SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-14096
CapMAC Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
13-3670828
(IRS employer identification no.)
885 Third Avenue
New York, New York 10022
(Address of principal executive offices)
(212) 755-1155
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of July 31, 1997, 17,317,004 shares (net of treasury shares) of
Common Stock, par value $0.01 per share of the Registrant were outstanding.
Page 1 of 38 Pages
Index to Exhibits on Page 22
1
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CapMAC Holdings Inc. and Subsidiaries
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 1997
and December 31, 1996...........................................4
Consolidated Statements of Income - three months ended
and six months ended June 30, 1997 and June 30, 1996............5
Consolidated Statements of Stockholders' Equity - six months
ended June 30, 1997.............................................6
Consolidated Statements of Cash Flows - six months
ended June 30, 1997 and June 30, 1996...........................7
Notes to Consolidated Financial Statements......................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................10
PART II OTHER INFORMATION, AS APPLICABLE
Item 2 Changes in Securities ............................................18
Item 4 Submission of Matters to a Vote of Security Holders...............19
Item 6. Exhibits and Reports on Form 8-K..................................20
SIGNATURES .......................................................21
INDEX TO EXHIBITS...........................................................22
Part 1 - Financial Information
Item 1 - Financial Statements of CapMAC Holdings Inc. and Subsidiaries.
2
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CapMAC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
3
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
June 30,1997
(Unaudited) December 31,1996
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $315,555 at June 30, 1997 and
$302,284 at December 31, 1996) $ 316,319 305,422
Short-term investments (at amortized cost which approximates fair
value) 40,254 33,752
Common stock 486 -
Investment in affiliates 35,732 34,886
Total investments 392,791 374,060
- -------------------------------------------------------------------------------------------------------------------
Cash 6,227 966
Accrued investment income 3,873 3,847
Deferred acquisition costs 50,327 45,380
Premiums receivable 5,826 5,141
Prepaid reinsurance 20,787 18,489
Other assets 13,420 9,351
Total assets $ 493,251 457,234
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Unearned premiums $ 71,800 68,262
Reserve for losses and loss adjustment expenses 13,861 10,985
Ceded reinsurance 2,766 1,738
Accounts payable and other accrued expenses 23,722 15,274
Senior notes 15,000 15,000
Current income taxes 5,107 2,890
Deferred income taxes 9,355 9,590
Total liabilities 141,611 123,739
- -------------------------------------------------------------------------------------------------------------------
Minority Interest 23,333 23,108
- -------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock - $0.01 par value per share; 20,000,000 shares are
authorized; none outstanding at June 30, 1997 and December 31, 1996 - -
Common stock - $0.01 par value per share; 50,000,000 shares are authorized;
17,296,289 and 16,425,324 shares issued June 30, 1997, and December 31, 1996;
17,296,204 and 16,425,274 shares
outstanding at June 30, 1997, and December 31, 1996 173 164
Additional paid-in capital 229,197 226,428
Unrealized appreciation (depreciation) on investments, net of tax 505 (71)
Retained earnings 103,315 89,310
Unallocated ESOP shares (4,845) (5,430)
Cumulative translation adjustment, net of tax (36) (14)
Treasury stock (2) -
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 328,307 310,387
- -------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest, and stockholders' equity $ 493,251 457,234
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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CapMAC Holdings Inc. and Sudsidiaries
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Direct premiums written $ 18,726 18,622 35,180 32,777
Assumed premiums written 655 150 916 1,024
Ceded premiums written (6,272) (5,103) (10,621) (7,013)
- ------------------------------------------------------------------------------------------------------------
Net premiums written 13,109 13,669 25,475 26,788
Increase in unearned premiums (877) (3,681) (1,240) (7,972)
- ------------------------------------------------------------------------------------------------------------
Net premiums earned 12,232 9,988 24,235 18,816
Advisory and other fees 7,300 5,705 10,673 15,577
Net investment income 5,161 3,808 10,410 7,919
Net realized capital gains (losses) 517 19 (1,198) 168
Other income 21 51 48 107
- ------------------------------------------------------------------------------------------------------------
Total revenues 25,231 19,571 44,168 42,587
- ------------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 1,333 1,109 2,876 2,184
Underwriting and operating expenses 7,082 4,277 14,299 9,115
Policy acquisition costs 2,472 2,059 5,053 4,123
Interest expense 301 301 602 602
- ------------------------------------------------------------------------------------------------------------
Total expenses 11,188 7,746 22,830 16,024
- ------------------------------------------------------------------------------------------------------------
Income before income taxes and
minority interest 14,043 11,825 21,338 26,563
- ------------------------------------------------------------------------------------------------------------
Income Taxes:
Current income tax 4,629 3,220 6,983 7,119
Deferred income tax 176 667 (456) 1,654
Total income taxes 4,805 3,887 6,527 8,773
- ------------------------------------------------------------------------------------------------------------
Income before minority interest 9,238 7,938 14,811 17,790
- ------------------------------------------------------------------------------------------------------------
Minority interest 29 397 (132) 445
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 9,267 8,335 14,679 18,235
===============================================================================---==========================
Primary earnings per share $ 0.52 0.47 0.81 1.04
Fully diluted earnings per share $ 0.52 0.47 0.81 1.02
===============================================================================---==========================
</TABLE>
See accompanying notes to consolidated financial statements.
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CapMAC Holdings Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Months Ended
June 30, 1997
<S> <C> <C>
Common stock:
Balance at beginning of period $ 164
Common stock issued 9
- -------------------------------------------------------------------------------
Balance at end of period 173
- -------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of period 226,428
Issuance of common stock 2,769
- -------------------------------------------------------------------------------
Balance at end of period 229,197
- -------------------------------------------------------------------------------
Unrealized appreciation (depreciation) on investments, net of tax:
Balance at beginning of period (71)
Unrealized depreciation on investments 576
Balance at end of period 505
- -------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 89,310
Net income 14,679
Dividends declared - $.02 per share (674)
Balance at end of period 103,315
- -------------------------------------------------------------------------------
Unallocated ESOP shares:
Balance at beginning of period (5,430)
Allocation of ESOP shares 585
Balance at end of period (4,845)
- -------------------------------------------------------------------------------
Cumulative translation adjustment, net of tax:
Balance at beginning of period (14)
Translation adjustment (22)
- -------------------------------------------------------------------------------
Balance at end of period (36)
- -------------------------------------------------------------------------------
Treasury stock:
Balance at beginning of period -
Treasury shares acquired (2)
- -------------------------------------------------------------------------------
Balance at end of period (2)
- -------------------------------------------------------------------------------
Total stockholders' equity $ 328,307
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
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CapMAC Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,679 18,235
- --------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Reserve for losses and loss adjustment expenses 2,876 1,821
Unearned premiums, net 3,538 10,977
Deferred acquisition costs (4,947) (4,742)
Premiums receivable (685) 308
Accrued investment income (26) (579)
Income taxes payable 2,147 4,500
Net realized capital (gains) losses 1,198 (168)
Accounts payable and other accrued expenses 8,448 4,591
Prepaid reinsurance (2,298) (3,004)
Other, net (4,155) (4,405)
Total adjustments 6,096 9,299
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,775 27,534
Cash flows from investing activities:
Cash flows from investing activities:
Purchases of investments (137,582) (142,196)
Purchases of investments in affiliates - (3,333)
Proceeds from sale of investments 74,768 19,875
Proceeds from maturities of investments 44,997 96,181
Net cash used in investing activities (17,817) (29,473)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities: Cash flows from financing activities:
Allocation of ESOP shares 585 536
Minority interest capital contribution to CapMAC Asia - 2,123
Dividends paid (674) (639)
Exercise of stock options and warrants 2,392 (155)
Net cash provided by financing activities 2,303 1,865
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
Net increase (decrease) in cash 5,261 (74)
Cash balance at beginning of period 966 1,033
Cash balance at end of period $ 6,227 959
=====================================================================================================
Supplemental disclosures of cash flow information:
Income taxes paid $ 4,363 4,161
Interest paid $ 564 564
Tax and loss bonds purchased $ 76 112
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
CapMAC Holdings Inc. and Subidiaries
Notes to Consolidated Financial Statements
June 30, 1997
1.Organization and Ownership
CapMAC Holdings Inc. ("Holdings" or the"Company"), a Delaware corporation,
is the sole stockholder of Capital Markets Assurance Corporation
("CapMAC"), CapMAC Financial Services Inc. ("CFS"), and CapMAC Investment
Management, Inc ("CIM"). CapMAC Assurance, S.A. is a subsidiary of Capital
Markets Assurance Corporation, and CapMAC Financial Services (Europe)
Limited ("CFS (Europe)") is a subsidiary of CFS. The Company is also a lead
investor in CapMAC Asia Ltd. ("CapMAC Asia").
