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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
December 10, 1997
EquiVantage Acceptance Corp. on behalf of EquiVantage Home Equity Loan Trust
1997-4
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(Exact Name of Registrant as Specified in its Charter)
Delaware 333-22343 76-0448074
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(State of Incorporation) (Commission (I.R.S. Employer
File Number) Identification No.)
13111 Northwest Freeway, Suite 301, Houston, Texas 77040
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 895-1957
No Change
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(Former Name or Former Address, if Changed Since Last Report)
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The financial statements of Financial Guaranty Insurance Company ("FGIC")
as of December 31, 1996 and 1995, that are incorporated by reference in this
Form 8-K have been audited by KPMG Peat Marwick LLP. The consent of KPMG Peat
Marwick LLP to the incorporation by reference of their audit report on such
financial statements in this Form 8-K and their being named as "experts" in the
Prospectus Supplement relating to EquiVantage Home Equity Loan Asset-Backed
Certificates, Series 1997-4, is attached hereto as Exhibit 23.1.
The audited financial statements of FGIC as of December 31, 1996 and 1995,
are incorporated by reference as Exhibit 99.1. The unaudited interim financial
statements of FGIC as of September 30, 1997, are attached hereto as Exhibit
99.2.
Item 7. Financial Statements; Pro Forma Financial Information and Exhibits.
(a) Not applicable.
(b) Not applicable.
(c) Exhibits:
23.1 Consent of KPMG Peat Marwick LLP
99.1 Audited financial statements of FGIC, December 31, 1996 and
1995*
99.2 Unaudited interim financial statements of FGIC as of
September 30, 1997
*Incorporated by reference to the Registrant's Current Report on Form 8-K
dated September 18, 1997.
2
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
EQUIVANTAGE ACCEPTANCE CORP.
By: /s/ Elizabeth Folk
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Elizabeth Folk
Senior Vice President
Date: December 9, 1997
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Consent of Independent Auditors
The Board of Directors
Financial Guaranty Insurance Company:
We consent to the use of our report dated January 17, 1997 on the financial
statements of Financial Guaranty Insurance Company as of December 31, 1996
and 1995, and for each of the years in the three-year period ended December
31, 1996, which report appears in the Form 8-K of EquiVantage Acceptance
Corp. ("the Registrant") dated September 18, 1997 which is incorporated by
reference in the Form 8-K of the Registrant dated December 10, 1997, and to
the reference to our firm under the heading "Experts" in the prospectus
supplement.
/s/ KPMG Peat Marwick LLP
New York, New York
December 10, 1997
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FINANCIAL GUARANTY INSURANCE COMPANY
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UNAUDITED INTERIM FINANCIAL STATEMENTS
September 30, 1997
<TABLE>
<S> <C>
Balance Sheets.............................................. 1
Statements of Income........................................ 2
Statements of Cash Flows.................................... 3
Notes to Unaudited Interim Financial Statements............. 4
</TABLE>
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Financial Guaranty Insurance
Company Balance Sheet
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($ in Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
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<S> <C> <C>
Assets (Unaudited)
Fixed maturity securities, available for sale, at fair value (amortized cost of
$2,260,772 in 1997 and $2,190,303 in 1996)......................................... $ 2,359,717 $2,250,549
Short-term investments, at cost, which approximates market........................... 131,524 73,839
Cash................................................................................. 699 860
Accrued investment income............................................................ 36,060 37,655
Reinsurance receivable............................................................... 8,271 7,015
Deferred policy acquisition costs.................................................... 88,738 91,945
Property, plant and equipment net of accumulated depreciation of $16,962 in 1997 and
$15,333 in 1996.................................................................... 3,551 4,696
Prepaid reinsurance premiums......................................................... 161,578 167,683
Prepaid expenses and other assets.................................................... 17,901 19,899
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Total assets.................................................................. $ 2,808,039 $2,654,141
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Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums.................................................................... $ 645,742 $ 681,816
Losses and loss adjustment expenses.................................................. 72,805 72,616
Ceded reinsurance payable............................................................ 3,391 10,561
Accounts payable and accrued expenses................................................ 44,921 54,165
Due to parent........................................................................ -- 1,791
Current federal income taxes payable................................................. (6,985) 52,016
Deferred federal income taxes payable................................................ 126,712 91,805
Payable for securities purchased..................................................... 33,843 4,937
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Total liabilities............................................................. 920,429 969,707
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Stockholder's Equity:
Common stock, par value $1,500 per share at September 30, 1997 and at December 31,
1996: 10,000 shares authorized, issued and outstanding............................. 15,000 15,000
Additional paid-in capital........................................................... 383,511 334,011
Net unrealized gains on fixed maturity securities available for sale, net of tax..... 64,347 39,160
Foreign currency translation adjustment.............................................. (231) (429)
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Retained earnings.................................................................... 1,424,983 1,296,692
