10-Q 1 b10qaug02.txt FGIC SECURITIES PURCHASE, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2002 COMMISSION FILE NO. 0-19564 FGIC SECURITIES PURCHASE, INC. A DELAWARE CORPORATION IRS EMPLOYER IDENTIFICATION NO. 13-3633082 125 PARK AVENUE, NEW YORK, NEW YORK 10017 TELEPHONE - (212) 312-3000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ----- SHARES OUTSTANDING TITLE OF CLASS AT AUGUST 14, 2002 -------------- ------------------ Common Stock (voting), $10.00 par value 10 Registrant meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format. TABLE OF CONTENTS ----------------- PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets 3 Statements of Income 4 Statements of Cash Flows 5 Notes to Unaudited Interim Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1 Legal Proceedings 10 Item 2. Changes in Securities 10 Item 3. Defaults on Senior Securities 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Item 5. Other Information 10 Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11 Page 2 ITEM 1. Financial Statements and Supplementary Data.

See accompanying notes to unaudited interim financial statements. Page 3

See accompanying notes to unaudited interim financial statements Page 4

See accompanying notes to uaudited interim financial statements. Page 5 FGIC SECURITIES PURCHASE, INC. (A WHOLLY-OWNED SUBSIDIARY OF FGIC HOLDINGS, INC.) NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) (1) BUSINESS -------- FGIC Securities Purchase, Inc. ("FGIC-SPI") is a wholly-owned subsidiary of FGIC Holdings, Inc. (the "Parent") which, in turn, is wholly-owned by General Electric Capital Corporation ("GE Capital"). FGIC-SPI provides liquidity for certain floating rate municipal securities whereby FGIC-SPI will, under certain circumstances, purchase such securities in the event they are tendered by the holders thereof as permitted under the terms of the respective bond authorizing documents. As of June 30, 2002, FGIC-SPI had approximately $4.8 billion (par and interest) of potential obligations under such arrangements. In order to obtain funds to purchase the securities, in the event such purchases are necessary, FGIC-SPI has entered into standby loan agreements with GE Capital totaling $4.8 billion at June 30, 2002, under which GE Capital will be irrevocably obligated to lend funds as needed for FGIC-SPI to purchase the securities. (2) SIGNIFICANT ACCOUNTING POLICIES ------------------------------- The unaudited interim financial statements of FGIC-SPI contained in this report reflect all normal recurring adjustments necessary, in the opinion of management, for a fair statement of (a) results of operations for the three and six months ending June 30, 2002 and 2001, (b) the financial position as of June 30, 2002 and December 31, 2001, and (c) cash flows for the six months ended June 30, 2002 and 2001. These unaudited interim financial statements should be read in conjunction with the financial statements and related notes included in the 2001 Annual Report on Form 10-K. Significant accounting policies are as follows: CASH AND CASH EQUIVALENTS Cash and cash equivalents are carried at cost, which approximates fair value. For purposes of the statement of cash flows, FGIC-SPI considers all highly liquid investments with original maturities of six months or less, which are not with affiliated entities, to be cash equivalents. REVENUE RECOGNITION Fees are paid up-front and in installments. Up-front fees are earned on a straight-line basis over the life of the liquidity commitment, usually five years, and installment fees are earned straight-line over the installment period. FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts of FGIC-SPI's financial instruments, relating primarily to short-term investments, liquidity fees receivable, due from GE Capital, other assets, deferred liquidity fee income, due to affiliates, commitment fees payable to GE Capital, accounts payable and accrued expenses and taxes payable, approximate their fair values. Page 6 SEC REGISTRATION FEES SEC registration fees are reimbursable to FGIC-SPI, as a separate item at the closing, by issuers of certain floating rate municipal securities, as transactions are consummated. Such fees are deferred and included in other assets when paid, and netted against the related reimbursement as transactions are consummated. Management evaluates the recoverability of such deferred fees at each reporting date. EXPENSES Direct expenses incurred by the Parent are fully allocated to FGIC-SPI on a specific identification basis. Employee related expenses are allocated by affiliates to FGIC-SPI based on an estimate of time such employees devote to the activities of FGIC-SPI which will be reviewed in the second half of 2002. For the six months ended June 30, 2002 and 2001 expenses of $200,000 and $444,887, respectively, were allocated to FGIC-SPI. Management believes that such allocation method is reasonable. Management believes that such expenses, as reported in the statement of income, would not differ materially from what expenses would have been on a stand-alone basis. COMMITMENT FEES The commitment fees are accrued on the outstanding liquidity facilities. RESERVE FOR LOSSES It is