Holdings provides financial guaranty insurance, principally of asset-backed
obligations, through CapMAC. CapMAC's claims paying ability is rated
triple-A by Moody's Investor Service, Inc., Standard & Poor's Ratings
Services, Duff and Phelps Credit Rating Co. and Nippon Investors Service,
Inc., a Japanese rating agency. Holdings also provides advisory and
structuring services in connection with asset-backed financings, through
CFS. On December 19, 1995 Holdings sold 2,500,000 new shares of its common
stock in an initial public offering. On July 5, 1996, Holdings completed a
secondary public offering by some of its stockholders of 3,737,500 shares
of common stock at an offering price of $28. The Company did not receive
any proceeds from the offering.
2. Basis of Presentation
The Company's consolidated 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 Company's financial condition, results of operations
and cash flows for the periods presented. The results of operations for the
six months ended June 30, 1997 may not be indicative of the results that
may be expected for the full year ending December 31, 1997. These
consolidated financial statements and notes should be read in conjunction
with the financial statements and notes included in the audited financial
statements of CapMAC Holdings Inc. and its subsidiaries contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996,
which was filed with the Securities and Exchange Commission on March 31,
1997.
3. Reclassifications
Certain prior period balances have been reclassified to conform to the
current period presentation.
4. Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("Statement 128"). Statement 128 supersedes APB Opinion No 15, Earnings Per
Share, ("APB Opinion No. 15"), and specifies the computation, presentation,
and disclosure requirements for earnings per share for entities with
publicly held common stock or potential common stock. Statement 128 was
issued to simplify the computation of earnings per share. It requires dual
presentation of "basic earnings per share" and "diluted earnings per share"
as defined. Statement 128 is effective for financial statements for both
interim and annual periods ending after December 15, 1997. Earlier
application is not permitted. After adoption, all prior period earnings per
share data presented shall be restated to conform with Statement 128. 8
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
Under APB Opinion No. 15, the Company's primary and fully diluted earnings
per share amounts are $0.52 and $0.47 per share for the three-month periods
ended June 30, 1997 and 1996, respectively. The Company's primary earnings
per share amounts are $0.81 and $1.04 per share for the six-month periods
ended June 30, 1997 and 1996, respectively, and the fully diluted earnings
per share amounts for the six-month periods ended June 30, 1997 and 1996
are $0.81 and $1.02 per share, respectively. The basic earnings per share
amounts, as computed under Statement 128, are expected to be approximately
$0.56 and $0.54 per share for the three-month periods ended June 30, 1997
and 1996, respectively and $0.89 and $1.18 per share for the six-month
periods ended June 30, 1997 and 1996, respectively. The Company anticipates
the adoption of Statement 128 will result in the presentation of diluted
earnings per share amounts which will not materially differ from the fully
diluted amounts previously presented under APB Opinion No. 15.
9
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
CapMAC Holdings Inc. ("Holdings" or the "Company"), a Delaware corporation, is
the sole stockholder of Capital Markets Assurance Corporation ("CapMAC"), CapMAC
Financial Services Inc. ("CFS"), and CapMAC Investment Management, Inc ("CIM").
CapMAC Assurance, S.A. is a subsidiary of CapMAC, and CapMAC Financial Services
(Europe) Limited ("CFS (Europe)") is a subsidiary of CFS. The Company is also a
lead investor in CapMAC Asia Ltd. ("CapMAC Asia").
Results of Operations
Quarter Ended June 30, 1997 versus Quarter Ended June 30, 1996
The Company reported net income of $9.3 million and primary and fully diluted
earnings per share of $0.52 during the second quarter of 1997 representing an
increase of 11% from net income of $8.4 million, or $0.47 per share on a primary
and fully diluted basis, reported for the second quarter of 1996. Operating
earnings, which the Company defines as net income less the effect of net
realized gains and losses, were $8.9 million, or $0.50 per share, up from $8.3
million, or $0.47 per share, earned in the second quarter of 1996.
Total revenues during the second quarter of 1997 were $25.2 million, an increase
of 29% from $19.6 million during the second quarter of 1996. This increase was
primarily due to higher premiums earned, advisory and other fees, net investment
income and net capital gains.
For the second quarter of 1997, gross premiums written were $19.4 million, an
increase of 3% from $18.8 million for the same period in 1996. This increase was
principally due to higher premiums written of $0.9 million from domestic
consumer transactions, $0.6 million from corporate transactions, $0.5 million
from municipal transactions, offset by lower premiums written with respect to
the international business of $1.4 million. However, the amount of premiums
ceded to reinsurers increased to $6.3 million during the second quarter of 1997
from $5.1 million in the second quarter of 1996. Net premiums earned were $12.2
million for the second quarter of 1997, an increase of 22% from $10.0 million
for the corresponding period in 1996.
CapMAC collects premiums primarily on an installment basis over the term of an
insurance policy and, to a lesser extent, on a one-time, up-front basis at the
time an insurance policy is issued. Due to the annuity nature of premium income,
CapMAC has an embedded future revenue stream which will be collected and
recognized as revenue not only in the year an insurance policy is issued, but
over the full term such policy is outstanding. CapMAC reflects a relatively
small portion of the expected future revenue on the business written in the
current period as premium earnings in the same period. To measure the amount of
business written in a period, the Company also tracks the total estimated
present value of future revenues ("PFR"), which includes premiums (net of ceded
premiums) and ceding commission income expected to be contractually due to or to
be earned by CapMAC in the future under outstanding policies. The amount of PFR
generated in any given period is based on the weighted average life of the
guarantees issued during the period and the net premium and ceding commissions
expected to be earned with respect to such guarantees, whereas "gross par
written" is based on the principal amount of guarantees issued and aggregate
program limits with respect to commercial paper conduit transactions.
Accordingly, an increase or decrease in PFR may not proportionately correspond
with an increase or decrease in gross par written.
10
<PAGE>
Business originated or renewed in the second quarter of 1997 was estimated to
generate $17.1 million of PFR, a decrease of 33% over the same period in 1996
due to lower net premium and ceding commissions primarily from certain
international and consumer transactions partially offset by an increase in net
premium and ceding commissions from corporate transactions. Correspondingly,
gross par written decreased to $4.3 billion in the second quarter of 1997 from
$4.6 billion in the second quarter of 1996, representing a decrease of 6%. At
June 30, 1997, CapMAC had 643 policies outstanding which are expected to
generate $247.0 million of PFR, up approximately 6% from $232.7 million at
December 31, 1996 relating to 607 policies outstanding at such date. The
discount rate used for purposes of the PFR calculation was 7% for 1997 and 1996.
At June 30, 1997, net par insured and outstanding was $21.9 billion, up 11% from
$19.7 billion at December 31, 1996. The remaining weighted average life of the
insured portfolio was estimated to be 6.5 years at June 30, 1997 and 6.4 years
at December 31, 1996.
Advisory and other fees increased 28% to $7.3 million in the second quarter of
1997 from $5.7 million in the second quarter of 1996. Advisory fees are
generally received by CFS in relation to the closing of transactions which
involve advisory and structuring services provided by CFS. Fees collected for
such services amounted to $4.8 million in the second quarter of 1997, compared
to $4.5 million in the second quarter of 1996. During the second quarter of 1997
advisory fees included $1.6 million paid in connection with the early
termination of a transaction. In addition to advisory fees, CFS also collects
recurring fees payable on a monthly and quarterly basis ("other fees") primarily
related to the administration of third-party owned and managed funding vehicles.
