10-Q 1 b10q093002.txt FGTIS 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, 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 October 25, 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. 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 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 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 Certifications 10

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FGIC SECURITIES PURCHASE, INC. (A ~~WHOLLY-OWNED~~Wholly ~~SUBSIDIARY~~Owned OFSubsidiary of FGIC ~~HOLDINGS~~Holdings, ~~INC~~Inc.) ~~BALANCE~~Balance ~~SHEETS~~Sheets ~~ASSETS~~September ~~JUNE~~30, 2002 and December 31, 2001 SEPTEMBER 30, DECEMBER 31, Assets 2002 2001 ------------------- ------------------- (~~UNAUDITED~~Unaudited) Liquidity fees receivable $ 21,~~307~~753,~~145~~436 $ 1,837,773 Due from GE Capital 3236,~~984~~440,~~076~~004 29,096,779 Other assets 8559,~~485~~788 147,822 ------------------- ------------------- Total assets $35 38,~~376~~253,~~706~~228 $31,082,374 =================== =================== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Deferred liquidity fee income $ ~~904~~957,~~530~~062 $ 865,611 Due to affiliates 13,~~452~~088,~~506~~043 642,137 Commitment fees payable to GE Capital ~~831~~919,~~258~~196 700,251 Accounts payable and accrued expenses ~~476~~522,~~480~~630 460,951 Taxes payable 1987,~~447,505~~750 511,913 ------------------- ------------------- Total liabilities ~~$ 5~~6,~~112~~474,~~279~~681 $ 3,180,863 ------------------- ------------------- Stockholder's ~~Equity~~equity: Common stock, par value $10.00 per share; 10 shares authorized, issued and outstanding 100 100 Additional paid-in capital 822,145 822,145 Retained earnings 2930,~~442~~956,~~182~~302 27,079,266 ------------------- ------------------- Total stockholder's equity ~~$30~~31,~~264~~778,~~427~~547 $27,901,511 ------------------- ------------------- Total liabilities and stockholder's equity $35 38,~~376~~253,~~706~~228 $31,082,374 =================== ===================

See accompanying notes to unaudited financial statements. - 1 -

FGIC SECURITIES PURCHASE, INC. (A ~~WHOLLY-OWNED~~Wholly ~~SUBSIDIARY~~Owned OFSubsidiary of FGIC ~~HOLDINGS~~Holdings, ~~INC~~Inc.) ~~STATEMENTS~~Statements OFof ~~INCOME~~Income (~~UNAUDITED~~Unaudited) ~~FOR~~THREE ~~THE~~MONTHS ~~THREEMONTHS~~ENDED ~~FOR~~NINE ~~THE SIX~~ MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~ENDED~~SEPTEMBER ~~JUNE~~ 30, ------------------------------------ ------------------------------------ 2002 2001 2002 2001 ----------------- ----------------- ----------------- ---------------- Liquidity fee income $ 2,~~010~~782,~~548~~371 $1,~~694~~601,~~392~~093 $47,~~247~~029,~~414~~785 $34,~~321~~922,~~321~~414 General and administrative expenses ~~165~~277,~~549~~622 ~~251~~231,~~572~~640 ~~338~~616,~~538~~160 ~~535~~767,~~730~~370 ----------------- ----------------- ----------------- ---------------- Income before income taxes 12,~~844~~504,~~999~~749 1,~~442~~369,~~820~~453 36,~~908~~413,~~876~~625 24,~~785~~155,~~591~~044 ----------------- ----------------- ----------------- ---------------- Income tax expense: Federal ~~603~~815,~~210~~295 ~~469~~445,~~638~~757 12,~~272~~087,~~339~~635 ~~906~~1,~~710~~352,467 State and local ~~129~~175,~~150~~333 ~~100~~95,~~997~~862 ~~273~~448,~~621~~954 ~~194~~290,~~991~~853 ----------------- ----------------- ----------------- ---------------- Total income tax expense ~~732~~990,~~360~~628 ~~570~~541,~~635~~619 12,~~545~~536,~~960~~589 1,~~101~~643,~~701~~320 ----------------- ----------------- ----------------- ---------------- Net income $ 1,~~112~~514,~~639~~121 ~~$_872~~827,~~185~~834 $23,~~362~~877,~~916~~036 ~~$ 1~~2,~~683~~511,~~890~~724 ================= ================= ================= ================

