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<SEC-DOCUMENT>0000950130-02-001969.txt : 20020415
<SEC-HEADER>0000950130-02-001969.hdr.sgml : 20020415
ACCESSION NUMBER: 0000950130-02-001969
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 20
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020326
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AMBAC FINANCIAL GROUP INC
CENTRAL INDEX KEY: 0000874501
STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351]
IRS NUMBER: 133621676
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-10777
FILM NUMBER: 02586304
BUSINESS ADDRESS:
STREET 1: ONE STATE ST PLZ
CITY: NEW YORK
STATE: NY
ZIP: 10004
BUSINESS PHONE: 2126680340
MAIL ADDRESS:
STREET 1: ONE STATE ST PLZ
CITY: NEW YORK
STATE: NY
ZIP: 10004
FORMER COMPANY:
FORMER CONFORMED NAME: AMBAC INC /DE/
DATE OF NAME CHANGE: 19930328
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>d10k.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
December 31, 2001 1-10777
Ambac Financial Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 13-3621676
(State of incorporation) (I.R.S. employer identification no.)
One State Street Plaza
New York, New York 10004
(Address of principal executive offices) (Zip code)
(212) 668-0340
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 per share and
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 18, 2002 was $6,172,530,043 (based upon the closing price
of the Registrant's shares of the New York Stock Exchange on March 18, 2002,
which was $59.33). For purposes of this information, the outstanding shares of
Common Stock which were owned by all directors and executive officers of the
Registrant were deemed to be shares of Common Stock held by affiliates.
As of March 18, 2002, 105,909,028 shares of Common Stock, par value $0.01
per share, (net of 111,509 treasury shares) were outstanding.
Documents Incorporated By Reference
Portions of the Registrant's Annual Report to Stockholders for the year
ended December 31, 2001 are incorporated by reference into Parts II and IV
hereof. The Registrant's Proxy Statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the Annual Meeting of Stockholders scheduled to be held
on May 7, 2002 are incorporated by reference into Part III hereof.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I
Item 1. Business ........................................................ 1
Item 2. Properties ...................................................... 25
Item 3. Legal Proceedings ............................................... 25
Item 4. Submission of Matters to a
Vote of Security Holders ........................................ 25
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters .......................... 25
Item 6. Selected Financial Data ......................................... 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 26
Item 7A. Quantitative and Qualitative Disclosures 26
About Market Risk................................................
Item 8. Financial Statements and Supplementary Data ..................... 26
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure ............................. 26
PART III
Item 10. Directors and Executive Officers
of the Registrant ............................................... 26
Item 11. Executive Compensation .......................................... 26
Item 12. Security Ownership of Certain
Beneficial Owners and Management ................................ 26
Item 13. Certain Relationships and
Related Transactions ............................................ 27
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K .............................. 27
SIGNATURES ................................................................. 33
FINANCIAL STATEMENT SCHEDULES ...................................................... S-1
</TABLE>
<PAGE>
Part I
Item 1. Business.
GENERAL
Ambac Financial Group, Inc., headquartered in New York City, is a holding
company whose subsidiaries provide financial guarantee products and other
financial services to clients in both the public and private sectors around the
world. Ambac Financial Group was incorporated on April 29, 1991. Ambac Financial
Group provides financial guarantees for public finance and structured finance
obligations through its principal operating subsidiary, Ambac Assurance
Corporation. Through its financial services subsidiaries, Ambac Financial Group
provides financial and investment products including investment agreements,
interest rate and total return swaps, funding conduits, investment advisory and
cash management services, principally to its financial guarantee clients which
include municipalities and their authorities, school districts, health care
organizations and asset-backed issuers.
Ambac Assurance, which serves the global capital markets, is primarily
engaged in guaranteeing public finance and structured finance obligations and is
the successor to the founding financial guarantee insurance company, which wrote
the first bond insurance policy in 1971. Financial guarantee insurance policies
written by Ambac Assurance in both the primary and secondary markets generally
guarantee payment when due of the principal of and interest on the guaranteed
obligation. Ambac Assurance seeks to minimize the risk inherent in its financial
guarantee portfolio by maintaining a diverse portfolio which spreads its risk
across a number of criteria, including issue size, type of bond, geographic area
and obligor. As of December 31, 2001, Ambac Assurance's net financial guarantee
in force (after giving effect for reinsurance) was $476.2 billion. See
"Financial Guarantee in Force" below.
Ambac Credit Products LLC, a wholly owned subsidiary of Ambac Assurance,
provides credit protection in the global markets in the form of structured
credit derivatives. These structured credit derivatives involve private
transactions in which highly rated credit risk is assumed by Ambac Credit
Products. These contracts require Ambac Credit Products to make payments upon
the occurrence of certain defined credit events relating to an underlying
obligation or portfolio of obligations (generally a fixed income obligation).
Structured credit derivatives issued by Ambac Credit Products are insured by
Ambac Assurance. See "Business Segments -- Financial Guarantee" below and
"Management's Discussion and Analysis -- Risk Management" in Ambac Financial
Group's 2001 Annual Report to Stockholders for more detail about structured
credit derivatives.
Ambac Assurance has earned triple-A ratings, the highest ratings available
from Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings
Services ("S&P"), Fitch, Inc. ("Fitch") and Rating and Investment Information,
Inc. ("R&I"). These ratings are an essential part of Ambac Assurance's ability
to provide credit enhancement. See "Rating Agencies" below.
Ambac Financial Group's investment agreement business, conducted through
its subsidiary, Ambac Capital Funding, Inc., provides investment agreements
primarily to municipalities and their authorities, structured finance
obligations and international issuers. Investment agreements issued by Ambac
Capital Funding are insured by Ambac Assurance. Investment agreements are
primarily used by issuers to invest bond proceeds until the proceeds can be used
for their intended purpose. The investment agreement provides for the guaranteed
return of principal invested, and for the payment of interest thereon at a
guaranteed rate. See "Investment Agreements" below.
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<PAGE>
Ambac Financial Group provides interest rate and total return swaps through
its subsidiary Ambac Financial Services, L.P., primarily to states,
municipalities and their authorities, issuers of asset-backed securities and
other entities in connection with their financings. Ambac Financial Services
also enters into total return swaps with professional counterparties. Total
return swaps are only used for fixed income obligations, which meet Ambac
Assurance's credit underwriting criteria. See "Derivative Products" below.
Ambac Financial Group provides investment advisory, cash management and
fund administration services through its subsidiary, Cadre Financial Services,
Inc., and broker/dealer services through its subsidiary, Cadre Securities, Inc.,
primarily to school districts, hospitals and health care organizations, and
municipalities.
As a holding company, Ambac Financial Group, Inc. is largely dependent on
dividends from Ambac Assurance, its principal operating subsidiary, to pay
dividends on its capital stock, to pay principal and interest on its
indebtedness, to pay its operating expenses, to purchase its common stock in the
open market and to make capital investments in its subsidiaries. Dividends from
Ambac Assurance are subject to certain insurance regulatory restrictions. See
"Insurance Regulatory Matters -- Wisconsin Dividend Restrictions" below and
"Management's Discussion and Analysis -- Liquidity and Capital Resources" in
Ambac Financial Group's 2001 Annual Report to Stockholders.
Materials in this Form 10-K may contain information that includes or is
based upon forward-looking statements within the meaning of the Securities
Litigation Reform Act of 1995. Forward-looking statements give Ambac Financial
Group's expectations or forecasts of future events. You can identify these
statements by the fact that they do not relate strictly to historical or current
facts and relate to future operating or financial performance.
Any or all of our forward-looking statements here or in other publications
may turn out to be wrong and are based on current expectations and the current
economic environment. Ambac Financial Group's actual results may vary
materially, and there are no guarantees about the performance of Ambac Financial
Group's securities. Among factors that could cause actual results to differ
materially are: (1) changes in the economic, credit or interest rate environment
in the United States and abroad; (2) the level of activity within the national
and worldwide debt markets; (3) competitive conditions and pricing levels; (4)
legislative and regulatory developments; (5) changes in tax laws; (6) the
policies and actions of the United States and other governments and (7) other
risks and uncertainties that have not been identified at this time. Ambac
Financial Group is not obligated to publicly correct or update any
forward-looking statement if we later become aware that it is not likely to be
achieved, except as required by law. You are advised, however, to consult any
further disclosures we make on related subjects in Ambac Financial Group's
reports to the Securities and Exchange Commission ("SEC").
2
<PAGE>
BUSINESS SEGMENTS
The following paragraphs describe the business operations of Ambac
Financial Group, Inc. and its subsidiaries for it's two reportable segments:
Financial Guarantee and Financial Services.
Financial Guarantee
Generally, financial guarantee insurance written by Ambac Assurance
guarantees to the holder of the underlying obligation timely payment of
principal and interest by the issuer on such obligation in accordance with its
original payment schedule.
Financial guarantee insurance is a form of credit enhancement that benefits
both the issuer and the investor. Issuers benefit because their securities are
sold with a higher credit rating than securities of the issuer sold without
credit enhancement, resulting in interest cost savings and greater
marketability. In addition, for complex financings and obligations of issuers
that are not well known by investors, credit enhanced obligations receive
greater market acceptance than obligations without credit enhancement. Investors
benefit from greater marketability, secondary market price stability, active
credit surveillance and protection from loss associated with issuer default.
Structured credit derivatives written by Ambac Credit Products provide
credit protection in respect of specific financial obligations (primarily fixed
income obligations). Ambac Credit Product's structured credit derivative
contracts relate to highly rated risks, investment grade risks, and in some
cases are partially hedged with various financial institutions or structured
with first loss protection. Such structuring mitigates Ambac Credit Product's
risk of loss and reduces the price volatility of these financial instruments.
Should a defined credit event occur, Ambac Credit Products would generally make
a payment equivalent to the difference between the par value and market value of
the underlying obligation.
Ambac Financial Group derives financial guarantee revenues from: (i)
premiums earned over the life of the obligations guaranteed; (ii) net investment
income; (iii) revenue from credit derivative transactions; (iv) net realized
gains and losses from sales of investment securities; and (v) certain
structuring and other fees. Financial guarantee revenues were $672.0 million,
$565.4 million and $474.1 million in 2001, 2000 and 1999, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 17 of Notes to Consolidated Financial Statements in Ambac
Financial Group's 2001 Annual Report to Stockholders.
Financial guarantee products are sold in three principal markets: the U.S.
public finance market, the U.S. structured finance and asset-backed market, and
the international market. Total gross par guaranteed for the years ended
December 31, 2001, 2000 and 1999 was $90.1 billion, $77.0 billion and $77.2
billion, respectively.
U. S. Public Finance Market
The U.S. public finance market includes taxable and tax-exempt bonds, notes
and other evidences of indebtedness issued by states, political subdivisions
(e.g., cities, counties, towns and villages), water, sewer, electric and other
utility districts, airports, higher educational institutions, hospitals,
transportation and housing authorities and other similar authorities and
agencies. Public finance obligations are generally supported by either the
taxing authority of the
3
<PAGE>
issuer or the issuer's or underlying obligor's ability to collect fees or
assessments for certain projects or public services. More recently, the public
finance market has expanded to include structured, project finance and
asset-backed bond issues for infrastructure projects, sports stadiums, lease
pools and other municipal purposes. This portion of the market is growing and
has become a focus for Ambac Financial Group in recent years. The following
table sets forth the volume of new issues of long-term (longer than 12 months)
public finance bonds and the volume of new issues of insured long-term public
finance bonds over the past ten years in the United States.
U.S. Public Finance Long-Term Market
------------------------------------
<TABLE>
<CAPTION>
Refundings Insured Bonds
New Total as Percentage Insured as Percentage
($ in Billions) Money Refundings Volume of Total Volume Volume of Total Volume
----- ---------- ------ --------------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
1992 .............. $ 142.2 $ 92.5 $234.7 39.4% $ 80.8 34.4%
1993 .............. 142.1 150.1 292.2 51.4 108.0 37.0
1994 .............. 126.4 38.6 165.0 23.4 61.5 37.3
1995 .............. 126.1 33.9 160.0 21.1 68.5 42.8
1996 .............. 139.1 45.9 185.0 24.8 85.7 46.3
1997 .............. 160.5 60.1 220.6 27.2 107.5 48.7
1998 .............. 204.2 82.0 286.2 28.9 145.1 50.7
1999 .............. 189.0 38.3 227.3 16.8 105.3 46.3
2000 .............. 180.7 19.4 200.1 9.7 79.3 39.6
2001 .............. 224.6 61.7 286.3 21.6 133.2 46.5
</TABLE>
Source: Amounts, except for 2001, are based upon estimated data reported by The
Bond Buyer's 2001 Yearbook. The 2001 amounts are Ambac Assurance
estimates, compiled from industry sources including Securities Data
Company, Inc. and The Bond Buyer. Amounts represent gross par amounts
issued or insured, respectively, during such year.
The foregoing table illustrates the changes in the total volume and insured
volume of new issues of public finance bonds over the past ten years. Changes in
volume of public finance bond issuance during this period are primarily
attributable to changes in refunding activity related to the then-current
interest rate environment, along with the issuers new money requirements.
Insured volume, as a percentage of total volume, which had grown consistently
from 1992 through 1998, declined during 1999 and 2000. The decline during 2000
is generally considered to have resulted from the combination of the relatively
high credit quality of issues that came to market during the period and the
firmness in premium pricing in the industry. During 2001, this market has shown
a resurgence, largely the result of the lower interest rate environment causing
an increase in both the refinancing and new money components of the market.
Also, the percentage of insured bonds increased, partially due to general credit
concerns.
Ambac Assurance guaranteed gross par of $35.9 billion, $21.4 billion and
$32.5 billion in 2001, 2000 and 1999, respectively, in the U.S. public finance
market.
In the U.S. public finance market, an issuer typically pays an up-front
premium to Ambac Assurance at the time the policy is issued. Premiums are
usually quoted as a percentage of the total amount of principal and interest
that is scheduled to become due during the life of the insured bonds.
Proposed new public finance bond issues are submitted to Ambac Assurance by
issuers (or their investment bankers or financial advisors) to determine their
suitability for financial guarantee. Public finance bond issues are sold on
either a competitive or a negotiated basis. With respect to competitive issues,
an issuer will publish a notice of sale soliciting bids for the purchase of a
proposed issue of bonds. Potential bidders on the bonds then form syndicates.
These syndicates then solicit a determination from some or all of the financial
guarantors whether an issue is suitable for financial guarantee and at what
premium rate and on what
4
<PAGE>
terms. The syndicate then determines whether to bid on the issue with a
financial guarantee (and if so, with which financial guarantor) or without a
financial guarantee. The issuer then generally selects the syndicate with the
lowest bid. In a negotiated offering, the issuer has already selected an
investment bank and that investment bank solicits premium quotes and terms from
the financial guarantors.
Ambac Assurance also provides financial guarantees on public finance bonds
outstanding in the secondary market that are typically purchased by an
institution to facilitate the sale of bonds in its portfolio or inventory. The
financial guarantee generally increases the sale price of bonds (typically by an
amount greater than the cost of the policy) and affords a wider secondary market
and therefore greater marketability to a given issue of previously issued bonds.
As is the case with new issues, the premium is generally payable in full at the
time of policy issuance. Ambac Assurance employs the same underwriting standards
on secondary market issues that it does on new public finance issues.
As of December 31, 2001 and 2000, net outstanding par exposure related to
public finance bond transactions was $196.6 billion and $180.3 billion,
respectively. See "Financial Guarantees in Force - Types of Bonds" below, for a
breakout of net outstanding par exposure by bond type.
U.S. Structured Finance and Asset-backed Market
Financial guarantees of securities in the U.S. structured finance and
asset-backed market are typically issued in connection with transactions in
which the securities being issued are secured by or payable from a specific pool
of financial or tangible assets. This pool of assets has an identifiable cash
flow or market value and is generally held by a special purpose issuing entity.
Asset-backed securizations may be supported by a broad range of financial
assets including mortgage loans and home equity loans, credit card receivables,
trade receivables, auto loans, student loans and leases. Collateralized debt
obligations, a type of structured finance transaction, are typically backed by
corporate, sovereign or sub-sovereign debt. Equipment enhanced trust
certificates are secured by specific tangible assets (e.g. aircraft) and the
cash flow generated thereby, typically rental income and the liquidation value
of the assets.
Structured finance also encompasses credit enhancement for asset-backed
commercial paper conduits ("conduits"). Conduits are used by issuers to
efficiently fund assets in the short-term commercial paper market. Typically
sponsored by financial institutions, the conduits typically purchase financial
assets and asset-backed securities, and issue commercial paper to fund the
purchase of the assets. In addition to providing credit enhancement to the
conduit with respect to all assets owned by the conduit, Ambac Assurance may
also provide a financial guarantee against the default of a specific financial
asset sold into a conduit.
Structured finance and asset-backed obligations insured by Ambac Assurance
generally have the benefit of over-collateralization and/or other forms of
credit enhancement to mitigate credit risks associated with the related assets.
Unlike the public finance market in which a substantial portion of the
deals is bid competitively by the financial guarantors, the structured and
asset-backed market is essentially a negotiated one. The financial guarantor
will work directly with the investment bank or client to create an acceptable
structure. Consequently, in addition to the types of deals listed above,
structured finance will also include unique transactions and small market
niches.
5
<PAGE>
The U.S. structured finance and asset-backed market in which Ambac
Assurance provides financial guarantees is broad and varied, comprising public
issues, private placements and asset-backed commercial paper. The increasing
array of classes of assets securitized or guaranteed, and the recent rapid
development of the market, makes estimating the size of the aggregate U.S.
structured finance and asset-backed markets difficult. Three of the most
developed sectors of this market are public asset-backed, mortgage-backed
securities and asset-backed commercial paper. According to Asset-Backed Alert,
volume in U.S. public asset-backed and mortgage-backed securities combined
totaled $471.3 billion and $341.3 billion in 2001 and 2000, respectively.
Approximately 19% and 21% of those markets were insured in 2001 and 2000,
respectively. According to the Federal Reserve, total asset-backed commercial
paper outstanding at December 31, 2001 and 2000 was approximately $745.3 billion
and $641.8 billion, respectively.
Ambac Assurance insured gross par of $33.0 billion, $30.7 billion and $33.5
billion in 2001, 2000 and 1999, respectively, in the U.S. Structured Finance and
Asset-backed market.
Premiums for structured finance and asset-backed policies are typically
based on a percentage of principal insured. Generally, the timing of the
collection of structured finance and asset-backed premiums are collected in a
single payment at policy inception date, and others being collected periodically
(e.g., monthly, quarterly or annually) from the cash flow generated by the
underlying assets.
As of December 31, 2001 and 2000, net outstanding par exposure related to
U.S. structured finance and asset-backed transactions was $72.6 billion and
$64.7 billion, respectively. See "Financial Guarantees in Force - Types of
Bonds" below, for a breakout of net outstanding par exposure by bond type.
International Finance Market
Outside of the United States, structured and asset-backed issuers,
utilities, sovereign and sub-sovereign issuers, and other issuers are
increasingly using financial guarantee products, particularly in markets
throughout Western Europe. A number of important trends in international finance
markets have contributed to this expansion. In the United Kingdom, Australia and
elsewhere, ongoing privatization efforts have shifted certain risks associated
with the development or impairment of infrastructure projects from the
government to market participants, thus prompting investors in such projects to
seek the security of financial guarantee products. In Europe, Australia, Japan
and the Emerging Markets, there is growing interest in asset-backed
securitization.
While the principles of securitization have been increasingly applied in
overseas markets, development in particular countries has varied due to the
sophistication of the local capital markets and the impact of legal and
financial regulatory requirements and accounting standards. It is anticipated
that securitization will continue to expand internationally, albeit at varying
rates in each country. Ambac Assurance insures a wide array of obligations in
the international finance markets including infrastructure finance, asset-backed
and structured finance transactions, utilities, and other obligations in
selected international finance markets.
Ambac Assurance's strategy in the international finance markets is to
strengthen its franchise in developed markets by focusing on high quality
infrastructure, structured finance, securitization, and utility finance
transactions, and in emerging markets by focusing on top tier
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<PAGE>
future flow transactions (structured transactions secured by cash flows
generated from exports or payment remittances) and collateralized debt
obligations.
Since 1997, Ambac Assurance UK Limited, which is authorized to conduct
certain classes of general financial guarantee business in the United Kingdom,
has been Ambac Assurance's primary vehicle for directly issuing financial
guarantee policies in the United Kingdom and Europe. Ambac UK has entered into
net worth maintenance and reinsurance agreements with Ambac Assurance, which
support its triple-A ratings.
During 2000, Ambac Assurance entered into an alliance agreement in Japan
with Yasuda Fire and Marine and now occupies joint offices in Japan with Yasuda
Kasai Financial Guarantee Insurance Company, Limited ("YKFG"), a Yasuda Fire and
Marine subsidiary and the first triple-A rated monoline financial guarantor in
Japan. Together, Ambac Assurance and YKFG will seek to significantly increase
the market for financial guarantees in Japan.
From 1995 to March 2000, Ambac Assurance and MBIA Insurance Corporation
("MBIA") marketed financial guarantees outside of the United States via an
unincorporated joint venture, MBIA.AMBAC International (the "Joint Venture").
The companies now market and originate financial guarantees independently.
While there is evidence that the volume of international structured finance
transactions has increased significantly in the recent past, unlike the public
finance and domestic asset-backed markets, there are few statistics that
effectively track volume in the global markets. There are several reasons for
this, including the varied nature of the deals coming to market, the early
stages of development of certain asset classes and the fact that many
international deals are privately placed.
Ambac Assurance guaranteed gross par of $21.2 billion, $24.9 billion and
$11.2 billion in 2001, 2000 and 1999, respectively, in the international finance
market. Premiums for international finance policies are based on a percentage of
either principal or principal and interest insured. The timing of the collection
of international finance premiums varies among individual transactions; some
being collected in a single payment at policy inception date, and others being
collected periodically (i.e., monthly, quarterly or annually).
As of December 31, 2001 and 2000, net outstanding par exposure related to
international finance transactions was $48.8 billion and $31.3 billion,
respectively. See "Financial Guarantees in Force - Types of Bonds" below, for a
breakout of net outstanding par exposure by bond type.
Underwriting and Surveillance
Underwriting guidelines, policies and procedures have been developed by
Ambac Assurance's management with the intent that Ambac Assurance guarantee only
those obligations which, in the opinion of Ambac Assurance analysts, are of
investment grade quality with a remote risk of loss. However, losses may occur
from time to time and it is Ambac Assurance's policy to provide for loss
reserves that are adequate to cover potential losses. See "Losses and Reserves"
below.
The underwriting process involves review of structural, legal, political
and credit issues, including compliance with current Ambac Assurance
underwriting standards. These standards are reviewed periodically by management.
Additionally, the underwriting process often entails extensive on-site due
diligence covering the issuer and other parties to an insured transaction.
7
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The decision to guarantee an issue is based upon such factors as the
issuer's ability to repay the bonds, the bond's security features and the bond's
structure, rather than upon an actuarial or statistical prediction of the
likelihood that the issuer will default on the underlying debt obligation.
Members of Ambac Assurance's underwriting staff review all requests for
guarantees. The underwriting process is designed to screen issues and begins
with a credit analysis by the primary analyst assigned to the issue. The credit
is then reviewed within the primary analyst's underwriting group. At a minimum,
the primary analyst's recommendation to qualify or reject an issue must be
approved by a concurring analyst and an underwriting officer. The number of
additional approvals required for a particular credit depends on Ambac
Assurance's aggregate exposure to the credit. In some cases, the complexity of
the credit or whether it is a new asset type are determining factors in the
approval/review process. For large, complex or new types of credits, the
underwriting decision must be approved by a credit committee comprised of senior
underwriting officers and an attorney, in addition to the analysts and
underwriting officer mentioned above.
Ambac Assurance assigns internal ratings to individual exposures as part of
the underwriting process and at surveillance reviews. These internal ratings,
which represent Ambac Assurance's independent judgments, are based upon
underlying credit parameters similar to those used by rating agencies.
Public Finance Underwriting:
---------------------------
In addition to general underwriting standards, each asset class, and bond
type within asset class, has more specific underwriting criteria. For example,
the critical risk factors for public finance credits will include the credit
quality of the issuer, type of issue, the repayment source, the type of security
pledged, the presence of restrictive covenants, and the bond's maturity. Each
bond issue is evaluated in accordance with, and the final premium rate is a
function of, the particular factors as they relate to such issue.
Underwriting criteria that have been developed for each bond type reflect
the differences in, for example, economic and social factors, debt management,
project essentiality, financial management, legal and administrative factors,
revenue sources and security features.
Structured Finance Underwriting:
-------------------------------
Structured finance and asset-backed obligations generally entail two forms
of risks: asset risk, which relates to the amount and quality of asset coverage;
and structural risk, which relates to the extent to which the transaction
structure protects the interests of the investors, and therefore the guarantor.
In general, the amount and quality of asset coverage required is determined
by the historical performance of the assets. The future performance or value of
the underlying pool of assets will generally determine whether the amount of
over-collateralization or other credit enhancement ultimately is sufficient to
protect investors, and therefore the guarantor, against adverse asset
performance. The ability of the servicer or manager to properly service and/or
manage the underlying assets often is a factor in determining future asset
performance.
Structured and asset-backed securities are usually designed to protect the
investors, and therefore the guarantor, from the bankruptcy or insolvency of the
entity that originated the underlying assets as well as from the bankruptcy or
insolvency of the servicer of those assets. The servicer of the assets is
typically responsible for collecting cash payments on the underlying assets and
forwarding such payments, net of servicing fees, to the special purpose
8
<PAGE>
issuing entity. Related issues that often arise concern whether the sale of the
assets by the originator to the issuer of the asset-backed obligations would be
respected in the event of the bankruptcy or insolvency of the originator and
whether the servicer of the assets may be permitted or required to delay the
remittance to investors of any cash collections held by it or received by it
after the time it becomes subject to bankruptcy or insolvency proceedings. In
addition, servicer risk is often present in these transactions. Generally,
servicer risk is the risk that poor performance at the servicer level
contributes to a decline in the collections of borrower payments in the
transaction. Ambac Assurance addresses these risks through its credit
underwriting guidelines, standards and procedures.
Within the mortgage-backed and home equity loan market, Ambac Assurance
seeks to work with higher quality, well-capitalized issuers. The issuers
typically originate or purchase first lien mortgages, home equity loans or home
equity lines of credit, which are in turn sold by the issuers in the form of
asset-backed securities. In considering whether to guarantee these securities,
Ambac Assurance analyzes the quality of the underlying assets, the structure of
the securitization, the experience and financial strength of the servicer of the
underlying assets and the credit quality of the issuer.
International Finance Underwriting:
----------------------------------
In the international markets, Ambac Assurance seeks to guarantee
transactions of the same high credit standards it applies in its U.S. business.
However, an understanding of the unique risks related to the particular country
and region that could impact the credit of the issuer is necessary. These risks
include legal and political environments, capital market dynamics, exposures to
foreign exchange, and the degree of governmental support. Ambac Assurance
monitors these risks carefully and addresses them through its credit
underwriting guidelines, country limits, standards and procedures.
Geographically, the markets receiving Ambac Assurance's primary
international focus have been the United Kingdom, Australia, Japan, France,
Germany and certain parts of Latin America. In addition, Ambac has guaranteed
transactions in which the geographic risk is spread over multiple countries. The
types of international obligations guaranteed have primarily been pooled
corporate obligations, asset-backed securities, sovereign and sub-sovereign
obligations, special revenue and infrastructure obligations. Management believes
that risk associated with its international book of business is similar in risk
type to its domestic structured finance book of business and, in fact,
international transactions may include components of domestic exposure.
Pricing:
-------
Ambac Assurance determines premium rates on the basis of the bond type and
its perception of the risk it is assuming based on the credit strength of the
bond issue. Factors considered in pricing include term to maturity, structure of
the issue, and credit and market factors including security features and other
credit enhancement features. Additionally, the interest rate spread between
insured and uninsured obligations with characteristics similar to those of the
proposed bond issue is considered in the pricing process as well as the cost and
the projected return to Ambac Assurance. The premium rate for a new issue also
takes into account the benefits to be obtained by the issuer.
Surveillance and Remediation:
----------------------------
Surveillance groups and other credit professionals review the financial
guarantee portfolio for concentration of risk by (i) specific bond types; (ii)
geographic location; and (iii) size of issue. Surveillance analysts schedule and
execute regular and ad hoc reviews of credits in the book of business.
Risk-adjusted surveillance strategies have been developed for each bond type.
Review periods and scope of review vary by bond type based upon the risk
inherent in the nature of the credits. The focus of the surveillance review is
to determine credit trends and recommend
9
<PAGE>
appropriate classification and review periods. The separate underwriting groups
are also responsible for portfolio surveillance which entails a broader
examination of trends in specific asset classes and bond types.
Surveillance of the credit quality of underlying reference obligations in
the Ambac Financial Group's structured credit derivatives portfolio is performed
on a regular basis. Credit spreads, which act as a measure of the market's
perception of an issuer's credit quality, are monitored to identify potential
problems. In addition, published credit ratings and current news reports are
monitored regularly.
Those issues that are either in default or have developed problems that
eventually may lead to a claim or loss are tracked closely by the appropriate
surveillance team. Internal and/or outside counsel reviews the documents
underlying any problem credit and an analysis is prepared outlining Ambac
Assurance's rights and potential remedies, the duties of all parties involved
and recommendations for corrective actions. This analysis, along with the
schedule of corrective actions, is reviewed in the regular remedial credit
meetings. Ambac Assurance also meets with issuers to reach agreement upon the
nature and the scope of the problem and to discuss the issuers' operating plans.
In many instances, Ambac Assurance, under the terms of the documents
governing the underlying obligation, has the ability, among other things, to
direct that audits be performed with respect to servicer and trustee contractual
responsibilities. Ambac Assurance would meet with the appropriate officials to
outline Ambac Assurance's concerns and rights. When the underlying economics so
indicate, Ambac Assurance may aid in a restructuring to improve the debt service
coverage.
The rating agencies also monitor the credits underlying Ambac Assurance's
financial guarantee in force and, in most cases, advise Ambac Assurance of the
credit rating each issue would receive if it were not insured.
Portfolio Risk Management Committee:
-----------------------------------
Ambac Financial Group has a Portfolio Risk Management Committee ("PRMC")
which has established various procedures and controls to monitor and manage
credit risk. The Portfolio Risk Management Committee is comprised of senior
credit professionals and senior management of Ambac Financial Group. Its purview
is enterprise-wide and its focus is on risk limits and measurement,
concentration and correlation of risk, and the attribution of economic and
regulatory capital in a portfolio context. This committee works closely with the
senior credit committees of each underwriting group to assure that credit
criteria are maintained, are appropriate and are systematically and consistently
applied.
Financial Guarantees in Force
Ambac Assurance underwrites and prices financial guarantees on the
assumption that the guarantee will remain in force until maturity of the
underlying bonds. Ambac Assurance estimates that the average life of its
guarantees on par in force at December 31, 2001 was 11 years. The 11 year
average life is determined by applying a weighted average calculation, using the
remaining years to maturity of each guaranteed bond, and weighting them on the
basis of the remaining par guaranteed. No assumptions are made for prepayments
or future refundings of guaranteed issues.
10
<PAGE>
Ambac Assurance seeks to maintain a diversified financial guarantee
portfolio designed to spread its risk based on a variety of criteria, including
issue size, type of bond, geographic area and issuer.
As of December 31, 2001, the total net par amount of guaranteed bonds
outstanding was $318.0 billion.
Types of Bonds
The table below shows the distribution by bond type of Ambac Assurance's
guaranteed portfolio as of December 31, 2001.
Guaranteed Portfolio by Bond Type
as of December 31, 2001
<TABLE>
<CAPTION>
% of Total Net
Net Par Amount Par Amount
Bond Type Outstanding Outstanding
- ---------------------------------------------------------------------- -------------------- -----------------
<S> <C> <C>
($ In Millions)
U.S. Public Finance:
Lease and tax-backed revenue .................................. $ 52,102 16%
General obligation ............................................ 39,664 13
Utility revenue ............................................... 29,513 9
Health care revenue ........................................... 19,003 6
Transportation revenue ........................................ 13,000 4
Higher education .............................................. 11,854 4
Investor-owned utilities ...................................... 11,642 4
Housing revenue ............................................... 7,476 2
Student loans ................................................. 7,249 2
Other ......................................................... 5,103 2
-------------------- -----------------
Total U.S. Public Finance ................................. 196,606 62
-------------------- -----------------
U.S. Structured Finance:
Mortgage-backed and home equity ............................... 42,723 14
Asset-backed and conduits ..................................... 23,302 7
Other ......................................................... 6,612 2
-------------------- -----------------
Total Structured Finance .................................. 72,637 23
-------------------- -----------------
Total Domestic. ........................................... 269,243 85
-------------------- -----------------
International Finance:
Structured credit derivatives ................................. 26,123 8
Asset-backed and conduits ..................................... 11,721 4
Utilities ..................................................... 2,878 1
Mortgage-backed and home equity ............................... 2,602 1
Sovereign/sub-sovereign ....................................... 1,299 -
Other ......................................................... 4,177 1
-------------------- -----------------
Total International Finance ............................... 48,800 15
-------------------- -----------------
Grand Total ........................................... $ 318,043 100%
==================== =================
</TABLE>
International Finance transactions includes components of domestic
exposure.
11
<PAGE>
The table below shows the percentage, by bond type, of new business
guaranteed by Ambac Assurance during each of the last five years.
New Business Guaranteed by Bond Type/(1)/
<TABLE>
<CAPTION>
Bond Type 2001 2000 1999 1998 1997
- -------------------------------------------- -------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
U.S. Public Finance:
Lease and tax-backed revenue ......... 13% 12% 9% 15% 17%
Utilities/(2)/ ....................... 7 5 9 12 12
General obligation ................... 6 5 9 10 18
Transportation revenue ............... 4 2 4 2 2
Higher education ..................... 3 1 3 2 3
Health care revenue .................. 3 0 4 8 8
Student loans ........................ 1 2 2 1 1
Housing revenue ...................... 1 1 1 2 3
Other ................................ 1 1 1 1 1
-------------- ------------- -------------- -------------- -------------
Total U.S. Public Finance .......... 39 29 42 53 65
-------------- ------------- -------------- -------------- -------------
U.S. Structured Finance:
Mortgage-backed and home
equity ........................... 21 21 30 22 18
Asset-backed and conduits ........... 13 16 16 15 9
Other ............................... 3 5 2 2 3
-------------- ------------- -------------- -------------- -------------
Total U.S. Structured Finance ...... 37 42 48 39 30
-------------- ------------- -------------- -------------- -------------
Total Domestic ................. 76 71 90 92 95
-------------- ------------- -------------- -------------- -------------
International Finance:
Structured credit derivatives ....... 14 20 4 0 0
Asset-backed and conduits ........... 5 6 4 4 1
Utilities ........................... 2 1 0 1 1
Mortgage-backed and home
equity ........................... 2 1 1 0 1
Sovereign/sub-sovereign ............. 0 0 0 0 1
Other ............................... 1 1 1 3 1
-------------- ------------- -------------- -------------- -------------
Total International Finance ....... 24 29 10 8 5
-------------- ------------- -------------- -------------- -------------
Grand Total ........................ 100% 100% 100% 100% 100%
============== ============= ============== ============== =============
</TABLE>
(1) Stated as a percentage of total net par amounts guaranteed during such year.
(2) Includes investor-owned utilities.
Issue Size
Ambac Assurance seeks a broad coverage of the market by guaranteeing small
and large issues alike. Ambac Assurance's financial guarantee exposure as of
December 31, 2001 reflects the historical emphasis on issues guaranteed with an
original par amount of less than $25 million in the public finance market.
However, U.S. structured finance and international finance transactions have an
emphasis on larger deals. The following table sets forth the distribution of
Ambac Assurance's guaranteed portfolio as of December 31, 2001, with respect to
the original size of each guaranteed issue:
12
<PAGE>
Original Par Amount Per Issue
as of December 31, 2001
<TABLE>
<CAPTION>
% of Total Net Par % of Total Net
Number of Number of Amount Par Amount
Original Par Amount Issues Issues Outstanding Outstanding
- ------------------------------------- ---------------- ---------------- --------------- ----------------
($ In Millions)
<S> <C> <C> <C> <C>
Less than $10 million ............... 8,569 59% $ 25,259 8%
$10-25 million ...................... 2,741 19 33,574 11
$25-50 million ...................... 1,313 9 36,172 11
Greater than $50 million ............ 1,825 13 223,038 70
---------------- ---------------- --------------- ----------------
14,448 100% $ 318,043 100%
================ ================ =============== ================
</TABLE>
Geographic Area
Ambac Assurance is licensed to write business in the U.S. and abroad. As of
December 31, 2001, the ten largest U.S. states, as measured by net par amount
outstanding, accounted for approximately 39% of Ambac Assurance's total net par
amount outstanding. The following table sets forth the geographic distribution
of Ambac Assurance's insured exposure as of December 31, 2001.
Guaranteed Portfolio by Geographic Area as of December 31, 2001
<TABLE>
<CAPTION>
Net Par % of Total Net
Amount Par Amount
Geographic Area Outstanding Outstanding
--------------------------------------------------------- ----------------- ----------------
($ In Millions)
<S> <C> <C>
Domestic:
California ............................................ $ 27,896 9%
New York .............................................. 18,095 5
Florida ............................................... 15,370 5
Pennsylvania .......................................... 14,949 5
Texas ................................................. 10,060 3
Illinois .............................................. 9,368 3
New Jersey ............................................ 8,694 3
Ohio .................................................. 7,131 2
Massachusetts ......................................... 6,931 2
Michigan .............................................. 6,103 2
Mortgage and asset-backed ............................. 66,025 21
Other states .......................................... 78,621 25
----------------- ----------------
Total Domestic ..................................... 269,243 85
----------------- ----------------
International:
United Kingdom ........................................ 6,531 2
Australia ............................................. 1,623 1
Japan ................................................. 1,167 1
France ................................................ 1,155 --
Germany ............................................... 948 --
Mexico ................................................ 654 --
Internationally diversified ........................... 32,621 10
Other international ................................... 4,101 1
----------------- ----------------
Total International ................................ 48,800 15
----------------- ----------------
Grand Total ........................................ $ 318,043 100%
================= ================
</TABLE>
Mortgage and asset-backed obligations include guarantees with multiple
locations of risk within the United States. Internationally diversified includes
pooled corporate obligations which includes components of domestic exposure.
13
<PAGE>
Single Risk
Ambac Assurance has adopted underwriting and exposure management
policies designed to limit the net guarantees in force for any one credit. In
addition, Ambac Assurance uses reinsurance to limit net exposure to any one
credit. As of December 31, 2001, Ambac Assurance's net par amount outstanding
for its 20 largest credits, totaling $13.4 billion, was approximately 4.2% of
Ambac Assurance's total net par amount outstanding with no one credit
representing more than 1% of Ambac Assurance's total net par amount outstanding.
Ambac Assurance is also subject to certain regulatory limits and rating agency
guidelines on exposure to a single credit. See "Insurance Regulatory Matters"
and "Rating Agencies," below.
Underlying Ratings
The following table sets forth Ambac Assurance's financial guarantee
portfolio by underlying rating prior to being guaranteed by Ambac Assurance, as
of December 31, 2001:
Insured Portfolio by Underlying Rating /(1)/
as of December 31, 2001
<TABLE>
<CAPTION>
Net Par % of Total Net
Amount Par Amount
Rating Outstanding Outstanding
--------------------------------------------------------- ----------------- ----------------
($ In millions)
<S> <C> <C>
AAA ................................................... $ 22,122 7%
AA .................................................... 67,059 21
A ..................................................... 146,827 46
BBB ................................................... 79,560 25
BIG /(2)/ ............................................. 2,475 *1
-------- --------
$318,043 100%
======== ========
</TABLE>
* Denotes less than
(1) Ratings represent Ambac Assurance internal ratings.
(2) Represents those bonds which have been categorized as "below investment
grade" by Ambac Assurance.
Losses and Reserves
Although there have been certain monetary defaults in bond issues of
substantial amounts, the incidence of monetary default on public finance and
structured finance bonds has historically been infrequent. The relatively low
incidence of bond defaults is the result of many factors, including the high
quality of issuers, the essentiality of funding, strong cash flow and legal
structures. Ambac Assurance's loss experience has been excellent historically,
due to its adherence to strict underwriting standards within these already high
quality markets. While this underwriting process has resulted in low loss rates
historically, an increased level of defaults in the future may be caused by
presently unforeseen economic and other factors.
Ambac Assurance's policy is to provide for loss and loss adjustment expense
reserves that are adequate to cover potential unidentified losses inherent in
the portfolio, as well as losses that may arise from guaranteed obligations
which are currently or imminently in monetary default. The active credit reserve
represents an estimate of unidentified losses from our guaranteed obligations.
As of December 31, 2001, Ambac Assurance's active credit reserve was $122.3
million. When a monetary default occurs or is imminent with respect to a
particular guaranteed obligation, a case basis reserve is established in an
amount that is sufficient to cover the present value of the anticipated
defaulted debt service payments over the expected period of default and the
estimated expenses associated with settling the claims, less estimated
recoveries under salvage or subrogation rights. In estimating the losses on
monetary defaults,
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<PAGE>
Ambac Assurance makes its assessment based on the full term of the guaranteed
obligation. All or part of the case basis reserve may be allocated from the
available active credit reserve. Ambac Assurance's net case basis reserves
totaled $27.8 million at December 31, 2001.
The most recent three-year history of Ambac Assurance's loss reserves,
and losses and loss adjustment expenses incurred and paid, is detailed in the
table below:
Reserve for Losses and Loss Adjustment Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
2001 2000 1999
------------- ------------ -------------
<S> <C> <C> <C>
($ In Thousands)
Reserve for losses and loss adjustment expenses at January 1, ............... $132,445 $121,475 $115,794
Less: reinsurance recoverable ............................................... 1,091 500 3,638
------------- ------------ -------------
Net reserve for losses and loss adjustment expenses at January 1, ........... 131,354 120,975 112,156
Losses and loss adjustment expenses incurred ................................ 20,000 15,000 11,000
Losses and loss adjustment expenses paid (net of salvage received)........... (1,261) (4,621) (2,181)
------------- ------------ -------------
Net reserve for losses and loss adjustment expenses at December 31, ......... 150,093 131,354 120,975
Plus: reinsurance recoverable................................................ 2,259 1,091 500
------------- ------------ -------------
Reserve for losses and loss adjustment expenses at December 31, ............. $152,352 $132,445 $121,475
============= ============ =============
</TABLE>
Management of Ambac Assurance believes that the reserves for losses and
loss adjustment expenses are adequate to cover the ultimate net costs of claims,
but the reserves are necessarily based on estimates and there can be no
assurance that the ultimate liability will not exceed such estimates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2 and Note 6 of Notes to Consolidated Financial Statements
in Ambac Financial Group's 2001 Annual Report to Stockholders.
Competition
The financial guarantee business is highly competitive. Ambac
Assurance's principal competitors in the market for financial guarantees are
three other triple-A rated monoline insurance companies, Financial Guaranty
Insurance Company, Financial Security Assurance Inc. and MBIA. In addition,
banks, smaller and lower rated financial guarantee insurance companies,
multiline insurers and reinsurers represent additional participants in the
broader market. The principal competitive factors are: (i) premium rates; (ii)
conditions precedent to the issuance of a policy related to the structure and
security features of a proposed bond issue; (iii) the financial strength of the
guarantor; and (iv) the quality of service provided to issuers, investors and
other clients of the issuer. With respect to each of these competitive factors,
Ambac Assurance believes it is on at least equal footing with each of its
principal competitors.