The amount related to other fees was $2.5 million in the second quarter of 1997,
compared to $1.2 million in the second quarter of 1996, primarily due to the
increased utilization of such funding vehicles. As advisory fees are generally
earned upon the closing of certain transactions, the timing and number of
transactions generating fees, as well as the amount of such fees, may result in
significant fluctuations in revenues attributable to such fees from period to
period.
Net investment income was $5.2 million and $3.8 million in the second quarter of
1997 and 1996, respectively. Average assets available for investment increased
to $348.9 million at June 30, 1997 from $314.3 million at June 30, 1996. The
average annualized pre-tax yield on the investment portfolio increased to 5.9%
in the second quarter of 1997 from 5.7% in the second quarter of 1996 due to a
higher interest rate environment. The average after-tax yield on the investment
portfolio was 4.6% in both the second quarter of 1997 and 1996. The amount of
tax-exempt securities held in the Company's investment portfolio decreased to
50% at June 30, 1997 from 59% at June 30, 1996.
Net realized capital gains were $0.5 million and $0.02 million and in the second
quarter of 1997 and 1996, respectively.
Total expenses were $11.2 million in the second quarter of 1997, an increase of
44% from $7.7 million in the second quarter of 1996. Total expenses included
additions to the reserve for losses and loss adjustment expenses, underwriting
and operating expenses, policy acquisition costs, and interest expense.
CapMAC maintains a reserve for losses and loss adjustment expenses which
consists of a supplemental loss reserve ("SLR") and, if appropriate, a case
basis loss reserve for expected levels of defaults resulting from credit
failures on currently insured issues. The SLR is based on estimates of the
portion of earned premiums required to cover those claims. A case basis loss
reserve is established for insured obligations when, in the judgment 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
11
<PAGE>
basis loss reserves when such amounts are reasonably estimable. Corresponding to
the growth in the insured portfolio, the losses and loss adjustment expenses
were $1.3 million in the second quarter of 1997 compared to $1.1 million in the
second quarter of 1996. Apart from additions to the SLR, the Company incurred no
losses during the first six months of 1997 and the year ended December 31, 1996.
Underwriting and operating expenses were $7.1 million in the second quarter of
1997, a 66% increase from $4.3 million in the first quarter of 1996.
Underwriting and operating expenses consisted of gross underwriting and
operating expenses, reduced by the deferral to future periods of certain costs
related to CapMAC's acquisition of new business ("Deferred Acquisition Costs" or
"DAC") and ceding commission income. Gross underwriting and operating expenses
were $11.4 million and $8.7 million in the second quarter of 1997 and 1996,
respectively. The increase in underwriting and operating expenses was due to
increased compensation costs and other operating costs. Staff and
benefit-related expenses, including the discretionary bonuses to employees,
constituted approximately 68% of gross underwriting and operating expenses in
the second quarter of 1997 compared to 75% in the second quarter of 1996. The
Company maintains a discretionary bonus plan under which annual bonuses are
awarded to employees. For the three months ended June 30, 1997 and June 30,
1996, $1.9 million and $2.4 million were accrued, respectively, for payment of
bonuses under such plan. Underwriting and operating expenses deferred by CapMAC
were $4.4 million in the second quarter of 1997 and 1996.
Policy acquisition costs represent the amortization of DAC, which are those
expenses incurred by CapMAC in acquiring new business. The increase in policy
acquisition costs to $2.5 million in the second quarter of 1997 from $2.1
million in the second quarter of 1996 related to the increase in premiums earned
in the corresponding periods. Interest expense related to the senior debt was
$0.3 million in the second quarter of 1997 and 1996.
In the second quarter of 1997 and 1996, the Company had net tax expense of $4.8
million and $3.9 million, respectively. The Company's effective tax rate was
34.1% and 31.3% for the second quarter of 1997 and 1996, respectively. The
effective tax rates during these periods were lower than the statutory tax rate
of 35% in 1997 and 1996 primarily due to tax-exempt interest income from the
Company's investment portfolio. In the second quarter of 1997, tax-exempt
interest income of $2.3 million represented 16% of earnings before taxes ("EBT")
compared to $2.4 million which represented 20% of EBT in the second quarter of
the prior year.
Results of Operations
Six Months Ended June 30, 1997 versus Six Months Ended June 30, 1996
The Company reported net income of $14.7 million and primary and fully diluted
earnings per share of $0.81 during the first six months of 1997. Although the
Company recorded growth in net premiums earned and business written during the
first half of 1997, lower advisory fees and net realized capital losses recorded
in the first quarter of 1997 resulted in a decline in net income of 20% from
$18.3 million or $1.04 per share on a primary basis and $1.02 on a fully diluted
basis in the first six months of 1996. Operating earnings were $15.5 million, or
$0.86 per share on a primary and fully diluted basis for the first six months of
1997, down from $18.1 million, or $1.04 and $1.02 per share on a primary and
fully diluted basis, respectively, earned in the first six months of 1996. The
decline in operating earnings was attributable to lower advisory fees earned
during the first quarter of 1997.
Total revenues during the first six months of 1997 were $44.2 million, an
increase of 4% from $42.6 million during the first six months of 1996. This
increase was primarily due to higher premiums earned, net investment income and
other fees partially offset by lower advisory fees.
12
<PAGE>
For the first six months of 1997, gross premiums written were $36.1 million as
compared to $33.8 million for the same period in 1996. This increase was
principally due to higher premiums written of $2.3 million from domestic
consumer transactions, $1.5 million from corporate transactions, $0.2 million
from municipal transactions, offset by lower premiums written with respect to
the international business of $1.7 million. However, the amount of premiums
ceded to reinsurers increased to $10.6 million during the first six months of
1997 from $7.0 million in the first six months of 1996. On January 1, 1996,
CapMAC reassumed the liability for all policies previously reinsured by
Winterthur Swiss Insurance Company ("Winterthur"). As a result, CapMAC reassumed
approximately $1.4 billion of principal insured by Winterthur as of December 31,
1995. In connection with this reassumption of liability, Winterthur commuted and
returned unearned premiums, net of ceding commission and Federal excise tax of
$2.0 million which reduced the amounts ceded to reinsurers in the first six
months of 1996. Net premiums earned were $24.2 million for the first six months
of 1997, an increase of 29% from $18.8 million for the corresponding period in
1996.
Business originated or renewed in the first six months of 1997 was estimated to
generate $39.3 million of PFR, an increase of 2% over the same period in 1996
due to higher premium earned and ceding commission obtained from corporate
transactions partially offset by a decrease from international and consumer
transactions. Correspondingly, the amount of guarantees issued (gross par
written) increased to $7.7 billion in the first six months of 1997 from $5.9
billion in the first six months of 1996, representing an increase of 29%.
Advisory and other fees decreased 31% to $10.7 million in the first six months
of 1997 from $15.6 million in the first six months of 1996. Advisory fees
amounted to $5.8 million in the first six months of 1997, compared to $13.7
million in the first six months of 1996. During the second quarter of 1997
advisory fees included $1.6 million paid in connection with the early
termination of a transaction. Structured international transactions closed
during the first quarter of 1996 contributed to the large amount of advisory
fees collected during that period. Advisory fees related to international
business were $2.7 million and $12.1 million in the first six months of 1997 and
1996, respectively. In addition to advisory fees, CFS also collects recurring
fees payable on a monthly and quarterly basis ("other fees") primarily related
to the administration of third-party owned and managed funding vehicles. The
amount related to other fees was $4.9 million in the first six months of 1997,
compared to $1.9 million in the first six months of 1996, primarily due to the
increased utilization of such funding vehicles. As advisory fees are generally
earned upon the closing of certain transactions, the timing and number of
transactions generating fees, as well as the amount of such fees, may result in
significant fluctuations in revenues attributable to such fees from period to
period.