See accompanying notes to unaudited financial statements. - 2 -

FGIC SECURITIES PURCHASE, INC. (A ~~WHOLLY-OWNED~~Wholly ~~SUBSIDIARY~~Owned OFSubsidiary of FGIC ~~HOLDINGS~~Holdings, ~~INC~~Inc.) ~~STATEMENTS~~Statements OFof ~~CASH~~Cash ~~FLOWS~~Flows ~~(UNAUDITED)~~Nine ~~FOR~~months ~~THE~~ended ~~SIX~~September 30, 2002 and 2001 (Unaudited) NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ----------------------------------------- 2002 2001 ------------------- ------------------- ~~OPERATING~~Operating ~~ACTIVITIES~~activities: Net income $2 3,~~362~~877,~~916~~036 ~~$ 1~~2,~~683~~511,~~890~~724 Adjustments to reconcile net income to net ~~cash~~ provided by operating activities: Change in taxes payable ~~935~~475,~~592~~837 ~~387~~(111,~~067~~921) Change in due from GE Capital (37,~~887~~343,~~297~~225) 5,~~884~~297,~~847~~455 Change in due from affiliates -- (103,946) Change in due to affiliates ~~810~~2,~~369~~445,906 (7,~~775~~786,~~656~~456) Change in other assets 6288,~~337~~034 75173,~~870~~976 Change in liquidity fees receivable ~~(469~~84,~~372)~~337 (~~316~~108,~~557~~692) Change in deferred liquidity fee income 3891,~~919~~451 (3823,~~304~~697) Change in accounts payable and accrued expenses 1561,~~529~~679 712,~~153~~154 Change in commitment fees payable to GE Capital ~~131~~218,~~007~~945 91139,~~690~~403 ------------------- ------------------- Cash provided by operating activities - - -- --------- ---------- ~~Net change in cash and cash equivalents~~ - - ----------- ------ 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 financial statements. - 3 - FGIC SECURITIES PURCHASE, INC. (A Wholly Owned Subsidiary of FGIC Holdings, Inc.) Notes to Unaudited Interim Financial Statements September 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 September 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 September 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 nine months ending September 30, 2002 and 2001, (b) the financial position as of September 30, 2002 and December 31, 2001, and (c) cash flows for the nine months ended September 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: (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 liquidity commitment, usually five years, and installments fees are earned straight-line over the installment period. (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, other assets, deferred liquidity fee income, due to affiliates, commitment fees payable to GE Capital, accounts, and accrued expenses and taxes payable, approximate their fair values. - 4 - (D) 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. (E) EXPENSES Direct expenses incurred by the Parent are fully allocated to FSIC-SPI on a specific identification basis. Employee related expenses are allocated by affiliates to FGIC-SPI. For the nine months ended September 30, 2002 and 2001 expenses of $385,155 and $639,221 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. (F) COMMITMENT FEES The commitment fees are accrued on the outstanding liquidity facilities. (G) 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, 2002, management does not anticipate any losses relative to such arrangements. (H) 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. - 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. For the nine months ended September 30, 2002, FGIC-SPI earned liquidity fees of $7,029,785 compared to $4,922,414 for the nine months ended September 30, 2001. The increase in earnings is primarily due to new deals written during 2001 being fully in effect in 2002. FGIC-SPI incurred $616,160 and $767,370 of general and administrative expenses for the nine months ended September 30, 2002 and 2001, respectively. Included in general and administrative expenses were commitment fees owed to GE Capital of $218,944 in 2002 and $139,403 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 significant decrease in 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 September 30, 2002, FGIC-SPI earned liquidity fees of $2,782,371 compared to $1,601,093 for the three months ended September 30, 2001. The increase in earnings is primarily due to new deals written during 2001 being fully in effect in 2002. FGIC-SPI incurred $277,622 and $231,640 of general and administrative expenses for the three months ended September 30, 2002 and 2001, respectively. Included in general and administrative expenses were commitment fees owed to GE Capital of $87,937 in 2002 and $47,713 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 significant decrease in 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 ($36.4 million at September 30, 2002) and draw upon the standby loan agreement ($4.8 billion at September 30, 2002) in the amount of the purchase price of tendered bonds. - 6 - 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 judgments. The Company's accounting policy with respect to the recognition of revenue was considered a critical accounting policy. ITEM 4. CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of the Company's management, including the Company's President along with the Company's Treasurer, we evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-14 under the Exchange Act as of a date (the Evaluation Date) within 90 days prior to the filing date of this report. Based upon that evaluation, the Company's President and Treasurer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. (b) There have been no significant changes in the Company's internal controls during the period covered by this report or, to our knowledge, in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. - 7 - OTHER INFORMATION 1. LEGAL PROCEEDINGS Omitted 2. CHANGES IN SECURITIES Omitted 3. DEFAULTS ON SENIOR SECURITIES Omitted 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted 5. OTHER INFORMATION Omitted 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 Sarbanes - Oxley Act of 2002 Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. b) Report on Form 8-K Omitted - 8 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registration has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FGIC SECURITIES PURCHASE, INC. ------------------------------ (Registrant) Date: ________________ /s/ Deborah Mary Reif ------------------------------ Deborah Mary Reif President (principal executive officer) Date: ________________ /s/ David Patrick Shea ------------------------------ David Patrick Shea Treasurer (principal financial and accounting officer) - 9 - CERTIFICATION I, Deborah M. Reif, certify 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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others 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 as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: ________________ /s/ Deborah M. Reif ------------------------------------ Deborah M. Reif President (principal executive officer) - 10 - I, David P. Shea, certify 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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others 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 as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: ________________ /s/ David P. Shea -------------------------------- David P. Shea Treasurer (principal financial and accounting officer) - 11 - EXHIBIT 99.1 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 Company) on Form 10-Q for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Deborah M. Reif, Chief Executive Officer of the Company, 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) such 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 such report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: ________________ /s/ Deborah M. Reif -------------------------------- Deborah M. Reif President (principal executive officer) - 12 - EXHIBIT 99.2 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 Company) on Form 10-Q for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David P. Shea, Chief Financial Officer of the Company, 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) such 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 such report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: ________________ /s/ David P. Shea -------------------------------- David P. Shea Treasurer (principal financial and accounting officer) - 13 -

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