<PAGE> 1
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): September 18, 1996
EQCC RECEIVABLES CORPORATION
EQCC ASSET BACKED CORPORATION
(Exact name of registrants as specified in governing instruments)
33-99344 59-3170055
Delaware 33-99344-01 59-3170052
- --------------- ---------------- -------------------
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification Nos.)
organization)
10401 Deerwood Park Blvd., Jacksonville, Florida 32256
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 987-5120
--------------
Not Applicable
(Former name or former address if changed since last report)
Exhibit Index located at Page 2
<PAGE> 2
Items 1 through 4, Item 6 and Item 8 are not included because they are not
applicable.
Item 5. Other Events.
The financial statements of Financial Guaranty Insurance
Company as of December 31, 1995 and 1994 that are included in this Form 8-K have
been audited by KPMG Peat Marwick LLP. The consent of KPMG Peat Marwick to the
inclusion of their audit report on such financial statements and to being named
as "experts" in the Prospectus Supplement for the EquiCredit Funding Trust
1996-A is attached hereto as Exhibit 23.1.
The financial statements of Financial Guaranty Insurance
Company as of December 31, 1995 and 1994 are attached hereto as Exhibit 99.1(D).
The unaudited financial statements of Financial Guaranty Insurance Company as of
June 30, 1996 are attached hereto as Exhibit 99.2(D).
Item 7. Financial Statements and Exhibits.
(a) Financial Statements - Not Applicable
(b) Pro Forma Financial Information - Not Applicable
(c) Exhibits - The following Exhibits to the Form S-3
Registration Statement of the Registrant are hereby
filed:
Sequentially
Exhibit Numbered
Number Exhibit Page
10.1(D) Securities Insurance Policy with 004
respect to EquiCredit Funding
Trust, Series 1996-A
23.1(D) Consent of Independent Auditors of 008
the Insurer
99.2(D) Audited Financials of Financial
Guaranty Insurance Company as
of December 31, 1995 and 1994 010
99.3(D) Unaudited Financial Statements of
Financial Guaranty Insurance
Company as of June 30, 1996
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by the
undersigned hereunto duly authorized.
EQCC RECEIVABLES CORPORATION
EQCC ASSET BACKED CORPORATION
(Registrants)
EQCC RECEIVABLES CORPORATION
September 20, 1996 By: /s/ Stephen R. Veth
---------------------------------
Stephen R. Veth
President
EQCC ASSET BACKED CORPORATION
September 20, 1996 By: /s/ Stephen R. Veth
---------------------------------
Stephen R. Veth
President
<PAGE> 4
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Exhibit Page
10.1(D) Securities Insurance Policy with 004
respect to EquiCredit Funding
Trust, Series 1996-A
23.1(D) Consent of Independent Auditors of 008
the Insurer
99.2(D) Audited Financials of Financial
Guaranty Insurance Company as
of December 31, 1995 and 1994 010
99.3(D) Unaudited Financial Statements of
Financial Guaranty Insurance
Company as of June 30, 1996
<PAGE> 1
Exhibit 10.1(D)
Securities Insurance Policy
FINANCIAL GUARANTY INSURANCE COMPANY
115 BROADWAY
NEW YORK, NEW YORK 10006
(212) 312-3000
(800) 352-0001
SURETY BOND
ISSUER: EquiCredit Funding POLICY NUMBER:
Trust 1996-A
SECURED OBLIGATIONS: $ CONTROL NUMBER:
aggregate principal amount of
EquiCredit Funding Asset Backed
Certificates, Series 1996-A
DEPOSIT PREMIUM: $
TRUSTEE: First Bank National
Association
Financial Guaranty Insurance Company ("Financial Guaranty"), a New York monoline
insurance company, in consideration of its receipt of the Deposit premium and
subject to the terms of this Surety Bond, hereby unconditionally and irrevocably
agrees to pay each Insured Payment to the Trustee named above or its successor,
as trustee for the Series 1996-A Certificates, to the extent set forth in the
Pooling and Servicing Agreement. The Series 1996-A Certificates are referred to
herein as the "Insured Obligations".
Financial Guaranty will make such payment out of its own funds by 10:00 A.M.
(New York City Time) in immediately available funds to the Trustee on the later
of (i) the Business Day next following the day on which Financial Guaranty shall
have received Notice that an Insured Payment is due and (ii) the Payment Date on
which the Insured Payment is distributable to Series 1996-A Certificateholders
pursuant to the Pooling and Servicing Agreement, for disbursement to Series
1996-A Certificateholders in the same manner as the payments with respect to the
Series 1996-A Certificates.
Upon such payment, Financial Guaranty shall be fully subrogated to the rights of
the Series 1996-A Certificateholders to receive the amount so paid as set forth
in Section 6.05(c) of the Pooling and Servicing Agreement. Financial Guaranty's
obligations hereunder with respect to each Payment Date shall be discharged to
the extent funds consisting
<PAGE> 2
FINANCIAL GUARANTY INSURANCE COMPANY
115 BROADWAY
NEW YORK, NEW YORK 10006
(212) 312-3000
(800) 352-0001
SURETY BOND
of the Insured Payment are received by the Trustee on behalf of the Series
1996-A Certificateholders for distribution to such holders, as provided in the
Pooling and Servicing Agreement and herein, whether or not such funds are
properly applied by the Trustee.
This Surety Bond is non-cancellable for any reason, including nonpayment of any
premium. The premium on this Surety Bond is not refundable for any reason,
including the payment of the Series 1996-A Certificates prior to their
respective maturities.
In addition to the Deposit Premium set forth on the face of this Surety Bond, a
monthly premium shall be due and payable on this Surety Bond on each Payment
Date, commencing October 15, 1996, in an amount equal to one-twelfth of .__% of
the then outstanding Series 1996-A Principal Balance on the Payment Date on
which said monthly premium shall be due and payable after giving effect to
distributions to Series 1996-A Certificateholders.