Net investment income was $10.4 million in the first six months of 1997 and $7.9
million for the corresponding period in 1996. Average assets available for
investment increased to $344.6 million at June 30, 1996 from $307.1 million at
June 30, 1996. The average annualized pre-tax yield on the investment portfolio
increased to 5.9% in the first six months of 1997 from 5.6% in the first six
months of 1996. The average after-tax yield on the investment portfolio was 4.6%
in the first six months of 1997 and 1996.
Net realized capital (losses) gains in the first half of 1997 and 1996 were
($1.2 million) and $0.2 million, respectively. In the first quarter of 1997, the
Company recorded a pre-tax capital loss of $3.7 million (in addition to a $2.0
million loss realized in the fourth quarter of 1996) related to Holdings'
investment in three derivatives products subsidiaries of The Mutual Life
Assurance Company of Canada (such subsidiaries, the "TMG Group"). Holdings was
committed to purchase common stock in TMG Group for approximately $11 million
and fund its investment in TMG Group no later than February 27, 2000 at which
time the commitment amount would have contractually increased to approximately
$13 million. On July 8, 1997, Holdings sold its interest in the TMG Group at its
March 31, 1997 carrying value of $5.5 million. As a result, no additional
realized losses or gains were recognized in connection with the sale. Holdings
has no remaining commitment to purchase stock in the TMG Group.
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<PAGE>
Total expenses were $22.8 million in the first six months of 1997, an increase
of 42% from $16.0 million in the first six months of 1996. Total expenses
included additions to the reserve for losses and loss adjustment expenses,
underwriting and operating expenses, policy acquisition costs, and interest
expense.
Corresponding to the growth in the insured portfolio, the losses and loss
adjustment expenses were $2.9 million in the first six months of 1997 compared
to $2.2 million in the first six months of 1996.
Underwriting and operating expenses were $14.3 million in the first six months
of 1997, a 57% increase from $9.1 million in the first six months of 1996.
Underwriting and operating expenses consisted of gross underwriting and
operating expenses, reduced by DAC and ceding commission income. Gross
underwriting and operating expenses were $24.3 million and $18.0 million in the
first six months of 1997 and 1996, respectively. The increase in underwriting
and operating expenses was due to increased compensation costs and other
operating costs. Staff and benefit-related expenses, including the discretionary
bonuses to employees, constituted approximately 72% of gross underwriting and
operating expenses in the first six months of 1997 compared to 74% in the first
six months of 1996. The Company maintains a discretionary bonus plan under which
annual bonuses are awarded to employees. As of June 30, 1997 and 1996, $6.2
million and $4.9 million were accrued, respectively, for payment of bonuses
under such plan. Underwriting and operating expenses deferred by CapMAC were
$10.0 million and $8.9 million in the first six months of 1997 and 1996,
respectively.
The increase in policy acquisition costs to $5.1 million in the first half of
1997 from $4.1 million in the first half of 1996 relates to the increase in
premiums earned in the corresponding periods. Interest expense related to the
senior debt was $0.6 million in the first six months of 1997 and 1996.
In the first six months of 1997 and 1996, the Company had net tax expense of
$6.5 million and $8.8 million, respectively. The Company's effective tax rate
was 30.6% and 33.0% for the first six months of 1997 and 1996, respectively. The
effective tax rates during these periods were lower than the statutory tax rate
of 35% in 1997 and 1996 primarily due to tax-exempt interest income. As of June
30, 1997, tax-exempt interest income of $4.7 million represented 22% of EBT
compared to $4.7 million representing 17% of EBT in the first six months of the
prior year.
Liquidity and Capital Resources
The Company and Holdings. The operations of the Company are conducted primarily
through CapMAC and CFS, wholly owned subsidiaries of Holdings. In addition, the
Company has commenced conducting operations through CIM, its investment advisory
subsidiary which was capitalized in the first quarter of 1997. The liquidity of
Holdings both on a short-term (less than twelve months) and long-term (twelve
months or longer) basis will be dependent on several factors, including
borrowings, equity issuances and dividends from CFS. Holdings requires liquidity
for payment of dividends to shareholders, investment in international and other
business ventures and debt service. While CFS has from time to time paid
dividends to Holdings, currently no dividends are expected to be received by
Holdings from CapMAC.
The Company's investment portfolio consists of both equity investments and high
quality, intermediate-term taxable and tax-exempt securities to obtain an
optimal portfolio mix of liquidity, quality, maturity and earnings. The average
contractual maturity of securities within the investment portfolio was 6.1 years
at June 30, 1997 and December 31, 1996. The average duration of the investment
portfolio at June 30, 1997 and December 31, 1996 was 4.3 years. At June 30,
1997, the amortized cost of the Company's investment portfolio was approximately
$356 million (fair value of $392.8 million). The foregoing discussion excludes
equity investments. Holdings' equity investments include investments in P.T. ABS
Finance Indonesia and CapMAC Asia as well as other equity investments which are
not liquid such as investments in specialized finance companies in connection
with its financial engineering activities. Holdings has also agreed to invest,
if required, an additional amount of $4.9 million in CapMAC Asia.
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<PAGE>
Management believes that the Company's operating liquidity needs, both on a
short-term basis and long-term basis, can be funded exclusively from its
operating cash flow. The Company has a number of sources of liquidity which it
expects to have available to pay claims on CapMAC insurance policies on a
short-term and long-term basis: the cash flow from its written premiums,
advisory fees collected, its investment portfolio and the earnings thereon, its
bank line of credit, its reinsurance arrangements with third-party reinsurers,
the capital markets and, under certain circumstances, realizations from
collateral underlying its insured transactions.
The Company has no material commitments for capital expenditures, although it
has the CapMAC Asia investment commitment referred to above. The total liquidity
resources of the Company represented by its investment income, premiums,
advisory fees and liquidity arrangements are, in management's opinion, adequate
to meet the Company's cash needs.
In the second quarter of 1997, the Company issued 725,539 new shares of common
stock in connection with the exercise and purchase of warrants. On April 24,
1997 the Company purchased all remaining outstanding warrants for its common
stock. The warrants had given the holders the right to purchase approximately
1.5 million shares of common stock at a price of $13.33 per share. The number of
shares issued to warrant holders in connection with the Company's purchase or
exercise of warrants was based on the average closing price of the Company's
common stock on each of the ten business days preceding and including the
purchase or exercise date.
CapMAC. CapMAC's primary sources of funds are from premiums received and
earnings from its investment portfolio. Currently CapMAC's primary use of funds
is to pay operating expenses. In the event of a default by an issuer of an
insured obligation which results in a claim on a CapMAC insurance policy,
generally after exhaustion of other liquidity sources in the transaction, such
as the cash flow from the collateral underlying such obligations, funds from
CapMAC's investment portfolio may be required to satisfy claims. CapMAC
generally insures asset-backed transactions which have been structured to
address liquidity risks through, among other measures, the addition of other
liquidity sources, such as banks, to transactions. The insurance policies issued
by CapMAC provide, in general, that payment of principal, interest and other
amounts insured by CapMAC may not be accelerated by the holder of the obligation
but are paid by CapMAC in accordance with the obligation's original payment
schedule or, at CapMAC's option, on an accelerated basis. These policy
provisions prohibiting acceleration of certain claims are mandatory under
Article 69 of the New York Insurance Law and serve to reduce CapMAC's liquidity
requirements.
CapMAC has a conservative investment strategy of investing in U.S. government
and agency obligations and securities that are rated "A" or better by the major
rating agencies. CapMAC has readily marketable, high quality, fixed income
securities and short-term investments in its investment portfolio. The average
contractual maturity of securities within the investment portfolio was 6.7 years
and 6.1 years at June 30, 1997 and December 31, 1996, respectively. The average
duration of the investment portfolio at June 30, 1997 and December 31, 1996 was
4.7 years and 4.3 years, respectively. At June 30, 1997, the amortized cost of
CapMAC's investment portfolio was approximately $324.2 million (fair value of
$324.9 million). CapMAC manages its investments with the objectives of
preserving its capital and claims-paying ability, maintaining a high level of
liquidity, minimizing taxes and, within these constraints, optimizing long-term
total return.
