<PAGE>
INSURER'S UNAUDITED INTERIM FINANCIAL STATEMENTS
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
UNAUDITED INTERIM FINANCIAL STATEMENTS
JUNE 30, 2000
1. Balance Sheets
2. Statements of Income
3. Statements of Cash Flows
4. Notes to Unaudited Interim Financial Statements
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
===============================================================================
<TABLE>
<CAPTION>
($ in Thousands)
JUNE 30, DECEMBER 31,
2000
---------------------- ------------------
<S> <C> <C>
ASSETS (UNAUDITED)
Fixed maturity securities, available for sale,
at fair value (amortized cost of
$2,154,362 in 2000 and $2,431,049 in 1999) $2,101,386 $2,412,504
Short-term investments, at cost, which approximates fair value 508,648 114,776
Cash 809 924
Accrued investment income 34,278 38,677
Reinsurance receivable 7,232 8,118
Deferred policy acquisition costs 72,458 71,730
Property, plant and equipment net of
accumulated depreciation of $7,864 in 2000 and $7,303 in 1999 777 967
Prepaid reinsurance premiums 133,526 133,874
Prepaid expenses and other assets 13,361 16,672
---------- ----------
Total assets $2,872,475 $2,798,242
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $585,740 $578,930
Losses and loss adjustment expenses 41,700 45,201
Ceded reinsurance payable 572 2,310
Accounts payable and accrued expenses 31,277 16,265
Current federal income taxes payable 59,844 62,181
Deferred federal income taxes payable 56,902 46,346
Payable for securities purchased - 7,894
---------- ----------
Total liabilities 776,035 759,127
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share at June 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 (32,459) (46,687)
Retained earnings 1,730,388 1,687,291
---------- ----------
Total stockholder's equity 2,096,440 2,039,115
---------- ----------
Total liabilities and stockholder's equity $2,872,475 $2,798,242
========== ==========
</TABLE>
See accompanying notes to unaudited interim financial statements
-1-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
===============================================================================
<TABLE>
<CAPTION>
($ in Thousands)
SIX MONTHS ENDED JUNE 30,
2000 1999
--------- ----------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Gross premiums written $55,707 $ 56,974
Ceded premiums (8,913) (11,151)
--------- ----------
Net premiums written 46,794 45,823
(Increase)/Decrease in net unearned premiums (7,158) 3,402
--------- --------
Net premiums earned 39,636 49,225
Net investment income 68,113 67,416
Net realized gains 12,670 25,019
-------- --------
Total revenues 120,419 141,660
-------- -------
EXPENSES:
Losses and loss adjustment expenses (2,486) (2,683)
Policy acquisition costs 5,490 8,996
Other underwriting expenses 7,058 9,640
-------- ------
Total expenses 10,062 15,953
-------- -------
Income before provision for federal income taxes 110,357 125,707
Provision for federal income taxes 17,261 25,765
-------- -------
Net income $93,096 $99,942
======= =======
</TABLE>
See accompanying notes to unaudited interim financial statements
-2-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
===============================================================================
<TABLE>
<CAPTION>
($ in Thousands)
SIX MONTHS ENDED JUNE 30,
2000 1999
--------- ----------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $93,096 $99,942
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income taxes 2,895 1,308
Amortization of fixed maturity securities 2,679 1,830
Policy acquisition costs deferred (6,219) (6,314)
Amortization of deferred policy acquisition costs 5,490 8,996
Depreciation of fixed assets 190 645
Change in reinsurance receivable 886 (44)
Change in prepaid reinsurance premiums 348 1,632
Foreign currency translation adjustment 2,615 1,838
Change in accrued investment income, prepaid
expenses and other assets 7,710 2,773
Change in unearned premiums 6,810 (5,035)
Change in losses and loss adjustment expense reserves (3,501) (4,860)
Change in other liabilities 13,274 (2,602)
Change in current income taxes payable (2,337) (932)
Net realized gains on investments (12,670) (25,019)
--------- --------
Net cash provided by operating activities 111,266 74,158
------- -------
INVESTING ACTIVITIES:
Sales or maturities of fixed maturity securities 608,512 581,563
Purchases of fixed maturity securities (276,021) (469,911)
Purchases of short-term investments, net (393,872) (135,446)
--------- ---------
Net cash used for investing activities (61,381) (23,794)
---------- --------
FINANCING ACTIVITIES:
Dividends paid (50,000) (50,000)
-------- --------
Net cash used for financing activities (50,000) (50,000)
-------- --------
(Decrease)/Increase in cash (115) 364
Cash at beginning of period 924 318
--------- --------
Cash at end of period $ 809 $ 682
======== =======
</TABLE>
See accompanying notes to unaudited interim financial statements
-3-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
June 30, 2000 and 1999
(Unaudited)
(1) BASIS OF PRESENTATION
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 six months
ended June 30, 2000 and 1999, (b) the financial position at
June 30, 2000 and December 31, 1999, and (c) cash flows for
the six months ended June 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 effect 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.
-4-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
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>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
2000 1999
-------------------------------- ----------------------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
GAAP basis amount $93,096 $2,096,440 $99,942 $2,028,358
Premium revenue recognition (8,243) (202,802) (8,326) (203,481)
Deferral of acquisition costs (728) (72,458) 2,682 (78,242)
Contingency reserve - (737,124) - (648,106)
Contingency reserve tax deduction - 74,059 - 74,059
Non-admitted assets - (679) - (933)
Case-basis losses incurred (315) (1,536) (989) (916)
Portfolio loss reserves (3,000) 22,900 1,000 33,900
Deferral of income tax 2,895 75,360 1,308 74,509
Unrealized losses/(gains) on fixed
maturity securities held at
value, net of taxes - 34,434 - 1,200
Profit commission 141 (7,002) 13 (6,038)
Provision for unauthorized reinsurers - (85) - (38)
Allocation of tax benefits due
to Parent's net operating loss
to the Company 146 11,239 156 11,325
------- ---------- ------- ----------
Statutory basis amount $83,992 $1,292,746 $95,786 $1,285,597
======= ========== ======= ==========
</TABLE>
-5-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
(3) DIVIDENDS
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 New York State
Insurance Department.
The amount of the Company's surplus available for dividends
during 2000 is approximately $129.3 million.
The Company declared dividends of $50 million during the first
six months of 2000 and 1999.
(4) INCOME TAXES
The Company's effective Federal corporate tax rate (15.6
percent and 20.5 percent for the six months ended June 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
In accordance with Statement of Financial Accounting Standards
No. 113 ("SFAS 113"), "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts",
the Company reports assets and liabilities relating to
reinsured contracts gross of the effects of reinsurance. Net
premiums earned are shown net of premiums ceded of $9.3
million and $12.8 million, respectively, for the six months
ended June 30, 2000 and 1999.
(6) COMPREHENSIVE INCOME
Comprehensive income encompasses all changes in shareholders'
equity (except those arising from transactions with
shareholders) and includes net income, net unrealized capital
gains or losses on available-for-sale securities and foreign
currency translation adjustments, net of taxes. This new
standard only changes the presentation of certain information
in the financial statements and does not affect the Company's
financial position or results of operations. The following is
a reconciliation of comprehensive income:
-6-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
2000 1999
---- ----
<S> <C> <C>
Net income $93,096 $99,942
Other comprehensive income:
Change in unrealized investment gains/,
(losses) net of taxes 12,528 (94,497)
Change in foreign exchange gains,
net of taxes 1,700 1,195
-------- -------
Comprehensive income $107,324 $ 6,640
======== =======
</TABLE>
-7-
