thus occasion a loss to the Securityholders, therefore depends on the
specific factual and legal circumstances at issue.
5
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
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(a) Not applicable.
(b) Not applicable.
(c) Exhibits:
99.1. Computational Materials.
99.2. Financial Statements of Capital Markets Assurance Corporation.
99.3 Consent of Independant Certified Accountants
6
<PAGE>
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 hereunto duly authorized.
FINANCIAL ASSET SECURITIES CORP.
By:/s/ Brian Bernard
-----------------
Name: Brian Bernard
Title: Vice President
Dated: December 26, 1996
7
<PAGE>
Exhibit Index
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Exhibit Page
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99.1. Computational Materials.
99.2. Financial Statements of Capital Markets Assurance Corporation.
99.3 Consent of Independent Certified Accountants
<PAGE>
EXHIBIT 99.1
This Preliminary Term Sheet is provided for information purposes only, and does
not constitute an offer to sell, nor a solicitation of an offer to buy, the
referenced securities. It does not purport to be all-inclusive or to contain all
of the information that a prospective investor may require to make a full
analysis of the transaction. All amounts are approximate and subject to change.
The information contained herein supersedes information contained in any prior
information term sheet for this transaction. In addition, the information
contained herein may be superseded by information contained in term sheets
circulated after the date hereof and is qualified in its entirety by information
contained in the Prospectus Supplement for this transaction. An offering may
only be made through the delivery of a Prospectus Supplement and the related
Prospectus.
PREPARED: 12/24/96
- --------------------
PRELIMINARY TERM SHEET
----------------------
$125,595,644.60
HEADLANDS HOME EQUITY LOAN TRUST 1996-1
REVOLVING HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 1996-1
<TABLE>
<CAPTION>
WAL Expected Price
Class Amount (Yrs.)* Window* Maturity* Talk Benchmark
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A $125,595,645 4.8 13-103 TBD + 17 to 20 1 M LIBOR
S $ 0** NA NA TBD NA 1.00%
- -------------------------------------------------------------------------------------------------------------
Total $125,595,645
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* SEE "COMPUTATIONAL MATERIALS DISCLAIMER"
** CLASS S NOTIONAL PRINCIPAL BALANCE EQUAL TO THE CLASS A CERTIFICATE
BALANCE.
Underwriter: Greenwich Capital Markets, Inc.
Seller and Servicer: Headlands Mortgage Company
Depositor: Financial Asset Securities Corp.
Trustee: First National Bank of Chicago
Federal Tax Status: It is anticipated that the Class A and Class S
Certificates (the "Certificates") will be treated
as debt for federal income tax purposes.
Registration: The Certificates will be available in book-entry
form through DTC.
Expected Pricing Date: December 24, 1996*
Expected Closing Date: December 30, 1996*
Expected Settlement Date: January 3, 1997*
Cut-off Date: December 1, 1996
Accrued Interest: Price will include interest accrued from the
Closing Date to, but not including, the Settlement
Date.
Accrual Period: Interest will accrue for the first distribution on
January 15, 1997 from the Closing Date through
January 14, 1997 (actual number of days/360).
Thereafter, the accrual period will be from the
prior Distribution Date, to but not including, the
next subsequent Distribution Date.
Distribution Dates: 15th day of each month (or the next succeeding
business day), beginning January 15, 1997.
Credit Enhancement: Overcollateralization and a surety wrap to be
provided by Capital Markets Assurance Corporation
("CapMAC")
Expected Ratings: Class A Certificates AAA/Aaa, S&P / Moody's (based
on CapMAC surety wrap);
Class S Certificates AAAr/Aaa, S&P / Moody's (based
on CapMAC surety wrap).
ERISA Eligibility: The Certificates are not EXPECTED TO BE ERISA
ELIGIBLE. PROSPECTIVE INVESTORS MUST REVIEW THE
PROSPECTUS AND PROSPECTUS SUPPLEMENT AND CONSULT
WITH THEIR PROFESSIONAL ADVISORS FOR A MORE
DETAILED DESCRIPTION OF THESE MATTERS PRIOR TO
INVESTING IN THE CERTIFICATES.
SMMEA Treatment: The Certificates will not constitute "mortgage
related securities" for purposes of SMMEA.
Optional Termination: 10% optional termination provision.
Prepayment Assumption: 30% CPR, 18% Draw Rate.
Mortgage Loans: The Mortgage Loans will consist of certain
adjustable-rate home equity revolving credit line
loans ("HELOCs") and certain fixed-rate closed-end
home equity loans ("Closed-End Loans"). It is
expected that Mortgage Loans (the "Initial Mortgage
Loans") having an aggregate principal balance of
approximately $128,158,821 will be deposited into
the Trust on the Closing Date. Subsequent HELOCs
and Closed-End Loans may be purchased by the Trust
during the first twelve months of the
securitization (the "Funding Period").
* SUBJECT TO CHANGE
1
<PAGE>
This Preliminary Term Sheet is provided for information purposes only, and does
not constitute an offer to sell, nor a solicitation of an offer to buy, the
referenced securities. It does not purport to be all-inclusive or to contain all
of the information that a prospective investor may require to make a full
analysis of the transaction. All amounts are approximate and subject to change.
The information contained herein supersedes information contained in any prior
information term sheet for this transaction. In addition, the information
contained herein may be superseded by information contained in term sheets
circulated after the date hereof and is qualified in its entirety by information
contained in the Prospectus Supplement for this transaction. An offering may
only be made through the delivery of a Prospectus Supplement and the related
Prospectus.
EXPECTED INITIAL MORTGAGE LOANS
COLLATERAL CHARACTERISTICS
(HELOCS AND CLOSED-END LOANS COMBINED)
Wtd. Avg Max Min
-------- --- ---
Balance: $34,516 $238,527 $0
WAC: 8.98% 14.25% 5.875%
FICO: 708 815 508
Margin: 2.69% 6.00% 0.25%
WAM: 238 months 300 months 172 months
CLTV: 86.91% 100% 4%
Seasoning: 2.9 months 8 months 0 months
Parameter % Geographic %
- --------- - ---------- -
Balloon: 0% California: 87.9%
Fully Am: 18.2% Washington: 3.2%
Oregon: 2.6%
5 Yr Draw: 31.0%
15 Yr Draw: 50.8% Total States: 11
2nd Lien: 100%
Single Family: 83%
2-4 Family: 2%
Condo: 4%
PUD: 11%
SEE ATTACHED COLLATERAL TERM SHEETS.
THE INFORMATION CONTAINED HEREIN WILL BE SUPERSEDED BY THE DESCRIPTION OF THE
COLLATERAL IN THE PROSPECTUS SUPPLEMENT.
2
<PAGE>
This Preliminary Term Sheet is provided for information purposes only, and does
not constitute an offer to sell, nor a solicitation of an offer to buy, the
referenced securities. It does not purport to be all-inclusive or to contain all
of the information that a prospective investor may require to make a full
analysis of the transaction. All amounts are approximate and subject to change.
The information contained herein supersedes information contained in any prior
information term sheet for this transaction. In addition, the information
contained herein may be superseded by information contained in term sheets
circulated after the date hereof and is qualified in its entirety by information
contained in the Prospectus Supplement for this transaction. An offering may
only be made through the delivery of a Prospectus Supplement and the related
Prospectus.
THE SELLER AND SERVICER
Headlands Mortgage Company, a California corporation, is a full service mortgage
banker engaged in the business of originating, acquiring, selling and servicing
residential mortgage loans secured by one- to four-family residential
properties. Headlands was incorporated in California in 1986 and currently is
licensed as a mortgage banker or registered, as appropriate, in 11 states
(including California, Washington, Oregon, and Colorado). As of June 30, 1996,
Headlands had originated over 92,000 loans, totaling over $14 billion dollars
and a master servicing portfolio of over 24,000 loans totaling over $3.5
billion.
THE TRUST
Headlands Home Equity
Loan Trust 1996-1: The Headlands Home Equity Loan Trust (the "Trust") will
consist of one class of Class A Certificates, one class of
Class S Certificates (the "Offered Certificates"), and the
Transferor Interest. The Cut-Off Date Trust Principal
Balance will be equal to $128,158,821.02. The aggregate
undivided interest in the Trust represented by the Offered
Certificates, as of the Closing Date, will represent
approximately 98% of the outstanding principal balances of
the Trust. The remaining undivided interest in the Trust
will be evidenced by the Transferor Interest
(approximately 2% of the outstanding principal balances of
the Trust, as of the Closing Date). The assets of the
Trust will consist of HELOCs (81.8% by dollar amount, as
of the Closing Date) and Closed-End Loans (18.2% by dollar
amount, as of the Closing Date).