This Surety Bond is subject to and shall be governed by the laws of the State of
New York. The proper venue for any action or proceeding on this Surety Bond
shall be the County of New York, State of New York. The insurance provided by
this Surety Bond is not covered by the New York Property/Casualty Insurance
Security Fund (New York Insurance Code, Article 76).
Capitalized terms used and not defined herein shall have the respective meanings
set forth in the Pooling and Servicing Agreement. "Notice" means written notice
in the form of Exhibit Q to the Pooling and Servicing Agreement by registered or
certified mail or telephonic or telegraphic notice, subsequently confirmed by
written notice delivered via telecopy, telex or hand delivery from the Trustee
to Financial Guaranty specifying the Class A Remittance Amount, the Available
Payment Amount and Excess Spread for such Payment Date, and the Insured Payment
which shall be due and owing on the Payment Date. "Series 1996-A
Certificateholder" means, as to a particular Series 1996-3 Certificate, the
person, other than the Trust, the Servicer, any Subservicer or the
Representative or any Depositor who, on the applicable Payment Date is entitled
under the terms of such Certificate to payment thereof. "Pooling and Servicing
Agreement" means the Pooling and Servicing Agreement by and among EquiCredit
Corporation of America, as Servicer, the Depositors listed therein and First
Bank National Association as Trustee, dated as of September 1, 1996.
ii
<PAGE> 3
FINANCIAL GUARANTY INSURANCE COMPANY
115 BROADWAY
NEW YORK, NEW YORK 10006
(212) 312-3000
(800) 352-0001
SURETY BOND
In the event that payments under any Series 1996-A Certificate is accelerated,
nothing herein contained shall obligate Financial Guaranty to make any payment
of principal or interest on such Certificates on an accelerated basis, unless
such acceleration of payment by Financial Guaranty is at the sole option of
Financial Guaranty.
IN WITNESS WHEREOF, Financial Guaranty has caused this Policy to be affixed with
its corporate seal and to be signed by its duly authorized officer in facsimile
to become effective and binding upon Financial Guaranty by virtue of the
countersignature of its duly authorized representative.
- --------------------------------- ------------------------------
President Authorized Representative
Effective Date: September 20, 1996
iii
<PAGE> 1
Exhibit 23.1(d)
Consents of Independent Auditors of the Insurer
The Board of Directors
Financial Guaranty Insurance Company:
We consent to the use of our report dated January 19, 1996 on the financial
statements of Financial Guaranty Insurance Company as of December 31, 1995 and
1994, and for each of the years in the three-year period ended December 31, 1995
included in the Form 8-K of EQCC Receivables Corporation and EQCC Asset Backed
Corporation, and to the reference to our firm under the heading "Experts" in the
Prospectus Supplement.
Our Report refers to changes, in 1993, in accounting methods for multiple-year
retrospectively rated reinsurance contracts and for the adoption of 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.
/s/ KPMG Peat Marwick LLP
---------------------------
New York, New York
September 20, 1996
<PAGE> 1
Exhibit 99.2 (D)
AUDITED FINANCIALS OF INSURER
FINANCIAL GUARANTY INSURANCE COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
A-1
<PAGE> 2
FINANCIAL GUARANTY INSURANCE COMPANY
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ A-3
Balance Sheets........................................................................ A-4
Statements of Income.................................................................. A-5
Statements of Stockholder's Equity.................................................... A-6
Statements of Cash Flows.............................................................. A-7
Notes to Financial Statements......................................................... A-8
</TABLE>
A-2
<PAGE> 3
LOGO
Report of Independent Auditors'
The Board of Directors and Stockholder
Financial Guaranty Insurance Company:
We have audited the accompanying balance sheets of Financial Guaranty
Insurance Company 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 then ended. 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 Financial Guaranty Insurance
Company 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 then ended in
conformity with generally accepted accounting principles.
As described in notes 6 and 2, respectively, in 1993, the Company changed
its methods of accounting for multiple-year retrospectively rated reinsurance
contracts and for the adoption of 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.
KPMG Peat Marwick LLP
January 19, 1996
LOGO
A-3
<PAGE> 4
FINANCIAL GUARANTY INSURANCE COMPANY
BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Fixed maturity securities available-for-sale (amortized cost of
$2,043,453 in 1995 and $1,954,177 in 1994)....................... $2,141,584 $1,889,910
Short-term investments, at cost, which approximates market......... 91,032 75,674
Cash............................................................... 199 1,766
Accrued investment income.......................................... 37,347 40,637
Reinsurance recoverable............................................ 7,672 14,472
Prepaid reinsurance premiums....................................... 162,087 164,668
Deferred policy acquisition costs.................................. 94,868 90,928
Property and equipment, net of accumulated depreciation ($12,861 in
1995 and $10,512 in 1994)........................................ 6,314 7,912
Receivable for securities sold..................................... 26,572 --
Prepaid expenses and other assets.................................. 12,627 12,243
---------- ----------
Total assets............................................. $2,580,302 $2,298,210
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums................................................ $ 727,535 $ 757,425
Loss and loss adjustment expenses................................ 77,808 98,746
Ceded reinsurance balances payable............................... 1,942 2,258
Accounts payable and accrued expenses............................ 32,811 28,489
Payable to Parent................................................ 1,647 18,600
Current federal income taxes payable............................. 51,296 82,123
Deferred federal income taxes.................................... 99,171 22,640
Payable for securities purchased................................. 40,211 8,206
---------- ----------
Total liabilities........................................ 1,032,421 1,018,487
========== ==========
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and outstanding................. 15,000 15,000
Additional paid-in capital....................................... 334,011 334,011
Net unrealized gains (losses) on fixed maturity securities
available-for-sale, net of tax................................ 63,785 (41,773)
Foreign currency translation adjustment.......................... (1,499) (1,221)
Retained earnings................................................ 1,136,584 973,706
---------- ----------
Total stockholder's equity............................... 1,547,881 1,279,723
---------- ----------
Total liabilities and stockholder's equity............... $2,580,302 $2,298,210
========== ==========
</TABLE>
See accompanying notes to financial statements.
