-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Grn3j/ixxCGNl0Ijp6vr9kulF0B2cTAwCyqN/KRPmwkKtUlZc3armbQZB8pzFg8U JbFZiTZCaP3sDHEqiw71HA== 0000889906-97-000002.txt : 19970815 0000889906-97-000002.hdr.sgml : 19970815 ACCESSION NUMBER: 0000889906-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970814 FILED AS OF DATE: 19970814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPMAC HOLDINGS INC CENTRAL INDEX KEY: 0000889906 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 133670828 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14096 FILM NUMBER: 97661292 BUSINESS ADDRESS: STREET 1: 885 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2127551155 MAIL ADDRESS: STREET 1: 885 THIRD AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 QUARTERLY REPORT FOR CAPMAC HOLDINGS INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-14096 CapMAC Holdings Inc. (Exact name of registrant as specified in its charter) Delaware (State of Incorporation) 13-3670828 (IRS employer identification no.) 885 Third Avenue New York, New York 10022 (Address of principal executive offices) (212) 755-1155 (Registrant's telephone number, including area code) 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 As of July 31, 1997, 17,317,004 shares (net of treasury shares) of Common Stock, par value $0.01 per share of the Registrant were outstanding. Page 1 of 38 Pages Index to Exhibits on Page 22 1 CapMAC Holdings Inc. and Subsidiaries INDEX PART I FINANCIAL INFORMATION PAGE Item 1. Consolidated Financial Statements Consolidated Balance Sheets - June 30, 1997 and December 31, 1996...........................................4 Consolidated Statements of Income - three months ended and six months ended June 30, 1997 and June 30, 1996............5 Consolidated Statements of Stockholders' Equity - six months ended June 30, 1997.............................................6 Consolidated Statements of Cash Flows - six months ended June 30, 1997 and June 30, 1996...........................7 Notes to Consolidated Financial Statements......................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................10 PART II OTHER INFORMATION, AS APPLICABLE Item 2 Changes in Securities ............................................18 Item 4 Submission of Matters to a Vote of Security Holders...............19 Item 6. Exhibits and Reports on Form 8-K..................................20 SIGNATURES .......................................................21 INDEX TO EXHIBITS...........................................................22 Part 1 - Financial Information Item 1 - Financial Statements of CapMAC Holdings Inc. and Subsidiaries. 2 CapMAC HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (Unaudited) 3 CapMAC Holdings Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands) ASSETS
June 30,1997 (Unaudited) December 31,1996 Investments: Bonds at fair value (amortized cost $315,555 at June 30, 1997 and $302,284 at December 31, 1996) $ 316,319 305,422 Short-term investments (at amortized cost which approximates fair value) 40,254 33,752 Common stock 486 - Investment in affiliates 35,732 34,886 Total investments 392,791 374,060 - ------------------------------------------------------------------------------------------------------------------- Cash 6,227 966 Accrued investment income 3,873 3,847 Deferred acquisition costs 50,327 45,380 Premiums receivable 5,826 5,141 Prepaid reinsurance 20,787 18,489 Other assets 13,420 9,351 Total assets $ 493,251 457,234 =================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Unearned premiums $ 71,800 68,262 Reserve for losses and loss adjustment expenses 13,861 10,985 Ceded reinsurance 2,766 1,738 Accounts payable and other accrued expenses 23,722 15,274 Senior notes 15,000 15,000 Current income taxes 5,107 2,890 Deferred income taxes 9,355 9,590 Total liabilities 141,611 123,739 - ------------------------------------------------------------------------------------------------------------------- Minority Interest 23,333 23,108 - ------------------------------------------------------------------------------------------------------------------- Stockholders' Equity: Preferred stock - $0.01 par value per share; 20,000,000 shares are authorized; none outstanding at June 30, 1997 and December 31, 1996 - - Common stock - $0.01 par value per share; 50,000,000 shares are authorized; 17,296,289 and 16,425,324 shares issued June 30, 1997, and December 31, 1996; 17,296,204 and 16,425,274 shares outstanding at June 30, 1997, and December 31, 1996 173 164 Additional paid-in capital 229,197 226,428 Unrealized appreciation (depreciation) on investments, net of tax 505 (71) Retained earnings 103,315 89,310 Unallocated ESOP shares (4,845) (5,430) Cumulative translation adjustment, net of tax (36) (14) Treasury stock (2) - - ------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 328,307 310,387 - ------------------------------------------------------------------------------------------------------------------- Total liabilities, minority interest, and stockholders' equity $ 493,251 457,234 ===================================================================================================================
See accompanying notes to consolidated financial statements. 4 CapMAC Holdings Inc. and Sudsidiaries Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data)
Three Months Ended Six Months Ended June 30 June 30 1997 1996 1997 1996 Revenues: Direct premiums written $ 18,726 18,622 35,180 32,777 Assumed premiums written 655 150 916 1,024 Ceded premiums written (6,272) (5,103) (10,621) (7,013) - ------------------------------------------------------------------------------------------------------------ Net premiums written 13,109 13,669 25,475 26,788 Increase in unearned premiums (877) (3,681) (1,240) (7,972) - ------------------------------------------------------------------------------------------------------------ Net premiums earned 12,232 9,988 24,235 18,816 Advisory and other fees 7,300 5,705 10,673 15,577 Net investment income 5,161 3,808 10,410 7,919 Net realized capital gains (losses) 517 19 (1,198) 168 Other income 21 51 48 107 - ------------------------------------------------------------------------------------------------------------ Total revenues 25,231 19,571 44,168 42,587 - ------------------------------------------------------------------------------------------------------------ Expenses: Losses and loss adjustment expenses 1,333 1,109 2,876 2,184 Underwriting and operating expenses 7,082 4,277 14,299 9,115 Policy acquisition costs 2,472 2,059 5,053 4,123 Interest expense 301 301 602 602 - ------------------------------------------------------------------------------------------------------------ Total expenses 11,188 7,746 22,830 16,024 - ------------------------------------------------------------------------------------------------------------ Income before income taxes and minority interest 14,043 11,825 21,338 26,563 - ------------------------------------------------------------------------------------------------------------ Income Taxes: Current income tax 4,629 3,220 6,983 7,119 Deferred income tax 176 667 (456) 1,654 Total income taxes 4,805 3,887 6,527 8,773 - ------------------------------------------------------------------------------------------------------------ Income before minority interest 9,238 7,938 14,811 17,790 - ------------------------------------------------------------------------------------------------------------ Minority interest 29 397 (132) 445 - ------------------------------------------------------------------------------------------------------------ NET INCOME $ 9,267 8,335 14,679 18,235 ===============================================================================---========================== Primary earnings per share $ 0.52 0.47 0.81 1.04 Fully diluted earnings per share $ 0.52 0.47 0.81 1.02 ===============================================================================---==========================
See accompanying notes to consolidated financial statements. 5 CapMAC Holdings Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity (Unaudited) (Dollars in thousands)
Months Ended June 30, 1997 Common stock: Balance at beginning of period $ 164 Common stock issued 9 - ------------------------------------------------------------------------------- Balance at end of period 173 - ------------------------------------------------------------------------------- Additional paid-in capital: Balance at beginning of period 226,428 Issuance of common stock 2,769 - ------------------------------------------------------------------------------- Balance at end of period 229,197 - ------------------------------------------------------------------------------- Unrealized appreciation (depreciation) on investments, net of tax: Balance at beginning of period (71) Unrealized depreciation on investments 576 Balance at end of period 505 - ------------------------------------------------------------------------------- Retained earnings: Balance at beginning of period 89,310 Net income 14,679 Dividends declared - $.02 per share (674) Balance at end of period 103,315 - ------------------------------------------------------------------------------- Unallocated ESOP shares: Balance at beginning of period (5,430) Allocation of ESOP shares 585 Balance at end of period (4,845) - ------------------------------------------------------------------------------- Cumulative translation adjustment, net of tax: Balance at beginning of period (14) Translation adjustment (22) - ------------------------------------------------------------------------------- Balance at end of period (36) - ------------------------------------------------------------------------------- Treasury stock: Balance at beginning of period - Treasury shares acquired (2) - ------------------------------------------------------------------------------- Balance at end of period (2) - ------------------------------------------------------------------------------- Total stockholders' equity $ 328,307 ===============================================================================