Mortgage Loan
Amortization: The Closed-End Loans are 15 year fully amortizing
fixed-rate second lien loans. Approximately 38% of the
HELOCs have 5 year Draw Periods followed by a 10 year
amortization period, while the other 62% have a 15 year
Draw Period followed by a 10 year amortization period.
Each outstanding HELOC principal balance is fixed at the
end of the Draw Period, and then amortized over the
subsequent 10 year period. Each HELOC interest rate
continues to adjust (on the first of each month) over the
life of the loan.
HELOC Interest Rates: 100% Prime-based, monthly re-setting HELOCs. Substantially
all of the HELOCs are teased for three months, at a
current rate of 5.875%, and float thereafter. The weighted
average margin on the HELOCs as of the Cut-off Date is
2.69%, with the margins ranging from 0.25% to 6.00%. All
of the HELOCs have an 18.00% Life Cap, and no Periodic
Caps.
Prepayment Penalties: Neither the HELOCs nor the Closed-End Loans have
prepayment penalties.
Invested Amount: The "Initial Invested Amount" as of the Closing Date will
be equal to the Class A Certificate Principal Balance. On
any Distribution Date thereafter, the "Invested Amount"
will be equal to the Initial Invested Amount less all
principal collections distributed to Class A
Certificateholders (other than Accelerated Principal
Distribution Amounts (defined below)).
THE OFFERED CERTIFICATES
Class A Certificates: The Class A Certificates will initially evidence
approximately 98% of the Cut-Off Date Trust Principal
Balance. The Class A Certificates receive distributions of
principal in the manner described below. The Class A
Certificates will receive interest on each Distribution
Date based on a variable rate described more fully below.
3
<PAGE>
This Preliminary Term Sheet is provided for information purposes only, and does
not constitute an offer to sell, nor a solicitation of an offer to buy, the
referenced securities. It does not purport to be all-inclusive or to contain all
of the information that a prospective investor may require to make a full
analysis of the transaction. All amounts are approximate and subject to change.
The information contained herein supersedes information contained in any prior
information term sheet for this transaction. In addition, the information
contained herein may be superseded by information contained in term sheets
circulated after the date hereof and is qualified in its entirety by information
contained in the Prospectus Supplement for this transaction. An offering may
only be made through the delivery of a Prospectus Supplement and the related
Prospectus.
Class S Certificates: The Class S Certificates will be interest-only ("IO")
certificates which have a notional amount equal to the
outstanding Class A Certificateholder Principal Balance as
of any Distribution Date. The Class S Certificates will
have a fixed rate of interest (subject to limitations
described below), distributed in the manner described
below.
CREDIT ENHANCEMENT
Credit Enhancement: The Class A Certificateholders and the Class S
Certificateholders will have the benefit of the following
credit enhancement;
(a) monthly available excess spread;
(b) the Spread Account (described below)
(c) the Overcollateralization Amount (described
below);
(d) the Transferor Interest (described below);
(e) the Policy (described below).
Spread Account: Pursuant to the Insurance Agreement, a spread account will
be created to be held by the Trustee, for the benefit of
the Class A Certificateholders, the Class S
Certificateholders and the Certificate Insurer. The spread
account will initially be funded with a deposit equal to
$1,281,588.21, or 1.00% of the Cut-Off Date Trust
Principal Balance. After building any required
Overcollateraliztion Required Amounts (as defined below),
the Spread Account Balance will grow by an additional
$640,794.11, up to a targeted balance of $1,922,382.31, or
1.50% of the Cut-Off Date Trust Principal Balance (the
"Required Spread Account Balance"). On each Distribution
Date, the Spread Account will be funded with collections
(to the extent available) up to the Required Spread
Account Balance.
Over -
collateralization: Although it is not anticipated that any distribution of
principal collections will be made to the Class A
Certificateholders during the Funding Period, Class A
Certificateholders will be entitled to receive
distributions of excess interest collections as principal
("Accelerated Principal Distribution Amounts") up to
$1,922,382.31, or 1.50% of the Cut-Off Date Trust
Principal Balance, the "Required Overcollateralization
Amount". This distribution of interest as principal will
have the effect of accelerating the Class A Certificates
relative to the underlying Trust assets. On any
Distribution Date, the Overcollateralization Amount will
be the Amount by which the Invested Amount exceeds the
Class A Certificate Balance. On any Distribution Date in
which the Invested Amount does not exceed the Class A
Certificateholder balance by the Required
Overcollateralization Amount, excess interest collections
will be distributed as principal to the Class A
Certificateholders to increase the Overcollateralization
Amount to the Required Overcollateralization Amount.
Transferor Interest: The Transferor will retain approximately 2% of the Cut-Off
Date Trust Principal Balance, evidenced by the Transferor
Interest. The Transferor Interest will be provide credit
support to the Class A Certificateholders and the Class S
Certificateholders, should excess spread, the Spread
Account and the Overcollateralization Amount be
insufficient.
The Policy: Capital Markets Assurance Corporation will issue a
certificate insurance policy which will guarantee timely
interest and ultimate repayment of principal to the Class
A Certificateholders and timely interest to the Class S
Certificateholders.
4
<PAGE>
This Preliminary Term Sheet is provided for information purposes only, and does
not constitute an offer to sell, nor a solicitation of an offer to buy, the
referenced securities. It does not purport to be all-inclusive or to contain all
of the information that a prospective investor may require to make a full
analysis of the transaction. All amounts are approximate and subject to change.
The information contained herein supersedes information contained in any prior
information term sheet for this transaction. In addition, the information
contained herein may be superseded by information contained in term sheets
circulated after the date hereof and is qualified in its entirety by information
contained in the Prospectus Supplement for this transaction. An offering may
only be made through the delivery of a Prospectus Supplement and the related
Prospectus.
DISTRIBUTIONS OF PRINCIPAL
Funding Period: The Funding Period will begin on the Closing Date and
continue until the Distribution Date occurring in January
1998. During the Funding Period, all principal collections
will be reinvested in (a) additional draws on existing
Trust HELOCs, (b) newly originated HELOCs, or in (c) newly
originated Closed-End Loans to be sold to the Trust. If
cash remains after applying principal collections received
during the calendar month occurring prior to the related
Distribution Date (each a "Collection Period") to clauses
(a), (b) and (c) above, those moneys will be distributed
to Class A Certificateholders on each respective
Distribution Date during the Funding Period. As long as
amounts created under clauses (a), (b) and (c) above equal
or exceed principal collected during the Funding Period,
no distributions of principal collections will be made to
the Class A Certificateholders, unless a Rapid
Amortization Event has occurred (as defined below).
Managed Am. Period: The Managed Amortization Period will begin on the
Distribution Date occurring in January 1998 and end on the
Distribution Date occurring in December 2002. During the
Managed Amortization Period, the Class A
Certificateholders will receive the lesser of (a) the
Maximum Principal Payment (as defined herein) and (b) the
Alternative Principal Payment (as defined herein). The
"Maximum Principal Payment" is equal to the Investor Fixed
Allocation Percentage (defined below) multiplied by
principal collections for such Distribution Date. The
"Alternate Principal Payment" is equal to the amount (not
less than zero) of principal collection for such
Distribution Date less the aggregate of additional draws
on existing Trust HELOCs created during such Distribution
Date.
Rapid Am. Period: Commencing no later than the Distribution Date occurring
inJanuary 2003 (or earlier, upon the occurrence of a Rapid
Amortization Event (as described below)), Class A
Certificateholders will receive the lesser of (a) the
Maximum Principal Payment and (b) the then outstanding
Class A Certificateholder balance.
Investor Fixed
Allocation %: 98%.
Rapid Am. Events: Any of the following events described below:
(i) failure of Transferor to remit funds required
under the Pooling and Servicing Agreement or the
Insurance Agreement (collectively, the Agreements");
(ii) failure of Transferor to observe or perform in
any material respect any other covenants of either
Agreement which continues unremedied for 60 days
after written notice;
(iii) any breach of representation and warranty made
by the Transferor in either Agreement which adversely
affects the Certificateholders or the Certificate
Insurer and is not repurchased in accordance with the
provisions of the Pooling and Servicing Agreement
within 60 days after written notification of such
breach;
(iv) the bankruptcy, insolvency or receivership of
the Transferor or any subsidiary or affiliate of the
Transferor related to the Trust;
(v) the Trust becomes subject to regulation under
the Investment Company Act of 1940;
5
<PAGE>
This Preliminary Term Sheet is provided for information purposes only, and does
not constitute an offer to sell, nor a solicitation of an offer to buy, the
referenced securities. It does not purport to be all-inclusive or to contain all
of the information that a prospective investor may require to make a full
analysis of the transaction. All amounts are approximate and subject to change.