A-4
<PAGE> 5
FINANCIAL GUARANTY INSURANCE COMPANY
STATEMENTS OF INCOME
($ IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Gross premiums written................................... $ 97,288 $161,940 $291,052
Ceded premiums........................................... (19,319) (46,477) (49,914)
-------- -------- --------
Net premiums written.................................. 77,969 115,463 241,138
Decrease (increase) in net unearned premiums............. 27,309 53,364 (74,902)
-------- -------- --------
Net premiums earned................................... 105,278 168,827 166,236
Net investment income.................................... 120,398 109,828 99,920
Net realized gains....................................... 30,762 5,898 35,439
-------- -------- --------
Total revenues................................... 256,438 284,553 301,595
-------- -------- --------
EXPENSES:
Loss and loss adjustment expenses........................ (8,426) 3,646 42,894
Policy acquisition costs................................. 13,072 15,060 19,592
(Increase) decrease in deferred policy acquisition
costs................................................. (3,940) 3,709 2,658
Other underwriting expenses.............................. 19,100 21,182 21,878
-------- -------- --------
Total expenses................................... 19,806 43,597 87,022
-------- -------- --------
Income before provision for Federal income taxes......... 236,632 240,956 214,573
-------- -------- --------
Federal income tax expense (benefit):
Current............................................... 28,913 43,484 59,505
Deferred.............................................. 19,841 7,741 (7,284)
-------- -------- --------
Total Federal income tax expense...................... 48,754 51,225 52,221
-------- -------- --------
Net income before cumulative effect of change in
accounting principle................................ 187,878 189,731 162,352
-------- -------- --------
Net cumulative effect of change in accounting
principle........................................... -- -- 3,008
-------- -------- --------
Net income....................................... $187,878 $189,731 $165,360
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
A-5
<PAGE> 6
FINANCIAL GUARANTY INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
($ IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES) ON
ADDITIONAL FIXED MATURITY SECURITIES FOREIGN
COMMON PAID-IN AVAILABLE-FOR-SALE, CURRENCY RETAINED
STOCK CAPITAL NET OF TAX ADJUSTMENT EARNINGS
------- ---------- ------------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993......... $ 2,500 $ 324,639 $ 7,267 $ (1,597) $ 618,615
Net income....................... -- -- -- -- 165,360
Capital contribution............. -- 21,872 -- -- --
Adjustment to common stock par
value.......................... 12,500 (12,500) -- -- --
Unrealized gains on fixed
maturity securities previously
held at market, net of tax of
($713)......................... -- -- (1,325) -- --
Implementation of change in
accounting for adoption of SFAS
115, net of tax of $45,643..... -- -- 84,766 -- --
Foreign currency translation
adjustment..................... -- -- -- (668) --
------- -------- -------- ------- ----------
Balance, December 31, 1993....... 15,000 334,011 90,708 (2,265) 783,975
Net income....................... -- -- -- -- 189,731
Unrealized losses on fixed
maturity securities
available-for-sale, net of tax
of ($71,336)................... -- -- (132,481) -- --
Foreign currency translation
adjustment..................... -- -- -- 1,044 --
------- -------- -------- ------- ----------
Balance, December 31, 1994....... 15,000 334,011 (41,773) (1,221) 973,706
Net income....................... -- -- -- -- 187,878
Dividend paid.................... -- -- -- -- (25,000)
Unrealized gains on fixed
maturity securities available
for sale, net of tax of
$56,839........................ -- -- 105,558 -- --
Foreign currency translation
adjustment..................... -- -- -- (278) --
------- -------- -------- ------- ----------
Balance, December 31, 1995....... $15,000 $ 334,011 $ 63,785 $ (1,499) $1,136,584
======= ======== ======== ======= ==========
</TABLE>
See accompanying notes to financial statements.
A-6
<PAGE> 7
FINANCIAL GUARANTY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
--------- --------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................ $ 187,878 $ 189,731 $ 165,360
Adjustments to reconcile net income to net cash
provided
by operating activities:
Cumulative effect of change in accounting
principle,
net of tax...................................... -- -- (3,008)
Change in unearned premiums....................... (29,890) (45,927) 90,429
Change in loss and loss adjustment expense
reserves........................................ (20,938) 2,648 51,264
Depreciation of property and equipment............ 2,348 2,689 2,012
Change in reinsurance receivable.................. 6,800 (304) (9,040)
Change in prepaid reinsurance premiums............ 2,581 (7,437) (15,527)
Change in foreign currency translation
adjustment...................................... (427) 1,607 (1,029)
Policy acquisition costs deferred................. (16,219) (18,306) (19,592)
Amortization of deferred policy acquisition
costs........................................... 12,279 22,015 22,250
Change in accrued investment income, and prepaid
expenses and other assets....................... 2,906 (5,150) (9,048)
Change in other liabilities....................... (12,946) 2,577 7,035
Change in deferred income taxes................... 19,841 7,741 (7,284)
Amortization of fixed maturity securities......... 1,922 5,112 8,976
Change in current income taxes payable............ (30,827) 33,391 30,089
Net realized gains on investments................. (30,762) (5,898) (35,439)
-------- -------- -----------
Net cash provided by operating activities......... 94,546 184,489 277,448
-------- -------- -----------
INVESTING ACTIVITIES:
Sales and maturities of fixed maturity securities...... 836,103 550,534 789,036
Purchases of fixed maturity securities............ (891,108) (721,908) (1,090,550)
Purchases, sales and maturities of short-term
investments, net................................ (15,358) (11,486) 4,164
Purchases of property and equipment, net.......... (750) (1,290) (985)
-------- -------- -----------
Net cash used in investing activities............. (71,113) (184,150) (298,335)
-------- -------- -----------
FINANCING ACTIVITIES:
Dividends paid......................................... (25,000) -- --
Capital contribution.............................. -- -- 21,872
-------- -------- -----------
Net cash provided by financing activities......... (25,000) -- 21,872
-------- -------- -----------
(Decrease) Increase in cash....................... (1,567) 339 985
Cash at beginning of year......................... 1,766 1,427 442
-------- -------- -----------
Cash at end of year............................... $ 199 $ 1,766 $ 1,427
======== ======== ===========
</TABLE>
See accompanying notes to financial statements.