See accompanying notes to consolidated financial statements. 6 CapMAC Holdings Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands)
Six Months Ended Six Months Ended June 30, 1997 June 30, 1996 Cash flows from operating activities: Net income $ 14,679 18,235 - -------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Reserve for losses and loss adjustment expenses 2,876 1,821 Unearned premiums, net 3,538 10,977 Deferred acquisition costs (4,947) (4,742) Premiums receivable (685) 308 Accrued investment income (26) (579) Income taxes payable 2,147 4,500 Net realized capital (gains) losses 1,198 (168) Accounts payable and other accrued expenses 8,448 4,591 Prepaid reinsurance (2,298) (3,004) Other, net (4,155) (4,405) Total adjustments 6,096 9,299 - -------------------------------------------------------------------------------------------------- Net cash provided by operating activities 20,775 27,534 Cash flows from investing activities: Cash flows from investing activities: Purchases of investments (137,582) (142,196) Purchases of investments in affiliates - (3,333) Proceeds from sale of investments 74,768 19,875 Proceeds from maturities of investments 44,997 96,181 Net cash used in investing activities (17,817) (29,473) - ----------------------------------------------------------------------------------------------------- Cash flows from financing activities: Cash flows from financing activities: Allocation of ESOP shares 585 536 Minority interest capital contribution to CapMAC Asia - 2,123 Dividends paid (674) (639) Exercise of stock options and warrants 2,392 (155) Net cash provided by financing activities 2,303 1,865 - ----------------------------------------------------------------------------------------------------- Net increase (decrease) in cash Net increase (decrease) in cash 5,261 (74) Cash balance at beginning of period 966 1,033 Cash balance at end of period $ 6,227 959 ===================================================================================================== Supplemental disclosures of cash flow information: Income taxes paid $ 4,363 4,161 Interest paid $ 564 564 Tax and loss bonds purchased $ 76 112 ====================================================================================================
See accompanying notes to consolidated financial statements. 7 CapMAC Holdings Inc. and Subidiaries Notes to Consolidated Financial Statements June 30, 1997 1.Organization and Ownership CapMAC Holdings Inc. ("Holdings" or the"Company"), a Delaware corporation, is the sole stockholder of Capital Markets Assurance Corporation ("CapMAC"), CapMAC Financial Services Inc. ("CFS"), and CapMAC Investment Management, Inc ("CIM"). CapMAC Assurance, S.A. is a subsidiary of Capital Markets Assurance Corporation, and CapMAC Financial Services (Europe) Limited ("CFS (Europe)") is a subsidiary of CFS. The Company is also a lead investor in CapMAC Asia Ltd. ("CapMAC Asia"). Holdings provides financial guaranty insurance, principally of asset-backed obligations, through CapMAC. CapMAC's claims paying ability is rated triple-A by Moody's Investor Service, Inc., Standard & Poor's Ratings Services, Duff and Phelps Credit Rating Co. and Nippon Investors Service, Inc., a Japanese rating agency. Holdings also provides advisory and structuring services in connection with asset-backed financings, through CFS. On December 19, 1995 Holdings sold 2,500,000 new shares of its common stock in an initial public offering. On July 5, 1996, Holdings completed a secondary public offering by some of its stockholders of 3,737,500 shares of common stock at an offering price of $28. The Company did not receive any proceeds from the offering. 2. Basis of Presentation The Company's consolidated unaudited interim financial statements have been prepared on the basis of generally accepted accounting principles and, in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company's financial condition, results of operations and cash flows for the periods presented. The results of operations for the six months ended June 30, 1997 may not be indicative of the results that may be expected for the full year ending December 31, 1997. These consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the audited financial statements of CapMAC Holdings Inc. and its subsidiaries contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, which was filed with the Securities and Exchange Commission on March 31, 1997. 3. Reclassifications Certain prior period balances have been reclassified to conform to the current period presentation. 4. Recent Accounting Pronouncement In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("Statement 128"). Statement 128 supersedes APB Opinion No 15, Earnings Per Share, ("APB Opinion No. 15"), and specifies the computation, presentation, and disclosure requirements for earnings per share for entities with publicly held common stock or potential common stock. Statement 128 was issued to simplify the computation of earnings per share. It requires dual presentation of "basic earnings per share" and "diluted earnings per share" as defined. Statement 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. After adoption, all prior period earnings per share data presented shall be restated to conform with Statement 128. 8 CapMAC Holdings Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 1997 Under APB Opinion No. 15, the Company's primary and fully diluted earnings per share amounts are $0.52 and $0.47 per share for the three-month periods ended June 30, 1997 and 1996, respectively. The Company's primary earnings per share amounts are $0.81 and $1.04 per share for the six-month periods ended June 30, 1997 and 1996, respectively, and the fully diluted earnings per share amounts for the six-month periods ended June 30, 1997 and 1996 are $0.81 and $1.02 per share, respectively. The basic earnings per share amounts, as computed under Statement 128, are expected to be approximately $0.56 and $0.54 per share for the three-month periods ended June 30, 1997 and 1996, respectively and $0.89 and $1.18 per share for the six-month periods ended June 30, 1997 and 1996, respectively. The Company anticipates the adoption of Statement 128 will result in the presentation of diluted earnings per share amounts which will not materially differ from the fully diluted amounts previously presented under APB Opinion No. 15. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General CapMAC Holdings Inc. ("Holdings" or the "Company"), a Delaware corporation, is the sole stockholder of Capital Markets Assurance Corporation ("CapMAC"), CapMAC Financial Services Inc. ("CFS"), and CapMAC Investment Management, Inc ("CIM"). CapMAC Assurance, S.A. is a subsidiary of CapMAC, and CapMAC Financial Services (Europe) Limited ("CFS (Europe)") is a subsidiary of CFS. The Company is also a lead investor in CapMAC Asia Ltd. ("CapMAC Asia"). Results of Operations Quarter Ended June 30, 1997 versus Quarter Ended June 30, 1996 The Company reported net income of $9.3 million and primary and fully diluted earnings per share of $0.52 during the second quarter of 1997 representing an increase of 11% from net income of $8.4 million, or $0.47 per share on a primary and fully diluted basis, reported for the second quarter of 1996. Operating earnings, which the Company defines as net income less the effect of net realized gains and losses, were $8.9 million, or $0.50 per share, up from $8.3 million, or $0.47 per share, earned in the second quarter of 1996. Total revenues during the second quarter of 1997 were $25.2 million, an increase of 29% from $19.6 million during the second quarter of 1996. This increase was primarily due to higher premiums earned, advisory and other fees, net investment income and net capital gains. For the second quarter of 1997, gross premiums written were $19.4 million, an increase of 3% from $18.8 million for the same period in 1996. This increase was principally due to higher premiums written of $0.9 million from domestic consumer transactions, $0.6 million from corporate transactions, $0.5 million from municipal transactions, offset by lower premiums written with respect to the international business of $1.4 million. However, the amount of premiums ceded to reinsurers increased to $6.3 million during the second quarter of 1997 from $5.1 million in the second quarter of 1996. Net premiums earned were $12.2 million for the second quarter of 1997, an increase of 22% from $10.0 million for the corresponding period in 1996. CapMAC collects premiums primarily on an installment basis over the term of an insurance policy and, to a lesser extent, on a one-time, up-front basis at the time an insurance policy is issued. Due to the annuity nature of premium income, CapMAC has an embedded future revenue stream which will be collected and recognized as revenue not only in the year an insurance policy is issued, but over the full term such policy is outstanding. CapMAC reflects a relatively small portion of the expected future revenue on the business written in the current period as premium earnings in the same period. To measure the amount of business written in a period, the Company also tracks the total estimated present value of future revenues ("PFR"), which includes premiums (net of ceded premiums) and ceding commission income expected to be contractually due to or to be earned by CapMAC in the future under outstanding policies. The amount of PFR generated in any given period is based on the weighted average life of the guarantees issued during the period and the net premium and ceding commissions expected to be earned with respect to such guarantees, whereas "gross par written" is based on the principal amount of guarantees issued and aggregate program limits with respect to commercial paper conduit transactions. Accordingly, an increase or decrease in PFR may not proportionately correspond with an increase or decrease in gross par written. 