management's policy to establish a reserve for losses based upon its estimate of the ultimate aggregate losses relative to its obligations under the liquidity facility arrangements written. At June 30, 2002, management does not anticipate any losses relative to such arrangements. OTHER COMPREHENSIVE INCOME There are no elements of other comprehensive income (3) INCOME TAXES Under an intercompany tax-sharing agreement with its parent, FGIC-SPI is included in the consolidated Federal income tax returns filed by GE Capital. FGIC-SPI provides for taxes as if it filed a separate tax return. Page 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS Liquidity fees are received up-front at the inception of the contract and in installments over the life of the contract. Up-front fees are earned on a straight-line basis over the life of the liquidity commitment, and installment fees are earned straight-line over the installment period. For the six months ended June 30, 2002, FGIC-SPI earned liquidity fees of $4,247,414 compared to $3,321,321 for the six months ended June 30, 2001. The increase in earnings is primarily due to new deals written during 2001 being fully in effect in 2002. FGIC-SPI incurred $338,538 and $535,730 of general and administrative expenses for the six months ended June 30, 2002 and 2001, respectively. Included in general and administrative expenses were commitment fees owed to GE Capital of $131,007 in 2002 and $91,690 in 2001. The increase in commitment fees is due to the increase in number of outstanding contracts. The remainder of general and administrative expenses is primarily comprised of intercompany overhead expense allocations, which decreased due to the number of deals written in 2002 as compared to 2001. The effective Federal tax rate during 2002 and 2001 was equal to the Federal corporate tax rate of 35% giving consideration to the benefit for the deduction of state taxes of 7%. For the three months ended June 30, 2002, FGIC-SPI earned liquidity fees of $2,010,548 compared to $1,694,392 for the three months ended June 30, 2001. The increase in earnings is primarily due to new deals written during 2001 being fully in effect in 2002. FGIC-SPI incurred $165,549 and $251,572 of general and administrative expenses for the three months ended June 30, 2002 and 2001, respectively. Included in general and administrative expenses were commitment fees owed to GE Capital of $61,018 in 2002 and $46,665 in 2001. The increase in commitment fees is due to the increase in number of outstanding contracts. The remainder of general and administrative expenses is primarily comprised of intercompany overhead expense allocations, which decreased due to the number of deals written in 2002 as compared to 2001. The effective Federal tax rate during 2002 and 2001 was equal to the Federal corporate tax rate of 35% giving consideration to the benefit for the deduction of state taxes of 7%. LIQUIDITY AND CAPITAL RESOURCES Liquidity is a measure of the ability to generate sufficient cash to meet cash obligations as they come due. FGIC-SPI's primary source of cash is from liquidity fees and investment income. Cash outflows primarily relate to general and administrative expenses, GE Capital commitment fees, and income taxes. To date FGIC-SPI has not been required to purchase securities (fund a cash outflow) under the liquidity facilities issued. Should FGIC-SPI be required to fund such an outflow, the Company can readily access the cash balances held by GE Capital ($33.0 million at June 30, 2002) and draw upon the standby loan agreement ($4.8 billion at June 30, 2002) in the amount of the purchase price of tendered bonds. Net cash provided by operating activities was $0 and $0 for the six months ended June 30, 2002 and 2001, respectively. There were no cash flows related to investing and financing activities for the six months ended June 30, 2002 and 2001, respectively. Page 8 CRITICAL ACCOUNTING POLICIES The footnotes to the Company's financial statements disclose the Company's significant accounting policies. Certain of these policies are critical to the portrayal of the Company's financial condition and results of operations as they require management to establish estimates based on subjective judgements. The Company's accounting policy with respect to the recognition of revenue was considered a critical accounting policy. Page 9 PART II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults on Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K a) Exhibits Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sabanes - Oxley Act of 2002. Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sabanes - Oxley Act of 2002. b) Reports on Form 8-K None. Page 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FGIC SECURITIES PURCHASE, INC. ------------------------------ (Registrant) Date: August 14, 2002 /s/ Deborah M. Reif --------------------------- ------------------------------ Deborah Mary Reif President (principal executive officer) Date: August 14, 2002 /s/ David P. Shea --------------------------- ------------------------------ David Patrick Shea Treasurer (principal financial and accounting officer) Page 11

FGIC SECURITIES PURCHASE INC 10-Q