A-7
<PAGE> 8
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS
Financial Guaranty Insurance Company (the "Company"), a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"), provides financial
guaranty insurance on newly issued municipal bonds and municipal bonds trading
in the secondary market, the latter including bonds held by unit investment
trusts and mutual funds. The Company also insures structured debt issues outside
the municipal market. Approximately 88% of the business written since inception
by the Company has been municipal bond insurance.
The Company insures only those securities that, in its judgment, are of
investment grade quality. Municipal bond insurance written by the Company
insures the full and timely payment of principal and interest when due on
scheduled maturity, sinking fund or other mandatory redemption and interest
payment dates to the holders of municipal securities. The Company's insurance
policies do not provide for accelerated payment of the principal of, or interest
on, the bond insured in the case of a payment default. If the issuer of a
Company-insured bond defaults on its obligation to pay debt service, the Company
will make scheduled interest and principal payments as due and is subrogated to
the rights of bondholders to the extent of payments made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP") which differ in certain
respects from the accounting practices prescribed or permitted by regulatory
authorities (see Note 3). The prior years financial statements have been
reclassified to conform to the 1995 presentation. Significant accounting
policies are as follows:
Investments
As of December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities." The Statement defines three categories for
classification of debt securities and the related accounting treatment for each
respective category. The Company has determined that its fixed maturity
securities portfolio should be classified as available-for-sale. Under SFAS 115,
securities held as available-for-sale are recorded at fair value and unrealized
holding gains/losses are recorded as a separate component of stockholder's
equity, net of applicable income taxes.
Short-term investments are carried at cost, which approximates fair value.
Bond discounts and premiums are amortized over the remaining terms of the
securities. Realized gains or losses on the sale of investments are determined
on the basis of specific identification.
Premium Revenue Recognition
Premiums are earned over the period at risk in proportion to the amount of
coverage provided which, for financial guaranty insurance policies, generally
declines according to predetermined schedules.
When unscheduled refundings of municipal bonds occur, the related unearned
premiums, net of premium credits allowed against the premiums charged for
insurance of refunding issues and applicable acquisition
A-8
<PAGE> 9
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
costs, are earned immediately. Unearned premiums represent the portion of
premiums written related to coverage yet to be provided on policies in force.
Policy Acquisition Costs
Policy acquisition costs include only those expenses that relate directly
to premium production. Such costs include compensation of employees involved in
underwriting, marketing and policy issuance functions, rating agency fees, state
premium taxes and certain other underwriting expenses, offset by ceding
commission income on premiums ceded to reinsurers (see Note 6). Net acquisition
costs are deferred and amortized over the period in which the related premiums
are earned. Anticipated loss and loss adjustment expenses are considered in
determining the recoverability of acquisition costs.
Loss and Loss Adjustment Expenses
Provision for loss and loss adjustment expenses is made in an amount equal
to the present value of unpaid principal and interest and other payments due
under insured risks at the balance sheet date for which, in management's
judgment, the likelihood of default is probable. Such reserves amounted to $77.8
million and $98.7 million at December 31, 1995 and 1994, respectively. As of
December 31, 1995 and 1994, such reserves included $28.8 million and $71.0
million, respectively, established based on an evaluation of the insured
portfolio in light of current economic conditions and other relevant factors.
Loss and loss adjustment expenses include amounts discounted at an interest rate
of 5.5% in 1995 and 7.8% in 1994. The reserve for loss and loss adjustment
expenses is necessarily based upon estimates, however, in management's opinion
the reserves for loss and loss adjustment expenses is adequate. However, actual
results will likely differ from those estimates.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. These temporary differences relate principally to unrealized gains
(losses) on fixed maturity securities available-for-sale, premium revenue
recognition, deferred acquisition costs and deferred compensation. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Financial guaranty insurance companies are permitted to deduct from taxable
income, subject to certain limitations, amounts added to statutory contingency
reserves (see Note 3). The amounts deducted must be included in taxable income
upon their release from the reserves or upon earlier release of such amounts
from such reserves to cover excess losses as permitted by insurance regulators.
The amounts deducted are allowed as deductions from taxable income only to the
extent that U.S. government non-interest bearing tax and loss bonds are
purchased and held in an amount equal to the tax benefit attributable to such
deductions.
Property and Equipment
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to income over
their estimated service lives. Office furniture and equipment are depreciated
straight-line over five years. Leasehold improvements are amortized over their
estimated service life or over the life of the lease, whichever is shorter.
Computer equipment and software are depreciated over three years. Maintenance
and repairs are charged to expense as incurred.
A-9
<PAGE> 10
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches are
local currencies. Accordingly, the assets and liabilities of these foreign
branches are translated into U.S. dollars at the rates of exchange existing at
December 31, 1995 and 1994 and revenues and expenses are translated at average
monthly exchange rates. The cumulative translation loss at December 31, 1995 and
1994 was $1.5 million and $1.2 million, respectively, net of tax, and is
reported as a separate component of stockholder's equity.
(3) STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP, which differs
in certain respects from accounting practices prescribed or permitted by state
insurance regulatory authorities. The following are the significant ways in
which statutory-basis accounting practices differ from GAAP:
(a) premiums are earned in proportion to the reduction of the related
risk rather than in proportion to the coverage provided;
(b) policy acquisition costs are charged to current operations as
incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of whether
loss contingencies actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are charged
directly against surplus but are reflected as assets under GAAP, if
recoverable;
(e) federal income taxes are only provided with respect to taxable
income for which income taxes are currently payable, while under GAAP taxes
are also provided for differences between the financial reporting and the
tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted assets,
while under GAAP they are recorded as federal income tax payments; and
(g) all fixed income investments are carried at amortized cost rather
than at fair value for securities classified as available-for-sale under
GAAP.