10 Business originated or renewed in the second quarter of 1997 was estimated to generate $17.1 million of PFR, a decrease of 33% over the same period in 1996 due to lower net premium and ceding commissions primarily from certain international and consumer transactions partially offset by an increase in net premium and ceding commissions from corporate transactions. Correspondingly, gross par written decreased to $4.3 billion in the second quarter of 1997 from $4.6 billion in the second quarter of 1996, representing a decrease of 6%. At June 30, 1997, CapMAC had 643 policies outstanding which are expected to generate $247.0 million of PFR, up approximately 6% from $232.7 million at December 31, 1996 relating to 607 policies outstanding at such date. The discount rate used for purposes of the PFR calculation was 7% for 1997 and 1996. At June 30, 1997, net par insured and outstanding was $21.9 billion, up 11% from $19.7 billion at December 31, 1996. The remaining weighted average life of the insured portfolio was estimated to be 6.5 years at June 30, 1997 and 6.4 years at December 31, 1996. Advisory and other fees increased 28% to $7.3 million in the second quarter of 1997 from $5.7 million in the second quarter of 1996. Advisory fees are generally received by CFS in relation to the closing of transactions which involve advisory and structuring services provided by CFS. Fees collected for such services amounted to $4.8 million in the second quarter of 1997, compared to $4.5 million in the second quarter of 1996. During the second quarter of 1997 advisory fees included $1.6 million paid in connection with the early termination of a transaction. In addition to advisory fees, CFS also collects recurring fees payable on a monthly and quarterly basis ("other fees") primarily related to the administration of third-party owned and managed funding vehicles. The amount related to other fees was $2.5 million in the second quarter of 1997, compared to $1.2 million in the second quarter of 1996, primarily due to the increased utilization of such funding vehicles. As advisory fees are generally earned upon the closing of certain transactions, the timing and number of transactions generating fees, as well as the amount of such fees, may result in significant fluctuations in revenues attributable to such fees from period to period. Net investment income was $5.2 million and $3.8 million in the second quarter of 1997 and 1996, respectively. Average assets available for investment increased to $348.9 million at June 30, 1997 from $314.3 million at June 30, 1996. The average annualized pre-tax yield on the investment portfolio increased to 5.9% in the second quarter of 1997 from 5.7% in the second quarter of 1996 due to a higher interest rate environment. The average after-tax yield on the investment portfolio was 4.6% in both the second quarter of 1997 and 1996. The amount of tax-exempt securities held in the Company's investment portfolio decreased to 50% at June 30, 1997 from 59% at June 30, 1996. Net realized capital gains were $0.5 million and $0.02 million and in the second quarter of 1997 and 1996, respectively. Total expenses were $11.2 million in the second quarter of 1997, an increase of 44% from $7.7 million in the second quarter of 1996. Total expenses included additions to the reserve for losses and loss adjustment expenses, underwriting and operating expenses, policy acquisition costs, and interest expense. CapMAC maintains a reserve for losses and loss adjustment expenses which consists of a supplemental loss reserve ("SLR") and, if appropriate, a case basis loss reserve for expected levels of defaults resulting from credit failures on currently insured issues. The SLR is based on estimates of the portion of earned premiums required to cover those claims. A case basis loss reserve is established for insured obligations when, in the judgment of management, a default in the timely payment of debt service is imminent. For defaults considered temporary, a case basis loss reserve is established in an amount equal to the present value of the anticipated defaulted debt service payments over the expected period of default. If the default is judged not to be temporary, the present value of all remaining defaulted debt service payments is recorded as a case basis loss reserve. Anticipated salvage recoveries are considered in establishing case 11 basis loss reserves when such amounts are reasonably estimable. Corresponding to the growth in the insured portfolio, the losses and loss adjustment expenses were $1.3 million in the second quarter of 1997 compared to $1.1 million in the second quarter of 1996. Apart from additions to the SLR, the Company incurred no losses during the first six months of 1997 and the year ended December 31, 1996. Underwriting and operating expenses were $7.1 million in the second quarter of 1997, a 66% increase from $4.3 million in the first quarter of 1996. Underwriting and operating expenses consisted of gross underwriting and operating expenses, reduced by the deferral to future periods of certain costs related to CapMAC's acquisition of new business ("Deferred Acquisition Costs" or "DAC") and ceding commission income. Gross underwriting and operating expenses were $11.4 million and $8.7 million in the second quarter of 1997 and 1996, respectively. The increase in underwriting and operating expenses was due to increased compensation costs and other operating costs. Staff and benefit-related expenses, including the discretionary bonuses to employees, constituted approximately 68% of gross underwriting and operating expenses in the second quarter of 1997 compared to 75% in the second quarter of 1996. The Company maintains a discretionary bonus plan under which annual bonuses are awarded to employees. For the three months ended June 30, 1997 and June 30, 1996, $1.9 million and $2.4 million were accrued, respectively, for payment of bonuses under such plan. Underwriting and operating expenses deferred by CapMAC were $4.4 million in the second quarter of 1997 and 1996. Policy acquisition costs represent the amortization of DAC, which are those expenses incurred by CapMAC in acquiring new business. The increase in policy acquisition costs to $2.5 million in the second quarter of 1997 from $2.1 million in the second quarter of 1996 related to the increase in premiums earned in the corresponding periods. Interest expense related to the senior debt was $0.3 million in the second quarter of 1997 and 1996. In the second quarter of 1997 and 1996, the Company had net tax expense of $4.8 million and $3.9 million, respectively. The Company's effective tax rate was 34.1% and 31.3% for the second quarter of 1997 and 1996, respectively. The effective tax rates during these periods were lower than the statutory tax rate of 35% in 1997 and 1996 primarily due to tax-exempt interest income from the Company's investment portfolio. In the second quarter of 1997, tax-exempt interest income of $2.3 million represented 16% of earnings before taxes ("EBT") compared to $2.4 million which represented 20% of EBT in the second quarter of the prior year. Results of Operations Six Months Ended June 30, 1997 versus Six Months Ended June 30, 1996 The Company reported net income of $14.7 million and primary and fully diluted earnings per share of $0.81 during the first six months of 1997. Although the Company recorded growth in net premiums earned and business written during the first half of 1997, lower advisory fees and net realized capital losses recorded in the first quarter of 1997 resulted in a decline in net income of 20% from $18.3 million or $1.04 per share on a primary basis and $1.02 on a fully diluted basis in the first six months of 1996. Operating earnings were $15.5 million, or $0.86 per share on a primary and fully diluted basis for the first six months of 1997, down from $18.1 million, or $1.04 and $1.02 per share on a primary and fully diluted basis, respectively, earned in the first six months of 1996. The decline in operating earnings was attributable to lower advisory fees earned during the first quarter of 1997. Total revenues during the first six months of 1997 were $44.2 million, an increase of 4% from $42.6 million during the first six months of 1996. This increase was primarily due to higher premiums earned, net investment income and other fees partially offset by lower advisory fees. 12 For the first six months of 1997, gross premiums written were $36.1 million as compared to $33.8 million for the same period in 1996. This increase was principally due to higher premiums written of $2.3 million from domestic consumer transactions, $1.5 million from corporate transactions, $0.2 million from municipal transactions, offset by lower premiums written with respect to the international business of $1.7 million. However, the amount of premiums ceded to reinsurers increased to $10.6 million during the first six months of 1997 from $7.0 million in the first six months of 1996. On January 1, 1996, CapMAC reassumed the liability for all policies previously reinsured by Winterthur Swiss Insurance Company ("Winterthur"). As a result, CapMAC reassumed approximately $1.4 billion of principal insured by Winterthur as of December 31, 1995. In connection with this reassumption of liability, Winterthur commuted and returned unearned premiums, net of ceding commission and Federal excise tax of $2.0 million which reduced the amounts ceded to reinsurers in the first six months of 1996. Net premiums earned were $24.2 million for the first six months of 1997, an increase of 29% from $18.8 million for the corresponding period in 1996. Business originated or renewed in the first six months of 1997 was estimated to generate $39.3 million of PFR, an increase of 2% over the same period in 1996 due to higher premium earned and ceding commission obtained from corporate transactions partially offset by a decrease from international and consumer transactions. Correspondingly, the amount of guarantees issued (gross par written) increased to $7.7 billion in the first six months of 1997 from $5.9 billion in the first six months of 1996, representing an increase of 29%. Advisory and other fees decreased 31% to $10.7 million in the first six