<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 22, 1996
EquiVantage Home Equity Loan Trust 1996-3
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 33-99364 Application Pending
- ------------------------------- ----------------- -------------------------
(State or Other Jurisdiction of (Commission File (I.R.S. Employer
Incorporation) Number) Identification No.)
c/o EquiVantage Acceptance Corp. 77040
Attention: John E. Smith -------------------------
13111 Northwest Freeway (Zip Code)
Houston, Texas
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (713) 895-1957
--------------
No change
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
- --------------------------------------------------------------------------------
<PAGE>
Item 5. OTHER EVENTS
Filing of Financial Guaranty Insurance Company
FINANCIALS AND CONSENT OF EXPERTS
The financial statements of Financial Guaranty Insurance Company as of
December 31, 1995 and 1994 that are included in this Form 8K have been audited
by KPMG Peat Marwick LLP. The consent of KPMG Peat Marwick LLP to the inclusion
of their audit report on such financial statements in the Form 8K and to being
named as "experts" in the Prospectus Supplement for the EquiVantage Home Equity
Loan Trust 1996-3 is attached hereto as Exhibit 23.4.
The financial statements of Financial Guaranty Insurance Company as of
December 31, 1995 and 1994 are attached hereto as Exhibit 99.3. The unaudited
financial statements of Financial Guaranty Insurance Company as of June 30, 1996
are attached hereto as Exhibit 99.4.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
The following are filed herewith. The exhibit numbers
correspond with Item 601(b) of Regulation S-K.
EXHIBIT NO. DESCRIPTION
23.4 Consent of KPMG Peat Marwick LLP with respect to inclusion
of the December 31, 1995 and 1994 financial statements of
Financial Guaranty Insurance Company.
99.3 Financial Guaranty Insurance Company December 31, 1995 and
1994 Financials.
99.4 Unaudited financial statements of Financial Guaranty
Insurance Company as of June 30, 1996.
<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 hereunto duly authorized.
EQUIVANTAGE HOME EQUITY LOAN TRUST 1996-3
By: EquiVantage Acceptance Corp., as Sponsor
By: /S/ JOHN E. SMITH
-----------------------
Name: John E. Smith
Title: President
Dated: August 22, 1996
<PAGE>
EXHIBIT INDEX
DESCRIPTION OF EXHIBIT
EXHIBIT NO. DESCRIPTION
23.4 Consent of KPMG Peat Marwick LLP with respect to inclusion
of the December 31, 1995 and 1994 financial statements of
Financial Guaranty Insurance Company.
99.3 Financial Guaranty Insurance Company December 31, 1995 and
1994 Financials.
99.4 Unaudited financial statements of Financial Guaranty
Insurance Company as of June 30, 1996.
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
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 EquiVantage Home Equity Loan Trust 1996-3, 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.
KPMG Peat Marwick LLP
New York, New York
August 22, 1996
<PAGE>
EXHIBIT 99.3
AUDITED FINANCIAL STATEMENTS
FINANCIAL GUARANTY INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1995 AND 1994
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
A-1
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Report of Independent Auditors . . . . . . . . . . . . . . . . . . 1
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Income . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Stockholder's Equity . . . . . . . . . . . . . . . . 4
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . 6
A-2
<PAGE>
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
A-3
<PAGE>
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 $2,298,210
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to financial statements.
A-4
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
- -----------------------------------------------------------------------------
($ 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 $165,360
--------- -------- --------
--------- -------- --------
</TABLE>
See accompanying notes to financial statements.
A-5
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY
- -------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES) ON
ADDITIONAL FIXED MATURITY FOREIGN
COMMON PAID-IN SECURITIES AVAILABLE- CURRENCY RETAINED
STOCK CAPITAL FOR-SALE, 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) $1,136,584
------- -------- --------- --------- ----------
------- -------- --------- --------- ----------
</TABLE>
See accompanying notes to financial statements.
A-6
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
($ 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 - - (3,008)
principle, net of tax
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>
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.
A-8
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
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 managements
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.
A-9
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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>
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>
A-11
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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.
<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>
A-12
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<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 1,839,566 25,809 (85,200) 1,780,175
subdivisions
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.
A-13
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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.
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>
A-14
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-15
<PAGE>
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.
A-16
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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-17
<PAGE>
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.
A-18
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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.
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 2,141,58 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.
A-19
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
As of December 31, 1995, the composition of principal exposure by type
of issue, net of reinsurance, was as follows (in millions):
<TABLE>
<CAPTION>
NET
PRINCIPAL
OUTSTANDING
-----------
<S> <C>
Municipal:
General obligation $43,308.2
Special revenue 38,137.9
Industrial revenue 2,480.0
Non-municipal 14,734.2
---------
Total $98,660.3
---------
---------
</TABLE>
A-20
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company is authorized to do business in 50 states, the District of
Columbia, and in the United Kingdom and France. Principal exposure
outstanding at December 31, 1995 by state, net of reinsurance, was as
follows (in millions):
<TABLE>
<CAPTION>
Net
Principal
Outstanding
-----------
<S> <C>
California $ 10,440.2
Florida 8,869.3
Pennsylvania 8,653.4
New York 7,706.7
Illinois 5,697.5
Texas 5,478.7
New Jersey 4,181.9
Michigan 3,385.9
Arizona 2,776.9
Ohio 2,327.7
----------
Sub-total 59,518.2
Other states and International 39,142.1
----------
Total $98,660.3
----------
----------
</TABLE>
(12) COMMITMENTS
Total rent expense was $2.2 million, $2.6 million and $2.4 million
in 1995, 1994 and 1993, respectively. For each of the next five
years and in the aggregate as of December 31, 1995, the minimum
future rental payments under noncancellable operating leases having
remaining terms in excess of one year approximate (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1996 $ 2,297
1997 2,909
1998 2,909
1999 2,909
2000 2,909
Subsequent to 2000 2,911
-------
Total minimum future rental payments $16,844
-------
-------
</TABLE>
A-21
<PAGE>
APPENDIX B
UNAUDITED FINANCIAL STATEMENTS
FINANCIAL GUARANTY INSURANCE COMPANY
SIX MONTHS ENDED JUNE 30, 1996
<PAGE>
EXHIBIT 99.4
FINANCIAL GUARANTY INSURANCE COMPANY
UNAUDITED INTERIM FINANCIAL STATEMENTS
JUNE 30, 1996
Balance Sheets 1
Statements of Income 2
Statements of Cash Flows 3
Notes to Unaudited Interim Financial Statements 4
B-1
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
<TABLE>
<CAPTION>
($ IN THOUSANDS)
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 $2,580,302
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to interim financial statements
B-2
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
(UNAUDITED)
<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>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOW
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
(UNAUDITED)
<S> <C> <C>
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>
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>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
The following is a reconciliation of the net income and stockholder's
equity of Financial Guaranty prepared on a GAAP basis to the corresponding
amounts reported on a statutory basis for the periods indicated below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------
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>
B-6
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
(Unaudited)
(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.
B-7