Financial guarantee insurance also competes domestically and
internationally with other forms of credit enhancement, including letters of
credit and guarantees (for example, mortgage guarantees where pools of mortgages
secure debt service payments) provided by banks and other financial
institutions, some of which are governmental agencies. Letters of credit are
most often issued for periods of less than 10 years, although there is no legal
restriction on the issuance of letters of credit having longer terms. Thus,
financial institutions and banks issuing letters of credit compete directly with
Ambac Assurance to guarantee short-term notes and bonds with a maturity of less
than 10 years.
In order to enter the financial guarantee market certain requirements
must be met, most restrictive of which is that a significant minimum amount of
capital is required of a financial guarantor in order to obtain financial
strength ratings by the rating agencies. In addition, under
15
<PAGE>
the New York law, a monoline financial guarantor must have at least $75 million
of paid-in capital and surplus and maintain thereafter at least $65 million of
policyholders' surplus. A similar law in California imposes a $100 million
minimum capital and surplus requirement, with a maintenance requirement
thereafter of $75 million.
Reinsurance
State insurance laws and regulations (as well as the rating agencies)
impose minimum capital requirements and single risk limits on financial
guarantee insurance companies, limiting the aggregate amount of insurance which
may be written and the maximum size of any single risk exposure which may be
assumed. Such companies can use reinsurance to diversify risk, increase
underwriting capacity, reduce additional capital needs, stabilize shareholder
returns and strengthen financial ratios. See "Insurance Regulatory Matters,"
below.
Ambac Assurance has facultative and treaty reinsurance agreements with
certain high quality reinsurers that allow Ambac Assurance to reduce its large
risks, to manage its portfolio of insurance by bond type and geographic
distribution, and to provide additional capacity for frequent bond issuers. In
April 2001, Ambac Assurance entered into a new surplus share treaty in order to
secure reinsurance on large domestic and international transactions.
Additionally, Ambac Assurance utilizes facultative reinsurance when needed. A
ceding commission is withheld by Ambac Assurance to defray its underwriting
expenses.
As of December 31, 2001, Ambac Assurance had retained approximately 88%
of its gross financial guarantees in force of $542.5 billion and had ceded
approximately 12% to its reinsurers. The largest reinsurer accounts for 3% of
gross financial guarantees in force. See Note 12 of Notes to Consolidated
Financial Statements in Ambac Financial Group's 2001 Annual Report to
Stockholders.
As a primary financial guarantor, Ambac Assurance is required to honor
its obligations to its policyholders whether or not its reinsurers perform their
obligations under the various reinsurance agreements with Ambac Assurance. To
minimize its exposure to significant losses from reinsurer insolvencies, Ambac
Assurance evaluates the financial condition of its reinsurers, prepares annual
written reviews of such reinsurers and monitors for concentrations of credit
risk. Ambac Assurance's current primary reinsurers are Ace Guaranty Re, American
Re, AXA Re Finance, Enhance Reinsurance Company, Yasuda Kasai Financial
Guarantee, Ram Reinsurance Limited and MBIA.
Rating Agencies
Moody's, S&P, Fitch and Ratings & Investment periodically review the
business and financial condition of Ambac Assurance and other companies
providing financial guarantees. These rating agencies' reviews focus on the
guarantor's underwriting policies and procedures and the quality of the
obligations guaranteed. The rating agencies have access to all insured
obligations and frequently perform assessments of the credits guaranteed by
Ambac Assurance to confirm that Ambac Assurance continues to meet the capital
allocation criteria considered necessary by the particular rating agency to
maintain Ambac Assurance's triple-A ratings. A rating by Moody's, S&P, Fitch or
Ratings & Investment, however, is not a "market rating" or a recommendation to
buy, hold or sell any security. Ambac Assurance's ability to attract new
business or to compete with other triple-A rated financial guarantors, and its
results of operations and financial condition, would be materially adversely
affected by any reduction in its ratings.
16
<PAGE>
Insurance Regulatory Matters
General Law
Ambac Assurance is licensed to do business as an insurance company in
all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the
territory of Guam. Ambac U.K., Ambac Assurance's wholly owned subsidiary, is
licensed to transact insurance in the United Kingdom and to offer insurance
services into twelve other European countries. Ambac Assurance is subject to the
insurance laws and regulations of the State of Wisconsin (the "Wisconsin
Insurance Laws"), its state of incorporation, and the insurance laws and
regulations of other states in which it is licensed to transact business. Ambac
U.K. is subject to the insurance laws and regulations of the United Kingdom.
These laws and regulations, as well as the level of supervisory authority that
may be exercised by the various state insurance departments, vary by
jurisdiction. They generally require financial guarantors to maintain minimum
standards of business conduct and solvency, meet certain financial tests, file
certain reports with regulatory authorities, including information concerning
their capital structure, ownership and financial condition. They generally
require prior approval of certain changes in control of domestic financial
guarantors and their direct and indirect parents and the payment of certain
dividends and distributions. In addition, these laws and regulations require
approval of certain inter-corporate transfers of assets and certain transactions
between financial guarantors and their direct and indirect parents and
affiliates. They generally require that all such transactions have terms no less
favorable than terms that would result from transactions between parties
negotiating at arm's length. Ambac Assurance is required to file quarterly and
annual statutory financial statements in each jurisdiction in which it is
licensed. It is subject to single and aggregate risk limits and other statutory
restrictions concerning the types and quality of investments and the filing and
use of policy forms and premium rates. Additionally, Ambac Assurance's accounts
and operations are subject to periodic examination by the Office of the
Commissioner of Insurance of the State of Wisconsin (the "Wisconsin
Commissioner") and other state insurance regulatory authorities. See Note 9 of
Notes to Consolidated Financial Statements in Ambac Financial Group's 2001
Annual Report to Stockholders.
Ambac Financial Group believes that Ambac Assurance is in material
compliance with all applicable insurance laws and regulations.
Insurance Holding Company Laws
Under the Wisconsin insurance holding company laws, any acquisition of
control of Ambac Financial Group and thereby indirect control of Ambac Assurance
requires the prior approval of the Wisconsin Commissioner. "Control" is defined
as the direct or indirect power to direct or cause the direction of the
management and policies of a person. Any purchaser of 10% or more of the
outstanding voting stock of a corporation is presumed to have acquired control
of that corporation and its subsidiaries unless the Wisconsin Commissioner, upon
application, determines otherwise. For purposes of this test, Ambac Financial
Group believes that a holder of common stock having the right to cast 10% of the
votes which may be cast by the holders of all shares of common stock of Ambac
Financial Group would be deemed to have control of Ambac Assurance within the
meaning of the Wisconsin Insurance Laws.
Pursuant to these laws, JP Morgan Chase obtained approval from the
Wisconsin Insurance Commissioner to acquire greater than 10% of Ambac Financial
Group's outstanding stock. As of December 31, 2001 their percentage of ownership
was approximately 14.7%. In
17
<PAGE>
their request for approval from the Wisconsin Commissioner, JP Morgan Chase
disclaimed any present intention to exercise control over Ambac Financial Group
or Ambac Assurance or to control or attempt to control the management or
operations of Ambac Financial Group or Ambac Assurance.
The Wisconsin insurance holding company laws also require prior
approval by the Wisconsin Commissioner of certain transactions between Ambac
Assurance and companies affiliated with Ambac Assurance.
Wisconsin Dividend Restrictions
Pursuant to the Wisconsin Insurance Laws, Ambac Assurance may declare
dividends, subject to any restriction in its articles of incorporation, provided
that, after giving effect to the distribution, it would not violate certain
statutory equity, solvency, income and asset tests. Distributions to the
shareholder (other than stock dividends) must be reported to the Wisconsin
Commissioner. Extraordinary dividends must be reported prior to payment and are
subject to disapproval by the Wisconsin Commissioner. An extraordinary dividend
is defined as a dividend or distribution, the fair market value of which,
together with all dividends from the preceding 12 months, exceeds the lesser of:
(a) 10% of policyholders' surplus as of the preceding December 31; or (b) the
greater of: (i) statutory net income for the calendar year preceding the date of
the dividend or distribution, minus realized capital gains for that calendar
year; or (ii) the aggregate of statutory net income for the three calendar years
preceding the date of the dividend or distribution, minus realized capital gains
for those calendar years and minus dividends paid or credited and distributions
made within the first two of the preceding three calendar years.
During 2001, 2000 and 1999, Ambac Assurance paid to Ambac Financial
Group, Inc. cash dividends on its common stock totaling $68.0 million, $59.8
million and $52.0 million, respectively. See Note 9 of Notes to Consolidated
Financial Statements in Ambac Financial Group's 2001 Annual Report to
Stockholders.
Statutory Contingency Reserve
Ambac Assurance is required to establish a mandatory contingency
reserve in accordance with the National Association of Insurance Commissioners
("NAIC") Accounting Practices and Procedures manual ("NAIC SAP"). Under NAIC
SAP, financial guarantors are required to establish a contingency reserve equal
to the greater of 50% of premiums written, or a stated percentage of the
principal guaranteed depending on the category of obligation insured.
Contributions are required to be made in equal quarterly installments over a
period of 20 years for municipal bonds and 15 years for all other obligations.
Contributions may be discontinued if the total reserve established for all
categories exceeds the sum of the stated percentages contained therein
multiplied by the unpaid principal balance. This reserve must be maintained for
the periods specified above, except that the guarantor may be permitted to
release reserves under specified circumstances in the event that actual loss
experience exceeds certain thresholds or if the reserve accumulated is deemed
excessive in relation to the guarantor's outstanding guaranteed obligations,
with notice to or approval by the insurance commissioner.
New York Financial Guarantee Insurance Law
New York's comprehensive financial guarantee insurance law governs the
conduct of business of all financial guarantors licensed to do business in New
York, including Ambac
18
<PAGE>
Assurance. Financial guarantors are also required to maintain case basis loss
and loss adjustment expense reserves and unearned premium reserves on bases
established by the regulations.
The New York financial guarantee insurance law establishes single risk
limits with respect to obligations insured by financial guaranty insurers. Such
limits are specific to the type of insured obligation (for example, municipal or
asset-backed). The limits generally compare the insured principal amount
outstanding and/or average annual debt service on the insured obligations, net
of reinsurance and collateral, for a single risk to the insurer's qualified
statutory capital, which is defined as the sum of the insurer's policyholders'
surplus and contingency reserves. As of December 31, 2001 and 2000, Ambac
Assurance and its subsidiaries were in compliance with these regulatory
requirements.
Aggregate risk limits are also established on the basis of aggregate
net liability and policyholders' surplus requirements. "Aggregate net liability"
is defined as outstanding principal and interest of guaranteed obligations, net
of reinsurance and collateral. Under these limits, policyholders' surplus and
contingency reserves must at least equal a percentage of aggregate net liability
that is equal to the sum of various percentages of aggregate net liability for
various categories of specified obligations. The percentage varies from 0.33%
for municipal bonds to 4.00% for certain non-investment grade obligations.
Financial Guarantee Insurance Regulation in Other States
The Wisconsin insurance laws and regulations governing municipal bond
guarantors are similar to those in New York. The Wisconsin regulations also
include certain single and aggregate risk limitations. The average annual debt
service for any single issue of municipal bonds may not exceed 10% of Ambac
Assurance's policyholders' surplus. In addition, Ambac Assurance's cumulative
net liability, defined as one-third of one percent of the guaranteed unpaid
principal and interest covered by current municipal bond insurance policies, may
not exceed its qualified statutory capital, which is defined as the sum of its
capital and surplus and contingency reserve.
California has financial guarantee insurance laws similar in structure
to those of New York. None of the risk limits established in California's
legislation with respect to business transacted by Ambac Assurance are more
stringent in any material respect than the corresponding provisions in the New
York financial guarantee insurance statute.
In addition to the laws and regulations of New York, Wisconsin and
California, Ambac Assurance is subject to laws and regulations of other states
concerning the transaction of financial guarantees, none of which is more
stringent in any material respect than the New York financial guarantee
insurance statute.
Financial Services
Ambac Financial Group's Financial Services segment provides financial
and investment products including investment agreements; interest rate and total
return swaps; funding conduits; investment advisory and cash management
services, principally to its financial guarantee clients which include
municipalities and their authorities, school districts, health care
organizations and asset-backed issuers.
19
<PAGE>
Financial services revenues are primarily derived from: (i) net
investment income; (ii) net swap revenues; (iii) fund management and advisory
revenues; and (iv) net realized gains and losses on sales of securities. Total
revenues were $49.2 million, $53.6 million and $48.5 million in 2001, 2000 and
1999, respectively. See "Management's Discussion and Analysis" and Note 17 of
Notes to Consolidated Financial Statements in Ambac Financial Group's 2001
Annual Report to Stockholders.
The principal competitive factors among providers of financial service
products that Ambac Financial Group offers are: (1) pricing of contracts; (2)
investment returns; (3) the financial strength of the financial guarantee
provider; (4) the ability to provide services tailored to customers' needs; and
(5) the quality of service provided to customers. With respect to each of these
competitive factors, Ambac Financial Group believes that it is on equal footing
with its principal competitors.
Investment Agreements
The principal purpose of Ambac Capital Funding is providing investment
agreements, including repurchase agreements, primarily to municipalities
and their authorities and structured finance entities. Investment
agreements are used by municipal bond issuers to invest bond proceeds until
such proceeds can be used for their intended purpose, such as financing
construction. Investment agreements used in structured financings provide a
guaranteed investment return customized to meet expected cash flow
requirements. The investment agreement provides for the guaranteed return
of principal invested, as well as the payment of interest thereon at a
guaranteed rate and is rated triple-A by virtue of Ambac Assurance's
financial guarantee policy, which guarantees its payment obligations.
Ambac Capital Funding manages its balance sheet to protect against a
number of risks inherent in its business including liquidity, market
(principally interest rate), credit, operational and legal risk. See
"Management's Discussion and Analysis -- Risk Management" in Ambac Financial
Group's 2001 Annual Report to Stockholders. Ambac Capital Funding is managed
with the goal of matching the payment schedule of the invested assets, including
hedges, to the payment schedule of the investment agreement liabilities in order
to minimize market and liquidity risk.
A source of liquidity risk is the ability of some counterparties to
withdraw moneys on dates other than those specified in the draw down schedule.
Liquidity risk is somewhat mitigated by provisions in certain of the investment
agreements that limit an issuer's ability to draw on the funds and by risk
management procedures that require the regular re-evaluation and re-projection
of draw down schedules. Investments are restricted to fixed income securities
with a credit quality such that the overall minimum average portfolio credit
quality is maintained at Aa/AA. Based upon management's projections, Ambac
Capital Funding maintains funds invested in cash and cash equivalents to meet
short-term liquidity needs.
The following table sets forth the net payments due under Ambac Capital
Funding's settled investment agreements in each of the next five years ending
December 31 and the period thereafter, based on expected call dates:
20
<PAGE>
Investment Agreements Obligations
($ In Thousands) Principal Amount /(1)/
-----------------------------------------------------------------------
2002 ........................................... $ 1,620,833
2003 ........................................... 1,181,083
2004 ........................................... 450,428
2005 ........................................... 93,552
2006 ........................................... 20,373
All later years ................................ 1,419,630
---------------------
$ 4,785,899
=====================
(1) As of December 31, 2001, the interest rates on these agreements
ranged from 2.0% to 8.1%.
Ambac Capital Funding may use interest rate swap contracts in the
normal course of business for hedging purposes as part of its overall cash flow
risk management. Some of its interest rate swap agreements have been entered
into with its affiliate, Ambac Financial Services. Interest rate swap contracts
are agreements where Ambac Capital Funding agrees with other parties to
exchange, at specified intervals, the difference between fixed-rate and
floating-rate interest amounts or the difference between different interest rate
indices calculated by reference to an agreed upon notional amount.
Derivative Products
Ambac Financial Services provides interest rate swaps and other
derivative products primarily to states, municipalities and their authorities,
asset-backed entities and other entities in connection with their financings.
Ambac Financial Services generally hedges its transactions with clients to
eliminate sensitivity to overall interest rates. On interest rate swaps for
municipals, Ambac Financial Services is subject to changes in the relationship
between tax-exempt and taxable interest rates, referred to as "basis risk." If
actual or projected tax-exempt interest rates change in relation to taxable
rates, Ambac Financial Services may experience a mark-to-market gain or loss.
Most municipal interest rate swaps transacted by Ambac Financial Services
contain provisions that are designed to protect Ambac Financial Group against
certain forms of tax reform, thus mitigating its basis risk. The interest rate
swaps provided by Ambac Financial Services are guaranteed by Ambac Assurance
through policies that guarantee the obligations of Ambac Financial Services and
its counterparties. Total return swaps are only used for fixed income
obligations, which meet Ambac Assurance's credit underwriting criteria.
Ambac Financial Services is a limited partnership. Ambac Assurance, the
sole limited partner, owns a limited partnership interest representing 90% of
the total partnership interests of Ambac Financial Services. Ambac Financial
Services Holdings, Inc., a wholly-owned subsidiary of Ambac Financial Group, the
sole general partner, owns a general partnership interest representing 10% of
the total partnership interest in Ambac Financial Services.
Ambac Financial Services manages a variety of risks inherent in its
business, including credit, market, liquidity, operational and legal. These
risks are identified, measured, and monitored through a variety of control
mechanisms, which are in place at different levels throughout the organization.
See "Management's Discussion and Analysis - Risk Management" in Ambac Financial
Group's 2001 Annual Report to Stockholders.
Investment Advisory and Cash Management
Cadre Financial Services is registered as an investment adviser with
the SEC. As a registered adviser, Cadre Financial Services is subject to
regulation in certain aspects of its
21
<PAGE>
business, particularly with respect to investment advisory services provided to
investment companies and clients. Cadre Financial Services provides investment
advisory and administrative services to money market funds that are primarily
offered to qualified participants, including school districts, health care
service providers and municipalities.
Cadre Securities' principal business is the distribution of money market
funds to the education, health care and municipal sectors, as well as the
brokering of short-term fixed income securities trades on behalf of its clients.
It also serves as placement agent and dealer for securities issued by its
affiliates in private placement transactions. Cadre Securities is registered as
a broker-dealer with the SEC and with certain states that require such
registration, and it is a member of the National Association of Securities
Dealers, Inc. As a registered broker-dealer, Cadre Securities is subject to the
net capital requirements of Rule 15c3-1 of the Securities Exchange Act of 1934,
as amended, which is designed to measure the general financial condition and
liquidity of a broker-dealer. In accordance with this rule, the ratio of
aggregate indebtedness to net capital ("net capital ratio") shall not exceed 15
to 1. At December 31, 2001, Cadre Securities had net capital of approximately
$0.7 million, which was $0.6 million in excess of its required net capital of
$100 thousand. The net capital ratio was 1.8 to 1.
At December 31, 2001, Cadre Financial Services and Cadre Securities
provided services to approximately 2,700 clients with approximately $7.5 billion
in assets.
Fees from the money market funds for which Cadre Financial Services and
Cadre Securities perform services are based on percentages of the average daily
net assets of such funds. Cadre Securities receives fees for brokering
short-term fixed income securities trades by marking up the price of the
securities purchased and sold on behalf of clients. These fees are recorded upon
execution of the trades since, at that time, substantially all of Cadre
Securities' obligations have been fulfilled.
Investments and Investment Policy
As of December 31, 2001, the consolidated investments of Ambac Financial
Group had an aggregate fair value of approximately $10.3 billion and an
aggregate amortized cost of approximately $10.2 billion. These investments are
managed internally by officers of Ambac Financial Group, who are experienced
investment managers. All investments are effected in accordance with the general
objectives and guidelines for investments established by each subsidiary's Board
of Directors. These guidelines encompass credit quality, risk concentration and
holding period, and are periodically reviewed and revised as appropriate.
Pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," Ambac
Financial Group has designated all investments as "available-for-sale" and
reports them at fair value. Unrealized gains and losses are excluded from
earnings and reported as a component of "Accumulated Other Comprehensive Income
(Loss)", in stockholders' equity, net of tax.
As of December 31, 2001, Ambac Assurance's investment portfolio had an
aggregate fair value of approximately $5.3 billion and an aggregate amortized
cost of approximately $5.1 billion. Ambac Assurance's investment policy is
designed to achieve diversification of its portfolio and only permits investment
in investment grade fixed income securities, consistent with its goal to achieve
the highest after-tax, long-term return. This policy takes into consideration
Ambac Assurance's desire for both current income and long-term capital growth.
Ambac Assurance is subject to limits on types and quality of investments imposed
by the insurance laws and regulations of the States of Wisconsin and New York.
In compliance with
22
<PAGE>
these laws, Ambac Assurance's Board of Directors approves each specific
investment transaction of Ambac Assurance. See "Insurance Regulatory Matters -
General Law," above.
As of December 31, 2001, the investment agreement business investment
portfolio had an aggregate fair value of approximately $5.0 billion and an
aggregate amortized cost of approximately $5.0 billion. Ambac Capital Funding's
investment policy is designed to achieve the highest after-tax return on equity,
subject to minimum average quality ratings. For further discussion, see
"Investment Agreements," above.
The following tables provide certain information concerning the
investments of Ambac Financial Group:
Investments by Rating /(1)/
as of December 31, 2001
% of Investment
Rating Portfolio
- --------------------------------------------------------------- ---------------
AAA /(2)/ ..................................................... 77%
AA ............................................................ 11
A ............................................................. 8
BBB ........................................................... 2
BIG ........................................................... *1
Not Rated ..................................................... 2
---------------
100%
===============
* Denotes less than
(1) Ratings represent S&P classifications. If unavailable, Moody's rating is
used.
(2) Includes U.S. Treasury and agency obligations, which comprised
approximately 33% of the total investment portfolio.
Summary of Investments
As of December 31
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------ ------------------------------ ---------------------------
Weighted Weighted Weighted
Average Average Average
Carrying Yield Carrying Yield Carrying Yield
Investment Category Value /(1)/ /(2)/ Value /(1)/ /(2)/ Value /(1)/ /(2)/
- ---------------------------------------------------- ------------- ----------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
($ In Thousands)
Long-term investments:
Taxable bonds ....................... $ 6,471,468 5.50% $ 4,945,457 6.62% $ 6,001,199 6.28%
Tax-exempt bonds .................... 3,399,217 5.47 3,119,044 5.77 2,737,272 5.78
----------- ------------ -----------
Total long-term investments ...... 9,870,685 5.49 8,064,501 6.29 8,738,471 6.13
Short-term investments /(3)/: 415,002 2.25 253,519 6.30 220,896 5.56
----------- ------------ -----------
Total ............................ $10,285,687 5.35% $ 8,318,020 6.30% $ 8,959,367 6.11%
=========== ============ ===========
</TABLE>
(1) Yields presented include assets held in the Investment Agreement Business
portfolio. Interest expense on related investment agreements was $235.4
million, $283.0 million and $299.5 million in 2001, 2000 and 1999,
respectively.
(2) Yields are stated on a pre-tax basis, based on average amortized cost.
(3) Includes taxable and tax-exempt investments.
23
<PAGE>
Investments by Security Type
As of December 31,
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
2001 2000 1999
-------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Investment Category Value Yield Value Yield Value Yield
/(1)/ /(2)/ /(1)/ /(2)/ /(1)/ /(2)/
- ----------------------------------------------------- ---------- ------------- ----------- ------------- -----------
($ In Thousands)
Municipal obligations /(4)/ ........... $ 3,684,798 5.56% $3,414,964 5.85% $2,962,939 5.80%
Corporate securities .................. 1,330,589 6.66 980,746 7.47 989,460 7.11
Foreign government obligations ........ 96,600 4.68 35,370 6.08 19,044 6.22
U.S. government obligations ........... 78,254 5.65 72,709 6.08 62,479 6.10
Mortgage and asset-backed securities
(includes U.S. government agency
obligations)/(3)/...................... 4,680,444 5.10 3,560,712 6.39 4,704,549 6.08
----------- ----------- ------------
Total long-term investments ....... 9,870,685 5.49 8,064,501 6.29 8,738,471 6.13
Short-term investments/(4)/............ 415,002 2.25 253,519 6.30 220,896 5.56
----------- ----------- ------------
Total ............................. $10,285,687 5.35% $8,318,020 6.30% $8,959,367 6.11%
=========== =========== ============
</TABLE>
(1) Yields presented include assets held in the Investment Agreement Business
portfolio. Interest expense on related investment agreements was $235.4
million, $283.0 million and $299.5 million in 2001, 2000 and 1999,
respectively.
(2) Yields are stated on a pre-tax basis, based on average amortized cost.
(3) The actual maturity dates of mortgage- and asset-backed securities are
uncertain because the underlying mortgages may be paid prior to the stated
maturity of such securities. This possibility of prepayment creates the risk
that Ambac Financial Group will be unable to replace such investments with
securities of comparable yield.
(4) Includes taxable and tax-exempt investments.
Distribution of Investments by Maturity
as of December 31, 2001
Amortized Estimated
Maturity Cost Fair Value
- --------------------------------------------- ------------- --------------
($ In Thousands)
Due in one year or less /(1)/................ $ 452,835 $ 453,292
Due after one year through five years........ 548,262 564,073
Due after five years through ten years ...... 749,742 763,697
Due after ten years ......................... 3,760,787 3,824,181
----------- -----------
5,511,626 5,605,243
Mortgage and asset-backed securities /(2)/... 4,652,165 4,680,444
----------- -----------
Total ....................................... $ 10,163,791 $ 10,285,687
=========== ===========
(1) Includes securities with a fair value of $38.3 million, which are
classified as long-term investments in the tables above but which mature
within one year.
(2) The actual maturity dates of mortgage and asset-backed securities are
uncertain because the underlying mortgages may be paid prior to the stated
maturity of such securities. This possibility of prepayment creates the
risk that Ambac Financial Group will be unable to replace such investments
with securities of comparable yield.
For further discussion, see Note 2 and 3 of Notes to Consolidated
Financial Statements in Ambac Financial Group's 2001 Annual Report to
Stockholders.
Employees
As of December 31, 2001, Ambac Financial Group and its
subsidiaries had 370 employees. None of the employees are covered by collective
bargaining agreements. Ambac Financial Group considers its employee relations to
be satisfactory.
24
<PAGE>
Item 2. Properties.
The principal executive offices of Ambac Financial Group are located at
One State Street Plaza, New York, New York 10004. The telephone number is (212)
668-0340.
Ambac Assurance, Ambac Capital Funding and Ambac Financial Services
maintains its principal executive offices at One State Street Plaza, New York,
New York 10004, which consists of approximately 121,000 square feet of office
space, under an agreement that expires on September 30, 2019.
Ambac UK maintains its principal offices at Hasilwood House, 60
Bishopsgate, London EC2N4BE, England, which consists of 7,100 square feet of
office space, under an agreement that expires in December 2006.
Cadre Financial Services and Cadre Securities maintains its principal
executive office at 905 Marconi Avenue, Ronkonkoma, New York 11779. Cadre
Financial Services owns the office building. It consists of approximately 15,000
square feet of office space and storage.
Item 3. Legal Proceedings.
There are no material lawsuits pending, or to the knowledge of Ambac
Financial Group threatened, to which Ambac Financial Group or any of its
majority-owned subsidiaries is a party.
Item 4. Submission of Matters to a Vote of Security-Holders.
There were no matters submitted to a vote of security holders during
the fourth quarter of 2001.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information relating to the principal market on which Ambac Financial
Group's Common Stock is tradable, the high and low sales prices per share for
each full quarterly period within the two most recent fiscal years, and the
frequency and amount of any cash dividends declared for the two most recent
fiscal years is set forth on the inside back cover of Ambac Financial Group's
2001 Annual Report to Stockholders and such information is incorporated herein
by reference. Information concerning restrictions on the payment of dividends is
set forth in Item 1 above under the caption "Insurance Regulatory Matters -
Wisconsin Dividend Restrictions." As of March 18, 2002, there were 79
stockholders of record of Ambac Financial Group's Common Stock, which is listed
on the New York Stock Exchange.
Item 6. Selected Financial Data.
Selected financial data for Ambac Financial Group and its subsidiaries
for each of the last five fiscal years is set forth under the captions "Five
Year Performance" and "Financial Highlights" on page 6 and page 7, respectively,
of Ambac Financial Group's 2001 Annual Report to Stockholders. Such information
is incorporated herein by reference and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto contained on pages 33
through 53 of such Annual Report.
25
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis of Financial Condition and Results
of Operations is set forth under the same caption on pages 21 through 31 of
Ambac Financial Group's 2001 Annual Report to Stockholders. Such information is
incorporated herein by reference and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto contained on pages 33
through 53 of such Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Quantitative and Qualitative Disclosures About Market Risk is set forth
under the caption Risk Management on pages 29 to 31 of Ambac Financial Group's
2001 Annual Report to Stockholders. Such information is incorporated herein by
reference and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto contained on pages 33 to 53 of such Annual
Report.
Item 8. Financial Statements and Supplementary Data.
The 2001 Consolidated Financial Statements, together with the Notes
thereto and the Independent Auditors' Report thereon, are set forth on pages 32
through 53 of Ambac Financial Group's 2001 Annual Report to Stockholders. Such
information is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of the Registrant.
This item is omitted because a definitive proxy statement which
involves the election of directors will be filed with the Securities and
Exchange Commission not later than 120 days after the close of the fiscal year
pursuant to Regulation 14A.
Item 11. Executive Compensation.
This item is omitted because a definitive proxy statement which
involves the election of directors will be filed with the Securities and
Exchange Commission not later than 120 days after the close of the fiscal year
pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This item is omitted because a definitive proxy statement which
involves the election of directors will be filed with the Securities and
Exchange Commission not later than 120 days after the close of the fiscal year
pursuant to Regulation 14A.
26
<PAGE>
Item 13. Certain Relationships and Related Transactions.
None.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as a part of this report:
1. Financial Statements
--------------------
The following consolidated financial statements included in the
2001 Annual Report to Stockholders are incorporated herein by
reference under Part II, Item 8:
<TABLE>
<CAPTION>
Page Number
In Annual Report
---------------------
<S> <C>
Independent Auditors' Report.......................................... 32
Consolidated Balance Sheets as of December 31,
2001 and 2000......................................................... 33
Consolidated Statements of Operations for each of
the years ended December 31, 2001, 2000 and 1999...................... 34
Consolidated Statements of Stockholders' Equity for each of
the years ended December 31, 2001, 2000 and 1999...................... 35
Consolidated Statements of Cash Flows for each of
the years ended December 31, 2001, 2000 and 1999...................... 36
Notes to Consolidated Financial Statements............................ 37-53
</TABLE>
2. Financial Statement Schedules
-----------------------------
The financial statement schedules filed herein, which are the
only schedules required to be filed, are as follows:
<TABLE>
<S> <C>
Independent Auditors' Report (Page S-1)
Schedule I -- Summary of Investments Other Than Investments (Page S-2)
in Related Parties
Schedule II -- Condensed Financial Information of Registrant (Pages S-3
(Parent Company Only) to S-7)
Schedule IV -- Reinsurance (Page S-8)
</TABLE>
27
<PAGE>
3. Exhibits
--------
The following items are annexed as exhibits:
Exhibit Number Description
-------------- -----------
3.01 Conformed Amended and Restated Certificate of
Incorporation of the Company filed with the Secretary
of State of the State of Delaware on July 11, 1997.
(Filed as Exhibit 4.05 to the Company's Quarterly
Report for the quarter ended September 30, 1997 and
incorporated herein by reference.)
3.02 Conformed Copy of the Certificate of Amendment to the
Amended and Restated Certificate of Incorporation of
the Company filed with the Secretary of State of the
State of Delaware on May 13, 1998. (Filed as Exhibit
4.04 to the Company's Quarterly Report for the quarter
ended June 30, 1998 and incorporated herein by
reference.)
3.03 By-laws of the Company, as amended through January 28,
1998. (Filed as Exhibit 3.02 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1997 and incorporated herein by reference.)
4.01 Definitive Engraved Stock Certificate representing
shares of Common Stock. (Filed as Exhibit 4.01 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by
reference.)
4.02 Indenture, dated as of August 1, 1991, between the
Company and The Chase Manhattan Bank (National
Association), Trustee. (Filed as Exhibit 4.01 to the
Company's Registration Statement on Form S-3 (Reg. No.
33-59290) and incorporated herein by reference.)
4.03 Indenture dated as of April 1, 1998, between the
Company and First Union National Bank, Trustee. (Filed
as Exhibit 5.2 to the Company's Current Report on Form
8-K dated April 1, 1998 and incorporated herein by
reference.)
4.04 Rights Agreement, dated as of January 31, 1996,
between Ambac Financial Group, Inc. and Citibank N.A.,
as Rights Agent, including all exhibits thereto.
(Filed as Exhibit 1 to the Company's Registration
Statement on Form 8-A dated February 27, 1996 and
incorporated herein by reference.)
4.05 Form of 9.38% Debenture due August 1, 2011. Filed as
Exhibit 4.02 to the Registration Statement on Form S-1
(Reg. No. 33-40385) and incorporated herein by
reference.)
4.06 Form of 7.50% Debenture due May 1, 2023. (Filed as
Exhibit 4.06 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 and
incorporated herein by reference.)
4.07 Form of 7.08% Debenture due March 31, 2098. (Filed as
Exhibit 5.3 to the Company's Current Report on Form
8-K dated April 1, 1998 and incorporated herein by
reference.)
4.08 Form of 7.00% Debenture due October 17, 2051. (Filed
as Exhibit 1 to the Company's Registration Statement
on Form 8-A dated October 26, 2001 and incorporated
herein by reference.)
28
<PAGE>
4.09 Indenture dated as of August 24, 2001 between Ambac
Financial Group and the Chase Manhattan Bank as
trustee. (Filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (Reg. No.
333-57206) and incorporated herein by reference.)
10.01* Second Amended and Restated Employment Agreement dated
as of December 2, 1997, between the Company and
Phillip B. Lassiter. (Filed as Exhibit 10.01 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by
reference.)
10.02* Ambac Financial Group, Inc. 1991 Stock Incentive Plan,
as amended as of December 2, 1997 Filed as Exhibit
10.02 (to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 and incorporated
herein by reference.)
10.03* Ambac Financial Group, Inc. 1997 Equity Plan, amended
as of December 12, 2000.
10.04* Ambac Financial Group, Inc. 1991 Non-Employee
Directors Stock Plan (Filed as Exhibit 10.09 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1992 and incorporated herein by
reference.)
10.05* Ambac Financial Group, Inc. 1997 Non-Employee
Directors Equity Plan. (as amended through December
12, 2000.)
10.06* Ambac Financial Group, Inc. 1997 Executive Incentive
Plan, amended as of January 1, 2000. (Filed as Exhibit
10.23 to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2000 and incorporated
herein by reference.)
10.07* Ambac Financial Group, Inc. Deferred Compensation Plan
for Outside Directors, effective as of December 1,
1993 and amended and restated as of October 26, 1999.
(Filed as Exhibit 10.26 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1999 and incorporated herein by reference.)
10.08* Ambac Financial Group, Inc. 1997 Equity Plan Senior
Officer Deferred Compensation Sub-Plan of the 1997
Equity Plan effective as of October 26, 1999 (Filed as
Exhibit 10.27 to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1999 and
incorporated herein by reference.)
10.09* Form of Amended and Restated Management Retention
Agreement dated as of December 2, 1997. (Filed as
Exhibit 10.08 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and
incorporated herein by reference.)
10.10* The Ambac Financial Group, Inc. Non-Qualified Savings
Incentive Plan (effective as of January 1, 1995).
(Filed as Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1995, and incorporated herein by reference.)
_______________________________
* Management contract or compensatory plan, contract or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
---------
29
<PAGE>
10.11* Amendment Number 1 to the Ambac Financial Group, Inc.
Non-Qualified Savings Incentive Plan effective as of
April 30, 1997. (Filed as Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by
reference.)
10.12* Ambac Financial Group, Inc. Excess Benefits Pension
Plan (Amended and Restated as of January 1, 1994) (As
amended through October 25, 1995). (Filed as Exhibit
10.17 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1995, and
incorporated herein by reference.)
10.13* Amendment Number 1 to the Ambac Financial Group, Inc.
Excess Benefits Pension Plan effective as of April 30,
1997. (Filed as Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1997 and incorporated herein by reference.)
10.14* Supplemental Pension Agreement between the Company and
Philip B. Lassiter dated April 30, 1997. (Filed as
Exhibit 10.24 in the Company's Quarterly Report Form
10-Q for the quarter ended June 30, 1997, and
incorporated herein by reference.)
10.15* Supplemental Pension Agreement between the Company and
David L. Boyle dated April 30, 1997. (Filed as Exhibit
10.25 in the Company's Quarterly Report Form 10-Q for
the quarter ended June 30, 1997, and incorporated
herein by reference.)
10.16* Ambac Financial Group, Inc. Supplemental Pension Plan
(Amended and Restated as of January 1, 1995) (As
amended through October 25, 1995). (Filed as Exhibit
10.18 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1995, and
incorporated herein by reference.)
10.17* Amendment Number 1 to the Ambac Financial Group, Inc.
Supplemental Pension Plan effective as of April 30,
1997. (Filed as Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1997 and incorporated herein by reference.)
10.18 Lease Agreement, dated as of January 1, 1992 between
South Ferry Building Company and Ambac Assurance
Corporation. (Filed as Exhibit 10.36 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992 and incorporated herein by
reference.)
10.19 Amendment to Lease Agreement dated August 1, 1997
between South Ferry Building Company and Ambac
Assurance Corporation. (Filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by
reference.)
_______________________________
* Management contract or compensatory plan, contract or arrangment required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-k.
---------
30
<PAGE>
10.20 Tax Settlement Agreement, dated as of March 30,
1993, among Citicorp, Citibank, N.A., Citicorp
Financial Guaranty Holdings, Inc., Ambac Financial
Group, Inc., Ambac Assurance Corporation, American
Municipal Bond Holding Company and Health Care
Investment Analysts, Inc. (Filed as Exhibit 10.02 to
the Company's Registration Statement on Form S-3
(Registration No. 33-59290) and incorporated herein by
reference.)
10.21 Conformed copy of U.S. $150,000,000 Credit Agreement,
dated as of August 3, 1998 (the "BNS Credit
Agreement") among the Company and Ambac Assurance
Corporation as the Borrowers, Certain Commercial
Lending Institutions as the Lenders, Citibank, N.A.,
as the Documentation Agent, First National Bank of
Chicago, as the Co-Agent, and The Bank of Nova Scotia,
acting through its New York Agency, as the Arranger
and the Administrative Agent. (Filed as Exhibit 10.22
to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1998 and incorporated herein by
reference.)
10.22 First Amendment to the BNS Agreement dated August 3,
1999 (Filed as Exhibit 10.23 to the Company's
Quarterly Report on Form 10-Q for the period ended
June 30, 1999 and incorporated herein by reference.)
10.23 Third Amendment to the BNS Agreement dated as of
August 3, 2001 among Ambac Financial Group an Ambac
Assurance as the Borrowers, Citibank, N.A. as the
Document Agent and as Lender, The Bank of New York and
Caja Madrid, each as co-agent and as Lender, and The
Bank of Nova Scotia, as Administrative Agent for the
Lenders and, as Lender. (Filed as Exhibit 10.27 to
Ambac Financial Group's Quarterly Report on Form 10-Q
for the period ended June 30, 2001 and incorporated
herein by reference.
10.24 $800,000,000 Amended and Restated Credit Agreement,
dated June 30, 2001 between Ambac Assurance
Corporation, various banks, Bank of America, N.A. and
Deutsche Bank AG (New York Branch), as Co-Syndication
Agents and the Bank of New York as Administrative
Agent (the "Soft Capital Agreement".)
10.25 Notice of termination of $400,000,000 of Unutilized
Commitments and Unutilized Contingent Commitments
effective December 21, 2001 under the Soft Capital
Agreement.
10.26 Second Extension of U.S. $50,000,000 Revolving Credit
Agreement, dated June 28, 2001 among Ambac Credit
Products, LLC, the banks, financial institutions and
other institutional lenders (the "Lenders") and The
Bank of New York, as Agent for the Lenders. (Filed as
Exhibit 10.26 to Ambac Financial Group's Quarterly
Report on Form 10-Q for the period ended June 30, 2001
and incorporated herein by reference.)
10.27 Put Option Agreement between Ambac Assurance
Corporation and Dutch Harbor Finance Master Trust, on
Behalf of its Series Dutch Harbor Finance Sub-Trust I,
dated as of December 3, 2001.
10.28 Put Option Agreement between Ambac Assurance
Corporation and Dutch Harbor Finance Master Trust, on
Behalf of its Series Dutch Harbor Finance Sub-Trust
II, dated as of December 3, 2001.
31
<PAGE>
10.29 Put Option Agreement between Ambac Assurance
Corporation and Dutch Harbor Finance Master Trust, on
Behalf of its Series Dutch Harbor Finance Sub-Trust
III, dated as of December 3, 2001.
10.30 Put Option Agreement between Ambac Assurance
Corporation and Dutch Harbor Finance Master Trust, on
Behalf of its Series Dutch Harbor Finance Sub-Trust
IV, dated as of December 3, 2001.
12.01 Statement re computation of ratios.
13.01 Annual Report to Stockholders for the fiscal year
ended December 31, 2001. (Furnished for the
information of the Securities and Exchange Commission
and not deemed "filed" as part of this Form 10-K
except for those portions that are expressly
incorporated by reference.)
21.01 List of Subsidiaries of Ambac Financial Group, Inc.
24.01 Power of Attorney from Phillip B. Lassiter.
24.02 Power of Attorney from Michael A. Callen.
24.03 Power of Attorney from Renso L. Caporali.
24.04 Power of Attorney from Jill M. Considine.
24.05 Power of Attorney from Richard Dulude.
24.06 Power of Attorney from C. Robert J. Genader.
24.07 Power of Attorney from W. Grant Gregory.
99.01 Ambac Assurance Corporation and Subsidiaries
Consolidated Financial Statements (with independent
auditors' report thereon) as of December 31, 2001 and
2000.
(b) Reports on Form 8-K:
On October 22, 2001, Ambac Financial Group Inc. filed a Current Report
on Form 8-K with its October 17, 2001 press release containing unaudited
--------
financial information and accompanying discussion for the three and nine months
ended September 30, 2001. On December 4, 2001, Ambac Financial Group, Inc. filed
a Current Report on Form 8-K with its December 3, 2001 press release announcing
--------
Ambac Assurance will replace a portion of its bank line capital support with an
innovative capital markets structure. On January 25, 2002, Ambac Financial
Group, Inc. filed a Current Report on Form 8-K with its January 23, 2002 press
--------
release containing unaudited financial information and accompanying discussion
for the three months ended December 31, 2001 and the year ended December 31,
2001.
32
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMBAC FINANCIAL GROUP, INC.