months of 1997 from $15.6 million in the first six months of 1996. Advisory fees amounted to $5.8 million in the first six months of 1997, compared to $13.7 million in the first six months of 1996. During the second quarter of 1997 advisory fees included $1.6 million paid in connection with the early termination of a transaction. Structured international transactions closed during the first quarter of 1996 contributed to the large amount of advisory fees collected during that period. Advisory fees related to international business were $2.7 million and $12.1 million in the first six months of 1997 and 1996, respectively. In addition to advisory fees, CFS also collects recurring fees payable on a monthly and quarterly basis ("other fees") primarily related to the administration of third-party owned and managed funding vehicles. The amount related to other fees was $4.9 million in the first six months of 1997, compared to $1.9 million in the first six months of 1996, primarily due to the increased utilization of such funding vehicles. As advisory fees are generally earned upon the closing of certain transactions, the timing and number of transactions generating fees, as well as the amount of such fees, may result in significant fluctuations in revenues attributable to such fees from period to period. Net investment income was $10.4 million in the first six months of 1997 and $7.9 million for the corresponding period in 1996. Average assets available for investment increased to $344.6 million at June 30, 1996 from $307.1 million at June 30, 1996. The average annualized pre-tax yield on the investment portfolio increased to 5.9% in the first six months of 1997 from 5.6% in the first six months of 1996. The average after-tax yield on the investment portfolio was 4.6% in the first six months of 1997 and 1996. Net realized capital (losses) gains in the first half of 1997 and 1996 were ($1.2 million) and $0.2 million, respectively. In the first quarter of 1997, the Company recorded a pre-tax capital loss of $3.7 million (in addition to a $2.0 million loss realized in the fourth quarter of 1996) related to Holdings' investment in three derivatives products subsidiaries of The Mutual Life Assurance Company of Canada (such subsidiaries, the "TMG Group"). Holdings was committed to purchase common stock in TMG Group for approximately $11 million and fund its investment in TMG Group no later than February 27, 2000 at which time the commitment amount would have contractually increased to approximately $13 million. On July 8, 1997, Holdings sold its interest in the TMG Group at its March 31, 1997 carrying value of $5.5 million. As a result, no additional realized losses or gains were recognized in connection with the sale. Holdings has no remaining commitment to purchase stock in the TMG Group. 13 Total expenses were $22.8 million in the first six months of 1997, an increase of 42% from $16.0 million in the first six months of 1996. Total expenses included additions to the reserve for losses and loss adjustment expenses, underwriting and operating expenses, policy acquisition costs, and interest expense. Corresponding to the growth in the insured portfolio, the losses and loss adjustment expenses were $2.9 million in the first six months of 1997 compared to $2.2 million in the first six months of 1996. Underwriting and operating expenses were $14.3 million in the first six months of 1997, a 57% increase from $9.1 million in the first six months of 1996. Underwriting and operating expenses consisted of gross underwriting and operating expenses, reduced by DAC and ceding commission income. Gross underwriting and operating expenses were $24.3 million and $18.0 million in the first six months of 1997 and 1996, respectively. The increase in underwriting and operating expenses was due to increased compensation costs and other operating costs. Staff and benefit-related expenses, including the discretionary bonuses to employees, constituted approximately 72% of gross underwriting and operating expenses in the first six months of 1997 compared to 74% in the first six months of 1996. The Company maintains a discretionary bonus plan under which annual bonuses are awarded to employees. As of June 30, 1997 and 1996, $6.2 million and $4.9 million were accrued, respectively, for payment of bonuses under such plan. Underwriting and operating expenses deferred by CapMAC were $10.0 million and $8.9 million in the first six months of 1997 and 1996, respectively. The increase in policy acquisition costs to $5.1 million in the first half of 1997 from $4.1 million in the first half of 1996 relates to the increase in premiums earned in the corresponding periods. Interest expense related to the senior debt was $0.6 million in the first six months of 1997 and 1996. In the first six months of 1997 and 1996, the Company had net tax expense of $6.5 million and $8.8 million, respectively. The Company's effective tax rate was 30.6% and 33.0% for the first six months of 1997 and 1996, respectively. The effective tax rates during these periods were lower than the statutory tax rate of 35% in 1997 and 1996 primarily due to tax-exempt interest income. As of June 30, 1997, tax-exempt interest income of $4.7 million represented 22% of EBT compared to $4.7 million representing 17% of EBT in the first six months of the prior year. Liquidity and Capital Resources The Company and Holdings. The operations of the Company are conducted primarily through CapMAC and CFS, wholly owned subsidiaries of Holdings. In addition, the Company has commenced conducting operations through CIM, its investment advisory subsidiary which was capitalized in the first quarter of 1997. The liquidity of Holdings both on a short-term (less than twelve months) and long-term (twelve months or longer) basis will be dependent on several factors, including borrowings, equity issuances and dividends from CFS. Holdings requires liquidity for payment of dividends to shareholders, investment in international and other business ventures and debt service. While CFS has from time to time paid dividends to Holdings, currently no dividends are expected to be received by Holdings from CapMAC. The Company's investment portfolio consists of both equity investments and high quality, intermediate-term taxable and tax-exempt securities to obtain an optimal portfolio mix of liquidity, quality, maturity and earnings. The average contractual maturity of securities within the investment portfolio was 6.1 years at June 30, 1997 and December 31, 1996. The average duration of the investment portfolio at June 30, 1997 and December 31, 1996 was 4.3 years. At June 30, 1997, the amortized cost of the Company's investment portfolio was approximately $356 million (fair value of $392.8 million). The foregoing discussion excludes equity investments. Holdings' equity investments include investments in P.T. ABS Finance Indonesia and CapMAC Asia as well as other equity investments which are not liquid such as investments in specialized finance companies in connection with its financial engineering activities. Holdings has also agreed to invest, if required, an additional amount of $4.9 million in CapMAC Asia. 14 Management believes that the Company's operating liquidity needs, both on a short-term basis and long-term basis, can be funded exclusively from its operating cash flow. The Company has a number of sources of liquidity which it expects to have available to pay claims on CapMAC insurance policies on a short-term and long-term basis: the cash flow from its written premiums, advisory fees collected, its investment portfolio and the earnings thereon, its bank line of credit, its reinsurance arrangements with third-party reinsurers, the capital markets and, under certain circumstances, realizations from collateral underlying its insured transactions. The Company has no material commitments for capital expenditures, although it has the CapMAC Asia investment commitment referred to above. The total liquidity resources of the Company represented by its investment income, premiums, advisory fees and liquidity arrangements are, in management's opinion, adequate to meet the Company's cash needs. In the second quarter of 1997, the Company issued 725,539 new shares of common stock in connection with the exercise and purchase of warrants. On April 24, 1997 the Company purchased all remaining outstanding warrants for its common stock. The warrants had given the holders the right to purchase approximately 1.5 million shares of common stock at a price of $13.33 per share. The number of shares issued to warrant holders in connection with the Company's purchase or exercise of warrants was based on the average closing price of the Company's common stock on each of the ten business days preceding and including the purchase or exercise date. CapMAC. CapMAC's primary sources of funds are from premiums received and earnings from its investment portfolio. Currently CapMAC's primary use of funds is to pay operating expenses. In the event of a default by an issuer of an insured obligation which results in a claim on a CapMAC insurance policy, generally after exhaustion of other liquidity sources in the transaction, such as the cash flow from the collateral underlying such obligations, funds from CapMAC's investment portfolio may be required to satisfy claims. CapMAC generally insures asset-backed transactions which have been structured to address liquidity risks through, among other measures, the addition of other liquidity sources, such as banks, to transactions. The insurance policies issued by CapMAC provide, in general, that payment of principal, interest and other amounts insured by CapMAC may not be accelerated by the holder of the obligation but are paid by CapMAC in accordance with the obligation's original payment schedule or, at CapMAC's option, on an accelerated basis. These policy provisions prohibiting acceleration of certain claims are mandatory under Article 69 of the New York Insurance Law and serve to reduce CapMAC's liquidity requirements. CapMAC has a conservative investment strategy of investing in U.S. government and agency obligations and securities that are rated "A" or better by the major rating agencies. CapMAC has readily marketable, high quality, fixed income securities and short-term investments in its investment portfolio. The average contractual maturity of securities within the investment portfolio was 6.7 years and 6.1 years at June 30, 1997 and December 31, 1996, respectively. The average duration of the investment portfolio at June 30, 1997 and December 31, 1996 was 4.7 years and 4.3 years, respectively. At June 30, 1997, the amortized cost of CapMAC's investment portfolio was approximately $324.2 million (fair value of $324.9 million). CapMAC manages its investments with the objectives of preserving its capital and claims-paying ability, maintaining a high level of liquidity, minimizing taxes and, within these constraints, optimizing long-term total return. CapMAC has available a $150 million, standby corporate liquidity facility presently scheduled to terminate in June 12, 2000 which, if necessary, is available (subject to satisfaction of customary drawing conditions) to provide funds for any claims payments under its policies. The liquidity facility is provided by a consortium of banks headed by Bank of Montreal, as agent, which is rated A1+ and P1 by Standard & Poor's Ratings Services (S&P) and Moody's Investors Service, Inc., respectively. As of June 30, 1997, CapMAC has never borrowed under this corporate liquidity facility. 