10-Q 1 b10q093003.txt FGIS 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 SEPTEMBER 30, 2003 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 --- --- TITLE OF CLASS SHARES OUTSTANDING AT OCTOBER 31, 2003 ------------------------------------ ----------------------------------------- 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. FGIC SECURITIES PURCHASE INC. (A Wholly Owned Subsidiary of FGIC Holdings, Inc.) TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Balance Sheets 1 Statements of Income and Retained Earnings 2 Statements of Cash Flows 3 Note to Unaudited Interim Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 4. Controls and Procedures 7 PART II. OTHER INFORMATION Item 1. Legal Proceedings 8 Item 2. Changes in Securities 8 Item 3. Defaults on Senior Securities 8 Item 4. Submission of Matters to a Vote of Security Holders 8 Item 5. Other Information 8 Item 6. Exhibits and Reports on Form 8-K 8 Signatures 9 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 10

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FGIC SECURITIES PURCHASE, INC. (A Wholly Owned Subsidiary of FGIC Holdings, Inc.) Balance Sheets ~~June~~September 30, 2003 and December 31, 2002 ~~JUNE~~SEPTEMBER 30, DECEMBER 31, ~~Assets~~ASSETS 2003 2002 ------------------- ------------------- (Unaudited) Liquidity fees receivable $ 2,~~389~~545,~~799~~031 1,827,918 Due from GE Capital 3738,~~357~~856,~~812~~839 34,799,176 ------------------- ------------------- Total assets $ 3941,~~747~~401,~~611~~870 36,627,094 =================== =================== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Deferred liquidity fee income $ ~~798~~787,~~543~~700 926,202 Due to affiliates ~~993~~50,~~885~~004 135,773 Commitment fees payable to GE Capital 1,~~133~~208,~~349~~163 992,975 Accounts payable and accrued expenses ~~508~~568,~~135~~694 496,417 Taxes payable ~~749~~2,~~613~~019,946 988,291 ------------------- ------------------- Total liabilities 4,~~183~~634,~~525~~507 3,539,658 ------------------- ------------------- Stockholder's Equity: Common stock, par value $10.00 per share. Authorized, issued, and outstanding 10 shares 100 100 Additional paid-in capital 822,145 822,145 Retained earnings 3435,~~741~~945,~~841~~118 32,265,191 ------------------- ------------------- Total stockholder's equity 3536,~~564~~767,~~086~~363 33,087,436 ------------------- ------------------- Total liabilities and stockholder's equity $ 3941,~~747~~401,~~611~~870 36,627,094 =================== ===================

See accompanying notes to unaudited interim financial statements. - 1 -

FGIC SECURITIES PURCHASE, INC. (A Wholly Owned Subsidiary of FGIC Holdings, Inc.) Statements of Income and Retained Earnings Three and ~~six-~~nine months ended ~~June~~September 30, 2003 and 2002 (Unaudited) ~~FOR THE~~ THREE -MONTHS ~~FOR~~ENDED ~~THE SIX~~ NINE-MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~ENDED~~SEPTEMBER ~~JUNE~~ 30, ---------------------------------------- ---------------------------------------- 2003 2002 2003 2002 ---------------------------------------- ------------------- -------------------- Liquidity fee income $ 2,~~362~~306,~~602~~018 2,~~010~~782,~~548~~371 46,~~624~~930,~~816~~834 47,~~247~~029,~~414~~785 General and administrative expenses ~~273~~315,~~708~~486 ~~165~~277,~~549~~622 ~~527~~843,~~793~~279 ~~338~~616,~~538~~160 ----------------- ----------------------- ------------------- -------------------- Income before income taxes 21,~~088~~990,~~894~~532 12,~~844~~504,~~999~~749 46,~~097~~087,~~023~~555 36,~~908~~413,~~876~~625 ----------------- ----------------------- ------------------- -------------------- Income tax expense: Federal ~~679~~647,~~935~~918 ~~603~~815,~~210~~295 1,~~333~~981,~~581~~499 12,~~272~~087,~~339~~635 State and local ~~146~~139,~~223~~337 ~~129~~175,~~150~~333 ~~286~~426,~~792~~129 ~~273~~448,~~621~~954 ----------------- ----------------------- ------------------- -------------------- Total income tax expense ~~826~~787,~~158~~255 ~~732~~990,~~360~~628 12,~~620~~407,~~373~~628 12,~~545~~536,~~960~~589 ----------------- ----------------------- ------------------- -------------------- Net income $ 1,~~262~~203,~~736~~277 1,~~112~~514,~~639~~121 23,~~476~~679,~~650~~927 23,~~362~~877,~~916~~036 Retained earnings at beginning of period 34,741,841 29,442,181 32,265,191 27,079,266 ---------------------------------------- ------------------- -------------------- Retained earnings at end of period $ 35,945,118 30,956,302 35,945,118 30,956,302 ================= ======================= =================== ====================