A-10
<PAGE> 11
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of net income and stockholder's equity
presented on a GAAP basis to the corresponding amounts reported on a
statutory-basis for the periods indicated below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- -----------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY INCOME EQUITY
-------- ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
GAAP basis amount................ $187,878 $ 1,547,881 $189,731 $ 1,279,723 $165,360 1,221,429
Premium revenue recognition...... (22,555) (166,927) (4,970) (144,372) (16,054) (139,401)
Deferral of acquisition costs.... (3,940) (94,868) 3,709 (90,928) 2,658 (94,637)
Contingency reserve.............. -- (386,564) -- (328,073) -- (252,542)
Non-admitted assets.............. -- (5,731) -- (7,566) -- (8,951)
Case basis loss reserves......... 4,048 (52) (3,340) (4,100) 1,626 (759)
Portfolio loss reserves.......... (22,100) 24,000 (11,050) 46,100 43,650 57,150
Deferral of income taxes
(benefits)..................... 19,842 64,825 7,741 45,134 (7,284) 35,209
Unrealized gains (losses) on
fixed maturity securities held
at fair value, net of tax...... -- (63,785) -- 41,773 -- (90,708)
Recognition of profit
commission..................... 3,096 (5,744) (2,410) (8,840) (4,811) (4,811)
Provision for unauthorized
reinsurance.................... -- -- -- (266) -- --
Contingency reserve tax deduction
(see Note 2)................... -- 78,196 -- 55,496 -- 45,402
Allocation of tax benefits due to
Parent's net operating loss to
the Company (see Note 5)....... 637 10,290 (63) 9,653 -- 9,716
-------- ---------- -------- ---------- -------- ----------
Statutory-basis amount........... $166,906 $ 1,001,521 $179,348 $ 893,734 $185,145 $ 777,097
======== ========== ======== ========== ======== ==========
</TABLE>
(4) INVESTMENTS
Investments in fixed maturity securities carried at fair value of $3.2
million and $3.0 million as of December 31, 1995 and 1994, respectively, were on
deposit with various regulatory authorities as required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as available-for-sale are as
follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1995 COST GAINS LOSSES VALUE
- --------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies................................... $ 71,182 $ 1,696 -- $ 72,878
Obligations of states and political
subdivisions............................... 1,942,001 98,458 $1,625 2,038,834
Debt securities issued by foreign
governments................................ 30,270 152 550 29,872
---------- -------- ------ ----------
Investments available-for-sale............... 2,043,453 100,306 2,175 2,141,584
Short-term investments....................... 91,032 -- -- 91,032
---------- -------- ------ ----------
Total.............................. $2,134,485 $ 100,306 $2,175 $2,232,616
========== ======== ====== ==========
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December 31,
1995, by contractual maturity date, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
A-11
<PAGE> 12
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED FAIR
1995 COST VALUE
------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Due in one year or less..................................... $ 99,894 $ 99,984
Due after one year through five years....................... 137,977 141,235
Due after five years through ten years...................... 287,441 300,560
Due after ten years through twenty years.................... 1,406,219 1,476,261
Due after twenty years...................................... 202,954 214,576
---------- ----------
Total....................................................... $2,134,485 $2,232,616
========== ==========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1994 COST GAINS LOSSES VALUE
- --------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies................................... $ 10,945 $ 8 $ (519) $ 10,434
Obligations of states and political
subdivisions............................... 1,839,566 25,809 (85,200) 1,780,175
Debt securities issued by foreign
governments................................ 103,666 400 (4,765) 99,301
---------- ------- -------- ----------
Investments available-for-sale............... 1,954,177 26,217 (90,484) 1,889,910
Short-term investments....................... 75,674 -- -- 75,674
---------- ------- -------- ----------
Total.............................. $2,029,851 $ 26,217 $ (90,484) $1,965,584
========== ======= ======== ==========
</TABLE>
In 1995, 1994 and 1993, proceeds from sales of investments in fixed
maturity securities available-for-sale carried at fair value were $836.1
million, $550.5 million, and $789.0 million, respectively. For 1995, 1994 and
1993 gross gains of $36.3 million, $18.2 million and $36.1 million respectively,
and gross losses of $5.5 million, $12.3 million and $1.0 million respectively,
were realized on such sales.
Net investment income of the Company is derived from the following sources
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Income from fixed maturity securities.............. $112,684 $108,519 $ 97,121
Income from short-term investments................. 8,450 2,479 3,914
-------- -------- --------
Total investment income............................ 121,134 110,998 101,035
Investment expenses................................ 736 1,170 1,115
-------- -------- --------
Net investment income.............................. $120,398 $109,828 $ 99,920
======== ======== ========
</TABLE>
As of December 31, 1995, the Company did not have more than 10% of its
investment portfolio concentrated in a single issuer or industry.
(5) INCOME TAXES
The Company files a federal tax return as part of the consolidated return
of General Electric Capital Corporation ("GE Capital"). Under a tax sharing
agreement with GE Capital, taxes are allocated to the Company and the Parent
based upon their respective contributions to consolidated net income. The
Company's effective federal corporate tax rate (20.6 percent in 1995, 21.3
percent in 1994 and 24.3 percent in 1993) is less than the corporate tax rate on
ordinary income of 35 percent in 1995, 1994 and 1993.