(Registrant)
Dated: March 26, 2002 By: /s/ Frank J. Bivona
--------------------------
Name: Frank J. Bivona
Title: Vice Chairman and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- -----
<S> <C> <C>
Phillip B. Lassiter* Chairman March 26, 2002
- --------------------------------------------
Phillip B. Lassiter and Chief Executive Officer
and Director (Principal Executive
Officer)
/s/ Frank J. Bivona Vice Chairman, and March 26, 2002
- --------------------------------------------
Frank J. Bivona Chief Financial Officer (Principal
Financial and Accounting Officer)
Michael A. Callen* Director March 26, 2002
- --------------------------------------------
Michael A. Callen
Renso L. Caporali* Director March 26, 2002
- --------------------------------------------
Renso L. Caporali
Jill M. Considine* Director March 26, 2002
- --------------------------------------------
Jill M. Considine
Richard Dulude* Director March 26, 2002
- --------------------------------------------
Richard Dulude
Robert J. Genader* Director March 26, 2002
- --------------------------------------------
Robert J. Genader
W. Grant Gregory* Director March 26, 2002
- --------------------------------------------
W. Grant Gregory
</TABLE>
* Frank J. Bivona, by signing his name hereto, does hereby sign this Annual
Report on Form 10-K on behalf of each of the directors and officers of the
Registrant after whose typed names asterisks appear pursuant to powers of
attorney duly executed by such directors and officers and filed with the
Securities and Exchange Commission as exhibits to this report.
By: /s/ Frank J. Bivona
-----------------------
Frank J. Bivona
Attorney-in-fact
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES AND CONSENT
The Board of Directors
Ambac Financial Group, Inc.:
The audits referred to in our report dated January 23, 2002, included the
related financial statement schedules as of December 31, 2001 and 2000 and for
each of the years in the three-year period ended December 31, 2001, included in
this Form 10-K. These financial statement schedules are the responsibility of
Ambac Financial Group Inc.'s management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits. In our
opinion, such financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
We consent to the use of our reports incorporated by reference in the
registration statement (Nos. 333-43695 and 333-57206) on Form S-3, and the
registration statements (Nos. 33-47970, 33-63134, 33-47971, 33-44913 and
333-52449) on Form S-8 of Ambac Financial Group, Inc.
/s/ KPMG LLP
KPMG LLP
New York, New York
March 26, 2002
<PAGE>
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
Other Than Investments in Related Parties
December 31, 2001
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Amount at
Amortized Estimated which shown in
Type of Investment Cost Fair Value the balance
sheet
- ------------------------------------------------------------- ---------------- -------------- --------------
<S> <C> <C> <C>
U.S. government obligations ................................ $ 75,703 $ 78,254 $ 78,254
Municipal obligations ...................................... 3,580,822 3,684,798 3,684,798
Mortgage- and asset-backed securities (includes U.S.
government agency obligations) ............................. 4,652,165 4,680,444 4,680,444
Corporate obligations ...................................... 1,342,990 1,330,589 1,330,589
Foreign government obligations ............................. 97,109 96,600 96,600
Short-term ................................................. 415,002 415,002 415,002
---------------- -------------- --------------
Total ............................................. $ 10,163,791 $ 10,285,687 $ 10,285,687
================ ============== ==============
</TABLE>
S-2
<PAGE>
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Balance Sheets
December 31, 2001 and 2000
(Dollar Amounts in Thousands Except Share Data)
<TABLE>
<CAPTION>
2001 2000
--------------- --------------
ASSETS
<S> <C> <C>
Assets:
Cash ................................................................ $ 2,700 $ 288
Investments in subsidiaries ......................................... 3,560,598 2,985,901
Fixed income securities, at fair value
(amortized cost of $31,887 in 2001 and $7,245 in 2000) ............ 30,830 7,038
Short-term investments, at cost (approximates fair value) ........... 19,160 34,483
Other investments ................................................... 769 4,980
Current income taxes receivable ..................................... 27,813 3,412
Deferred income taxes receivable .................................... 13,843 17,923
Other assets ........................................................ 18,284 9,609
--------------- --------------
Total assets .................................................... $ 3,673,997 $ 3,063,634
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debentures .......................................................... $ 619,315 $ 424,061
Note payable to subsidiary .......................................... 8,942 --
Accrued interest payable ............................................ 6,155 10,348
Other liabilities ................................................... 55,897 33,111
--------------- --------------
Total liabilities ............................................... 690,309 467,520
--------------- --------------
Stockholders' equity:
Preferred stock, par value $0.01 per share; authorized shares -
4,000,000; issued and outstanding shares - none .................... -- --
Common Stock, par value $0.01 per share; authorized shares -
200,000,000 at December 31, 2001 and 2000; issued shares -
106,020,537 at December 31, 2001 and 2000 .......................... 1,060 1,060
Additional paid-in capital ........................................... 538,135 533,558
Accumulated other comprehensive income ............................... 62,476 45,154
Retained earnings .................................................... 2,403,473 2,035,209
Common Stock held in treasury at cost, 436,488 shares at December 31,
2001 and 469,932 at December 31, 2000 ............................... (21,456) (18,867)
--------------- --------------
Total stockholders' equity ...................................... 2,983,688 2,596,114
--------------- --------------
Total liabilities and stockholders' equity ...................... $ 3,673,997 $ 3,063,634
=============== ==============
</TABLE>
S-3
<PAGE>
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Statements of Operations
Three Years Ended December 31,
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
2001 2000 1999
---------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Dividend income ....................................... $ 69,000 $ 63,800 $ 52,000
Interest and other income ............................. 4,328 2,359 10,567
Net realized (losses) gains ........................... (564) 8 797
---------------- ----------------- -----------------
Total revenues ....................................... 72,764 66,167 63,364
---------------- ----------------- -----------------
Expenses:
Interest expense ...................................... 35,965 33,450 33,470
Operating expenses .................................... 5,947 6,669 6,506
---------------- ----------------- -----------------
Total expenses ....................................... 41,912 40,119 39,976
---------------- ----------------- -----------------
Income before income taxes and equity in
undistributed net income of subsidiaries .............. 30,852 26,048 23,388
Federal income tax benefit ................................. (13,341) (18,088) (10,260)
---------------- ----------------- -----------------
Income before equity in undistributed net income of
subsidiaries ........................................... 44,193 44,136 33,648
Equity in undistributed net income of subsidiaries ......... 388,713 322,036 274,269
---------------- ----------------- -----------------
Net income ................................................. $ 432,906 $ 366,172 $ 307,917
================ ================= =================
</TABLE>
S-4
<PAGE>
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Statements of Stockholders' Equity
Three Years Ended December 31,
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
2001 2000 1999
------------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Retained Earnings:
Balance at January 1 $ 2,035,209 $ 1,713,446 $ 1,449,832
Net income 432,906 $ 432,906 366,172 $ 366,172 307,917 $ 307,917
----------- ---------- ----------
Dividends declared - common stock (35,937) (32,213) (29,366)
Exercise of stock options (28,705) (12,196) (14,937)
------------ ------------ ------------
Balance at December 31 $ 2,403,473 $ 2,035,209 $ 1,713,446
------------ ------------ ------------
Accumulated Other Comprehensive Income
(Loss):
Balance at January 1 $ 45,154 $ (187,540) $ 159,313
Unrealized gains (losses) on securities,
$39,542, $373,291, and $(552,645), pre-tax,
in 2001, 2000 and 1999, respectively)/(1)/ 23,643 234,178 (346,211)
Cumulative effect of accounting change (880) -- --
Loss on derivative hedges (4,371) -- --
Foreign currency gain (1,070) (1,484) (642)
----------- ---------- ----------
Other comprehensive income (loss) 17,322 17,322 232,694 232,694 (346,853) (346,853)
------------------------- ------------------------ ------------------------
Total comprehensive income (loss) $ 450,228 $ 598,866 $ (38,936)
=========== ========== ==========
Balance at December 31 $ 62,476 $ 45,154 $ (187,540)
------------ ------------ ------------
Preferred Stock:
Balance at January 1 and December 31 $ -- $ -- $ --
------------ ------------ ------------
Common Stock:
Balance at January 1 $ 1,060 $ 707 $ 707
Stock split effected as dividend -- 353 --
------------ ------------ ------------
Balance at December 31 $ 1,060 $ 1,060 $ 707
------------ ------------ ------------
Additional Paid-in Capital:
Balance at January 1 $ 533,558 $ 525,012 $ 519,305
Exercise of stock options 13,045 8,899 5,707
Capital issuance costs (8,468) -- --
Stock split effected as dividend -- (353) --
------------ ------------ ------------
Balance at December 31 $ 538,135 $ 533,558 $ 525,012
------------ ------------ ------------
Common Stock Held in Treasury at Cost:
Balance at January 1 $ (18,867) $ (33,175) $ (33,067)
Cost of shares acquired (40,876) (23,618) (17,626)
Shares issued under equity plans 38,287 37,926 17,518
------------ ------------ ------------
Balance at December 31 $ (21,456) $ (18,867) $ (33,175)
------------ ------------ ------------
Total Stockholders' Equity at December 31 $ 2,983,688 $ 2,596,114 $ 2,018,450
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
(1) Disclosure of reclassification amount: 2001 2000 1999
----------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during period $25,817 $230,985 $(351,412)
Less: reclassification adjustment for net (losses) gains included 2,174 (3,193) (5,201)
in net income ----------------------------------
Net unrealized gains (losses) on securities $23,643 $234,178 $(346,211)
==================================
</TABLE>
S-5
<PAGE>
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Statements of Cash Flows
Three Years Ended December 31,
(Dollar Amounts in Thousands)
<TABLE>
2001 2000 1999
---------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 432,906 $ 366,172 $ 307,917
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed net income of
Subsidiaries (388,713) (322,036) (274,269)
Net realized losses (gains) 564 (8) (797)
(Increase) decrease in current income
taxes receivable (24,401) (1,499) (2,942)
Decrease (increase) in other assets (8,675) 8,041 5,936
Other, net 6,479 (6,853) (5,188)
---------------- ----------------- -----------------
Net cash provided by operating activities 18,160 43,817 30,657
---------------- ----------------- -----------------
Cash flows from investing activities:
Proceeds from sales of bonds 48,205 -- 16,627
Proceeds from maturities of bonds 3,584 542 --
Purchases of bonds (248,251) (1,615) (22,625)
Change in short-term investments 15,323 (22,160) 11,821
Other, net 8,795 (1,894) (1,544)
---------------- ----------------- -----------------
Net cash (used in) provided by investing
activities (172,344) (25,127) 4,279
---------------- ----------------- -----------------
Cash flows from financing activities:
Dividends paid (35,937) (32,213) (29,366)
Proceeds from issuance of debentures 193,700 -- --
Payment for buyback of debentures (7,500) -- --
Proceeds from intercompany note 8,942 -- --
Purchases of treasury stock (40,876) (23,618) (17,626)
Proceeds from sale of treasury stock 38,287 37,926 17,518
Contribution to subsidiaries (20) (500) (5,575)
---------------- ----------------- -----------------
Net cash provided by (used in) financing
activities 156,596 (18,405) (35,049)
---------------- ----------------- -----------------
Net cash flow 2,412 285 (113)
Cash at January 1 288 3 116
---------------- ----------------- -----------------
Cash at December 31 $ 2,700 $ 288 $ 3
================ ================= =================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 45,000 $ 75,000 $ 37,000
================ ================= =================
Interest expense on debt $ 36,704 $ 33,848 $ 33,848
================ ================= =================
</TABLE>
Supplemental disclosure of non-cash financing activities:
Ambac Financial Group, Inc. contributed fixed income securities to Ambac
Assurance Corporation amounting to $176,193 in November 2001 and $101,479 and
$107,533 in April 1999 and November 1999, respectively.
S-6
<PAGE>
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Note to Condensed Financial Information
The condensed financial information of Ambac Financial Group, Inc. for the years
ended December 31, 2001, 2000 and 1999, should be read in conjunction with the
consolidated financial statements of Ambac Financial Group, Inc. and
Subsidiaries and the notes thereto. Investments in subsidiaries are accounted
for using the equity method of accounting.
S-7
<PAGE>
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Assumed Percentage of
Ceded to from Amount
Gross Other Other Net Amount Assumed to
Insurance Premiums Written Amount Companies Companies Net
- ---------------------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999 ..... $ 420,669 $ 61,845 $ 24,573 $ 383,397 6.41 %
Year ended December 31, 2000 ..... $ 440,111 $ 80,789 $ 42,971 $ 402,293 10.68 %
Year ended December 31, 2001 ..... $ 632,413 $ 95,534 $ 50,883 $ 587,762 8.66 %
</TABLE>
S-8
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
10.03 Ambac Financial Group, Inc. 1997 Equity Plan, amended as of
December 12, 2000.
10.05 Ambac Financial Group, Inc. 1997 Non-Employee Directors
Equity Plan. (as amended through December 12, 2000.)
10.24 $800,000,000 Amended and Restated Credit Agreement, dated
June 30, 2001 between Ambac Assurance Corporation, various
banks, Bank of America, N.A. and Deutsche Bank AG (New York
Branch), as Co-Syndication Agents and the Bank of New York
as Administrative Agent (the "Soft Capital Agreement".)
10.25 Notice of termination of $400,000,000 of Unutilized
Commitments and Unutilized Contingent Commitments effective
December 21, 2001 under the Soft Capital Agreement.
10.27 Put Option Agreement between Ambac Assurance Corporation and
Dutch Harbor Finance Master Trust, on Behalf of its Series
Dutch Harbor Finance Sub-Trust I, dated as of December 3,
2001.
10.28 Put Option Agreement between Ambac Assurance Corporation and
Dutch Harbor Finance Master Trust, on Behalf of its Series
Dutch Harbor Finance Sub-Trust II, dated as of December 3,
2001.
10.29 Put Option Agreement between Ambac Assurance Corporation and
Dutch Harbor Finance Master Trust, on Behalf of its Series
Dutch Harbor Finance Sub-Trust III, dated as of December 3,
2001.
10.30 Put Option Agreement between Ambac Assurance Corporation and
Dutch Harbor Finance Master Trust, on Behalf of its Series
Dutch Harbor Finance Sub-Trust IV, dated as of December 3,
2001.
12.01 Statement re computation of ratios.
13.01 Annual Report to Stockholders for the fiscal year ended
December 31, 2001. (Furnished for the information of the
Securities and Exchange Commission and not deemed "filed" as
part of this Form 10-K except for those portions that are
expressly incorporated by reference.)
21.01 List of Subsidiaries of Ambac Financial Group, Inc.
24.01 Power of Attorney from Phillip B. Lassiter.
24.02 Power of Attorney from Michael A. Callen.
24.03 Power of Attorney from Renso L. Caporali.
24.04 Power of Attorney from Jill M. Considine.
24.05 Power of Attorney from Richard Dulude.
<PAGE>
24.06 Power of Attorney from Robert J. Genader.
24.07 Power of Attorney from W. Grant Gregory.
99.01 Ambac Assurance Corporation and Subsidiaries Consolidated
Financial Statements (with independent auditors' report
thereon) as of December 31, 2001 and 2000.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.03
<SEQUENCE>3
<FILENAME>dex1003.txt
<DESCRIPTION>AMBAC FINANCIAL GROUP, INC. 1997 EQUITY PLAN
<TEXT>
<PAGE>
EXHIBIT 10.03
AMBAC 1997 EQUITY PLAN
(amended as of December 12, 2000)
1. Purposes
The purposes of the Ambac 1997 Equity Plan (the "Plan") are to attract,
retain and motivate key employees of the Company, to compensate them for their
contributions to the growth and profits of the Company and to encourage
ownership by them of Common Stock.
2. Definitions
For purposes of the Plan, the following terms shall be defined as follows:
"Administrator" means the individual or individuals to whom the Committee
delegates authority under the Plan in accordance with Section 3(d).
"Ambac" means Ambac Financial Group, Inc., a Delaware corporation.
"Award" means an award made pursuant to the terms of the Plan to an Eligible
Individual in the form of Stock Options, Stock Appreciation Rights, Stock
Awards, Restricted Stock Units, Performance Units or Other Awards.
"Award Agreement" means a written document approved in accordance with
Section 3 which sets forth the terms and conditions of the Award to the
Participant. An Award Agreement may be in the form of (i) an agreement between
Ambac or one of its Subsidiaries which is executed by an officer on behalf of
Ambac or such Subsidiary and is signed by the Participant or (ii) a certificate
issued by Ambac or one of its Subsidiaries which is executed by an officer on
behalf of Ambac or such Subsidiary but does not require the signature of the
Participant.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, and the
applicable rulings and regulations (including any proposed regulations)
thereunder.
"Committee" means the Compensation and Organization Committee of the Board,
any successor committee thereto or any other committee appointed from time to
time by the Board to administer the Plan. The Committee shall consist of at
least two individuals and shall serve at the pleasure of the Board.
"Common Stock" means the Common Stock, par value $.01 per share, of the
Company.
"Company" means Ambac and its Subsidiaries.
"Eligible Individuals" means the individuals described in Section 6 who are
eligible for Awards under the Plan.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the applicable rulings and regulations thereunder.
"Excluded Individual" means (i) any individual who is designated by the
Company at the time of hire as not eligible to participate in the Plan or (ii)
any individual who is treated or designated by the Company as an independent
contractor, leased employee (including, without limitation, a "leased employee"
as defined in Section 414(n) of the Code) or consultant. Excluded Individuals
are not eligible to participate in or receive benefits under the Plan. If any
Excluded Individual pursuant to the preceding clauses (i) or
<PAGE>
(ii) shall be determined by a court or federal, state or local regulatory or
administrative authority to have served as a common law employee of the Company,
such determination shall not alter such person's status as an Excluded
Individual for purposes of the Plan
"Fair Market Value" means, with respect to a share of Common Stock, the fair
market value thereof as of the relevant date of determination, as determined in
accordance with a valuation methodology approved by the Committee. In the
absence of any alternative valuation methodology approved by the Committee, the
Fair Market Value of a share of Common Stock shall equal the average of the
highest and the lowest quoted selling price of a share of Common Stock as
reported on the composite tape for securities listed on the New York Stock
Exchange, or such other national securities exchange as may be designated by the
Committee, or, in the event that the Common Stock is not listed for trading on a
national securities exchange but is quoted on an automated system, on such
automated system, in any such case on the valuation date (or, if there were no
sales on the valuation date, the average of the highest and the lowest quoted
selling prices as reported on said composite tape or automated system for the
most recent day during which a sale occurred).
"Incentive Stock Option" means a Stock Option which is an "incentive stock
option" within the meaning of Section 422 of the Code and designated by the
Committee as an Incentive Stock Option in an Award Agreement.
"Nonqualified Stock Option" means a Stock Option which is not an Incentive
Stock Option.
"Other Award" means any other form of award authorized under Section 13 of
the Plan.
"Participant" means an Eligible Individual to whom an Award has been granted
under the Plan.
"Performance Unit" means a performance unit granted to an Eligible
Individual pursuant to Section 12 hereof.
"Predecessor Plan" means the Ambac Inc. 1991 Stock Incentive Plan, as
amended.
"Restoration Option" means a Stock Option that is awarded upon the exercise
of a Stock Option earlier awarded under the Plan or the Predecessor Plan (an
"Underlying Option") for which the exercise price is paid in whole or in party
by tendering shares of Common Stock previously owned by the Participant, where
such Restoration Option (i) covers a number of shares of Common Stock no greater
than the number of previously owned shares tendered in payment of the exercise
price of the Underlying Option plus the number of shares withheld to pay taxes
arising upon such exercise, (ii) the expiration date of the Restoration Option
is no later than the expiration date of the Underlying Option and (iii) the
exercise price per share of the Restoration Option is no less than the Fair
Market Value per share of Common Stock on the date of exercise of the Underlying
Option.
"Restricted Stock Unit" means a restricted stock unit granted to an Eligible
Individual pursuant to Section 11 hereof.
"Stock Appreciation Right" means a right to receive all or some portion of
the appreciation on shares of Common Stock granted to an Eligible Individual
pursuant to Section 9 hereof.
"Stock Award" means a share of Common Stock granted to an Eligible
Individual for no consideration other than the provision of services or offer
for sale to an Eligible Employee at a purchase price determined by the
Committee, in either case pursuant to Section 10 hereof.
"Stock Option" means an Award to purchase shares of Common Stock granted to
an Eligible Individual pursuant to Section 8 hereof, which Award may be either
an Incentive Stock Option or a Nonqualified Stock Option.
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<PAGE>
"Subsidiary" means (i) a corporation or other entity with respect to which
Ambac, directly or indirectly, has the power, whether through the ownership of
voting securities, by contract or otherwise, to elect at least a majority of the
members of such corporation's board of directors or analogous governing body, or
(ii) any other corporation or other entity in which Ambac, directly or
indirectly, has an equity or similar interest and which the Committee designates
as a Subsidiary for purposes of the Plan.
"Substitute Award" means an Award granted upon assumption of, or in
substitution for, outstanding awards previously granted by a company or other
entity in connection with a corporate transaction, such as a merger,
combination, consolidation or acquisition of property or stock.
3. Administration of the Plan
(a) Power and Authority of the Committee. The Plan shall be administered by
the Committee, which shall have full power and authority, subject to the express
provisions hereof:
(i) to select Participants from the Eligible Individuals;
(ii) to make Awards in accordance with the Plan;
(iii) to determine the number of shares of Common Stock subject to each
Award or the cash amount payable in connection with an Award;
(iv) to determine the terms and conditions of each Award, including,
without limitation, those related to vesting, forfeiture, payment and
exercisability, and the effect, if any, of a Participant's termination of
employment with the Company, and including the authority to amend the terms
and conditions of an Award after the granting thereof to a Participant in a
manner that is not, without the consent of the Participant, prejudicial to
the rights of such Participant in such Award;
(v) to specify and approve the provisions of the Award Agreements
delivered to Participants in connection with their Awards;
(vi) to construe and interpret any Award Agreement delivered under the
Plan;
(vii) to prescribe, amend and rescind rules and procedures relating to
the Plan;
(viii) to vary the terms of Awards to take account of tax, securities
law and other regulatory requirements of foreign jurisdictions;
(ix) subject to the provisions of the Plan and subject to such
additional limitations and restrictions as the Committee may impose, to
delegate to one or more officers of the Company some or all of its authority
under the Plan;
(x) to employ such legal counsel, independent auditors and consultants
as it deems desirable for the administration of the Plan and to rely upon
any opinion or computation received therefrom; and
(xi) to make all other determinations and to formulate such procedures
as may be necessary or advisable for the administration of the Plan.
(b) Plan Construction and Interpretation. The Committee shall have full
power and authority, subject to the express provisions hereof, to construe and
interpret the Plan.
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<PAGE>
(c) Determinations of Committee Final and Binding. All determinations by the
Committee in carrying out and administering the Plan and in construing and
interpreting the Plan shall be final, binding and conclusive for all purposes
and upon all persons interested herein.
(d) Delegation of Authority. The Committee may, but need not, from time to
time delegate some or all of its authority under the Plan to an Administrator
consisting of one or more members of the Committee or of one or more officers of
the Company; provided, however, that the Committee may not delegate its
authority (i) to make Awards to Eligible Individuals who are officers of the
Company who are delegated authority by the Committee hereunder, or (ii) under
Sections 3(b) and 16 of the Plan. Any delegation hereunder shall be subject to
the restrictions and limits that the Committee specifies at the time of such
delegation or thereafter. Nothing in the Plan shall be construed as obligating
the Committee to delegate authority to an Administrator, and the Committee may
at any time rescind the authority delegated to an Administrator appointed
hereunder or appoint a new Administrator. At all times, the Administrator
appointed under this Section 3(d) shall serve in such capacity at the pleasure
of the Committee. Any action undertaken by the Administrator in accordance with
the Committee's delegation of authority shall have the same force and effect as
if undertaken directly by the Committee, and any reference in the Plan to the
Committee shall, to the extent consistent with the terms and limitations of such
delegation, be deemed to include a reference to the Administrator.
(e) Liability of Committee. No member of the Committee shall be liable for
any action nor determination made in good faith, and the members of the
Committee shall be entitled to indemnification and reimbursement in the manner
provided in Ambac's Certificate of Incorporation as it may be amended from time
to time. In the performance of its responsibilities with respect to the Plan,
the Committee shall be entitled to rely upon information and advice furnished by
the Company's officers, the Company's accountants, the Company's counsel and any
other party the Committee deems necessary, and no member of the Committee shall
be liable for any action taken or not taken in reliance upon any such advice.
(f) Action by the Board. Anything in the Plan to the contrary
notwithstanding, any authority or responsibility which, under the terms of the
Plan, may be exercised by the Committee may alternatively be exercised by the
Board.
4. Effective Date and Term
The Plan shall become effective upon its adoption by the Board subject to
its approval by the stockholders of Ambac. Prior to such stockholder approval,
the Committee may grant Awards conditioned on stockholder approval. If such
stockholder approval is not obtained at or before the first annual meeting of
stockholders to occur after the adoption of the Plan by the Board (including any
adjournment or adjournments thereof), the Plan and any Awards made thereunder
shall terminate ab initio and be of no further force and effect. In no event
shall any Awards be made under the Plan after the seventh anniversary of the
date of stockholder approval.
5. Shares of Common Stock Subject to the Plan
(a) General. Subject to adjustment as provided in Section 15(b) hereof, the
number of shares of Common Stock that may be issued pursuant to Awards under the
Plan (the "Section 5 Limit") shall not exceed, in the aggregate:
(I) 8,250,000 shares; plus
(II) the number of shares of Common Stock that remain available for
issuance under the Predecessor Plan as of the date this Plan is approved by
the stockholders of the Company (increased by any shares of Common Stock
subject to any award (or portion thereof) outstanding under the
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<PAGE>
Predecessor Plan on such date which lapses, expires or is otherwise
terminated without the issuance of such shares or is settled by the delivery
of consideration other than shares).
Shares issued under this Plan may be either authorized but unissued shares,
treasury shares or any combination thereof.
(b) Rules Applicable to Determining Shares Available for Issuance. For
purposes of determining the number of shares of Common Stock that remain
available for issuance, the following shares shall be added back to the Section
5 Limit and again be available for Awards:
(x) The number of shares tendered to pay the exercise price of a Stock
Option or other Award; and
(y) The number of shares withheld from any Award to satisfy a
Participant's tax withholding obligations or, if applicable, to pay the
exercise price of a Stock Option or other Award.
In addition, any shares underlying Substitute Awards shall not be counted
against the Section 5 Limit and shall not be subject to Section 5(c) below.
(c) Special Limits. Anything to the contrary in Section 5(a) above
notwithstanding, but subject to Section 15(b) below, the following special
limits shall apply to shares of Common Stock available for Awards under the
Plan:
(i) The maximum number of shares that may be issued in the form of Stock
Awards, or issued upon settlement of Restricted Stock Units or Other Awards,
shall equal 2,400,000 shares, of which no more than a number of shares equal
to 10% of the Section 5 Limit shall be in the form of Other Awards,
provided, however, that any such Stock Awards, Restricted Stock Units or
Other Awards that are issued in lieu of cash compensation that otherwise
would be paid to a Participant, or in satisfaction of any other obligation
owed by the Company to a Participant, shall not be counted against such
limitation; and
(ii) The maximum number of shares of Common Stock that may be subject to
Stock Options or Stock Appreciation Rights granted to any Eligible
Individual in any fiscal year of the Company shall equal 600,000 shares plus
any shares which were available under this Section 5(c) (ii) for Awards of
Stock Options or Stock Appreciation Rights to such Eligible Individual in
any prior fiscal year but which were not covered by such Awards.
(d) No Further Awards under Predecessor Plan. From and after the date this
Plan is approved by the stockholders of the Company, no further awards shall be
made under the Predecessor Plan.
6. Eligible Individuals
Awards may be granted by the Committee to individuals ("Eligible
Individuals") who are: (i) officers or other key employees of the Company; (ii)
employees of joint ventures, partnerships or similar business organizations in
which the Company has a direct or indirect equity interest; (iii) employees of
MBIA Insurance Corporation or any of its subsidiaries or affiliates who provide
services to MBIAo Ambac International, an unincorporated joint venture, or its
successor; and individuals who provide services to any similar joint ventures or
business organizations in which the Company may participate in the future.
Excluded Individuals are not eligible to receive Awards under the Plan. Members
of the Committee will not be eligible to receive Awards under the Plan. An
individual's status as an Administrator will not affect his or her eligibility
to participate in the Plan.
5
<PAGE>
7. Awards in General
(a) Types of Award and Award Agreement. Awards under the Plan may consist of
Stock Options, Stock Appreciation Rights, Stock Awards, Restricted Stock Units,
Performance Units or Other Awards. Any Award described in Sections 8 through 13
of the Plan may be granted singly or in combination or tandem with any other
Award, as the Committee may determine. Awards may be made in combination with,
in replacement of, or as alternatives to grants of rights under any other
employee compensation plan of the Company, including the plan of any acquired
entity, or may be granted in satisfaction of the Company's obligations under any
such plan.
(b) Terms Set Forth in Award Agreement. The terms and provisions of an Award
shall be set forth in a written Award Agreement approved by the Committee and
delivered or made available to the Participant as soon as practicable following
the date of the award. The vesting, exercisability, payment and other
restrictions applicable to an Award (which may include, without limitation,
restrictions on transferability or provision for mandatory resale to the
Company) shall be determined by the Committee and set forth in the applicable
Award Agreement. Notwithstanding the foregoing, the Committee may accelerate (i)
the vesting or payment of any Award, (ii) the lapse of restrictions on any Award
or (iii) the date on which any Stock Option, Stock Appreciation Right or other
Award first becomes exercisable.
(c) Termination of Employment and Change in Control. The Committee shall
also have full authority to determine and specify in the applicable Award
Agreement the effect, if any, that a Participant's termination of employment for
any reason will have on the vesting, exercisability, payment or lapse of
restrictions applicable to an Award. The date of a Participant's termination of
employment for any reason shall be determined in the sole discretion of the
Committee. Similarly, the Committee shall have full authority to determine the
effect, if any, of a change in control of Ambac on the vesting, exercisability,
payment or lapse of restrictions applicable to an Award, which effect may be
specified in the applicable Award Agreement or determined at a subsequent time.
(d) Dividends and Dividend Equivalents. The Committee may provide
Participants with the right to receive dividends or payments equivalent to
dividends or interest with respect to an outstanding Awards, which payments can
either be paid currently or deemed to have been reinvested in shares of Common
Stock, and can be made in Common Stock, cash or a combination thereof, as the
Committee shall determine.
8. Stock Options
(a) Terms of Stock Options Generally. A Stock Option shall entitle the
Participant to whom the Stock Option was granted to purchase a specified number
of shares of Common Stock during a specified period at a price that is
determined in accordance with Section 8(b) below. Stock Options may be either
Nonqualified Stock Options or Incentive Stock Options. The Committee will fix
the vesting and exercisability conditions applicable to a Stock Option, provided
that no Stock Option shall vest sooner than one year from the date of grant
(subject to early vesting, if so provided by the Committee, upon death,
disability, termination of employment or a change in control of the Company),
but provided, further, that such minimum vesting period shall not apply to any
Restoration Option.
(b) Exercise Price. The exercise price per share of Common Stock purchasable
under a Stock Option shall be fixed by the Committee at the time of grant or,
alternatively, shall be determined by a method specified by the Committee at the
time of grant; provided, however, that the exercise price per share shall be no
less than 100% of the Fair Market Value per share on the date of grant (or it
the exercise price is not fixed on the date of grant, then on such date as the
exercise price is fixed); and provided further, that, except as provided in
Section 15(b) below, the exercise price per share of Common Stock applicable to
a Stock Option may not be adjusted or amended, including by means of amendment,
cancellation or the replacement of such Stock Option with a subsequently awarded
Stock Option. Notwithstanding the
6
<PAGE>
foregoing, the exercise price per share of a Stock Option that is a Substitute
Award may be less than the Fair Market Value per share on the date of award,
provided that the excess of:
(i) the aggregate Fair Market Value (as of the date such Substitute
Award is granted) of the shares of Common Stock subject to the Substitute
Award, over
(ii) the aggregate exercise price thereof,
does not exceed the excess of:
(iii) the aggregate fair market value (as of the time immediately
preceding the transaction giving rise to the Substitute Award, such fair
market value to be determined by the Committee) of the shares of the
predecessor entity that were subject to the award assumed or substituted for
by the Company, over
(iv) the aggregate exercise price of such shares.
(c) Option Term. The term of each Stock Option shall be fixed by the
Committee and shall not exceed ten years from the date of grant.
(d) Method of Exercise. Subject to the provisions of the applicable Award
Agreement, the exercise price of a Stock Option may be paid in cash or
previously owned shares or a combination thereof and, if the applicable Award
Agreement so provides, in whole or in part through the withholding of shares
subject to the Stock Option with a value equal to the exercise price. In
accordance with the rules and procedures established by the Committee for this
purpose, the Stock Option may also be exercised through a "cashless exercise"
procedure approved by the Committee involving a broker or dealer approved by the
Committee, that affords Participants the opportunity to sell immediately some or
all of the shares underlying the exercised portion of the Stock Option in order
to generate sufficient cash to pay the Stock Option exercise price and/or to
satisfy withholding tax obligations related to the Stock Option.
9. Stock Appreciation Rights
(a) General. A Stock Appreciation Right shall entitle a Participant to
receive, upon satisfaction of the conditions to the payment specified in the
applicable Award Agreement, an amount equal to the excess, if any, of the Fair
Market Value on the exercise date of the number of shares of Common Stock for
which the Stock Appreciation Right is exercised, over the exercise price for
such Stock Appreciation Right specified in the applicable Award Agreement. The
exercise price per share of Common Stock covered by a Stock Appreciation Right
shall be fixed by the Committee at the time of grant or, alternatively, shall be
determined by a method specified by the Committee at the time of grant;
provided, however, that, except as provided in Section 9(b) below, the exercise
price per share shall be no less than 100% of the Fair Market Value per share on
the date of grant (or if the exercise price is not fixed on the date of grant,
then on such date as the exercise price is fixed); and provided further, that,
except as provided in Section 15(b) below, the exercise price per share of
Common Stock subject to a Stock Appreciation Right may not be adjusted or
amended, including by means of amendment, cancellation or the replacement of
such Stock Appreciation Right with a subsequently awarded Stock Appreciation
Right. Notwithstanding the foregoing, the exercise price per share of a Stock
Appreciation Right that is a Substitute Award may be less than the Fair Market
Value per share on the date of award, provided, that such exercise price is not
less than the minimum exercise price that would be permitted for an equivalent
Stock Option as determined in accordance with Section 8(b) above. At the sole
discretion of the Committee, payments to a Participant upon exercise of a Stock
Appreciation Right may be made in cash, in shares of Common Stock having an
aggregate Fair Market Value as of the date of exercise equal to such amount, or
in a combination of cash and shares having an aggregate value as of the date of
exercise equal to such amount.
7
<PAGE>
(b) Stock Appreciation Rights in Tandem with Stock Options. A Stock
Appreciation Right may be granted alone or in addition to other Awards, or in
tandem with a Stock Option. A Stock Appreciation Right granted in tandem with a
Stock Option may be granted either at the same time as such Stock Option or
subsequent thereto. If granted in tandem with a Stock Option, a Stock
Appreciation Right shall cover the same number of shares of Common Stock as
covered by the Stock Option (or such lesser number of shares as the Committee
may determine) and shall be exercisable only at such time or times and to the
extent the related Stock Option shall be exercisable, and shall have the same
term and exercise price as the related Stock Option (which, in the case of a
Stock Appreciation Right granted after the grant of the related Stock Option,
may be less than the Fair Market Value per share on the date of grant of the
tandem Stock Appreciation Right). Upon exercise of a Stock Appreciation Right
granted in tandem with a Stock Option, the related Stock Option shall be
canceled automatically to the extent of the number of shares covered by such
exercise; conversely, if the related Stock Option is exercised as to some or all
of the shares covered by the tandem grant, the tandem Stock Appreciation Right
shall be canceled automatically to the extent of the number of shares covered by
the Stock Option exercise.
10. Stock Awards
(a) General. A Stock Award shall consist of one or more shares of Common
Stock granted to a Participant for no consideration other than the provision of
services (or, if required by applicable law in the reasonable judgment of the
Company, for payment of the par value of such shares). Stock Awards shall be
subject to such restrictions (if any) on transfer or other incidents of
ownership for such periods of time, and shall be subject to such conditions of
vesting, as the Committee may determine and as shall be set forth in the
applicable Award Agreement.
(b) Distributions. Any shares of Common Stock or other securities of the
Company received by a Participant to whom a Stock Award has been granted as a
result of a stock distribution to holders of Common Stock or as a stock dividend
on Common Stock shall be subject to the same terms, conditions and restrictions
as such Stock Award.
11. Restricted Stock Units
An Award of Restricted Stock Units shall consist of a grant of units, each
of which represents the right of the Participant to receive one share of Common
Stock, subject to the terms and conditions established by the Committee in
connection with the Award and set forth in the applicable Award Agreement. Upon
satisfaction of the conditions to vesting and payment specified in the
applicable Award Agreement, Restricted Stock Units will be payable in Common
Stock, equal to the Fair Market Value of the shares subject to such Restricted
Stock Units. Restricted Stock Units that are granted in respect to individual or
corporate performance shall vest no sooner than one year from the date of grant,
and Restricted Stock Units that are granted in connection with hiring or
retention arrangements between the Company and a Participant shall vest no
sooner than three years from the date of grant (subject, in either case, to
early vesting, if so provided by the Committee, upon death, disability,
termination of employment or a change in control of the Company).
12. Performance Units
Performance units may be granted as fixed or variable share- or
dollar-denominated units subject to such conditions of vesting and time of
payment as the Committee may determine and as shall be set forth in the
applicable Award Agreement relating to such Performance Units. Performance Units
may be paid in Common Stock, cash or a combination of Common Stock and cash, as
the Committee may determine.
13. Other Awards
The Committee shall have the authority to specify the terms and provisions
of other forms of equity-based or equity-related Awards not described above
which the Committee determines to be consistent with
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<PAGE>
the purpose of the Plan and the interests of the Company, which Awards may
provide for cash payments based in whole or in part on the value or future value
of Common Stock, for the acquisition or future acquisition of Common Stock, or
any combination thereof. Other Awards shall also include cash payments
(including the cash payment of dividend equivalents) under the Plan which may be
based on one or more criteria determined by the Committee which are unrelated to
the value of Common Stock and which may be granted in tandem with, or
independent of, other Awards under the Plan.
14. Certain Restrictions
(a) Transfers. Unless the Committee determines otherwise, no Award shall be
transferable other than by will or by the laws of descent and distribution or
pursuant to a domestic relations order; provided, however, that the Committee
may, in its discretion and subject to such terms and conditions as it shall
specify, permit the transfer of an Award for no consideration to a Participant's
family members or to one or more trusts or partnerships established in whole or
in part for the benefit of one or more of such family members (collectively,
"Permitted Transferees"). Any Award transferred to a Permitted Transferee shall
be further transferable only by will or the laws of descent and distribution or,
for no consideration, to another Permitted Transferee of the Participant. The
Committee may in its discretion permit transfers of Awards other than those
contemplated by this Section.
(b) Exercise. During the lifetime of the Participant, a Stock Option, Stock
Appreciation Right or similar-type Other Award shall be exercisable only by the
Participant or by a Permitted Transferee to whom such Stock Option, Stock
Appreciation Right or Other Award has been transferred in accordance with
Section 14(a).
15. Recapitalization or Reorganization
(a) Authority of the Company and Stockholders. The existence of the Plan,
the Award Agreements and the Awards granted hereunder shall not affect or
restrict in any way the right or power of the Company or the stockholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of stock or of options, warrants or
rights to purchase stock or of bonds, debentures, preferred or prior preference
stocks whose rights are superior to or affect the Common Stock or the rights
thereof or which are convertible into or exchangeable for Common Stock, or the
dissolution or liquidation of the Company, or any sale or transfer of all or any
part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
(b) Change in Capitalization. Notwithstanding any provision of the Plan or
any Award Agreement, the number and kind of shares authorized for issuance under
Section 5(a) above, including the maximum number of shares available under the
special limits provided for in Section 5(c) above, may be equitably adjusted in
the sole discretion of the Committee in the event of a stock split, stock
dividend, recapitalization, reorganization, merger, consolidation, extraordinary
dividend, split-up, spin-off, combination, exchange of shares, warrants or
rights offering to purchase Common Stock at a price substantially below Fair
Market Value or other similar corporate event affecting the Common Stock in
order to preserve, but not increase, the benefits or potential benefits intended
to be made available under the Plan. In addition, upon the occurrence of any of
the foregoing events, the number of outstanding Awards and the number and kind
of shares subject to any outstanding Award and the purchase price per share, if
any, under any outstanding Award may be equitably adjusted (including by payment
of cash to a Participant) in the sole discretion of the Committee in order to
preserve the benefits or potential benefits intended to be made available to
Participants granted Awards. Such adjustments shall be made by the Committee,
whose determination as to what adjustments shall be made, and the extent
thereof, shall be final. Unless otherwise determined by the Committee, such
adjusted Awards shall be subject to the same vesting schedule and restrictions
to which the underlying Award is subject.
9
<PAGE>
16. Amendments
The Board or Committee may at any time and from time to time alter, amend,
suspend or amend the Plan in whole or in part; provided, however, that any
amendment which under the requirements of any applicable law or stock exchange
rule must be approved by the stockholders of the Company shall not be effective
unless and until such stockholder approval has been obtained in compliance with
such law or rule; and provided further, that, except as contemplated by Section
15(b) above, the Board or Committee may not, without the approval of the
Company's stockholders, increase the maximum number of shares issuable under the
Plan or reduce the exercise price of a Stock Option or Stock Appreciation Right.
No termination or amendment of the Plan may, without the consent of the
Participant to whom an Award has been granted, adversely affect the rights of
such Participant under such Award. Notwithstanding any provision herein to the
contrary, the Board or Committee shall have broad authority to amend the Plan or
any Award under the Plan to take into account changes in applicable tax laws,
securities laws, accounting rules and other applicable state and federal laws.
17. Miscellaneous
(a) Tax Withholding. The Company may require any individual entitled to
receive a payment in respect of an Award to remit to the Company, prior to such
payment, an amount sufficient to satisfy any Federal, state or local tax
withholding requirements. The Company shall also have the right to deduct from
all cash payments made pursuant to or in connection with any Award any Federal,
state or local taxes required to be withheld with respect to such payments. In
the case of an Award payable in shares of Common Stock, the Company may permit
such individual to satisfy, in whole or in part, such obligation to remit taxes
by directing the Company to withhold shares of Common Stock that would otherwise
be received by such individual, pursuant to such rules as the Committee may
establish from time to time.
(b) No Right to Grants or Employment. No Eligible Individual or Participant
shall have any claim or right to receive grants of Awards under the Plan.
Nothing in the Plan or in any Award or Award Agreement shall confer upon any
employee of the Company any right to continued employment with the Company or
interfere in any way with the right of the Company to terminate the employment
of any of its employees at any time, with or without cause.
(c) Other Compensation. Nothing in this Plan shall preclude or limit the
ability of the Company to pay any compensation to a Participant under the
Company's other compensation and benefit plans and programs.
(d) Other Employee Benefit Plans. Payments received by a Participant under
any Award made pursuant to the Plan shall not be included in, nor have any
effect on, the determination of benefits under any other employee benefit plan
or similar arrangement provided by the Company, unless otherwise specifically
provided for under the terms of such plan or arrangement or by the Committee.
(e) Unfunded Plan. The Plan is intended to constitute an unfunded plan for
incentive compensation. Prior to the payment or settlement of any Award, nothing
contained herein shall give any Participant any rights that are greater than
those of a general creditor of the Company. In its sole discretion, the
Committee may authorize the creation of trusts or other arrangements to meet the
obligations created under the Plan to deliver Common Stock or payments in lieu
thereof with respect to awards hereunder.