See accompanying notes to unaudited interim financial statements. - 2 -

FGIC SECURITIES PURCHASE, INC. (A Wholly Owned Subsidiary of FGIC Holdings, Inc.) Statements of Cash Flows ~~Six-~~Nine months ended ~~June~~September 30, 2003 and 2002 (Unaudited) ~~2003~~NINE-MONTHS ~~2002~~ENDED SEPTEMBER 30, --------------------------------------- 2003 2002 ------------------ ------------------ (Unaudited) (Unaudited) Operating activities: Net income $ 23,~~476~~679,~~650~~927 23,~~362~~877,~~916~~036 Adjustments to reconcile net income to net cash provided by operating activities: Change in taxes payable ~~(238~~1,~~678)~~031,655 ~~935~~475,~~592~~837 Change in due from GE Capital (24,~~558~~057,~~636~~663) (37,~~887~~343,~~297~~225) Change in due to affiliates ~~858~~(85,~~112~~769) ~~810~~2,~~369~~445,906 ~~Changes~~Change in other assets -- 6284,337 Change in liquidity fees receivable (~~561~~717,~~881~~113) ~~(469~~88,~~372)~~034 Change in deferred liquidity fee income (~~127~~138,~~659~~502) 3891,~~919~~451 Change in accounts payable and accrued expenses 1172,~~718~~277 1561,~~529~~679 Change in commitment fees payable to GE Capital ~~140~~215,~~374~~188 ~~131~~218,~~007~~945 ------------------- ------------------- Cash provided by operating activities -- -- ------------------- ------------------- Net change in cash and cash equivalents -- -- Cash and cash equivalents at beginning of period -- -- ------------------ ------------------- Cash and cash equivalents at end of period $ -- -- =================== ===================

