FSA-insured GICs subject the Company to risk associated with early withdrawal of principal allowed by the terms of the GICs. The majority of municipal GICs insured by FSA relate to debt service reserve funds and construction funds in support of municipal bond transactions. Debt service reserve fund GICs may be drawn unexpectedly upon a payment default by the municipal issuer. Construction fund GICs may be drawn unexpectedly when construction of the underlying municipal project does not proceed as expected. In addition, most FSA-insured GICs allow for withdrawal of GIC funds in the event of a downgrade of FSA, typically below AA- by S&P or Aa3 by Moody's, unless the GIC provider posts collateral or otherwise enhances its credit.
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
On July 5, 2000, the Company completed a merger in which the Company became a direct subsidiary of Dexia Holdings, Inc., which, in turn, is a subsidiary of Dexia Credit Local. Dexia Credit Local is a subsidiary of Dexia S.A. (Dexia), a publicly held Belgian corporation. At the merger date, each outstanding share of the Company's common stock was converted into the right to receive $76.00 in cash. Dexia also indirectly acquired the Company's redeemable preferred stock, which was then contributed to the Company's capital. As a result of this transaction, the Company valued its liabilities under the Company's equity-based compensation plans at the transaction price and changed its assumption regarding those plans by assuming all future payments will be settled in cash. It also reflected the settlement of its forward share agreements at the merger price and the sale of 511,031 shares of the Company's common stock to Dexia at the merger price. The net effect of the merger, reflected in the December 31, 2000 financial statements, was to decrease net income by $75.5 million and decrease shareholders' equity by $36.1 million. At December 31, 2001, the only holders of the Company's common stock were Dexia Holdings, Inc., White Mountains Insurance Group, Ltd. and certain directors of the Company who owned shares of the Company's common stock or economic interests in the Company's common stock under the Director Share Purchase Program (see Note 11).
Non-interest bearing tax and loss bonds are purchased for the tax benefit that results from deducting contingency reserves as provided under Internal Revenue Code Section 832(e). The Company records the purchase of tax and loss bonds as pre-payments of federal income taxes and includes them in other assets.
Proceeds from sales of equity investments during 2001, 2000 and 1999 were $0, $14,167,000 and $87,471,000, respectively. Gross gains of $0, $0 and $11,707,000 and gross losses of $0, $5,927,000 and $5,008,000 were realized on sales in 2001, 2000 and 1999, respectively. Equity investments had gross unrealized gains of $75,000 and $0 and gross unrealized losses of $5,000 and $259,000 as of December 31, 2001 and 2000, respectively.
Performance shares are awarded under the Company's 1993 Equity Participation Plan. The Plan authorizes the discretionary grant of performance shares by the Human Resources Committee to key employees of the Company and its Subsidiaries. The amount earned for each performance share depends upon the attainment by the Company of certain growth rates of adjusted book value (or in the case of performance shares issued after January 1, 2001, growth rates of adjusted book value and book value) per outstanding share over a three-year period. No payout occurs if the compound annual growth rate of the Company's adjusted book value (or in the case of performance shares issued after January 1, 2001, growth rates of adjusted book value and book value) per outstanding share is less than 7%, and a 200% payout occurs if the compound annual growth rate is 19% or greater. Payout percentages are interpolated for compound annual growth rates between 7% and 19%.
Cash, receivable for investments sold and payable for investments purchased - The carrying amount approximates fair value because of the short maturity of these instruments.
GICs - The fair value of a GIC is the present value of the expected cash flows as of the reporting date.