The information contained herein supersedes information contained in any prior
information term sheet for this transaction. In addition, the information
contained herein may be superseded by information contained in term sheets
circulated after the date hereof and is qualified in its entirety by information
contained in the Prospectus Supplement for this transaction. An offering may
only be made through the delivery of a Prospectus Supplement and the related
Prospectus.
(vi) the aggregate of all draws under the Insurance
Policy exceeds 1% of the Cut-Off Date Pool Balance.
DISTRIBUTIONS OF INTEREST
Interest
Distributions: Interest will be allocated to the Class A
Certificateholders and the Class S Certificateholders,
sequentially, from the Investor Floating Allocation
Percentage of interest collections received with respect
to such Distribution Date. The "Investor Floating
Allocation Percentage" for any Distribution Date is the
percentage equivalent of a fraction determined by dividing
(a) the Invested Amount as of the close of business on the
prior Distribution Date (or, in the case of the first
Distribution Date, as of the Closing Date) and (b) the sum
of (x) the pool balance as of the beginning of the related
collection period and (y) the amount of principal
collected during the related Collection Period. The
remainder of the interest received during the Collection
Period will be allocated to the Transferor Interest.
Interest will be distributed on the Class A Certificates
at a rate equal to the lesser of (a) One Month LIBOR plus
[17 to 20] basis points [0.17% to 0.20%], based on the
actual number of days elapsed since the prior Distribution
Date (or in the case of the Initial Distribution Date,
from the Closing Date) and (b) the weighted average net
available funds rate. Interest will be distributed on the
Class S Certificates at a rate equal to the lesser of (a)
1.00% and (b) the weighted average net available funds
rate. The "weighted average net available funds rate" is
an amount equal to the weighted average of the Loan Rates
minus (i) the Servicing Fee, (ii) the Insurance Premium
Fee and (iii) the Trustee Fee (the three fees in total,
expected to be approximately [0.71]%). Should Class A
Certificateholders or Class S Certificateholders receive
an interest amount based on clause (b) above (an
"Available Funds Shortfall"), future remaining interest
amounts to be distributed to the Transferor Interest will
first be allocated to Available Funds Shortfall Amounts
outstanding and unpaid, with accrued interest at the
applicable Class A or Class S Certificateholder rate.
Class A
Decrement Tables: See attached.
Collateral
Term Sheets: See attached.
6
<PAGE>
This Preliminary Term Sheet is provided for information purposes only, and does
not constitute an offer to sell, nor a solicitation of an offer to buy, the
referenced securities. It does not purport to be all-inclusive or to contain all
of the information that a prospective investor may require to make a full
analysis of the transaction. All amounts are approximate and subject to change.
The information contained herein supersedes information contained in any prior
information term sheet for this transaction. In addition, the information
contained herein may be superseded by information contained in term sheets
circulated after the date hereof and is qualified in its entirety by information
contained in the Prospectus Supplement for this transaction. An offering may
only be made through the delivery of a Prospectus Supplement and the related
Prospectus.
HEADLANDS MORTGAGE COMPANY
DELINQUENCY AND FORECLOSURE EXPERIENCE
(Loss Info coming)
The following tables set forth information relating to the delinquency and
foreclosure experience of Headlands for its servicing portfolio of home equity
loans (including home equity loans serviced for others) as of the dates or for
the periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995 NOVEMBER 31, 1996
Loans % of Portfolio Loans % of Portfolio Loans % of Portfolio
----- -------------- ----- -------------- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
Total $ Amount (1) $ 5,347 $ 4,156 $ 4,231
Total Number 29,076 100% 27,261 100% 32,623 100%
Delinquencies
30 - 59 Days 327 1.1% 283 1.0% 426 1.3%
60 - 89 Days 49 0.2% 62 0.2% 68 0.2%
90 Days or more 50 0.2% 47 0.2% 13 0.0%
- --------------- ---- ---- ---- ---- ---- ----
Total 426 1.5% 392 1.4% 507 1.6%
Foreclosures Pending 102 0.4% 146 0.5% 198 0.6%
</TABLE>
(1) Dollar amount in millions; Total Portfolio has been reduced by the number
of loans pending servicing release or loans in foreclosure.
(2) The past due period is based on the actual number of days that a payment is
contractually past due. A loan as to which a monthly payment was due 30-59
days prior to the reporting period is considered 30-59 days past due, etc.
Excludes foreclosures.
7
<PAGE>
THE ATTACHED MATERIALS ARE PRIVILEGED AND CONFIDENTIAL AND INTENDED FOR
USE BY THE ADDRESSEE ONLY. THESE MATERIALS HAVE BEEN PREPARED BY GREENWICH
CAPITAL MARKETS, INC. IN RELIANCE ON INFORMATION FURNISHED BY OTHER PARTIES.
THEY MAY NOT BE PROVIDED TO ANY THIRD PARTY OTHER THAN THE ADDRESSEEOS LEGAL,
TAX, FINANCIAL AND/OR ACCOUNTING ADVISORS FOR THE PURPOSES OF EVALUATING SAID
MATERIAL.
ALTHOUGH A REGISTRATION STATEMENT (INCLUDING THE PROSPECTUS) RELATING TO THE
SECURITIES DISCUSSED IN THIS COMMUNICATION HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION AND IS EFFECTIVE, THE FINAL PROSPECTUS SUPPLEMENT
RELATING TO THE SECURITIES DISCUSSED IN THIS COMMUNICATION HAS NOT BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS COMMUNICATION SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THE SECURITIES DISCUSSED IN THIS COMMUNICATION IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTIVE PURCHASERS ARE REFERRED TO THE FINAL PROSPECTUS SUPPLEMENT RELATING
TO THE SECURITIES DISCUSSED IN THIS COMMUNICATION FOR A DEFINITIVE DESCRIPTION
OF ANY MATTER DISCUSSED HEREIN. A FINAL PROSPECTUS AND PROSPECTUS SUPPLEMENT
MAY BE OBTAINED WHEN AVAILABLE BY CONTACTING GCMOS TRADING DESK AT (203) 625-
6160.
PLEASE BE ADVISED THAT THESE SECURITIES MAY NOT BE APPROPRIATE FOR ALL
INVESTORS. INVESTORS SHOULD MAKE EVERY EFFORT TO CONSIDER THE RISKS OF THESE
SECURITIES.
IF YOU HAVE RECEIVED THIS COMMUNICATION IN ERROR, PLEASE NOTIFY THE SENDING
PARTY IMMEDIATELY BY TELEPHONE AND SEND THE ORIGINAL TO SUCH PARTY BY MAIL.
<PAGE>
!DESCRIPTION! Headlands Home Equity Loan Trust 1996-1
!TITLE! Price-Yield Sensitivity Report
!TRANCHE! S
!SETT_DATE! 12/30/96
!ASSUMPTIONS_START!
Notional Balance| $125,595,645
Cut-off Date| 12/01/96
Next Payment Date| 01/15/97
Call| Yes
Accrued Interest Days| 29
Draw Rate| 18% CPR
!ASSUMPTIONS_END!
!TABLE_DIVIDER_YES!
!COL_TITLE_START!
<TABLE>
<CAPTION>
Flat|Price 0%_CPR 10%_CPR 20%_CPR 25%_CPR 30%_CPR 35%_CPR 40%_CPR
!COL_TITLE_END!
-----------------------------------------------------------------------------------------------------------------------------
!TABLE_START!
<S> <C> <C> <C> <C> <C> <C> <C>
3.474092 28.857 26.193 21.649 16.626 11.387 5.880 -0.023
3.536592 28.284 25.544 20.973 15.937 10.683 5.159 -0.766
3.599092 27.731 24.916 20.317 15.269 10.000 4.459 -1.488
3.661592 27.196 24.306 19.681 14.620 9.338 3.781 -2.187
!TABLE_END!