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Total stockholder's equity.................................................... 1,887,610 1,684,434
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Total liabilities and stockholder's equity.................................... $ 2,808,039 $2,654,141
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</TABLE>
See accompanying notes to interim financial statements
1
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Financial Guaranty Insurance
Company Statement Of Income
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($ in Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
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1997 1996
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(UNAUDITED)
<S> <C> <C>
Revenues:
Gross premiums written.................................................................. $ 69,164 $ 65,875
Ceded premiums.......................................................................... (14,648) (14,178)
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Net premiums written.................................................................... 54,516 51,697
Decrease in net unearned premiums....................................................... 29,970 39,589
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Net premiums earned..................................................................... 84,486 91,286
Net investment income................................................................... 95,346 92,957
Net realized gains...................................................................... 12,514 11,132
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Total revenues....................................................................... 192,346 195,375
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Expenses:
Losses and loss adjustment expenses..................................................... 6,459 (2,078)
Policy acquisition costs................................................................ 13,115 13,056
Other underwriting expenses............................................................. 11,050 10,582
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Total expenses....................................................................... 30,624 21,560
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Income before provision for federal income taxes..................................... 161,722 173,815
Provision for federal income taxes...................................................... 33,431 37,566
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Net income........................................................................... $ 128,291 $ 136,249
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</TABLE>
See accompanying notes to interim financial statements
2
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Financial Guaranty Insurance
Company Statement Of Cash Flow
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($ in Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
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1997 1996
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(UNAUDITED)
<S> <C> <C>
Operating activities:
Net income........................................................................... $ 128,291 $ 136,249
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for deferred income taxes.................................................. 214 3,155
Amortization of fixed maturity securities............................................ 1,210 606
Policy acquisition costs deferred.................................................... (9,908) (11,864)
Amortization of deferred policy acquisition costs.................................... 13,115 13,056
Depreciation of fixed assets......................................................... 1,629 1,843
Change in reinsurance receivable..................................................... (1,256) 254
Change in prepaid reinsurance premiums............................................... 6,105 2,581
Foreign currency translation adjustment.............................................. 305 (1,226)
Change in accrued investment income, prepaid expenses and other assets............... 3,214 14,140
Change in unearned premiums.......................................................... (36,074) (42,171)
Change in losses and loss adjustment expense reserves................................ 189 (5,681)
Change in other liabilities.......................................................... (18,205) 24,749
Change in current income taxes payable............................................... (59,001) 27,522
Net realized gains on investments.................................................... (12,514) (11,132)
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Net cash provided by operating activities.............................................. 17,314 152,081
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Investing activities:
Sales or maturities of fixed maturity securities....................................... 602,067 633,347
Purchases of fixed maturity securities................................................. (610,873) (727,641)
Sales or maturities (purchases) of short-term investments, net......................... (57,685) (56,428)
Purchases of property and equipment, net............................................... (484) (561)
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Net cash used for investing activities................................................. (66,975) (151,283)
Financing activities
Capital
Contributions.......................................................................... 49,500 --
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Increase in cash....................................................................... (161) 798
Cash at beginning of period............................................................ 860 199
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Cash at end of period.................................................................. $ 699 $ 997
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</TABLE>
See accompanying notes to interim financial statements
3
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Financial Guaranty Insurance Notes to Financial Statements
Company
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September 30, 1997 and 1996
(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 nine
months ended September 30, 1997 and 1996, (b) the financial
position at September 30, 1997 and December 31, 1996, and (c)
cash flows for the nine months ended September 30, 1997 and
1996.
