<PAGE>
INSURER'S UNAUDITED INTERIM FINANCIAL STATEMENTS
FINANCIAL GUARANTY INSURANCE COMPANY
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Unaudited Interim Financial Statements
September 30, 2000
1. Balance Sheets
2. Statements of Income
3. Statements of Cash Flows
4. Notes to Unaudited Interim Financial Statements
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Financial Guaranty Insurance Company Balance Sheets
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<TABLE>
<CAPTION>
($ in Thousands)
September 30, December 31,
2000 1999
------------- ------------
Assets (Unaudited)
<S> <C> <C>
Fixed maturity securities, available for sale, at fair value
(amortized cost of $2,254,334 in 2000 and $2,484,753 in
1999) $2,219,960 $2,412,504
Short-term investments, at cost, which approximates fair value 189,700 114,776
Cash 478 924
Accrued investment income 34,572 38,677
Reinsurance receivable 9,398 8,118
Deferred policy acquisition costs 71,967 71,730
Property, plant and equipment net of accumulated depreciation
of $7,940 in 2000 and $7,803 in 1999 702 967
Prepaid reinsurance premiums 134,395 133,874
Receivable for Securities Sold 124,359 10
Prepaid expenses and other assets 13,361 16,662
---------- ----------
Total assets $2,799,053 $2,798,242
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Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $581,221 $578,930
Losses and loss adjustment expenses 47,013 45,201
Ceded reinsurance payable 2,525 2,310
Accounts payable and accrued expenses 11,996 16,265
Current federal income taxes payable 56,562 62,181
Deferred federal income taxes payable 61,705 46,346
Payable for securities purchased 89,866 7,894
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Total liabilities 850,888 759,127
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Stockholder's Equity:
Common stock, par value $1,500 per share at September 30,
2000 and at December 31, 1999: 10,000 shares authorized,
issued and outstanding 15,000 15,000
Additional paid-in capital 383,511 383,511
Accumulated other comprehensive loss, net of tax (20,687) (46,687)
Retained earnings 1,570,341 1,687,291
Total stockholder's equity 1,948,165 2,039,115
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Total liabilities and stockholder's equity $2,779,053 $2,798,242
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</TABLE>
See accompanying notes to unaudited interim financial statements
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Financial Guaranty Insurance Company Statements of Income
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<TABLE>
<CAPTION>
($ in Thousands)
Nine Months Ended September 30,
2000 1999
----------- ---------
(Unaudited)
<S> <C> <C>
Revenues:
Gross premiums written $77,729 $ 75,398
Ceded premiums (14,744) (13,086)
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Net premiums written 62,985 62,312
(Increase)/Decrease in net unearned premiums (1,770) 29,090
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Net premiums earned 61,215 91,402
Net investment income 103,273 101,187
Net realized gains 18,780 25,186
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Total revenues 183,286 217,775
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Expenses:
Losses and loss adjustment expenses 3,087 (4,386)
Policy acquisition costs 8,320 15,032
Other underwriting expenses 11,635 13,471
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Total expenses 23,042 24,117
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Income before provision for federal income taxes 160,226 193,658
Provision for federal income taxes 27,176 38,894
------- -------
Net income $93,096 $154,764
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</TABLE>
See accompanying notes to unaudited interim financial statements
<PAGE>
Financial Guaranty Insurance Company Statements of Cash Flows
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<TABLE>
<CAPTION>
($ in Thousands)
Nine Months Ended September 30,
2000 1999
----------- ---------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $133,050 $154,764
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for deferred income taxes 1,359 533
Amortization of fixed maturity securities 3,731 3,195
Policy acquisition costs deferred (8,557) (10,496)
Amortization of deferred policy acquisition costs 8,320 15,032
Depreciation of property, plant and equipment 265 740
Change in reinsurance receivable (1,280) (1,927)
Change in prepaid reinsurance premiums (521) 10,192
Foreign currency translation adjustment 2,125 1,891
Change in accrued investment income, prepaid expenses and other 7,245 (2,474)
assets
Change in unearned premiums 2,291 (39,282)
Change in losses and loss adjustment expense 1,812 (5,845)
Change in ceded reinsurance payable, accounts payable and accrued (4,045) (6,170)
expenses
Change in current income taxes payable (5,619) (7,175)
Net realized gains (18,780) (25,186)
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Net cash provided by operating activities 121,387 87,792
-------- --------
Investing activities:
Sales or maturities of fixed maturity securities 717,451 662,901
Purchases of fixed maturity securities (514,360) (590,689)
Purchases of short-term investments, net (74,924) (84,900)
-------- --------
Net cash used for investing activities 128,167 (12,688)
-------- --------
Financing activities:
Dividends paid (250,000) (250,000)
-------- --------
Net cash used for financing activities (250,000) (250,000)
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(Decrease)/Increase in cash (446) 104
Cash at beginning of period 924 318
-------- --------
Cash at end of period $ 478 $ 422
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</TABLE>
See accompanying notes to unaudited interim financial statements
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
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September 30, 2000 and 1999
(Unaudited)
(1) Basis of Presentation
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The interim financial statements of Financial Guaranty Insurance
Company (the Company) in this report reflect all adjustments necessary,
in the opinion of management, for a fair statement of (a) results of
operations for the nine months ended September 30, 2000 and 1999, (b)
the financial position at September 30, 2000 and December 31, 1999, and
(c) cash flows for the nine months ended September 30, 2000 and 1999.
These interim financial statements should be read in conjunction with
the financial statements and related notes included in the 1999 audited
financial statements.
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 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. Actual results could differ
from those estimates.
