<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 11, 1996
LEHMAN ABS CORPORATION, (as depositor under the Pooling
and Servicing Agreement, dated as of November 30, 1996,
which forms Champion Home Equity Loan Trust 1996-4 which
will issue the Champion Home Equity Loan Trust 1996-4, Home
Equity Loan Asset-Backed Certificates, Series 1996-4).
LEHMAN ABS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 333-3911 13-3447441
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
Three World Financial Center
200 Vesey Street
New York, New York 10285
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code (212) 526-7000
<PAGE>
Item 5. Other Events.
Filing of Capital Markets Assurance Corporation Policy, Capital
Markets Assurance Corporation Audited and Unaudited Financials and
Consent of Experts
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"), Lehman ABS Corporation, (the
"Company") is filing a prospectus and prospectus supplement with
the Securities and Exchange Commission relating to its Home Equity
Loan Asset-Backed Certificates, Series 1996-4.
The audited financial statements of Capital Markets
Assurance Corporation ("CapMAC") that are included in this Form 8-K and the
Prospectus Supplement (the "Audited CapMAC Financials") have been audited by
KPMG Peat Marwick LLP ("KPMG"). The consent of KPMG is attached hereto as
Exhibit 1. The Audited CapMAC Financials are attached hereto as Exhibit 2.
The unaudited financial statements of CapMAC for the period ended September 30,
1996 (the "Unaudited CapMAC Financials") that are included in this Form 8-K
and the Prospectus Supplement are attached hereto as Exhibit 3.
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits.
(a) Not applicable.
(b) Not applicable.
(c) Exhibits:
99.1. Consent of KPMG Peat Marwick LLP.
99.2. Audited CapMAC Financials.
99.3. Unaudited CapMAC Financials.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
LEHMAN ABS CORPORATION
By: /s/ Martin P. Harding
Martin P. Harding
Managing Director
Dated: December 11, 1996
<PAGE>
Exhibit Index
Exhibit Page
99.1. Consent of KPMG Peat Marwick LLP.
99.2. Audited CapMAC Financials.
99.3. Unaudited CapMAC Financials.
5
<PAGE>
Consent of Independent Certified Public Accountants
The Board of Directors
Capital Markets Assurance Corporation:
We consent to the use of our report included in the Form 8-K of Lehman ABS
Corporation and to the reference to our firm under the heading "Experts" in
the Prospectus Supplement for Champion Home Equity Loan Trust 1996-4.
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 11, 1996
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 and 1993
(With Independent Auditors' Report Thereon)
A-II-1
<PAGE>
[LETTERHEAD OF KMPG PEAT MARWICK LLP]
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
New York, New York
January 25, 1996
A-II-2
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands)
ASSETS
------
December 31 December 31
1995 1994
------- -------
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
======== =======
See accompanying notes to financial statements.
A-II-3
<PAGE>
Capital Markets Assurance Corporation
Statements of Income
(Dollars in thousands)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 1994 1993
------------ ------------ ------------
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
======== ======= ======
See accompanying notes to financial statements.
A-II-4
<PAGE>
Capital Markets Assurance Corporation
Statements of Stockholder's Equity
(Dollars in thousands)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 1994 1993
------------ ------------ ------------
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
======== ======= =======
See accompanying notes to financial statements.
A-II-5
<PAGE>
Capital Markets Assurance Corporation
Statements of Cash Flows
(Dollar in thousands)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 1994 1993
------------ ------------ ------------
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
========= ======= ========
See accompanying notes to financial statements.
A-II-6
<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.
A-II-7
<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.
A-II-8
<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.
A-II-9
<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 $170 million, respectively.
Net Principal Outstanding
December 31, 1995 December 31, 1994
----------------- -----------------
Type of Obligations Insured ($ in millions) Amount % Amount %
- ------------------------------------------- ------- ----- ------ -----
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
======= ===== ====== =====
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 $2,200,000 of income which has been included in other income in
the accompanying financial statements.
The following entities each accounted for, through referrals and otherwise,
10% or more of total revenues for each of the periods presented:
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
----------------- ----------------- -----------------------------
% of % of % of
Name Revenues Name Revenues Name Revenues
----------------- ----------------- -----------------------------
Citicorp 15.2 Citicorp 16.3 Citicorp 13.7
Merrill Lynch & Co. 14.1
A-II-10
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
4) Investments
At December 31, 1995 and 1994, all of the Company's investments were
classified as available-for-sale securities. The amortized cost, gross
unrealized gains, gross unrealized losses and estimated fair value for
available-for-sale securities by major security type at December 31, 1995
and 1994 were as follows ($ in thousands):
December 31, 1995
- -------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- ----------------------------- --------- ---------- ---------- ---------
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
======== ===== === =======
December 31, 1994
- -------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- ----------------------------- --------- ---------- ---------- ---------
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 $197,399 379 8,710 189,068
======== === ===== =======
The Company's investment in mutual funds in 1994 represents an investment
in an open-end management investment company which invests primarily in
investment-grade fixed-income securities denominated in foreign and United
States currencies.
A-II-11
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1995 by contractual maturity are shown below
($ in thousands):
December 31, 1995
-----------------------------------------------------------------------
Amortized Estimated
Securities Available-for-Sale Cost Fair Value
----------------------------- --------- ----------
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
======== =======
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 at December 31, 1995 and 1994, respectively, with state regulators
as required by law.
Investment income is comprised of interest and dividends, net of related
expenses, and is applicable to the following sources:
Year Ended Year Ended Year Ended
$ in thousands December 31, 1995 December 31, 1994 December 31, 1993
- -------------- ----------------- ----------------- -----------------
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
======= ====== ======
A-II-12
<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:
Year Ended Year Ended
$ in thousands December 31, 1995 December 31, 1994
-------------- ----------------- -----------------
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)
======= =======
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:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
$ in thousands 1995 1994 1993
-------------- ----------- ------------ ------------
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
======= ====== ======
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.
A-II-13
<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 $2.5 million. The portion of such claims and expenses not covered
under the quota share agreement is being funded through payments to CapMAC
from the Lureco Trust Account (see note 12).
A-II-14
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The following is a summary of the activity in the case basis loss reserve
account and the components of the liability for losses and loss adjustment
expenses ($ in thousands):
Case Basis Loss Reserve:
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
======
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>
A-II-15
<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.
A-II-16
<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>
A-II-17
<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
A-II-18
<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.
December 31, 1995 December 31, 1994
-------------------- -------------------
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
-------------- -------- ---------- -------- ----------
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
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.
A-II-19
<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.
A-II-20
<PAGE>
Exhibit 99.3
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
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
====================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
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.
<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.
<PAGE>
Capital Markets Assurance Corporation
Statement of Stockholder's Equity
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30, 1996
- -----------------------------------------------------------------------------
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
=============================================================================
See accompanying notes to financial statements.
<PAGE>
Capital Markets Assurance Corporation
Statements 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.
<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.