CapMAC has available a $150 million, standby corporate liquidity facility
presently scheduled to terminate in June 12, 2000 which, if necessary, is
available (subject to satisfaction of customary drawing conditions) to provide
funds for any claims payments under its policies. The liquidity facility is
provided by a consortium of banks headed by Bank of Montreal, as agent, which is
rated A1+ and P1 by Standard & Poor's Ratings Services (S&P) and Moody's
Investors Service, Inc., respectively. As of June 30, 1997, CapMAC has never
borrowed under this corporate liquidity facility.
15
<PAGE>
Reinsurance arrangements provide a further source of liquidity to CapMAC. CapMAC
actively pursues reinsurance as a means of diversifying and reducing risk,
enhancing return on capital and adding underwriting capacity. In addition to its
facultative and treaty reinsurance agreements, CapMAC has several "stop-loss"
reinsurance treaties. Effective January 1, 1997 the stop-loss reinsurance
coverage increased to $75 million in excess of incurred losses above $150
million. This coverage increases annually based on increases in CapMAC's
statutory qualified capital. The stop-loss reinsurance is provided by Mitsui,
Marine and Fire Insurance Co., Ltd. ("Mitsui"), AXA Re Finance S.A. ("AXA Re"),
and Munchener Ruckversicherungs-Gesellschaft ("Munich Re"). At June 30, 1997,
the majority of CapMAC's reinsurance capacity was held by reinsurers who were
rated AA or better by S&P. CapMAC monitors the creditworthiness of all of its
reinsurers on a regular basis.
At June 30, 1997, CapMAC had statutory qualified capital, which consisted of
statutory capital, unassigned surplus and contingency reserves, of $271.6
million up from $260.2 million at December 31, 1996. CapMAC's policyholders'
leverage ratio, which is measured by the ratio of net principal and interest
insured to statutory qualified capital, was 95 to 1 at June 30, 1997 and 90 to 1
at December 31, 1996. These ratios were within aggregate limits permissible
under New York State Financial Guaranty Law. CapMAC's claims-paying resources as
defined by the Company (which includes statutory qualified capital, PFR and
stop-loss reinsurance) stood at $593.6 million and $542.9 million at June 30,
1997 and December 31, 1996, respectively.
In early 1997, CapMAC made an investment of 50 million French francs
(approximately 10 million U.S. dollars) in CapMAC Assurance, S.A., an insurance
subsidiary to be established in Paris, France. CapMAC Assurance, S.A., is
licensed to write financial guarantee insurance in the European Union member
states.
CapMAC Financial Services. The primary sources of funds for CFS are payments by
Holdings, CapMAC and CFS (Europe) under a service agreement (the "CFS Servicing
Agreement") and the collection of advisory fees for providing advisory and
structuring services to third parties. In addition, both CFS and CFS (Europe)
generate earnings from their respective investment portfolios. At June 30, 1997,
the amortized cost and fair value of the consolidated CFS portfolio was $12.4
million. The entire portfolio was highly liquid with maturities of less than one
year. The primary use of the funds of CFS is to pay its operating expenses. All
of the Company's personnel are employed by CFS. Under the CFS Servicing
Agreement, CFS allocates expenses to Holdings, CapMAC and CFS (Europe) for
services provided to these entities. It is intended that a portion of CFS' funds
be used to pay dividends to Holdings in order that Holdings will have funds
available to pay dividends and satisfy its obligations.
CapMAC Investment Management. CIM is a registered investment advisor and has
been formed for the purpose of establishing investment funds and providing
investment advice regarding asset-backed structures, mortgage-backed securities,
foreign and domestic fixed income and equity securities and certain other
securities based on the investment objectives of its clients. CIM has been
initially capitalized with approximately $2 million and has commenced operations
in the first quarter of 1997. CIM is expected to generate revenue through fees
charged for assets under management.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share
("Statement 128"). Statement 128 supersedes APB Opinion No. 15, Earnings Per
Share, ("APB Opinion No. 15"), and specifies the computation, presentation, and
disclosure requirements for earnings per share for entities with publicly held
common stock or potential common stock. Statement 128 was issued to simplify the
computation of earnings per share. It requires dual presentation of "basic
earnings per share" and "diluted earnings per
16
<PAGE>
share" as defined. Statement 128 is effective for financial statements for both
interim and annual periods ending after December 15, 1997. Earlier application
is not permitted. After adoption, all prior period earnings per share data
presented shall be restated to conform with Statement 128.
Under APB Opinion No. 15, the Company's primary and fully diluted earnings per
share amounts are $0.52 and $0.47 per share for the three-month periods ended
June 30, 1997 and 1996, respectively. The Company's primary earnings per share
amounts are $0.81 and $1.04 per share for the six-month periods ended June 30,
1997 and 1996, respectively, and the fully diluted earnings per share amounts
for the six-month periods ended June 30, 1997 and 1996 are $0.81 and $1.02 per
share, respectively. The basic earnings per share amounts, as computed under
Statement 128, are expected to be approximately $0.56 and $0.54 per share for
the three-month periods ended June 30, 1997 and 1996, respectively and $0.89 and
$1.18 per share for the six-month periods ended June 30, 1997 and 1996,
respectively. The Company anticipates the adoption of Statement 128 will result
in the presentation of diluted earnings per share amounts which will not
materially differ from the fully diluted amounts previously presented under APB
Opinion No. 15.
SFAS No. 130, Reporting Comprehensive Income, ("Statement 130") was issued in
June 1997 and establishes standards for the reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income encompasses all changes in shareholders' equity (except
those arising from transactions with owners) and includes net income, net
unrealized capital gains or losses on available for sale securities and foreign
currency translation adjustments. As this new standard only requires additional
information in a financial statement, it will not affect the Company's financial
position or results of operations. Statement 130 is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. The
Company is currently evaluating the presentation alternatives permitted by the
statement.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, ("Statement 131") was issued in June 1997 and establishes standards
for the reporting of information relating to operating segments in annual
financial statements, as well as disclosure of selected information in interim
financial reports. This statement supersedes SFAS No. 14, Financial Reporting
for Segments of a Business Enterprise, which requires reporting segment
information by industry and geographic area (industry approach). Under Statement
131, operating segments are defined as components of a company for which
separate financial information is available and is used by management to
allocate resources and assess performance (management approach). This statement
is effective for year-end 1998 financial statements. Interim financial
information will be required beginning in 1999 (with comparative 1998
information). The Company is currently evaluating the segment information
disclosure required by Statement 131.
17
<PAGE>
PART II - OTHER INFORMATION
Items 1, 3 and 5 are omitted either because they are inapplicable or because the
answer to such questions is negative.
Item 2. Changes in Securities
On April 14, 1997, the Company notified holders of all of its remaining
outstanding warrants for shares of common stock that it intended to exercise its
option to purchase the warrants on April 24, 1997 and, in lieu of paying cash,
to issue to the holders of the warrants shares of the Company's common stock. As
set forth in the notice, the amount of common stock to be delivered to
shareholders was to be determined by subtracting the aggregate exercise price of
the warrants ($13.33 per share) from the aggregate Market Price of the common
stock. The "Market Price" was to be determined on April 24, 1997 based on the
rolling ten-day average price of the Company's common stock. Warrant holders had
the option of (i) exercising their warrant by paying the exercise price of the
warrant in cash ( a "cash exercise") and taking delivery of their shares before
April 24, 1997, (ii) exercising their warrant via a cashless exercise, whereby
the warrant holder receives shares of common stock determined by subtracting the
exercise price of the warrant from the Market Price (the rolling ten-day average
price for the preceding ten trading days) calculated from the date on which the
warrant was tendered or (iii) waiting until April 24, 1997 and receiving shares
of common stock from the Company based on the Market Price calculated from that
date.
190,268 shares of the Company's common stock were issued in connection with the
exercise of warrants during the second quarter of 1997 before the Company
purchased the warrants on April 24, 1997. This includes all warrants exercised
on or after April 1, 1997 but before the Company's purchase of the warrants on
April 24, 1997, whether via a cash exercise or a cashless exercise. On April 24,
1997, the Company purchased the remaining warrants, and in lieu of cash,
delivered to warrant holders an additional 535,271 shares of the Company's
common stock. The Market Price of the Company's common stock calculated in
connection with the Company's purchase of the warrants was $23.588. The
aggregate number of additional shares of common stock issued by the Company in
the second quarter of 1997 in connection with the exercise of warrants and the
purchase by the Company of warrants was 725,539.