</TABLE>
<PAGE>
Percentage of Original Certificate Principal Balance -
Amortization Schedule(1)(2)
Conditional Prepayment Rate (% CPR)
-----------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Date 0% 10% 20% 25% 30% 35% 40%
---- -- --- --- --- --- --- ---
Initial Percentage ........... 100% 100% 100% 100% 100% 100% 100%
12/15/97 ........... 98% 98% 98% 98% 98% 98% 98%
12/15/98 ........... 98% 98% 93% 88% 70% 76% 70%
12/15/99 ........... 98% 98% 89% 78% 50% 59% 50%
12/15/2000 ........... 97% 98% 85% 70% 36% 46% 36%
12/15/2001 ........... 96% 96% 81% 63% 26% 36% 26%
12/15/2002 ........... 95% 95% 78% 57% 18% 28% 18%
12/15/2003 ........... 94% 82% 61% 41% 0% 17% 0%
12/15/2004 ........... 93% 69% 44% 26% 0% 0% 0%
12/15/2005 ........... 92% 56% 27% 13% 0% 0% 0%
12/15/2006 ........... 91% 44% 11% 0% 0% 0% 0%
12/15/2007 ........... 89% 31% 0% 0% 0% 0% 0%
12/15/2008 ........... 87% 19% 0% 0% 0% 0% 0%
12/15/2009 ........... 85% 0% 0% O% 0% 0% 0%
12/15/2010 ........... 83% 0% 0% 0% 0% 0% 0%
12/15/2011 ........... 42% 0% 0% 0% 0% 0% 0%
12/15/2012 ........... 42% 0% 0% 0% 0% 0% 0%
12/15/2013 ........... 42% 0% 0% 0% 0% 0% 0%
12/15/2014 ........... 42% 0% 0% 0% 0% 0% 0%
12/15/2015 ........... 42% 0% 0% 0% 0% 0% 0%
12/15/2016 ........... 42% 0% 0% 0% 0% 0% 0%
12/15/2017 ........... 42% 0% 0% 0% 0% 0% 0%
12/15/2018 ........... 41% 0% 0% 0% 0% 0% 0%
12/15/2019 ........... 41% 0% 0% 0% 0% 0% 0%
12/15/2020 ........... 41% 0% 0% 0% 0% 0% 0%
12/15/2021 ........... 0% 0% 0% 0% 0% 0% 0%
12/15/2022 ........... 0% 0% 0% 0% 0% 0% 0%
Weighted Average Life
Years 17.81 9.34 7.13 5.80 3.51 4.09 3.51
</TABLE>
(1) Assumes (i) that an optional termination is exercised when the outstanding
Certificate Principal Balance is less than or equal to 10% of the Original
Certificate Principal Balance and (ii) a constant draw rate of 18%.
(2) All percentages are rounded to the nearest 1%.
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION EXHIBIT 99.2
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
<PAGE>
Capital Markets Assurance Corporation
Balance sheets
(Dollars in thousands)
ASSETS
------
<TABLE>
<CAPTION>
September 30, 1996 December 31,1995
(Unaudited)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS:
Bonds at fair value (amortized cost $283,996 at
September 30, 1996 and $210,651 at December 31,
1995) $ 284,595 215,706
Short-term investments (at amortized cost which
approximates fair value) 23,081 68,646
- ---------------------------------------------------------------------------------------------
Total investments 307,676 284,352
=============================================================================================
Cash 514 344
Accrued investment income 3,604 3,136
Deferred acquisition costs 42,350 35,162
Premiums receivable 4,068 3,540
Prepaid reinsurance 17,801 13,171
Other assets 4,194 3,428
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $ 380,207 343,133
=============================================================================================
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
LIABILITIES:
Unearned premiums $ 61,410 45,767
Reserve for losses and loss adjustment expenses 9,602 6,548
Ceded reinsurance 2,455 2,469
Accounts payable and other accrued expenses 12,446 10,844
Current income taxes - 136
Deferred income taxes 13,608 11,303
- ---------------------------------------------------------------------------------------------
Total liabilities 99,521 77,067
- ---------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY:
Common stock 15,000 15,000
Additional paid-in capital 208,475 205,808
Unrealized appreciation on investments, net of tax 389 3,286
Retained earnings 56,822 41,972
- ---------------------------------------------------------------------------------------------
Total stockholder's equity 280,686 266,066
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 380,207 343,133
=============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30 September 30
1996 1995 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Direct premiums written $ 17,206 12,204 49,983 45,042
Assumed premiums written 8 102 1,032 925
Ceded premiums written (4,129) (6,188) (11,142) (11,834)
- -------------------------------------------------------------------------------------
Net premiums written 13,085 6,118 39,873 34,133
(Increase) decrease in unearned premiums (3,042) 1,193 (11,014) (12,418)
- -------------------------------------------------------------------------------------
Net premiums earned 10,043 7,311 28,859 21,715
Net investment income 4,307 3,013 12,296 8,606
Net realized capital gains (loss) (57) 364 111 449
Other income 25 14 104 38
- -------------------------------------------------------------------------------------
Total revenues 14,318 10,702 41,370 30,808
- -------------------------------------------------------------------------------------
EXPENSES:
Losses and loss adjustment expenses 1,248 821 3,432 2,279
Underwriting and operating expenses 3,780 2,563 11,142 9,939
Policy acquisition costs 2,126 2,022 6,249 5,481
- -------------------------------------------------------------------------------------
Total expenses 7,154 5,406 20,823 17,699
- -------------------------------------------------------------------------------------
Income before income taxes 7,164 5,296 20,547 13,109
- -------------------------------------------------------------------------------------
INCOME TAXES:
Current federal income tax 1,027 231 3,008 895
Deferred federal income tax 718 1,280 2,689 2,256
- -------------------------------------------------------------------------------------
Total income taxes 1,745 1,511 5,697 3,151
- -------------------------------------------------------------------------------------
NET INCOME $ 5,419 3,785 14,850 9,958
=====================================================================================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
- ------------------------------------------------------------------------------
<S> <C>
COMMON STOCK:
Balance at beginning of period $ 15,000
- ------------------------------------------------------------------------------
Balance at end of period 15,000
- ------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 205,808
Capital contribution 2,667
- ------------------------------------------------------------------------------
Balance at end of period 208,475
- ------------------------------------------------------------------------------
UNREALIZED (DEPRECIATION) APPRECIATION
ON INVESTMENTS, NET OF TAX:
Balance at beginning of period 3,286
Unrealized depreciation on investments (2,897)
- ------------------------------------------------------------------------------
Balance at end of period 389
- ------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of period 41,972
Net income 14,850
- ------------------------------------------------------------------------------
Balance at end of period 56,822
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $ 280,686
==============================================================================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,850 9,958
- --------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Reserve for losses and loss adjustment expenses 3,054 1,474
Unearned premiums 15,643 17,982
Deferred acquisition costs (7,188) (6,981)
Premiums receivable (528) 81
Accrued investment income (468) 63
Income taxes payable 2,341 2,447
Net realized capital gains (111) (449)
Accounts payable and other accrued expenses 5,445 3,456
Prepaid reinsurance (4,630) (5,564)
Other, net (381) 2,253
- --------------------------------------------------------------------------------------------
Total adjustments 13,177 14,762
- --------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,027 24,720
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (154,308) (109,235)
Proceeds from sale of investments 35,388 38,577
Proceeds from maturities of investments 91,063 37,361
- --------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (27,857) (33,297)
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Paid-in capital - 9,000
- --------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES - 9,000
- --------------------------------------------------------------------------------------------
Net increase in cash 170 423
Cash balance at beginning of period 344 85
- --------------------------------------------------------------------------------------------
CASH BALANCE AT END OF PERIOD $ 514 508
============================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Income taxes paid $ 3,225 650
Tax and loss bonds purchased $ 131 54
============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. BACKGROUND
Capital Markets Assurance Corporation ("CapMAC") is a New York-domiciled
monoline stock insurance company which engages only in the business of
financial guaranty and surety insurance. CapMAC is a wholly-owned
subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC is licensed in all
50 states in addition to the District of Columbia, the Commonwealth of
Puerto Rico and the territory of Guam. CapMAC insures structured asset-
backed, corporate, municipal and other financial obligations in the U.S.
and international capital markets. CapMAC also provides financial guaranty
reinsurance for structured asset-backed, corporate, municipal and other
financial obligations written by other major insurance companies.
CapMAC's claims-paying ability is rated triple-A by Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, Duff & Phelps Credit
Rating Co., and Nippon Investors Service, Inc., a Japanese rating agency.
Such ratings reflect only the views of the respective rating agencies, are
not recommendations to buy, sell or hold securities and are subject to
revision or withdrawal at any time by such rating agencies.
2. BASIS OF PRESENTATION
CapMAC's unaudited interim financial statements have been prepared on the
basis of generally accepted accounting principles and, in the opinion of
management, reflect all adjustments necessary for a fair presentation of
the CapMAC's financial condition, results of operations and cash flows for
the periods presented. The results of operations for the nine months ended
September 30, 1996 may not be indicative of the results that may be
expected for the full year ending December 31, 1996. These financial
statements and notes should be read in conjunction with the financial
statements and notes included in the audited financial statements of
CapMAC as of December 31, 1995 and 1994, and for each of the years in the
three-year period ended December 31, 1995.
3. RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the
current period presentation.
F-6
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-7
<PAGE>
[LOGO] KPMG PEAT MARWICK LLP
345 Park Avenue
New York, NY 10154
Independent Auditors' Report
----------------------------
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1995 and 1994 and the related statements of
income, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Markets Assurance
Corporation as of December 31, 1995 and 1994 and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in note 2, the Company changed its method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," at December 31, 1993.
/s/ KPMG Peat Marwick LLP
January 25, 1996
F-8
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands)
ASSETS
------
<TABLE>
<CAPTION>
December 31 December 31
1995 1994
<S> <C> <C>
INVESTMENTS:
Bonds at fair value (amortized cost $210,651 at December 31,
1995 and $178,882 at December 31, 1994) $ 215,706 172,016
- -----------------------------------------------------------------------------------------------
Short-term investments (at amortized cost which approximates
fair value) 68,646 2,083
Mutual funds at fair value (cost $16,434 at December 31, 1994) - 14,969
- -----------------------------------------------------------------------------------------------
Total investments 284,352 189,068
- -----------------------------------------------------------------------------------------------
Cash 344 85
Accrued investment income 3,136 2,746
Deferred acquisition costs 35,162 24,860
Premiums receivable 3,540 3,379
Prepaid reinsurance 13,171 5,551
Other assets 3,428 3,754
- -----------------------------------------------------------------------------------------------
Total assets $ 343,133 229,443
===============================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
LIABILITIES:
Unearned premiums $ 45,767 25,905
Reserve for losses and loss adjustment expenses 6,548 5,191
Ceded reinsurance 2,469 1,497
Accounts payable and other accrued expenses 10,844 10,372
Current income taxes 136 -
Deferred income taxes 11,303 3,599
- -----------------------------------------------------------------------------------------------
Total liabilities 77,067 46,564
- -----------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY:
Common stock 15,000 15,000
Additional paid-in capital 205,808 146,808
Unrealized appreciation (depreciation) on investments,
net of tax 3,286 (5,499)
Retained earnings 41,972 26,570
- -----------------------------------------------------------------------------------------------
Total stockholder's equity 266,066 182,879
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 343,133 229,443
===============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31,1994 December 31, 1993
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
REVENUES:
Direct premiums written $ 56,541 43,598 24,491
Assumed premiums written 935 1,064 403
Ceded premiums written (15,992) (11,069) (3,586)
- ---------------------------------------------------------------------------------------------
Net premiums written 41,484 33,593 21,308
Increase in unearned premiums (12,242) (10,490) (3,825)
- ---------------------------------------------------------------------------------------------
Net premiums earned 29,242 23,103 17,483
Net investment income 11,953 10,072 10,010
Net realized capital gains 1,301 92 1,544
Other income 2,273 120 354
- ---------------------------------------------------------------------------------------------
Total revenues 44,769 33,387 29,391
- ---------------------------------------------------------------------------------------------
EXPENSES:
Losses and loss adjustment expenses 3,141 1,429 902
Underwriting and operating expenses 13,808 11,833 11,470
Policy acquisition costs 7,203 4,529 2,663
- ---------------------------------------------------------------------------------------------
Total expenses 24,152 17,791 15,035
- ---------------------------------------------------------------------------------------------
Income before income taxes 20,617 15,596 14,356
- ---------------------------------------------------------------------------------------------
INCOME TAXES:
Current income tax 2,113 865 1,002
Deferred income tax 3,102 2,843 2,724
- ---------------------------------------------------------------------------------------------
Total income taxes 5,215 3,708 3,726
- ---------------------------------------------------------------------------------------------
NET INCOME $ 15,402 11,888 10,630
=============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31,1995 December 31, 1994 December 31, 1993
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of period $ 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------
Balance at end of period 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 146,808 146,808 146,808
Paid-in capital 59,000 - -
- ---------------------------------------------------------------------------------------------
Balance at end of period 205,808 146,808 146,808
- ---------------------------------------------------------------------------------------------
UNREALIZED (DEPRECIATION) APPRECIATION
ON INVESTMENTS, NET OF TAX:
Balance at beginning of period (5,499) 3,600 -
Unrealized appreciation (depreciation) on
investments 8,785 (9,099) 3,600
- ---------------------------------------------------------------------------------------------
Balance at end of period 3,286 (5,499) 3,600
- ---------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of period 26,570 14,682 4,052
Net income 15,402 11,888 10,630
- ---------------------------------------------------------------------------------------------
Balance at end of period 41,972 26,570 14,682
- ---------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $ 266,066 182,879 180,090
=============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLAR IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,402 11,888 10,630
- ----------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Reserve for losses and loss adjustment
expenses 1,357 1,429 902
Unearned premiums 19,862 15,843 4,024
Deferred acquisition costs (10,302) (9,611) (9,815)
Premiums receivable (161) (2,103) (432)
Accrued investment income (390) (848) (110)
Income taxes payable 3,621 2,611 2,872
Net realized capital gains (1,301) (92) (1,544)
Accounts payable and other accrued
expenses 472 3,726 1,079
Prepaid reinsurance (7,620) (5,352) (199)
Other, net 992 689 1,201
- ----------------------------------------------------------------------------------------------
Total adjustments 6,530 6,292 (2,022)
- ----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,932 18,180 8,608
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (158,830) (77,980) (139,061)
Proceeds from sales of investments 49,354 39,967 24,395
Proceeds from maturities of investments 28,803 19,665 106,042
- ----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (80,673) (18,348) (8,624)
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 59,000 - -
- ----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 59,000 - -
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash 259 (168) (16)
Cash balance at beginning of period 85 253 269
- ----------------------------------------------------------------------------------------------
CASH BALANCE AT END OF PERIOD $ 344 85 253
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid $ 1,450 1,063 833
==============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
December 31, 1995 and 1994
1) BACKGROUND
Capital Markets Assurance Corporation ("CapMAC" or "the Company") is a New
York-domiciled monoline stock insurance company which engages only in the
business of financial guarantee and surety insurance. CapMAC is a wholly
owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC is licensed
in all 50 states in addition to the District of Columbia, the Commonwealth
of Puerto Rico and the territory of Guam. CapMAC insures structured asset-
backed, corporate, municipal and other financial obligations in the U.S.
and international capital markets. CapMAC also provides financial
guarantee reinsurance for structured asset-backed, corporate, municipal
and other financial obligations written by other major insurance
companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Group
("S&P"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff & Phelps"), and
"AAA" by Nippon Investors Service, Inc., a Japanese rating agency. Such
ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to
revision or withdrawal at any time by such rating agencies.
2) SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
a) BASIS OF PRESENTATION
The accompanying financial statements are prepared on the basis of
generally accepted accounting principles ("GAAP"). Such accounting
principles differ from statutory reporting practices used by insurance
companies in reporting to state regulatory authorities.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Management believes
the most significant estimates relate to deferred acquisition costs,
reserve for losses and loss adjustment expenses and disclosures of
financial guarantees outstanding. Actual results could differ from
those estimates.
b) INVESTMENTS
At December 31, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS No.
115, the Company can classify its debt and marketable equity
securities in one of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held principally
for the purpose of selling them in the near term. Held-to-maturity
securities are those securities in which the Company has the ability
and intent to hold the securities until maturity. All other securities
not included in trading or held-to-maturity are classified as
available-for-sale. As of December 31, 1995 and 1994, all of the
Company's securities have been classified as available-for-sale.
F-13
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Available-for-sale securities are recorded at fair value. Fair value is
based upon quoted market prices. Unrealized holding gains and losses, net
of the related tax effect, on available-for-sale securities are excluded
from earnings and are reported as a separate component of stockholder's
equity until realized. Transfers of securities between categories are
recorded at fair value at the date of transfer.
A decline in the fair value of any available-for-sale security below cost
that is deemed other than temporary is charged to earnings resulting in
the establishment of a new cost basis for the security.
