10-Q 1 d64701_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-Q ----------- [X] QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED June 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ___________ ----------- COMMISSION FILE NUMBER 0-19564 ----------- MUNICIPAL SECURITIES PURCHASE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3633082 --------------------------------------------- ------------------------------- (State or other jurisdiction incorporation or (I.R.S. Employer Identification organization) No.) 201 HIGH RIDGE ROAD, STAMFORD, CONNECTICUT 06927 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE) (203) 357-4000 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF EACH CLASS ------------------- COMMON STOCK, PAR VALUE $10.00 PER SHARE 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X . --- --- At July 28, 2005, 10 shares of voting common stock, which constitutes all of the outstanding common equity, with a par value of $10.00 per share were outstanding. 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. MUNICIPAL SECURITIES PURCHASE, INC. PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statement of Financial Position 1 Statement of Income 2 Statement of Changes in Shareowner's Equity 3 Statement of Cash Flows 4 Notes to Unaudited Interim Financial Statements 5 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 6 Item 4. Controls and Procedures 7 PART II. OTHER INFORMATION Item 6. Exhibits 8 Signatures 9 Unless the context otherwise requires, the "Company," "Municipal-SPI," "We," "Us," or "Our" shall mean Municipal Securities Purchase, Inc. FORWARD-LOOKING STATEMENTS This document contains "forward-looking statements" - that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," or "will." Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties arise from the behavior of financial markets, including fluctuations in interest rates and from numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive or regulatory nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MUNICIPAL SECURITIES PURCHASE, INC. Statement of Financial Position

See accompanying notes to unaudited interim financial statements. 1 MUNICIPAL SECURITIES PURCHASE, INC. Statement of Income (Unaudited)

See accompanying notes to unaudited interim financial statements. 2 MUNICIPAL SECURITIES PURCHASE, INC. Statement of Changes in Shareowner's Equity Six-months ended June 30, 2005

See accompanying notes to unaudited interim financial statements. 3 MUNICIPAL SECURITIES PURCHASE, INC. Statement of Cash Flows (Unaudited)