Because the exercise of the warrants by the holders and the Company's purchase
of the warrants did not involve a public offering and were an exchange of
securities where no commission was charged, the transactions were completed in
reliance upon the exemptions set forth in Section 4(2) and 3(a)(9) of the
Securities Act of 1933, as amended.
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Item 4. Submission of Matters to a Vote of Security Holders
The following matters were voted upon at the Annual Meeting of Stockholders of
the Company held on May 7, 1997, and received the votes set forth below:
Proposal 1
The following directors were elected to serve on the Company's Board of
Directors for three year terms expiring in 2000:
Number of Votes Cast
For Withheld
George M. Jenkins 13,574,028 85,735
Robert Model 13,562,445 97,318
Doren W. Russler 13,573,431 86,332
John T. Shea 13,576,312 83,451
Richard C. Yancey 13,573,431 86,332
Proposal 2
The proposal to ratify the selection of KPMG Peat Marwick LLP as independent
auditors of the Company and its subsidiaries for 1997 was adopted, with
13,581,059 votes in favor, 75,354 votes against and 3,350 votes abstaining.
Proposal 3
The proposal to amend the CapMAC Holdings Inc. 1995 Omnibus Stock Incentive Plan
(the "Omnibus Plan") by (i) increasing by 1,500,000 shares the maximum number of
shares of common stock available for grant under the Omnibus Plan and (ii)
satisfying the requirements necessary for exemption from the deduction
limitation under the final regulations issued under Section 162(m) of the
Internal Revenue Code of 1986, as amended, with respect to stock options and
stock appreciation rights by limiting to 200,000 the number of shares which can
be issued to any one individual in a single calendar year, was adopted, with
7,034,158 votes in favor, 5,469,804 votes against and 120,674 votes abstaining.
19
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.44 Seventh Amendment dated June 12, 1997 to Credit Agreement,
dated June 25, 1992, among CapMAC, Bank of Montreal
individually and as agent, and the banks from time to time
party thereto.
10.45 Promissory Note of C. Jackson Lester dated June 12, 1997.*
11 Computation of Earnings Per Share
27 Financial Data Schedule
99 Additional Exhibits - Capital Markets Assurance Corporation
Financial Statements
(b) Reports on Form 8-K - No Reports on Form 8-K were filed in this quarter.
- ------------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-Q pursuant to item 14(c).
20
<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 thereunto duly authorized.
CapMAC Holdings Inc.
Registrant
Date: August 13, 1997 /s/ Paul V. Palmer
Paul V. Palmer
Managing Director and
Chief Financial Officer
Date: August 13, 1997 /s/ Gerard Edward Murray
Gerard Edward Murray
Vice President and
Controller
(Principal Accounting Officer)
21
<PAGE>
Exhibit Index
Page Number
in Sequential
Exhibit No. Exhibit Number Copy
10.44 Seventh Amendment dated June 12, 1997 to Credit Agreement, dated June
25, 1992, among CapMAC, Bank of Montreal individually and as agent, and
the banks from time to time party thereto 23
10.45 Promissory Note of C. Jackson Lester dated June 12, 1997* 28
11 Computation of Earnings Per Share 30
27 Financial Data Schedule 32
99 Capital Markets Assurance Corporation Financial Statements 34
- ------------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-Q pursuant to item 14(c).
22
<PAGE>
Exhibit 10.44
Capital Markets Assurance Corporation
Seventh Amendment to Credit Agreement
To The Banks Party to the
June 25, 1992 Credit Agreement with
Capital Markets Assurance Corporation
Gentlemen:
The undersigned, Capital Markets Assurance Corporation (the "Company")
refers to the Credit Agreement dated as of June 25, 1992 as amended and
currently in effect between the Company, Bank of Montreal individually and as
agent and the Bank parties thereto (the "Credit Agreement"), capitalized terms
used without definition below to have the meanings ascribed to them in the
Credit Agreement. Upon satisfaction of the conditions precedent to effectiveness
hereinafter set forth, this letter shall serve as an agreement between us as
follows:
1. Amendments to Credit Agreement.
(a) Increase in the Commitment of Deutsche Bank.
Effective on the Effective Date (as hereinafter defined) the Commitment of
Deutsche Bank shall be increased to $65,000,000 (subject to any reductions
thereafter made pursuant to the terms of the Credit Agreement).
(b) Deletion of Bank Nationale de Paris as a Bank.
Effective on the Effective Date, Banque Nationale de Paris shall no longer
be a Bank party to the Credit Agreement and, accordingly, shall no longer have
any commitment or obligation to extend credit to the Company pursuant to the
Credit Agreement.
(c) Extension of the Termination Date.
The definition of the term "Termination Date" appearing in Section 7.1 of
the Credit Agreement shall be amended by striking the date "June 12, 1999"
therefrom and substituting the date "June 12, 2000" therefor.
2. Conditions Precedent to Effectiveness.
The amendments herein provided for shall become effective on June 12, 1997
(the "Effective Date") provided that each of the following conditions precedent
have then been satisfied:
(a) the Agent shall have received counterparts hereof which,
taken together, bear the signatures of the Company and the Banks;
(b) the Agent shall have received a Certificate of the
Secretary of the Company in the form annexed hereto as Exhibit A in sufficient
counterparts for the Banks;
23
<PAGE>
(c) the Agent shall have received for Deutsche Bank a Note in
the amount of its Commitment as increased hereby such note to constitute a
"Note" for all purposes of the Credit Agreement and all instruments and
documents delivered pursuant thereto;
(d) if there are any Loans outstanding on the Effective Date
and this Amendment has become effective, there shall as of such date be such
nonratable borrowings and repayments made under the Credit Agreement as shall be
necessary so that after giving effect thereto, the percentage of each Bank's
Commitment which is in use is identical and all principal and interest owing
Banque Nationale de Paris has been paid in full;
(e) Banque Nationale de Paris shall have been paid any accrued
commitment fee owed it for the period to the Effective Date; and
(f) The representations and warranties contained in Section 3
of the Credit Agreement as amended hereby shall be true and correct as of the
time the other conditions precedent to effectiveness hereinabove set forth have
been satisfied and no Default or Event of Default shall have occurred and be
continuing , the satisfaction by the Company of such other conditions precedent
to constitute a representation from the Company to the foregoing effects, such
representation to be deemed made in connection with the Credit Agreement.
Promptly after this Seventh Amendment to Credit Agreement becomes
effective Deutsche Bank shall return the Note now held by it to the Company
marked "superseded" and (provided always that such Note has been in full) Banque
Nationale de Paris shall return the Note held by it to the Company marked
"cancelled" or "paid".
3. Miscellaneous.
Except as specifically amended hereby all of the terms, conditions and
provisions of the Credit Agreement shall stand and remain unchanged and in full
force and effect. No reference to this Seventh Amendment to Credit Agreement
need be made in any instrument or document at any time referring to the Credit
Agreement, a reference to the Credit Agreement in any of such to be deemed to be
a reference to the Credit Agreement as amended hereby. This Seventh Amendment to
Credit Agreement shall be construed and determined in accordance with the laws
of the State of New York. This Seventh Amendment to Credit Agreement may be
executed in counterparts and by separate parties hereto on separate
counterparts, each to constitute an original but all but one and the same
instrument.
Dated as of this 12th day of June, 1997
CAPITAL MARKETS ASSURANCE
CORPORATION
By /s/ Robert L. Nevin, Jr.
Its Managing Director
Accepted and agreed to as of the day and year last above written.