Short-term investments are those investments having a maturity of less
than one year at purchase date. Short-term investments are carried at
amortized cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned. Realized
gains and losses are included in earnings and are derived using the FIFO
(first-in, first-out) method for determining the cost of securities sold.
c) REVENUE RECOGNITION
Premiums which are payable monthly to CapMAC are reflected in income when
due, net of amounts payable to reinsurers. Premiums which are payable
quarterly, semi-annually or annually are reflected in income, net of
amounts payable to reinsurers, on an equal monthly basis over the
corresponding policy term. Premiums that are collected as a single premium
at the inception of the policy and have a term longer than one year are
earned, net of amounts payable to reinsurers, by allocating premium to
each bond maturity based on the principal amount and earning it straight-
line over the term of each bond maturity. For the year ended December 31,
1995, 91% of net premiums earned were attributable to premiums payable in
installments and 9% were attributable to premiums collected on an up-front
basis.
d) DEFERRED ACQUISITION COSTS
Certain costs incurred by CapMAC, which vary with and are primarily
related to the production of new business, are deferred. These costs
include direct and indirect expenses related to underwriting, marketing
and policy issuance, rating agency fees and premium taxes. The deferred
acquisition costs are amortized over the period in proportion to the
related premium earnings. The actual amount of premium earnings may differ
from projections due to various factors such as renewal or early
termination of insurance contracts or different run-off patterns of
exposure resulting in a corresponding change in the amortization pattern
of the deferred acquisition costs.
e) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists of a
Supplemental Loss Reserve ("SLR") and a case basis loss reserve. The SLR
is established based on expected levels of defaults resulting from credit
failures on currently insured issues. This SLR is based on estimates of
the portion of earned premiums required to cover those claims.
F-14
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
A case basis loss reserve is established for insured obligations when, in
the judgement of management, a default in the timely payment of debt
service is imminent. For defaults considered temporary, a case basis loss
reserve is established in an amount equal to the present value of the
anticipated defaulted debt service payments over the expected period of
default. If the default is judged not to be temporary, the present value
of all remaining defaulted debt service payments is recorded as a case
basis loss reserve. Anticipated salvage recoveries are considered in
establishing case basis loss reserves when such amounts are reasonably
estimable.
Management believes that the current level of reserves is adequate to
cover the estimated liability for claims and the related adjustment
expenses with respect to financial guaranties issued by CapMAC. The
establishment of the appropriate level of loss reserves is an inherently
uncertain process involving numerous estimates and subjective judgments by
management, and therefore there can be no assurance that losses in
CapMAC's insured portfolio will not exceed the loss reserves.
f) DEPRECIATION
Leasehold improvements, furniture and fixtures are being depreciated over
the lease term or useful life, whichever is shorter, using the straight-
line method.
g) INCOME TAXES
Deferred income taxes are provided with respect to temporary differences
between the financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences
are expected to reverse.
h) RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year presentation.
F-15
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
3) INSURED PORTFOLIO
At December 31, 1995 and 1994, the principal amount of financial
obligations insured by CapMAC was $16.9 billion and $11.6 billion,
respectively, and net of reinsurance (net principal outstanding), was
$12.6 billion and $9.4 billion, respectively, with a weighted average life
of 6.0 years and 5.0 years, respectively. CapMAC's insured portfolio was
broadly diversified by geographic distribution and type of insured
obligations, with no single insured obligation in excess of statutory
single risk limits, after giving effect to any reinsurance and collateral,
which are a function of CapMAC's statutory qualified capital (the sum of
statutory capital and surplus and mandatory contingency reserve). At
December 31, 1995 and 1994, the statutory qualified capital was
approximately $240 million and $170 million, respectively.
<TABLE>
<CAPTION>
Net Principal Outstanding
December 31, 1995 December 31, 1994
--------------------- --------------------
Type of Obligations Insured ($ in millions) Amount % Amount %
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer receivables $ 6,959 55.1 $4,740 50.4
Trade and other corporate
obligations 4,912 38.9 4,039 43.0
Municipal/government obligations 757 6.0 618 6.6
- ------------------------------------------------------------------------------------------
TOTAL $12,628 100.0 $9,397 100.0
==========================================================================================
</TABLE>
At December 31, 1995, approximately 85% of CapMAC's insured portfolio was
comprised of structured asset-backed transactions. Under these structures,
a pool of assets covering at least 100% of the principal amount guaranteed
under its insurance contract is sold or pledged to a special purpose
bankruptcy remote entity. CapMAC's primary risk from such insurance
contracts is the impairment of cash flows due to delinquency or loss on
the underlying assets. CapMAC, therefore, evaluates all the factors
affecting past and future asset performance by studying historical data on
losses, delinquencies and recoveries of the underlying assets. Each
transaction is reviewed to ensure that an appropriate legal structure is
used to protect against the bankruptcy risk of the originator of the
assets. Along with the legal structure, an additional level of first loss
protection is also created to protect against losses due to credit or
dilution. This first level of loss protection is usually available from
reserve funds, excess cash flows, overcollateralization, or recourse to a
third party. The level of first loss protection depends upon the
historical losses and dilution of the underlying assets, but is typically
several times the normal historical loss experience for the underlying
type of assets.
During 1995, the Company sold without recourse its interest in potential
cash flows from transactions included in its insured portfolio and
recognized $2,200,000 of income which has been included in other income in
the accompanying financial statements.
The following entities each accounted for, through referrals and
otherwise, 10% or more of total revenues for each of the periods
presented:
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
- -------------------- -------------------- -------------------------
% of % of % of
Name Revenues Name Revenues Name Revenues
- -------------------- -------------------- -------------------------
Citicorp 15.2 Citicorp 16.3 Citicorp 13.7
Merrill Lynch & Co. 14.1
F-16
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
4) INVESTMENTS
At December 31, 1995 and 1994, all of the Company's investments were
classified as available-for-sale securities. The amortized cost, gross
unrealized gains, gross unrealized losses and estimated fair value for
available-for-sale securities by major security type at December 31, 1995
and 1994 were as follows ($ in thousands):
<TABLE>
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,153 55 - 4,208
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 100,628 313 79 100,862
Obligations of states, municipalities
and political subdivisions 166,010 4,809 82 170,737
Corporate and asset-backed
securities 8,506 45 6 8,545
- --------------------------------------------------------------------------------------
TOTAL $ 279,297 5,222 167 284,352
======================================================================================
<CAPTION>
December 31, 1994
- --------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,295 - 153 4,142
Mortgage-backed securities of U.S.
government instrumentalities and
agencies 40,973 - 2,986 37,987
Obligations of states, municipalities
and political subdivisions 128,856 364 3,994 125,226
Corporate and asset-backed
securities 6,841 15 112 6,744
Mutual Funds 16,434 - 1,465 14,969
- --------------------------------------------------------------------------------------
TOTAL $ 197,399 379 8,710 189,068
======================================================================================
</TABLE>
The Company's investment in mutual funds in 1994 represents an investment in
an open-end management investment company which invests primarily in
investment-grade fixed-income securities denominated in foreign and United
States currencies.
F-17
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The amortized cost and estimated fair value of investments in debt securities
at december 31, 1995 by contractual maturity are shown below ($ in thousands):
<TABLE>
<CAPTION>
December 31, 1995
- ----------------------------------------------------------
Amortized Estimated
Securities Available-for-Sale Cost Fair Value
- ----------------------------------------------------------
<S> <C> <C>
Less than one year to maturity $ 5,569 5,572
One to five years to maturity 37,630 38,553
Five to ten years to maturity 99,567 102,264
Greater than ten years to maturity 35,903 37,101
- ----------------------------------------------------------
Sub-total 178,669 183,490
Mortgage-backed securities 100,628 100,862
- ----------------------------------------------------------
TOTAL $ 279,297 284,352
==========================================================
</TABLE>
Actual maturities may differ from contractual maturities because borrowers may
call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales of investment securities were approximately $49 million,
$40 million and $24 million in 1995, 1994 and 1993, respectively. Gross
realized capital gains of $1,320,000, $714,000 and $1,621,000, and gross
realized capital losses of $19,000, $622,000 and $77,000 were realized on
those sales for the years ended December 31, 1995, 1994 and 1993,
respectively.
Investments include bonds having a fair value of approximately $3,985,000 and
$3,873,000 (amortized cost of $3,970,000 and $4,011,000) which are on deposit
by law.
Investment income is comprised of interest and dividends, net of related
expenses, and is applicable to the following sources:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1995 December 31, 1994 December 31, 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS $11,105 9,193 7,803
SHORT-TERM INVESTMENTS 1,245 484 572
MUTUAL FUNDS (162) 579 1,801
INVESTMENT EXPENSES (235) (184) (166)
- -----------------------------------------------------------------------------------
TOTAL $11,953 10,072 10,010
===================================================================================
</TABLE>
F-18
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The change in unrealized appreciation (depreciation) on available-for-sale
securities is included in a separate component of stockholder's equity as
shown below:
<TABLE>
<CAPTION>
Year Ended Year Ended
$ in thousands December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ (5,499) 3,600
Change in unrealized appreciation (depreciation) 13,386 (13,786)
Income tax effect (4,601) 4,687
- ------------------------------------------------------------------------------------------
Net change 8,785 (9,099)
- ------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $ 3,286 (5,499)
==========================================================================================
</TABLE>
No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 10% of stockholder's equity as of
December 31, 1995.