(f) Securities Law Restrictions. The Committee may require each Eligible
Individual purchasing or acquiring shares of Common Stock pursuant to a Stock
Option or other Award under the Plan to represent to and agree with the Company
in writing that such Eligible Individual is acquiring the shares for investment
and not with a view to the distribution thereof. All certificates for shares of
Common Stock delivered under the Plan shall be subject to such stock-transfer
orders and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Securities and
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Exchange Commission, any exchange upon which the Common Stock is then listed,
and any applicable federal or state securities law, and the Committee may cause
a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions. No shares of Common Stock shall be issued
hereunder unless the Company shall have determined that such issuance is in
compliance with, or pursuant to an exemption from, all applicable federal and
state securities laws.
(g) Compliance with Rule 16b-3. Notwithstanding anything contained in the
Plan or in any Award Agreement to the contrary, if the consummation of any
transaction under the Plan would result in the possible imposition of liability
on a Participant pursuant to Section 16(b) of the Exchange Act, the Committee
shall have the right, in its sole discretion, but shall not be obligated, to
defer such transaction or the effectiveness of such action to the extent
necessary to avoid such liability, but in no event for a period longer than six
months.
(h) Award Agreement. In the event of any conflict or inconsistency between
the Plan and any Award Agreement, the Plan shall govern, and the Award Agreement
shall be interpreted to minimize or eliminate any such conflict or
inconsistency.
(i) Expenses. The costs and expenses of administering the Plan shall be
borne by the Company.
(j) Application of Funds. The proceeds received from the Company from the
sale of Common Stock or other securities pursuant to Awards will be used for
general corporate purposes.
(k) Applicable Law. Except as to matters of federal law, the Plan and all
actions taken thereunder shall be governed by and construed in accordance with
the laws of the State of Delaware without giving effect to conflicts of law
principles.
11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.05
<SEQUENCE>4
<FILENAME>dex1005.txt
<DESCRIPTION>AMBAC 1997 NON-EMPLOYEE DIRECTORS EQUITY PLAN
<TEXT>
<PAGE>
EXHIBIT 10.05
AMBAC FINANCIAL GROUP, INC.
1997 NON-EMPLOYEE DIRECTORS EQUITY PLAN
(as amended through December 12, 2000)
1. Purpose
The purpose of the Ambac Financial Group, Inc. 1997 Non-Employee Directors
Equity Plan (the "Plan") is to promote the long-term growth and financial
success of the Company by attracting, motivating and retaining non-employee
directors of outstanding ability and assisting the Company in promoting a
greater identity of interest between the Company's non-employee directors and
its stockholders.
The Plan replaces the AMBAC Inc. 1991 Non-Employee Directors Stock Plan (the
"Predecessor Plan"). From and after the effective date of the Plan as provided
in Section 10 below, no further awards shall be made under the Predecessor Plan.
2. Definitions
For purposes of the Plan, the following terms shall be defined as follows:
"Annual Meeting" means an annual meeting of the Company's stockholders.
"Board" means the Board of Directors of the Company.
"Change in Control" means:
(i) the acquisition by any Person of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the
Common Stock then outstanding, but shall not include any such acquisition by:
(A) the Company;
(B) any Subsidiary of the Company;
(C) any employee benefit plan of the Company or of any Subsidiary of the
Company;
(D) any Person or entity organized, appointed or established by the
Company for or pursuant to the terms of any such plan;
(E) any Person who as of January 31, 1996 was the beneficial owner of
15% or more of the shares of Common Stock outstanding on such date unless
and until such Person, together with all affiliates and associates of such
Person, becomes the beneficial owner of 25% or more of the shares of Common
Stock then outstanding whereupon a Change in Control shall be deemed to have
occurred; or
(F) any Person who becomes the Beneficial Owner of 20% or more, or, with
respect to a Person described in clause (E) above, 25% or more, of the
shares of Common Stock then outstanding as a result of a reduction in the
number of shares of Common Stock outstanding due to the repurchase of shares
of Common Stock by the Company unless and until such Person, after becoming
aware that such Person has become the beneficial owner of 20% or more, or
25% or more, as the case may be, of the then outstanding shares of Common
Stock, acquires beneficial ownership of additional shares of Common Stock
representing 1% or more of the shares of Common Stock then outstanding,
whereupon a Change in Control shall be deemed to have occurred or
<PAGE>
(ii) individuals who, as of the date this Plan is approved by the Board,
constitute the Board, and subsequently elected members of the Board whose
election is approved or recommended by at least a majority of such current
members or their successors whose election was so approved or recommended (other
than any subsequently elected members whose initial assumption of office occurs
as a result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a person other than the Board), cease for
any reason to constitute at least a majority of such Board; or
(iii) approval by the stockholders of the Company of (A) a merger or
consolidation of the Company with any other corporation, (B) the issuance of
voting securities of the Company in connection with a merger or consolidation of
the Company (or any Subsidiary) pursuant to applicable stock exchange
requirements, or (C) sale or other disposition of all or substantially all of
the assets of the Company or the acquisition of assets of another corporation
(each, a "Business Combination"), unless, in each case, immediately following
such Business Combination, all or substantially all of the individuals and
entities who were the beneficial owners of the Common Stock outstanding
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 70% of the then outstanding shares of common stock and 70%
of the combined voting power of the then outstanding voting securities entitled
to vote generally in the election of directors, as the case may be, of the
corporation resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns the Company
or all or substantially all of the Company's assets either directly or through
one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination, of the Common Stock.
"Common Stock" means the Common Stock of the Company, par value $.01 per
share, or such other class or kind of shares or other securities as may be
applicable under Section 12 below.
"Company" means Ambac Financial Group, Inc., a Delaware corporation, or any
successor to substantially all its business.
"Director Account" means the bookkeeping record established for each
Non-Employee Director. A Director Account is established only for purposes of
measuring the value of the Company's obligation to a Non-Employee Director in
respect of Director Stock Units and earnings thereon and not to segregate assets
or to identify assets that may be used to settle Director Stock Units.
"Director Option" means a right to purchase shares of Common Stock granted
to a Non-Employee Director pursuant to Section 7 hereof.
"Director Stock Unit" means a restricted stock unit granted to a
Non-Employee Director pursuant to Section 6 hereof.
"Effective Date" means the effective date of the Plan provided for in
Section 10 below.
"Fair Market Value" means the average of the highest and the lowest quoted
selling price of Common Stock as reported on the composite tape for securities
listed on the New York Stock Exchange on the applicable valuation date or, if
there were no sales on such valuation date, the average of the highest and the
lowest quoted selling prices on said composite tape for the preceding business
day.
"Non-Employee Director" means a member of the Board who is not an employee
of the Company or any of its subsidiaries.
"Permanent Disability" means a physical or mental impairment rendering a
Non-Employee Director substantially unable to function as a member of the Board
for any period of six consecutive months. Any dispute as to whether a
Non-Employee Director is Permanently Disabled shall be resolved by a physician
2
<PAGE>
mutually acceptable to the Non-Employee Director and the Company, whose decision
shall be final and binding upon the Non-Employee Director and the Company.
"Person" means any individual, firm, corporation, partnership or other
entity.
"Predecessor Plan" has the meaning set forth in Section 1 above.
"Subsidiary" means (i) a corporation or other entity with respect to which
the Company, directly or indirectly, has the power, whether through the
ownership of voting securities, by contract or otherwise, to elect at least a
majority of the members of such corporation's board of directors or analogous
governing body, or (ii) any other corporation or other entity in which the
Company, directly or indirectly, has an equity or similar interest and which the
Committee designates as a Subsidiary for purposes of the Plan.
3. Administration
(a) Administration by the Board. The Plan shall be administered by the
Board, which may adopt rules and regulations it considers necessary or
appropriate to carry out the Plan's purposes. The Board's interpretation and
construction of any Plan provision shall be final and conclusive. The Board may,
but need not, from time to time delegate some or all of its authority under the
Plan to a committee consisting of one or more members of the Board, any such
delegation to be subject to the restrictions and limits that the Board specifies
at the time of such delegation or thereafter. References in the Plan to the
"Board" shall, to the extent consistent with the terms and limitations of any
such delegation, be deemed to include a reference to any such committee to which
the Board's authority hereunder has been delegated.
(b) Award Certificate. The terms and conditions of each grant of Directors
Stock Units and Director Options under the Plan shall be embodied in an award
agreement or award certificate which shall incorporate the Plan by reference,
shall indicate the date on which the Director Stock Units or Director Options
were granted and the number of Director Stock Units or Director Options granted
on such date.
4. Shares Available
Subject to the provisions of Section 12 below, the maximum number of shares
of Common Stock which may be issued under the Plan (the "Section 4 Limit") shall
be 210,000 shares plus the number of shares of Common Stock that remain
available for issuance under the Predecessor Plan as of the date the Plan is
approved by the stockholders of the Company (increased by any shares of Common
Stock subject to any award (or portion thereof) outstanding under the
Predecessor Plan on such date which lapses, expires or is otherwise terminated
without the issuance of such shares or is settled by the delivery of
consideration other than shares). Subject to Section 12 below, of the shares of
Common Stock available for issuance under the Plan, no more than 75,000 shares
may be issued upon settlement of Director Stock Units. For purposes of
determining the number of shares of Common Stock that remain available for
issuance, there shall be added back to the Section 4 Limit and again be
available under the Plan any shares of Common Stock tendered to pay the exercise
price of a Director Option. Either authorized and unissued shares of Common
Stock or treasury shares may be delivered pursuant to the Plan.
5. Eligibility
Director Stock Units and Director Options shall be granted only to
Non-Employee Directors.
6. Director Stock Units
(a) General. A Director Stock Unit shall represent the right to receive one
share of Common Stock upon satisfaction of the conditions to vesting and
settlement specified in the Plan. Director Stock Units will be settled
exclusively in Common Stock.
3
<PAGE>
(b) Grants of Director Stock Units. Director Stock Units shall be
awarded under the Plan as follows:
(i) On the date of the Annual Meeting coincident with or first
succeeding a Non-Employee Director's initial election to the Board (or
re-election to the Board after a period during which the Non-Employee
Director did not serve on the Board), the Non-Employee Director shall
receive a grant of 3,000 Director Stock Units.
(ii) As of the date of the Annual Meeting that is closest in time to the
applicable vesting date of any Director Stock Units in accordance with
Section 6(d)(i) below, or the vesting date of any restricted shares under
the Predecessor Plan in accordance with Section 6(c)(i) thereof, a
Non-Employee Director shall receive an additional grant of 3,000 Director
Stock Units, provided that (A) the Annual Meeting as of which such
additional grant is to be made occurs during the term of the Plan as set
forth in Section 10 below, and (B) the Non-Employee Director is standing for
re-election at such Annual Meeting.
(c) Accounts. As of the date of each Annual Meeting as of which a
Non-Employee Director is granted Director Stock Units, the Director Account
of such Non-Employee Director will be credited with 3,000 Director Stock
Units. In the event that the Company pays any cash or other dividend or
makes any other distribution in respect of the Common Stock, each Director
Account will be credited with an additional number of Director Stock Units
(including fractions thereof) determined by dividing (A) the amount of cash,
or the value (as determined by the Board) of any securities or other
property, paid or distributed in respect of one outstanding share of Common
Stock by (B) the Fair Market Value of a share of Common Stock for the date
of such payment or distribution, and multiplying the result of such division
by (C) the number of Director Stock Units that were credited to the Director
Account immediately prior to the date of the dividend or other distribution.
Credits shall be made effective as of the date of the dividend or other
distribution in respect of the Common Stock.
(d) Vesting; Accelerated Vesting; Deferral.
(i) Director Stock Units granted in respect of a given Annual Meeting,
and any additional Director Stock Units credited to a Director Account in
respect of earnings or other distributions on such Director Stock Units as
provided in Section 6(c), shall vest on the fifth anniversary of the date of
grant and shall be settled as soon as practicable thereafter, provided that
the Non-Employee Director shall have remained a member of the Board
continuously from the date of grant until the earlier of (A) such fifth
anniversary or (B) if the Non-Employee Director declines to stand for
re-election to the Board at the Annual Meeting held in the fifth calendar
year following the date of grant, the date of such Annual Meeting.
(ii) Notwithstanding the provisions of Section 6(d)(i) above, all
Director Stock Units granted to a Non-Employee Director shall immediately
vest upon the first to occur of (A) a Non-Employee Director ceasing to be a
member of the Board as a result of retirement from the Board in accordance
with the retirement policy then applicable to Board members, (B) a
Non-Employee Director ceasing to be a member of the Board as a result of
death or Permanent Disability or (C) subject to the following sentence, a
Change in Control of the Company, and shall be settled as soon as
practicable thereafter. Notwithstanding the preceding sentence, if any
Person commences a tender offer for shares of Common Stock which, if
successfully completed, would result in a Change in Control, then all
Director Stock Units granted to a Non-Employee Director shall vest and be
settled immediately prior to the scheduled expiration of such tender offer,
and the Company shall have instituted procedures to enable the Non-Employee
Director, if he so desires, to tender the shares issued upon settlement of
such Directors Stock Units into such offer
(iii) Notwithstanding the provisions of Sections 6(d)(i) and 6(d)(ii)
above, a Non-Employee Director may elect to defer settlement of any or all
Director Stock Units to a date subsequent to the vesting date of such
Director Stock Units, provided that no such deferral may extend beyond the
4
<PAGE>
earlier of (A) the Non-Employee Director's termination of service on the
Board or (B) the Non-Employee's death. Settlement of any deferred Director
Stock Units shall be made on or as soon as practicable following the date
specified by the Non-Employee Director in the relevant deferral election or,
if applicable, the earlier of the dates specified in clauses (A) and (B) of
the preceding sentence.
(e) Forfeiture of Grant. Except as provided in Section 6(d)(ii) above,
all Director Stock Units shall be forfeited, and all rights of the
Non-Employee Director to or with respect to such Director Units shall
terminate without any obligation on the part of the Company, upon the
termination of a Non-Employee Director's service as a member of the Board
prior to the date on which such Director Stock Units vest in accordance with
Section 6(d)(i) above.
(f) Delivery of Share Certificates. As soon as practicable following the
vesting of Director Stock Units as provided in Sections 6(d)(i) and 6(d)(ii)
above, or the date for deferred settlement as provided in Section 6(d)(iii)
above, Director Stock Units shall be settled by delivery to the Non-Employee
Director of a share certificate for the number of shares corresponding to
such Director Units. Shares delivered in settlement of Director Stock Units
shall be free of all such restrictions, except any that may be imposed under
applicable law or the Company's trading policy.
(g) No Stockholder Rights. The crediting of Director Stock Units to a
Director Account shall not confer on the relevant Non-Employee Director any
rights as a stockholder of the Company.
7. Grants of Director Options
(a) General. A Director Option shall entitle a Non-Employee Director to
purchase a specified number of shares of Common Stock during a specified
period at an exercise price per share of Common Stock determined as provided
below. All Director Options provided for herein shall have the general terms
and conditions set forth in Section 8 below.
(b) Annual Grants of Director Options. As of the date of each Annual
Meeting, commencing with the 1997 Annual Meeting, each Non-Employee Director
shall automatically receive Director Options to purchase 3,750 shares of
Common Stock provided that the Non-Employee Director shall continue to serve
as a director of the Company after such Annual Meeting. The exercise price
per share of Common Stock of each Director Option provided for in this
Section 7(b) shall be the Fair Market Value of one share of Common Stock on
the date of the relevant Annual Meeting.
(c) Grants of Director Options to New Directors. A Non-Employee Director
who is initially elected or appointed to the Board other than in connection
with an Annual Meeting shall receive, as of the date of such initial
election or appointment, Director Options to purchase a number of shares
determined by multiplying 3,750 by a fraction, the numerator of which is the
number of full months remaining until the next Annual Meeting (starting with
the month following the date of election or appointment and counting the
month in which the next Annual Meeting is scheduled to occur as a full
month) and the denominator of which is 12. (If the date of the next Annual
Meeting has not been scheduled at the time of the Non-Employee Director's
initial election or appointment, it shall be assumed that the next Annual
Meeting will occur in the same month as the immediately preceding Annual
Meeting.) The exercise price per share of Common Stock of each Director
Option provided for in this Section 7(d) shall be the Fair Market Value of
one share of Common Stock on the date of the Non-Employee Director's
election or appointment to the Board.
8. General Terms and Conditions of Directors Options
(a) Option Term. Each Director Option shall expire on the date of the Annual
Meeting held in the seventh calendar year following the date of grant, subject
to earlier expiration as provided herein, provided, however, that Director
Options granted to a Non-Employee Director whose initial election
5
<PAGE>
occurs other than in connection with an Annual Meeting shall be treated for this
purpose as though they had been granted at the first Annual Meeting following
such initial election.
(b) Vesting; Accelerated Vesting; Effect of Termination of Service.
(i) Vesting Generally. Director Options shall vest and become
exercisable as of the first anniversary of the date of grant, assuming that
the Non-Employee Director has continued to serve as a member of the Board
until the earlier of (A) such first anniversary or (B) if the Non-Employee
Director declines to stand for reelection to the Board at the Annual Meeting
held in the calendar year following the date of grant, the date of such
Annual Meeting. Notwithstanding the preceding sentence, all Director Options
shall be considered fully vested and exercisable upon the earlier to occur
of (X) termination of the Non-Employee Director's service on the Board by
reason of death or Permanent Disability or (Y) a Change in Control,
provided, however, that if any Person commences a tender offer for shares of
Common Stock which, if successfully completed, would result in a Change in
Control, then all Director Options granted to a Non-Employee Director shall
vest immediately prior to the scheduled expiration of such tender offer, and
the Company shall have instituted procedures to enable the Non-Employee
Director, if he so desires, to tender the shares issued upon the exercise of
such stock options into such offer.
(ii) Exercise Following Termination of Service. Following termination of
a Non-Employee Director's service on the Board, the former Non-Employee
Director (or the former Non-Employee Directors' estate, personal
representative or beneficiary, as the case may be) shall have the right,
subject to the other terms and conditions hereof, to exercise all Director
Options that had vested as of or in connection with the termination of
service:
(A) at any time within three years after the date of termination of
service, if such termination was by reason of death, Permanent
Disability or retirement from the Board in accordance with the
retirement policy then in effect for Board members, or
(B) in all other cases, at any time within one year after the date
of termination of service; subject, in all case, to earlier expiration
of the Director Option pursuant to Section 8(a) above.
(c) Notice of Exercise. Subject to the other terms and conditions of the
Plan, a Non-Employee Director may exercise all or any portion of a vested
Director Option by giving written notice of exercise to the Company or its
designated agent, provided, however, that no fewer than 10 shares of Common
Stock may be purchased upon any exercise of a Director Option unless the number
of shares purchased at such time is the total number of shares in respect of
which the Director Option is then exercisable, and provided, further, that in no
event shall the Option be exercisable for a fractional share. The date of
exercise of an Option shall be the later of (i) the date on which the Company or
its agent receives such written notice or (ii) the date on which the conditions
provided in Sections 8(d) and 8(e) below are satisfied.
(d) Payment. The exercise price of a Director Option may be paid in cash or
previously owned shares or a combination thereof or by any other method approved
by the Board.
(e) Limitation on Exercise. A Director Option shall not be exercisable
unless the Common Stock subject thereto has been registered under the Securities
Act of 1933, as amended (the "1933 Act"), and qualified under applicable state
"blue sky" laws in connection with the offer and sale thereof, or the Company
has determined that an exemption from registration under the 1933 Act and from
qualification under such state "blue sky" laws is available.
(f) Issuance of Shares. Subject to the foregoing conditions, as soon as is
reasonably practicable after its receipt of a proper notice of exercise and
payment of the exercise price for the number of shares with respect to which a
Director Option is exercised, the Company shall deliver to the exercising
Non-
6
<PAGE>
Employee Director, at the principal office of the Company or at such other
location as may be acceptable to the Company and the Non-Employee Director, one
or more stock certificates for the appropriate number of shares of Common Stock
issued in connection with such exercise. Such shares shall be fully paid and
nonassessable and shall be issued in the name of the Non-Employee Director.
Notwithstanding the foregoing, the Board in its discretion may, subject to rules
and procedures as it may adopt or impose from time to time, provide Non-Employee
Directors with the opportunity to defer receipt of shares of Common Stock
issuable upon exercise of Director Options.
9. Transferability
Director Stock Units (including interests in a Director Account) and
Director Options may not be transferred, pledged, assigned or otherwise disposed
of except by will or the laws of descent and distribution or pursuant to a
domestic relations order, provided, however, that Director Options may be
transferred to a member or members of a Non-Employee Director's immediate family
(as defined below) or to one or more trusts or partnerships established in whole
or in part for the benefit of one or more of such immediate family members
(collectively as "Permitted Transferees"), subject to such rules and procedures
as may from time to time be adopted or imposed by the Board. If a Director Stock
Option is transferred to a Permitted Transferee, it shall be further
transferable only by will or the laws of descent and distribution or, for no
consideration, to another Permitted Transferee of the Non-Employee Director. A
Non-Employee Director shall notify the Company in writing prior to any proposed
transfer of a Director Option to a Permitted Transferee and shall furnish the
Company, upon request, with information concerning such Permitted Transferee's
financial condition and investment experience. For purposes of the Plan, a
Non-Employee Director's "immediate family" means any child, stepchild,
grandchild, spouse, son-in-law or daughter-in-law and shall include adoptive
relationships; provided, however, that if the Company adopts a different
definition of "immediate family" (or similar term) in connection with the
transferability of employee stock options awarded to employees of the Company,
such definition shall apply, without further action of the Board, to the Plan.
10. Term
(a) Effective Date; Expiration. The Effective Date shall be the date of the
1997 Annual Meeting, assuming the Plan is approved by the stockholders of the
Company at such Annual Meeting. Unless earlier terminated in accordance with
Section 11 below, the Plan shall expire on the date of the Annual Meeting held
in 2004. Grants of Director Stock Units and Director Options shall be made in
connection with the Annual Meeting held in 2004, and shall be the last grants
made under the Plan. Expiration of the Plan in connection with the Annual
Meeting held in 2004 shall not affect awards of Director Stock Units and
Director Options made prior to such Annual Meeting, which awards shall remain
outstanding subject to the terms hereof.
(b) Coordination with Predecessor Plan. Awards of "Directors Shares" (as
such term is defined in the Predecessor Plan) shall be made under the
Predecessor Plan in connection with the 1997 Annual Meeting. Assuming the Plan
is approved by the stockholders of the Company at the 1997 Annual Meeting, no
further awards shall be made under the Predecessor Plan after the Effective
Date. Awards outstanding under the Predecessor Plan (including awards made in
connection with the 1997 Annual Meeting) shall remain outstanding after the
Effective Date subject to the terms thereof.
11. Amendments
The Board may at any time and from time to time alter, amend, suspend or
terminate the Plan in whole of in part, including without limitation to amend
the provisions for determining the amount of Director Stock Units or Directors
Options to be issued to a Non-Employee Director, provided, however, that:
7
<PAGE>
(i) any amendment which under the requirements of applicable law or
stock exchange rule must be approved by the stockholders of the Company
shall not be effective unless and until such stockholder approval has been
obtained in compliance with such law or rule;
(ii) except as provided in Section 12 below, the Board may not, without
the approval of the Company's stockholders, increase the number of shares
available for issuance under the Plan pursuant to Section 4 above or the
number of Director Stock Units to be issued to any Non-Employee Director
pursuant to Section 6 above or reduce the exercise price of a Director
Option.
No termination or amendment of the Plan that would adversely affect a
Non-Employee Director's rights under the Plan with respect to any award of
Directors Stock Units or Director Options made prior to such action shall be
effective as to such Non-Employee Director unless he or she consents thereto.
12. Adjustment of and Changes in Shares
In the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, distribution of property, special cash
dividend or other change in corporate structure affecting the shares, the Board,
in its discretion, may make (i) such proportionate adjustments as it considers
appropriate in the number and kind of shares authorized for issuance hereunder
in order to preserve, but not increase, the benefits or potential benefits
intended to be made available hereunder and/or (ii) such other adjustments as it
deems appropriate. The Board's determination as to what, if any, adjustments
shall be made shall be final and binding on the Company and all Non-Employee
Directors who receive grants under the Plan.
13. No Right to Re-election
Nothing in the Plan shall be deemed to create any obligation on the part of
the Board to nominate any of its members for re-election by the Company's
stockholders, nor confer upon any Non-Employee Director the right to remain a
member of the Board for any period of time, or at any particular rate of
compensation.
14. Governing Law
The Plan and all agreements entered into under the Plan shall be construed
in accordance with and governed by the laws of the State of Delaware.
15. No Restriction on Right of Company to Effect Corporate Changes
The Plan shall not affect in any way the right or power of the Company or
its stockholders to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of stock
or of options, warrants or rights to purchase stock or of bonds, debentures,
preferred or prior preference stocks whose rights are superior to or affect the
Common Stock or the rights thereof or which are convertible into or exchangeable
for Common Stock, or the dissolution or liquidation of the Company, or any sale
or transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
16. Unfunded Plan
The Plan is unfunded. Prior to the payment or settlement of any award of
Director Stock Units or the exercise of any Director Options, nothing contained
herein shall give any non-Employee Director any rights that are greater than
those of a general creditor of the Company. In its sole discretion, the Board
may authorize the creation of trusts or other arrangements to meet the
obligations created under the Plan to deliver Common Stock with respect to
awards hereunder.
8
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.24
<SEQUENCE>5
<FILENAME>dex1024.txt
<DESCRIPTION>$800,000,000 AMENDED & RELSTATED CREDIT AGREEMENT
<TEXT>
<PAGE>
================================================================================
EXHIBIT 10.24
$800,000,000
AMENDMENT AND RESTATEMENT
TO AND OF
AMENDED AND RESTATED CREDIT AGREEMENT
by and among
AMBAC ASSURANCE CORPORATION,
as Borrower,
VARIOUS BANKS,
BANK OF AMERICA, N.A.,
and
DEUTSCHE BANK, AG,
NEW YORK BRANCH
As Co-Syndication Agents
and
THE BANK OF NEW YORK,
As Administrative Agent
----------------------
Dated as of June 30, 2001
----------------------
BNY CAPITAL MARKETS, INC.,
as Lead Arranger and Sole Book Manager
================================================================================
<PAGE>
AMENDMENT AND RESTATEMENT
TO AND OF
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
AMENDMENT AND RESTATEMENT (this "Restatement"), dated as of June 30,
2001, to and of the Existing Credit Agreement (as defined in the Recitals),
among AMBAC ASSURANCE CORPORATION (the "Borrower"), a Wisconsin stock insurance
corporation, the Banks (as defined in the Recitals), and THE BANK OF NEW YORK,
as Administrative Agent (in such capacity, the "Administrative Agent").
RECITALS
--------
WHEREAS:
A. Reference is made to the Amended and Restated Credit Agreement
dated as of December 2, 2000 (the "Existing Credit Agreement") among the
Borrower, the Banks party thereto (the "Existing Banks"), each financial
institution acting as a Syndication Agent thereunder, and The Bank of New York,
in its capacity as Administrative Agent.
B. Simultaneously with the execution and delivery hereof: (i)
certain of the Existing Banks (each, a "Withdrawing Bank" and collectively, the
"Withdrawing Banks") are terminating their Commitment and/or their Contingent
Commitment under the Existing Credit Agreement and shall no longer be deemed
party thereto; (ii) each of the financial institutions listed on Schedule II
annexed hereto (each, a "New Bank" and collectively, the "New Banks"; the
Existing Banks that are not Withdrawing Banks together with the New Banks are
hereinafter referred to collectively as the "Banks") has agreed to become a
"Bank" under the Existing Credit Agreement as amended and restated hereby and to
extend to the Borrower a Commitment and/or a Contingent Commitment in the amount
set forth opposite its name on Part A of Schedule I annexed hereto and the
Borrower desires to accept such Commitments and/or Contingent Commitments of the
New Banks and to cause each New Bank to be added as a "Bank" to the Existing
Credit Agreement as amended and restated hereby; and (iii) certain of the
Existing Banks that are not Withdrawing Banks desire to change their respective
Commitments and/or their Contingent Commitments to the amount set forth opposite
their respective names on Schedule I hereto and the Borrower desires to accept
such changed Commitments and/or Contingent Commitments.
C. The parties hereto desire to amend and restate the Existing
Credit Agreement upon the terms, and subject to the conditions, contained
herein.
D. Capitalized terms used herein that are defined in the Existing
Credit Agreement and are not otherwise defined herein shall have the respective
meanings ascribed thereto in the Existing Credit Agreement.
Accordingly, in consideration of the Recitals and the covenants,
conditions and agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
<PAGE>
Article 1. Amendments to and Restatement of the Existing Credit
Agreement.
---------
Section 1.01 The parties hereto agree that:
(a) The Existing Credit Agreement is hereby restated in its entirety,
except as specifically amended by this Restatement; and
(b) The Existing Credit Agreement and the other Credit Documents are
each deemed amended, supplemented and restated hereby to the extent necessary to
give effect to the provisions of this Restatement.
Section 1.02 The parties hereto further agree that from and after the
Restatement Effective Date:
(a) Section 3.04(a) of the Existing Credit Agreement is hereby
amended by (i) deleting the date "December 2, 2007" in the second line thereof
and substituting therefor the date "June 30, 2008", (ii) deleting the words "the
Effective Date" on the third and fourth lines thereof and substituting therefor
the date "June 30, 2001", and (iii) deleting the date "December 2" on the 16th
line thereof and substituting therefor the date "June 30";
(b) Schedule I to the Existing Credit Agreement is hereby amended by
deleting the text thereof in its entirety and substituting therefor Schedule I
annexed to this Restatement, and notwithstanding any of the procedures set forth
in Section 12.04 of the Existing Credit Agreement, the Commitment and/or
Contingent Commitment of each Bank shall be the amount set forth opposite such
Bank's name on such Schedule I, as the same may be reduced or increased pursuant
to the terms of the Existing Credit Agreement as amended and restated hereby,
and, with respect to each Existing Bank that is not a Withdrawing Bank, such
amount shall supersede and be deemed to amend the amount of its respective
Commitment and/or Contingent Commitment as set forth opposite its name on
Schedule I to the Existing Credit Agreement;
(c) The Commitment and/or the Contingent Commitment of each
Withdrawing Bank under the Existing Credit Agreement has been terminated and
each Withdrawing Bank shall have no further duties or obligations under the
Existing Credit Agreement after the Restatement Effective Date;
(d) (i) Each New Bank will abide by the terms of the Existing Credit
Agreement as amended and restated hereby, (ii) the Existing Credit Agreement as
amended and restated hereby shall be binding upon, inure to the benefit of, and
be enforceable by and against each New Bank, and (ii) each New Bank shall be
deemed to be a "Bank" under, and as such term is defined in, the Existing Credit
Agreement as amended and restated hereby, and shall have the rights and
obligations of a "Bank" thereunder and under the other Credit Documents.
Article 2. Extension of Commitment Period.
------------------------------
The Administrative Agent and each of the Banks hereby consent to the
amendment of the Expiry Date effected pursuant to Section 1.02(a) of this
Restatement, notwithstanding the procedures set forth in Section 3.04 of the
Existing Credit Agreement.
-2-
<PAGE>
Article 3. Conditions to Effectiveness of this Restatement.
-----------------------------------------------
This Restatement shall become effective as of the date hereof (the
"Restatement Effective Date") upon the fulfillment (to the satisfaction of the
Administrative Agent) of the following conditions precedent:
Section 3.01 Restatement; Notes.
------------------
The Borrower and each Bank shall have signed a copy hereof (whether the
same or different copies) and shall have delivered such copy to the
Administrative Agent at its Notice Office and there shall have been delivered to
each New Bank and to each Existing Bank whose Commitment and/or Contingent
Commitment has changed, a Note or Notes executed by the Borrower in the amount,
maturity and as otherwise provided in the Existing Credit Agreement, as amended
and restated by this Restatement.
Section 3.02 No Default; Representations and Warranties.
------------------------------------------
There shall exist no Default or Event of Default and all
representations and warranties contained in the Existing Credit Agreement, as
amended and restated by this Restatement and in the other Credit Documents shall
be true and correct in all material respects with the same effect as though such
representations and warranties had been made on and as of the Restatement
Effective Date (other than representations and warranties made as of a specific
date).
Section 3.03 Opinions of Counsel to the New Banks.
------------------------------------
Moody's, S&P and the Borrower shall have received an opinion addressed
to each of them and dated the Restatement Effective Date from counsel to each of
the New Banks covering the matters set forth in the appropriate form or forms
attached as Exhibits E-1, E-2, and E-3 to the Existing Credit Agreement, with
appropriate modifications to reflect this Restatement.
Section 3.04 Covered Portfolio, Etc.
----------------------
The Administrative Agent shall have received a certificate, dated the
Restatement Effective Date, signed by the President or any Vice President of the
Borrower, setting forth in reasonable detail as of March 31, 2001 (a) each
Insured Municipal Obligation in the Covered Municipal Portfolio, each Insured
Structured Obligation in the Covered Structured Portfolio and each reinsurance
agreement or similar arrangement which covers any material amount of such
Insured Municipal Obligations or such Insured Structured Obligations, (b) each
default by the issuer of any such Insured Municipal Obligation or Insured
Structured Obligation or other obligor with respect thereto which has formed or
could form the basis of a claim under an Insurance Contract, (c) each default by
any party to any such reinsurance agreement or similar arrangement, (d) each
claim paid by the Borrower under any Insurance Contract with respect to such
Insured Municipal Obligations or Insured Structured Obligations, (e) the
Borrower's reasonable estimate as of March 31, 2001 of the Average Annual Debt
Service on the Covered Municipal Portfolio and the Net Remaining Par on the
Covered Structured Portfolio, (f) the Borrower's Cumulative Municipal Losses and
Cumulative Structured Losses (stating separately any Permitted Municipal
Reserves or Permitted Structured Reserves, as the case may be,
-3-
<PAGE>
included therein) for the period from December 2, 2000 through March 31, 2001,
and (g) the Borrower's reasonable estimate as of March 31, 2001 of Municipal
Installment Premiums payable with respect to the Covered Municipal Portfolio and
Structured Installment Premiums payable with respect to the Covered Structured
Portfolio.
Section 3.05 Adverse Change, Rating, Etc.
---------------------------
(a) Nothing shall have occurred (and no Bank shall have become aware
of any facts or conditions not previously known) which such Bank shall
reasonably determine has, or could reasonably be expected to have, a material
adverse effect on the rights or remedies of such Bank, or on the ability of the
Borrower to perform its obligations to such Bank or which has, or could
reasonably be expected to have, a materially adverse effect on the business,
operations, property, assets, liabilities or condition (financial or otherwise)
of the Borrower.
(b) All necessary governmental (domestic and foreign) and third party
approvals in connection with the transactions contemplated by the Credit
Documents and otherwise referred to herein or therein shall have been obtained
and remain in effect, and all applicable waiting periods shall have expired
without any action being taken by any competent authority which restrains,
prevents or imposes materially adverse conditions upon the consummation of the
transactions contemplated by the Credit Documents and otherwise referred to
herein or therein. Additionally, there shall not exist any judgment, order,
injunction or other restraint issued or filed or a hearing seeking injunctive
relief or other restraint pending or notified prohibiting or imposing materially
adverse conditions upon the making of the Loans.
(c) On the Restatement Effective Date, the Borrower's Rating assigned
by Moody's and S&P shall be Aaa and AAA, respectively.
Section 3.06 Litigation.
----------
No litigation by any entity (private or governmental) shall be pending
or threatened with respect to this Agreement or any documentation executed in
connection herewith or the transactions contemplated hereby, or with respect to
any material Indebtedness of the Borrower or which any Bank shall determine
could reasonably be expected to have a materially adverse effect on the
business, operations, property, assets, liabilities or condition (financial or
otherwise) of the Borrower.
Section 3.07 Fees, Etc.
---------
(a) All of the certificates, legal opinions and other documents and
papers referred to in this Section 3, unless otherwise specified, shall have
been delivered to the Administrative Agent at its Notice Office.
(b) The Borrower shall have paid to each Credit Party, for its own
account, fees and other amounts payable in the amounts and at the times
separately agreed upon between the Borrower and such Credit Party.
(c) The Administrative Agent shall have received a certificate of the
Secretary or Assistant Secretary of the Borrower (i) attaching a true and
complete copy of the resolutions
-4-
<PAGE>
of its Board of Directors and of all documents evidencing all necessary
corporate action (in form and substance reasonably satisfactory to the
Administrative Agent) taken by it to authorize this Restatement, (ii) certifying
that its Restated Articles of Incorporation and Restated Corporate By-Laws have
not been amended since December 21, 1999, or, if so, setting forth the same, and
(iii) setting forth the incumbency of its officer or officers who may sign this
Restatement, including therein a signature specimen of such officer or officers.
(d) The Administrative Agent shall have received such other documents
as it shall reasonably request.
Article 4. Representations and Warranties.
------------------------------
Section 4.01 Representations and Warranties of the Borrower.
----------------------------------------------
As of the Restatement Effective Date, and after giving effect to this
Restatement, the Borrower hereby (i) reaffirms, ratifies and confirms and admits
the validity and enforceability of the Existing Credit Agreement and the other
Credit Documents and all of its obligations thereunder, (ii) represents and
warrants that there exists no Default or Event of Default immediately after
giving effect to this Restatement, and (iii) represents and warrants that the
representations and warranties contained in the Credit Documents, including the
Existing Credit Agreement as amended and restated by this Restatement (other
than the representations and warranties made as of a specific date), are true
and correct in all material respects on and as of the date hereof.
Section 4.02 Representations and Warranties of the New Banks.
-----------------------------------------------
Each New Bank (i) confirms that it has received a copy of the Existing
Credit Agreement and the other Credit Documents, together with copies of the
financial statements referred to therein and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Restatement; (ii) agrees that it will, independently
and without reliance upon the Administrative Agent or any other Bank and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
the Existing Credit Agreement as amended and restated hereby; (iii) confirms
that it is an Eligible Transferee under Section 12.04(b) of the Existing Credit
Agreement as amended and restated hereby; and (iv) agrees that it will perform
in accordance with their terms all of the obligations which by the terms of the
Existing Credit Agreement as amended and restated hereby are required to be
performed by it as a "Bank" thereunder including, without limitation, if such
New Bank is not a United States person (as such term is defined in Section
7701(a)(30) of the Code) for U.S. Federal income tax purposes, complying with
the provisions of Section 4.04(b) thereof.
Article 5. Miscellaneous.
-------------
Section 5.01 Counterparts.
------------
This Restatement may be executed in any number of counterparts, each of
which shall be an original and all of which shall constitute one agreement. It
shall not be necessary in
-5-
<PAGE>
making proof of this Restatement to produce or account for more than one
counterpart signed by the party against which enforcement is sought.
Section 5.02 Return of Replaced Notes.
------------------------
Each Existing Bank that receives a new Note or Notes pursuant to
Section 3.01 hereof shall, promptly after the execution and delivery by the
Borrower of its new Note or Notes, mark the Note or Notes delivered to it in
connection with the Existing Credit Agreement "Replaced by substituted Note" and
return such Note or Notes to the Borrower.
Section 5.03 References in Credit Documents.
------------------------------
All references in and to the Existing Credit Agreement and in the other
Credit Documents to (i) the "Credit Agreement", and also, in the case of the
Existing Credit Agreement to "this Agreement", shall be deemed to refer to the
Existing Credit Agreement as amended and restated hereby, (ii) "Note" and/or
"Notes", shall be deemed to include all Notes executed hereunder, (iii) the
"Credit Documents", shall be deemed to include this Restatement and the Notes
executed hereunder, and (iv) the "Banks", shall be deemed to include the New
Banks.
Section 5.04 Ratification and Confirmation.
-----------------------------
Except as amended and restated hereby, the Existing Credit Agreement
and the other Credit Documents are hereby ratified and confirmed in all respects
and shall remain in full force and effect in accordance with their respective
terms.
Section 5.05 Governing Law; Jurisdiction and Venue.
-------------------------------------
(a) This Restatement and the rights and obligations of the parties
hereunder shall be construed in accordance with and be governed by the law of
the State of New York. Any legal action or proceeding against the Borrower with
respect to this Restatement may be brought in the courts of the State of New
York or of the United States for the Southern District of New York, and, by
execution and delivery of this Restatement, the Borrower hereby irrevocably
accepts for itself and in respect of its property, generally and
unconditionally, the jurisdiction of the aforesaid courts. The Borrower
irrevocably consents to the service of process out of any of the aforementioned
courts in any such action or proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to the Borrower at its address
set forth opposite its signature below, such service to become effective 30 days
after such mailing. Except as otherwise provided in Section 4.05 of the Existing
Credit Agreement, nothing herein shall affect the right of any Agent or any Bank
under the Agreement or this Restatement to serve process in any other manner
permitted by law or to commence legal proceedings or otherwise proceed against
the Borrower in any other jurisdiction.
(b) The Borrower hereby irrevocably waives any objection which it may
now or hereafter have to the laying of venue of any of the aforesaid actions or
proceedings arising out of or in connection with this Restatement brought in the
courts referred to in clause (a) above and hereby further irrevocably waives and
agrees not to plead or claim in any such court that any such action or
proceeding brought in any such court has been brought in an inconvenient forum.
-6-
<PAGE>
Section 5.06 Waiver of Trial by Jury.
-----------------------
Each of the parties hereto hereby irrevocably waives all right to trial
by jury in any action, proceeding or counterclaim (whether based on contract,
tort or otherwise) arising out of or relating to any of the Credit Documents or
the actions of any of the parties hereto in the negotiation, administration,
performance or enforcement thereof.
[Signature Pages to Follow]
-7-
<PAGE>
AMENDMENT AND RESTATEMENT
TO AND OF
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
AS EVIDENCE of the agreement by the parties hereto to the terms and
conditions herein contained, each such party has caused this Restatement to be
executed on its behalf.