15 Reinsurance arrangements provide a further source of liquidity to CapMAC. CapMAC actively pursues reinsurance as a means of diversifying and reducing risk, enhancing return on capital and adding underwriting capacity. In addition to its facultative and treaty reinsurance agreements, CapMAC has several "stop-loss" reinsurance treaties. Effective January 1, 1997 the stop-loss reinsurance coverage increased to $75 million in excess of incurred losses above $150 million. This coverage increases annually based on increases in CapMAC's statutory qualified capital. The stop-loss reinsurance is provided by Mitsui, Marine and Fire Insurance Co., Ltd. ("Mitsui"), AXA Re Finance S.A. ("AXA Re"), and Munchener Ruckversicherungs-Gesellschaft ("Munich Re"). At June 30, 1997, the majority of CapMAC's reinsurance capacity was held by reinsurers who were rated AA or better by S&P. CapMAC monitors the creditworthiness of all of its reinsurers on a regular basis. At June 30, 1997, CapMAC had statutory qualified capital, which consisted of statutory capital, unassigned surplus and contingency reserves, of $271.6 million up from $260.2 million at December 31, 1996. CapMAC's policyholders' leverage ratio, which is measured by the ratio of net principal and interest insured to statutory qualified capital, was 95 to 1 at June 30, 1997 and 90 to 1 at December 31, 1996. These ratios were within aggregate limits permissible under New York State Financial Guaranty Law. CapMAC's claims-paying resources as defined by the Company (which includes statutory qualified capital, PFR and stop-loss reinsurance) stood at $593.6 million and $542.9 million at June 30, 1997 and December 31, 1996, respectively. In early 1997, CapMAC made an investment of 50 million French francs (approximately 10 million U.S. dollars) in CapMAC Assurance, S.A., an insurance subsidiary to be established in Paris, France. CapMAC Assurance, S.A., is licensed to write financial guarantee insurance in the European Union member states. CapMAC Financial Services. The primary sources of funds for CFS are payments by Holdings, CapMAC and CFS (Europe) under a service agreement (the "CFS Servicing Agreement") and the collection of advisory fees for providing advisory and structuring services to third parties. In addition, both CFS and CFS (Europe) generate earnings from their respective investment portfolios. At June 30, 1997, the amortized cost and fair value of the consolidated CFS portfolio was $12.4 million. The entire portfolio was highly liquid with maturities of less than one year. The primary use of the funds of CFS is to pay its operating expenses. All of the Company's personnel are employed by CFS. Under the CFS Servicing Agreement, CFS allocates expenses to Holdings, CapMAC and CFS (Europe) for services provided to these entities. It is intended that a portion of CFS' funds be used to pay dividends to Holdings in order that Holdings will have funds available to pay dividends and satisfy its obligations. CapMAC Investment Management. CIM is a registered investment advisor and has been formed for the purpose of establishing investment funds and providing investment advice regarding asset-backed structures, mortgage-backed securities, foreign and domestic fixed income and equity securities and certain other securities based on the investment objectives of its clients. CIM has been initially capitalized with approximately $2 million and has commenced operations in the first quarter of 1997. CIM is expected to generate revenue through fees charged for assets under management. Recent Accounting Pronouncement In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share ("Statement 128"). Statement 128 supersedes APB Opinion No. 15, Earnings Per Share, ("APB Opinion No. 15"), and specifies the computation, presentation, and disclosure requirements for earnings per share for entities with publicly held common stock or potential common stock. Statement 128 was issued to simplify the computation of earnings per share. It requires dual presentation of "basic earnings per share" and "diluted earnings per 16 share" as defined. Statement 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. After adoption, all prior period earnings per share data presented shall be restated to conform with Statement 128. Under APB Opinion No. 15, the Company's primary and fully diluted earnings per share amounts are $0.52 and $0.47 per share for the three-month periods ended June 30, 1997 and 1996, respectively. The Company's primary earnings per share amounts are $0.81 and $1.04 per share for the six-month periods ended June 30, 1997 and 1996, respectively, and the fully diluted earnings per share amounts for the six-month periods ended June 30, 1997 and 1996 are $0.81 and $1.02 per share, respectively. The basic earnings per share amounts, as computed under Statement 128, are expected to be approximately $0.56 and $0.54 per share for the three-month periods ended June 30, 1997 and 1996, respectively and $0.89 and $1.18 per share for the six-month periods ended June 30, 1997 and 1996, respectively. The Company anticipates the adoption of Statement 128 will result in the presentation of diluted earnings per share amounts which will not materially differ from the fully diluted amounts previously presented under APB Opinion No. 15. SFAS No. 130, Reporting Comprehensive Income, ("Statement 130") was issued in June 1997 and establishes standards for the reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income encompasses all changes in shareholders' equity (except those arising from transactions with owners) and includes net income, net unrealized capital gains or losses on available for sale securities and foreign currency translation adjustments. As this new standard only requires additional information in a financial statement, it will not affect the Company's financial position or results of operations. Statement 130 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. The Company is currently evaluating the presentation alternatives permitted by the statement. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, ("Statement 131") was issued in June 1997 and establishes standards for the reporting of information relating to operating segments in annual financial statements, as well as disclosure of selected information in interim financial reports. This statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, which requires reporting segment information by industry and geographic area (industry approach). Under Statement 131, operating segments are defined as components of a company for which separate financial information is available and is used by management to allocate resources and assess performance (management approach). This statement is effective for year-end 1998 financial statements. Interim financial information will be required beginning in 1999 (with comparative 1998 information). The Company is currently evaluating the segment information disclosure required by Statement 131. 17 PART II - OTHER INFORMATION Items 1, 3 and 5 are omitted either because they are inapplicable or because the answer to such questions is negative. Item 2. Changes in Securities On April 14, 1997, the Company notified holders of all of its remaining outstanding warrants for shares of common stock that it intended to exercise its option to purchase the warrants on April 24, 1997 and, in lieu of paying cash, to issue to the holders of the warrants shares of the Company's common stock. As set forth in the notice, the amount of common stock to be delivered to shareholders was to be determined by subtracting the aggregate exercise price of the warrants ($13.33 per share) from the aggregate Market Price of the common stock. The "Market Price" was to be determined on April 24, 1997 based on the rolling ten-day average price of the Company's common stock. Warrant holders had the option of (i) exercising their warrant by paying the exercise price of the warrant in cash ( a "cash exercise") and taking delivery of their shares before April 24, 1997, (ii) exercising their warrant via a cashless exercise, whereby the warrant holder receives shares of common stock determined by subtracting the exercise price of the warrant from the Market Price (the rolling ten-day average price for the preceding ten trading days) calculated from the date on which the warrant was tendered or (iii) waiting until April 24, 1997 and receiving shares of common stock from the Company based on the Market Price calculated from that date. 190,268 shares of the Company's common stock were issued in connection with the exercise of warrants during the second quarter of 1997 before the Company purchased the warrants on April 24, 1997. This includes all warrants exercised on or after April 1, 1997 but before the Company's purchase of the warrants on April 24, 1997, whether via a cash exercise or a cashless exercise. On April 24, 1997, the Company purchased the remaining warrants, and in lieu of cash, delivered to warrant holders an additional 535,271 shares of the Company's common stock. The Market Price of the Company's common stock calculated in connection with the Company's purchase of the warrants was $23.588. The aggregate number of additional shares of common stock issued by the Company in the second quarter of 1997 in connection with the exercise of warrants and the purchase by the Company of warrants was 725,539. Because the exercise of the warrants by the holders and the Company's purchase of the warrants did not involve a public offering and were an exchange of securities where no commission was charged, the transactions were completed in reliance upon the exemptions set forth in Section 4(2) and 3(a)(9) of the Securities Act of 1933, as amended. 