A-12
<PAGE> 13
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Federal income tax expense (benefit) relating to operations of the Company
for 1995, 1994 and 1993 is comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Current tax expense................................... $28,913 $43,484 $59,505
Deferred tax expense.................................. 19,841 7,741 (7,284)
------- ------- -------
Federal income tax expense............................ $48,754 $51,225 $52,221
======= ======= =======
</TABLE>
The following is a reconciliation of federal income taxes computed at the
statutory rate and the provision for federal income taxes (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Income taxes computed on income before provision
for federal income taxes, at the statutory
rate............................................. $ 82,821 $ 84,334 $ 75,101
Tax effect of:
Tax-exempt interest.............................. (30,630) (30,089) (27,185)
Other, net....................................... (3,437) (3,020) 4,305
-------- -------- --------
Provision for income taxes......................... $ 48,754 $ 51,225 $ 52,221
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities at December 31, 1995 and 1994 are
presented below (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Deferred tax assets:
Unrealized losses on fixed maturity securities,
available-for-sale......................................... -- $22,493
Loss reserves................................................. $ 8,382 16,136
Deferred compensation......................................... 5,735 9,685
Tax over book capital gains................................... 1,069 365
Other......................................................... 3,248 3,760
-------- -------
Total gross deferred tax assets................................. 18,434 52,439
-------- -------
Deferred tax liabilities:
Unrealized gains on fixed maturity securities,
available-for-sale......................................... 34,346 --
Deferred acquisition costs.................................... 33,204 31,825
Premium revenue recognition................................... 32,791 24,674
Rate differential on tax and loss bonds....................... 9,454 9,454
Other......................................................... 7,810 9,126
-------- -------
Total gross deferred tax liabilities............................ 117,605 75,079
-------- -------
Net deferred tax liability...................................... $ 99,171 $22,640
======== =======
</TABLE>
Based upon the level of historical taxable income, projections of future
taxable income over the periods in which the deferred tax assets are deductible
and the estimated reversal of future taxable temporary differences, the Company
believes it is more likely than not that it will realize the benefits of these
deductible differences and has not established a valuation allowance at December
31, 1995 and 1994. The company anticipates that the related deferred tax asset
will be realized.
Total federal income tax payments during 1995, 1994 and 1993 were $59.8
million, $10.1 million, and $29.4 million, respectively.
A-13
<PAGE> 14
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) REINSURANCE
The Company reinsures portions of its risk with other insurance companies
through quota share reinsurance treaties and, where warranted, on a facultative
basis. This process serves to limit the Company's exposure on risks
underwritten. In the event that any or all of the reinsuring companies were
unable to meet their obligations, the Company would be liable for such defaulted
amounts. The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from activities or economic
characteristics of the reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies. The Company holds collateral under reinsurance
agreements in the form of letters of credit and trust agreements in various
amounts with various reinsurers totaling $33.7 million that can be drawn on in
the event of default.
Effective January 1, 1993, the Company adopted the Emerging Issues Task
Force Issue 93-6, "Accounting for Multiple-Year Retrospectively-Rated Contracts
by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6 requires that an
asset be recognized by a ceding company to the extent a payment would be
received from the reinsurer based on the contract's experience to date,
regardless of the outcome of future events. To reflect the adoption of EITF 93-6
in the accompanying financial statements, an initial adjustment of $4.6 million,
before applicable income taxes, has been reflected in the 1993 income statement.
Net premiums earned are presented net of ceded earned premiums of $21.9
million, $39.0 million and $34.4 million for the years ended December 31, 1995,
1994 and 1993, respectively. Loss and loss adjustment expenses incurred are
presented net of ceded losses of $1.1 million, $0.3 million and $9.1 million for
the years ended December 31, 1995, 1994 and 1993, respectively.
(7) LOSS AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for loss and loss adjustment expenses is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Balance at January 1,............................... $ 98,746 $ 96,098 $44,834
Less reinsurance recoverable...................... 14,472 14,168 5,128
-------- -------- -------
Net balance at January 1,........................... 84,274 81,930 39,706
Incurred related to:
Current year................................... 26,681 15,133 --
Prior years.................................... (1,207) (437) (756)
Portfolio reserves............................. (33,900) (11,050) 43,650
-------- -------- -------
Total Incurred............................ (8,426) 3,646 42,894
-------- -------- -------
Paid related to:
Current year................................... (197) (382) --
Prior years.................................... (5,515) (920) (670)
-------- -------- -------
Total Paid................................ (5,712) (1,302) (670)
-------- -------- -------
Net balance at December 31,......................... 70,136 84,274 81,930
Plus reinsurance recoverable...................... 7,672 14,472 14,168
-------- -------- -------
Balance at December 31,............................. $ 77,808 $ 98,746 $96,098
======== ======== =======
</TABLE>
The changes in incurred portfolio reserves principally relate to business
written in prior years. The changes are based upon an evaluation of the insured
portfolio in light of current economic conditions and other relevant factors.
A-14
<PAGE> 15
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) RELATED PARTY TRANSACTIONS
The Company has various agreements with subsidiaries of General Electric
Company ("GE") and GE Capital. These business transactions include appraisal
fees and due diligence costs associated with underwriting structured finance
mortgage-backed security business; payroll and office expenses incurred by the
Company's international branch offices but processed by a GE subsidiary;
investment fees pertaining to the management of the Company's investment
portfolio; and telecommunication service charges. Approximately $3.2 million,
$3.2 million and $1.0 million in expenses were incurred in 1995, 1994 and 1993,
respectively, related to such transactions.
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of the
underlying assets. For some of these issues, GE Capital also provides first loss
protection in the event of default. Gross premiums written on these issues
amounted to $1.3 million in 1995, $2.5 million in 1994, and $3.3 million in
1993.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums written
in 1995 and 1994 and 2 percent in 1993).
(9) COMPENSATION PLANS
Officers and other key employees of the Company participate in the Parent's
incentive compensation, deferred compensation and profit sharing plans. Expenses
incurred by the Company under compensation plans and bonuses amounted to $7.5
million, $12.2 million and $16.7 million in 1995, 1994 and 1993, respectively,
before deduction for related tax benefits.
(10) DIVIDENDS
Under New York insurance law, the Company may pay a dividend only from
earned surplus subject to the following limitations: (a) statutory surplus after
such dividend may not be less than the minimum required paid-in capital, which
was $2.1 million in 1995 and 1994, and (b) dividends may not exceed the lesser
of 10 percent of its surplus or 100 percent of adjusted net investment income,
as defined by New York insurance law, for the 12 month period ending on the
preceding December 31, without the prior approval of the Superintendent of the
New York State Insurance Department. At December 31, 1995 and 1994, the amount
of the Company's surplus available for dividends was approximately $100.2
million and $89.3 million, respectively.
During 1995, the company paid dividends of $25 million. No dividends were
paid during 1994 or 1993.