Address: AMBAC ASSURANCE CORPORATION
One State Street Plaza By /s/ ROBERT W. STARR
New York, New York 10004 --------------------------------------
Attn: Robert W. Starr Name: Robert W. Starr
Telecopy: (212) 208-3108 Title: Managing Director and Treasurer
With a copy to:
Kevin Doyle, Managing Director
and General Counsel
Telecopy: (212) 208-3550
THE BANK OF NEW YORK,
Address: as Administrative Agent and as Lender
One Wall Street By ______________________________________
New York, New York 10286 Name:_________________________________
Attn: Evan R. Glass Title:________________________________
Telecopy: (212) 809-9520
BANK OF AMERICA, N.A.,
Address: as Lender
231 South LaSalle Street By ______________________________________
Chicago, Illinois 60697 Name:_________________________________
Attn: Mehul Mehta Title:________________________________
Telecopy: 312-828-7448
DEUTSCHE BANK AG, NEW YORK BRANCH,
Address: as Lender
31 West 52nd Street By ______________________________________
New York, New York 10019 Name:_________________________________
Attn: John McGill Title:________________________________
Telecopy: (212) 469-8366
-8-
<PAGE>
AMENDMENT AND RESTATEMENT
TO AND OF
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
LANDESBANK BADEN - WURTTEMBERG,
Address: as Lender
535 Madison Avenue By ______________________________________
New York, NY 10022-4212 Name:_________________________________
Attn: Robert O'Brien Title:________________________________
Telecopy: (212) 584-1709
By ______________________________________
Name:_________________________________
Title:________________________________
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "RABOBANK
NEDERLAND", NEW YORK BRANCH,
Address: as Lender
245 Park Avenue By ______________________________________
New York, NY 10167-0062 Name:_________________________________
Attn: Angela R. Reilly Title:________________________________
Telecopy: (212) 309-5139
BAYERISCHE LANDESBANK GIROZENTRALE,
Address: as Lender
560 Lexington Avenue By ______________________________________
New York, NY 10022 Name:_________________________________
Attn: Scott M. Allison Title:________________________________
Telecopy: (212) 310-9993
-9-
<PAGE>
AMENDMENT AND RESTATEMENT
TO AND OF
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
WESTDEUTSCHE LANDESBANK GIROZENTRALE,
Address: as Lender
1211 Avenue of the Americas By ______________________________________
New York, NY 10036 Name:_________________________________
Attn: Lilian Tung Lum Title:________________________________
Telecopy: (212) 852-6156
By ______________________________________
Name:_________________________________
Title:________________________________
NORDDEUTSCHE LANDESBANK GIROZENTRALE,
Address: as Lender
1114 Avenue of the Americas By ______________________________________
New York, NY 10036 Name:_________________________________
Attn: Georg L. Peters Title:________________________________
Telecopy: (212) 812-6860
KBC BANK NV,
Address: as Lender
New York Branch By ______________________________________
125 West 55th Street Name:_________________________________
New York, NY 10019 Title:________________________________
Attn: Patrick J. Owens
Telecopy: (212) 956-5580
LANDESBANK HESSEN-THURINGEN GIROZENTRALE,
Address: as Lender
New York Branch By ______________________________________
420 Fifth Avenue Name:_________________________________
New York, NY 10018-2729 Title:________________________________
Attn: John A. Sarno
Telecopy: (212) 703-5256
-10-
<PAGE>
AMENDMENT AND RESTATEMENT
TO AND OF
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
LLOYDS TSB,
Address: as Lender
575 Fifth Avenue By ______________________________________
17th Floor Name:_________________________________
New York, NY 10017 Title:________________________________
Attn: Thea Watkins
Telecopy: (212) 930-5098
By ______________________________________
Name:_________________________________
Title:________________________________
THE CHASE MANHATTAN BANK,
Address: as Lender
270 Park Avenue, 20th Floor By ______________________________________
New York, NY 10017 Name:_________________________________
Attn: Marybeth Mullen Title:________________________________
Telecopy: (212) 270-0670
BARCLAYS BANK PLC,
Address: as Lender
222 Broadway By ______________________________________
New York, NY 10038 Name:_________________________________
Attn: Richard H. Herder Title:________________________________
Telecopy: (212) 412-5610
CAJA MADRID,
Address: as Lender
Torre Caja Madrid By ______________________________________
Paseo de la Castellana, 189 Name:_________________________________
28046 Madrid, Spain Title:________________________________
Attn: Paul Barrabes
Telecopy: (3491) 423-95-93
-11-
<PAGE>
AMENDMENT AND RESTATEMENT
TO AND OF
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
DGZ - DEKA BANK DEUTSCHE KOMMUNALBANK,
Address: as Lender
International Finance By _____________________________________
Taunusanlage 10 Name:_________________________________
Title:________________________________
60325 Frankfurt am Main
Germany
Attn: Stephan Wagner
Telecopy: (4969) 7147-2171
SWISS RE FINANCIAL PRODUCTS CORPORATION
Address: as Lender
55 East 52nd Street By ______________________________________
New York, New York 10055 Name:_________________________________
Attn: David Colarossi Title:________________________________
Telecopy: (212) 317-5050
By ______________________________________
Name:_________________________________
Title:________________________________
BANCO SANTANDER CENTRAL
HISPANO, S.A. NEW YORK BRANCH
Address: as Lender
45 East 53rd Street By ______________________________________
New York, New York 10022 Name:_________________________________
Attn: Victoria Moreno Title:________________________________
Telecopy: (212) 350-3690
-12-
<PAGE>
AMENDMENT AND RESTATEMENT
TO AND OF
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
SCHEDULE I
PART A
Commitments
-----------
Municipal Structured
Tranche Tranche
Name Commitment Commitment
- ---- ------------ ------------
Landesbank Baden - Wurttemberg $ 75,000,000 -
The Bank of New York 20,000,000 $ 50,000,000
Cooperatieve Centrale Raiffeisen - 55,000,000 25,000,000
Boerenleenbank B.A., "Rabobank Nederland",
New York Branch
Bayerische Landesbank Girozentrale 45,000,000 30,000,000
Westdeutsche Landesbank Girozentrale 50,000,000 25,000,000
Deutsche Bank AG, New York Branch 75,000,000 -
Norddeutsche Landesbank Girozentrale 35,000,000 15,000,000
Bank of America, N.A 35,000,000 15,000,000
KBC Bank NV 34,000,000 -
Landesbank Hessen - Thueringen Girozentrale 35,000,000 -
Lloyds TSB 20,000,000 15,000,000
The Chase Manhattan Bank 26,000,000 -
Barclays Bank Plc 50,000,000 -
Caja Madrid 25,000,000 -
DGZ - Deka Bank Deutsche Kommunalbank 25,000,000 -
Banco Santander Central Hispano, S.A 15,000,000 5,000,000
New York Branch
------------ ------------
Total $620,000,000 $180,000,000
<PAGE>
PART B
Part B Banks
------------
The Bank of New York
Westdeutsche Landesbank Girozentrale
Deutsche Bank AG, New York Branch
Norddeutsche Landesbank Girozentrale
Bank of America, N.A.
KBC Bank NV
Lloyds TSB
The Chase Manhattan Bank
Barclays Bank Plc
Caja Madrid
DGZ - Deka Bank Deutsche Konmunalbank
Banco Santander Central Hispano, S.A.
New York Branch
-2-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.25
<SEQUENCE>6
<FILENAME>dex1025.txt
<DESCRIPTION>NOTICE OF TERMINATION OF $400,000,000 OF UNUTILIZE
<TEXT>
<PAGE>
EXHIBIT 10.25
December 14, 2001
Ms. Susan Baratta
BNY Capital Markets, Inc.
Agency Function Administration
One Wall Street 18th floor
New York, New York 10286
Dear Ms. Baratta:
I refer to the Amended and Restated Credit Agreement, dated as of December 2,
2000 as amended and restated as of June 30, 2001 (the "Agreement") among Ambac
Assurance Corporation (the "Borrower"), various banks (the "Banks"), Bank of
America, N.A. and Deutsche Bank AG, New York Branch, (the "Co-Syndication
Agents") and The Bank of New York (the "Administrative Agent").
In accordance with Section 3.02 of the Agreement, the Borrower hereby gives
notice of termination of i) $400 million of Unutilized Commitments pro-rata
among the Banks and between the Municipal Tranche Commitment and the Structured
Tranche Commitment, ii) $86 million of Unutilized Contingent Commitments from
Swiss Re Financial Products Corporation, iii) $10 million of Unutilized
Contingent Commitments from Bayerische Landesbank Girozentrale, and iv) $33
million of Unutilized Contingent Commitments from Cooperative Centrale
Raiffeisen Boerenleenbank B.A., "Rabobank Nederland", New York Branch. The
termination of the Unutilized Commitments and Unutilized Contingent Commitments
should be effective as of December 21, 2001.
Please sign below and fax to me at 212.208.3108 to confirm your receipt of this
Notice.
Sincerely,
Robert W. Starr
RECEIVED:
The Bank of New York
as Administrative Agent
By _________________________
Title:
cc. Frank Bivona
Louis DiFranco
David Trick
Lizanne Eberle
Bill Giusti
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.27
<SEQUENCE>7
<FILENAME>dex1027.txt
<DESCRIPTION>PUT OPTION AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.27
PUT OPTION AGREEMENT
between
AMBAC ASSURANCE CORPORATION
and
DUTCH HARBOR FINANCE MASTER TRUST,
ON BEHALF OF ITS SERIES
DUTCH HARBOR FINANCE SUB-TRUST I
Dated as of December 3, 2001
<PAGE>
Preamble
This Put Option Agreement, dated as of December 3, 2001 (the
"Agreement"), is by and between Ambac Assurance Corporation, a Wisconsin
corporation ("Ambac Assurance") and Dutch Harbor Finance Master Trust (the
"Master Trust"), a Delaware business trust, on behalf of its series, Dutch
Harbor Finance Sub-Trust I (the "Sub-Trust").
Recitals
WHEREAS, Ambac Assurance is authorized to issue 4,000 shares of
non-cumulative, perpetual preferred stock designated "Auction Market Preferred
Shares," which shares shall not be registered with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, on or before the Put
Option Payment Date (defined below) (the "Preferred Stock"); and
WHEREAS, Ambac Assurance and the Master Trust, on behalf of the
Sub-Trust, desire to enter into a binding agreement pursuant to which Ambac
Assurance will have the right to sell, at its option, the Preferred Stock to the
Master Trust, on behalf of the Sub-Trust, and the Master Trust, on behalf of the
Sub-Trust, will have an obligation to purchase the Preferred Stock upon Ambac
Assurance's exercise of its option and upon the other terms and conditions
agreed upon by the parties.
NOW THEREFORE, the parties hereto agree as follows:
1. Definitions; Interpretation
1.1 The words "herein," "hereof" and "hereunder" and other words o(pound)
similar import refer to this Agreement as a whole and not to any
particular section, clause or other subdivision, and references to
"Sections" refer to Sections of this Agreement except as otherwise
expressly provided.
1.2 In this Agreement:
"ABC Securities" has the meaning set forth in the Declaration.
"Agreement" has the meaning set forth above in the Preamble.
"Ambac Assurance" has the meaning set forth above in the Preamble.
"Auction Date" has the meaning set forth in the General Terms of the
ABC Securities attached to the Declaration as Appendix A.
2
<PAGE>
"Auction Rate" has the meaning set forth in the General Terms of the
ABC Securities attached to the Declaration as Appendix A.
"Business Day" has the meaning set forth in the Declaration.
"Closing Date" means the date of this Agreement.
"Declaration" means the Declaration of Trust governing the Master
Trust, as the same may be amended or restated from time to time.
"Default" has the meaning set forth in the Declaration.
"Delayed Auction" has the meaning set forth in the General Terms of the
ABC Securities attached to the Declaration as Appendix A.
"Delayed Auction Date" has the meaning set forth in the General Terms
of the ABC Securities attached to the Declaration as Appendix A.
"Delayed Auction Period" has the meaning set forth in the General Terms
of the ABC Securities attached to the Declaration as Appendix A.
"Delayed Auction Rate" has the meaning set forth in the General Terms
of the ABC Securities attached to the Declaration as Appendix A.
"Delayed Distribution Rate" means, for each Delayed Auction Period, an
amount equal to (a) the yield anticipated to be earned during such
period on the Trust Property, minus (b) the anticipated expenses of the
Sub-Trust for such Delayed Auction Period, provided that such amount
shall be annualized and expressed as an annual rate with respect to the
aggregate face amount of the ABC Securities outstanding on the date the
Delayed Put Option Premium is determined.
"Delayed Put Option Premium" has the meaning set forth in Section 5.1.
"Delayed Put Option Premium Certificate" has the meaning set forth in
Section 5.2.
"Distribution Rate" means, for each Distribution Period, an amount
equal to (a) the Projected Yield for such period, minus (b) the
anticipated expenses of the Sub-Trust for such Distribution Period,
provided that such amount shall be annualized and expressed as an
annual rate with respect to the aggregate face amount of the ABC
Securities outstanding on the date the Put Option Premium is
determined. The Distribution Rate for each Distribution Period will be
calculated on the Auction Date occurring on the last Business Day prior
to such Distribution Period.
3
<PAGE>
"Distribution Payment Date" has the meaning set forth in the General
Terms of the ABC Securities attached to the Declaration as Appendix A.
"Distribution Period" has the meaning set forth in the General Terms of
the ABC Securities attached to the Declaration as Appendix A.
"Federal Funds Effective Rate" has the meaning set forth in the
Declaration.
"Holder" has the meaning set forth in the Declaration.
"Overnight Rate of Return" means the rate earned on the earnings on the
principal of the Trust Property from each Auction Date to the
Distribution Payment Date occurring on the next Business Day, which
shall be equal to the Federal Funds Effective Rate in effect as of the
Business Day prior to the date of the determination of the Put Option
Premium with respect to the Distribution Period for which such Put
Option Premium is calculated.
"Preferred Stock" has the meaning set forth above in the Recitals.
"Projected Yield" means all amounts of interest (including accreted
interest) and other payments due and payable (upon maturity or
otherwise) on the principal amount of the Trust Property (excluding any
repayment of principal) held by the Sub-Trust during the respective
Distribution Period, plus the amount of interest anticipated to be
earned based on the Overnight Rate of Return, as calculated on or prior
to 11:00 a.m. on the Auction Date for each respective Distribution
Period.
"Put Notice" means a written notice substantially in the form attached
hereto as Annex A.
"Put Option Premium" has the meaning set forth in Section 5.
"Put Option Premium Certificate" has the meaning set forth in Section
5.2.
"Put Option Payment Date" has the meaning set forth in Section 3.2(a).
"Put Option Price" has the meaning set forth in Section 4.1.
"Sub-Trust" has the meaning set forth above in the Preamble.
"Tax Matters Partner" has the meaning set forth in the Declaration.
"Trust Property" has the meaning set forth in the Declaration.
"Trustee" has the meaning set forth in the Declaration.
4
<PAGE>
In this Agreement, any reference to a "company" shall be construed so
as to include any corporation, trust, partnership, limited liability
company or other legal entity, wheresoever incorporated or established.
1.3 In this Agreement, save where the contrary is indicated, any reference
to:
(a) this Agreement or any other agreement or document shall be
construed as a reference to this Agreement or, as the case maybe,
such other agreement or document as the same may have been, or
may from time to time be, amended, varied, novated or
supplemented in accordance with its terms; and
(b) a statute shall be construed as a reference to such statute as
the same may have been, or may from time to time be, amended or
re-enacted.
1.4 In this Agreement, any definition shall be equally applicable to both
the singular and plural forms of the defined terms.
2. Put Option; Term
2.1 In consideration of the payment of the Put Option Premium and the
Delayed Put Option Premium, if any, the Master Trust, on behalf of the
Sub-Trust, hereby grants to Ambac Assurance the right to require the
Master Trust, on behalf of the Sub-Trust, to purchase the Preferred
Stock on the terms set forth in this Agreement.
2.2 This Agreement and the put option created hereby shall remain in effect
until the earlier to occur of the following:
(a) Ambac Assurance terminates this agreement by delivering a written
notice to the Master Trust, on behalf of the Sub-Trust, stating
that Ambac Assurance is terminating the Agreement on the next
succeeding Auction Date that follows the notice by at least three
(3) Business Days and indicating the Auction Date on which the
termination shall become effective. Delivery of a termination
notice by Ambac Assurance shall be irrevocable; and
(b) Ambac Assurance fails to make payment of the Put Option Premium
or the Delayed Put Option Premium, if any, and such failure has
not been cured within five (5) Business Days.
2.3 This Agreement shall terminate upon Ambac Assurance's exercise of its
rights under Section 3 and the payment of the Put Option Price under
Section 4, provided, however, that Section 7.5 shall survive such
termination.
5
<PAGE>
3. Exercise of Put Option
3.1 The Master Trust, on behalf of the Sub-Trust, agrees that it shall,
upon exercise of the option as provided in Section 3.2, purchase the
Preferred Stock from Ambac Assurance for a purchase price equal to the
Put Option Price, which Put Option Price shall be payable on the Put
Option Payment Date in accozdance with Section 4.
3.2 (a) Ambac Assurance may exercise the option at any time upon three
(3) Business Days' notice after the date hereof and prior to the
termination of this Agreement by serving a Put Notice on the
Master Trust, on behalf of the Sub-Trust, specifying a payment
date (the "Put Option Payment Date"), which shall be the next
Distribution Payment Date on or after the third Business Day
after service of the Put Notice on the Master Trust, on behalf of
the Sub-Trust. Any notice of exercise provided pursuant to this
Section 3.2(a) shall be irrevocable.
(b) On the Put Option Payment Date, Ambac Assurance shall convey to
the Master Trust, on behalf of the Sub-Trust, or its designee
Preferred Stock with an aggregate liquidation preference equal to
the aggregate face amount of the ABC Securities outstanding on
the Put Option Payment Date. In addition, the number of shares of
Preferred Stock delivered shall equal the number of ABC
Securities outstanding on the Put Option Payment Date. The
Preferred Stock shall be delivered free and clear of any defect
in title, together with all transfer and registration documents
(or all notices, instructions or other communications) as are
necessary to convey title to the Preferred Stock to the Master
Trust, on behalf of the Sub-Trust (or its nominee).
(c) For avoidance of doubt, (1) any cash received by the Master
Trust, on behalf of the Sub-Trust, as interest or other payments
earned on the principal amount of the Trust Property (net of fees
and expenses and excluding any repayment of principal) and not
distributed to Holders as of the Put Option Payment Date shall be
distributed to Holders and shall not be used to purchase shares
of Preferred Stock; and (2) the amount of Preferred Stock
purchased from Ambac Assurance shall be reduced by the amount, if
any, by which the aggregate face amount of ABC Securities is
reduced pursuant to principal or interest losses on Trust
Property as a result of Defaults as required by the operation of
Section 6.10) of the Declaration and Section 6(b) of the General
Terms of the ABC Securities attached to the Declaration as
Appendix A on or before the Put Option Payment Date.
4. Payments
4.1 Upon receipt of a Put Notice, the Master Trust will allow the then
current assets of the Sub-Trust to mature, and will deliver the
proceeds attributable to principal received upon
6
<PAGE>
maturity of the assets (after satisfying the Sub-Trust's creditors, if
any, and after any principal returned to holders of the ABC Securities
pursuant to Section 6.10j) of the Declaration and Section 6(b) of the
General Terms of the ABC Securities attached to the Declaration as
Appendix A) to Ambac Assurance on the Put Option Payment Date. The
amount of such payment shall be referred to herein as the "Put Option
Price."
4.2 Payment by the Master Trust, on behalf of the Sub-Trust, of the Put
Option Price shall be made on or prior to 3:00 p.m. on the Put Option
Payment Date and to the account of Ambac Assurance specified in the Put
Notice.
4.3 Payment of the Put Option Price by the Master Trust, on behalf of the
Sub-Trust, shall be made as provided in Section 4.1 and Section 4.2
without setoff, claim, recoupment, deduction or counterclaim; provided,
however, that if Ambac Assurance exercises its option under Section 3
hereof at any time that it has failed to pay all or a portion of the
Put Option Premium or the Delayed Put Option Premium, if any, and such
failure has not been cured on or before the Put Option Payment Date,
the Master Trust, on behalf of the Sub-Trust, shall be entitled to set
off against the Put Option Price such unpaid portion of the Put Option
Premium or the Delayed Put Option Premium, as the case may be.
5. Put Option Premium
5.1 In consideration for the Master Trust's agreement to purchase the
Preferred Stock on behalf of the Sub-Trust in accordance with the terms
of this Agreement, Ambac Assurance agrees to pay to the Master Trust,
on behalf of the Sub-Trust, in US dollars, on each Distribution Payment
Date, an amount equal to the product of (A) the Auction Rate on the ABC
Securities for the respective Distribution Period less the Distribution
Rate for such Distribution Period, (B) the aggregate face amount of the
ABC Securities of the Sub-Trust outstanding at the time the Put Option
Premium is calculated and (C) a fraction, the numerator of which will
be the number of calendar days in the respective Distribution Period,
and the denominator of which will be 360 days.
The amount derived in accordance with such formula shall be known
herein as the "Put Option Premium."
If there is a Default during any Distribution Period, then Ambac
Assurance agrees to pay to the Master Trust, on behalf of the
Sub-Trust, in US dollars on each Distribution Payment Date following
receipt of the Delayed Put Option Premium Certificate an amount, as
determined by the Trustee, equal to the product of (A) the Delayed
Auction Rate on the ABC Securities for the Delayed Auction Period less
the Delayed Distribution Rate for such Distribution Period, (B) the
aggregate face amount of the ABC Securities of the respective Sub-Trust
outstanding at the time the Delayed Put Option Premium is calculated
and (C) a fraction, the numerator of which will be the number of
calendar days in the respective Delayed Auction Period, and the
denominator of which will be 360 days.
7
<PAGE>
The amount derived in accordance with such formula shall be known
herein as the "Delayed Put Option Premium"
5.2 The amount of the Put Option Premium shall be calculated by the Trustee
and delivered in writing (the "Put Option Premium Certificate"),
substantially in the form attached hereto as Annex B, to Ambac
Assurance prior to 5:00 p.m. on each Auction Date. The amount of the
Delayed Put Option Premium shall be calculated by the Trustee and
delivered in writing (the "Delayed Put Option Premium Certificate") to
Arnbac Assurance prior to 5:00 p.m. on the Delayed Auction Date. The
Put Option Premium Certificate, and any Delayed Put Option Premium
Certificate, also shall set forth the eligible assets held by the
Sub-Trust, the anticipated yield earned on each such asset, any
anticipated fees to be paid or incurred by the Trustee on behalf of the
Trust and the computation of the Put Option Premium, or the Delayed Put
Option Premium, as the case may be, in each case for the respective
Distribution Period and the Delayed Auction Period, respectively, and
shall be in the form attached hereto as Annex B.
5.3 If the Put Option Premium, or the Delayed Put Option Premium, if any,
is not paid on the date on which it is due, interest shall accrue
thereon at a rate equal to the maximum rate then in effect, during the
five (5) day cure period set forth in Section 2.2(b) hereof until such
Put Option Premium, or Delayed Put Option Premium, is paid.
6. Obligations Absolute
6.1 The Master Trust, on behalf of the Sub-Trust, acknowledges that,
provided Ambac Assurance has complied with the terms of this Agreement,
the obligations of the Master Trust, on behalf of the Sub-Trust,
undertaken under this Agreement are absolute, irrevocable and
unconditional irrespective of any circumstances whatsoever, including
any defense otherwise available to the Master Trust, on behalf of the
Sub-Trust, in equity or at law, including, without limitation, the
defense of fraud, any defense based on the failure of Ambac Assurance
to disclose any matter, whether or not material, to the Master Trust,
on behalf of the Sub-Trust, or any other person, and any defense of
breach of warranty or misrepresentation, and irrespective of any other
circumstance which might otherwise constitute a legal or equitable
discharge or defense of an insurer, surety or guarantor under any and
all circumstances. The enforceability and effectiveness of this
Agreement and the liability of the Master Trust, on behalf of the
Sub-Trust, and the rights, remedies, powers and privileges of Arnbac
Assurance under this Agreement shall not be affected, limited, reduced,
discharged or terminated, and the Master Trust, on behalf of the
Sub-Trust, hereby expressly waives, to the fullest extent permitted by
applicable law, any defense now or in the future arising by reason of:
(a) the illegality, invalidity or unenforceability of all or any part
of the Declaration;
(b) any action taken by Ambac Assurance;
8
<PAGE>
(c) any change in the direct or indirect ownership or control of
Ambac Assurance or of any shares or ownership interests thereof
(d) any other circumstance whatsoever that might otherwise constitute
a legal or equitable discharge or defense of or for the Master
Trust, on behalf of the SubTrust;
provided, however, that notwithstanding the provisions of this Section
6.1, the Master Trust, on behalf of the Sub-Trust, shall have no
further obligations under this Agreement after the termination of this
Agreement. In addition, the breach of any covenant made in this
Agreement by the Master Trust, on behalf of the Sub-Trust, shall not
terminate this Agreement or limit the rights of Ambac Assurance
hereunder.
6.2 For the avoidance of doubt, no failure or delay by Ambac Assurance in
exercising its rights hereunder shall operate as a waiver of its rights
hereunder (except as specifically provided in this Agreement,
including, without limitation, in respect of the notice periods and
payment dates set forth in Section 3.2(a)) and, subject to the
termination of this Agreement not having occurred, Ambac Assurance may
continue to exercise its rights hereunder at any time.
7. Covenants
7.1 Ambac Assurance hereby covenants and agrees that, at all times prior to
the earlier of the termination of this Agreement or completion of the
sale of the Preferred Stock to the Master Trust, on behalf of the
Sub-Trust, pursuant to this Agreement, it shall not amend, restate,
revise or otherwise alter the rights, terms and preferences of the
Preferred Stock whether by operation of merger, reorganization or
otherwise, without the prior consent of the Master Trust, on behalf of
the Sub-Trust, and it will not register the Preferred Stock with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended, on or before the Put Option Payment Date.
7.2 The Master Trust, on behalf of the Sub-Trust, hereby covenants and
agrees that, at all times prior to the earlier of the termination of
this Agreement or completion of the sale of the Preferred Stock to the
Master Trust, on behalf of the Sub-Trust, pursuant to this Agreement,
it shall not amend, restate, revise or otherwise alter the rights,
terms and preferences of the ABC Securities whether by operation of
merger, reorganization or otherwise and it will not register the ABC
Securities with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
7.3 Ambac Assurance hereby covenants and agrees that any Preferred Stock
delivered to the Master Trust, on behalf of the Sub-Tnrst, shall rank,
at the time of delivery, (a) senior to the common stock ofAmbac
Assurance and (b) senior to or pari passu with the most
9
<PAGE>
senior preferred shares of Ambac then authorized by its Restated
Articles of Amendment or then issued and outstanding; provided that
this covenant may be amended with the consent of Ambac Assurance and at
least a Majority in Face Amount (as defined in the Declaration) of the
ABC Securities.
7.4 Ambac Assurance hereby covenants and agrees that if Ambac Assurance's
financial strength rating is ever lowered while this Agreement remains
effective, Ambac Assurance shall provide written notice to the Trustee,
on behalf of the Sub-Trust, of such lowered rating.
7.5 Ambac Assurance hereby covenants and agrees that it will not pay a
dividend on its common stock pursuant to the first and second provisos
of Section 4 of its Restated Articles of Incorporation unless it
receives written assurance from Ambac Financial Group, Inc. that it
will use such dividends for the purposes permitted by such provisos.
Such written assurance shall provide that the holders of the Preferred
Stock shall be third party beneficiaries of, and entitled to enforce,
the provisions of such assurance as if they were parties thereto. The
agreements and rights set forth in this Section 7.5 shall survive the
exercise by Ambac Assurance of its rights under this Agreement, the
issuance of the Preferred Stock and the liquidation of the Sub-Trust.
8. This Agreement to Govern
If there is any inconsistency between any provision of this Agreement
and any other agreement, the provisions of this Agreement shall prevail
to the extent of such inconsistency but not otherwise.
9. Representations and Warranties
9.1 The Master Trust represents and warrants to Ambac Assurance, on behalf
of the SubTrust, that, as of the date hereof:
(a) the Master Trust is duly organized and validly existing under the
Delaware Business Trust Act and has the power and authority to
own its assets and to conduct the activities which it conducts;
(b) the Sub-Trust has been duly formed by the Master Trust in
accordance with its Declaration;
(c) its entry into, exercise of its rights and/or performance of or
compliance with its obligations under this Agreement do not and
will not violate (1) any law to which it is subject, (2) any of
its constitutional documents or (3) any agreement to which it is
a party or which is binding on it or its assets;
10
<PAGE>
(d) it has the power to enter into, exercise its rights and perform
and comply with its obligations under this Agreement and has
taken all necessary action to authorize the execution, delivery
and performance of this Agreement;
(e) it will obtain and maintain in effect and comply with the terms
of all necessary consents, registrations and the like of or
with any government or other regulatory body or authority
applicable to this Agreement;
(f) its obligations under this Agreement are valid, binding and
enforceable at law;
(g) it is not in default under any agreement to which it is a party
or by which it or its assets is or are bound and no litigation,
arbitration or administrative proceedings are current or pending,
which default, litigation, arbitration or administrative
proceedings are material in the context of this Agreement;
(h) it is not necessary or advisable in order to ensure the validity,
effectiveness, performance or enforceability of this Agreement
that any document be filed, registered or recorded in any public
office or elsewhere;
(i) each of the above representations and warranties will be correct
and complied with in all respects during the term of this
Agreement;
(j) no consent, approval, authorization or order of any court or
governmental authority, agency, commission or commissioner or
other regulatory authority is required for the consummation by
the Master Trust, on behalf of the Sub-Trust, of the transactions
contemplated by this Agreement; and
(k) assuming compliance with the transfer restrictions with respect
to the ABC Securities set forth in the Declaration, neither the
Sub-Trust nor the Master Trust is required to register with the
Securities and Exchange Commission as an investment company under
the Investment Company Act of 1940, as amended.
9.2 Ambac Assurance represents and warrants to the Master Trust, on behalf
of the SubTrust, that, as of the date hereof:
(a) it is duly organized and validly existing as a corporation under
the corporate law statutes of the State of Wisconsin and has the
power and authority to own its assets and to conduct the
activities which it conducts;
(b) its entry into, exercise of its rights and/or performance of or
compliance with its obligations under this Agreement do not and
will not violate (1) any law to which it is subject, (2) any of
its constitutional documents or (3) any agreement to which it is
a party or which is binding on it or its assets;
11
<PAGE>
(c) it has the power to enter into, exercise its rights and perform
and comply with its obligations under this Agreement and has
taken all necessary action to authorize the execution, delivery
and performance of this Agreement;
(d) it will obtain and maintain in effect and comply with the terms
of all necessary consents, registrations and the like of or with
any government or other regulatory body or authority applicable
to this Agreement;
(e) its obligations under this Agreement are valid, binding and
enforceable at law;
(f) it is not in default under any agreement to which it is a party
or by which it or its assets is or are bound and no litigation,
arbitration or administrative proceedings are current or pending,
which default, litigation, arbitration or administrative
proceedings are material in the context of this Agreement;
(g) it is not necessary or advisable in order to ensure the validity,
effectiveness, performance or enforceability of this Agreement
that any document be filed, registered or recorded in any public
office or elsewhere;
(h) each of the above representations and warranties will be correct
and complied with in all respects during the term of this
Agreement;
(i) no consent, approval, authorization or order of any court or
governmental authority, agency, commission or commissioner or
other regulatory authority is required for the consummation by
Ambac Assurance of the transactions contemplated by this
Agreement and the sale of the Preferred Stock to the Master
Trust, on behalf of the Sub-Trust, pursuant to the terms hereof
need not be registered with the Securities and Exchange
Commission under the Securities Act of 1933, as amended; and
(j) as of the Put Option Payment Date, the Preferred Stock will be
duly authorized for issuance and sale to the Master Trust, on
behalf of the Sub-Trust, pursuant to this Agreement and, when
issued and delivered by Ambac Assurance pursuant to this
Agreement against payment of the Put Option Price, will be
validly issued, fully paid and nonassessable; the Preferred Stock
will conform in all respects to the terms of the Preferred Stock
set forth in the Restated Articles of Incorporation of Ambac
Assurance attached hereto as Annex C; and the Preferred Stock
will not be subject to preemptive or other similar rights.
12
<PAGE>
10. Severability
10.1 Any provision of this Agreement which is or becomes illegal, invalid or
unenforceable in any jurisdiction may be severed from the other
provisions of this Agreement without invalidating the remaining
provisions hereof, and any such illegality, invalidity or
unenforceability shall not invalidate or render illegal or
unenforceable such provision in any other jurisdiction.
11. Notices
11.1 Each communication to be made hereunder shall be deemed to have been
given (i) five (5) days after deposit of such communication with a
reputable national courier service addressed to such party at its
address specified below (or at such other address as such party shall
specify to the other party hereto in writing) or (ii) when transmitted
by facsimile to such party at its fccsimile number specified below (or
at such other facsimile number as such party shall specify to the other
party hereto in writing):
If to Ambac Assurance at:
Ambac Assurance Corporation
One State Street Plaza
New York, New York 10004
Attention: Robert Starr,
Treasurer Facsimile: (212) 208-3108
Copy to: Kevin Doyle, General Counsel
If to the Master Trust or Sub-Trust at:
The Bank of New York (Delaware)
P.O. Box 6973
White Clay Center Route 273
Newark, Delaware 19714
Attention: Kristine Gullo
Facsimile: (302) 283-8279
Copies to:
The Bank of New York
Corporate Trust Administration
5 Penn Plaza
New York, NY 10001
13
<PAGE>
Attention: Dealing and Trading Group
Facsimile: (212) 896-7295
12. Counterparts
This Agreement may be executed in any number of counterparts and by the
different parties hereto on separate counterparts each of which when
executed and delivered shall constitute an original, but all the
counterparts shall together constitute but one and the same instrument.
13. Benefit of Agreement and Disclaimer
13.1 This Agreement shall enure to the benefit of each party hereto and its
successors and assigns and transferees; provided that neither party
hereto may transfer its rights and obligations hereunder, by operation
of law or otherwise, without the prior written consent of the other
party.
14. Amendment and Assignment
14.1 This Agreement may not be amended or modified in any respect, nor may
any provision be waived, without the written agreement of both parties.
No waiver by one party of any obligation of the other hereunder shall
be considered a waiver of any other obligation of such party.
14.2 Neither the Master Trust, on behalf of the Sub-Trust, nor Ambac
Assurance may assign its rights or obligations under this Agreement to
any other person, except that Ambac Assurance may assign its rights and
obligations under this Agreement to another person as a result of a
merger of Ambac Assurance with another person or as a result of a sale
of all or substantially all of the assets of Ambac Assurance to another
person if the other person expressly assumes all of the rights and
obligations of Ambac Assurance under this Agreement; and immediately
following the merger or sale of substantially all of its assets, the
rating of the substitute preferred stock or the unsecured debt
obligations of the other person is at least as high as the credit
rating of the Preferred Stock or the general unsecured debt obligations
of Ambac Assurance, as the case may be (or if no such ratings exist,
the financial strength rating of Ambac Assurance) immediately prior to
the merger or sale.
15. Governing Law
15.1 THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
14
<PAGE>
16. Jurisdiction
16.1 Each of the parties hereto irrevocably submits to the non-exclusive
jurisdiction of the courts of the State of New York in respect of any
action or proceeding arising out of or in connection with this
Agreement ("Proceedings"). Each of the parties hereto irrevocably
waives, to the fullest extent permitted by applicable law, any
objection that it may now or hereafter have to the laying of the venue
of any such Proceedings in the courts of the State of New York and any
claim that any Proceeding brought in any such court has been brought in
an inconvenient forum. Each of the Master Trust, on behalf of the
Sub-Trust, and Ambac Assurance agrees that it shall at all times have
an authorized agent in the State of New York upon whom process may be
served in connection with any Proceedings, and each of the Master
Trust, on behalf of the Sub-Trust, and Ambac Assurance hereby
authorizes and appoints the Trustee to accept service of all legal
process arising out of or connected with this Agreement in the State of
New York and service on such person (or substitute) shall be deemed to
be service on the Master Trust, on behalf of the Sub-Trust, or Ambac
Assurance, as the case may be. Except upon such a substitution, the
Master Trust, on behalf of the Sub-Trust, and Ambac Assurance shall not
revoke any such authority or appointment and shall at all times
maintain an agent for service of process in the State of New York. If
for any reason such person shall cease to act as agent for the service
of process, the Master Trust, on behalf of the Sub-Trust, and Ambac
Assurance shall promptly appoint another such agent, and shall
forthwith notify each other of such appointment. The submission to
jurisdiction reflected in this paragraph shall not (and shall not be
construed so as to) limit the right of any person to take Proceedings
in any court of competent jurisdiction, nor shall the taking of
Proceedings in any one or more jurisdictions preclude the taking of
Proceedings in any other jurisdiction (whether concurrently or not) if
and to the extent permitted by law.
17. Limitation of Liability
17.1 It is expressly understood that (a) this Agreement is executed and
delivered by The Bank of New York (Delaware), not individually or
personally but solely as Trustee, in the exercise of the powers and
authority conferred and vested in it under the Declaration, (b) each of
the representations, undertakings and agreements herein made on the
part of the Master Trust, on behalf of the Sub-Trust, is made and
intended not as personal representations, undertakings and agreements
by The Bank of New York (Delaware), but is made and intended for the
purpose of binding only the Master Trust, on behalf of the Sub-Trust,
and (c) under no circumstances shall The Bank of New York (Delaware) be
personally liable for the breach or failure of any obligation,
representation, warranty or covenant made or undertaken by the Master
Trust, on behalf of the Sub-Trust, under this Agreement or the other
related documents.
15
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Put Option
Agreement to be duly executed as of the day and year first above written.
DUTCH HARBOR FINANCE MASTER TRUST,
on behalf of its series, Dutch Harbor
Finance SubTrust I,
By: The Bank of New York (Delaware),
not in its individual capacity but
solely as Trustee
By: _____________________________________
Name:
Title:
AMBAC ASSURANCE CORPORATION
By: _____________________________________
Name:
Title:
16
<PAGE>
ANNEX A
Form of Put Notice
To: Dutch Harbor Finance Sub-Trust 1
c/o Bank of New York (Delaware)
P.O. Box 6973
502 White Clay Center
Route 273
Newark, Delaware 19714
with a copy to:
The Bank of New York
5 Penn Plaza
New York, New York 10001
Attention: Dealing and Trading Group
Date:
Ladies and Gentlemen:
We refer to the put option agreement dated December 3, 2001 (as heretofore
amended, the "Put Option Agreement") entered into between us and you. Terms
defined in the Put Option Agreement (except where otherwise defined herein)
shall have the same respective meanings herein.
This notice is the notice for the purposes of Section 3.2(a) of the Put Option
Agreement. We hereby require you to pay the Put Option Price on the Put Option
Payment Date, which shall be [ ] to the following account:
[ ]
Yours faithfully,
for and on behalf of
Ambac Assurance Corporation
<PAGE>
ANNEX B
Put Option Premium Certificate
Ambac Assurance Corporation
Put Option on Auction Market Preferred Shares
- --------------------------------------------------------------------------------
1. Distribution Period: [first day of Period]-[last day of Period]: [number of
days in period-generally 28]
2. Auction Rate determined for the Distribution Period on [insert date of
Auction]. 0.000000% $ (0)
3.
Issuer Ratings Purchase Price Yield to Maturity Interest
- ------------- --------- ---------------- ------------------- ------------
One Corp A1+/Pl
Two Corp A1+/P1
Three Corp A1+/P1
Four Corp A1+/P1
Five Corp A1+/P1
Six Corp A1+/P1
Seven Corp A1+/P1
Eight Corp A1+/P1
Nine Corp Al/P1
Ten Corp Al/P1
- ------------- --------- ---------------- ------------------- ------------
4. 000,000,000 0.0% $ 0.0
5. Applicable Federal Funds Effective Rate: 0.00% 0.0% $ 0.0
6. Broker-Dealer Fee 0.0% $ (0.0)
7. Trustee, Custodian and IPA Fees 0.0% $ (0.0)
8. Asset Management Fee 0.0% $ (0.0)
9. Tax Matters Partner Fee 0.0% $ (0.0)
<PAGE>
10. Servicing Agent Fee 0.0% $ (0.0)
11. Other Fees and Expenses for the Distribution
Period, if any 0.0% $ (0.0)
12. Computation of Put Premium Due on [insert
Distribution PaymentDate] by 11:00 a.m. ------------------- ------------
New York Time: 0.0% $ (0.0)
------------------- ------------
13. The asset manager is in compliance with the investment policy.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.28
<SEQUENCE>8
<FILENAME>dex1028.txt
<DESCRIPTION>PUT OPTION AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.28
PUT OPTION AGREEMENT
between
AMBAC ASSURANCE CORPORATION
and
DUTCH HARBOR FINANCE MASTER TRUST,
ON BEHALF OF ITS SERIES
DUTCH HARBOR FINANCE SUB-TRUST II
Dated as of December 3, 2001
<PAGE>
Preamble
This Put Option Agreement, dated as of December 3, 2001 (the
"Agreement"), is by and between Ambac Assurance Corporation, a Wisconsin
corporation ("Ambac Assurance") and Dutch Harbor Finance Master Trust (the
"Master Trust"), a Delaware business trust, on behalf of its series, Dutch
Harbor Finance Sub-Trust II (the "Sub-Trust").
Recitals
WHEREAS, Ambac Assurance is authorized to issue 4,000 shares of
non-cumulative, perpetual preferred stock designated "Auction Market Preferred
Shares," which shares shall not be registered with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, on or before the Put
Option Payment Date (defined below) (the "Preferred Stock "); and
WHEREAS, Ambac Assurance and the Master Trust, on behalf of the
Sub-Trust, desire to enter into a binding agreement pursuant to which Ambac
Assurance will have the right to sell, at its option, the Preferred Stock to the
Master Trust, on behalf of the Sub-Trust, and the Master Trust, on behalf of the
Sub-Trust, will have an obligation to purchase the Preferred Stock upon Ambac
Assurance's exercise of its option and upon the other terms and conditions
agreed upon by the parties.
NOW THEREFORE, the parties hereto agree as follows:
1. Definitions; Interpretation
1.1 The words "herein," "hereof" and "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular
section, clause or other subdivision, and references to "Sections "
refer to Sections of this Agreement except as otherwise expressly
provided.
1.2 In this Agreement:
"ABC Securities" has the meaning set forth in the Declaration.
"Agreement" has the meaning set forth above in the Preamble.
"Ambac Assurance" has the meaning set forth above in the Preamble.
"Auction Date" has the meaning set forth in the General Terms of the
ABC Securities attached to the Declaration as Appendix A.
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"Auction Rate" has the meaning set forth in the General Terms of the
ABC Securities attached to the Declaration as Appendix A.
"Business Day" has the meaning set forth in the Declaration.
"Closing Date" means the date of this Agreement.
"Declaration" means the Declaration of Trust governing the Master
Trust, as the same may be amended or restated from time to time.
"Default" has the meaning set forth in the Declaration.
"Delayed Auction" has the meaning set forth in the General Terms of the
ABC Securities attached to the Declaration as Appendix A.
"Delayed Auction Date" has the meaning set forth in the General Terms
of the ABC Securities attached to the Declaration as Appendix A.
"Delayed Auction Period" has the meaning set forth in the General Terms
of the ABC Securities attached to the Declaration as Appendix A.
"Delayed Auction Rate" has the meaning set forth in the General Terms
of the ABC Securities attached to the Declaration as Appendix A.
"Delayed Distribution Rate" means, for each Delayed Auction Period, an
amount equal to (a) the yield anticipated to be earned during such
period on the Trust Property, minus (b) the anticipated expenses of the
Sub-Trust for such Delayed Auction Period, provided that such amount
shall be annualized and expressed as an annual rate with respect to the
aggregate face amount of the ABC Securities outstanding on the date the
Delayed Put Option Premium is determined.
"Delayed Put Option Premium" has the meaning set forth in Section 5.1.
"Delayed Put Option Premium Certificate" has the meaning set forth in
Section 5.2.
"Distribution Rate" means, for each Distribution Period, an amount
equal to (a) the Projected Yield for such period, minus (b) the
anticipated expenses of the Sub-Trust for such Distribution Period,
provided that such amount shall be annualized and expressed as an
annual rate with respect to the aggregate face amount of the ABC
Securities outstanding on the date the Put Option Premium is
determined. The Distribution Rate for each Distribution Period will be
calculated on the Auction Date occurring on the last Business Day prior
to such Distribution Period.
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"Distribution Payment Date" has the meaning set forth in the General
Terms of the ABC Securities attached to the Declaration as Appendix A.
"Distribution Period" has the meaning set forth in the General Terms of
the ABC Securities attached to the Declaration as Appendix A.