18 Item 4. Submission of Matters to a Vote of Security Holders The following matters were voted upon at the Annual Meeting of Stockholders of the Company held on May 7, 1997, and received the votes set forth below: Proposal 1 The following directors were elected to serve on the Company's Board of Directors for three year terms expiring in 2000: Number of Votes Cast For Withheld George M. Jenkins 13,574,028 85,735 Robert Model 13,562,445 97,318 Doren W. Russler 13,573,431 86,332 John T. Shea 13,576,312 83,451 Richard C. Yancey 13,573,431 86,332 Proposal 2 The proposal to ratify the selection of KPMG Peat Marwick LLP as independent auditors of the Company and its subsidiaries for 1997 was adopted, with 13,581,059 votes in favor, 75,354 votes against and 3,350 votes abstaining. Proposal 3 The proposal to amend the CapMAC Holdings Inc. 1995 Omnibus Stock Incentive Plan (the "Omnibus Plan") by (i) increasing by 1,500,000 shares the maximum number of shares of common stock available for grant under the Omnibus Plan and (ii) satisfying the requirements necessary for exemption from the deduction limitation under the final regulations issued under Section 162(m) of the Internal Revenue Code of 1986, as amended, with respect to stock options and stock appreciation rights by limiting to 200,000 the number of shares which can be issued to any one individual in a single calendar year, was adopted, with 7,034,158 votes in favor, 5,469,804 votes against and 120,674 votes abstaining. 19 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.44 Seventh Amendment dated June 12, 1997 to Credit Agreement, dated June 25, 1992, among CapMAC, Bank of Montreal individually and as agent, and the banks from time to time party thereto. 10.45 Promissory Note of C. Jackson Lester dated June 12, 1997.* 11 Computation of Earnings Per Share 27 Financial Data Schedule 99 Additional Exhibits - Capital Markets Assurance Corporation Financial Statements (b) Reports on Form 8-K - No Reports on Form 8-K were filed in this quarter. - ------------------ * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-Q pursuant to item 14(c). 20 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. CapMAC Holdings Inc. Registrant Date: August 13, 1997 /s/ Paul V. Palmer Paul V. Palmer Managing Director and Chief Financial Officer Date: August 13, 1997 /s/ Gerard Edward Murray Gerard Edward Murray Vice President and Controller (Principal Accounting Officer) 21 Exhibit Index Page Number in Sequential Exhibit No. Exhibit Number Copy 10.44 Seventh Amendment dated June 12, 1997 to Credit Agreement, dated June 25, 1992, among CapMAC, Bank of Montreal individually and as agent, and the banks from time to time party thereto 23 10.45 Promissory Note of C. Jackson Lester dated June 12, 1997* 28 11 Computation of Earnings Per Share 30 27 Financial Data Schedule 32 99 Capital Markets Assurance Corporation Financial Statements 34 - ------------------ * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-Q pursuant to item 14(c). 22 Exhibit 10.44 Capital Markets Assurance Corporation Seventh Amendment to Credit Agreement To The Banks Party to the June 25, 1992 Credit Agreement with Capital Markets Assurance Corporation Gentlemen: The undersigned, Capital Markets Assurance Corporation (the "Company") refers to the Credit Agreement dated as of June 25, 1992 as amended and currently in effect between the Company, Bank of Montreal individually and as agent and the Bank parties thereto (the "Credit Agreement"), capitalized terms used without definition below to have the meanings ascribed to them in the Credit Agreement. Upon satisfaction of the conditions precedent to effectiveness hereinafter set forth, this letter shall serve as an agreement between us as follows: 1. Amendments to Credit Agreement. (a) Increase in the Commitment of Deutsche Bank. Effective on the Effective Date (as hereinafter defined) the Commitment of Deutsche Bank shall be increased to $65,000,000 (subject to any reductions thereafter made pursuant to the terms of the Credit Agreement). (b) Deletion of Bank Nationale de Paris as a Bank. Effective on the Effective Date, Banque Nationale de Paris shall no longer be a Bank party to the Credit Agreement and, accordingly, shall no longer have any commitment or obligation to extend credit to the Company pursuant to the Credit Agreement. (c) Extension of the Termination Date. The definition of the term "Termination Date" appearing in Section 7.1 of the Credit Agreement shall be amended by striking the date "June 12, 1999" therefrom and substituting the date "June 12, 2000" therefor. 2. Conditions Precedent to Effectiveness. The amendments herein provided for shall become effective on June 12, 1997 (the "Effective Date") provided that each of the following conditions precedent have then been satisfied: (a) the Agent shall have received counterparts hereof which, taken together, bear the signatures of the Company and the Banks; (b) the Agent shall have received a Certificate of the Secretary of the Company in the form annexed hereto as Exhibit A in sufficient counterparts for the Banks; 23 (c) the Agent shall have received for Deutsche Bank a Note in the amount of its Commitment as increased hereby such note to constitute a "Note" for all purposes of the Credit Agreement and all instruments and documents delivered pursuant thereto; (d) if there are any Loans outstanding on the Effective Date and this Amendment has become effective, there shall as of such date be such nonratable borrowings and repayments made under the Credit Agreement as shall be necessary so that after giving effect thereto, the percentage of each Bank's Commitment which is in use is identical and all principal and interest owing Banque Nationale de Paris has been paid in full; (e) Banque Nationale de Paris shall have been paid any accrued commitment fee owed it for the period to the Effective Date; and (f) The representations and warranties contained in Section 3 of the Credit Agreement as amended hereby shall be true and correct as of the time the other conditions precedent to effectiveness hereinabove set forth have been satisfied and no Default or Event of Default shall have occurred and be continuing , the satisfaction by the Company of such other conditions precedent to constitute a representation from the Company to the foregoing effects, such representation to be deemed made in connection with the Credit Agreement. Promptly after this Seventh Amendment to Credit Agreement becomes effective Deutsche Bank shall return the Note now held by it to the Company marked "superseded" and (provided always that such Note has been in full) Banque Nationale de Paris shall return the Note held by it to the Company marked "cancelled" or "paid". 3. Miscellaneous. Except as specifically amended hereby all of the terms, conditions and provisions of the Credit Agreement shall stand and remain unchanged and in full force and effect. No reference to this Seventh Amendment to Credit Agreement need be made in any instrument or document at any time referring to the Credit Agreement, a reference to the Credit Agreement in any of such to be deemed to be a reference to the Credit Agreement as amended hereby. This Seventh Amendment to Credit Agreement shall be construed and determined in accordance with the laws of the State of New York. This Seventh Amendment to Credit Agreement may be executed in counterparts and by separate parties hereto on separate counterparts, each to constitute an original but all but one and the same instrument. Dated as of this 12th day of June, 1997 CAPITAL MARKETS ASSURANCE CORPORATION By /s/ Robert L. Nevin, Jr. Its Managing Director Accepted and agreed to as of the day and year last above written. 24 ADDRESS AND AMOUNT AND PERCENTAGE OF COMMITMENTS AFTER GIVING EFFECT TO AMENDMENT: $65,000,000 43.33333% DEUTSCHE BANK AG NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By /s/ John S. McGill Its Vice President By /s/ Louis Caltavuturo Its Vice President Address for Notices: Deutsche Bank, AG New York Branch 31 West 52nd Street New York, New York 10019 Attn: Mac Johnson Telephone: (212) 474-8107 Fax: (212) 474-8108 Lending Office: 31 West 52nd Street New York, New York 10019 Attn: Mac Johnson $45,000,000 30% BANK OF MONTREAL, individually and as Agent 430 Park Avenue, 14th Floor New York, New York 10022 Attn: Richard McClorey Telephone: (2120 605-1444 Fax: (212) 605-1455 By /s/ R.J. McClorey Its Director Lending Office: Bank of Montreal 115 South LaSalle Street Chicago, Illinois 60603 Attn: Manager-Loan Operations 25 $40,000,000 26.66667% BANK OF AMERICA ILLINOIS 231 South LaSalle Street Chicago, Illinois 60697 ttn: Elizabeth Bishop Telephone: (312) 828-6550 Fax: 312-987-0889 By /s/ Elizabeth Bishop Its Vice President Lending Office: Bank of America Illinois 231 South LaSalle Street Chicago, Illinois 60697 Attn: Elizabeth Bishop $-0- 0% BANQUE NATIONALE DE PARIS By /s/ Nathalie Coulon Its Vice President By /s/ Mark J. Daniel Its Vice President 26 Exhibit A Certificate of the Secretary of Capital Markets Assurance Corporation The undersigned, Ram D. Wertheim, certifies that he is the duly elected, qualified and acting secretary of Capital Markets Assurance Corporation, a corporation duly organized and existing under the laws of the State of New York and that as such Secretary he is the keeper of the corporate records and seal of said corporation. The undersigned further certifies that the Resolutions of the Board of Directors of said Corporation attached as Exhibit A to the certificate of the undersigned dated June 25, 1992 and heretofore delivered to the Banks have not been rescinded or modified in any respect but still remain in full force and effect and that the persons named in such certificate as being the duly elected, qualified and acting incumbents of their respective offices remain the duly elected, qualified and acting incumbents of said offices. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of said Corporation _______ day of _____________, 1997. (SEAL) CAPITAL MARKETS ASSURANCE CORPORATION Ram D. Wertheim, Secretary 27 Exhibit 10.45 PROMISSORY NOTE $100,000 New York, New York June 12, 1997 1. FOR VALUE RECEIVED, the undersigned, C. Jackson Lester (the "Borrower") , agrees to pay to the order of CapMAC Financial Services, Inc. (the "Lender") at 885 Third Avenue, New York, New York 10022 or such other place as may be designated by the Lender from time to time, in lawful money of the United States of America and in immediately available funds, the principal amount of One Hundred Thousand Dollars ($100,000) together with interest on the unpaid portion of such principal amount from the date hereof until due and payable (whether at the stated maturity thereof, by acceleration or otherwise) at the per annum rate equal to 7.00%. 2. Interest on this Note will be payable annually concurrently with the payment of an annual bonus to the Borrower and, if no bonus is paid to the Borrower in any calender year, then interest on this Note shall be payable by the Borrower on the last business day of such year. The Lender (or any affiliate of the Lender) shall be entitled to deduct from any bonus or other compensation payable to the Borrower the amount of interest due hereon that is not paid by the Borrower when due. Interest shall be calculated on the basis of a year of 365 days for the actual number of days elapsed. 3. The principal amount of this Note shall become payable in full on the earlier of (i) June 12, 2002, (ii) the date of the Borrower's Termination of Employment for reasons other than death or disability and (iii) 90 days after the date of the Borrower's Termination of Employment due to death or disability. As used herein, "Termination of Employment" shall mean any termination of employment, whether voluntary or involuntary and with or without cause, including death or permanent disability. This Note shall become due and payable (i) within five days after notice by the Lender to the Borrower of any default by the Borrower of the Borrower's obligations hereunder and (ii) immediately upon the filing by or against the Borrower of any bankruptcy petition for protection under the bankruptcy laws of United States or any state thereof. 4. The principal amount of this Note may be prepaid in whole or in part at any time. 5. Upon the maturity of this Note (whether at the stated maturity thereof, by acceleration or otherwise), the Lender (or any of its affiliates) shall be entitled to apply any amounts due (including, without limitation, any severance payments) by the Lender (or any affiliate of the Lender) to the Borrower to the payment of any accrued and unpaid interest and any outstanding principal of this Note and of any other Notes issued by the Borrower to the Lender under the CapMAC Financial Services Executive Loan Program (the "Loan Program") in the inverse order of the maturity of such Notes, and the Borrower shall be liable for the payment of any remaining accrued interest and unpaid principal of this Note and any such other Notes. 6. The Borrower hereby agrees that as long as any amount is outstanding under this Note, the Borrower shall (i) not pledge any of his stock in CapMAC Holdings Inc., including any stock issuable to the Borrower upon the exercise of any stock options ("Stock"), to secure any indebtedness or other payment obligation and (ii) apply the proceeds of the sale of any Stock to repay the unpaid principal amount of this Note and of any other Note issued by the Borrower under the Loan Program, such payment to be applied to repay such Notes in the order specified by the Borrower or, if the Borrower does not specify how such payment is to be applied, in the inverse order of the maturity of all Notes issued by the Borrower under the Loan Program. 28 7. If any payment on this Note becomes due and payable on a day other than a business day the maturity thereof shall be extended to the next succeeding business day, and with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. IN WITNESS WHEREOF, the Borrower has duly executed and delivered this Note to the Lender By: /s/ C. Jackson Lester C. Jackson Lester Accepted and Agreed: CapMAC FINANCIAL SERVICES, INC. By: /s/ Ram D. Wertheim Title: Managing Director 29 Exhibit 11a CapMAC Holdings Inc. and Subsidiaries Statement Re Computation of Per Share Earnings (Dollars in thousands, except Per Share Amounts)
Three Months Ended Six Months Ended June 30 June 30 1997 1996 1997 1996 - ----------------------------------------------------- ---- ---------- ------------ -------- -------- Modified Treasury Stock Method E.P.S. - Fully Diluted - ----------------------------------------------------------- ---------- ------------ -------- -------- Net income $ 9,267 8,335 14,679 18,235 - ----------------------------------------------------- ---- ---------- ------------ -------- -------- Average number of common shares outstanding 16,907 15,509 16,519 15,499 Assumed exercise of dilutive stock options 894 2,242 1,398 2,242 - ----------------------------------------------------- ---- ---------- ------------ -------- -------- Fully diluted number of shares 17,801 17,751 17,917 17,741 Earnings per share assuming full dilution $ 0.52 0.47 0.81 1.03 - ----------------------------------------------------- ---- ---------- ------------ -------- -------- Common stock equivalents 2,664 4,530 2,664 4,530 Proceeds from exercise of all equivalents $ 51,228 65,223 51,228 65,223 Purchase of treasury stock 1,524 2,289 1,524 2,289 Market value per share $ 33.63 28.50 33.63 28.50 - ----------------------------------------------------- ---- ---------- ------------ -------- --------
As of June 30, 1997 approximately 2,664,000 stock options had been granted and were outstanding. Based upon various exercise prices, the total consideration for the common stock equivalents will be approximately $51.2 million. Using the Modified Treasury Stock method, it is assumed that the proceeds from the exercised common stock equivalents would be used to purchase up to 20% of the outstanding shares using a market value of $33.63 per share for six months ended June 30, 1997. The dilution would be the equivalent of approximately 1,398,000 shares. 30 Exhibit 11b CapMAC Holdings Inc. and Subsidiaries Statement Re Computation of Per Share Earnings (Dollars in thousands, except Per Share Amounts)
Three Months Ended Six Months Ended June 30 June 30 1997 1996 1997 1996 - ----------------------------------------------------- ---- ---------- ----------- ---- ---------- Modified Treasury Stock Method E.P.S. - Primary Net Income $ 9,267 8,335 $ 14,679 18,235 - ----------------------------------------------------- ---- ------- ----------- ---- -------- ----- Average number of common shares outstanding 16,907 15,509 16,519 15,499 Assumed exercise of dilutive stock options 989 2,159 1,519 2,020 - ----------------------------------------------------- ---- ------- ----------- ---- -------- ----- Fully diluted number of shares 17,896 17,668 18,039 17,519 Earnings per share assuming full dilution $ 0.52 0.47 $ 0.81 1.04 - ----------------------------------------------------- ---- ------- ----------- ---- -------- ----- Common stock equivalents 2,664 4,530 2,664 4,530 Proceeds from exercise of all equivalents $ 51,228 65,223 $ 51,228 65,223 Purchase of treasury stock 1,794 2,377 993 2,020 Average market value per share $ 28.56 27.44 $ 30.66 25.98 - ----------------------------------------------------- ---- ------- ----------- ---- ---------- -- As of June 30, 1997 approximately 2,664,000 stock options had been granted and were outstanding. Based upon various exercise prices, the total consideration for the common stock equivalents will be approximately $51.2 million. Using the Modified Treasury Stock method, it is assumed that the proceeds from the exercised common stock equivalents would be used to purchase up to 20% of the outstanding shares using an average market value of $30.66 per share for six months ended June 30, 1997. The dilution would be the equivalent of approximately 1,519,000 shares. 31
EX-27 2 FOR 10Q
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION extracted from CapMAC Holdings Inc. and Subsidiaries Consolidated Balance Sheets for the quarter ending June 30, 1997 and the consolidated statements of income, stockholders' equity and cash flows, for the quarter then ended and the notes thereto and is qualified in its entirety by reference to such financial statements. 0000889906 CapMAC Holdings Inc. 1000 US Dollars 6-MOS DEC-31-1996 JAN-01-1997 JUN-30-1997 1 356573 0 0 486 0 0 392791 6227 0 50327 493251 13861 71800 0 0 15000 0 0 173 328134 493251 24235 10410 (1198) 48 2876 5053 14299 21338 6527 0 0 0 0 14679 0.81 0.81 10985 0 0 0 0 13861 0
EX-99 3 CAPITAL ASSURANCE CORPORATION CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (Unaudited) 33 Capital Markets Assurance Corporation and Subsidiary Consolidated Balance Sheets (Dollars in thousands) ASSETS