24
<PAGE>
ADDRESS AND AMOUNT AND PERCENTAGE OF
COMMITMENTS AFTER GIVING EFFECT TO AMENDMENT:
$65,000,000 43.33333% DEUTSCHE BANK AG
NEW YORK BRANCH AND/OR
CAYMAN ISLANDS BRANCH
By /s/ John S. McGill
Its Vice President
By /s/ Louis Caltavuturo
Its Vice President
Address for Notices:
Deutsche Bank, AG
New York Branch
31 West 52nd Street
New York, New York 10019
Attn: Mac Johnson
Telephone: (212) 474-8107
Fax: (212) 474-8108
Lending Office:
31 West 52nd Street
New York, New York 10019
Attn: Mac Johnson
$45,000,000 30% BANK OF MONTREAL, individually
and as Agent
430 Park Avenue, 14th Floor
New York, New York 10022
Attn: Richard McClorey
Telephone: (2120 605-1444
Fax: (212) 605-1455
By /s/ R.J. McClorey
Its Director
Lending Office:
Bank of Montreal
115 South LaSalle Street
Chicago, Illinois 60603
Attn: Manager-Loan Operations
25
<PAGE>
$40,000,000 26.66667% BANK OF AMERICA ILLINOIS
231 South LaSalle Street
Chicago, Illinois 60697
ttn: Elizabeth Bishop
Telephone: (312) 828-6550
Fax: 312-987-0889
By /s/ Elizabeth Bishop
Its Vice President
Lending Office:
Bank of America Illinois
231 South LaSalle Street
Chicago, Illinois 60697
Attn: Elizabeth Bishop
$-0- 0% BANQUE NATIONALE DE PARIS
By /s/ Nathalie Coulon
Its Vice President
By /s/ Mark J. Daniel
Its Vice President
26
<PAGE>
Exhibit A
Certificate of the Secretary of
Capital Markets Assurance Corporation
The undersigned, Ram D. Wertheim, certifies that he is the duly elected,
qualified and acting secretary of Capital Markets Assurance Corporation, a
corporation duly organized and existing under the laws of the State of New York
and that as such Secretary he is the keeper of the corporate records and seal of
said corporation. The undersigned further certifies that the Resolutions of the
Board of Directors of said Corporation attached as Exhibit A to the certificate
of the undersigned dated June 25, 1992 and heretofore delivered to the Banks
have not been rescinded or modified in any respect but still remain in full
force and effect and that the persons named in such certificate as being the
duly elected, qualified and acting incumbents of their respective offices remain
the duly elected, qualified and acting incumbents of said offices. IN WITNESS
WHEREOF, I have hereunto set my hand and affixed the corporate seal of said
Corporation _______ day of _____________, 1997. (SEAL)
CAPITAL MARKETS ASSURANCE
CORPORATION
Ram D. Wertheim, Secretary
27
<PAGE>
Exhibit 10.45
PROMISSORY NOTE
$100,000 New York, New York
June 12, 1997
1. FOR VALUE RECEIVED, the undersigned, C. Jackson Lester (the "Borrower") ,
agrees to pay to the order of CapMAC Financial Services, Inc. (the "Lender") at
885 Third Avenue, New York, New York 10022 or such other place as may be
designated by the Lender from time to time, in lawful money of the United States
of America and in immediately available funds, the principal amount of One
Hundred Thousand Dollars ($100,000) together with interest on the unpaid portion
of such principal amount from the date hereof until due and payable (whether at
the stated maturity thereof, by acceleration or otherwise) at the per annum rate
equal to 7.00%.
2. Interest on this Note will be payable annually concurrently with the payment
of an annual bonus to the Borrower and, if no bonus is paid to the Borrower in
any calender year, then interest on this Note shall be payable by the Borrower
on the last business day of such year. The Lender (or any affiliate of the
Lender) shall be entitled to deduct from any bonus or other compensation payable
to the Borrower the amount of interest due hereon that is not paid by the
Borrower when due. Interest shall be calculated on the basis of a year of 365
days for the actual number of days elapsed.
3. The principal amount of this Note shall become payable in full on the earlier
of (i) June 12, 2002, (ii) the date of the Borrower's Termination of Employment
for reasons other than death or disability and (iii) 90 days after the date of
the Borrower's Termination of Employment due to death or disability. As used
herein, "Termination of Employment" shall mean any termination of employment,
whether voluntary or involuntary and with or without cause, including death or
permanent disability. This Note shall become due and payable (i) within five
days after notice by the Lender to the Borrower of any default by the Borrower
of the Borrower's obligations hereunder and (ii) immediately upon the filing by
or against the Borrower of any bankruptcy petition for protection under the
bankruptcy laws of United States or any state thereof.
4. The principal amount of this Note may be prepaid in whole or in part at any
time.
5. Upon the maturity of this Note (whether at the stated maturity thereof, by
acceleration or otherwise), the Lender (or any of its affiliates) shall be
entitled to apply any amounts due (including, without limitation, any severance
payments) by the Lender (or any affiliate of the Lender) to the Borrower to the
payment of any accrued and unpaid interest and any outstanding principal of this
Note and of any other Notes issued by the Borrower to the Lender under the
CapMAC Financial Services Executive Loan Program (the "Loan Program") in the
inverse order of the maturity of such Notes, and the Borrower shall be liable
for the payment of any remaining accrued interest and unpaid principal of this
Note and any such other Notes.
6. The Borrower hereby agrees that as long as any amount is outstanding under
this Note, the Borrower shall (i) not pledge any of his stock in CapMAC Holdings
Inc., including any stock issuable to the Borrower upon the exercise of any
stock options ("Stock"), to secure any indebtedness or other payment obligation
and (ii) apply the proceeds of the sale of any Stock to repay the unpaid
principal amount of this Note and of any other Note issued by the Borrower under
the Loan Program, such payment to be applied to repay such Notes in the order
specified by the Borrower or, if the Borrower does not specify how such payment
is to be applied, in the inverse order of the maturity of all Notes issued by
the Borrower under the Loan Program.
28
<PAGE>
7. If any payment on this Note becomes due and payable on a day other than a
business day the maturity thereof shall be extended to the next succeeding
business day, and with respect to payments of principal, interest thereon shall
be payable at the then applicable rate during such extension.
IN WITNESS WHEREOF, the Borrower has duly executed and delivered this Note to
the Lender
By: /s/ C. Jackson Lester
C. Jackson Lester
Accepted and Agreed:
CapMAC FINANCIAL SERVICES, INC.
By: /s/ Ram D. Wertheim
Title: Managing Director
29
<PAGE>
Exhibit 11a
CapMAC Holdings Inc. and Subsidiaries
Statement Re Computation of Per Share Earnings
(Dollars in thousands, except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
<S> <C> <C> <C> <C>
1997 1996 1997 1996
- ----------------------------------------------------- ---- ---------- ------------ -------- --------
Modified Treasury Stock Method E.P.S. - Fully
Diluted
- ----------------------------------------------------------- ---------- ------------ -------- --------
Net income $ 9,267 8,335 14,679 18,235
- ----------------------------------------------------- ---- ---------- ------------ -------- --------
Average number of common shares outstanding 16,907 15,509 16,519 15,499
Assumed exercise of dilutive stock options 894 2,242 1,398 2,242
- ----------------------------------------------------- ---- ---------- ------------ -------- --------
Fully diluted number of shares 17,801 17,751 17,917 17,741
Earnings per share assuming full dilution $ 0.52 0.47 0.81 1.03
- ----------------------------------------------------- ---- ---------- ------------ -------- --------
Common stock equivalents 2,664 4,530 2,664 4,530
Proceeds from exercise of all equivalents $ 51,228 65,223 51,228 65,223
Purchase of treasury stock 1,524 2,289 1,524 2,289
Market value per share $ 33.63 28.50 33.63 28.50
- ----------------------------------------------------- ---- ---------- ------------ -------- --------
</TABLE>
As of June 30, 1997 approximately 2,664,000 stock options had been granted and
were outstanding. Based upon various exercise prices, the total consideration
for the common stock equivalents will be approximately $51.2 million. Using the
Modified Treasury Stock method, it is assumed that the proceeds from the
exercised common stock equivalents would be used to purchase up to 20% of the
outstanding shares using a market value of $33.63 per share for six months ended
June 30, 1997. The dilution would be the equivalent of approximately 1,398,000
shares.