"Federal Funds Effective Rate" has the meaning set forth in the
Declaration.
"Holder" has the meaning set forth in the Declaration.
"Overnight Rate of Return" means the rate earned on the earnings on the
principal of the Trust Property from each Auction Date to the
Distribution Payment Date occurring on the next Business Day, which
shall be equal to the Federal Funds Effective Rate in effect as of the
Business Day prior to the date of the determination of the Put Option
Premium with respect to the Distribution Period for which such Put
Option Premium is calculated.
"Preferred Stock" has the meaning set forth above in the Recitals.
"Projected Yield" means all amounts of interest (including accreted
interest) and other payments due and payable (upon maturity or
otherwise) on the principal amount of the Trust Property (excluding any
repayment of principal) held by the Sub-Trust during the respective
Distribution Period, plus the amount of interest anticipated to be
earned based on the Overnight Rate of Return, as calculated on or prior
to 11:00 a.m. on the Auction Date for each respective Distribution
Period.
"Put Notice" means a written notice substantially in the form attached
hereto as Annex A.
"Put Option Premium" has the meaning set forth in Section 5.
"Put Option Premium Certificate" has the meaning set forth in Section
5.2.
"Put Option Payment Date" has the meaning set forth in Section 3.2(a).
"Put Option Price" has the meaning set forth in Section 4.1.
"Sub-Trust" has the meaning set forth above in the Preamble.
"Tax Matters Partner" has the meaning set forth in the Declaration.
"Trust Property" has the meaning set forth in the Declaration.
"Trustee" has the meaning set forth in the Declaration.
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In this Agreement, any reference to a "company" shall be construed so
as to include any corporation, trust, partnership, limited liability
company or other legal entity, wheresoever incorporated or established.
1.3 In this Agreement, save where the contrary is indicated, any reference
to:
(a) this Agreement or any other agreement or document shall be
construed as a reference to this Agreement or, as the case may
be, such other agreement or document as the same may have been,
or may from time to time be, amended, varied, novated or
supplemented in accordance with its terms; and
(b) a statute shall be construed as a reference to such statute as
the same may have been, or may from time to time be, amended or
re-enacted.
1.4 In this Agreement, any definition shall be equally applicable to both
the singular and plural forms of the defined terms.
2. Put Option; Term
2.1 In consideration of the payment of the Put Option Premium and the
Delayed Put Option Premium, if any, the Master Trust, on behalf of the
Sub-Trust, hereby grants to Ambac Assurance the right to require the
Master Trust, on behalf of the Sub-Trust, to purchase the Preferred
Stock on the terms set forth in this Agreement.
2.2 This Agreement and the put option created hereby shall remain in effect
until the earlier to occur of the following:
(a) Ambac Assurance terminates this agreement by delivering a written
notice to the Master Trust, on behalf of the Sub-Trust, stating
that Ambac Assurance is terminating the Agreement on the next
succeeding Auction Date that follows the notice by at least three
(3) Business Days and indicating the Auction Date on which the
termination shall become effective. Delivery of a termination
notice by Ambac Assurance shall be irrevocable; and
(b) Ambac Assurance fails to make payment of the Put Option Premium
or the Delayed Put Option Premium, if any, and such failure has
not been cured within five (5) Business Days.
2.3 This Agreement shall terminate upon Ambac Assurance's exercise of its
rights under Section 3 and the payment of the Put Option Price under
Section 4, provided, however, that Section 7.5 shall survive such
termination.
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3. Exercise of Put Option
3.1 The Master Trust, on behalf of the Sub-Trust, agrees that it shall,
upon exercise of the option as provided in Section 3.2, purchase the
Preferred Stock from Ambac Assurance for a purchase price equal to the
Put Option Price, which Put Option Price shall be payable on the Put
Option Payment Date in accordance with Section 4.
3.2 (a) Ambac Assurance may exercise the option at any time upon three
(3) Business Days' notice after the date hereof and prior to the
termination of this Agreement by serving a Put Notice on the
Master Trust, on behalf of the Sub-Trust, specifying a payment
date (the "Put Option Payment Date"), which shall be the next
Distribution Payment Date on or after the third Business Day
after service of the Put Notice on the Master Trust, on behalf of
the Sub-Trust. Any notice of exercise provided pursuant to this
Section 3.2(a) shall be irrevocable.
(b) On the Put Option Payment Date, Ambac Assurance shall convey to
the Master Trust, on behalf of the Sub-Trust, or its designee
Preferred Stock with an aggregate liquidation preference equal to
the aggregate face amount of the ABC Securities outstanding on
the Put Option Payment Date. In addition, the number of shares of
Preferred Stock delivered shall equal the number of ABC
Securities outstanding on the Put Option Payment Date. The
Preferred Stock shall be delivered free and clear of any defect
in title, together with all transfer and registration documents
(or all notices, instructions or other communications) as are
necessary to convey title to the Preferred Stock to the Master
Trust, on behalf of the Sub-Trust (or its nominee).
(c) For avoidance of doubt, (1) any cash received by the Master
Trust, on behalf of the Sub-Trust, as interest or other payments
earned on the principal amount of the Trust Property (net of fees
and expenses and excluding any repayment of principal) and not
distributed to Holders as of the Put Option Payment Date shall be
distributed to Holders and shall not be used to purchase shares
of Preferred Stock; and (2) the amount of Preferred Stock
purchased from Ambac Assurance shall be reduced by the amount, if
any, by which the aggregate face amount of ABC Securities is
reduced pursuant to principal or interest losses on Trust
Property as a result of Defaults as required by the operation of
Section 6.1(j) of the Declaration and Section 6(b) of the General
Terms of the ABC Securities attached to the Declaration as
Appendix A on or before the Put Option Payment Date.
4. Payments
4.1 Upon receipt of a Put Notice, the Master Trust will allow the then
current assets of the Sub-Trust to mature, and will deliver the
proceeds attributable to principal received upon
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maturity of the assets (after satisfying the Sub-Trust's creditors, if
any, and after any principal returned to holders of the ABC Securities
pursuant to Section 6.1(j) of the Declaration and Section 6(b) of the
General Terms of the ABC Securities attached to the Declaration as
Appendix A) to Ambac Assurance on the Put Option Payment Date. The
amount of such payment shall be referred to herein as the "Put Option
Price."
4.2 Payment by the Master Trust, on behalf of the Sub-Trust, of the Put
Option Price shall be made on or prior to 3:00 p.m. on the Put Option
Payment Date and to the account of Ambac Assurance specified in the Put
Notice.
4.3 Payment of the Put Option Price by the Master Trust, on behalf of the
Sub-Trust, shall be made as provided in Section 4.1 and Section 4.2
without setoff, claim, recoupment, deduction or counterclaim; provided,
however, that if Ambac Assurance exercises its option under Section 3
hereof at any time that it has failed to pay all or a portion of the
Put Option Premium or the Delayed Put Option Premium, if any, and such
failure has not been cured on or before the Put Option Payment Date,
the Master Trust, on behalf of the Sub-Trust, shall be entitled to set
off against the Put Option Price such unpaid portion of the Put Option
Premium or the Delayed Put Option Premium, as the case may be.
5. Put Option Premium
5.1 In consideration for the Master Trust's agreement to purchase the
Preferred Stock on behalf of the Sub-Trust in accordance with the terms
of this Agreement, Ambac Assurance agrees to pay to the Master Trust,
on behalf of the Sub-Trust, in US dollars, on each Distribution Payment
Date, an amount equal to the product of (A) the Auction Rate on the ABC
Securities for the respective Distribution Period less the Distribution
Rate for such Distribution Period, (B) the aggregate face amount of the
ABC Securities of the Sub-Trust outstanding at the time the Put Option
Premium is calculated and (C) a fraction, the numerator of which will
be the number of calendar days in the respective Distribution Period,
and the denominator of which will be 360 days.
The amount derived in accordance with such formula shall be known
herein as the "Put Option Premium."
If there is a Default during any Distribution Period, then Ambac
Assurance agrees to pay to the Master Trust, on behalf of the
Sub-Trust, in US dollars on each Distribution Payment Date following
receipt of the Delayed Put Option Premium Certificate an amount, as
determined by the Trustee, equal to the product of (A) the Delayed
Auction Rate on the ABC Securities for the Delayed Auction Period less
the Delayed Distribution Rate for such Distribution Period, (B) the
aggregate face amount of the ABC Securities of the respective Sub-Trust
outstanding at the time the Delayed Put Option Premium is calculated
and (C) a fraction, the numerator of which will be the number of
calendar days in the respective Delayed Auction Period, and the
denominator of which will be 360 days.
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The amount derived in accordance with such formula shall be known
herein as the "Delayed Put Option Premium."
5.2 The amount of the Put Option Premium shall be calculated by the Trustee
and delivered in writing (the "Put Option Premium Certificate"),
substantially in the form attached hereto as Annex B, to Ambac
Assurance prior to 5:00 p.m. on each Auction Date. The amount of the
Delayed Put Option Premium shall be calculated by the Trustee and
delivered in writing (the "Delayed Put Option Premium Certificate") to
Ambac Assurance prior to 5:00 p.m. on the Delayed Auction Date. The Put
Option Premium Certificate, and any Delayed Put Option Premium
Certificate, also shall set forth the eligible assets held by the
Sub-Trust, the anticipated yield earned on each such asset, any
anticipated fees to be paid or incurred by the Trustee on behalf of the
Trust and the computation of the Put Option Premium, or the Delayed Put
Option Premium, as the case may be, in each case for the respective
Distribution Period and the Delayed Auction Period, respectively, and
shall be in the form attached hereto as Annex B.
5.3 If the Put Option Premium, or the Delayed Put Option Premium, if any,
is not paid on the date on which it is due, interest shall accrue
thereon at a rate equal to the maximum rate then in effect, during the
five (5) day cure period set forth in Section 2.2(b) hereof until such
Put Option Premium, or Delayed Put Option Premium, is paid.
6. Obligations Absolute
6.1 The Master Trust, on behalf of the Sub-Trust, acknowledges that,
provided Ambac Assurance has complied with the terms of this Agreement,
the obligations of the Master Trust, on behalf of the Sub-Trust,
undertaken under this Agreement are absolute, irrevocable and
unconditional irrespective of any circumstances whatsoever, including
any defense otherwise available to the Master Trust, on behalf of the
Sub-Trust, in equity or at law, including, without limitation, the
defense of fraud, any defense based on the failure of Ambac Assurance
to disclose any matter, whether or not material, to the Master Trust,
on behalf of the Sub-Trust, or any other person, and any defense of
breach of warranty or misrepresentation, and irrespective of any other
circumstance which might otherwise constitute a legal or equitable
discharge or defense of an insurer, surety or guarantor under any and
all circumstances. The enforceability and effectiveness of this
Agreement and the liability of the Master Trust, on behalf of the
Sub-Trust, and the rights, remedies, powers and privileges of Ambac
Assurance under this Agreement shall not be affected, limited, reduced,
discharged or terminated, and the Master Trust, on behalf of the
Sub-Trust, hereby expressly waives, to the fullest extent permitted by
applicable law, any defense now or in the future arising by reason of:
(a) the illegality, invalidity or unenforceability of all or any part
of the Declaration;
(b) any action taken by Ambac Assurance;
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(c) any change in the direct or indirect ownership or control of
Ambac Assurance or of any shares or ownership interests thereof;
(d) any other circumstance whatsoever that might otherwise constitute
a legal or equitable discharge or defense of or for the Master
Trust, on behalf of the Sub- Trust;
provided, however, that notwithstanding the provisions of this Section
6.1, the Master Trust, on behalf of the Sub-Trust, shall have no
further obligations under this Agreement after the termination of this
Agreement. In addition, the breach of any covenant made in this
Agreement by the Master Trust, on behalf of the Sub-Trust, shall not
terminate this Agreement or limit the rights of Ambac Assurance
hereunder.
6.2 For the avoidance of doubt, no failure or delay by Ambac Assurance in
exercising its rights hereunder shall operate as a waiver of its rights
hereunder (except as specifically provided in this Agreement,
including, without limitation, in respect of the notice periods and
payment dates set forth in Section 3.2(a)) and, subject to the
termination of this Agreement not having occurred, Ambac Assurance may
continue to exercise its rights hereunder at any time.
7. Covenants
7.1 Ambac Assurance hereby covenants and agrees that, at all times prior to
the earlier of the termination of this Agreement or completion of the
sale of the Preferred Stock to the Master Trust, on behalf of the
Sub-Trust, pursuant to this Agreement, it shall not amend, restate,
revise or otherwise alter the rights, terms and preferences of the
Preferred Stock whether by operation of merger, reorganization or
otherwise, without the prior consent of the Master Trust, on behalf of
the Sub-Trust, and it will not register the Preferred Stock with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended, on or before the Put Option Payment Date.
7.2 The Master Trust, on behalf of the Sub-Trust, hereby covenants and
agrees that, at all times prior to the earlier of the termination of
this Agreement or completion of the sale of the Preferred Stock to the
Master Trust, on behalf of the Sub-Trust, pursuant to this Agreement,
it shall not amend, restate, revise or otherwise alter the rights,
terms and preferences of the ABC Securities whether by operation of
merger, reorganization or otherwise and it will not register the ABC
Securities with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
7.3 Ambac Assurance hereby covenants and agrees that any Preferred Stock
delivered to the Master Trust, on behalf of the Sub-Trust, shall rank,
at the time of delivery, (a) senior to the common stock of Ambac
Assurance and (b) senior to or pari passu with the most
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senior preferred shares of Ambac then authorized by its Restated
Articles of Amendment or then issued and outstanding; provided that
this covenant may be amended with the consent of Ambac Assurance and at
least a Majority in Face Amount (as defined in the Declaration) of the
ABC Securities.
7.4 Ambac Assurance hereby covenants and agrees that if Ambac Assurance's
financial strength rating is ever lowered while this Agreement remains
effective, Ambac Assurance shall provide written notice to the Trustee,
on behalf of the Sub-Trust, of such lowered rating.
7.5 Ambac Assurance hereby covenants and agrees that it will not pay a
dividend on its common stock pursuant to the first and second provisos
of Section 4 of its Restated Articles of Incorporation unless it
receives written assurance from Ambac Financial Group, Inc. that it
will use such dividends for the purposes permitted by such provisos.
Such written assurance shall provide that the holders of the Preferred
Stock shall be third party beneficiaries of, and entitled to enforce,
the provisions of such assurance as if they were parties thereto. The
agreements and rights set forth in this Section 7.5 shall survive the
exercise by Ambac Assurance of its rights under this Agreement, the
issuance of the Preferred Stock and the liquidation of the Sub-Trust.
8. This Agreement to Govern
If there is any inconsistency between any provision of this Agreement
and any other agreement, the provisions of this Agreement shall prevail
to the extent of such inconsistency but not otherwise.
9. Representations and Warranties
9.1 The Master Trust represents and warrants to Ambac Assurance, on behalf
of the Sub- Trust, that, as of the date hereof:
(a) the Master Trust is duly organized and validly existing under the
Delaware Business Trust Act and has the power and authority to
own its assets and to conduct the activities which it conducts;
(b) the Sub-Trust has been duly formed by the Master Trust in
accordance with its Declaration;
(c) its entry into, exercise of its rights and/or performance of or
compliance with its obligations under this Agreement do not and
will not violate (1) any law to which it is subject, (2) any of
its constitutional documents or (3) any agreement to which it is
a party or which is binding on it or its assets;
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(d) it has the power to enter into, exercise its rights and perform
and comply with its obligations under this Agreement and has
taken all necessary action to authorize the execution, delivery
and performance of this Agreement;
(e) it will obtain and maintain in effect and comply with the terms
of all necessary consents, registrations and the like of or with
any government or other regulatory body or authority applicable
to this Agreement;
(f) its obligations under this Agreement are valid, binding and
enforceable at law;
(g) it is not in default under any agreement to which it is a party
or by which it or its assets is or are bound and no litigation,
arbitration or administrative proceedings are current or pending,
which default, litigation, arbitration or administrative
proceedings are material in the context of this Agreement;
(h) it is not necessary or advisable in order to ensure the validity,
effectiveness, performance or enforceability of this Agreement
that any document be filed, registered or recorded in any public
office or elsewhere;
(i) each of the above representations and warranties will be correct
and complied with in all respects during the term of this
Agreement;
(j) no consent, approval, authorization or order of any court or
governmental authority, agency, commission or commissioner or
other regulatory authority is required for the consummation by
the Master Trust, on behalf of the Sub-Trust, of the transactions
contemplated by this Agreement; and
(k) assuming compliance with the transfer restrictions with respect
to the ABC Securities set forth in the Declaration, neither the
Sub-Trust nor the Master Trust is required to register with the
Securities and Exchange Commission as an investment company under
the Investment Company Act of 1940, as amended.
9.2 Ambac Assurance represents and warrants to the Master Trust, on behalf
of the Sub- Trust, that, as of the date hereof:
(a) it is duly organized and validly existing as a corporation under
the corporate law statutes of the State of Wisconsin and has the
power and authority to own its assets and to conduct the
activities which it conducts;
(b) its entry into, exercise of its rights and/or performance of or
compliance with its obligations under this Agreement do not and
will not violate (1) any law to which it is subject, (2) any of
its constitutional documents or (3) any agreement to which it is
a party or which is binding on it or its assets;
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(c) it has the power to enter into, exercise its rights and perform
and comply with its obligations under this Agreement and has
taken all necessary action to authorize the execution, delivery
and performance of this Agreement;
(d) it will obtain and maintain in effect and comply with the terms
of all necessary consents, registrations and the like of or with
any government or other regulatory body or authority applicable
to this Agreement;
(e) its obligations under this Agreement are valid, binding and
enforceable at law;
(f) it is not in default under any agreement to which it is a party
or by which it or its assets is or are bound and no litigation,
arbitration or administrative proceedings are current or pending,
which default, litigation, arbitration or administrative
proceedings are material in the context of this Agreement;
(g) it is not necessary or advisable in order to ensure the validity,
effectiveness, performance or enforceability of this Agreement
that any document be filed, registered or recorded in any public
office or elsewhere;
(h) each of the above representations and warranties will be correct
and complied with in all respects during the term of this
Agreement;
(i) no consent, approval, authorization or order of any court or
governmental authority, agency, commission or commissioner or
other regulatory authority is required for the consummation by
Ambac Assurance of the transactions contemplated by this
Agreement and the sale of the Preferred Stock to the Master
Trust, on behalf of the Sub-Trust, pursuant to the terms hereof
need not be registered with the Securities and Exchange
Commission under the Securities Act of 1933, as amended; and
(j) as of the Put Option Payment Date, the Preferred Stock will be
duly authorized for issuance and sale to the Master Trust, on
behalf of the Sub-Trust, pursuant to this Agreement and, when
issued and delivered by Ambac Assurance pursuant to this
Agreement against payment of the Put Option Price, will be
validly issued, fully paid and nonassessable; the Preferred Stock
will conform in all respects to the terms of the Preferred Stock
set forth in the Restated Articles of Incorporation of Ambac
Assurance attached hereto as Annex C; and the Preferred Stock
will not be subject to preemptive or other similar rights.
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10. Severability
10.1 Any provision of this Agreement which is or becomes illegal, invalid or
unenforceable in any jurisdiction may be severed from the other
provisions of this Agreement without invalidating the remaining
provisions hereof, and any such illegality, invalidity or
unenforceability shall not invalidate or render illegal or
unenforceable such provision in any other jurisdiction.
11. Notices
11.1 Each communication to be made hereunder shall be deemed to have been
given (i) five (5) days after deposit of such communication with a
reputable national courier service addressed to such party at its
address specified below (or at such other address as such party shall
specify to the other party hereto in writing) or (ii) when transmitted
by facsimile to such party at its facsimile number specified below (or
at such other facsimile number as such party shall specify to the other
party hereto in writing):
If to Ambac Assurance at:
Ambac Assurance Corporation
One State Street Plaza
New York, New York 10004
Attention: Robert Starr, Treasurer
Facsimile: (212) 208-3108
Copy to: Kevin Doyle, General Counsel
If to the Master Trust or Sub-Trust at:
The Bank of New York (Delaware)
P.O. Box 6973
White Clay Center
Route 273
Newark, Delaware 19714
Attention: Kristine Gullo
Facsimile: (302) 283-8279
Copies to:
The Bank of New York
Corporate Trust Administration
5 Penn Plaza
New York, NY 10001
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Attention: Dealing and Trading Group
Facsimile: (212) 896-7295
12. Counterparts
This Agreement may be executed in any number of counterparts and by the
different parties hereto on separate counterparts each of which when
executed and delivered shall constitute an original, but all the
counterparts shall together constitute but one and the same instrument.
13. Benefit of Agreement and Disclaimer
13.1 This Agreement shall enure to the benefit of each party hereto and its
successors and assigns and transferees; provided that neither party
hereto may transfer its rights and obligations hereunder, by operation
of law or otherwise, without the prior written consent of the other
party.
14. Amendment and Assignment
14.1 This Agreement may not be amended or modified in any respect, nor may
any provision be waived, without the written agreement of both parties.
No waiver by one party of any obligation of the other hereunder shall
be considered a waiver of any other obligation of such party.
14.2 Neither the Master Trust, on behalf of the Sub-Trust, nor Ambac
Assurance may assign its rights or obligations under this Agreement to
any other person, except that Ambac Assurance may assign its rights and
obligations under this Agreement to another person as a result of a
merger of Ambac Assurance with another person or as a result of a sale
of all or substantially all of the assets of Ambac Assurance to another
person if the other person expressly assumes all of the rights and
obligations of Ambac Assurance under this Agreement; and immediately
following the merger or sale of substantially all of its assets, the
rating of the substitute preferred stock or the unsecured debt
obligations of the other person is at least as high as the credit
rating of the Preferred Stock or the general unsecured debt obligations
of Ambac Assurance, as the case may be (or if no such ratings exist,
the financial strength rating of Ambac Assurance) immediately prior to
the merger or sale.
15. Governing Law
15.1 THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
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16. Jurisdiction
16.1 Each of the parties hereto irrevocably submits to the non-exclusive
jurisdiction of the courts of the State of New York in respect of any
action or proceeding arising out of or in connection with this
Agreement ("Proceedings"). Each of the parties hereto irrevocably
waives, to the fullest extent permitted by applicable law, any
objection that it may now or hereafter have to the laying of the venue
of any such Proceedings in the courts of the State of New York and any
claim that any Proceeding brought in any such court has been brought in
an inconvenient forum. Each of the Master Trust, on behalf of the
Sub-Trust, and Ambac Assurance agrees that it shall at all times have
an authorized agent in the State of New York upon whom process may be
served in connection with any Proceedings, and each of the Master
Trust, on behalf of the Sub-Trust, and Ambac Assurance hereby
authorizes and appoints the Trustee to accept service of all legal
process arising out of or connected with this Agreement in the State of
New York and service on such person (or substitute) shall be deemed to
be service on the Master Trust, on behalf of the Sub-Trust, or Ambac
Assurance, as the case may be. Except upon such a substitution, the
Master Trust, on behalf of the Sub-Trust, and Ambac Assurance shall not
revoke any such authority or appointment and shall at all times
maintain an agent for service of process in the State of New York. If
for any reason such person shall cease to act as agent for the service
of process, the Master Trust, on behalf of the Sub-Trust, and Ambac
Assurance shall promptly appoint another such agent, and shall
forthwith notify each other of such appointment. The submission to
jurisdiction reflected in this paragraph shall not (and shall not be
construed so as to) limit the right of any person to take Proceedings
in any court of competent jurisdiction, nor shall the taking of
Proceedings in any one or more jurisdictions preclude the taking of
Proceedings in any other jurisdiction (whether concurrently or not) if
and to the extent permitted by law.
17. Limitation of Liability
17.1 It is expressly understood that (a) this Agreement is executed and
delivered by The Bank of New York (Delaware), not individually or
personally but solely as Trustee, in the exercise of the powers and
authority conferred and vested in it under the Declaration, (b) each of
the representations, undertakings and agreements herein made on the
part of the Master Trust, on behalf of the Sub-Trust, is made and
intended not as personal representations, undertakings and agreements
by The Bank of New York (Delaware), but is made and intended for the
purpose of binding only the Master Trust, on behalf of the Sub-Trust,
and (c) under no circumstances shall The Bank of New York (Delaware) be
personally liable for the breach or failure of any obligation,
representation, warranty or covenant made or undertaken by the Master
Trust, on behalf of the Sub-Trust, under this Agreement or the other
related documents.
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IN WITNESS WHEREOF the parties hereto have caused this Put Option
Agreement to be duly executed as of the day and year first above written.
DUTCH HARBOR FINANCE MASTER TRUST,
on behalf of its series, Dutch Harbor
Finance Sub- Trust II,
By: The Bank of New York (Delaware),
not in its individual capacity but
solely as Trustee
By: _____________________________________
Name:
Title:
AMBAC ASSURANCE CORPORATION
By: _____________________________________
Name:
Title:
16
<PAGE>
ANNEX A
Form of Put Notice
To: Dutch Harbor Finance Sub-Trust II
c/o Bank of New York (Delaware)
P.O. Box 6973
502 White Clay Center
Route 273
Newark, Delaware 19714
with a copy to:
The Bank of New York
5 Penn Plaza
New York, New York 10001
Attention: Dealing and Trading Group
Date:
Ladies and Gentlemen:
We refer to the put option agreement dated December 3, 2001 (as heretofore
amended, the "Put Option Agreement") entered into between us and you. Terms
defined in the Put Option Agreement (except where otherwise defined herein)
shall have the same respective meanings herein.
This notice is the notice for the purposes of Section 3.2(a) of the Put Option
Agreement. We hereby require you to pay the Put Option Price on the Put Option
Payment Date, which shall be [ ] to the following account:
[ ]
Yours faithfully,
for and on behalf of
Ambac Assurance Corporation
<PAGE>
ANNEX B
Put Option Premium Certificate
Ambac Assurance Corporation
Put Option on Auction Market Preferred Shares
- --------------------------------------------------------------------------------
1. Distribution Period: [first day of Period]-[last day of Period]: [number of
days in period-generally 28]
2. Auction Rate determined for the Distribution Period on [insert date of
Auction]. 0.000000% $ (0)
3.
Issuer Ratings Purchase Price Yield to Maturity Interest
- ------------- --------- ---------------- ------------------- ------------
One Corp A1+/Pl
Two Corp A1+/P1
Three Corp A1+/P1
Four Corp A1+/P1
Five Corp A1+/P1
Six Corp A1+/P1
Seven Corp A1+/P1
Eight Corp A1+/P1
Nine Corp Al/P1
Ten Corp Al/P1
- ------------- --------- ---------------- ------------------- ------------
4. 000,000,000 0.0% $ 0.0
5. Applicable Federal Funds Effective Rate: 0.00% 0.0% $ 0.0
6. Broker-Dealer Fee 0.0% $ (0.0)
7. Trustee, Custodian and IPA Fees 0.0% $ (0.0)
8. Asset Management Fee 0.0% $ (0.0)
9. Tax Matters Partner Fee 0.0% $ (0.0)
<PAGE>
10. Servicing Agent Fee 0.0% $ (0.0)
11. Other Fees and Expenses for the Distribution
Period, if any 0.0% $ (0.0)
12. Computation of Put Premium Due on [insert
Distribution PaymentDate] by 11:00 a.m. ------------------- ------------
New York Time: 0.0% $ (0.0)
------------------- ------------
13. The asset manager is in compliance with the investment policy.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.29
<SEQUENCE>9
<FILENAME>dex1029.txt
<DESCRIPTION>PUT OPTION AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.29
PUT OPTION AGREEMENT
between
AMBAC ASSURANCE CORPORATION
and
DUTCH HARBOR FINANCE MASTER TRUST,
ON BEHALF OF ITS SERIES
DUTCH HARBOR FINANCE SUB-TRUST III
Dated as of December 3, 2001
<PAGE>
Preamble
This Put Option Agreement, dated as of December 3, 2001 (the
"Agreement"), is by and between Ambac Assurance Corporation, a Wisconsin
corporation ("Ambac Assurance") and Dutch Harbor Finance Master Trust (the
"Master Trust"), a Delaware business trust, on behalf of its series, Dutch
Harbor Finance Sub-Trust III (the "Sub-Trust").
Recitals
WHEREAS, Ambac Assurance is authorized to issue 4,000 shares of
non-cumulative, perpetual preferred stock designated "Auction Market Preferred
Shares," which shares shall not be registered with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, on or before the Put
Option Payment Date (defined below) (the "Preferred Stock "); and
WHEREAS, Ambac Assurance and the Master Trust, on behalf of the
Sub-Trust, desire to enter into a binding agreement pursuant to which Ambac
Assurance will have the right to sell, at its option, the Preferred Stock to the
Master Trust, on behalf of the Sub-Trust, and the Master Trust, on behalf of the
Sub-Trust, will have an obligation to purchase the Preferred Stock upon Ambac
Assurance's exercise of its option and upon the other terms and conditions
agreed upon by the parties.
NOW THEREFORE, the parties hereto agree as follows:
1. Definitions; Interpretation
1.1 The words "herein," "hereof" and "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular
section, clause or other subdivision, and references to "Sections "
refer to Sections of this Agreement except as otherwise expressly
provided.
1.2 In this Agreement:
"ABC Securities" has the meaning set forth in the Declaration.
"Agreement" has the meaning set forth above in the Preamble.
"Ambac Assurance" has the meaning set forth above in the Preamble.
"Auction Date" has the meaning set forth in the General Terms of the
ABC Securities attached to the Declaration as Appendix A.
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<PAGE>
"Auction Rate" has the meaning set forth in the General Terms of the
ABC Securities attached to the Declaration as Appendix A.
"Business Day" has the meaning set forth in the Declaration.
"Closing Date" means the date of this Agreement.
"Declaration" means the Declaration of Trust governing the Master
Trust, as the same may be amended or restated from time to time.
"Default" has the meaning set forth in the Declaration.
"Delayed Auction" has the meaning set forth in the General Terms of the
ABC Securities attached to the Declaration as Appendix A.
"Delayed Auction Date" has the meaning set forth in the General Terms
of the ABC Securities attached to the Declaration as Appendix A.
"Delayed Auction Period" has the meaning set forth in the General Terms
of the ABC Securities attached to the Declaration as Appendix A.
"Delayed Auction Rate" has the meaning set forth in the General Terms
of the ABC Securities attached to the Declaration as Appendix A.
"Delayed Distribution Rate" means, for each Delayed Auction Period, an
amount equal to (a) the yield anticipated to be earned during such
period on the Trust Property, minus (b) the anticipated expenses of the
Sub-Trust for such Delayed Auction Period, provided that such amount
shall be annualized and expressed as an annual rate with respect to the
aggregate face amount of the ABC Securities outstanding on the date the
Delayed Put Option Premium is determined.
"Delayed Put Option Premium" has the meaning set forth in Section 5.1.
"Delayed Put Option Premium Certificate" has the meaning set forth in
Section 5.2.
"Distribution Rate" means, for each Distribution Period, an amount
equal to (a) the Projected Yield for such period, minus (b) the
anticipated expenses of the Sub-Trust for such Distribution Period,
provided that such amount shall be annualized and expressed as an
annual rate with respect to the aggregate face amount of the ABC
Securities outstanding on the date the Put Option Premium is
determined. The Distribution Rate for each Distribution Period will be
calculated on the Auction Date occurring on the last Business Day prior
to such Distribution Period.
3
<PAGE>
"Distribution Payment Date" has the meaning set forth in the General
Terms of the ABC Securities attached to the Declaration as Appendix A.
"Distribution Period" has the meaning set forth in the General Terms of
the ABC Securities attached to the Declaration as Appendix A.
"Federal Funds Effective Rate" has the meaning set forth in the
Declaration.
"Holder" has the meaning set forth in the Declaration.
"Overnight Rate of Return" means the rate earned on the earnings on the
principal of the Trust Property from each Auction Date to the
Distribution Payment Date occurring on the next Business Day, which
shall be equal to the Federal Funds Effective Rate in effect as of the
Business Day prior to the date of the determination of the Put Option
Premium with respect to the Distribution Period for which such Put
Option Premium is calculated.
"Preferred Stock" has the meaning set forth above in the Recitals.
"Projected Yield" means all amounts of interest (including accreted
interest) and other payments due and payable (upon maturity or
otherwise) on the principal amount of the Trust Property (excluding any
repayment of principal) held by the Sub-Trust during the respective
Distribution Period, plus the amount of interest anticipated to be
earned based on the Overnight Rate of Return, as calculated on or prior
to 11:00 a.m. on the Auction Date for each respective Distribution
Period.
"Put Notice" means a written notice substantially in the form attached
hereto as Annex A.
"Put Option Premium" has the meaning set forth in Section 5.
"Put Option Premium Certificate" has the meaning set forth in Section
5.2.
"Put Option Payment Date" has the meaning set forth in Section 3.2(a).
"Put Option Price" has the meaning set forth in Section 4.1.
"Sub-Trust" has the meaning set forth above in the Preamble.
"Tax Matters Partner" has the meaning set forth in the Declaration.
"Trust Property" has the meaning set forth in the Declaration.
"Trustee" has the meaning set forth in the Declaration.
4
<PAGE>
In this Agreement, any reference to a "company" shall be construed so
as to include any corporation, trust, partnership, limited liability
company or other legal entity, wheresoever incorporated or established.
1.3 In this Agreement, save where the contrary is indicated, any reference
to:
(a) this Agreement or any other agreement or document shall be
construed as a reference to this Agreement or, as the case may
be, such other agreement or document as the same may have been,
or may from time to time be, amended, varied, novated or
supplemented in accordance with its terms; and
(b) a statute shall be construed as a reference to such statute as
the same may have been, or may from time to time be, amended or
re-enacted.
1.4 In this Agreement, any definition shall be equally applicable to both
the singular and plural forms of the defined terms.
2. Put Option; Term
2.1 In consideration of the payment of the Put Option Premium and the
Delayed Put Option Premium, if any, the Master Trust, on behalf of the
Sub-Trust, hereby grants to Ambac Assurance the right to require the
Master Trust, on behalf of the Sub-Trust, to purchase the Preferred
Stock on the terms set forth in this Agreement.
2.2 This Agreement and the put option created hereby shall remain in effect
until the earlier to occur of the following:
(a) Ambac Assurance terminates this agreement by delivering a written
notice to the Master Trust, on behalf of the Sub-Trust, stating
that Ambac Assurance is terminating the Agreement on the next
succeeding Auction Date that follows the notice by at least three
(3) Business Days and indicating the Auction Date on which the
termination shall become effective. Delivery of a termination
notice by Ambac Assurance shall be irrevocable; and
(b) Ambac Assurance fails to make payment of the Put Option Premium
or the Delayed Put Option Premium, if any, and such failure has
not been cured within five (5) Business Days.
2.3 This Agreement shall terminate upon Ambac Assurance's exercise of its
rights under Section 3 and the payment of the Put Option Price under
Section 4, provided, however, that Section 7.5 shall survive such
termination.
5
<PAGE>
3. Exercise of Put Option
3.1 The Master Trust, on behalf of the Sub-Trust, agrees that it shall,
upon exercise of the option as provided in Section 3.2, purchase the
Preferred Stock from Ambac Assurance for a purchase price equal to the
Put Option Price, which Put Option Price shall be payable on the Put
Option Payment Date in accordance with Section 4.
3.2 (a) Ambac Assurance may exercise the option at any time upon three
(3) Business Days' notice after the date hereof and prior to the
termination of this Agreement by serving a Put Notice on the
Master Trust, on behalf of the Sub-Trust, specifying a payment
date (the "Put Option Payment Date"), which shall be the next
Distribution Payment Date on or after the third Business Day
after service of the Put Notice on the Master Trust, on behalf of
the Sub-Trust. Any notice of exercise provided pursuant to this
Section 3.2(a) shall be irrevocable.
(b) On the Put Option Payment Date, Ambac Assurance shall convey to
the Master Trust, on behalf of the Sub-Trust, or its designee
Preferred Stock with an aggregate liquidation preference equal to
the aggregate face amount of the ABC Securities outstanding on
the Put Option Payment Date. In addition, the number of shares of
Preferred Stock delivered shall equal the number of ABC
Securities outstanding on the Put Option Payment Date. The
Preferred Stock shall be delivered free and clear of any defect
in title, together with all transfer and registration documents
(or all notices, instructions or other communications) as are
necessary to convey title to the Preferred Stock to the Master
Trust, on behalf of the Sub-Trust (or its nominee).
(c) For avoidance of doubt, (1) any cash received by the Master
Trust, on behalf of the Sub-Trust, as interest or other payments
earned on the principal amount of the Trust Property (net of fees
and expenses and excluding any repayment of principal) and not
distributed to Holders as of the Put Option Payment Date shall be
distributed to Holders and shall not be used to purchase shares
of Preferred Stock; and (2) the amount of Preferred Stock
purchased from Ambac Assurance shall be reduced by the amount, if
any, by which the aggregate face amount of ABC Securities is
reduced pursuant to principal or interest losses on Trust
Property as a result of Defaults as required by the operation of
Section 6.1(j) of the Declaration and Section 6(b) of the General
Terms of the ABC Securities attached to the Declaration as
Appendix A on or before the Put Option Payment Date.
4. Payments
4.1 Upon receipt of a Put Notice, the Master Trust will allow the then
current assets of the Sub-Trust to mature, and will deliver the
proceeds attributable to principal received upon
6
<PAGE>
maturity of the assets (after satisfying the Sub-Trust's creditors, if
any, and after any principal returned to holders of the ABC Securities
pursuant to Section 6.1(j) of the Declaration and Section 6(b) of the
General Terms of the ABC Securities attached to the Declaration as
Appendix A) to Ambac Assurance on the Put Option Payment Date. The
amount of such payment shall be referred to herein as the "Put Option
Price."
4.2 Payment by the Master Trust, on behalf of the Sub-Trust, of the Put
Option Price shall be made on or prior to 3:00 p.m. on the Put Option
Payment Date and to the account of Ambac Assurance specified in the Put
Notice.
4.3 Payment of the Put Option Price by the Master Trust, on behalf of the
Sub-Trust, shall be made as provided in Section 4.1 and Section 4.2
without setoff, claim, recoupment, deduction or counterclaim; provided,
however, that if Ambac Assurance exercises its option under Section 3
hereof at any time that it has failed to pay all or a portion of the
Put Option Premium or the Delayed Put Option Premium, if any, and such
failure has not been cured on or before the Put Option Payment Date,
the Master Trust, on behalf of the Sub-Trust, shall be entitled to set
off against the Put Option Price such unpaid portion of the Put Option
Premium or the Delayed Put Option Premium, as the case may be.
5. Put Option Premium
5.1 In consideration for the Master Trust's agreement to purchase the
Preferred Stock on behalf of the Sub-Trust in accordance with the terms
of this Agreement, Ambac Assurance agrees to pay to the Master Trust,
on behalf of the Sub-Trust, in US dollars, on each Distribution Payment
Date, an amount equal to the product of (A) the Auction Rate on the ABC
Securities for the respective Distribution Period less the Distribution
Rate for such Distribution Period, (B) the aggregate face amount of the
ABC Securities of the Sub-Trust outstanding at the time the Put Option
Premium is calculated and (C) a fraction, the numerator of which will
be the number of calendar days in the respective Distribution Period,
and the denominator of which will be 360 days.
The amount derived in accordance with such formula shall be known
herein as the "Put Option Premium."
If there is a Default during any Distribution Period, then Ambac
Assurance agrees to pay to the Master Trust, on behalf of the
Sub-Trust, in US dollars on each Distribution Payment Date following
receipt of the Delayed Put Option Premium Certificate an amount, as
determined by the Trustee, equal to the product of (A) the Delayed
Auction Rate on the ABC Securities for the Delayed Auction Period less
the Delayed Distribution Rate for such Distribution Period, (B) the
aggregate face amount of the ABC Securities of the respective Sub-Trust
outstanding at the time the Delayed Put Option Premium is calculated
and (C) a fraction, the numerator of which will be the number of
calendar days in the respective Delayed Auction Period, and the
denominator of which will be 360 days.
7
<PAGE>
The amount derived in accordance with such formula shall be known
herein as the "Delayed Put Option Premium."
5.2 The amount of the Put Option Premium shall be calculated by the Trustee
and delivered in writing (the "Put Option Premium Certificate"),
substantially in the form attached hereto as Annex B, to Ambac
Assurance prior to 5:00 p.m. on each Auction Date. The amount of the
Delayed Put Option Premium shall be calculated by the Trustee and
delivered in writing (the "Delayed Put Option Premium Certificate") to
Ambac Assurance prior to 5:00 p.m. on the Delayed Auction Date. The Put
Option Premium Certificate, and any Delayed Put Option Premium
Certificate, also shall set forth the eligible assets held by the
Sub-Trust, the anticipated yield earned on each such asset, any
anticipated fees to be paid or incurred by the Trustee on behalf of the
Trust and the computation of the Put Option Premium, or the Delayed Put
Option Premium, as the case may be, in each case for the respective
Distribution Period and the Delayed Auction Period, respectively, and
shall be in the form attached hereto as Annex B.
5.3 If the Put Option Premium, or the Delayed Put Option Premium, if any,
is not paid on the date on which it is due, interest shall accrue
thereon at a rate equal to the maximum rate then in effect, during the
five (5) day cure period set forth in Section 2.2(b) hereof until such
Put Option Premium, or Delayed Put Option Premium, is paid.
6. Obligations Absolute
6.1 The Master Trust, on behalf of the Sub-Trust, acknowledges that,
provided Ambac Assurance has complied with the terms of this Agreement,
the obligations of the Master Trust, on behalf of the Sub-Trust,
undertaken under this Agreement are absolute, irrevocable and
unconditional irrespective of any circumstances whatsoever, including
any defense otherwise available to the Master Trust, on behalf of the
Sub-Trust, in equity or at law, including, without limitation, the
defense of fraud, any defense based on the failure of Ambac Assurance
to disclose any matter, whether or not material, to the Master Trust,
on behalf of the Sub-Trust, or any other person, and any defense of
breach of warranty or misrepresentation, and irrespective of any other
circumstance which might otherwise constitute a legal or equitable
discharge or defense of an insurer, surety or guarantor under any and
all circumstances. The enforceability and effectiveness of this
Agreement and the liability of the Master Trust, on behalf of the
Sub-Trust, and the rights, remedies, powers and privileges of Ambac
Assurance under this Agreement shall not be affected, limited, reduced,
discharged or terminated, and the Master Trust, on behalf of the
Sub-Trust, hereby expressly waives, to the fullest extent permitted by
applicable law, any defense now or in the future arising by reason of:
(a) the illegality, invalidity or unenforceability of all or any part
of the Declaration;
(b) any action taken by Ambac Assurance;
8
<PAGE>
(c) any change in the direct or indirect ownership or control of
Ambac Assurance or of any shares or ownership interests thereof;
(d) any other circumstance whatsoever that might otherwise constitute
a legal or equitable discharge or defense of or for the Master
Trust, on behalf of the Sub-Trust;
provided, however, that notwithstanding the provisions of this Section
6.1, the Master Trust, on behalf of the Sub-Trust, shall have no
further obligations under this Agreement after the termination of this
Agreement. In addition, the breach of any covenant made in this
Agreement by the Master Trust, on behalf of the Sub-Trust, shall not
terminate this Agreement or limit the rights of Ambac Assurance
hereunder.