5) DEFERRED ACQUISITION COSTS
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1995 December 31, 1994 December 31, 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 24,860 15,249 5,434
Additions 17,505 14,140 12,478
Amortization (policy
acquisition costs) (7,203) (4,529) (2,663)
- ----------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $ 35,162 24,860 15,249
==============================================================================================
</TABLE>
6) EMPLOYEE BENEFITS
On June 25, 1992, CapMAC entered into a Service Agreement with CapMAC
Financial Services, Inc. ("CFS"), which was then a newly formed wholly owned
subsidiary of Holdings. Under the Service Agreement, CFS has agreed to
provide various services, including underwriting, reinsurance, data
processing and other services to CapMAC in connection with the operation of
CapMAC's insurance business. CapMAC pays CFS an arm's length fee for
providing such services, but not in excess of CFS's cost for such services.
CFS incurred, on behalf of CapMAC, total compensation expenses, excluding
bonuses, of $13,484,000, $11,081,000 and $9,789,000 in 1995, 1994 and 1993,
respectively.
CFS maintains an incentive compensation plan for its employees. The plan is
an annual discretionary bonus award based upon Holdings' and an individual's
performance. CFS also has a health and welfare plan and a 401(k) plan to
cover substantially all of its employees. CapMAC reimburses CFS for all out-
of-pocket expenses incurred by CFS in providing services to CapMAC,
including awards given under the incentive compensation plan and benefits
provided under the health and welfare plan. For the years ended December 31,
1995, 1994 and 1993, the Company had provided approximately $7,804,000,
$5,253,000 and $3,528,000, respectively, for the annual discretionary bonus
plan.
F-19
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
On June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units ("RSU") at $13.33 a share in respect of certain
deferred compensation. On December 7, 1995, the RSU's were converted to
cash in the amount of approximately $3.7 million, and such officers agreed
to defer receipt of such cash amount in exchange for receiving the same
number of new shares of restricted stock of Holdings as the number of RSU's
such officers previously held. The cash amount will be held by Holdings and
invested in accordance with certain guidelines. Such amount, including the
investment earnings thereon, will be paid to each officer upon the
occurrence of certain events but no later than December, 2000.
7) EMPLOYEE STOCK OWNERSHIP PLAN
On June 25, 1992, Holdings adopted an Employee Stock Ownership Plan
("ESOP") to provide its employees the opportunity to obtain beneficial
interests in the stock of Holdings through a trust (the "ESOP Trust"). The
ESOP Trust purchased 750,000 shares at $13.33 per share of Holdings' stock.
The ESOP Trust financed its purchase of common stock with a loan from
Holdings in the amount of $10 million. The ESOP loan is evidenced by a
promissory note delivered to Holdings. An amount representing unearned
employee compensation, equivalent in value to the unpaid balance of the
ESOP loan, is recorded as a deduction from stockholder's equity
(unallocated ESOP shares).
CFS is required to make contributions to the ESOP Trust, which enables the
ESOP Trust to service its loan to Holdings. The ESOP expense is calculated
using the shares allocated method. Shares are released for allocation to
the participants and held in trust for the employees based upon the ratio
of the current year's principal and interest payment to the sum of
principal and interest payments estimated over the life of the loan. As of
December 31, 1995 approximately 262,800 shares were allocated to the
participants. Compensation expense related to the ESOP was approximately
$2,087,000, $2,086,000 and $1,652,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
8) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists of a case
basis loss reserve and the SLR.
In 1995 CapMAC incurred its first claim on a financial guarantee policy.
Based on its current estimate, the company expects the aggregate amount of
claims and related expenses not to exceed $2.7 million, although no
assurance can be given that such claims and related expenses will not
exceed that amount. Such loss amount was covered through a recovery under a
quota share reinsurance agreement of $0.2 million and a reduction in the
SLR of $2.5 million. The portion of such claims and expenses not covered
under the quota share agreement is being funded through payments to capmac
from the Lureco Trust Account (see note 12).
F-20
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The following is a summary of the activity in the case basis loss reserve
account and the components of the liability for losses and loss adjustment
expenses ($ in thousands):
CASE BASIS LOSS RESERVE:
<TABLE>
<S> <C>
Net balance at January 1, 1995 $ -
- ------------------------------------------------------------------------------
INCURRED RELATED TO:
Current year 2,473
Prior years -
- ------------------------------------------------------------------------------
Total incurred 2,473
- ------------------------------------------------------------------------------
PAID INCURRED TO:
Current year 1,853
Prior years -
- ------------------------------------------------------------------------------
Total paid 1,853
- ------------------------------------------------------------------------------
Balance at December 31, 1995 620
- ------------------------------------------------------------------------------
Reinsurance recoverable 69
- ------------------------------------------------------------------------------
Supplemental loss reserve 5,859
- ------------------------------------------------------------------------------
TOTAL $ 6,548
==============================================================================
</TABLE>
9) INCOME TAXES
Pursuant to a tax sharing agreement with Holdings, the Company is included
in Holdings' consolidated U.S. Federal income tax return. The Company's
annual Federal income tax liability is determined by computing its pro rata
share of the consolidated group Federal income tax liability.
Total income tax expense differed from the amount computed by applying the
U.S. Federal income tax rate of 35% in 1995 and 34% in 1994 and 1993:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
$ in thousands Amount % Amount % Amount %
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed
at the statutory rate $ 7,216 35.0 $ 5,303 34.0 $ 4,881 34.0
Increase (decrease) in tax
resulting from:
Tax-exempt interest (2,335) (11.3) (1,646) (10.6) (1,140) (7.9)
Other, net 334 1.6 51 0.4 (15) (0.1)
- ---------------------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ 5,215 25.3 $ 3,708 23.8 $ 3,726 26.0
=========================================================================================================
</TABLE>
F-21
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred Federal income tax liability are as follows:
<TABLE>
<CAPTION>
$ in thousands December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Unrealized capital losses on investments $ - (2,833)
Deferred compensation (1,901) (1,233)
Losses and loss adjustment expenses (1,002) (936)
Unearned premiums (852) (762)
Other, net (98) (228)
- ------------------------------------------------------------------------------------
Total gross deferred tax assets (3,853) (5,992)
- ------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Deferred acquisition costs 12,307 8,453
Unrealized capital gains on investments 1,769 -
Deferred capital gains on investments 654 726
Other, net 426 412
- ------------------------------------------------------------------------------------
Total gross deferred tax liabilities 15,156 9,591
- ------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ 11,303 3,599
====================================================================================
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Management
believes that the deferred tax assets will be fully realized in the
future.
10) INSURANCE REGULATORY RESTRICTIONS
CapMAC is subject to insurance regulatory requirements of the State of
New York and other states in which it is licensed to conduct business.
Generally, New York insurance laws require that dividends be paid from
earned surplus and restrict the amount of dividends in any year that may
be paid without obtaining approval for such dividends from the
Superintendent of Insurance to the lower of (i) net investment income as
defined or (ii) 10% of statutory surplus as of December 31 of the
preceding year. No dividends were paid by CapMAC to Holdings during the
years ended December 31, 1995, 1994 and 1993. No dividends could be paid
during these periods because CapMAC had negative earned surplus.
Statutory surplus at December 31, 1995 and 1994 was approximately
$195,018,000 and $139,739,000, respectively. Statutory surplus differs
from stockholder's equity determined under GAAP principally due to the
mandatory contingency reserve required for statutory accounting purposes
and differences in accounting for investments, deferred acquisition
costs, SLR and deferred taxes provided under GAAP. Statutory net income
was $9,000,000, $4,543,000 and $4,528,000 for the years ended December
31, 1995, 1994 and 1993, respectively. Statutory net income differs from
net income determined under GAAP principally due to deferred acquisition
costs, SLR and deferred income taxes.
F-22
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
11) COMMITMENTS AND CONTINGENCIES
On January 1, 1988, the Company assumed from Citibank, N.A. the
obligations of a sublease agreement for space occupied in New York. On
November 21, 1993, the sublease was terminated and a new lease was
negotiated which expires on November 20, 2008. CapMAC has a lease
agreement for its London office beginning October 1, 1992 and expiring
October 1, 2002. As of December 31, 1995, future minimum payments under
the lease agreements are as follows:
$ in thousands Payment
-----------------------------------------------------------
1996 $ 2,255
1997 2,948
1998 3,027
1999 3,476
2000 and thereafter 36,172
-----------------------------------------------------------
TOTAL $ 47,878
===========================================================
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1995, 1994 and 1993 amounted to $1,939,000, $2,243,000 and
$2,065,000, respectively.