30
<PAGE>
Exhibit 11b
CapMAC Holdings Inc. and Subsidiaries
Statement Re Computation of Per Share Earnings
(Dollars in thousands, except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
- ----------------------------------------------------- ---- ---------- ----------- ---- ----------
Modified Treasury Stock Method E.P.S. - Primary
Net Income $ 9,267 8,335 $ 14,679 18,235
- ----------------------------------------------------- ---- ------- ----------- ---- -------- -----
Average number of common shares outstanding 16,907 15,509 16,519 15,499
Assumed exercise of dilutive stock options 989 2,159 1,519 2,020
- ----------------------------------------------------- ---- ------- ----------- ---- -------- -----
Fully diluted number of shares 17,896 17,668 18,039 17,519
Earnings per share assuming full dilution $ 0.52 0.47 $ 0.81 1.04
- ----------------------------------------------------- ---- ------- ----------- ---- -------- -----
Common stock equivalents 2,664 4,530 2,664 4,530
Proceeds from exercise of all equivalents $ 51,228 65,223 $ 51,228 65,223
Purchase of treasury stock 1,794 2,377 993 2,020
Average market value per share $ 28.56 27.44 $ 30.66 25.98
- ----------------------------------------------------- ---- ------- ----------- ---- ---------- --
As of June 30, 1997 approximately 2,664,000 stock options had been granted and
were outstanding. Based upon various exercise prices, the total consideration
for the common stock equivalents will be approximately $51.2 million. Using the
Modified Treasury Stock method, it is assumed that the proceeds from the
exercised common stock equivalents would be used to purchase up to 20% of the
outstanding shares using an average market value of $30.66 per share for six
months ended June 30, 1997. The dilution would be the equivalent of
approximately 1,519,000 shares.
31
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION extracted from CapMAC
Holdings Inc. and Subsidiaries Consolidated Balance Sheets for the quarter
ending June 30, 1997 and the consolidated statements of income, stockholders'
equity and cash flows, for the quarter then ended and the notes thereto and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000889906
<NAME> CapMAC Holdings Inc.
<MULTIPLIER> 1000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 356573
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 486
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 392791
<CASH> 6227
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 50327
<TOTAL-ASSETS> 493251
<POLICY-LOSSES> 13861
<UNEARNED-PREMIUMS> 71800
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 15000
0
0
<COMMON> 173
<OTHER-SE> 328134
<TOTAL-LIABILITY-AND-EQUITY> 493251
24235
<INVESTMENT-INCOME> 10410
<INVESTMENT-GAINS> (1198)
<OTHER-INCOME> 48
<BENEFITS> 2876
<UNDERWRITING-AMORTIZATION> 5053
<UNDERWRITING-OTHER> 14299
<INCOME-PRETAX> 21338
<INCOME-TAX> 6527
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14679
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
<RESERVE-OPEN> 10985
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 13861
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
33
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
ASSETS
<CAPTION>
June 30,1997 December 31,1996
(Unaudited)
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
Investments:
Bonds at fair value (amortized cost $307,166 at June 30,
1997 and $294,861 at December 31, 1996) $ 307,821 297,893
Short-term investments (at amortized cost which
approximates fair value) 17,053 16,810
- -------------------------------------------------------------------------------------------------------
Total investments 324,874 314,703
- -------------------------------------------------------------------------------------------------------
Cash 4,506 371
Accrued investment income 3,835 3,807
Deferred acquisition costs 50,327 45,380
Premiums receivable 5,826 5,141
Prepaid reinsurance 20,787 18,489
Other assets 10,464 6,424
- ------------------------------------------------------------------------------------------------------
Total assets $ 420,619 394,315
=======================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 71,800 68,262
Reserve for losses and loss adjustment expenses 13,861 10,985
Ceded reinsurance 2,766 1,738
Accounts payable and other accrued expenses 14,433 8,019
Current income taxes 203 679
Deferred income taxes 15,700 15,139
- -------------------------------------------------------------------------------------------------------
Total liabilities 118,763 104,822
- -------------------------------------------------------------------------------------------------------
Stockholder's Equity:
Common stock - $1.00 par value per share; 15,000,000 shares are authorized,
issued and outstanding at June 30, 1997
and December 31, 1996 15,000 15,000
Additional paid-in capital 208,475 208,475
Unrealized appreciation on investments, net of tax 425 1,970
Retained earnings 77,956 64,048
- -------------------------------------------------------------------------------------------------------
Total stockholder's equity 301,856 289,493
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 420,619 394,315
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Direct premiums written $ 18,726 18,622 35,180 32,777
Assumed premiums written 655 150 916 1,024
Ceded premiums written (6,272) (5,103) (10,621) (7,013)
- -------------------------------------------------------------------------------------------------------------
Net premiums written 13,109 13,669 25,475 26,788
Increase in unearned premiums (877) (3,681) (1,240) (7,972)
- -------------------------------------------------------------------------------------------------------------
Net premiums earned 12,232 9,988 24,235 18,816
Net investment income 4,684 4,112 9,386 7,989
Net realized capital gains 506 19 2,549 168
Other income 45 25 88 79
- -------------------------------------------------------------------------------------------------------------
Total revenues 17,467 14,144 36,258 27,052
- -------------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 1,333 1,109 2,876 2,184
Underwriting and operating expenses 4,208 3,385 8,879 7,362
Policy acquisition costs 2,472 2,059 5,053 4,123
- -------------------------------------------------------------------------------------------------------------
Total expenses 8,013 6,553 16,808 13,669
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 9,454 7,591 19,450 13,383
- -------------------------------------------------------------------------------------------------------------
Income Taxes:
Current income tax 2,277 1,316 4,150 1,981
Deferred income tax 473 1,148 1,392 1,971
- -------------------------------------------------------------------------------------------------------------
Total income taxes 2,750 2,464 5,542 3,952
- -------------------------------------------------------------------------------------------------------------
Net Income $ 6,704 5,127 13,908 9,431
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statement of Stockholder's Equity
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997
<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 ............................. 208,475
---------
Balance at end of period ................................ 208,475
Unrealized appreciation (depreciation) on investments, net of tax:
Balance at beginning of period ............................. 1,970
Unrealized depreciation on investments ..................... (1,545)
---------
Balance at end of period ................................ 425
---------
Retained earnings:
Balance at beginning of period ............................. 64,048
Net income ................................................. 13,908
---------
Balance at end of period ................................ 77,956
---------
Total stockholder's equity .............................. $ 301,856
=========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 13,908 9,431
- -------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Reserve for losses and loss adjustment expenses 2,876 1,821
Unearned premiums, net 3,538 10,977
Deferred acquisition costs (4,947) (4,742)
Premiums receivable (685) 308
Accrued investment income (28) (579)
Income taxes payable 916 2,113
Net realized capital gains (2,549) (168)
Accounts payable and other accrued expenses 6,414 2,581
Prepaid reinsurance (2,298) (3,004)
Other, net (2,765) (183)
- -------------------------------------------------------------------------------------------------------------
Total adjustments 472 9,124
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,380 18,555
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (112,743) (121,115)
Proceeds from sales of investments 74,768 19,875
Proceeds from maturities of investments 27,730 82,800
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,245) (18,440)
- -------------------------------------------------------------------------------------------------------------
Net increase in cash 4,135 115
Cash balance at beginning of period 371 344
- -------------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 4,506 459
=============================================================================================================
Supplemental disclosures of cash flow information:
Income taxes paid $ 4,550 1,725
Tax and loss bonds purchased $ 76 112
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 1997
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"). In early
1997, CapMAC made an investment of 50 million French francs
(approximately 10 million U.S. dollars) in CapMAC Assurance, S.A., an
insurance subsidiary to be established in Paris, France. CapMAC
Assurance, S.A., is licensed to write financial guarantee insurance in
the European Union member states.
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 consolidated 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 six months ended June 30, 1997 may not be indicative
of the results that may be expected for the full year ending December
31, 1997. These consolidated 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, 1996 and
1995, and for each of the years in the three-year period ended December
31, 1996.
3. Reclassifications
Certain prior period balances have been reclassified to conform to the
current period presentation.
38