6.2 For the avoidance of doubt, no failure or delay by Ambac Assurance in
exercising its rights hereunder shall operate as a waiver of its rights
hereunder (except as specifically provided in this Agreement,
including, without limitation, in respect of the notice periods and
payment dates set forth in Section 3.2(a)) and, subject to the
termination of this Agreement not having occurred, Ambac Assurance may
continue to exercise its rights hereunder at any time.
7. Covenants
7.1 Ambac Assurance hereby covenants and agrees that, at all times prior to
the earlier of the termination of this Agreement or completion of the
sale of the Preferred Stock to the Master Trust, on behalf of the
Sub-Trust, pursuant to this Agreement, it shall not amend, restate,
revise or otherwise alter the rights, terms and preferences of the
Preferred Stock whether by operation of merger, reorganization or
otherwise, without the prior consent of the Master Trust, on behalf of
the Sub-Trust, and it will not register the Preferred Stock with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended, on or before the Put Option Payment Date.
7.2 The Master Trust, on behalf of the Sub-Trust, hereby covenants and
agrees that, at all times prior to the earlier of the termination of
this Agreement or completion of the sale of the Preferred Stock to the
Master Trust, on behalf of the Sub-Trust, pursuant to this Agreement,
it shall not amend, restate, revise or otherwise alter the rights,
terms and preferences of the ABC Securities whether by operation of
merger, reorganization or otherwise and it will not register the ABC
Securities with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
7.3 Ambac Assurance hereby covenants and agrees that any Preferred Stock
delivered to the Master Trust, on behalf of the Sub-Trust, shall rank,
at the time of delivery, (a) senior to the common stock of Ambac
Assurance and (b) senior to or pari passu with the most
9
<PAGE>
senior preferred shares of Ambac then authorized by its Restated
Articles of Amendment or then issued and outstanding; provided that
this covenant may be amended with the consent of Ambac Assurance and at
least a Majority in Face Amount (as defined in the Declaration) of the
ABC Securities.
7.4 Ambac Assurance hereby covenants and agrees that if Ambac Assurance's
financial strength rating is ever lowered while this Agreement remains
effective, Ambac Assurance shall provide written notice to the Trustee,
on behalf of the Sub-Trust, of such lowered rating.
7.5 Ambac Assurance hereby covenants and agrees that it will not pay a
dividend on its common stock pursuant to the first and second provisos
of Section 4 of its Restated Articles of Incorporation unless it
receives written assurance from Ambac Financial Group, Inc. that it
will use such dividends for the purposes permitted by such provisos.
Such written assurance shall provide that the holders of the Preferred
Stock shall be third party beneficiaries of, and entitled to enforce,
the provisions of such assurance as if they were parties thereto. The
agreements and rights set forth in this Section 7.5 shall survive the
exercise by Ambac Assurance of its rights under this Agreement, the
issuance of the Preferred Stock and the liquidation of the Sub-Trust.
8. This Agreement to Govern
If there is any inconsistency between any provision of this Agreement
and any other agreement, the provisions of this Agreement shall prevail
to the extent of such inconsistency but not otherwise.
9. Representations and Warranties
9.1 The Master Trust represents and warrants to Ambac Assurance, on behalf
of the Sub-Trust, that, as of the date hereof:
(a) the Master Trust is duly organized and validly existing under the
Delaware Business Trust Act and has the power and authority to
own its assets and to conduct the activities which it conducts;
(b) the Sub-Trust has been duly formed by the Master Trust in
accordance with its Declaration;
(c) its entry into, exercise of its rights and/or performance of or
compliance with its obligations under this Agreement do not and
will not violate (1) any law to which it is subject, (2) any of
its constitutional documents or (3) any agreement to which it is
a party or which is binding on it or its assets;
10
<PAGE>
(d) it has the power to enter into, exercise its rights and perform
and comply with its obligations under this Agreement and has
taken all necessary action to authorize the execution, delivery
and performance of this Agreement;
(e) it will obtain and maintain in effect and comply with the terms
of all necessary consents, registrations and the like of or with
any government or other regulatory body or authority applicable
to this Agreement;
(f) its obligations under this Agreement are valid, binding and
enforceable at law;
(g) it is not in default under any agreement to which it is a party
or by which it or its assets is or are bound and no litigation,
arbitration or administrative proceedings are current or pending,
which default, litigation, arbitration or administrative
proceedings are material in the context of this Agreement;
(h) it is not necessary or advisable in order to ensure the validity,
effectiveness, performance or enforceability of this Agreement
that any document be filed, registered or recorded in any public
office or elsewhere;
(i) each of the above representations and warranties will be correct
and complied with in all respects during the term of this
Agreement;
(j) no consent, approval, authorization or order of any court or
governmental authority, agency, commission or commissioner or
other regulatory authority is required for the consummation by
the Master Trust, on behalf of the Sub-Trust, of the transactions
contemplated by this Agreement; and
(k) assuming compliance with the transfer restrictions with respect
to the ABC Securities set forth in the Declaration, neither the
Sub-Trust nor the Master Trust is required to register with the
Securities and Exchange Commission as an investment company under
the Investment Company Act of 1940, as amended.
9.2 Ambac Assurance represents and warrants to the Master Trust, on behalf
of the Sub-Trust, that, as of the date hereof:
(a) it is duly organized and validly existing as a corporation under
the corporate law statutes of the State of Wisconsin and has the
power and authority to own its assets and to conduct the
activities which it conducts;
(b) its entry into, exercise of its rights and/or performance of or
compliance with its obligations under this Agreement do not and
will not violate (1) any law to which it is subject, (2) any of
its constitutional documents or (3) any agreement to which it is
a party or which is binding on it or its assets;
11
<PAGE>
(c) it has the power to enter into, exercise its rights and perform
and comply with its obligations under this Agreement and has
taken all necessary action to authorize the execution, delivery
and performance of this Agreement;
(d) it will obtain and maintain in effect and comply with the terms
of all necessary consents, registrations and the like of or with
any government or other regulatory body or authority applicable
to this Agreement;
(e) its obligations under this Agreement are valid, binding and
enforceable at law;
(f) it is not in default under any agreement to which it is a party
or by which it or its assets is or are bound and no litigation,
arbitration or administrative proceedings are current or pending,
which default, litigation, arbitration or administrative
proceedings are material in the context of this Agreement;
(g) it is not necessary or advisable in order to ensure the validity,
effectiveness, performance or enforceability of this Agreement
that any document be filed, registered or recorded in any public
office or elsewhere;
(h) each of the above representations and warranties will be correct
and complied with in all respects during the term of this
Agreement;
(i) no consent, approval, authorization or order of any court or
governmental authority, agency, commission or commissioner or
other regulatory authority is required for the consummation by
Ambac Assurance of the transactions contemplated by this
Agreement and the sale of the Preferred Stock to the Master
Trust, on behalf of the Sub-Trust, pursuant to the terms hereof
need not be registered with the Securities and Exchange
Commission under the Securities Act of 1933, as amended; and
(j) as of the Put Option Payment Date, the Preferred Stock will be
duly authorized for issuance and sale to the Master Trust, on
behalf of the Sub-Trust, pursuant to this Agreement and, when
issued and delivered by Ambac Assurance pursuant to this
Agreement against payment of the Put Option Price, will be
validly issued, fully paid and nonassessable; the Preferred Stock
will conform in all respects to the terms of the Preferred Stock
set forth in the Restated Articles of Incorporation of Ambac
Assurance attached hereto as Annex C; and the Preferred Stock
will not be subject to preemptive or other similar rights.
12
<PAGE>
10. Severability
10.1 Any provision of this Agreement which is or becomes illegal, invalid or
unenforceable in any jurisdiction may be severed from the other
provisions of this Agreement without invalidating the remaining
provisions hereof, and any such illegality, invalidity or
unenforceability shall not invalidate or render illegal or
unenforceable such provision in any other jurisdiction.
11. Notices
11.1 Each communication to be made hereunder shall be deemed to have been
given (i) five (5) days after deposit of such communication with a
reputable national courier service addressed to such party at its
address specified below (or at such other address as such party shall
specify to the other party hereto in writing) or (ii) when transmitted
by facsimile to such party at its facsimile number specified below (or
at such other facsimile number as such party shall specify to the other
party hereto in writing):
If to Ambac Assurance at:
Ambac Assurance Corporation
One State Street Plaza
New York, New York 10004
Attention: Robert Starr, Treasurer
Facsimile: (212) 208-3108
Copy to: Kevin Doyle, General Counsel
If to the Master Trust or Sub-Trust at:
The Bank of New York (Delaware)
P.O. Box 6973
White Clay Center
Route 273
Newark, Delaware 19714
Attention: Kristine Gullo
Facsimile: (302) 283-8279
Copies to:
The Bank of New York
Corporate Trust Administration
5 Penn Plaza
New York, NY 10001
13
<PAGE>
Attention: Dealing and Trading Group
Facsimile: (212) 896-7295
12. Counterparts
This Agreement may be executed in any number of counterparts and by the
different parties hereto on separate counterparts each of which when
executed and delivered shall constitute an original, but all the
counterparts shall together constitute but one and the same instrument.
13. Benefit of Agreement and Disclaimer
13.1 This Agreement shall enure to the benefit of each party hereto and its
successors and assigns and transferees; provided that neither party
hereto may transfer its rights and obligations hereunder, by operation
of law or otherwise, without the prior written consent of the other
party.
14. Amendment and Assignment
14.1 This Agreement may not be amended or modified in any respect, nor may
any provision be waived, without the written agreement of both parties.
No waiver by one party of any obligation of the other hereunder shall
be considered a waiver of any other obligation of such party.
14.2 Neither the Master Trust, on behalf of the Sub-Trust, nor Ambac
Assurance may assign its rights or obligations under this Agreement to
any other person, except that Ambac Assurance may assign its rights and
obligations under this Agreement to another person as a result of a
merger of Ambac Assurance with another person or as a result of a sale
of all or substantially all of the assets of Ambac Assurance to another
person if the other person expressly assumes all of the rights and
obligations of Ambac Assurance under this Agreement; and immediately
following the merger or sale of substantially all of its assets, the
rating of the substitute preferred stock or the unsecured debt
obligations of the other person is at least as high as the credit
rating of the Preferred Stock or the general unsecured debt obligations
of Ambac Assurance, as the case may be (or if no such ratings exist,
the financial strength rating of Ambac Assurance) immediately prior to
the merger or sale.
15. Governing Law
15.1 THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
14
<PAGE>
16. Jurisdiction
16.1 Each of the parties hereto irrevocably submits to the non-exclusive
jurisdiction of the courts of the State of New York in respect of any
action or proceeding arising out of or in connection with this
Agreement ("Proceedings"). Each of the parties hereto irrevocably
waives, to the fullest extent permitted by applicable law, any
objection that it may now or hereafter have to the laying of the venue
of any such Proceedings in the courts of the State of New York and any
claim that any Proceeding brought in any such court has been brought in
an inconvenient forum. Each of the Master Trust, on behalf of the
Sub-Trust, and Ambac Assurance agrees that it shall at all times have
an authorized agent in the State of New York upon whom process may be
served in connection with any Proceedings, and each of the Master
Trust, on behalf of the Sub-Trust, and Ambac Assurance hereby
authorizes and appoints the Trustee to accept service of all legal
process arising out of or connected with this Agreement in the State of
New York and service on such person (or substitute) shall be deemed to
be service on the Master Trust, on behalf of the Sub-Trust, or Ambac
Assurance, as the case may be. Except upon such a substitution, the
Master Trust, on behalf of the Sub-Trust, and Ambac Assurance shall not
revoke any such authority or appointment and shall at all times
maintain an agent for service of process in the State of New York. If
for any reason such person shall cease to act as agent for the service
of process, the Master Trust, on behalf of the Sub-Trust, and Ambac
Assurance shall promptly appoint another such agent, and shall
forthwith notify each other of such appointment. The submission to
jurisdiction reflected in this paragraph shall not (and shall not be
construed so as to) limit the right of any person to take Proceedings
in any court of competent jurisdiction, nor shall the taking of
Proceedings in any one or more jurisdictions preclude the taking of
Proceedings in any other jurisdiction (whether concurrently or not) if
and to the extent permitted by law.
17. Limitation of Liability
17.1 It is expressly understood that (a) this Agreement is executed and
delivered by The Bank of New York (Delaware), not individually or
personally but solely as Trustee, in the exercise of the powers and
authority conferred and vested in it under the Declaration, (b) each of
the representations, undertakings and agreements herein made on the
part of the Master Trust, on behalf of the Sub-Trust, is made and
intended not as personal representations, undertakings and agreements
by The Bank of New York (Delaware), but is made and intended for the
purpose of binding only the Master Trust, on behalf of the Sub-Trust,
and (c) under no circumstances shall The Bank of New York (Delaware) be
personally liable for the breach or failure of any obligation,
representation, warranty or covenant made or undertaken by the Master
Trust, on behalf of the Sub-Trust, under this Agreement or the other
related documents.
15
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Put Option
Agreement to be duly executed as of the day and year first above written.
DUTCH HARBOR FINANCE MASTER TRUST, on
behalf of its series, Dutch Harbor
Finance Sub-Trust III,
By: The Bank of New York (Delaware),
not in its individual capacity but
solely as Trustee
By: _____________________________________
Name:
Title:
AMBAC ASSURANCE CORPORATION
By: _____________________________________
Name:
Title:
<PAGE>
ANNEX A
Form of Put Notice
To: Dutch Harbor Finance Sub-Trust III
c/o Bank of New York (Delaware)
P.O. Box 6973
502 White Clay Center
Route 273
Newark, Delaware 19714
with a copy to:
The Bank of New York
5 Penn Plaza
New York, New York 10001
Attention: Dealing and Trading Group
Date:
Ladies and Gentlemen:
We refer to the put option agreement dated December 3, 2001 (as heretofore
amended, the "Put Option Agreement") entered into between us and you. Terms
defined in the Put Option Agreement (except where otherwise defined herein)
shall have the same respective meanings herein.
This notice is the notice for the purposes of Section 3.2(a) of the Put Option
Agreement. We hereby require you to pay the Put Option Price on the Put Option
Payment Date, which shall be [ ] to the following account:
[ ]
Yours faithfully,
for and on behalf of
Ambac Assurance Corporation
<PAGE>
ANNEX B
Put Option Premium Certificate
Ambac Assurance Corporation
Put Option on Auction Market Preferred Shares
- --------------------------------------------------------------------------------
1. Distribution Period: [first day of Period]-[last day of Period]: [number of
days in period-generally 28]
2. Auction Rate determined for the Distribution Period on [insert date of
Auction]. 0.000000% $ (0)
3.
Issuer Ratings Purchase Price Yield to Maturity Interest
- ------------- --------- ---------------- ------------------- ------------
One Corp A1+/Pl
Two Corp A1+/P1
Three Corp A1+/P1
Four Corp A1+/P1
Five Corp A1+/P1
Six Corp A1+/P1
Seven Corp A1+/P1
Eight Corp A1+/P1
Nine Corp Al/P1
Ten Corp Al/P1
- ------------- --------- ---------------- ------------------- ------------
4. 000,000,000 0.0% $ 0.0
5. Applicable Federal Funds Effective Rate: 0.00% 0.0% $ 0.0
6. Broker-Dealer Fee 0.0% $ (0.0)
7. Trustee, Custodian and IPA Fees 0.0% $ (0.0)
8. Asset Management Fee 0.0% $ (0.0)
9. Tax Matters Partner Fee 0.0% $ (0.0)
<PAGE>
10. Servicing Agent Fee 0.0% $ (0.0)
11. Other Fees and Expenses for the Distribution
Period, if any 0.0% $ (0.0)
12. Computation of Put Premium Due on [insert
Distribution PaymentDate] by 11:00 a.m. ------------------- ------------
New York Time: 0.0% $ (0.0)
------------------- ------------
13. The asset manager is in compliance with the investment policy.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.30
<SEQUENCE>10
<FILENAME>dex1030.txt
<DESCRIPTION>PUT OPTION AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.30
PUT OPTION AGREEMENT
between
AMBAC ASSURANCE CORPORATION
and
DUTCH HARBOR FINANCE MASTER TRUST,
ON BEHALF OF ITS SERIES
DUTCH HARBOR FINANCE SUB-TRUST IV
Dated as of December 3, 2001
<PAGE>
Preamble
This Put Option Agreement, dated as of December 3, 2001 (the
"Agreement"), is by and between Ambac Assurance Corporation, a Wisconsin
corporation ("AMBAC Assurance") and Dutch Harbor Finance Master Trust (the
"Master Trust"), a Delaware business trust, on behalf of its series, Dutch
Harbor Finance Sub-Trust IV (the "Sub-Trust").
Recitals
WHEREAS, Ambac Assurance is authorized to issue 4,000 shares of
non-cumulative, perpetual preferred stock designated "Auction Market Preferred
Shares," which shares shall not be registered with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, on or before the Put
Option Payment Date (defined below) (the "Preferred Stock"); and
WHEREAS, Ambac Assurance and the Master Trust, on behalf of the
Sub-Trust, desire to enter into a binding agreement pursuant to which Ambac
Assurance will have the right to sell, at its option, the Preferred Stock to the
Master Trust, on behalf of the Sub-Trust, and the Master Trust, on behalf of the
Sub-Trust, will have an obligation to purchase the Preferred Stock upon Ambac
Assurance's exercise of its option and upon the other terms and conditions
agreed upon by the parties.
NOW THEREFORE, the parties hereto agree as follows:
1. Definitions; Interpretation
1.1 The words "herein," "hereof" and "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular
section, clause or other subdivision, and references to "Sections"
refer to Sections of this Agreement except as otherwise expressly
provided.
1.2 In this Agreement:
"ABC Securities" has the meaning set forth in the Declaration.
"Agreement" has the meaning set forth above in the Preamble.
"Ambac Assurance" has the meaning set forth above in the Preamble.
"Auction Date" has the meaning set forth in the General Terms of the
ABC Securities attached to the Declaration as Appendix A.
2
<PAGE>
"Auction Rate" has the meaning set forth in the General Terms of the
ABC Securities attached to the Declaration as Appendix A.
"Business Day" has the meaning set forth in the Declaration.
"Closing Date" means the date of this Agreement.
"Declaration" means the Declaration of Trust governing the Master
Trust, as the same may be amended or restated from time to time.
"Default" has the meaning set forth in the Declaration.
"Delayed Auction" has the meaning set forth in the General Terms of the
ABC Securities attached to the Declaration as Appendix A.
"Delayed Auction Date" has the meaning set forth in the General Terms
of the ABC Securities attached to the Declaration as Appendix A.
"Delayed Auction Period" has the meaning set forth in the General Terms
of the ABC Securities attached to the Declaration as Appendix A.
"Delayed Auction Rate" has the meaning set forth in the General Terms
of the ABC Securities attached to the Declaration as Appendix A.
"Delayed Distribution Rate" means, for each Delayed Auction Period, an
amount equal to (a) the yield anticipated to be earned during such
period on the Trust Property, minus (b) the anticipated expenses of the
Sub-Trust for such Delayed Auction Period, provided that such amount
shall be annualized and expressed as an annual rate with respect to the
aggregate face amount of the ABC Securities outstanding on the date the
Delayed Put Option Premium is determined.
"Delayed Put Option Premium" has the meaning set forth in Section 5.1.
"Delayed Put Option Premium Certificate" has the meaning set forth in
Section 5.2.
"Distribution Rate" means, for each Distribution Period, an amount
equal to (a) the Projected Yield for such period, minus (b) the
anticipated expenses of the Sub-Trust for such Distribution Period,
provided that such amount shall be annualized and expressed as an
annual rate with respect to the aggregate face amount of the ABC
Securities outstanding on the date the Put Option Premium is
determined. The Distribution Rate for each Distribution Period will be
calculated on the Auction Date occurring on the last Business Day prior
to such Distribution Period.
3
<PAGE>
"Distribution Payment Date" has the meaning set forth in the General
Terms of the ABC Securities attached to the Declaration as Appendix A.
"Distribution Period" has the meaning set forth in the General Terms of
the ABC Securities attached to the Declaration as Appendix A.
"Federal Funds Effective Rate" has the meaning set forth in the
Declaration.
"Holder" has the meaning set forth in the Declaration.
"Overnight Rate of Return" means the rate earned on the earnings on the
principal of the Trust Property from each Auction Date to the
Distribution Payment Date occurring on the next Business Day, which
shall be equal to the Federal Funds Effective Rate in effect as of the
Business Day prior to the date of the determination of the Put Option
Premium with respect to the Distribution Period for which such Put
Option Premium is calculated.
"Preferred Stock" has the meaning set forth above in the Recitals.
"Projected Yield" means all amounts of interest (including accreted
interest) and other payments due and payable (upon maturity or
otherwise) on the principal amount of the Trust Property (excluding any
repayment of principal) held by the Sub-Trust during the respective
Distribution Period, plus the amount of interest anticipated to be
earned based on the Overnight Rate of Return, as calculated on or prior
to 11:00 a.m. on the Auction Date for each respective Distribution
Period.
"Put Notice" means a written notice substantially in the form attached
hereto as Annex A.
"Put Option Premium" has the meaning set forth in Section 5.
"Put Option Premium Certificate" has the meaning set forth in Section
5.2.
"Put Option Payment Date" has the meaning set forth in Section 3.2(a).
"Put Option Price" has the meaning set forth in Section 4.1.
"Sub-Trust" has the meaning set forth above in the Preamble.
"Tax Matters Partner" has the meaning set forth in the Declaration.
"Trust Property" has the meaning set forth in the Declaration.
"Trustee" has the meaning set forth in the Declaration.
4
<PAGE>
In this Agreement, any reference to a "company" shall be construed so
as to include any corporation, trust, partnership, limited liability
company or other legal entity, wheresoever incorporated or established.
1.3 In this Agreement, save where the contrary is indicated, any reference
to:
(a) this Agreement or any other agreement or document shall be
construed as a reference to this Agreement or, as the case may
be, such other agreement or document as the same may have been,
or may from time to time be, amended, varied, novated or
supplemented in accordance with its terms; and
(b) a statute shall be construed as a reference to such statute as
the same may have been, or may from time to time be, amended or
re-enacted.
1.4 In this Agreement, any definition shall be equally applicable to both
the singular and plural forms of the defined terms.
2. Put Option; Term
2.1 In consideration of the payment of the Put Option Premium and the
Delayed Put Option Premium, if any, the Master Trust, on behalf of the
Sub-Trust, hereby grants to Ambac Assurance the right to require the
Master Trust, on behalf of the Sub-Trust, to purchase the Preferred
Stock on the terms set forth in this Agreement.
2.2 This Agreement and the put option created hereby shall remain in effect
until the earlier to occur of the following:
(a) Ambac Assurance terminates this agreement by delivering a written
notice to the Master Trust, on behalf of the Sub-Trust, stating
that Ambac Assurance is terminating the Agreement on the next
succeeding Auction Date that follows the notice by at least three
(3) Business Days and indicating the Auction Date on which the
termination shall become effective. Delivery of a termination
notice by Ambac Assurance shall be irrevocable; and
(b) Ambac Assurance fails to make payment of the Put Option Premium
or the Delayed Put Option Premium, if any, and such failure has
not been cured within five (5) Business Days.
2.3 This Agreement shall terminate upon Ambac Assurance's exercise of
its rights under Section 3 and the payment of the Put Option
Price under Section 4, provided, however, that Section 7.5 shall
survive such termination.
5
<PAGE>
3. Exercise of Put Option
3.1 The Master Trust, on behalf of the Sub-Trust, agrees that it shall,
upon exercise of the option as provided in Section 3.2, purchase the
Preferred Stock from Ambac Assurance for a purchase price equal to the
Put Option Price, which Put Option Price shall be payable on the Put
Option Payment Date in accordance with Section 4.
3.2 (a) Ambac Assurance may exercise the option at any time upon three
(3) Business Days' notice after the date hereof and prior to the
termination of this Agreement by serving a Put Notice on the
Master Trust, on behalf of the Sub-Trust, specifying a payment
date (the "Put Option Payment Date"), which shall be the next
Distribution Payment Date on or after the third Business Day
after service of the Put Notice on the Master Trust, on behalf of
the Sub-Trust. Any notice of exercise provided pursuant to this
Section 3.2(a) shall be irrevocable.
(b) On the Put Option Payment Date, Ambac Assurance shall convey to
the Master Trust, on behalf of the Sub-Trust, or its designee
Preferred Stock with an aggregate liquidation preference equal to
the aggregate face amount of the ABC Securities outstanding on
the Put Option Payment Date. In addition, the number of shares of
Preferred Stock delivered shall equal the number of ABC
Securities outstanding on the Put Option Payment Date. The
Preferred Stock shall be delivered free and clear of any defect
in title, together with all transfer and registration documents
(or all notices, instructions or other communications) as are
necessary to convey title to the Preferred Stock to the Master
Trust, on behalf of the Sub-Trust (or its nominee).
(c) For avoidance of doubt, (1) any cash received by the Master
Trust, on behalf of the Sub-Trust, as interest or other payments
earned on the principal amount of the Trust Property (net of fees
and expenses and excluding any repayment of principal) and not
distributed to Holders as of the Put Option Payment Date shall be
distributed to Holders and shall not be used to purchase shares
of Preferred Stock; and (2) the amount of Preferred Stock
purchased from Ambac Assurance shall be reduced by the amount, if
any, by which the aggregate face amount of ABC Securities is
reduced pursuant to principal or interest losses on Trust
Property as a result of Defaults as required by the operation of
Section 6.1(j) of the Declaration and Section 6(b) of the General
Terms of the ABC Securities attached to the Declaration as
Appendix A on or before the Put Option Payment Date.
4. Payments
4.1 Upon receipt of a Put Notice, the Master Trust will allow the then
current assets of the Sub-Trust to mature, and will deliver the
proceeds attributable to principal received upon
6
<PAGE>
maturity of the assets (after satisfying the Sub-Trust's creditors, if
any, and after any principal returned to holders of the ABC Securities
pursuant to Section 6.1(j) of the Declaration and Section 6(b) of the
General Terms of the ABC Securities attached to the Declaration as
Appendix A) to Ambac Assurance on the Put Option Payment Date. The
amount of such payment shall be referred to herein as the "Put Option
Price."
4.2 Payment by the Master Trust, on behalf of the Sub-Trust, of the Put
Option Price shall be made on or prior to 3:00 p.m. on the Put Option
Payment Date and to the account of Ambac Assurance specified in the Put
Notice.
4.3 Payment of the Put Option Price by the Master Trust, on behalf of the
Sub-Trust, shall be made as provided in Section 4.1 and Section 4.2
without setoff, claim, recoupment, deduction or counterclaim; provided,
however, that if Ambac Assurance exercises its option under Section 3
hereof at any time that it has failed to pay all or a portion of the
Put Option Premium or the Delayed Put Option Premium, if any, and such
failure has not been cured on or before the Put Option Payment Date,
the Master Trust, on behalf of the Sub-Trust, shall be entitled to set
off against the Put Option Price such unpaid portion of the Put Option
Premium or the Delayed Put Option Premium, as the case may be.
5. Put Option Premium
5.1 In consideration for the Master Trust's agreement to purchase the
Preferred Stock on behalf of the Sub-Trust in accordance with the terms
of this Agreement, Ambac Assurance agrees to pay to the Master Trust,
on behalf of the Sub-Trust, in US dollars, on each Distribution Payment
Date, an amount equal to the product of (A) the Auction Rate on the ABC
Securities for the respective Distribution Period less the Distribution
Rate for such Distribution Period, (B) the aggregate face amount of the
ABC Securities of the Sub-Trust outstanding at the time the Put Option
Premium is calculated and (C) a fraction, the numerator of which will
be the number of calendar days in the respective Distribution Period,
and the denominator of which will be 360 days.
The amount derived in accordance with such formula shall be known
herein as the "Put Option Premium."
If there is a Default during any Distribution Period, then Ambac
Assurance agrees to pay to the Master Trust, on behalf of the
Sub-Trust, in US dollars on each Distribution Payment Date following
receipt of the Delayed Put Option Premium Certificate an amount, as
determined by the Trustee, equal to the product of (A) the Delayed
Auction Rate on the ABC Securities for the Delayed Auction Period less
the Delayed Distribution Rate for such Distribution Period, (B) the
aggregate face amount of the ABC Securities of the respective Sub-Trust
outstanding at the time the Delayed Put Option Premium is calculated
and (C) a fraction, the numerator of which will be the number of
calendar days in the respective Delayed Auction Period, and the
denominator of which will be 360 days.
7
<PAGE>
The amount derived in accordance with such formula shall be known
herein as the "Delayed Put Option Premium."
5.2 The amount of the Put Option Premium shall be calculated by the Trustee
and delivered in writing (the "Put Option Premium Certificate"),
substantially in the form attached hereto as Annex B, to Ambac
Assurance prior to 5:00 p.m. on each Auction Date. The amount of the
Delayed Put Option Premium shall be calculated by the Trustee and
delivered in writing (the "Delayed Put Option Premium Certificate") to
Ambac Assurance prior to 5:00 p.m. on the Delayed Auction Date. The Put
Option Premium Certificate, and any Delayed Put Option Premium
Certificate, also shall set forth the eligible assets held by the
Sub-Trust, the anticipated yield earned on each such asset, any
anticipated fees to be paid or incurred by the Trustee on behalf of the
Trust and the computation of the Put Option Premium, or the Delayed Put
Option Premium, as the case may be, in each case for the respective
Distribution Period and the Delayed Auction Period, respectively, and
shall be in the form attached hereto as Annex B.
5.3 If the Put Option Premium, or the Delayed Put Option Premium, if any,
is not paid on the date on which it is due, interest shall accrue
thereon at a rate equal to the maximum rate then in effect, during the
five (5) day cure period set forth in Section 2.2(b) hereof until such
Put Option Premium, or Delayed Put Option Premium, is paid.
6. Obligations absolute
6.1 The Master Trust, on behalf of the Sub-Trust, acknowledges that,
provided Ambac Assurance has complied with the terms of this Agreement,
the obligations of the Master Trust, on behalf of the Sub-Trust,
undertaken under this Agreement are absolute, irrevocable and
unconditional irrespective of any circumstances whatsoever, including
any defense otherwise available to the Master Trust, on behalf of the
Sub-Trust, in equity or at law, including, without limitation, the
defense of fraud, any defense based on the failure of Ambac Assurance
to disclose any matter, whether or not material, to the Master Trust,
on behalf of the Sub-Trust, or any other person, and any defense of
breach of warranty or misrepresentation, and irrespective of any other
circumstance which might otherwise constitute a legal or equitable
discharge or defense of an insurer, surety or guarantor under any and
all circumstances. The enforceability and effectiveness of this
Agreement and the liability of the Master Trust, on behalf of the
Sub-Trust, and the rights, remedies, powers and privileges of Ambac
Assurance under this Agreement shall not be affected, limited, reduced,
discharged or terminated, and the Master Trust, on behalf of the
Sub-Trust, hereby expressly waives, to the fullest extent permitted by
applicable law, any defense now or in the future arising by reason of:
(a) the illegality, invalidity or unenforceability of all or any part
of the Declaration;
(b) any action taken by Ambac Assurance;
8
<PAGE>
(c) any change in the direct or indirect ownership or control of
Ambac Assurance or of any shares or ownership interests thereof;
(d) any other circumstance whatsoever that might otherwise constitute
a legal or equitable discharge or defense of or for the Master
Trust, on behalf of the Sub-Trust;
provided, however, that notwithstanding the provisions of this Section
6.1, the Master Trust, on behalf of the Sub-Trust, shall have no
further obligations under this Agreement after the termination of this
Agreement. In addition, the breach of any covenant made in this
Agreement by the Master Trust, on behalf of the Sub-Trust, shall not
terminate this Agreement or limit the rights of Ambac Assurance
hereunder.
6.2 For the avoidance of doubt, no failure or delay by Ambac Assurance in
exercising its rights hereunder shall operate as a waiver of its rights
hereunder (except as specifically provided in this Agreement,
including, without limitation, in respect of the notice periods and
payment dates set forth in Section 3.2(a)) and, subject to the
termination of this Agreement not having occurred, Ambac Assurance may
continue to exercise its rights hereunder at any time.
7. Covenants
7.1 Ambac Assurance hereby covenants and agrees that, at all times prior to
the earlier of the termination of this Agreement or completion of the
sale of the Preferred Stock to the Master Trust, on behalf of the
Sub-Trust, pursuant to this Agreement, it shall not amend, restate,
revise or otherwise alter the rights, terms and preferences of the
Preferred Stock whether by operation of merger, reorganization or
otherwise, without the prior consent of the Master Trust, on behalf of
the Sub-Trust, and it will not register the Preferred Stock with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended, on or before the Put Option Payment Date.
7.2 The Master Trust, on behalf of the Sub-Trust, hereby covenants and
agrees that, at all times prior to the earlier of the termination of
this Agreement or completion of the sale of the Preferred Stock to the
Master Trust, on behalf of the Sub-Trust, pursuant to this Agreement,
it shall not amend, restate, revise or otherwise alter the rights,
terms and preferences of the ABC Securities whether by operation of
merger, reorganization or otherwise and it will not register the ABC
Securities with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
7.3 Ambac Assurance hereby covenants and agrees that any Preferred Stock
delivered to the Master Trust, on behalf of the Sub-Trust, shall rank,
at the time of delivery, (a) senior to the common stock of Ambac
Assurance and (b) senior to or pari passu with the most
9
<PAGE>
senior preferred shares of Ambac then authorized by its Restated
Articles of Amendment or then issued and outstanding; provided that
this covenant may be amended with the consent of Ambac Assurance and at
least a Majority in Face Amount (as defined in the Declaration) of the
ABC Securities.
7.4 Ambac Assurance hereby covenants and agrees that if Ambac Assurance's
financial strength rating is ever lowered while this Agreement remains
effective, Ambac Assurance shall provide written notice to the Trustee,
on behalf of the Sub-Trust, of such lowered rating.
7.5 Ambac Assurance hereby covenants and agrees that it will not pay a
dividend on its common stock pursuant to the first and second provisos
of Section 4 of its Restated Articles of Incorporation unless it
receives written assurance from Ambac Financial Group, Inc. that it
will use such dividends for the purposes permitted by such provisos.
Such written assurance shall provide that the holders of the Preferred
Stock shall be third party beneficiaries of, and entitled to enforce,
the provisions of such assurance as if they were parties thereto. The
agreements and rights set forth in this Section 7.5 shall survive the
exercise by Ambac Assurance of its rights under this Agreement, the
issuance of the Preferred Stock and the liquidation of the Sub-Trust.
8. This Agreement to Govern
If there is any inconsistency between any provision of this Agreement
and any other agreement, the provisions of this Agreement shall prevail
to the extent of such inconsistency but not otherwise.
9. Representations and Warranties
9.1 The Master Trust represents and warrants to Ambac Assurance, on behalf
of the Sub-Trust, that, as of the date hereof:
(a) the Master Trust is duly organized and validly existing under the
Delaware Business Trust Act and has the power and authority to
own its assets and to conduct the activities which it conducts;
(b) the Sub-Trust has been duly formed by the Master Trust in
accordance with its Declaration;
(c) its entry into, exercise of its rights and/or performance of or
compliance with its obligations under this Agreement do not and
will not violate (1) any law to which it is subject, (2) any of
its constitutional documents or (3) any agreement to which it is
a party or which is binding on it or its assets;
10
<PAGE>
(d) it has the power to enter into, exercise its rights and perform
and comply with its obligations under this Agreement and has
taken all necessary action to authorize the execution, delivery
and performance of this Agreement;
(e) it will obtain and maintain in effect and comply with the terms
of all necessary consents, registrations and the like of or with
any government or other regulatory body or authority applicable
to this Agreement;
(f) its obligations under this Agreement are valid, binding and
enforceable at law;
(g) it is not in default under any agreement to which it is a party
or by which it or its assets is or are bound and no litigation,
arbitration or administrative proceedings are current or pending,
which default, litigation, arbitration or administrative
proceedings are material in the context of this Agreement;
(h) it is not necessary or advisable in order to ensure the validity,
effectiveness, performance or enforceability of this Agreement
that any document be filed, registered or recorded in any public
office or elsewhere;
(i) each of the above representations and warranties will be correct
and complied with in all respects during the term of this
Agreement;
(j) no consent, approval, authorization or order of any court or
governmental authority, agency, commission or commissioner or
other regulatory authority is required for the consummation by
the Master Trust, on behalf of the Sub-Trust, of the transactions
contemplated by this Agreement; and
(k) assuming compliance with the transfer restrictions with respect
to the ABC Securities set forth in the Declaration, neither the
Sub-Trust nor the Master Trust is required to register with the
Securities and Exchange Commission as an investment company under
the Investment Company Act of 1940, as amended.
9.2 Ambac Assurance represents and warrants to the Master Trust, on behalf
of the Sub-Trust, that, as of the date hereof:
(a) it is duly organized and validly existing as a corporation under
the corporate law statutes of the State of Wisconsin and has the
power and authority to own its assets and to conduct the
activities which it conducts;
(b) its entry into, exercise of its rights and/or performance of or
compliance with its obligations under this Agreement do not and
will not violate (1) any law to which it is subject, (2) any of
its constitutional documents or (3) any agreement to which it is
a party or which is binding on it or its assets;
11
<PAGE>
(c) it has the power to enter into, exercise its rights and perform
and comply with its obligations under this Agreement and has
taken all necessary action to authorize the execution, delivery
and performance of this Agreement;
(d) it will obtain and maintain in effect and comply with the terms
of all necessary consents, registrations and the like of or with
any government or other regulatory body or authority applicable
to this Agreement;
(e) its obligations under this Agreement are valid, binding and
enforceable at law;
(f) it is not in default under any agreement to which it is a party
or by which it or its assets is or are bound and no litigation,
arbitration or administrative proceedings are current or pending,
which default, litigation, arbitration or administrative
proceedings are material in the context of this Agreement;
(g) it is not necessary or advisable in order to ensure the validity,
effectiveness, performance or enforceability of this Agreement
that any document be filed, registered or recorded in any public
office or elsewhere;
(h) each of the above representations and warranties will be correct
and complied with in all respects during the term of this
Agreement;
(i) no consent, approval, authorization or order of any court or
governmental authority, agency, commission or commissioner or
other regulatory authority is required for the consummation by
Ambac Assurance of the transactions contemplated by this
Agreement and the sale of the Preferred Stock to the Master
Trust, on behalf of the Sub-Trust, pursuant to the terms hereof
need not be registered with the Securities and Exchange
Commission under the Securities Act of 1933, as amended; and
(j) as of the Put Option Payment Date, the Preferred Stock will be
duly authorized for issuance and sale to the Master Trust, on
behalf of the Sub-Trust, pursuant to this Agreement and, when
issued and delivered by Ambac Assurance pursuant to this
Agreement against payment of the Put Option Price, will be
validly issued, fully paid and nonassessable; the Preferred Stock
will conform in all respects to the terms of the Preferred Stock
set forth in the Restated Articles of Incorporation of Ambac
Assurance attached hereto as Annex C; and the Preferred Stock
will not be subject to preemptive or other similar rights.
12
<PAGE>
10. Severability
10.1 Any provision of this Agreement which is or becomes illegal, invalid or
unenforceable in any jurisdiction may be severed from the other
provisions of this Agreement without invalidating the remaining
provisions hereof, and any such illegality, invalidity or
unenforceability shall not invalidate or render illegal or
unenforceable such provision in any other jurisdiction.
11. Notices
11.1 Each communication to be made hereunder shall be deemed to have been
given (i) five (5) days after deposit of such communication with a
reputable national courier service addressed to such party at its
address specified below (or at such other address as such party shall
specify to the other party hereto in writing) or (ii) when transmitted
by facsimile to such party at its facsimile number specified below (or
at such other facsimile number as such party shall specify to the other
party hereto in writing):
If to Ambac Assurance at:
Ambac Assurance Corporation
One State Street Plaza
New York, New York 10004
Attention: Robert Starr, Treasurer
Facsimile: (212) 208-3108
Copy to: Kevin Doyle, General Counsel
If to the Master Trust or Sub-Trust at:
The Bank of New York (Delaware)
P.O. Box 6973
White Clay Center
Route 273
Newark, Delaware 19714
Attention: Kristine Gullo
Facsimile: (302) 283-8279
Copies to:
The Bank of New York
Corporate Trust Administration
5 Penn Plaza
New York, NY 10001
13
<PAGE>
Attention: Dealing and Trading Group
Facsimile: (212) 896-7295
12. Counterparts
This Agreement may be executed in any number of counterparts and by the
different parties hereto on separate counterparts each of which when
executed and delivered shall constitute an original, but all the
counterparts shall together constitute but one and the same instrument.
13. Benefit of Agreement and Disclaimer
13.1 This Agreement shall enure to the benefit of each party hereto and its
successors and assigns and transferees; provided that neither party
hereto may transfer its rights and obligations hereunder, by operation
of law or otherwise, without the prior written consent of the other
party.
14. Amendment and Assignment
14.1 This Agreement may not be amended or modified in any respect, nor may
any provision be waived, without the written agreement of both parties.
No waiver by one party of any obligation of the other hereunder shall
be considered a waiver of any other obligation of such party.
14.2 Neither the Master Trust, on behalf of the Sub-Trust, nor Ambac
Assurance may assign its rights or obligations under this Agreement to
any other person, except that Ambac Assurance may assign its rights and
obligations under this Agreement to another person as a result of a
merger of Ambac Assurance with another person or as a result of a sale
of all or substantially all of the assets of Ambac Assurance to another
person if the other person expressly assumes all of the rights and
obligations of Ambac Assurance under this Agreement; and immediately
following the merger or sale of substantially all of its assets, the
rating of the substitute preferred stock or the unsecured debt
obligations of the other person is at least as high as the credit
rating of the Preferred Stock or the general unsecured debt obligations
of Ambac Assurance, as the case may be (or if no such ratings exist,
the financial strength rating of Ambac Assurance) immediately prior to
the merger or sale.
15. Governing Law
15.1 THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
14
<PAGE>
16. Jurisdiction
16.1 Each of the parties hereto irrevocably submits to the non-exclusive
jurisdiction of the courts of the State of New York in respect of any
action or proceeding arising out of or in connection with this
Agreement ("Proceedings"). Each of the parties hereto irrevocably
waives, to the fullest extent permitted by applicable law, any
objection that it may now or hereafter have to the laying of the venue
of any such Proceedings in the courts of the State of New York and any
claim that any Proceeding brought in any such court has been brought in
an inconvenient forum. Each of the Master Trust, on behalf of the
Sub-Trust, and Ambac Assurance agrees that it shall at all times have
an authorized agent in the State of New York upon whom process may be
served in connection with any Proceedings, and each of the Master
Trust, on behalf of the Sub-Trust, and Ambac Assurance hereby
authorizes and appoints the Trustee to accept service of all legal
process arising out of or connected with this Agreement in the State of
New York and service on such person (or substitute) shall be deemed to
be service on the Master Trust, on behalf of the Sub-Trust, or Ambac
Assurance, as the case may be. Except upon such a substitution, the
Master Trust, on behalf of the Sub-Trust, and Ambac Assurance shall not
revoke any such authority or appointment and shall at all times
maintain an agent for service of process in the State of New York. If
for any reason such person shall cease to act as agent for the service
of process, the Master Trust, on behalf of the Sub-Trust, and Ambac
Assurance shall promptly appoint another such agent, and shall
forthwith notify each other of such appointment. The submission to
jurisdiction reflected in this paragraph shall not (and shall not be
construed so as to) limit the right of any person to take Proceedings
in any court of competent jurisdiction, nor shall the taking of
Proceedings in any one or more jurisdictions preclude the taking of
Proceedings in any other jurisdiction (whether concurrently or not) if
and to the extent permitted by law.