(11) FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities
are based on quoted market prices, if available. If a quoted market price
is not available, fair values is estimated using quoted market prices for
similar securities. Fair value disclosure for fixed maturity securities is
included in the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost,
which approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities
Purchased: The carrying amounts of these items approximate their fair
values.
A-15
<PAGE> 16
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair values of the Company's financial instruments at
December 31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand and in demand accounts...................... $ 199 $ 199 $ 1,766 $ 1,766
Short-term investments................................ 91,032 91,032 75,674 75,674
Fixed maturity securities............................. 2,141,584 2,141,584 1,889,910 1,889,910
</TABLE>
Financial Guaranties: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of deferred
acquisition costs, and loss and loss adjustment expense reserves. Estimated
fair values of these guaranties are based on amounts currently charged to
enter into similar agreements (net of applicable ceding commissions),
discounted cash flows considering contractual revenues to be received
adjusted for expected prepayments, the present value of future obligations
and estimated losses, and current interest rates. The estimated fair values
of such financial guaranties range between $412.8 million and $456.2
million compared to a carrying value of $540.6 million as of December 31,
1995 and between $518.1 million and $565.9 million compared to a carrying
value of $585.1 million as of December 31, 1994.
Concentrations of Credit Risk
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only those
securities that, in its judgment, are of investment grade quality. The Company
has established and maintains its own underwriting standards that are based on
those aspects of credit that the Company deems important for the particular
category of obligations considered for insurance. Credit criteria include
economic and social trends, debt management, financial management and legal and
administrative factors, the adequacy of anticipated cash flows, including the
historical and expected performance of assets pledged for payment of securities
under varying economic scenarios and underlying levels of protection such as
insurance or overcollateralization.
In connection with underwriting new issues, the Company sometimes requires,
as a condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the obligation
insured by a party of acceptable credit quality obligated to make payment prior
to any payment by the Company. The types and extent of collateral pledged
varies, but may include residential and commercial mortgages, corporate debt,
government debt and consumer receivables.
As of December 31, 1995, the Company's total insured principal exposure to
credit loss in the event of default by bond issuers was $98.7 billion, net of
reinsurance of $20.7 billion. The Company's insured portfolio as of December 31,
1995 was broadly diversified by geography and bond market sector with no single
debt issuer representing more than 1% of the Company's principal exposure
outstanding, net of reinsurance.
A-16
<PAGE> 1
Exhibit 99.3 (D)
FINANCIAL GUARANTY INSURANCE COMPANY
UNAUDITED INTERIM FINANCIAL STATEMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Balance Sheets........................................................................ B-2
Statements of Income.................................................................. B-3
Statements of Cash Flows.............................................................. B-4
Notes to Unaudited Interim Financial Statements....................................... B-5
</TABLE>
B-1
<PAGE> 2
FINANCIAL GUARANTY INSURANCE COMPANY
BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Fixed maturity securities, available for sale, at fair value
(amortized cost of $2,066,231 in 1996 and $2,043,453 in 1995).... $ 2,057,812 $2,141,584
Short-term investments, at cost, which approximates market......... 133,832 91,032
Cash............................................................... 1,294 199
Accrued investment income.......................................... 37,753 37,347
Reinsurance receivable............................................. 7,358 7,672
Deferred policy acquisition costs.................................. 93,100 94,868
Property, plant and equipment net of accumulated depreciation of
$14,094 in 1996 and $12,861 in 1995.............................. 5,573 6,314
Prepaid reinsurance premiums....................................... 156,055 162,088
Prepaid expenses and other assets.................................. 50,908 39,198
---------- ----------
Total assets............................................. $ 2,543,685 $2,580,302
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums................................................ 698,149 727,535
Losses and loss adjustment expenses.............................. 71,034 77,808
Ceded reinsurance payable........................................ 2,777 1,942
Accounts payable and accrued expenses............................ 38,035 32,811
Due to parent.................................................... 267 1,647
Current federal income taxes payable............................. 67,077 51,296
Deferred federal income taxes payable............................ 63,850 99,171
Payable for securities purchased................................. 32,186 40,211
---------- ----------
Total liabilities........................................ 973,375 1,032,421
========== ==========
Stockholder's Equity:
Common stock, par value $1,500 per share at June 30, 1996 and at
December 31, 1995: 10,000 shares authorized, issued and
outstanding................................................... 15,000 15,000
Additional paid-in capital....................................... 334,011 334,011
Net unrealized (losses) gains on fixed maturity securities
available for sale, net of tax................................ (5,472) 63,785
Foreign currency translation adjustment.......................... (2,296) (1,499)
Retained earnings................................................ 1,229,067 1,136,584
---------- ----------
Total stockholder's equity............................... 1,570,310 1,547,881
---------- ----------
Total liabilities and stockholder's equity............... $ 2,543,685 $2,580,302
========== ==========
</TABLE>
See accompanying notes to interim financial statements
B-2
<PAGE> 3
FINANCIAL GUARANTY INSURANCE COMPANY
STATEMENTS OF INCOME
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
REVENUES:
Gross premiums written............................................... $ 45,481 $ 42,773
Ceded premiums....................................................... (6,643) (5,965)
-------- --------
Net premiums written.............................................. 38,838 36,808
Decrease in net unearned premiums.................................... 23,353 18,136
-------- --------
Net premiums earned............................................... 62,191 54,944
Net investment income................................................ 61,513 59,327
Net realized gains................................................... 8,348 17,446
-------- --------
Total revenues............................................... 132,052 131,717
-------- --------
EXPENSES:
Losses and loss adjustment expenses.................................. (2,702) 815
Policy acquisition costs............................................. 9,637 5,308
Other underwriting expenses.......................................... 7,561 8,662
-------- --------
Total expenses............................................... 14,496 14,785
-------- --------
Income before provision for federal income taxes..................... 117,556 116,932
Provision for federal income taxes................................... 25,071 25,066
-------- --------
Net income................................................... $ 92,485 $ 91,866
======== ========
</TABLE>
See accompanying notes to interim financial statements
B-3
<PAGE> 4
FINANCIAL GUARANTY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
($ IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES:
Net income...................................................... $ 92,485 $ 91,866
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for deferred income taxes............................. 2,400 11,991
Amortization of fixed maturity securities....................... 398 1,096
Policy acquisition costs deferred............................... (8,565) (10,254)
Amortization of deferred policy acquisition costs............... 10,333 5,308
Depreciation of fixed assets.................................... 1,233 1,167
Change in reinsurance receivable................................ 314 4,569
Change in prepaid reinsurance premiums.......................... 6,033 5,877
Foreign currency translation adjustment......................... (1,226) 972
Change in accrued investment income, prepaid expenses and other
assets......................................................... (12,116) (3,483)
Change in unearned premiums..................................... (29,386) (24,013)
Change in losses and loss adjustment expense reserves........... (6,774) (4,617)
Change in other liabilities..................................... 4,678 (11,076)
Change in current income taxes payable.......................... 15,781 (9,625)
Net realized gains on investments............................... (8,348) (17,446)
--------- ---------
Net cash provided by operating activities....................... 67,240 42,332
--------- ---------
INVESTING ACTIVITIES:
Sales or maturities of fixed maturity securities..................... 406,676 478,328
Purchases of fixed maturity securities.......................... (429,529) (413,181)
Sales or maturities (purchases) of short-term investments, net....... (42,800) (102,414)
Purchases of property and equipment, net........................ (492) (354)
--------- ---------
Net cash used for investing activities............................... (66,145) (37,621)
--------- ---------
Increase (decrease) in cash..................................... 1,095 4,711
Cash at beginning of period 199 1,766
--------- ---------
Cash at end of period $ 1,294 $ 477
========= =========
</TABLE>
See accompanying notes to interim financial statements.