(2) Statutory Accounting Practices
------------------------------
The financial statements are prepared on the basis of GAAP, which
differs in certain respects from accounting practices prescribed or
permitted by state insurance regulatory authorities. The following are
the significant ways in which statutory basis accounting practices
differ from GAAP:
(a) premiums are earned directly in proportion to the scheduled
principal and interest payments rather than in proportion to the
total exposure outstanding at any point in time;
(b) policy acquisition costs are charged to current operations as
incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of
whether loss contingencies actually exist, whereas under GAAP, a
reserve is established based on an ultimate estimate of exposure;
(d) certain assets designated as "non-admitted assets" are charged
directly against surplus but are reflected as assets under GAAP, if
recoverable;
(e) federal income taxes are only provided with respect to taxable
income for which income taxes are currently payable, while under
GAAP taxes are also provided for differences between the financial
reporting and tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted assets,
while under GAAP they are recorded as federal income tax payments;
and
(g) all fixed income investments are carried at amortized cost, rather
than at fair value for securities classified as available for sale
under GAAP.
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements (Continued)
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The following is a reconciliation of the net income and stockholder's equity of
Financial Guaranty prepared on a GAAP basis to the corresponding amounts
reported on a statutory basis for the periods indicated below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------------------
2000 1999
-------------------------------- ------------------------------
Net Stockholder's Net Stockholder's
Income Equity Income Equity
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
GAAP basis amount $133,050 $1,948,165 $154,764 $2,038,827
Premium revenue recognition (9,908) (204,467) (4,836) (199,991)
Deferral of acquisition costs (237) (71,967) 4,536 (76,388)
Contingency reserve - (747,059) - (665,383)
Contingency reserve tax deduction - 74,059 - 74,059
Non-admitted assets - (636) - (632)
Case-basis losses incurred 440 (781) (1,091) (1,018)
Portfolio loss reserves 2,800 28,700 1,000 33,900
Deferral of income tax 1,359 73,654 533 73,479
Unrealized losses on fixed maturity securities held at fair
value, net of taxes - 22,343 - 20,585
Profit commission 27 (7,116) (457) (6,508)
Provision for unauthorized reinsurers - (87) - (88)
Allocation of tax benefits due to Parent's net operating loss
to the Company 219 11,312 235 11,404
-------- ---------- -------- ----------
Statutory basis amount $127,750 $1,126,120 $154,684 $1,302,246
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</TABLE>
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Financial Guaranty Insurance Company Notes to Financial Statements (Continued)
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(3) Dividends
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Under New York Insurance Law, the Company may pay a dividend only from
earned surplus subject to the following limitations:
o Statutory surplus after dividends may not be less than the minimum
required paid-in capital, which was $66.4 million in 2000.
o Dividends may not exceed the lesser of 10 percent of its surplus or
100 percent of adjusted net investment income, as defined therein,
for the twelve month period ending on the preceding December 31,
without the prior approval of the Superintendent of the State of New
York Insurance Department.
The amount of the Company's surplus available for dividends during 2000
is approximately $112.6 million.
The Company declared dividends of $50 million and $75 million during
the first nine months of 2000 and 1999 respectively. In addition, an
extraordinary dividend of $200 million (approved by New York State
Insurance Department) was paid during the first nine months of 2000.
(4) Income Taxes
------------
The Company's effective Federal corporate tax rate (17.0 percent and
20.1 percent for the nine months ended September 30, 2000 and 1999,
respectively) is less than the statutory corporate tax rate (35 percent
in 2000 and 1999) on ordinary income due to permanent differences
between financial and taxable income, principally tax-exempt interest.
(5) Reinsurance
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Net premiums earned are shown net of premiums ceded of $14.2 million
and $23.8 million, respectively, for the nine months ended September
30, 2000 and 1999.
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Financial Guaranty Insurance Company Notes to Financial Statements (Continued)
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(6) Comprehensive Income
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Comprehensive income encompasses all changes in stockholders' equity
(except those arising from transactions with stockholders) and includes
net income, net unrealized capital gains or losses on
available-for-sale securities (net of taxes) and foreign currency
translation adjustments, net of taxes. The following is a
reconciliation of comprehensive income:
<TABLE>
<CAPTION>
September 30, 2000 and 1999
(Unaudited)
For the Nine Months Ended September 30,
---------------------------------------
2000 1999
-------- --------
<S> <C> <C>
Net income $133,050 $154,764
Other comprehensive income:
Change in unrealized investment gains/, (losses)
net of taxes of $13,256 in 2000 and ($61,321) in
1999 24,619 (113,882)
Change in foreign exchange gains, net of taxes of
$743 in 2000 and $622 in 1999 1,381 1,229
-------- --------
Comprehensive income $159,050 $ 42,111
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</TABLE>
(7) Current Accounting Pronouncements
---------------------------------
The Financial Accounting Standards Board ("FASB") has issued, then
subsequently amended Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
activities, effective for Financial Guaranty Insurance Company on
January 1, 2001. Upon adoption, all derivative instruments (including
certain derivative instruments embedded in other contracts) will be
recognized in the balance sheet at their fair values; changes in such
fair values must be recognized immediately in earnings unless specific
hedging criteria are met. Management estimates that at September 30,
2000, the effects on its financial statements of adopting SFAS 133, as
amended, will be immaterial. However, the transition effect as of
January 1, 2001, cannot be estimated at this time because it is subject
to the following unknown variables as of that date: (1) actual
derivatives and related hedged positions, (2) market values of
derivatives and hedged positions, and (3) further interpretation of
SFAS 133 by the FASB.