17. Limitation of Liability
17.1 It is expressly understood that (a) this Agreement is executed and
delivered by The Bank of New York (Delaware), not individually or
personally but solely as Trustee, in the exercise of the powers and
authority conferred and vested in it under the Declaration, (b) each of
the representations, undertakings and agreements herein made on the
part of the Master Trust, on behalf of the Sub-Trust, is made and
intended not as personal representations, undertakings and agreements
by The Bank of New York (Delaware), but is made and intended for the
purpose of binding only the Master Trust, on behalf of the Sub-Trust,
and (c) under no circumstances shall The Bank of New York (Delaware) be
personally liable for the breach or failure of any obligation,
representation, warranty or covenant made or undertaken by the Master
Trust, on behalf of the Sub-Trust, under this Agreement or the other
related documents.
15
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Put Option
Agreement to be duly executed as of the day and year first above written.
DUTCH HARBOR FINANCE MASTER TRUST,
on behalf of its series, Dutch Harbor
Finance Sub-Trust IV,
By: The Bank of New York (Delaware), not
in its individual capacity but solely
as Trustee
By: _____________________________________
Name:
Title:
AMBAC ASSURANCE CORPORATION
By: _____________________________________
Name:
Title:
16
<PAGE>
ANNEX A
Form of Put Notice
To: Dutch Harbor Finance Sub-Trust IV
c/o Bank of New York (Delaware)
P.O. Box 6973
502 White Clay Center
Route 273
Newark, Delaware 19714
with a copy to:
The Bank of New York
5 Penn Plaza
New York, New York 10001
Attention: Dealing and Trading Group
Date:
Ladies and Gentlemen:
We refer to the put option agreement dated December 3, 2001 (as heretofore
amended, the "Put Option Agreement") entered into between us and you. Terms
defined in the Put Option Agreement (except where otherwise defined herein)
shall have the same respective meanings herein.
This notice is the notice for the purposes of Section 3.2(a) of the Put Option
Agreement. We hereby require you to pay the Put Option Price on the Put Option
Payment Date, which shall be [ ] to the following account:
[ ]
Yours faithfully,
for and on behalf of
Ambac Assurance Corporation
<PAGE>
ANNEX B
Put Option Premium Certificate
Ambac Assurance Corporation
Put Option on Auction Market Preferred Shares
- --------------------------------------------------------------------------------
1. Distribution Period: [first day of Period]-[last day of Period]: [number of
days in period-generally 28]
2. Auction Rate determined for the Distribution Period on [insert date of
Auction]. 0.000000% $ (0)
3.
Issuer Ratings Purchase Price Yield to Maturity Interest
- ------------- --------- ---------------- ------------------- ------------
One Corp A1+/Pl
Two Corp A1+/P1
Three Corp A1+/P1
Four Corp A1+/P1
Five Corp A1+/P1
Six Corp A1+/P1
Seven Corp A1+/P1
Eight Corp A1+/P1
Nine Corp Al/P1
Ten Corp Al/P1
- ------------- --------- ---------------- ------------------- ------------
4. 000,000,000 0.0% $ 0.0
5. Applicable Federal Funds Effective Rate: 0.00% 0.0% $ 0.0
6. Broker-Dealer Fee 0.0% $ (0.0)
7. Trustee, Custodian and IPA Fees 0.0% $ (0.0)
8. Asset Management Fee 0.0% $ (0.0)
9. Tax Matters Partner Fee 0.0% $ (0.0)
<PAGE>
10. Servicing Agent Fee 0.0% $ (0.0)
11. Other Fees and Expenses for the Distribution
Period, if any 0.0% $ (0.0)
12. Computation of Put Premium Due on [insert
Distribution PaymentDate] by 11:00 a.m. ------------------- ------------
New York Time: 0.0% $ (0.0)
------------------- ------------
13. The asset manager is in compliance with the investment policy.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.01
<SEQUENCE>11
<FILENAME>dex1201.txt
<DESCRIPTION>STATEMENT RE COMPUTATION OF RATIOS
<TEXT>
<PAGE>
EXHIBIT 12.01
Ambac Financial Group, Inc.
Ratio of Earnings to Fixed Charges
(In thousands, except ratios)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes $ 568,727 $ 482,124 $ 404,658 $ 328,912 $ 285,996
Interest expense 40,442 37,477 36,525 32,761 21,346
Portion of rentals deemed to be
interest 1,972 1,859 1,782 1,846 1,699
------------------------------------------------------------------
Earnings $ 611,141 $ 521,460 $ 442,965 $ 363,519 $ 309,041
==================================================================
Fixed Charges:
Interest Expense $ 40,442 $ 37,477 $ 36,525 $ 32,761 $ 21,346
Portion of rentals deemed to be
interest 1,972 1,859 1,782 1,846 1,699
------------------------------------------------------------------
Fixed Charges $ 42,414 $ 39,336 $ 38,307 $ 34,607 $ 23,045
==================================================================
Ratio of earnings to fixed charges 14.4 13.3 11.6 10.5 13.4
==================================================================
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.01
<SEQUENCE>12
<FILENAME>dex1301.txt
<DESCRIPTION>ANNUAL REPORT TO STOCKHOLDERS
<TEXT>
<PAGE>
Exhibit 13.01
6
5-Year Performance
[bar chart]
Operating Earnings per Diluted Share/1/
(in dollars)
97 1.98
98 2.46
99 2.93
00 3.48
01 4.00
Core Earnings per Diluted Share/1/
(in dollars)
97 1.83
98 2.21
99 2.73
00 3.37
01 3.80
Operating Return on Equity/2/
97 12.9%
98 14.3%
99 15.1%
00 15.7%
01 16.0%
Expense Ratio/3/
97 28.4%
98 21.9%
99 18.2%
00 17.1%
01 17.0%
[end bar chart]
1 Operating earnings and core earnings are not substitutes for net income
computed in accordance with accounting principles generally accepted in the
United States of America (GAAP), but are important measures used by management,
equity analysts and investors to measure Ambac's financial results. Ambac
defines operating earnings as net income, less the effect of realized and
unrealized gains and losses and certain non-recurring items. Core earnings,
which Ambac reports as analytical data, is defined as operating earnings less
net insurance premiums earned from refundings and calls. The definitions of
operating earnings and core earnings used by Ambac may differ from definitions
of operating earnings and core earnings used by other public holding companies
of financial guarantors. See 'Supplemental Analytical Financial Data' in the
Management's Discussion and Analysis section of this report.
2 Operating return on equity is defined as operating earnings divided by
average stockholders' equity, exclusive of unrealized gains/losses on the
investment portfolio.
3 Expense ratio is computed as financial guarantee underwriting and operating
expenses divided by net premiums earned and other credit enhancement fees.
<PAGE>
7
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Ambac Financial Group, Inc. and Subsidiaries
(Dollars in millions, except per share amounts) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS HIGHLIGHTS
Gross premiums written $ 683.3 $ 483.1 $ 445.2 $ 361.0 $ 286.2
Net premiums earned and other credit
enhancement fees 400.4 323.4 268.3 213.0 154.0
Net investment income 267.8 241.0 209.3 186.2 159.7
Financial services net revenue 52.2 62.7 51.6 49.5 35.2
Total revenue 724.9 621.3 533.3 457.0 381.8
Losses and loss adjustment expenses 20.0 15.0 11.0 6.0 2.9
Financial guarantee underwriting and
operating expenses 68.0 55.2 48.8 46.7 40.7
Financial services expenses 21.8 24.8 25.8 35.5 28.0
Interest expense 40.4 37.5 36.5 32.8 21.3
Net income 432.9 366.2 307.9 254.0 223.0
Net income per share:
Basic 4.10 3.49 2.94 2.42 2.12
Diluted 3.97 3.41 2.88 2.37 2.09
Return on equity 15.5% 15.9% 15.0% 12.8% 12.8%
Cash dividends declared per common share 0.340 0.307 0.280 0.253 0.230
- -----------------------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS
Total investments, at fair value $ 10,287.9 $ 8,323.9 $ 8,962.5 $ 8,748.4 $ 6,915.1
Prepaid reinsurance 267.7 242.6 218.0 199.9 183.5
Total assets 12,267.7 10,120.3 11,345.1 11,212.3 8,291.7
Unearned premiums 1,780.3 1,546.3 1,431.1 1,294.2 1,179.0
Losses and loss adjustment expense reserve 152.4 132.4 121.5 115.8 103.3
Obligations under investment agreements,
investment repurchase agreements and
payment agreements 5,511.9 4,892.9 6,140.3 5,956.8 4,321.0
Debentures 619.3 424.1 424.0 423.9 223.9
Total stockholders' equity 2,983.7 2,596.1 2,018.5 2,096.1 1,872.5
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Ambac Financial Group, Inc., headquartered in New York City, is a holding
company whose subsidiaries provide financial guarantees and financial services
to clients in both the public and private sectors around the world.
The following paragraphs describe the consolidated results of operations of
Ambac and its subsidiaries for 2001, 2000 and 1999, and its financial condition
as of December 31, 2001 and 2000. These results are presented for Ambac's two
reportable segments: Financial Guarantee and Financial Services. Management has
identified the accounting for loss and loss adjustment expenses and the
valuation of financial instruments as critical accounting policies. These
policies are discussed in the applicable sections of this document. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereon included elsewhere in this report.
Materials in this annual report may contain information that includes or is
based upon forward-looking statements within the meaning of the Securities
Litigation Reform Act of 1995. Forward-looking statements present Ambac's
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts and
relate to future operating or financial performance.
Any or all of Ambac's forward-looking statements here or in other
publications may turn out to be wrong and are based on current expectations and
the current economic environment. Ambac's actual results may vary materially,
and there are no guarantees about the performance of Ambac's securities. Among
factors that could cause actual results to differ materially are: (1) changes in
the economic, credit or interest rate environment in the United States and
abroad; (2) the level of activity within the national and worldwide debt
markets; (3) competitive conditions and pricing levels; (4) legislative and
regulatory developments; (5) changes in tax laws; (6) the policies and actions
of the United States and other governments and (7) other risks and uncertainties
that have not been identified at this time. Ambac is not obligated to publicly
correct or update any forward-looking statement if we later become aware that it
is not likely to be achieved, except as required by law. You are advised,
however, to consult any further disclosures we make on related subjects in
Ambac's reports to the Securities and Exchange Commission.
RESULTS OF OPERATIONS
CONSOLIDATED NET INCOME. Ambac's net income in 2001 was $432.9 million or $3.97
per diluted share, an increase of 18% from $366.2 million, and 16% from $3.41
per diluted share in 2000. This increase was primarily attributable to growth
in Financial Guarantee operating income partially offset by a decline in
Financial Services operating income. Financial Guarantee revenues increased by
$106.5 million, or 19%. Financial Services revenues decreased by $4.3 million,
or 8%. Excluding realized and unrealized gains and losses, Financial Guarantee
and Financial Services revenues increased by 18% and decreased by 17%,
respectively. Financial Guarantee total expenses increased $17.8 million, or
25%.
Ambac's net income in 2000 increased 19% from $307.9 million, and 18% from
$2.88 per diluted share, in 1999. This increase was primarily attributable to
the growth in Financial Guarantee operating income.
Ambac's income before income taxes was $568.7 million in 2001, an 18%
increase from income before income taxes of $482.1 million in 2000. Of the
$568.7 million of income (loss) before income taxes in 2001, $583.9 million was
from Financial Guarantee, $27.4 million from Financial Services and $(42.6)
million from Corporate. Corporate consists primarily of Ambac's interest
expense. That compares to income (loss) before income taxes in 2000 of $495.2
million, $28.8 million and $(41.8) million from Financial Guarantee, Financial
Services and Corporate, respectively. Ambac's income before income taxes
increased 19% from $404.7 million in 1999. Income before income taxes in 1999
consisted of $414.3 million from Financial Guarantee, $22.7 million from
Financial Services and $(32.3) million from Corporate.
FINANCIAL GUARANTEE Ambac provides financial guarantees for debt obligations
through its principal operating subsidiary Ambac Assurance Corporation, as well
as credit protection in the form of structured credit derivatives through Ambac
Credit Products LLC, a wholly owned subsidiary of Ambac Assurance. Ambac
provides these services in three principal markets: public finance, structured
finance and international finance.
Public finance obligations are bonds issued by states, municipalities and
other governmental or not-for-profit entities located in the United States
("Public Finance"). Bond proceeds are used to finance or refinance a broad
spectrum of public purpose initiatives, including education, utility,
transportation, healthcare and other general purpose projects. Although Ambac
generally guarantees the full range of Public Finance obligations, more
recently, Ambac has been concentrating on those deals in the Public Finance area
which require more structuring skills. Certain projects which had been financed
by the local or U.S. government alone are now being financed through
public/private partnerships. In these transactions, debt service on the bonds,
rather than being paid solely by tax revenues or other governmental funds, are
being paid from a variety of revenue sources, including revenues derived from
the project itself. Examples of these deals include stadium financings, student
housing and military housing.
Structured finance obligations include the securitization of a variety of
asset types such as mortgages, home equity loans, leases and pooled corporate
obligations originated in the United States ("Structured Finance"). Currently,
the largest component of Ambac's structured business stems from the
securitization of mortgages and home equity loans. Another target area in
Structured Finance is the credit enhancement of pooled corporate obligations and
structured credit derivatives. These transactions involve the securitization of
a portfolio of corporate or asset-backed obligations and, as with all
securitizations, Ambac's participation is generally structured with first loss
protection or over-collateralization.
<PAGE>
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
International finance obligations include public purpose infrastructure
projects and asset-backed securities originated outside of the United States
("International Finance"). Ambac's emphasis internationally has been on Western
Europe, Japan and Australia. In the United Kingdom, Ambac has participated
extensively in the Private Finance Initiative, whereby the government has been
privatizing certain activities. In Japan, Ambac has an alliance with Yasuda
Kasai Financial Guarantee Insurance Co. Ltd., the only triple-A rated financial
guarantor in Japan. Ambac also participates in developing markets through
certain structures such as pooled debt obligations or future flow transactions.
Future flow transactions essentially securitize future revenue streams derived
from the sale of commodities or receivables.
GROSS PAR VALUE WRITTEN. Ambac Assurance guaranteed $90.1 billion of par value
bonds during 2001, an increase of 17% from $77.0 billion in 2000. Par value
written during 2000 was flat compared to $77.2 billion written during 1999.
Par value written during 2001 comprised $35.9 billion from the guarantee of
Public Finance bond obligations, $33.0 billion from Structured Finance
obligations and $21.2 billion from International Finance obligations, versus
$21.4 billion, $30.7 billion and $24.9 billion, respectively, in 2000 and $32.5
billion, $33.5 billion and $11.2 billion, respectively, in 1999. The 2001
increase in guaranteed Public Finance bond obligations was affected by a 47%
increase in total Public Finance issuance, an increase in insured market
penetration from 41% in 2000 to 47% in 2001, and an increase in Ambac's Public
Finance market share during the period from 22% in 2000 to 25% in 2001. The
increase in total issuance was largely the result of the lower interest rate
environment, causing an increase in both the refinancing and new money
components of the market during 2001. The increase in guaranteed Structured
Finance obligations during 2001 resulted from higher mortgage-backed guarantees
and greater penetration into other consumer asset-backed markets (auto rental,
credit card and lease securitizations). International Finance obligations
guaranteed during 2001 decreased, primarily due to lower structured credit
derivatives written. This was partially offset by greater penetration into the
United Kingdom residential mortgage-backed market.
The following table provides a breakdown of net par guaranteed outstanding
by market sector:
(Dollars in billions) 2001 2000
- -----------------------------------------------------------
Public Finance $196.6 $180.3
Structured Finance 72.6 64.7
International Finance 48.8 31.3
- -----------------------------------------------------------
Total net par outstanding $318.0 $276.3
===========================================================
GROSS PREMIUMS WRITTEN. Gross premiums written in 2001 were $683.3 million, an
increase of 41% from $483.1 million in 2000. Up-front premiums written in 2001
were $440.8 million, an increase of 49% from 295.9 million. This increase
resulted from increased business activity in all markets, particularly Public
Finance, as discussed above under "Gross Par Value Written." Installment
premiums written in 2001 were $242.5 million, an increase of 30% from $187.2
million in 2000. The growth in installment premiums is due to the growing book
of business in all segments with written premiums of $44.8 million for
transactions guaranteed in 2001. Gross premiums written in 2000 increased 8%
from $445.2 million in 1999. Strong business activity in Structured Finance and
International Finance transactions were partially offset by lower Public
Finance transactions. The following table sets forth the amounts of gross
premiums written and related gross par written by type:
<TABLE>
<CAPTION>
(Dollars in millions) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross Gross Gross
Premiums Par Premiums Par Premiums Par
Written Written Written Written Written Written
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Public Finance:
Up-front:
New issue $333.8 $30,617 $203.1 $17,660 $261.5 $27,242
Secondary market 21.0 1,678 14.0 1,261 14.8 1,570
- -------------------------------------------------------------------------------------------------------------------
Sub-total up-front 354.8 32,295 217.1 18,921 276.3 28,812
Installment 32.9 3,605 22.4 2,495 21.7 3,649
- -------------------------------------------------------------------------------------------------------------------
Total Public Finance 387.7 35,900 239.5 21,416 298.0 32,461
- -------------------------------------------------------------------------------------------------------------------
Structured Finance:
Up-front 9.5 1,135 25.6 2,179 7.9 842
Installment 138.5 31,921 108.2 28,518 67.6 32,623
- -------------------------------------------------------------------------------------------------------------------
Total Structured Finance 148.0 33,056 133.8 30,697 75.5 33,465
- -------------------------------------------------------------------------------------------------------------------
International Finance:
Up-front 76.5 2,965 53.2 3,180 35.6 1,242
Installment 71.1 18,212 56.6 21,691 36.1 10,018
- -------------------------------------------------------------------------------------------------------------------
Total International Finance 147.6 21,177 109.8 24,871 71.7 11,260
- -------------------------------------------------------------------------------------------------------------------
Total $683.3 $90,133 $483.1 $76,984 $445.2 $77,186
===================================================================================================================
Total up-front $440.8 $36,395 $295.9 $24,280 $319.8 $30,896
Total installment 242.5 53,738 187.2 52,704 125.4 46,290
- -------------------------------------------------------------------------------------------------------------------
Total $683.3 $90,133 $483.1 $76,984 $445.2 $77,186
===================================================================================================================
</TABLE>
<PAGE>
23
ADJUSTED GROSS PREMIUMS. (1) Adjusted gross premiums written were $974.3
million in 2001, up 37% from $710.7 million in 2000. The increase was due to
increased activity in all markets. Public Finance adjusted gross premiums were
$417.9 million in 2001, up 62% from $258.5 million in 2000. This increase
resulted from higher issuance, higher insured penetration and increased market
share, as discussed above under "Gross Par Value Written." Structured Finance
adjusted gross premiums were $257.3 million in 2001, up 11% from $231.8 million
in 2000. This increase resulted from increased business activity in consumer
asset-backed transactions, particularly mortgage, auto rental and credit card
asset types. International Finance adjusted gross premiums were $299.0 million
in 2001, up 36% from $220.5 million in 2000. International Finance business
continues to be dominated by large transactions with the top ten deals
comprising $153.3 million and $119.5 million in 2001 and 2000, respectively.
These deals represent 51% and 54% of total International Finance adjusted gross
premiums written for 2001 and 2000, respectively. For 2001, the top ten deals
comprise utility obligations, asset-backed securitizations and future flow
transactions. Adjusted gross premiums written in 2000 increased 9% from $652.0
million in 1999. The increase in 2000 was driven by pricing increases for all
business lines and was affected by changes in market issuance. The aggregate
net present value, calculated at a 7% discount rate, of estimated future
installment premiums was $986.8 million at December 31, 2001, up 29% from
$763.9 million at December 31, 2000.
CEDED PREMIUMS WRITTEN. Ceded premiums written in 2001 were $95.5 million, up
18% from $80.8 million in 2000. The increase in ceded premiums written in 2001
was largely due to higher cessions of Public Finance premiums pursuant to a
reinsurance surplus share treaty that Ambac Assurance implemented during 2001,
partially offset by lower cessions on International Finance transactions. This
new treaty covers certain large domestic and international policies that are
underwritten directly by Ambac Assurance. Ceded premiums written in 2000 were
up 31% from $61.8 million in 1999. Ceded premiums written in 2000 were affected
by a large facultative cede of Public Finance health care exposure. Excluding
this cession in 2000, ceded premiums written in 2000 increased 20% over ceded
premiums written in 1999, primarily due to increased gross premiums written as
well as increased ceded premiums written on international policies and
mortgage-backed business. Ceded premiums written were 14%, 17%, and 14% of
gross premiums written in 2001, 2000 and 1999, respectively.
NET PREMIUMS EARNED AND OTHER CREDIT ENHANCEMENT FEES. Net premiums earned and
other credit enhancement fees during 2001 were $400.4 million, an increase of
24% from $323.4 million in 2000. This increase was primarily the result of the
larger Financial Guarantee book of business, higher refundings, calls, and
other accelerations of previously insured obligations (collectively referred to
as "refundings") during the year and higher other credit enhancement fees
earned from the structured credit derivatives business.
When an issue insured by Ambac Assurance has been refunded or called, any
remaining unearned premium (net of refunding credits, if any) is generally
earned at that time. Earnings on refundings typically relate to insured Public
Finance obligations, where the premium is usually paid up front for the life of
the policy. Refunding levels vary depending upon a number of conditions,
primarily the relationship between current interest rates and interest rates on
outstanding debt. Net premiums earned during 2001 included $38.6 million (net
income per diluted share effect of $0.20) from refundings of previously insured
issues. Net premiums earned in 2000 included $22.2 million (net income per
diluted share effect of $0.12) from refundings. Excluding the effect of
accelerated earnings related to refundings, normal net premiums earned (which is
defined as net premiums earned less refundings) in 2001 were $340.1 million, an
increase of 18% from $289.0 million in 2000. The increase in normal net premiums
earned resulted from strong business written from prior periods in all areas.
Normal net premiums earned from transactions guaranteed in 2001 were $43.1
million.
Other credit enhancement fees in 2001, which is primarily comprised of fees
received from the structured credit derivatives product, were $21.7 million, an
increase of 78% from $12.2 million in 2000. This increase was due to rapid
growth in the structured credit derivative business in 2000 and 2001.
Net premiums earned and other credit enhancement fees during 2000 increased
21% from $268.3 million in 1999. This increase was primarily the result of the
larger Financial Guarantee book of business and higher other credit enhancement
fees, partially offset by decreased refundings. Net premiums earned in 1999
included $35.9 million (net income per diluted share effect of $0.19) from
refundings. Excluding the effect of accelerated earnings related to refundings,
normal net premiums earned in 2000 increased 26% from $228.5 million in 1999.
Other credit enhancement fees more than tripled from $3.9 million in 1999.
The following table provides a breakdown of net premiums earned by market
sector and other credit enhancement fees:
(Dollars in millions) 2001 2000 1999
- ------------------------------------------------------------
Public Finance $149.1 $135.6 $130.7
Structured Finance 128.7 105.9 68.1
International Finance 62.3 47.5 29.7
- ------------------------------------------------------------
Total normal premiums
earned 340.1 289.0 228.5
Refundings 38.6 22.2 35.9
- ------------------------------------------------------------
Total net premiums earned 378.7 311.2 264.4
Other credit enhancement fees 21.7 12.2 3.9
- ------------------------------------------------------------
Total net premiums earned
and other credit
enhancement fees $400.4 $323.4 $268.3
============================================================
NET INVESTMENT INCOME. Net investment income in 2001 was $267.8 million, an
increase of 11% from $241.0 million in 2000. The increase was attributable to:
(i) the growth of the investment portfolio resulting from the growth in the
Financial Guarantee book of business, partially offset by a lower reinvestment
rate due to the current interest rate environment; and (ii) a capital
contribution from Ambac Financial Group, Inc. to Ambac Assurance totaling
approximately $176 million during the fourth quarter of 2001. The contribution
was in the form of taxable securities. Investments in tax-exempt securities
amounted to 65% of the total fair value of the portfolio as of December 31,
2001, versus 72% and 74% as of December 31, 2000 and December 31, 1999,
respectively. The average pre-tax yield-to-maturity on the investment portfolio
was 5.74% as of December 31, 2001 compared with 6.20% and 6.08% at December 31,
2000 and 1999, respectively. Net investment income in 2000
<PAGE>
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increased 15% from $209.3 million in 1999. This increase was primarily
attributable to the growth of the investment portfolio resulting from the
growth in the Financial Guarantee book of business, investment of new money at
higher taxable rates during 2000 as opposed to primarily tax-exempt rates in
1999 and capital contributions from Ambac Financial Group to Ambac Assurance
totaling approximately $200 million during the course of 1999.
NET REALIZED LOSSES. Net realized losses in 2001 were $1.5 million, compared to
net realized losses of $3.4 million and $5.7 million in 2000 and 1999,
respectively. The following table details amounts included in net realized
losses:
(Dollars in millions) 2001 2000 1999
- ---------------------------------------------------------
Net gains (losses) on
securities sold $ 5.3 $ 4.2 $(5.7)
Foreign exchange losses
on investments (3.2) (3.5) --
Change in fair value of
structured credit derivatives (3.6) (4.1) --
- ---------------------------------------------------------
Net realized losses $(1.5) $(3.4) $(5.7)
=========================================================
Net gains (losses) on securities sold are generated as a result of the ongoing
management of the investment portfolio. Foreign exchange gains and losses
result from investing in certain high-grade foreign currency denominated
securities. The change in fair value of structured credit derivatives reflects
net mark-to-market gains and losses due to changes in credit spreads.
OTHER INCOME. Other income in 2001 was $5.2 million, an increase of 18% from
$4.4 million in 2000. Included in other income are deal structuring fees and
commitment fees. Other income doubled in 2000 from $2.2 million in 1999.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Losses and loss adjustment expenses in
2001 were $20.0 million, versus $15.0 million in 2000 and $11.0 million in
1999. Losses and loss adjustment expenses are based upon estimates of the
ultimate aggregate losses inherent in the Financial Guarantee portfolio. The
liability for losses and loss adjustment expenses consists of the active credit
reserve, which represents an estimate of the expected levels of debt service
defaults resulting from credit failures on currently guaranteed issues that are
not presently or imminently in default, and case basis loss reserves for
obligations in monetary default, or, in the judgment of management, for which
default is imminent. The following table summarizes Ambac's loss reserves split
between case basis loss reserves and active credit reserves at December 31,
2001 and 2000:
(Dollars in millions) 2001 2000
- -------------------------------------------------------
Net loss and loss adjustment
expense reserves:
Case basis reserves* $ 27.8 $ 31.0
Active credit reserves 122.3 100.3
- -------------------------------------------------------
Total $150.1 $131.3
=======================================================
*After netting reinsurance recoverable amounting to $2.3 million and $1.1
million in 2001 and 2000, respectively.
The following table summarizes the changes in the total net loss reserves
for the years ended December 31, 2001 and 2000:
(Dollars in millions) 2001 2000
- ---------------------------------------------------------------
Beginning balance of net loss reserves $131.3 $121.0
Additions to loss reserves 20.0 15.0
Losses paid (2.6) (4.7)
Recoveries of previously paid losses 1.4 --
- ---------------------------------------------------------------
Ending balance of net loss reserves $150.1 $131.3
===============================================================
Management continually reviews and monitors the guaranteed book of business for
potential problem credits. Case reserves on guaranteed issues presently in
monetary default were $7.1 million at December 31, 2001. These obligations in
monetary default require debt service through 2026 totaling $11.6 million.
Annual debt service payments are $0.5 million, $0.7 million, $0.5 million, $2.9
million and $0.3 million for 2002, 2003, 2004, 2005 and 2006, respectively. Case
reserves on guaranteed issues not presently in monetary default were $20.7
million at December 31, 2001. Net par related to the $20.7 million in case
reserves amounted to $94.3 million at December 31, 2001. Additions (reductions)
made to the case reserve totaled $(3.2) million, $4.8 million and $(7.7) million
in 2001, 2000 and 1999, respectively. The net reduction in the 2001 case reserve
reflects a $6.0 million reduction for two guaranteed issues, as a result of the
improved financial condition of the obligor. Excluding $.04 million of paid
losses on Structured Finance obligations in 2001, the entire case reserves,
losses paid and recoveries relate to the Public Finance book of business for all
periods presented.
Ambac Assurance's management believes that the reserves for losses and loss
adjustment expenses are adequate to cover the ultimate net cost of claims, but
the reserves are necessarily based on estimates and there can be no assurance
that the ultimate liability will not exceed such estimates.
UNDERWRITING AND OPERATING EXPENSES. Underwriting and operating expenses of
$68.0 million in 2001 increased by 23% from $55.2 million in 2000. Underwriting
and operating expenses in 2000 increased 13% from $48.8 million in 1999.
Underwriting and operating expenses consist of gross underwriting and operating
expenses, less the deferral to future periods of expenses and reinsurance
commissions related to the acquisition of new insurance contracts, plus the
amortization of previously deferred expenses and reinsurance commissions. In
2001, gross underwriting and operating expenses were $99.3 million, an increase
of 12% from $88.6 million in 2000. During 2000, gross underwriting and operating
expenses increased 19% from $74.5 million in 1999. The increases in gross
underwriting and operating expenses in both 2001 and 2000 reflect the overall
increased business activity in those years and are primarily attributable to
higher compensation costs related to the
<PAGE>
25
addition of staff. Underwriting and operating expenses deferred were $59.5
million, $55.8 million, and $45.9 million in 2001, 2000 and 1999,
respectively.The amortization of previously deferred expenses and reinsurance
commissions was $28.2 million, $22.5 million, and $20.8 million in 2001, 2000
and 1999, respectively. The ratio of amortization of previously deferred
expenses to net premiums earned and other credit enhancement fees was 7.0%, 6.9%
and 7.8% for 2001, 2000 and 1999, respectively.
FINANCIAL SERVICES
Through its financial services subsidiaries, Ambac provides financial and
investment products including investment agreements, interest rate swaps,
funding conduits, investment advisory and cash management services, principally
to its financial guarantee clients, which include municipalities and their
authorities, school districts, health care organizations and asset-backed
issuers.
Revenues in 2001 decreased 17% to $52.2 million (excludes $3.0 million in
net realized losses) from $62.7 million (excludes $9.1 million in net realized
losses) in 2000. This decrease is primarily due to lower revenues from interest
rate swaps and lower investment agreement revenues due to lower interest rate
spreads, partially offset by higher volume. Revenues from investment advisory
and cash management increased 6% in 2001 compared to 2000. Revenues in 2000
reflected a 22% increase from $51.6 million (excludes $3.1 million in net
realized losses) in 1999. The increase in revenue from 1999 to 2000 was
primarily due to higher revenues from interest rate swaps, including higher
post-inception revenues from existing business and higher volume of business
activity. This was partially offset by a decline in investment agreement revenue
due to lower outstanding volume, which resulted from maturing investment
agreements and declining Public Finance market issuance in 2000 compared to
1999. Revenues from investment advisory and cash management increased 16% in
2000 compared to 1999.
Financial Services expenses in 2001 were $21.8 million, a decrease of 12%
from $24.8 million in 2000. Expenses in 2000 decreased 4% from $25.8 million in
1999.
CORPORATE ITEMS
INTEREST EXPENSE. Interest expense was $40.4 million, $37.5 million and $36.5
million in 2001, 2000 and 1999, respectively. The 2001 increase is primarily
attributable to Ambac's issuance of $200 million in debentures in October 2001.
OTHER REVENUE. Other revenue includes investment income of Ambac Financial
Group. Other revenue was $4.3 million, $2.3 million and $9.9 million in 2001,
2000 and 1999, respectively. The 2000 decrease is due to the capital
contributions to Ambac Assurance during 1999 (see "Net Investment Income"
section above).
OTHER EXPENSES. Other expenses include the operating expenses of Ambac Financial
Group. Other expenses were $5.9 million in 2001, $6.7 million in 2000, and $6.5
million in 1999.
INCOME TAXES. Income taxes for 2001 were at an effective rate of 23.9%, compared
to 24.1% and 23.9% for 2000 and 1999, respectively. The decrease in the
effective tax rate in 2001, as compared to 2000, is due to a favorable
settlement of a state income tax audit, partially offset by increased
underwriting profits. The increase in the effective tax rate from 1999 to 2000
is primarily the result of the growth in underwriting profits.
SUPPLEMENTAL ANALYTICAL FINANCIAL DATA
CORE EARNINGS.(2) In 2001, core earnings were $414.2 million, an increase of 15%
from $361.6 million in 2000. This increase was primarily the result of continued
higher normal premiums earned from the growth in the Financial Guarantee book of
business, higher other credit enhancement fees and higher net investment income
from Financial Guarantee operations. These increases were partially offset by
higher expenses in the Financial Guarantee segment and lower revenues from the
Financial Services segment. In 2000, core earnings increased 24% from $292.6
million in 1999. The increase was primarily the result of higher normal premiums
earned from the growth in the Financial Guarantee book of business and higher
net investment income from Financial Guarantee operations and growth in
Financial Services earnings.
OPERATING EARNINGS.(2) Operating earnings in 2001 were $436.2 million, an
increase of 17% from $374.3 million in 2000. This increase was primarily the
result of continued higher normal premiums earned from the growth in the
Financial Guarantee book of business and higher refundings, higher other credit
enhancement fees and higher net investment income from Financial Guarantee
operations. These increases were partially offset by higher expenses in the
Financial Guarantee segment and lower revenues from the Financial Services
segment. Operating earnings in 2000 increased 20% from $313.1 million in 1999.
The increase was primarily the result of higher normal premiums earned from the
growth in the Financial Guarantee book of business, partially offset by lower
refundings and higher net investment income from Financial Guarantee operations
and growth in Financial Services earnings.
Following is a table reconciling net income computed in accordance with
accounting principles generally accepted in the United States of America
("GAAP") to operating earnings and core earnings for the years ended December
31, 2001, 2000 and 1999:
(Dollars in Millions) 2001 2000 1999
- -----------------------------------------------------------
Net income $432.9 $366.2 $307.9
Net realized losses, after tax 3.3 8.1 5.2
- -----------------------------------------------------------
Operating earnings 436.2 374.3 313.1
Premiums earned from
refundings, after tax (22.0) (12.7) (20.5)
- -----------------------------------------------------------
Core earnings $414.2 $361.6 $292.6
===========================================================
<PAGE>
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
AMBAC FINANCIAL GROUP, INC. Liquidity. Ambac's liquidity, both on a short-term
basis (for the next twelve months) and a long-term basis (beyond the next twelve
months), is largely dependent upon: (i) Ambac Assurance and other subsidiaries'
ability to pay dividends or make payments to Ambac; and (ii) external
financings. Pursuant to Wisconsin insurance laws, Ambac Assurance may declare
dividends, provided that, after giving effect to the distribution, it would not
violate certain statutory equity, solvency and asset tests. During 2001, Ambac
Assurance paid dividends of $68.0 million on its common stock to Ambac. For
further discussion, see Note 9 of Notes to Consolidated Financial Statements.
Ambac's principal uses of liquidity are for the payment of its operating
expenses, income taxes, interest on its debt, dividends on its shares of common
stock, purchases of its common stock in the open market and capital investments
in its subsidiaries. Based on the amount of dividends that it expects to receive
from Ambac Assurance and other subsidiaries during 2002, and the income it
expects to receive from its investment portfolio, management believes that Ambac
will have sufficient liquidity to satisfy its needs over the next twelve months,
including the ability to pay dividends on its common stock in accordance with
its dividend policy. Beyond the next twelve months, Ambac Assurance's ability to
declare and pay dividends to Ambac may be influenced by a variety of factors
including adverse market changes, insurance regulatory changes and changes in
general economic conditions. Consequently, although management believes that
Ambac will continue to have sufficient liquidity to meet its debt service and
other obligations over the long term, no guarantee can be given that Ambac
Assurance will be permitted to dividend amounts sufficient to pay all of Ambac's
operating expenses, debt service obligations and dividends on its common stock.
AMBAC ASSURANCE LIQUIDITY. The principal uses of Ambac Assurance's liquidity are
the payment of operating expenses, reinsurance premiums, taxes, dividends to
Ambac, and capital investments in its subsidiaries. Management believes that
Ambac Assurance's operating liquidity needs can be funded exclusively from its
operating cash flow. The principal sources of Ambac Assurance's liquidity are
gross premiums written, scheduled investment maturities, net investment income
and receipts from structured credit derivatives. During 2001, Ambac contributed
approximately $176 million of capital to Ambac Assurance to support the growth
in the Financial Guarantee business.
FINANCIAL SERVICES LIQUIDITY. The principal uses of liquidity by financial
services subsidiaries are payment of investment agreement obligations pursuant
to defined terms, net obligations under interest rate swaps and related hedges,
operating expenses, income taxes, and dividends to Ambac. Management believes
that its Financial Services liquidity needs can be funded primarily from its
operating cash flow and the maturity of its invested assets. The principal
sources of this segment's liquidity are proceeds from issuance of investment
agreements, net investment income, maturities of securities from its investment
portfolio (which are invested with the objective of matching the maturity
schedule of its obligations under the investment agreements), net receipts from
interest rate swaps and related hedges, and fees for investment management
services. Additionally, from time to time, liquidity needs are satisfied by
short-term intercompany loans from Ambac. The investment objectives with respect
to investment agreements are to achieve the highest after-tax total return,
subject to a minimum average quality rating of Aa/AA on invested assets, and to
maintain cash flow matching of invested assets to funded liabilities to minimize
interest rate and liquidity exposure. Financial Services subsidiaries maintain a
portion of their assets in short-term investments and repurchase agreements in
order to meet unexpected liquidity needs.
CREDIT FACILITIES. Ambac and Ambac Assurance have a revolving credit facility
with four major international banks for $200 million, which expires in August
2002 and provides a two-year term loan provision. The facility is available for
general corporate purposes, including the payment of claims. As of December 31,
2001 and 2000, no amounts were outstanding under this credit facility.
Ambac Credit Products has a revolving credit facility with one major
international bank for $50 million that expires in June 2002 and provides a
three-year term loan provision. The facility is available to Ambac Credit
Products for general corporate purposes, including payments in regard to its
structured credit derivative activities. As of December 31, 2001 and 2000, no
amounts were outstanding under this facility.
CAPITAL SUPPORT. Ambac Assurance maintains third party capital support in the
form of a seven-year irrevocable limited recourse credit facility from a group
of highly rated banks. This credit facility provides liquidity to Ambac
Assurance in the event claims from municipal or certain structured obligations
in its guaranteed portfolios exceed specified levels. Repayment of amounts drawn
under the credit facility is limited primarily to the amount of any recoveries
of losses related to policy obligations in the guaranteed portfolios. During
2001, Ambac Assurance replaced a portion of the facility with a new capital
markets structure (see below). Consequently, the facility was reduced from $800
million to $400 million. The facility's expiration date was also extended to
June 30, 2008. As of December 31, 2001 and 2000, no amounts were outstanding
under this facility.
Ambac Assurance acquired a perpetual put option on its own preferred stock
from a trust established by a major investment bank. The trust was created as a
vehicle for providing capital support to Ambac Assurance by allowing it to
obtain immediate access to new capital at its sole discretion at any time
through the exercise of the put option. If the put option were exercised, the
preferred stock holdings of Ambac Assurance would give investors the rights of
an equity investor in Ambac Assurance. Such rights are subordinate to insurance
claims, as well as to the general unsecured creditors of Ambac Assurance. If
exercised, Ambac Assurance would receive up to $400 million in return for the
issuance of its own perpetual preferred stock, the proceeds of which may be used
for any purpose including the payment of claims. Dividend payments on
<PAGE>
27
the preferred stock are cumulative only if Ambac Assurance pays dividends on
its common stock. The trust is a special purpose trust that is restricted to
holding high quality short-term commercial paper investments to ensure that it
can meet its obligations under the put option. To fund these investments, the
trust has issued its own auction market perpetual preferred stock. Ambac
Assurance pays a floating put option fee. The trust is rated AA/Aa2 by Standard
& Poor's and Moody's respectively.
STOCK REPURCHASE PROGRAM. The Board of Directors of Ambac has authorized the
establishment of a stock repurchase program that permits the repurchase of up to
12,000,000 shares of Ambac's common stock. During 2001, Ambac acquired
approximately 781,000 treasury shares for an aggregate amount of $40.9 million.
Since inception of the stock repurchase program, Ambac has acquired
approximately 8,272,000 shares for an aggregate amount of $224.8 million.
ADJUSTED BOOK VALUE. (3) Adjusted Book Value ("ABV") per share increased 16% to
$42.03 at December 31, 2001 from $36.35 at December 31, 2000.
The following table reconciles book value per share to ABV per share as of
December 31, 2001 and 2000:
2001 2000
- ----------------------------------------------------------
Book value per share $28.26 $24.60
After-tax value of:
Net unearned premium reserve 9.31 8.02
Deferred acquisition costs (1.00) (0.95)
Present value of future
installment premiums 6.07 4.71
Net unrealized (losses) gains on
investment agreement liabilities (0.61) (0.03)
- ----------------------------------------------------------
Adjusted book value per share $42.03 $36.35
==========================================================
BALANCE SHEET. Total assets as of December 31, 2001 were $12.27 billion, an
increase of 21% from $10.12 billion at December 31, 2000. This increase was due
primarily to cash generated from business written during 2001, higher volume in
the guaranteed investment agreement business, as well as Ambac's $200 million
debt offering in October 2001. Stockholders' equity as of December 31, 2001 was
$2.98 billion, an increase of 15% from $2.60 billion at year-end 2000. The
increase stemmed primarily from net income for the year.
The following table summarizes the composition of the fair value of Ambac's
investment portfolio by segment at December 31, 2001, and 2000:
<TABLE>
<CAPTION>
Financial Financial
(Dollars in Millions) Guarantee Services Corporate Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2001:
Fixed income securities:
Municipal obligations $3,540.3 $144.5 $ -- $3,684.8
Corporate obligations 656.2 674.4 -- 1,330.6
Foreign government obligations 96.6 -- -- 96.6
U.S. government obligations 54.8 6.0 17.5 78.3
Mortgage and asset-backed securities
(includes U.S. government agency obligations) 735.2 2,530.4 13.3 3,278.9
Other 1.4 -- 0.8 2.2
- ------------------------------------------------------------------------------------------------------------------------
5,084.5 3,355.3 31.6 8,471.4
Short-term 170.6 225.2 19.2 415.0
- ------------------------------------------------------------------------------------------------------------------------
5,255.1 3,580.5 50.8 8,886.4
- ------------------------------------------------------------------------------------------------------------------------
Fixed income securities pledged as collateral:
Mortgage and asset-backed securities
(includes U.S. government agency obligations) -- 1,401.5 -- 1,401.5
- ------------------------------------------------------------------------------------------------------------------------
Total investments $5,255.1 $4,982.0 $50.8 $10,287.9
- ------------------------------------------------------------------------------------------------------------------------
Percent total 51.1% 48.4% 0.5% 100%
- ------------------------------------------------------------------------------------------------------------------------
2000:
Fixed income securities:
Municipal obligations $3,328.8 $ 86.2 $ -- $3,415.0
Corporate obligations 422.1 551.6 7.0 980.7
Forei