June 30,1997 December 31,1996 (Unaudited) - ------------------------------------------------------------------------------------------------------- Investments: Bonds at fair value (amortized cost $307,166 at June 30, 1997 and $294,861 at December 31, 1996) $ 307,821 297,893 Short-term investments (at amortized cost which approximates fair value) 17,053 16,810 - ------------------------------------------------------------------------------------------------------- Total investments 324,874 314,703 - ------------------------------------------------------------------------------------------------------- Cash 4,506 371 Accrued investment income 3,835 3,807 Deferred acquisition costs 50,327 45,380 Premiums receivable 5,826 5,141 Prepaid reinsurance 20,787 18,489 Other assets 10,464 6,424 - ------------------------------------------------------------------------------------------------------ Total assets $ 420,619 394,315 ======================================================================================================= LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Unearned premiums $ 71,800 68,262 Reserve for losses and loss adjustment expenses 13,861 10,985 Ceded reinsurance 2,766 1,738 Accounts payable and other accrued expenses 14,433 8,019 Current income taxes 203 679 Deferred income taxes 15,700 15,139 - ------------------------------------------------------------------------------------------------------- Total liabilities 118,763 104,822 - ------------------------------------------------------------------------------------------------------- Stockholder's Equity: Common stock - $1.00 par value per share; 15,000,000 shares are authorized, issued and outstanding at June 30, 1997 and December 31, 1996 15,000 15,000 Additional paid-in capital 208,475 208,475 Unrealized appreciation on investments, net of tax 425 1,970 Retained earnings 77,956 64,048 - ------------------------------------------------------------------------------------------------------- Total stockholder's equity 301,856 289,493 - ------------------------------------------------------------------------------------------------------- Total liabilities and stockholder's equity $ 420,619 394,315 =======================================================================================================
See accompanying notes to consolidated financial statements. 34 Capital Markets Assurance Corporation and Subsidiary Consolidated Statements of Income (Unaudited) (Dollars in thousands)
Three Months Ended Six Months Ended June 30 June 30 1997 1996 1997 1996 Revenues: Direct premiums written $ 18,726 18,622 35,180 32,777 Assumed premiums written 655 150 916 1,024 Ceded premiums written (6,272) (5,103) (10,621) (7,013) - ------------------------------------------------------------------------------------------------------------- Net premiums written 13,109 13,669 25,475 26,788 Increase in unearned premiums (877) (3,681) (1,240) (7,972) - ------------------------------------------------------------------------------------------------------------- Net premiums earned 12,232 9,988 24,235 18,816 Net investment income 4,684 4,112 9,386 7,989 Net realized capital gains 506 19 2,549 168 Other income 45 25 88 79 - ------------------------------------------------------------------------------------------------------------- Total revenues 17,467 14,144 36,258 27,052 - ------------------------------------------------------------------------------------------------------------- Expenses: Losses and loss adjustment expenses 1,333 1,109 2,876 2,184 Underwriting and operating expenses 4,208 3,385 8,879 7,362 Policy acquisition costs 2,472 2,059 5,053 4,123 - ------------------------------------------------------------------------------------------------------------- Total expenses 8,013 6,553 16,808 13,669 - ------------------------------------------------------------------------------------------------------------- Income before income taxes 9,454 7,591 19,450 13,383 - ------------------------------------------------------------------------------------------------------------- Income Taxes: Current income tax 2,277 1,316 4,150 1,981 Deferred income tax 473 1,148 1,392 1,971 - ------------------------------------------------------------------------------------------------------------- Total income taxes 2,750 2,464 5,542 3,952 - ------------------------------------------------------------------------------------------------------------- Net Income $ 6,704 5,127 13,908 9,431 =============================================================================================================
See accompanying notes to consolidated financial statements. 35 Capital Markets Assurance Corporation and Subsidiary Consolidated Statement of Stockholder's Equity (Unaudited) (Dollars in thousands)
Six Months Ended June 30, 1997 Common stock: Balance at beginning of period ............................. $ 15,000 --------- Balance at end of period ................................ 15,000 --------- Additional paid-in capital: Balance at beginning of period ............................. 208,475 --------- Balance at end of period ................................ 208,475 Unrealized appreciation (depreciation) on investments, net of tax: Balance at beginning of period ............................. 1,970 Unrealized depreciation on investments ..................... (1,545) --------- Balance at end of period ................................ 425 --------- Retained earnings: Balance at beginning of period ............................. 64,048 Net income ................................................. 13,908 --------- Balance at end of period ................................ 77,956 --------- Total stockholder's equity .............................. $ 301,856 =========
See accompanying notes to consolidated financial statements. 36 Capital Markets Assurance Corporation and Subsidiary Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands)
Six Months Ended Six Months Ended June 30, 1997 June 30, 1996 - ------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 13,908 9,431 - ------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Reserve for losses and loss adjustment expenses 2,876 1,821 Unearned premiums, net 3,538 10,977 Deferred acquisition costs (4,947) (4,742) Premiums receivable (685) 308 Accrued investment income (28) (579) Income taxes payable 916 2,113 Net realized capital gains (2,549) (168) Accounts payable and other accrued expenses 6,414 2,581 Prepaid reinsurance (2,298) (3,004) Other, net (2,765) (183) - ------------------------------------------------------------------------------------------------------------- Total adjustments 472 9,124 - ------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 14,380 18,555 - ------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of investments (112,743) (121,115) Proceeds from sales of investments 74,768 19,875 Proceeds from maturities of investments 27,730 82,800 - ------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (10,245) (18,440) - ------------------------------------------------------------------------------------------------------------- Net increase in cash 4,135 115 Cash balance at beginning of period 371 344 - ------------------------------------------------------------------------------------------------------------- Cash balance at end of period $ 4,506 459 ============================================================================================================= Supplemental disclosures of cash flow information: Income taxes paid $ 4,550 1,725 Tax and loss bonds purchased $ 76 112 =============================================================================================================
See accompanying notes to consolidated financial statements. 37 Capital Markets Assurance Corporation and Subsidiary Notes to Unaudited Consolidated Financial Statements June 30, 1997 1. Background Capital Markets Assurance Corporation ("CapMAC") is a New York-domiciled monoline stock insurance company which engages only in the business of financial guaranty and surety insurance. CapMAC is a wholly owned subsidiary of CapMAC Holdings Inc. ("Holdings"). In early 1997, CapMAC made an investment of 50 million French francs (approximately 10 million U.S. dollars) in CapMAC Assurance, S.A., an insurance subsidiary to be established in Paris, France. CapMAC Assurance, S.A., is licensed to write financial guarantee insurance in the European Union member states. CapMAC is licensed in all 50 states in addition to the District of Columbia, the Commonwealth of Puerto Rico and the territory of Guam. CapMAC insures structured asset-backed, corporate, municipal and other financial obligations in the U.S. and international capital markets. CapMAC also provides financial guaranty reinsurance for structured asset-backed, corporate, municipal and other financial obligations written by other major insurance companies. CapMAC's claims-paying ability is rated triple-A by Moody's Investors Service, Inc., Standard & Poor's Ratings Services, Duff & Phelps Credit Rating Co., and Nippon Investors Service, Inc., a Japanese rating agency. Such ratings reflect only the views of the respective rating agencies, are not recommendations to buy, sell or hold securities and are subject to revision or withdrawal at any time by such rating agencies. 2. Basis of Presentation CapMAC's consolidated unaudited interim financial statements have been prepared on the basis of generally accepted accounting principles and, in the opinion of management, reflect all adjustments necessary for a fair presentation of the CapMAC's financial condition, results of operations and cash flows for the periods presented. The results of operations for the six months ended June 30, 1997 may not be indicative of the results that may be expected for the full year ending December 31, 1997. These consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the audited financial statements of CapMAC as of December 31, 1996 and 1995, and for each of the years in the three-year period ended December 31, 1996. 3. Reclassifications Certain prior period balances have been reclassified to conform to the current period presentation. 38 -----END PRIVACY-ENHANCED MESSAGE-----