B-4
<PAGE> 5
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995 (UNAUDITED)
(1) BASIS OF PRESENTATION
The interim financial statements of Financial Guaranty Insurance Company
(the Company) in this report reflect all adjustments necessary, in the opinion
of management, for a fair statement of (a) results of operations for the six
months ended June 30, 1996 and 1995, (b) the financial position at June 30, 1996
and December 31, 1995, and (c) cash flows for the six months ended June 30, 1996
and 1995.
These interim financial statements should be read in conjunction with the
financial statements and related notes included in the 1995 audited financial
statements. The 1995 financial statements have been reclassified to conform to
the 1996 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP, which differs
in certain respects from accounting practices prescribed or permitted by state
insurance regulatory authorities. The following are the significant ways in
which statutory basis accounting practices differ from GAAP:
(a) premiums are earned in proportion to the reduction of the related
risk rather than in proportion to the coverage provided;
(b) policy acquisition costs are charged to current operations as
incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of whether
loss contingencies actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as "non-admitted assets" are charged
directly against surplus but are reflected as assets under GAAP, if
recoverable;
(e) federal income taxes are only provided with respect to taxable
income for which income taxes are currently payable, while under GAAP taxes
are also provided for differences between the financial reporting and tax
bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted assets,
while under GAAP they are recorded as federal income tax payments; and
(g) all fixed income investments are carried at amortized cost, rather
than at fair value for securities classified as "Available for Sale" under
GAAP.
B-5
<PAGE> 6
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30 1996 AND 1995 (UNAUDITED)
The following is a reconciliation of the net income and stockholder's
equity of Financial Guaranty prepared on a GAAP basis to the corresponding
amounts reported on a statutory basis for the periods indicated below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------
1996 1995
------------------------- --------------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY
------- ------------- -------- -------------
<S> <C> <C> <C> <C>
GAAP basis amount............................ $92,485 $ 1,570,310 $ 91,866 $ 1,441,820
Premium revenue recognition.................. (4,061) (170,988) (9,905) (154,322)
Deferral of acquisition costs................ 1,768 (93,100) (4,946) (95,874)
Contingency reserve.......................... -- (415,603) -- (357,817)
Non-admitted assets.......................... -- (4,837) -- (6,579)
Case-basis losses incurred and salvage
recoverable................................ (3,394) (3,446) 6,631 2,531
Portfolio loss reserves...................... -- 24,000 (10,900) 35,200
Deferral of income tax....................... 2,400 66,796 11,991 57,466
Unrealized gains on fixed maturity securities
held at fair value, net of taxes........... -- 5,472 -- (27,827)
Profit commission............................ 1,273 (4,471) 4,909 (3,931)
Contingency reserve tax deduction............ -- 85,176 -- 78,196
Provision for unauthorized reinsurance....... -- -- -- (266)
Allocation of tax benefits due to Parent's
net operating loss to the Company.......... (4) 10,287 244 9,898
------- ---------- -------- ----------
Statutory basis amount....................... $90,467 $ 1,069,596 $ 89,845 $ 978,495
======= ========== ======== ==========
</TABLE>
(3) DIVIDENDS
Under New York Insurance Law, the Company may pay a dividend only from
earned surplus subject to the following limitations:
- Statutory surplus after dividends may not be less than the minimum
required paid-in capital, which was $2,100,000 in 1996.
- Dividends may not exceed the lesser of 10 percent of its surplus or 100
percent of adjusted net investment income, as defined therein, for the
twelve month period ending on the preceding December 31, without the
prior approval of the Superintendent of the New York State Insurance
Department.
The amount of the Company's surplus available for dividends during 1996 is
approximately $106.2 million.
(4) INCOME TAXES
The Company's effective Federal corporate tax rate (21.3 percent and 21.4
percent for the six months ended June 30, 1996 and 1995, respectively) is less
than the statutory corporate tax rate (35 percent in 1996 and 1995) on ordinary
income due to permanent differences between financial and taxable income,
principally tax-exempt interest.
(5) REINSURANCE
In accordance with Statement of Financial Accounting Standards No. 113
("SFAS 113"), "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts", adopted in 1993, the Company reports assets and
liabilities relating to reinsured contracts gross of the effects of reinsurance.
Net premiums earned are shown net of premiums ceded of $12.7 million and $11.6
million, respectively, for the six months ended June 30, 1996 and 1995.
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