CapMAC has available a $100,000,000 standby corporate liquidity facility
(the "Liquidity Facility") provided by a consortium of banks, headed by
Bank of Montreal, as agent, which is rated "A-1+" and "P-1" by S&P and
Moody's, respectively. Under the Liquidity Facility, CapMAC will be able,
subject to satisfying certain conditions, to borrow funds from time to
time in order to enable it to fund any claim payments or payments made in
settlement or mitigation of claim payments under its insurance contracts.
For the years ended December 31, 1995, 1994 and 1993, no draws had been
made under the Liquidity Facility.
12) REINSURANCE
In the ordinary course of business, CapMAC cedes exposure under various
treaty, pro rata and excess of loss reinsurance contracts primarily
designed to minimize losses from large risks and protect the capital and
surplus of CapMAC.
The effect of reinsurance on premiums written and earned was as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------
1995 1994 1993
------------------- ---------------- ----------------
$ in thousands Written Earned Written Earned Written Earned
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 56,541 36,853 43,598 28,561 24,491 20,510
Assumed 935 761 1,064 258 403 364
Ceded (15,992) (8,372) (11,069) (5,716) (3,586) (3,391)
- ---------------------------------------------------------------------------------
NET PREMIUMS $ 41,484 29,242 33,593 23,103 21,308 17,483
=================================================================================
</TABLE>
F-23
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Although the reinsurance of risk does not relieve the ceding insurer of
its original liability to its policyholders, it is the industry practice
of insurers for financial statement purposes to treat reinsured risks as
though they were risks for which the ceding insurer was only contingently
liable. A contingent liability exists with respect to the aforementioned
reinsurance arrangements which may become a liability of CapMAC in the
event the reinsurers are unable to meet obligations assumed by them under
the reinsurance contracts. At December 31, 1995 and 1994, CapMAC had
ceded loss reserves of $69,000 and $0, respectively and had ceded
unearned premiums of $13,171,000 and $5,551,000, respectively.
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco
Treaty") with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a
European-based reinsurer. The agreement is renewable annually at the
Company's option, subject to satisfying certain conditions. The agreement
reinsured and indemnified the Company for any loss incurred by CapMAC
during the agreement period up to the limits of the agreement. The Lureco
Treaty provides that the annual reinsurance premium payable by CapMAC to
Lureco, after deduction of the reinsurer's fee payable to Lureco, be
deposited in a trust account (the "Lureco Trust Account") to be applied
by CapMAC, at its option, to offset losses and loss expenses incurred by
CapMAC in connection with incurred claims. Amounts on deposit in the
Lureco Trust Account which have not been applied against claims are
contractually due to CapMAC at the termination of the treaty.
The premium deposit amounts in the Lureco Trust Account have been
reflected as assets by CapMAC during the term of the agreement. Premiums
in excess of the deposit amounts have been recorded as ceded premiums in
the statements of income. In the 1994 policy year, the agreement provided
$5 million of loss coverage in excess of the premium deposit amounts of
$2 million retained in the Lureco Trust Account. No losses were applied
against the Lureco Trust Account or ceded to the Lureco Treaty in 1994.
The agreement was renewed for the 1995 policy year and provides $5
million of loss coverage in excess of the premium deposit amount of $4.5
million retained in the Lureco Trust Account. Additional coverage is
provided for losses incurred in excess of 200% of the net premiums earned
up to $4 million for any one agreement year. In September 1995, a claim
of approximately $2.5 million on an insurance policy was applied against
the Lureco Trust Account.
In addition to its capital (including statutory contingency reserves) and
other reinsurance available to pay claims under its insurance contracts,
on June 25, 1992, CapMAC entered into a Stop Loss Reinsurance Agreement
(the "Stop-loss Agreement") with Winterthur Swiss Insurance Company
("Winterthur") which is rated "AAA" by S&P and "Aaa" by Moody's. At the
same time, CapMAC and Winterthur also entered into a Quota Share
Reinsurance Agreement (the "Winterthur Quota Share Agreement") pursuant
to which Winterthur had the right to reinsure on a quota share basis 10%
of each policy written by CapMAC.
The Winterthur Stop-loss Agreement had an original term of seven years
and was renewable for successive one-year periods. In April 1995,
Winterthur notified CapMAC that it was canceling the Winterthur Stop-loss
Agreement and the Winterthur Quota Share Agreement effective June 30,
1996.
CapMAC elected to terminate the Winterthur Stop-loss Agreement effective
November 30, 1995 and, on the same date, entered into a Stop-loss
Reinsurance Agreement with Mitsui Marine (the "Mitsui Stop-loss
Agreement"). Under the Mitsui Stop-loss Agreement, Mitsui
F-24
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Marine would be required to pay any losses in excess of $100 million in
the aggregate incurred by CapMAC during the term of the Mitsui Stop-loss
Agreement on the insurance policies in effect on December 1, 1995 and
written during the one-year period thereafter, up to an aggregate limit
payable under the Mitsui Stop-loss Agreement of $50 million. The Mitsui
Stop-loss Agreement has a term of seven years and is subject to early
termination by CapMAC in certain circumstances.
The Winterthur Quota Share Agreement was canceled November 30, 1995. On
January 1, 1996, CapMAC reassumed the liability, principally unearned
premium, for all policies reinsured by Winterthur. As a result, CapMAC
reassumed approximately $1.4 billion of principal insured by Winterthur
as of December 31, 1995. In connection with the commutation, Winterthur
will return the unearned premiums as of December 31, 1995, net of ceding
commission and federal excise tax. Such amount is expected to total
approximately $2.0 million.
13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1995 and
1994. SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current
transaction between willing parties.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Investments $ 284,352 284,352 189,068 189,068
OFF-BALANCE-SHEET INSTRUMENTS:
Financial Guarantees Outstanding $ - 147,840 - 93,494
Ceding Commission $ - 44,352 - 28,048
--------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments summarized above:
INVESTMENTS
The fair values of fixed maturities and mutual funds are based upon
quoted market prices. The fair value of short-term investments
approximates amortized cost.
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<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
FINANCIAL GUARANTEES OUTSTANDING
The fair value of financial guarantees outstanding consists of (1) the
current unearned premium reserve, net of prepaid reinsurance and (2) the
fair value of installment revenue which is derived by calculating the
present value of the estimated future cash inflow to CapMAC of policies
in force having installment premiums, net of amounts payable to
reinsurers, at a discount rate of 7% at December 31, 1995 and 1994. The
amount calculated is equivalent to the consideration that would be paid
under market conditions prevailing at the reporting dates to transfer
CapMAC's financial guarantee business to a third party under reinsurance
and other agreements. Ceding commission represents the expected amount
that would be paid to CapMAC to compensate CapMAC for originating and
servicing the insurance contracts. In constructing estimated future cash
inflows, management makes assumptions regarding prepayments for
amortizing asset-backed securities which are consistent with relevant
historical experience. For revolving programs, assumptions are made
regarding program utilization based on discussions with program users.
The amount of installment premium actually realized by the Company could
be reduced in the future due to factors such as early termination of
insurance contracts, accelerated prepayments of underlying obligations or
lower than anticipated utilization of insured structured programs, such
as commercial paper conduits. Although increases in future installment
revenue due to renewals of existing insurance contracts historically have
been greater than reductions in future installment revenue due to factors
such as those described above, there can be no assurance that future
circumstances might not cause a net reduction in installment revenue,
resulting in lower revenues.
14) CAPITALIZATION
The Company's certificate of incorporation authorizes the issuance of
15,000,000 shares of common stock, par value $1.00 per share. Authorized,
issued and outstanding shares at December 31, 1995 and 1994 were
15,000,000 at $1.00 per share.
In 1995, $59.0 million of the proceeds received by Holdings from the sale
of shares in connection with an Initial Public Offering and private
placements were contributed to CapMAC.
F-26
<PAGE>
Consent of Independent Certified Accountants
The Board of Directors
Capital Markets Assurance Corporation
We consent to the use of our report included in the Form 8-K of Financial Asset
Securities Corp. and to the reference to our firm under the heading "Experts" in
the Prospectus Supplement for Headlands Home Equity Loan Trust 1996-1.
Our report dated January 25, 1996, refers to the Company's adoption at December
31, 1993 of Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities".
/s/ KPMG Peat Marwick LLP
New York, New York
December 26, 1996