See accompanying notes to unaudited interim financial statements. - 3 - FGIC SECURITIES PURCHASE INC. (A Wholly Owned Subsidiary of FGIC Holdings, Inc.) Notes to Unaudited Interim Financial Statements September 30, 2003 (Unaudited) (1) BUSINESS FGIC Securities Purchase, Inc. (FGIC-SPI) is a wholly owned subsidiary of FGIC Holdings, Inc. (the Parent). The Parent is wholly owned by GEI, Inc., 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 purchase agreement. As of September 30, 2003, FGIC-SPI had approximately $4.5 billion (par and interest) of potential obligations under such arrangements. At September 30, 2003 the Company had remaining capacity of $0.3 billion. Presently, management of the Company has decided not to provide any new standby security purchase agreements. Management will continue to reassess this decision in the in the future. The current standby security purchase agreement shall remain in effect in accordance with their terms. 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 $4.5 billion at September 30, 2003, under which GE Capital will be irrevocably obligated to lend funds as heeded 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 nine months ended September 30, 2003 and 2002, (b) the financial position as of September 30, and (c) cash flows for the nine months ended September 30, 2003 and 2002. These unaudited interim financial statements should be read in conjunction with the financial statements and related notes included in the 2002 Annual Report on Form 10-K. Significant accounting policies are as follows: (A) 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. (B) 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 commitment, usually five years, and installment fees are earned straight-line over the installment period. - 4 - (C) 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, 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. (D) 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. For the nine months ended September 30, 2003 and 2002 expenses of $556,815 and $385,155, respectively, were allocated to FGIC-SPI. For the three months ended September 30, 2003 and 2002, expenses of $184,114 and $185,155, 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. (E) COMMITMENT FEES The commitment fees are accrued on the outstanding liquidity facilities. (F) 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 September 30, 2003, management does not anticipate any losses relative to such arrangements. (G) OTHER COMPREHENSIVE INCOME There are no elements of other comprehensive income. (H) NEW ACCOUNTING PRONOUNCEMENTS In November 2002, the FASB issued Interpretation No. 45 (FIN 45) Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The standby security purchase agreements issued by FGIC-SPI are subject to the disclosure requirements of FIN 45 and management believes the accounting provisions of FIN 45 are applicable to the agreements issued by the Company. (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. - 5 - 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. Presently, management of the Company has decided not to provide any new standby security purchase agreement. Management will continue to reassess this decision in the future. The current agreements shall remain in effect in accordance with their terms. For the nine months ended September 30, 2003, FGIC-SPI earned liquidity fees of $6,910,127 compared to $7,029,785 for the nine months ended September 30, 2002. The decrease in earnings is primarily due to the fact that the business is in a run-off mode and existing deals are maturing. FGIC-SPI incurred $843,279 and $616,160 of general and administrative expenses for the nine months ended September 30, 2003 and 2002, respectively. Included in general and administrative expenses were commitment fees owed to GE Capital of $215,187 in 2003 and $218,944 in 2002. The decrease in commitment fees corresponds with the decrease in liquidity fees. The remainder of general and administrative expenses is primarily comprised of intercompany overhead expense allocations, which increased due to the increase in underlying costs being allocated. The effective Federal tax rate during 2003 and 2002 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 September 30, 2003, FGIC-SPI earned liquidity fees of $2,285,311 compared to $2,782,371 for the three months ended September 30, 2002. The decrease in earnings is primarily due to the fact that the business is in a run-off mode and existing deals are maturing. FGIC-SPI incurred $315,486 and $277,622 of general and administrative expenses for the three months ended September 30, 2003 and 2002, respectively. Included in general and administrative expenses were commitment fees owed to GE Capital of $74,814 in 2003 and $87,937 in 2002. The decrease in commitment fees corresponds with the decrease in liquidity fees. The remainder of general and administrative expenses is primarily comprised of intercompany overhead expense allocations, which increased due to the increase in underlying costs being allocated. 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 out flow) 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 ($38.8 million at September 30, 2003) and draw upon the standby loan agreement ($4.5 billion at September 30, 2003) in the amount of the purchase price of tendered bonds. CRITICAL ACCOUNTING POLICIES The footnotes to the Company's financial statements disclose the Company's significant accounting policies. Some accounting policies may be critical to the portrayal of the Company's financial condition and results of operations as they require management to establish estimates based on subjective judgments. The Company's accounting policy with respect to the recognition of revenue was considered a critical accounting policy as management estimates the risk associated with the liquidity facilities is - 6 - distributed ratably over the life of facilities and as such earns the fees evenly over the liquidity facility period. ITEM 4. CONTROLS AND PROCEDURES As of September 30, 2003, under direction of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures and internal controls over financial reporting and concluded that (i) our disclosure controls and procedures were effective as of September 30, 2003, and (ii) no changes occurred during the quarter ended September 30, 2003, that have materially affected, or are reasonably likely to materially affect, such internal controls. - 7 - PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Omitted Item 2. CHANGES IN SECURITIES Omitted Item 3. DEFAULTS ON SENIOR SECURITIES Omitted Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted Item 5. OTHER INFORMATION Omitted Item 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Exhibit 31.1 - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32 - Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 b) Reports on Form 8-K Omitted - 8 - 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: October 31, 2003 /s/ A. Edward Turi, III -------------------------- A. Edward Turi, III Acting President (principal executive officer) Date: October 31, 2003 /s/ Donna J. Blank -------------------------- Donna J. Blank Chief Financial Officer (principal financial and accounting officer) - 9 - EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION ------------- I, A. Edward Turi, III, certified that: (1) I have reviewed this quarterly report on Form 10-Q of FGIC Securities Purchase, Inc. (the Company); (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designated such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by other within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation (the Evaluation Date); and (c) disclosed in this quarterly report and change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions); (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 31, 2003 /s/ A. Edward Turi, III ----------------------- A. Edward Turi, III Acting President (principal executive officer) - 10 - EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION ------------- I, Donna J. Blank, certified that: (1) I have reviewed this quarterly report on Form 10-Q of FGIC Securities Purchase, Inc. (the Company); (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designated such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by other within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation (the Evaluation Date); and (c) disclosed in this quarterly report and change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions); (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 31, 2003 /s/ Donna J. Blank ------------------ Donna J. Blank Chief Financial Officer (principal financial and accounting officer) - 11 - EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FGIC Securities Purchase, Inc. (the Registrant) on Form 10-Q for the period ending September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the Report), we, A. Edward Turi, III and Donna J. Blank, Chief Executive Officer, and Chief Financial Officer, respectively, of the Registrant, herby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant. Date: October 31, 2003 /s/ A. Edward Turi, III ----------------------- A. Edward Turi, III Acting President (principal executive officer) Date: October 31, 2003 /s/ Donna J. Blank ------------------ Donna J. Blank Chief Financial Officer (principal financial and accounting officer) - 12 -

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