See accompanying notes to unaudited interim financial statements. 4 MUNICIPAL SECURITIES PURCHASE, INC. NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS (1) BUSINESS DESCRIPTION Municipal Securities Purchase, Inc. (the Company) is a wholly-owned subsidiary of GE Funding Services Inc. (the Parent), which is a wholly-owned subsidiary of GEI, Inc., and in turn, wholly owned by General Electric Capital Corporation (GE Capital), the ultimate parent of which is General Electric Company (GE). In the fourth quarter of 2003, FGIC Securities Purchase, Inc. (FGIC-SPI) changed its name to Municipal Securities Purchase, Inc. The Company provides liquidity for certain floating rate municipal securities whereby the Company will, under certain circumstances, purchase such securities in the event they are tendered by the holders as permitted under the terms of the respective bond indentures. As of June 30, 2005, the Company had approximately $3.1 billion (par amount and interest) of potential obligations under such arrangements. When issued, each of the liquidity facilities had a term not exceeding five years (subject to renewal). In order to obtain funds to purchase the securities, in the event such purchases are necessary, the Company has entered into standby loan agreements with GE Capital totaling $3.1 billion as of June 30, 2005, under which GE Capital is irrevocably obligated to lend funds as needed for the Company to purchase the securities. BASIS OF CONSOLIDATION The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. The unaudited interim financial statements of the Company contained in this report reflect all normal recurring adjustments necessary, in the opinion of management, for a fair statement of the results of operations, financial position and cash flows. The results reported in these quarterly financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. We label our quarterly information using a calendar convention, that is, first quarter is labeled as ending March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It is our longstanding practice to establish interim quarterly closing dates using a fiscal calendar, which requires our business to close their books on a Saturday. The effects of this practice are modest and only exist within a reporting year. These unaudited interim financial statements should be read in conjunction with the financial statements and related notes included in the 2004 Form 10-K. (2) INCOME TAXES We are included in GE's consolidated U.S. federal income tax return under an intercompany tax-sharing agreement. The provision for current tax expense includes our effect on the consolidated return. We provide for taxes as if we filed a separate return. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS REVENUES We provide liquidity facilities for certain floating rate municipal securities whereby we will, under certain circumstances, purchase such securities in the event they are tendered by the holders. We earn liquidity fees from the issuers of these securities, municipal governments in the U.S., for providing the liquidity facilities. During 2004 and the six-months ended June 30, 2005, we did not commit to any new liquidity facilities. We earned liquidity fees of $2.9 million and $3.2 million during the six-months ended June 30, 2005 and 2004, respectively and $1.4 million and $1.6 million during the three-months ended June 30, 2005 and 2004, respectively. The total liquidity facility in force as of June 30, 2005 and December 31, 2004 was $3.1 billion and $3.6 billion, respectively. OPERATING EXPENSES We incurred $151,940 and $234,019 of total operating expenses during the six-months ended June 30, 2005 and 2004, respectively, and $54,098 and $117,223 of total operating expenses during the three-months ended June 30, 2005 and 2004, respectively. Included in total operating expenses were commitment fees owed to GE Capital under the standby loan agreements, which are based on the outstanding par in force on each of the liquidity facilities at a rate of 0.625 basis points. Commitment fees were $101,304 and $114,019 for the six-months ended June 30, 2005 and 2004, respectively, and $47,600 and $57,223 for the three-months ended June 30, 2005 and 2004, respectively. The decrease in commitment fees from 2004 to 2005 corresponds with the respective decrease in liquidity fees earned, which is also based upon the par in force on each of the liquidity facilities outstanding. Total operating expenses also includes general and administrative expenses, which are principally comprised of intercompany overhead expense allocation. General and administrative expenses were $50,636 and $120,000 for the six-months ended June 30, 2005 and 2004, respectively, and $6,498 and $60,000 for the three-months ended June 30, 2005 and 2004, respectively. The decrease in general and administrative expenses from 2004 to 2005 reflects the decline in the Company's activities, as the total outstanding par amount of the liquidity facilities has decreased. INCOME TAX EXPENSE The statutory U.S. Federal tax rate during the three-months ended June 30, 2005 and 2004 was 35%. Our effective tax rate was 39.25% including the net effect of state taxes. CAPITAL RESOURCES AND LIQUIDITY Liquidity is a measure of the ability to generate sufficient cash to meet cash obligations as they come due. The largest use of potential liquidity would be if we were required to purchase all securities under the liquidity facilities issued. Since inception, we have not been required to purchase any securities. If we were required to purchase such securities, we would draw on the standby loan agreements with GE Capital. Since the standby loan agreements with GE Capital are irrevocable during the period the liquidity agreements are 6 outstanding, we believe we have sufficient liquidity in the event that we are required to fund any draw downs under the liquidity facilities issued. Our other primary source of cash is from liquidity fee income, which we lend to GE Capital. We believe that such income and access to the intercompany receivable from GE Capital ($1.9 million at June 30, 2005) is sufficient to fund our general and administrative expenses. Net cash provided by operating activities was $6.0 million for the six-months ended June 30, 2005 as we collected a portion of the intercompany receivable from GE Capital. We used the cash to pay a $6.0 million dividend to the Parent, resulting in a $6.0 million financing cash outflow during the six-months ended June 30, 2005. There were no cash flows related to investing activities for the six-months ended June 30, 2005. ITEM 4. CONTROLS AND PROCEDURES Under the direction of our Chairman of the Board (serving as the principal executive officer) and Vice President and Treasurer (serving as the chief financial officer), we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that (i) our disclosure controls and procedures were effective as of June 30, 2005, and (ii) no change in internal control over financial reporting occurred during the quarter ended June 30, 2005, that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting. 7 PART II - OTHER INFORMATION ITEM 6. EXHIBITS Exhibit 31(a) - Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Amended. Exhibit 31(b) - Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Amended. Exhibit 32 - Certification Pursuant to 18 U.S.C. Section 1350. 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Municipal Securities Purchase, Inc. (Registrant) July 29, 2005 /s/ LeAnn Rogers ------------- ---------------- Date LeAnn Rogers Chairman (Principal Executive Officer) July 29, 2005 /s/ Kathleen Gan ------------- ---------------- Date Kathleen Gan Vice President and Treasurer (Principal Financial and Accounting Officer) 9

MUNICIPAL SECURITIES PURCHASE INC 10-Q