These interim financial statements should be read in
conjunction with the financial statements and related notes
included in the 1996 audited financial statements.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that effect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(2) Statutory Accounting Practices
The financial statements are prepared on the basis of GAAP,
which differs in certain respects from accounting practices
prescribed or permitted by state insurance regulatory
authorities. The following are the significant ways in which
statutory basis accounting practices differ from GAAP:
(a) premiums are earned directly in proportion to the
scheduled principal and interest payments rather than in
proportion to the total exposure outstanding at any point
in time;
(b) policy acquisition costs are charged to current
operations as incurred rather than as related premiums
are earned;
(c) a contingency reserve is computed on the basis of
statutory requirements for the security of all
policyholders, regardless of whether loss contingencies
actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as "non-admitted assets" are
charged directly against surplus but are reflected as
assets under GAAP, if recoverable;
(e) federal income taxes are only provided with respect to
taxable income for which income taxes are currently
payable, while under GAAP taxes are also provided for
differences between the financial reporting and tax bases
of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted
assets, while under GAAP they are recorded as federal
income tax payments; and
(g) all fixed income investments are carried at amortized
cost, rather than at fair value for securities classified
as "Available for Sale" under GAAP.
4
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Financial Guaranty Insurance Notes to Financial Statements
Company
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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>
NINE MONTHS ENDED SEPTEMBER 30,
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1997 1996
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NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY
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<S> <C> <C> <C> <C>
GAAP basis amount............................................ $ 128,291 $1,887,611 $ 136,249 $1,631,887
Premium revenue recognition.................................. (4,363) (180,648) (6,742) (173,669)
Deferral of acquisition costs................................ 3,207 (88,738) 1,192 (93,676)
Contingency reserve.......................................... -- (501,023) -- (428,798)
Non-admitted assets.......................................... -- (3,086) -- (4,314)
Case-basis losses incurred................................... 1,037 (2,212) (3,854) (3,906)
Portfolio loss reserves...................................... 5,000 29,000 -- 24,000
Deferral of income tax....................................... 211 71,035 3,155 67,550
Unrealized gains on fixed maturity securities held at fair
value, net of taxes........................................ -- (64,347) -- (12,340)
Profit commission............................................ (735) (6,920) 1,234 (4,510)
Contingency reserve tax deduction............................ -- 95,185 -- 85,087
Allocation of tax benefits due to Parent's net operating loss
to the Company............................................. 235 10,838 (2) 10,289
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Statutory basis amount....................................... $ 132,883 $1,246,695 $ 131,232 $1,097,600
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</TABLE>
5
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Financial Guaranty Insurance Notes to Financial Statements
Company
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September 30, 1997 and 1996
(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 $66.4 million 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
1997 is approximately $124.7 million.
(4) Income Taxes
The Company's effective Federal corporate tax rate (20.7 percent
and 21.6 percent for the three months ended September 30, 1997
and 1996, respectively) is less than the statutory corporate tax
rate (35 percent in 1997 and 1996) on ordinary income due to
permanent differences between financial and taxable income,
principally tax-exempt interest.
(5) Reinsurance
In accordance with Statement of Financial Accounting Standards
No. 113 ("SFAS 113"), "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts", the Company
reports assets and liabilities relating to reinsured contracts
gross of the effects of reinsurance. Net premiums earned are
shown net of premiums ceded of $20.8 million and $16.8 million,
respectively, for the nine months ended September 30, 1997 and
1996.
(5) Capital Contribution
During 1997, FGIC Corporation made a capital contribution of
$49.5 million to the Company.
6
